What happens if the IRS issues a levy to someone who does not owe taxes to the IRS, but the IRS does not receive anything from the levy? The levy sits dormant for several years. Everything is good, right? But then the third party pays the IRS. Can the person’s right to challenge the levy to be lost due to the passage of time? The court recently addressed these rules in Gold Forever Music, Inc. v. United States, No. 17-13927 (E.D. Mich. 2018).
The Facts & Procedural History
Mr. Holland owned a publishing company, Gold Forever Music, Inc (“GFMI”). He also owed the IRS $19 million in unpaid taxes. The IRS levied on royalty payments owed to GFMI by third parties. The levy notices were received on August 27, 2012. The royalties were paid to the IRS in 2016 and 2017. GFMI requested refunds on June 23, 2017 and September 17, 2017 and litigation ensued.
Filing Suit to Recoup a Wrongful Levy
Section 7426 provides an ability to bring suit against the IRS for wrongful levies. It provides:
If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.
If the property has already been sold, Sec. 7426 provides that the owner can bring suit to recover the surplus proceeds.
The court is then authorized to order the return of the property or a monetary award equal to the amount the IRS received or the fair market value.
Time to Bring Suit for Wrongful Levy
Even though the Code provides an ability to bring suit for wrongful levy, time may take away the remedy.
Section 6532(c) provides that a wrongful levy suit cannot be brought after the expiration of two years from the date of the levy or agreement giving rise to such action. Thus, the “date of the levy” is critical.
What does “date of the levy” mean? Does it mean the date the funds are paid over to the IRS pursuant to the levy?
A Literal & Reasonable Reading of the Code
A literal reading of the Code would suggest the “date of levy” is the actual date the funds are paid over to the IRS pursuant to the levy. This reading is also supported by reason. It would seem unreasonable to require a third party to bring a wrongful levy suit before the IRS had taken any property pursuant to the levy.
The Gold Forever facts provide an example of this. In the Gold Forever case, the proceeds were paid to the IRS in 2016 and 2017 pursuant to the IRS levy. The IRS levy notice was issued in 2012. If the 2012 date is controlling, the wrongful levy suit has to be brought by 2014. This was two to three years before the IRS even received proceeds pursuant to the levy. If the company did not bring suit by 2016, before the proceeds were paid to the IRS, it would be barred from bringing suit when the IRS actually received the proceeds in 2016 and 2017.
How did the court rule? The court in Gold Forever, held that the “date of the levy” means the date of the levy notice.
As such, persons who receive IRS levy notices should take action upon receiving the notice, even if there is no property the IRS may levy on at the time. Failure to act timely may prevent the person from contesting a long-dormant IRS levy.