Levy First, Notice Afterwards vs. Lien First, Notice Afterwards

Levy is OK even if Form 3552 notice comes after notice of levy, but not if notice of lien comes first, and Form 3552 comes after. Thus spake Judge Paris, in Michael J. Conway and Raymond T. Nakano, 137 T.C. 16, filed 12/19/11. Case will probably be cited as Michael J. Conway tout court, although both go  up together under Rule 122(a), fully stipulated.

Mike and Ray were officers of the ill-fated National Airlines, founded 1999, cratered 2000. They were responsible parties for filing returns and paying Section 9502(a) Airport and Airways Trust Fund taxes, which I never heard of either, but anyway the trust funds weren’t turned over, and IRS is looking for trust fund recovery penalties (TFRP). Mike and Ray had sued in Federal District Court for refunds after IRS denied their claims (and IRS only took three years to do so), but these taxes are Subtitle Ds, not Subtitle Cs, and so are not divisible and Section 6331(i) does not bar collection. Clear? Thought not.

Anyway, Mike and Ray lost all their District Court cases and Circuit Court appeals.

Ray is first one on the Tax Court chopping block. He claims he got Form 1058 Notice of Levy first, and then two weeks later he got Form 3552 Notice of Tax Due.

Mike is next. He got letter 3164B “we are attempting to collect”, two weeks later gets Letter 3172, Notice of Lien and Right to Hearing, and a week later gets his Form 3552.

Both guys get a CDP. They claim they didn’t get 60-day demand notices and therefore the lien and levy were invalid.

Originally Appeals were going to withdraw the notices and re-serve in both cases, but SO Villaverde, who made that determination, got promoted to Team Manager. His successor, SO Hernandez, agreed with him, but then the Manager overruled her, and decided IRS could proceed to lien and levy. Judge Paris furnishes a bemused footnote: “The record does not reflect whether the Appeals team manager who overruled SO Hernandez was former SO Villaverde or another person.” 137 T. C. 16, at p. 9 (footnote 7).

As to Ray and the Notice of Levy, Judge Paris: “Respondent [IRS] contends that he gave Nakano valid notice and demand when he issued Nakano the levy notice on May 22, 2006. The levy notice went beyond the typical notice of intent to levy by including a demand for immediate payment of the specific amounts of TFRP owed, listed by period at issue, within 60 days of the assessments. In this limited circumstance, the Court agrees that this levy notice constitutes notice and demand.

“‘The form on which a notice of assessment and demand for payment is made is irrelevant as long as it provides the taxpayer with all of the information required under * * * [section 6303].’ Hughes v. United States, 953 F.2d 531, 536 (9th Cir. 1992) (quoting Elias v. Connett, 908 F.2d 521, 525 (9th Cir. 1990)); see also Deputy v. Commissioner, T.C. Memo. 2003-210. Section 6303 requires only that the notice (1) state the amount of unpaid tax, (2) demand payment, and (3) be issued within 60 days of assessment. The levy notice here did provide Nakano with all of the information required under the statute because it listed the type and amount of unpaid tax for each tax period, explicitly demanded payment, and was sent within 60 days of the assessments. The Court therefore holds that respondent gave Nakano the notice and demand required by section 6303.” 137 T. C. 16, at p. 13.

Ray challenges the assessments, but gets no joy from Judge Paris, who finds no prejudice in the mischaracterization of the quick assessments here as “jeopardy” assessments, or IRS’ misstatement that the assessments were untimely.

So Ray goes down in flames.

Now for Mike. Mike says the Letter 3164B was inadequate notice. IRS says “yes it was, and anyway, we don’t need no stinkin’ letter, Mike was boss of National and knew he owed tax, he’d been litigating with us for years and lost every time.” No good, says Judge Paris. IRS did not follow the law, therefore abuse of discretion and Mike wins.

First, “(T)he Letter 3164B merely reflected that unpaid taxes were owed but did not state the amounts, types, or periods of the unpaid taxes. Respondent [IRS] contends that the Letter 3164B did not have to state the amounts owed because, by the time respondent issued the Letter 3164B, Conway’s multiple communications with IRS Appeals (before the assessments) regarding the amounts of the unpaid TFRPs had provided him with constructive notice. Even if Conway had previously seen the proposed assessments, section 6303(a) required respondent, after making an assessment of tax, to either leave notice and demand of payment at Conway’s “dwelling or usual place of business” or mail it to his last known address. Cf. Resyn Corp. v. United States (In re Resyn Corp.), 945 F.2d 1279 (3d Cir. 1991) (IRS’ filing of a proof of claim in bankruptcy did not satisfy section 6303(a) because it did not employ either of these notification methods). Therefore, since the Letter 3164B gave notice of nothing other than that unpaid taxes were owed, it did not constitute a valid postassessment notice and demand.” 137 T.C. 16, at pp. 15-16.

Judge Paris goes on: “Next, the lien notice did not constitute valid notice and demand under section 6303 and section 6321. Respondent’s argument assumes that the lien notice issued to Conway on June 1, 2006, can serve as both notice and demand under 6303 and notice under section 6320. This assumption is flawed. A tax lien imposed under section 6321 arises at the time of assessment, see sec. 6322, and is enforceable when a ‘person liable to pay any tax neglects or refuses to pay the same after demand’, sec. 6321 (emphasis added). Moreover, section 6320(a)(1) requires the Commissioner to notify ‘the person described in section 6321’ of the NFTL filing. (Emphasis added.) This person is the person liable to pay who has refused to pay after demand (emphasis by the Court). Thus, the Commissioner must issue notice under section 6320(a)(1) only after demand has been made and the person neglects or refuses to pay. Therefore, no notice can serve as both assessment notice and demand under section 6303 and also postlien notice under section 6320(a)(1).” 137 T.C. 16, at pp.16-17. One size does not fit all.

IRS went backwards. Lien first, notice afterwards. No can do.

IRS’ argument that Mike, as CEO of the downed airline, knew right well that he had to pay the trust fund tax, fares no better. Judge Paris shoots IRS down: “Respondent relies on Jersey Shore State Bank v. United States, 479 U.S. 442 (1987), to support his argument. Respondent’s reliance on Jersey Shore is misplaced. The penalty imposed on the bank in Jersey Shore was nonassessable and not subject to administrative collection procedures. Id. at 447. Thus, the Supreme Court’s reasoning in Jersey Shore does not support the proposition that any notice Conway may have had eliminated the need for respondent to issue notice and demand before the lien on Conway’s property arose.” 137 T.C. 16, at pp. 17-18. Mike’s notice of lien bites the dust.

So Mike wins, Ray loses. And although IRS’ administrative procedures here were far from admirable, they do get Ray’s property.