Bank Liable for Failure to Honor Tax Levy; Not Liable for Conversion of Sale Proceeds (Boardwalk Motor Sports Ltd., CA-5)

A bank was liable for its failure to honor an IRS levy, but neither the bank nor the car dealer were liable for conversion under state (Texas) law of the proceeds from the sale of an automobile that was subject to a federal tax lien. The IRS failed to prove it had a right to immediate possession under state law because a federal tax lien is not self-executing and does not provide the IRS with a right of possession until a levy is issued. However, the levy was served before the car dealer took possession of the car. Therefore, the IRS could not prevail on a state common-law conversion claim. However, the bank was liable for failure to honor the IRS levy because when the automobile was sold, the tax lien attached to the sale proceeds and was not extinguish when the sale proceeds were subsequently transferred to the bank. The bank’s argument that it dissipated the funds subject to the tax lien by applying them to the taxpayer’s bank debt and, therefore, it did not hold anything to which a levy could attach was rejected. The levy against the bank was effective because the proceeds were subject to tax lien, could be traced to the bank’s account and the bank was still in possession of the funds.

Reversing and remanding a DC Tex. decision, 2010-2 ustc ¶50,789 .

Boardwalk Motor Sports, Ltd., CA-5, 2012-2 ustc ¶50,536

Other References:

Code Sec. 6331

CCH Reference – 2012FED ¶38,187.221

Code Sec. 6332

CCH Reference – 2012FED ¶38,198.135

Tax Research Consultant

CCH Reference – TRC IRS: 51,060.35



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