Conway v. Commissioner

MICHAEL J. CONWAY, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT

RAYMOND T. NAKANO, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket Nos. 23833–08L, 24600–08L. Filed December 19, 2011.

R assessed trust fund recovery penalties against Ps (P–C
and P–N). R did not issue Ps Forms 3552, Notice of Tax Due
on Federal Tax Return, within 60 days of the assessments. R
filed a notice of Federal tax lien (NFTL) on P–C’s property. R
then issued a CDP lien notice to P–C and a CDP levy notice
to P–N. R issued Ps Forms 3552 after issuing the CDP
notices. Ps argue that R’s determinations to proceed with
collection were an abuse of discretion because R had not com-
plied with the requirement of sec. 6303(a), I.R.C., that notice
and demand be given within 60 days of assessment. Held: The
CDP levy notice issued to P–N satisfies the requirements of
sec. 6303, I.R.C. Held, further, R’s determination to proceed
with levy against P–N was not an abuse of discretion. Held,
further, the filing of the NFTL against P–C was premature.
Held, further, R’s determination to sustain the NFTL filing
against P–C was an abuse of discretion.

Tim A. Tarter, for petitioners.
Chris J. Sheldon, for respondent.

OPINION

PARIS, Judge: Petitioner Michael J. Conway (Conway) and
petitioner Raymond T. Nakano (Nakano) petitioned the
Court to challenge the Internal Revenue Service Office of
Appeals’ (IRS Appeals) determinations to sustain: (1) The
filing of a notice of Federal tax lien (NFTL) against Conway
209

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 210 137 UNITED STATES TAX COURT REPORTS (209)

and (2) a proposed levy against Nakano. See secs. 6321,
6330(c)(3), 6331(a). 1 Respondent filed the NFTL and proposed
the levy to collect trust fund recovery penalties (TFRPs)
assessed against petitioners for the taxable quarters ending
September 30, 2000, September 30, 2001, and December 31,
2001 (the tax periods at issue). See sec. 6672(a). The Court
has jurisdiction to review IRS Appeals determinations. Sec.
6330(d). On March 15, 2010, the parties filed a joint motion
to consolidate for trial, briefing, and opinion, which the Court
granted. These consolidated cases present one issue for deci-
sion: whether IRS Appeals abused its discretion in sustaining
the NFTL filing and proposed levy.

Background
The parties submitted these cases for decision fully stipu-
lated. See Rule 122(a). The stipulation of facts filed March
18, 2010, and the attached exhibits are incorporated herein
by this reference. When the petitions were filed, Conway
resided in Texas, and Nakano resided in Arizona.
I. Transportation Excise Taxes for National Airlines, Inc.
Conway founded and operated National Airlines, Inc.
(National), which was based in Las Vegas, Nevada. Conway
was National’s chief executive officer (CEO), its president, and
chairman of its board of directors during the tax periods at
issue. Nakano was National’s chief financial officer during
the tax periods at issue. National began flying passengers in
1999, but by December 2000 it was under bankruptcy protec-
tion. National ceased operations at the end of 2001. When
National stopped doing business, it had reported but unpaid
transportation excise taxes 2 for the tax periods at issue of
$1,832,501.01, $3,497,448.32, and $4,803,626.85, respectively.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986,

as amended and in effect when the petition was filed; all Rule references are to the Tax Court
Rules of Practice and Procedure.
2 Sec. 9502 establishes the Airport and Airway Trust Fund, which consists in part of excise

taxes on taxable transportation collected by airlines under sec. 4261. Airlines remit the excise
taxes to the U.S. Treasury for the benefit of the Airport and Airway Trust Fund. See secs.
7501(a), 9502(b)(1)(B).

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II. Trust Fund Recovery Penalties
Respondent determined that petitioners were responsible
for National’s failure to pay the excise taxes. On March 14,
2003, respondent notified petitioners that he proposed to
assess TFRPs against them. On May 9, 2003, petitioners filed
protests of the proposed TFRP assessments with IRS Appeals.
Almost 3 years later, on March 23, 2006, IRS Appeals notified
petitioners that it had rejected their protests. Five days later,
on March 28, 2006, TFRPs were assessed against petitioners.
The notice of tax due, although dated March 28, 2006, was
not issued until June 6, 2006. 3
III. The Proposed Levy on Nakano’s Property
On May 22, 2006, respondent sent Nakano a Form 1058,
Final Notice—Notice of Intent to Levy and Notice of Your
Right to a Hearing (levy notice). The levy notice reflected
respondent’s intent to levy on Nakano’s property and rights
to property to collect the TFRPs assessed against him. The
levy notice listed the type and amount of tax owed for each
of the tax periods at issue. The levy notice also stated: ‘‘To
prevent collection action, please send your full payment
3 Petitioners each filed a refund suit in Federal District Court after respondent denied their

refund claims submitted at the end of May 2006. Conway v. United States, No. 08–CV–201–
MHS–DDB (E.D. Tex., filed June 4, 2008); Nakano v. United States, No. 08–CV–1026–ROS (D.
Ariz., filed June 2, 2008). The District Courts each found the respective petitioner to be respon-
sible for National’s failure to pay the excise taxes, see sec. 6672, and entered summary judgment
sustaining the respective petitioner’s liability for the TFRPs and the assessments in connection
therewith, Conway v. United States, 105 AFTR 2d 2010–1310, 2010–1 USTC par. 50,297 (E.D.
Tex. 2010), affd. 647 F.3d 228 (5th Cir. 2011); Nakano v. United States, No. 08–CV–1026–ROS
(D. Ariz., Nov. 2, 2011). In Conway’s case, the Court of Appeals for the Fifth Circuit affirmed
the District Court’s judgment on July 19, 2011. Conway v. United States, 647 F.3d 228 (5th Cir.
2011).
While the refund suits were pending, respondent filed a collection action against petitioners
in the U.S. District Court for the District of Nevada. United States v. Nakano, No. 2:08–CV–
01340 (D. Nev., filed Oct. 6, 2008). Petitioners filed motions in their refund suits to enjoin the
Nevada proceedings based on sec. 6331(i)(1)–(4), which provides in relevant part that ‘‘No pro-
ceeding in court for the collection of any unpaid [divisible] tax * * * shall be begun by the Sec-
retary during the pendency of [any proceeding brought by such person in a proper Federal trial
court for the recovery of any portion of such divisible tax]’’. The District Courts granted peti-
tioners’ motions.
Upon motions to reconsider, however, the District Courts lifted the injunctions on the basis
of the distinction between divisible taxes, which are limited to taxes imposed under subtit. C,
and airline excise taxes, which are imposed by subtit. D. Nakano v. United States, supra (order
granting motion for reconsideration entered Nov. 12, 2009); Conway v. United States, supra
(order granting motion for reconsideration entered Nov. 30, 2009). Therefore, sec. 6331(i) does
not bar respondent’s collection action in these cases. Cf. Beard v. United States, 99 Fed. Cl. 147
(2011) (applying sec. 6331(i) to bar the Government’s collection action in District Court for the
same employment taxes that were subject to plaintiff’s refund suit in the U.S. Court of Federal
Claims).

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today.’’ The levy notice informed Nakano of his right to a
collection due process hearing (CDP hearing) with IRS Appeals
before respondent carried out the levy. Fifteen days later, on
June 6, 2006, respondent issued Nakano a Form 3552, Notice
of Tax Due on Federal Tax Return, for each of the tax
periods at issue (collectively, Nakano’s Forms 3552). 4
IV. The Federal Tax Lien Against Conway
On May 18, 2006, respondent sent Conway a Letter 3164B.
The letter stated that ‘‘We are attempting to collect unpaid
taxes from you’’, but it did not state the amounts, types, or
periods of the unpaid taxes.
On May 26, 2006, respondent filed an NFTL with the Clark
County Recorder’s Office in Nevada. The NFTL stated:
As provided by section 6321, 6322, and 6323 of the Internal Revenue Code,
we are giving a notice that taxes (including interest and penalties) have
been assessed against the following-named taxpayer. We have made a
demand for payment of this liability, but it remains unpaid. Therefore,
there is a lien in favor of the United States on all property and rights to
property belonging to this taxpayer for the amount of these taxes, and
additional penalties, interest, and costs that may accrue.

Conway was the named taxpayer on the NFTL. On June 1,
2006, respondent issued Conway a Letter 3172, Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under
IRC 6320. Five days later, on June 6, 2006, respondent issued
Conway a Form 3552 for each tax period at issue (collec-
tively, Conway’s Forms 3552). 5
V. The Collection Due Process Hearing
Nakano and Conway timely requested CDP hearings on
June 16 and July 3, 2006, respectively, to contest the pro-
posed levy and NFTL filing. At the request of petitioners’
counsel, they received a joint CDP hearing. In their CDP
hearing requests, petitioners claimed the following: (1) The
TFRP assessments were invalid and (2) respondent failed to

4 Nakano’s Forms 3552 were dated Mar. 28, 2006, which was contemporaneous with the as-

sessment. The record does not reflect why they were not issued until June 6, 2006.
5 Like Nakano’s Forms 3552, Conway’s Forms 3552 were dated Mar. 28, 2006. Also, as is the

case with Nakano, the record does not reflect why Conway’s Forms 3552 were not issued until
June 6, 2006. See supra note 4. Although Forms 3552 were mailed to Conway on June 6, 2006,
they were returned as undeliverable. The forms were subsequently remailed to Conway’s coun-
sel. The parties have agreed that the date of mailing of the Forms 3552 to Conway was June
6, 2006.

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issue notice and demand for payment within 60 days of the
assessments, thus precluding him from collecting the TFRP
assessments via lien and levy. 6
Petitioners’ CDP hearing was originally assigned to Settle-
ment Officer David Villaverde (SO Villaverde), who held a
face-to-face hearing with petitioners’ counsel. On the results
of the CDP hearing, SO Villaverde determined that ‘‘some
errors were found to have been made by the Service * * *
[but] there were no fatal errors made.’’ Specifically, SO
Villaverde agreed that respondent did not issue notice and
demand to petitioners within 60 days of the TFRP assess-
ments. However, he believed that this failure did not prevent
respondent from collecting the TFRP assessments via lien and
levy. Rather, SO Villaverde determined that ‘‘the Service
does have the collection tools available 10 days after the
untimely notice was sent on June 6, 2006, which would be
on or after June 16, 2006.’’ On the basis of this determina-
tion, SO Villaverde thought withdrawing the NFTL filing and
rescinding the levy notice were appropriate courses of action
given that the NFTL was filed and the levy notice was issued
before June 16, 2006.
Before SO Villaverde made final determinations in peti-
tioners’ CDP hearing, he was promoted to Appeals team man-
ager. Petitioners’ case was reassigned to Settlement Officer
Veronica Hernandez (SO Hernandez). After reviewing the
record and meeting with petitioners’ counsel, SO Hernandez
concluded that, while the untimely issuance of notice and
demand did not invalidate the TFRP assessments, respondent
should withdraw the NFTL filing and rescind the levy notice.
The Appeals team manager, however, disagreed with SO
Hernandez’s conclusions and ultimately overruled her. 7
Thus, IRS Appeals ultimately determined that: (1) The TFRP
assessments were valid and (2) failure to issue timely notice
and demand did not invalidate the NFTL filing or the pro-
posed levy. Petitioners timely petitioned the Court for review
of the determinations. See sec. 6330(d).
6 Petitioners also claimed in their CDP hearing requests that they were not responsible for

National’s failure to pay the excise taxes and thus were not liable for the TFRPs. During the
actual CDP hearing, however, petitioners conceded that they were not entitled to challenge the
underlying liabilities. Thus, petitioners’ underlying liabilities are not at issue here but were the
subject matter of U.S. District Court complaints. See supra note 3.
7 The record does not reflect whether the Appeals team manager who overruled SO Hernandez

was former SO Villaverde or another person.

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Discussion
I. Applicable Law
A. Trust Fund Recovery Penalty
Section 6672(a) provides that any person required to with-
hold and pay over any tax who willfully fails to do so is liable
for a TFRP. The Commissioner is authorized to impose a TFRP
on any ‘‘officer or employee of a corporation, or a member or
employee of a partnership who as such officer, employee, or
member is under a duty to perform’’ the duties referred to in
section 6672. Sec. 6671(b). The Commissioner must give the
person on whom he intends to impose the TFRP notice of his
intent before assessing the TFRP. Sec. 6672(b)(1). If the per-
son timely protests the proposed assessment, the period for
assessing the TFRP does not expire before ‘‘the date 30 days
after the Secretary makes a final administrative determina-
tion with respect to such protest.’’ Sec. 6672(b)(3)(B). If the
person fails to protest or, after a timely protest, the Sec-
retary makes a final determination, the Commissioner may
assess the TFRP. A TFRP is assessed and collected in the same
manner as tax. Sec. 6671(a).
B. Notice and Demand for Payment
Once the Commissioner assesses a TFRP against a person,
he must give that person notice and demand for payment.
Sec. 6303(a). The Commissioner must leave the notice at the
person’s dwelling or usual place of business or mail it to the
person’s last known address. Id. The statute requires that
the Commissioner give the notice within 60 days of assess-
ment. Id. The regulations under that section, however, pro-
vide that ‘‘the failure to give notice within 60 days does not
invalidate the notice.’’ See sec. 301.6303–1(a), Proced. &
Admin. Regs.
C. NFTL Filing
If a person liable for a tax, including a TFRP, fails to pay
it after demand, the unpaid amount, including any interest
and additions to tax, becomes a lien in favor of the United
States upon that person’s property and rights to property.
Sec. 6321. The Commissioner may then file an NFTL to pro-
tect the validity and priority of the lien against certain third

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parties. Sec. 6323. Once the Commissioner files an NFTL, he
must notify the person of the filing and of the person’s right
to a CDP hearing to appeal the filing. Secs. 6320(a) and (b),
6330(a).
D. Notice of Intent To Levy
If a person liable to pay a tax, including a TFRP, does not
pay it within 10 days after notice and demand, it becomes
lawful for the Commissioner to levy on that person’s property
and rights to property to collect the unpaid amount,
including interest and additions to tax. Sec. 6331(a). At least
30 days before carrying out the levy, however, the Commis-
sioner must give notice to that person of the proposed levy
and of the person’s right to a CDP hearing to appeal the pro-
posed levy. Secs. 6330(a), 6331(d).
E. The CDP Hearing
If a person requests a CDP hearing to appeal an NFTL filing
or a proposed levy, he receives one before IRS Appeals. Sec.
6330(b). During the CDP hearing, IRS Appeals must verify
that all legal and procedural requirements have been met
with respect to the NFTL filing and the proposed levy. Sec.
6330(c)(1). Specifically, IRS Appeals must verify, among other
things, that the Commissioner properly issued the person
notice and demand for payment. Sec. 6303(a); Ron Lykins,
Inc. v. Commissioner, 133 T.C. 87, 96–97 (2009). Sustaining
an NFTL filing or proposed levy without proper verification
renders IRS Appeals’ determination an abuse of discretion.
Freije v. Commissioner, 125 T.C. 14, 36 (2005).
After conducting the CDP hearing, IRS Appeals determines
whether to sustain the NFTL filing or proposed levy. Sec.
6330(c). The person may appeal an IRS Appeals determina-
tion to the Court. Sec. 6330(d). If the person appeals and his
underlying liability for the tax (or TFRP) was not at issue
during the CDP hearing, the Court reviews the IRS Appeals
determination for abuse of discretion. Lunsford v. Com-
missioner, 117 T.C. 183, 185 (2001) (citing Nicklaus v.
Commissioner, 117 T.C. 117, 120 (2001)). IRS Appeals abuses
its discretion if it makes a determination that is ‘‘arbitrary,
capricious, or without sound basis in fact or law.’’ Giamelli
v. Commissioner, 129 T.C. 107, 111 (2007) (citing Woodral v.

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 216 137 UNITED STATES TAX COURT REPORTS (209)

Commissioner, 112 T.C. 19, 23 (1999)). Petitioners conceded
during the CDP hearing that they could not contest their
underlying liability for the TFRPs. 8 Thus, the Court reviews
IRS Appeals’ determinations for abuse of discretion.

II. The Proposed Levy Against Nakano’s Property
Nakano contends that IRS Appeals failed to verify that the
requirements of applicable law had been met. Specifically, he
argues that respondent did not: (1) Properly assess the TFRPs
against him or (2) give him notice and demand within 60
days of any assessment. Nakano ultimately claims that this
failure rendered IRS Appeals’ determination to proceed with
the proposed levy an abuse of discretion.
A. Notice and Demand
Respondent contends that he gave Nakano valid notice and
demand when he issued Nakano the levy notice on May 22,
2006. The levy notice went beyond the typical notice of intent
to levy by including a demand for immediate payment of the
specific amounts of TFRP owed, listed by period at issue,
within 60 days of the assessments. In this limited cir-
cumstance, the Court agrees that this levy notice constitutes
notice and demand.
‘‘ ‘The form on which a notice of assessment and demand
for payment is made is irrelevant as long as it provides the
taxpayer with all of the information required under * * *
[section 6303].’ ’’ Hughes v. United States, 953 F.2d 531, 536
(9th Cir. 1992) (quoting Elias v. Connett, 908 F.2d 521, 525
(9th Cir. 1990)); see also Deputy v. Commissioner, T.C.
Memo. 2003–210. Section 6303 requires only that the notice
(1) state the amount of unpaid tax, (2) demand payment, and
(3) be issued within 60 days of assessment. The levy notice
here did provide Nakano with all of the information required
under the statute because it listed the type and amount of
unpaid tax for each tax period, explicitly demanded payment,
and was sent within 60 days of the assessments. The Court
therefore holds that respondent gave Nakano the notice and
demand required by section 6303.

8 See supra note 6.

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B. Assessment
Nakano also argues that the TFRP assessments are invalid
because: (1) The assessments were untimely; (2) Nakano’s
Forms 4340, Certificate of Assessments, Payments, and
Other Specified Matters, incorrectly characterized the assess-
ments as jeopardy assessments rather than quick assess-
ments; and (3) respondent did not timely issue notice and
demand. The Court disagrees. While Nakano’s notice of
determination states that ‘‘It was believed to have been
established that the assessment[s], although made late in
error, * * * [were] still * * * valid [assessments]’’, the
record contradicts this statement. Both the Forms 4340 and
Nakano’s Forms 3552 show that respondent assessed the
TFRPs on March 28, 2006. Aside from the statement in the
notice of determination, no evidence suggests that
respondent did not timely assess the TFRPs. Also, Nakano has
shown no prejudice, and, therefore, mislabeling the quick
assessments as jeopardy assessments does not invalidate
them. See McCall v. Commissioner, T.C. Memo. 2009–75. In
addition, the Court has already rejected Nakano’s argument
that he did not receive timely notice and demand for pay-
ment. Thus, the Court holds that the TFRP assessments
against Nakano are valid.
C. Conclusion
Respondent properly assessed the TFRPs against Nakano
and issued him valid notice and demand for payment. Thus,
IRS Appeals correctly verified that all legal and administra-
tive requirements had been met. Therefore, IRS Appeals did
not abuse its discretion when it sustained the proposed levy.
III. The NFTL Filed on Conway’s Property
Like Nakano, Conway contends that IRS Appeals failed to
verify that the requirements of applicable law had been met.
Specifically, he argues that respondent did not give him
notice and demand within 60 days of the assessment. 9
Respondent, however, contends that he issued Conway valid
9 To be sure, Conway also argues that respondent improperly assessed the TFRPs against him.

Because respondent did not give Conway notice and demand before the NFTL filing, thus invali-
dating the filing and rendering IRS Appeals’ determination an abuse of discretion, the Court
need not address this argument. See supra note 5.

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notice and demand when he sent Conway the Letter 3164B,
the lien notice, and Conway’s Forms 3552. Alternatively,
respondent argues that he did not need to issue notice and
demand to Conway because Conway’s role as National’s CEO
put him on notice of the unpaid amounts and respondent’s
demand for payment. The Court disagrees with both of
respondent’s arguments.
First, the Letter 3164B did not constitute valid notice and
demand. The Letter 3164B merely reflected that unpaid
taxes were owed but did not state the amounts, types, or
periods of the unpaid taxes. Respondent contends that the
Letter 3164B did not have to state the amounts owed
because, by the time respondent issued the Letter 3164B,
Conway’s multiple communications with IRS Appeals (before
the assessments) regarding the amounts of the unpaid TFRPs
had provided him with constructive notice. Even if Conway
had previously seen the proposed assessments, section
6303(a) required respondent, after making an assessment of
tax, to either leave notice and demand of payment at
Conway’s ‘‘dwelling or usual place of business’’ or mail it to
his last known address. Cf. Resyn Corp. v. United States (In
re Resyn Corp.), 945 F.2d 1279 (3d Cir. 1991) (IRS’ filing of
a proof of claim in bankruptcy did not satisfy section 6303(a)
because it did not employ either of these notification
methods). Therefore, since the Letter 3164B gave notice of
nothing other than that unpaid taxes were owed, it did not
constitute a valid postassessment notice and demand.
Next, the lien notice did not constitute valid notice and
demand under section 6303 and section 6321. Respondent’s
argument assumes that the lien notice issued to Conway on
June 1, 2006, can serve as both notice and demand under
section 6303 and notice under section 6320. This assumption
is flawed. A tax lien imposed under section 6321 arises at the
time of assessment, see sec. 6322, and is enforceable when a
‘‘person liable to pay any tax neglects or refuses to pay the
same after demand’’, sec. 6321 (emphasis added). Moreover,
section 6320(a)(1) requires the Commissioner to notify ‘‘the
person described in section 6321’’ of the NFTL filing.
(Emphasis added.) This person is the person liable to pay
who has refused to pay after demand. Thus, the Commis-
sioner must issue notice under section 6320(a)(1) only after
demand has been made and the person neglects or refuses to

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 (209) CONWAY v. COMMISSIONER 219

pay. Therefore, no notice can serve as both assessment notice
and demand under section 6303 and also postlien notice
under section 6320(a)(1).
Unlike the statutory requirements above that the
postassessment notice and demand precedes the postlien
notice, respondent did the reverse. On June 1, 2006,
respondent issued the lien notice to Conway. On June 6,
2006, respondent issued to Conway the Forms 3552, notice of
tax due. Thus, the NFTL filed on May 26, 2006, predated the
notice and demand for payment reflected on Forms 3552
issued to Conway on June 6, 2006. Similarly, the Forms
3552 issued to Conway on June 6, 2006, even though consti-
tuting valid notice and demand under the applicable regula-
tion, cannot support the instant NFTL filing because the filing
predated the issuance of the Forms 3552.
Alternatively, respondent argues that he did not need to
issue notice and demand to Conway because Conway’s role as
National’s CEO put him on notice of the unpaid amounts and
respondent’s demand for payment. Respondent relies on
Jersey Shore State Bank v. United States, 479 U.S. 442
(1987), to support his argument. Respondent’s reliance on
Jersey Shore is misplaced. The penalty imposed on the bank
in Jersey Shore was nonassessable and not subject to
administrative collection procedures. Id. at 447. Thus, the
Supreme Court’s reasoning in Jersey Shore does not support
the proposition that any notice Conway may have had elimi-
nated the need for respondent to issue notice and demand
before the lien on Conway’s property arose.
Because respondent failed to give notice and demand
before filing the NFTL, the NFTL filing was premature and
respondent should have withdrawn the NFTL pursuant to sec-
tion 6323(j)(1)(A). The Appeals team manager’s verification
that the requirements of applicable law had been met was
therefore incorrect, and respondent’s determination to sus-
tain the NFTL filing was an abuse of discretion.

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To reflect the foregoing,
Appropriate decisions will be entered.
f

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