People are often surprised by the long reach of Internal Revenue Service (“Service” or “IRS”) liens.¹ Plains Capital Corporation (“Plains”) recently learned this lesson. Plains lost a fight with the Service in a case before the United States District Court for the Eastern District of Texas. It appealed to Fifth Circuit Court of Appeals. Losing again, Plains proceeded with an appeal to the United States Supreme Court. Unfortunately, on June 24, 2013, the highest court in the nation refused to hear Plain’s appeal.² The saga is over for Plains, but the case should be a loud warning to others.
In 2002 and 2003, the Service assessed taxpayer Gregory Rand (“Rand”) for tax liabilities arising from 2000 and 2002. It eventually filed notices of federal tax liens totaling over $3 million (“Tax Liens”).
In 2005, Rand obtained a $200,000 line of credit from Plains. Plains was aware of the Tax Liens. To secure its credit extension, however, it took possession of the title to Rand’s 2005 Ferrari. Plains thought taking possession of the vehicle title would put it in front of the IRS. Wrong!
In 2007, Rand agreed with the IRS that he would deliver the Ferrari to Boardwalk Motor Sports, Ltd (“Boardwalk”). Boardwalk agreed to sell the vehicle on consignment.
The Service and Plains could not agree upon the priority of their respective liens. So, the IRS served a notice of levy on Boardwalk and instructed Boardwalk to deliver the sale proceeds to it. Later, an IRS agent instructed Boardwalk not to release the sale proceeds until the IRS and Plains reached agreement on lien priorities. If it was unsure whether an agreement was reached, Boardwalk was instructed to go to the local court and file an interpleader action.
Less than one month later, Boardwalk sold the Ferrari for $210,454. Boardwalk immediately attempted to contact the IRS agent to discuss what to do with the proceeds, but the agent was away on vacation. Rather than wait for the agent’s return, or pursue an interpleader action, Boardwalk inexplicably sent the net sale proceeds ($210,454 less a commission and sale costs = $194,982) to Plains and obtained the vehicle title for the buyer.
The IRS agent returned from vacation and learned of the sale. Likely irate, the agent served Boardwalk with a demand for payment of the net sales proceeds. He also served a notice of levy on Plains.
Having received no acceptable response from either Boardwalk or Plains, the Service sued both of them for failure to honor the demand and levy. It also sued them for tortious conversion. The Fifth Circuit concluded:
- The IRS had perfected its lien.
- The IRS’ lien was superior to Plain’s lien.
- Once the Ferrari was sold, the Service’s lien attached to the sale proceeds.
- Plains failed to honor the IRS’ levy.³
There are many lessons learned:
- Subsequent liens (including possession of title to a vehicle) generally do not trump a prior IRS lien.
- If unsure who has superior rights to sale proceeds, consider filing an interpleader action and let the court decide the issue.
- Do not ignore IRS liens or levies; possession of the taxpayer’s property generally will not save the day.
¹ This article is for educational purposes only and should not be relied upon as tax or legal advice.
² U.S. v. Boardwalk Motor Sports Ltd. And Plains Capital Corporation, 692 F3d (5th Cir. 2012), certiorari denied (NO. 12-1025), June 24, 2013.
³ Due to state law technicalities, the court found no conversion occurred.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Developments in the World of IRC Section 1031 Exchanges Including the TCJA," Oregon Society of Certified Public Accountants (OSCPA) Forest Products ConferenceEugene, OR, 6.22.18
- "Evaluating the Built-in Gains Tax for C to S Conversions After TCJA," New York University Summer Institute in Taxation – Advanced Conference on Subchapter SNew York, NY, 7.26.18-7.27.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationNew York, NY, 10.21.18-10.26.18
- "The Tax Cuts and Jobs Act – What It May Mean to Your Clients," Estate Planning Council of Portland Mini-SeminarPortland, OR, 11.7.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationSan Diego, CA, 11.11.18-11.16.18