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IRS inadvertently helps in theft; must pay in wrongful-levy suit.

The Bank of Nebraska loaned Gordon's Towing $40,000; the bank, as a result, held a first lien on two of Gordon's trucks, together worth about $40,000. The security interests were recorded and noted on the trucks' title certificates.

When Gordon's didn't pay its taxes, the Internal Revenue Service seized the trucks and sold them at public auction. Before the auction began, an IRS representative notified the audience of the existence and amount of the bank's liens and said any successful bidder would have to satisfy the liens.

There were no bidders on the trucks except Kleiman, who bid and paid $5,700 (which the IRS had determined to be the minimum acceptable bid after subtracting the liens). The IRS took his cash payment, and he and a friend drove the trucks away.

The certificates of sale issued to Kleiman did not mention the bank's lien. The bank discovered the address Kleiman gave the IRS was false. Later investigations revealed he had left the state and sold the trucks to two parties that knew nothing of the liens. He never paid the bank, and searches for him were fruitless.

Note: A federal statute provides that for state registration of motor vehicles, state authorities must regard a certificate of sale provided at an IRS sale as a valid title certificate, regardless of whether the person holding the certificate of sale has the original title. This statute, combined with the IRS's failure to mention the liens on the certificates of sale, enabled Kleiman to carry out his scheme.

The bank sued the IRS under the wrongful-levy provisions [Internal Revenue Code section 7426(a)(1)]. It claimed the IRS's failure to mention the liens on the certificate of sale amounted to a wrongful levy, and the IRS was liable to the bank for the lost security interests. The district court held for the IRS, finding the destruction of the bank's interest resulted not from the IRS levy but from Kleiman's deceit.

Result: The Eighth Circuit allowed the wrongful-levy suit. The IRS's failure to mention the lien on the certificate effectively destroyed the bank's interests. Although section 7426(a)(1) does not define a wrongful levy, a regulation says a levy is wrongful if "the . . . sale pursuant to levy will or does effectively destroy . . . such person's interest in the property which is senior to" the lien. Thus, the IRS had to pay damages to the bank.

* Bank of Nebraska in La Vista (8th Cir., 1991).
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Article Details
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Author:Wagenbrenner, Anne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Feb 1, 1992
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