IRS Liable for Stock Loss After Levy

When the IRS levies or takes property from the taxpayer, the taxpayer has the right to request that the property be sold within 60 days.

This rule applies to more than just stocks. It also applies to cryptocurrency, for example.

In Zapara v. Commissioner, 126 T.C. 215 (2005), aff’d, 652 F.3d 1042 (9th Cir. 2011), the U.S. Tax Court ordered the IRS to credit $47,501.06 to the taxpayer for the loss in value of the taxpayer’s stock after the levy due to the IRS’s failure to sell the property within 60 days.

Facts & Procedural History in Zapara

The IRS served a jeopardy levy to seize the taxpayer’s stock accounts. The taxpayer requested a collection due process hearing.

The taxpayer asked the IRS Office of Appeals to sell the stock. The IRS did not act on the taxpayer’s request and the value of the stock declined.

The taxpayer petitioned the U.S. Tax Court to consider the IRS’s decision.

The 60 Day Sale Rule

The 60 day sale rule addresses the situation where the stock declines in value from the time of the IRS levy. The thought is that if the IRS levies on the stocks, it should have to sell the stocks and credit the taxpayer with the amount of the stock proceeds. It would not be fair if the IRS failed to act timely and then the taxpayer was not credited with the full value of the stocks at or near the time of the levy.

As noted above, the U.S. Tax Court ordered the IRS to credit the taxpayers $47,501.06 for the loss in value of the stocks that were levied by the IRS.

The IRS does not agree with the court’s decision in this case. The IRS issued AOD 2012-06 to nonacquiese with the holding.

The IRS’s complaint is that it feels that the U.S. Tax Court does not have the power to order a credit in this situation. The IRS argues that Sec. 7433 is the only means for ordering the IRS to pay taxpayers. Section 7433 allows taxpayers to sue the IRS for wrongful conduct. According to the IRS, Section 7433 is the exclusive means for ordering the IRS to make payments. Section 7433 claims have to be filed in the U.S. district court–not the U.S. Tax Court. This is set out directly in Section 7433.

The U.S. Tax Court exercised its jurisdiction under Section 6330/6331 for this case. The remedies afforded under these Code sections allow the court to make determinations like this, as that was the express intent of Congress in enacting 6330/6331.

The Takeaway

This court opinion shows how important the collection due process hearing is. Taxpayers who have volatile assets such as stocks or cryptocurrency should consider asking the IRS to levy on these assets. This can provide some downside protection in the event that the IRS does not act timely to levy and sell the assets. This is an argument that can be raised in the collection due process hearing.