To
set the scene, it is necessary to go back slightly before the issuance
of the levy. The taxpayer, Mr. Waterman, filed a return and received a
refund that was much too large. The IRS discovered its mistake. The case
does not give much detail about the erroneous refund or why the IRS
thought that jeopardy procedures were appropriate and necessary for the
recovery of the money. It does note that the revenue officer (RO)
assigned to the case obtained the appropriate approval from Chief
Counsel, IRS to use the jeopardy levy procedures. Armed with approval to
use the jeopardy levy process, the RO went to taxpayer’s home.
The
RO arrived at the taxpayer’s home at 9:30 AM on September 9, 2009. The
time sequence is important in order to see the speed required of the
bank here. The statute requires that the IRS make demand for payment
before executing the levy. This making of the demand gives the taxpayer a
last opportunity to pay – generally, the taxpayer will have received
notice and demand and other collection correspondence prior to this
point but not always – and also gives the taxpayer notice that the IRS
is hot on their trail. On balance, Congress might decide that giving the
taxpayer one last chance to pay gives them too much information about
the intentions of the IRS. At this time, however, the IRS must make this
notification despite the obvious consequences.
Here,
the RO not only demanded payment but also gave him documents showing
that the IRS intended to levy his bank account. The RO did not need to
be that specific although the taxpayer could probably have figured that
out with very little effort. Having given the required last demand for
payment, the RO drove directly to taxpayer’s bank and served a jeopardy
levy shortly before 9:50 AM, less than 20 minutes after arriving at the
taxpayer’s house. The bank employee faxed the levy at 9:50 AM to the
bank’s central processing office. Less than two hours later, the
taxpayer arrives at the bank – perhaps he was a slow reader – and
withdrew $40,000 from his account before the bank placed a freeze on the
account. The
bank did put the freeze on the account two days later and did capture
some money which it turned over to the IRS. The IRS, however, felt that
the bank acted too slowly in putting on the initial freeze and brought
suit for failure to honor the levy. The bank responded that it acted
fast enough and that the IRS should not have alerted the taxpayer to its
intent to levy the taxpayer’s bank account. How
fast should a bank, or any party, act upon receipt of a levy? Should it
act more quickly if the levy is a jeopardy levy? Should a large bank
with a specific process for handling levies have a different time frame
than a smaller, potentially more nimble, operation. Here, the IRS argues
that the bank had a duty to build a system that placed a hold on the
bank account in less than two hours. Neither the code nor the
regulations address the time a party receiving a levy has to process the
levy and two hours seems very fast.
The
local bank employee faxed the levy with alacrity. If a breakdown
occurred, it occurred in the handling of the levy by the centralized
unit. In a large operation with multiple bank branches, the
establishment of a central unit provides the only way to alert all
branches unless the first bank the IRS touches has the ability through
the bank’s computer system to place a freeze on the account across the
entire system. In the end that seems to be exactly what the IRS thinks
the bank should do. This is an interesting expectation given the speed
with which the IRS acts and the operation of its computer system. I do
not necessarily disagree with the IRS and its expectation of the bank
but it is interesting to think about how our concepts of speed in
ordinary business practices have evolved over time with the increasing
power of computers.
The
court looked to the statute to find its answer to the liability of the
bank in these circumstances. It took note of the fact that the RO did
not need to tell the taxpayer that it intended to levy his bank account
and in doing so the RO’s actions were “clearly improper.” Because I
think that anyone being handed a levy noticed and receiving a personal
demand for immediate payment should quickly conclude that the IRS would
be all over their bank account, I do not think that the RO did anything
that made a difference. I would agree with the court that best
practice would not be to rub it in the taxpayer’s face but I might argue
that the truly best practice would be to lock up the assets before
telling the taxpayer that you were personally pursuing collection. If
collection of the liability is in jeopardy, go get the money before
alerting the taxpayer that you are hot on the case.
Having
determined that the RO should not have given the taxpayer notice of the
intent to levy on the bank account, the court went on to point out that
only two defenses exist under IRC 6332 to the failure to turn over
property subject to a levy: 1) the defendant did not possess any
property or rights to property belong to the taxpayer or 2) the property
held by the defendant was subject to prior attachment or execution. It
was agreed that neither of those defenses worked here.
Since
the bank knew that it did not have a statutory defense, it sought to
use equitable defenses. When a bank uses equitable defenses, you know it
is in trouble. Aside from the defense that the RO should not have
specifically provided the taxpayer with information about the IRS
intention to levy, the bank made the reasonable argument that it acted
within a reasonable period of time. Since neither the statute nor the
regulations spell out the speed with which a bank must freeze its
accounts, it makes sense for the bank to focus on the allowance of a
reasonable period of time for compliance. The court concluded, however,
that the statute does not contain any reasonableness element delaying
the placing of the bank account under the IRS’ control. The bank needed
to act immediately to do this and it did not. The court pointed to the
50% penalty that exists where the party receiving the levy fails to turn
over the levied property. Here, the IRS did not seek the 50% penalty
but the court found that the inference of the penalty was that it
applied where the party acted unreasonably. This placed the
reasonableness of the actions of the party receiving the levy in the
realm of argument about the application of the penalty and not the
application of the liability itself.
Finally,
the court said a bright line rule was needed in order to avoid have the
IRS and the courts bog down into a “granular inquiry on the levy
process.” That provides great support for the IRS and a strong
cautionary rule for anyone receiving a levy that they must react
immediately. Banks receive levies all the time and have systems for
processing the levies. Many third parties receive levies very
infrequently or once in a lifetime. Understanding the importance of
moving quickly in the face of its receipt cannot be overemphasized.
Third parties not familiar with the process will frequently contact
counsel for assistance and need immediate advice. The speed required by
this opinion could apply to the actions of counsel as well as the
receiving entity.
The
court had previously denied a summary judgment motion filed by the IRS.
It made clear that it came to this conclusion only after studying the
circumstances of a levy and the statute. The fact that the party
receiving the levy is the only one who can stop the dissipation of the
asset in their control drove the result. Maybe the bank will take this
case into the 9th Circuit but for now the IRS has a very powerful well-reasoned opinion supporting immediate compliance with its levy.
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