Mr. Nicholson, acting pro se, brought a suit against his credit union related to the surrender of the money in his account to the IRS pursuant to a levy. No doubt Mr. Nicholson was dismayed to find his account essentially wiped out by the levy; however, his effort to recover the money by suing the credit union does not fare well. It does show, however, that in complying with the levy provisions the credit union has a good defense to such suits but still must engage lawyers to help it defend itself. Occasionally, the US Attorney’s office might assist with the defense.
Mr. Nicholson alleges the credit union breached its fiduciary duty to him, violated IRS code provisions and violated the constitution by paying money over to the IRS in response to a levy.
The credit union countered that it had a mandatory obligation to comply with the levy under IRC 6332(c). It further argues that IRC 6332(e) provides a complete shield of liability to Mr. Nicholson:
(e) Effect of honoring levy.
Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.
Because of the mandatory requirement to comply and the shield provided by IRC 6332(e), the credit union moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6).
Mr. Nicholson responded with some standard tax protestor arguments that the income tax laws do not apply to him, but he also cited Treasury Regulation § 301.6332-1(c)(2)–(3). The regulations cited by Plaintiff provide, in relevant part, that:
(2) Exception for certain incorrectly surrendered property. Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property.
(3) Remedy. In situations described in paragraphs (c)(1) and (c)(2) of this section, taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in section 6343(b) or may bring suit to recover the property under section 7426.
The court makes relatively quick work of his attempt to use the wrongful levy provisions in this case pointing out their inapplicability because he has an interest in the property. He had previously sued the IRS seeking a return of his property. He faces the additional problem that a wrongful levy action needs to be brought against the IRS and not the third party such as the credit union. The statutory scheme essentially requires the third party to turn over the property to the IRS and then allows a party whose property was wrongfully taken to seek the return of that property from the IRS.
The court not only finds for the credit union but determines that Mr. Nicholson’s argument has so little merit that it does not afford him the opportunity to amend his complaint. The court had some familiarity with Mr. Nicholson from prior tax protestor type litigation. The failure of the district court or the Fourth Circuit to sanction Mr. Nicholson surprises me a little bit, but perhaps the courts knew that he had no ability to pay for any sanctions imposed.
While not remarkable, the case shows what should happen in a straightforward challenge of a levy. The quick dismissal saves the credit union from the burden of additional expenses. Mr. Nicholson can pursue his case against the IRS if he has one while allowing the party that received and paid the levy to stand on the sidelines of the dispute.