The IRS could apply a payment resulting from a levy on an account to the liabilities for any of the years covered by the levy, notwithstanding the fact that a taxpayer had earlier delivered a check to the IRS written on the account, which bounced because the funds in the account had been transferred to satisfy the levy.
David and Audrey Melasky filed joint tax returns for tax years 1995, 1996, 1999-2004, 2006, 2008, and 2009, but they did not pay their tax liabilities for these years. As of April 2009, the IRS had sent the couple multiple notices of intent to levy for each pre-2006 liability. Between 1997 and 2006, the Melaskys and the IRS negotiated offers in compromise and partial-payment installment agreements, but the Melaskys failed to meet the terms of the agreements.
As of January 2011, the Melaskys had not satisfied any of their pre-2006 tax liabilities and owed approximately $345,000 to the IRS for that period. They also owed tax liabilities of approximately $724 for 2006, $334 for 2008, and $18,000 for 2009.
On Jan. 27, 2011, the Melaskys delivered an $18,000 personal check to an IRS office in Houston. They designated this check to be applied toward their 2009 liability. Although the IRS Houston office made an entry on that date in their account for 2009 showing the payment, it did not immediately present the check for payment.
On Jan. 31, 2011, before the IRS Houston office presented the Melaskys' check for payment, the IRS office in Philadelphia issued their bank a notice of levy with respect to their 1995, 1996, and 1999-2004 liabilities (the Jan. 31 levy). As a result, the bank froze the couple's account.
Thereafter, the IRS presented the $18,000 check to the bank for payment, but it bounced because the bank had already turned over the account's balance in response to the Jan. 31 levy. The IRS reversed the previously applied credit it had given the Melaskys for 2009 and assessed a $360 penalty for issuing a bad check.
The Melaskys filed suit in Tax Court, arguing, among other things, that the IRS was required to apply $18,000 of the amount taken from their bank account due to the Jan. 31 levy to the outstanding liability for 2009.
The Melaskys argued that, based on their delivery of a personal check before the funds in their bank account were transferred because of the levy, the payment due to the levy was a voluntary payment, which they could designate to be applied to the year of their choice.
The court acknowledged that, generally, a taxpayer may designate the liability to which a voluntary payment is applied. However, under Tax Court and state law precedent, a payment by check is a conditional payment until the check is paid by the bank upon presentation. Because the check bounced, the payment was not a valid voluntary payment by check. Rather, the payment the IRS received was a result of the levy and was therefore an involuntary payment. An involuntary payment can be applied to whichever liability of the taxpayer the IRS chooses, and therefore the IRS did not abuse its discretion by applying the amount it received to the Melaskys' pre-2006 liabilities.
The Melaskys appealed the Tax Court's decision to the Fifth Circuit.
The Fifth Circuit's decision
The Fifth Circuit affirmed the Tax Court's holding that the IRS did not abuse its discretion in applying the payment from the Jan. 31 levy. In addition to finding, as did the Tax Court, that the payment made by the Melaskys was an involuntary payment that the Melaskys could not designate to a specific year's liability, the court found that the IRS could not have applied the payment to the 2009 liability.
After discussing the differences between delivering a check and making a payment, and between the treatment of a voluntary and involuntary payment, the court considered the payment made by the Melaskys. The court noted that not only did the facts indicate that the payment was an involuntary payment as a result of a levy, but also the Melaskys agreed with this categorization throughout their dealings with the IRS and the Tax Court proceedings and had continued to do so in the proceedings on appeal, repeatedly referring to "levy proceeds."
The court then observed that the Jan. 31 levy was for the Melaskys' pre-2006 liabilities. As such, the levy proceeds could not have been used as a credit toward their liability for 2009. Because the IRS had no discretion to apply the proceeds of the levy to their outstanding 2009 liability, it was not an abuse of discretion not to apply them to 2009 as the Melaskys requested.
The Melaskys also asserted on appeal that the IRS deliberately delayed presenting their check for payment so that it could seize the same funds by levy, which they claimed was an "intentional manipulation of banking procedures." However, when the court asked about these allegations during oral arguments, the Melaskys admitted they had no evidence to support this assertion and stated they only presumed this to be the case.
As the Fifth Circuit pointed out, the Melaskys could have obtained their desired result by simply sending the IRS a certified check. Rather than dealing with checks at all, taxpayers in a similar situation would be well advised to make a payment electronically, which is now very easy to do through the IRS website.
Melasky, No. 19-60084 (5th Cir. 2/3/20)