About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Update on CIC Services: The Scope of Relief Available if A Court Finds That An Agency’s Rulemaking Violates the APA

Following the Supreme Court decision in CIC Services, the matter was remanded back to the district court. Last month the district court granted CIC Services’ motion for preliminary injunction, finding that the Notice 2016-66 was a legislative rule and its issuance violates the notice-and-comment provisions of the APA.  Following CIC Services’ victory, however, it filed a motion to reconsider.

Why would CIC file a motion for reconsideration? Last month’s district court’s opinion narrowly enjoined the IRS from enforcing the Notice against CIC Services. In its motion, CIC Services has requested that the court broaden the relief and issue a national outright injunction that would prevent the IRS from enforcing it against anyone.

Readers may recall that in CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues I discussed the lurking issue as to the extent of any relief that a court could grant if it were to find that the IRS issuance of the notice violated the APA. In that piece I pointed to an excellent Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Professor Mila Sohoni provides context on the debate within administrative law. She argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.

In the motion CIC Services acknowledges that there is uncertainty as to the scope of relief but argues that the court’s power to vacate the notice is broad (citing to the Notice & Comment blog). It also discusses the particular harm that CIC Services faces in the absence of a national injunction, including how it must incur costs to assist its nationwide clients who still have to comply and how the order “does not explicitly relieve CIC Services of the on-going and compulsory record-keeping that Notice 2016-66 requires.”

This is an important issue not only for tax administration. It has wide implications for administrative law.

In Summons Dispute IRS Entitled to Confidential Emails Between Insurance Companies and State Regulator

In US v Delaware Department of Insurance a federal district court ordered the Delaware Department of Insurance (DDOI) to turn over emails associated with micro-captive promoters.  In tax cases it is somewhat unusual that the federal government finds itself in court with state attorneys as adversaries. The case flags tension between the vast information-gathering powers of the IRS versus state and non tax specific federal law designed to provide state law with exclusive responsibility for regulating insurance companies. In this post I will briefly describe the case and highlight how federal law preempts Delaware confidentiality provisions.

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IRS had previously investigated Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC (“Tribeca”) (which is owned by Artex) in transactions involving micro-captive insurance plans. As part of its investigation into possibly abusive micro-captive insurance transactions, IRS served an administrative summons on DDOI asking for a wide range of information relating to Artex and Tribeca. DDOI turned over thousands of pages of documents but refused to turn over client specific information.

As justification for its refusal, DDOI relied on Section 6920 of the Delaware Insurance Code, which provides for confidential treatment of materials and information that captive insurers submit to the state tax commissioner, either directly or through DDOI, as part of the application and licensing process.

In response to the IRS’s seeking client specific information, DDOI contacted the parties and asked for consent to comply with the IRS summons. A handful agreed but most did not. DDOI then sought to enforce the summons and DDOI filed a petition to quash, relying on Section 6920 of the Delaware Insurance Code.

As a general matter, when there is a conflict between a federal statute and a state statute, the state statute yields under the doctrine of preemption. The McCarran-Ferguson Act (“MFA”) creates an exception to this general rule.  The MFA generally provides that states are entitled to regulate the business of insurance and that “no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance.”

MFA thus sets out a reverse preemption principle. State law cedes to federal law but not when the state law pertains to the state’s role in regulating the business of insurance. The opinion discusses the policy underlying the MFA:

“Congress was mainly concerned with the relationship between insurance ratemaking and the antitrust laws, and with the power of the States to tax insurance companies.” S.E.C. v. Nat’l Sec., Inc. , 393 U.S. 453, 458-59 (1969) (citing 91 Cong. Rec. 1087-1088). The MFA attempted “to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation.” Nat’l Sec., 393 U.S. at 459.

While the language in the MFA is broad, the opinion notes that It did not “purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws ‘regulating the business of insurance.’ Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the ‘business of insurance’ does the [MFA] apply.” 

The opinion gets into some detailed discussion about how cases have applied the MFA and its reach but essentially the magistrate and ultimately the district court held that the MFA “simply does not apply – i.e., the MFA only allows for reverse preemption when the conduct at issue is the “business of insurance,” which was found missing here. “

DDOI asserted that the conduct “is more properly characterized as “receiving, maintaining and restricting dissemination of application and licensing information of captive insurers,” which it argues is fundamental to insurance regulation.”

The magistrate and district court judge disagreed, framing the state’s conduct as akin to maintaining records rather than actual regulation:

Here, the Court finds no error in the Report’s conclusion that the challenged conduct itself is fairly characterized as “record maintenance” and, more specifically, the dissemination and maintenance of information, documents, and communications maintained by the state. In the Court’s view, this is a fair characterization because it flows directly from the language of Section 6920, which is what DDOI argues protects it from complying with the Summons. Section 6920 protects from disclosure broad swathes of information, not merely application and licensing information of captive insurers (as DDOI suggests). See, e.g. , 18 Del. C. § 6920 (“ … all examination reports, preliminary examination reports, working papers, recorded information, other documents, and any copies of any of the foregoing, produced or obtained by or submitted or disclosed to the Commissioner that are related to an examination pursuant to this chapter … ”). Given the broad scope of documents and information covered by Section 6920, the Report committed no error in characterizing the conduct at issue.

I am giving somewhat short shrift to the MFA arguments that DDOI made, including a disagreement on the standard relating to how to define the business of insurance, but they will be of interest more to a small group of practitioners. Not only does the case highlight the IRS appetite to challenge captive insurance arrangements, but it also resonates n light of the recent Pandora Papers scandal. The Pandora Papers release reveals how at times states’ trust laws are designed to shield information from taxing authorities and other creditors. Many state laws, such as in the DDOI case, present formidable but not insurmountable barriers to engaged and inquisitive IRS employees. Tax havens are not only located outside the US. We will likely see government efforts to obtain information that is potentially subject to state laws that are meant to make it difficult, though not impossible, to attract the eyes of the federal government.

Appeals Finalizes Team Case Leader Initiative

The Sixth International Taxpayer Rights Conference kicked off today with a workshop on ombuds and advocates and continues through Friday. As Nina Olson mentioned last week in Taxpayer Rights as Human Rights: Registration is open for the 6th International Conference on Taxpayer Rights, the conference focuses on taxpayer rights as human rights. It provides the opportunity to learn from the way other countries administer their tax systems. If you have the time I strongly encourage you to attend this year’s conference, which is online only.

As part of the conference, I will be speaking Thursday morning on a panel that looks at how the right to administrative appeals promotes integrity and fairness in the tax system. I am joined by the Governor of the Greek Independent Revenue Authority and Professor Carika Fritz from the University of Witwatersrand in South Africa.

One of the topics I will discuss on the panel is the IRS’s Independent Office of Appeals recent decision concerning the Appeals Team Case Leader Conferencing Initiative. As readers may know, back in 2017 Appeals (as of the Taxpayer First Act the IRS Independent Office of Appeals) initiated a pilot program where IRS Large Business and International Exam teams and their Chief Counsel Attorneys meet with Appeals, taxpayers and their representatives at the commencement of the Appeals process. The goal was to narrow the scope of controversies and improve Appeals’ understanding of any differing takes on the law and facts. 

The pilot was limited to large complex cases that are led by seasoned Appeals employees known as Appeals Team Case Leaders. When Appeals announced the pilot, practitioners, the NTA and IRSAC weighed in (see the 2017 NTA comments here and IRSAC here), with some comments expressing deep reservations about the possible impact of Appeals’ engagement with Counsel and compliance employees on public confidence in Appeals’ impartiality and independence.

Last month Appeals announced that it has concluded the pilot and reached a decision on the process going forward. Appeals will not mandate joint case discussions in every case but will continue to operate under policies that allow it, in its discretion, to invite Counsel and Exam employees into the non-settlement portions of the Appeals process.

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It has been a while since I was practicing at large law firms and worked on LB&I Appeals so I cannot speak personally to the experiences of those practitioners who may have strong views on this. I was impressed, however, by the Appeals memo that accompanied the decision to continue the practice. The memo itself discusses the external comments, identifies some of the suggestions practitioners made, and flagged the reasons why Appeals decided to continue and formalize the practice.  As an example of the transparency reflected in the memo, while rejecting the recommendation, Appeals candidly discussed the suggestion that several commenters made to tether the process to taxpayer consent.

In reaching this conclusion, we carefully considered the suggestion by several commenters that taxpayer consent be required for Compliance to attend the non- settlement portion of Appeals conferences. While we agree that an ATCL should always consider the taxpayer’s (or their representative’s) views about Compliance attending an initial case discussion, we left the decision within the ATCL’s sole discretion for several reasons. First, the discretion to invite Compliance to conferences has been Appeals’ policy since at least 1967. During this time, Appeals technical employees have used this discretion sparingly and responsibly. More importantly, requiring taxpayer consent would effectively substitute the judgment of the taxpayer (or the taxpayer’s representative) for the judgment of the ATCL on the question of how best the ATCL can fully understand the merits of both parties’ positions and fairly assess the hazards of litigation in complex cases.

Taxpayers are entitled to negotiate settlements with Appeals without Compliance’s participation but allowing taxpayers to limit Appeals’ ability to understand a case would undermine fair tax administration. ATCLs are highly experienced and knowledgeable tax professionals with the ability to independently judge the facts, law and litigating hazards and propose fair and reasonable settlements. Appeals leadership trusts their judgment in determining when it would be helpful to invite Compliance to attend an initial case discussion with the taxpayer.

Going forward the memo notes that Appeals will focus on best practices and identifies the need to ensure public confidence in the integrity and independence of Appeals. To that end, it states that it will continue to reflect on additional feedback and adjust policies to preserve public confidence in the process. The transparency and willingness to solicit information seems like a strong recipe for tax administration. Even if one disagrees with the conclusion in the memo it is refreshing to see an open discussion of how and why Appeals decided to continue with its policy.

Can IRS Levy Reach Future Rent Payments?

A relatively brief CCA issued this month discusses the IRS’s ability to levy on the right to receive rent payments beyond the date of the levy. The CCA explores the rationale as to why a single levy may have continuous legal effect that will extent to the right to receive future payments, a topic I discussed recently in Levy on Social Security Benefits: IRS Taking Payments Beyond Ten Years of Assessment Still Timely. It also explores whether the IRS is required to use a Form 668-A to effectuate the levy, as it appears that an IRS employee had arguably mistakenly served a Form 668-W. Form 668-W is typically associated with continuous wage levies.

As Keith has patiently explained to me (and readers of both the blog and the Saltzman and Book treatise), there are two types of levies: 1) one-time events and 2) continuous wage levies.  The one time event levies come in two varieties: 1) bank levies where the IRS gets what is in the bank that day or other similar levies where the IRS reaches a static asset and 2) levies that reach an asset with future fixed payments.  Lots of people have trouble distinguishing between continuous wage levies and levies with fixed future payments, and it appears that the mistaken form IRS used reflects some of that confusion.

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The levy involved in this CCA reaches an asset with fixed future payments. As the CCA explains, “rental income is generally subject to a levy with continuous effect meaning that, to the extent that future rental liabilities are fixed and determinable, meaning the terms are provided for in a rental contract, the single levy reaches both current and future rental payments.”

There are a handful of cases that apply this principle in the context of rental income, including United States v. Halsey, Civ. A.  No. 85-1266, 1986 U.S. Dist. LEXIS 24130 (C.D.Ill.1986). One wrinkle in the CCA is that the lease was a month-to-month, but as the CCA explains

that [the] lease was a month-to-month lease does not affect the levy’s attachment to future payments. The levy was effective to reach future payments not by reason of the fact that it continued to operate beyond the time at which it was made, which it does not, but rather because the levy reached Plaintiff’s then existing right to the future payments under the lease, not the future payments themselves.

The CCA concludes that the Service’s use of the Form 668-W (meant for wages and allowing for exemptions under 6334(a)) in the context of rental income does not invalidate the levy, relying on there essentially being no material harm by the use of the improper form and that there is no authority concluding that the Service use a particular form for effectuating the levy.

TIGTA Report Highlights Major Compliance Issues When Businesses Fail to Pay Salaries to Sole Shareholder S Corporations

We mostly stick to procedure on this blog. So we do not often talk about the taxation of entities. But most of us, even true procedure folks know that S corporations generally do not pay federal income tax on their profits. Instead, the profits flow through to shareholders and are not subject to self-employment taxes. This creates the incentive for shareholders to minimize or even fail to pay any compensation for service-providing S Corps. The savings for S Corps who fail to pay reasonable or in some cases any compensation means that there is a hefty amount of owed Social Security and Medicare taxes that the fisc misses out on (and I leave aside any 199A issues that create further incentives for S corps and their service performing shareholders to avoid or minimize salaries).  

A recent TIGTA report highlights the problem. While IRS has made employment taxes a priority, TIGTA notes that IRS selects few S corporations for examination.  On top of that, “when the IRS does examine S corporations, nearly half of the revenue agents do not evaluate officer’s compensation during the examination even when single-shareholder owners may not have reported officer’s compensation and may have taken tax-free distributions in lieu of compensation.”

This is bad news.  The study looked at a few years of S Corp returns and noted that some really profitable S Corps with only one shareholder pay absolutely no compensation:

TIGTA’s analysis of all S corporation returns received between Processing Years 2016 through 2018 identified 266,095 returns with profits greater than $100,000, a single shareholder, and no officer’s compensation claimed that were not selected for a field examination. The analysis found that the single-shareholder owners had profits of $108 billion and took $69 billion in the form of a distribution, without reporting they received officer’s compensation for which they would have to pay Social Security and Medicare tax. TIGTA estimated 266,095 returns may not have reported nearly $25 billion in compensation and may have avoided paying approximately $3.3 billion in Federal Insurance Contributions Act tax.

As TIGTA notes, there are many cases that hold that shareholder-employees are subject to employment taxes even when shareholders take distributions, dividends, or other forms of compensation instead of wages. The substantive rules require that S Corp shareholders performing services are to take reasonable salaries.  For some of these cases, see Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141 (2001). Joly v. Commissioner, T.C. Memo. 1998-361, aff’d by unpub. Op., 211 F.3d 1269 (2002). Joseph M. Grey Public Accountant, P.C. vs. Commissioner, 119 T.C. 121 (2002). David E. Watson, PC vs. U.S., 668 F.3d 1008 (8th Cir. 2012).

Reasonable compensation cases have been around for many decades.  It used to be that the reason for the cases was the flip side because solely owned companies wanted to pay a high salary in order to avoid the problem with dividends.  So, companies with lots of assets would structure their compensation to the executives to avoid having any money left over for dividends and avoid the tax on leaving excess profits in the corporation.

To get to a court case is labor intensive, though for sure in any situation with zero compensation it would be fairly easy for the government to prove that there should be some deemed compensation. S Corp audits are handled in the field. For FY 2017-2019 there were about 5 million S corp returns filed. The audit coverage ranged from a high of 12,169 in FY 2017 to a low of 9,556 in FY 19, with coverage ranging from .2% to .3%.  TIGTA notes that many of the audits failed to even raise the issue of officer compensation. While IRS should audit more and do a better job targeting the issue, I wonder if there needs to be a statutory fix that requires or perhaps presumes some minimum salary that is pegged to earnings. Any legislative fix should consider how to minimize the burdens both to the IRS and taxpayers and remove the temptation for businesses to play the lottery.

As Keith notes, there is a long-term cost to not paying a salary which is that the owner is not building Social Security credits.  So, their social security upon retirement could be significantly less than it would have been otherwise if this goes on for a long time.  While there is a back end savings to the government that may not be reflected in the loss figures that may be much less than the costs to the government relating to the foregone employment taxes.

District Court Finds That IRS Failed to Adequately Notify Taxpayer Before it Contacted Third Party

In US v Vaught a federal district court in Idaho declined to enforce a third party summons due to the IRS’s failure to notify a taxpayer of its intent to contact a third party during the course of the audit.  

In this post I will discuss Vaught and provide some context for the summons dispute.

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In 2015 IRS began an investigation of Stanley Crow into penalties associated with his promotion of installment sale transactions. The IRS suspected the transactions were tax shelters subject to registration and disclosure requirements.  At the start of the examination it sent Crow a Publication 1, Your Rights as a Taxpayer. That publication gives generic information about the audit process, and also informs taxpayers that the IRS may contact third parties during the course of an examination.

Prior to the Taxpayer First Act, under Section 7602(c)(1), enacted as part of the Restructuring and Reform Act of 1998, IRS was required to provide a taxpayer with “reasonable notice in advance” before it contacted financial institutions, employers or other third parties.  Pre-TFA there was litigation as to what constituted reasonable advance notice. In many of the cases, the IRS argued that sending Publication 1, at the start of an exam sufficed for these purposes. 

In JB v United States, which I discussed in Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts, the Ninth Circuit held that sending the Publication 1 was insufficient notice, though it did not categorically hold Publication 1 can never constitute “reasonable notice in advance.” The court was skeptical though stating that it was “doubtful that Publication 1 alone will ever suffice to provide reasonable notice in advance to the taxpayer, as the statute requires.”

Shortly after JB v US, TFA did away with the squishy reasonable standard and requires the IRS to provide notice to the taxpayer at least 45 days before the beginning of the period of third-party contact, which may not extend longer than one year.  In Keith’s post on the major tax procedural developments of 2019, he discusses the TFA change, and the earlier TAS legislative recommendations that highlighted the problems with the “reasonable advance notice” standard under pre TFA law.

Back to Vaught. The case involves an exam and third-party summonses that were issued in 2018 in connection with the IRS’s examination of Crow and his suspected shelter promotions activities. Two of the summonses were served on Steve Vaught and Alpha Lending, LLC, where Vaught was a key executive. Alpha had a business relationship with Crow, having served as a lender or escrow agent in the installment sales transactions Crow and his company promoted. Vaught/Alpha did not appear or produce the IRS’s requested records. The government filed a petition to enforce the summons, and Crow intervened in the case and filed a motion to quash based on an alleged violation of the advance notice requirements.

As I mention above, the summonses were issued before TFA, so the case involves the old reasonable advance notice standard. As the district court explained, in JB the Ninth Circuit added some meat to the reasonable notice standard:

[T]he Ninth Circuit held the phrase “reasonable notice in advance” means “notice reasonably calculated, under all the relevant circumstances, to apprise interested parties of the possibility that the IRS may contact third parties, and that affords interested parties a meaningful opportunity to resolve issues and volunteer information before third-party contacts are made.” 916 F.3d at 1164 (citing Flowers , 547 U.S. at 226). In so holding, the Ninth Circuit highlighted the purpose of the notice requirement is to protect the taxpayer’s reputational interest by giving the taxpayer an “opportunity to resolve issues and volunteer information before the IRS seeks information from third parties, which would be unnecessary if the relevant information is provided by the taxpayer himself.”

The JB standard requires district courts to examine the totality of the circumstances, “balancing of the interests of the State’ in administering an effective auditing system against the ‘individual interest’ in receiving notice of the potential third-party contact and an opportunity to respond.”

Crow challenged both related aspects of the notice requirement:  that the IRS did not provide pre-contact notice and also that the IRS did not provide a reasonable meaningful opportunity to resolve issues and volunteer information before third-party contacts were made.

The government argued it did provide sufficient notice, pointing to the Pub 1 it sent at the start of the exam in November of 2015 as well as supposed oral communications between IRS agents and Crow in December of 2015. At that meeting IRS revenue agents purportedly said that they said that the IRS may contact third parties during the course of the examination of Crow.

The district court found that the IRS failed to satisfy the reasonable advance notice standard, emphasizing the time between the generic notice and the actual contact IRS made with the third party:

Here, the IRS issued the Vaught Summonses in January of 2018, twenty-six months after it sent Crow Publication 1 on November 17, 2015. Similarly, in J.B., two years elapsed between the date the IRS sent Publication 1 to the taxpayers and the date the IRS sought records from a third party. As in J.B , this Court cannot find the IRS satisfied its “administrative duty” of giving Crow a meaningful opportunity to provide relevant documents involving the Alpha Companies by generally informing Crow, over two years before, that it may “talk with other persons” in the course of its investigation

As to the purported oral communication from IRS agents failing to tip the scales toward reasonable notice, the court focused on the absence of specific information concerning the nature of the needed information in the agent’s affidavit:

Neither the Government’s brief, nor Allred’s affidavit, offer any details regarding what London and Allred said about potential third-party contacts on December 16, 2015….[T]he Government does not provide any specific information regarding how the IRS purportedly notified Crow of potential third-party contacts on December 16, 2015. For instance, what did London or Allred say about third-party contacts on this date? Did they reference any specific third parties or types of businesses they may contact if Crow did not provide information himself? Did they give any hint that Crow should produce documents involving the escrow companies or lenders that SCCC used in its installment sales transactions?

Taken together the court concluded that the IRS failed to provide reasonable advance notice. As the opinion notes, IRS could have done more to act consistently with Crow’s legitimate privacy interests. To that end, the opinion discusses (at Crow’s suggestion) steps the IRS could have taken, including renewing its request for information from Crow closer in time to the contact (which was over two years from both the generic notice IRS provided and revenue agent conversation) and specifying that it would contact third parties if Crow did not provide the information it wanted. As a final measure, the court noted that FOIA-obtained IRS case notes erroneously concluded that Alpha and Vaught were not third parties for purposes of the notice requirements. This suggested perhaps that the IRS did not provide additional notice because of the mistaken belief that the contacts did not trigger notice requirements.

Conclusion

The court ultimately concluded that the violation of the advance notice requirement meant that the IRS failed to satisfy the fourth Powell summons requirement, that the IRS follow all administrative requirements in the issuance of the summons.  While Vaught involves pre TFA law, it is an important opinion in at least two respects. First, there may be summons enforcement cases still percolating under the pre TFA notice rules. Second, and perhaps more important, the opinion reflects a perspective that emphasizes that taxpayers have legitimate privacy and reputational interests. When there is the scent of shelters or allegedly improper taxpayer conduct at times IRS may fail to adequately weigh or even consider the interests of taxpayers. Vaught should serve as a reminder that privacy and reputational interests are at stake even when there is a taxpayer suspected of engaging or promoting aggressive transactions.

What are the next steps here? I have not dug into the filings but I assume that if the IRS has not received the information it could reissue the summonses, ensuring that it complies with post TFA notice requirements. Challenges to summons enforcement typically toll the SOL on assessment, so perhaps the taxpayer victory is short lived.

CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues

We have followed the CIC Services case for years, starting with the first district court opinion through the recent Supreme Court opinion. Following the unanimous Supreme Court opinion, the case has been remanded to the district court, and CIC Services has filed a motion for a preliminary injunction.

There are a few important issues at the intersection of tax procedure and administrative law that the court will address. For example, is the Notice a legislative rule under the APA, and if it is, do the regulations that allow the IRS to define reportable transaction through other IRB guidance satisfy the notice and comment requirements? (For brief background, see my post here.)

There is another issue that has received less attention in the tax community lurking in the CIC Services case. That issue pertains to the nature of the relief that a court can grant when it finds that the IRS (or another agency) has failed to comply with the procedural requirements under the APA.  That gets to the scope of an injunction that a court may issue if it finds that CIC Services is correct on the merits.

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The IRS in the briefing following the remand has argued that if CIC Services prevails on getting the court to issue an injunction, any injunction should be limited to CIC Services and not have universal application. CIC Services, however, has argued for a broader sweep, and has asked that the court set aside the Notice not only for it specifically, but for everyone.

This an issue that is hot among some administrative law scholars. I flagged the issue in a post earlier this summer. In that post I discussed the terrific Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Associate Dean and Professor Mila Sohoni of the University of San Diego Law School provides context on the debate within administrative law and argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.

Essentially Professor Sohoni notes that the Supreme Court in CIC Services views the request for injunctive relief and the request to set aside the Notice as two sides of the same coin. Professor Sohoni has written more extensively on the broader topic concerning the remedy of universal vacatur in APA challenges. See, for example, a 2020 George Washington Law Review article, The Power to Vacate a Rule.

As the briefing on the preliminary injunction has concluded, the court is likely to issue an order soon.

CCA Distinguishes Between Continuous Levies on Wages and Levies on Social Security Income

A relatively brief IRS CCA briefly highlights some confusion concerning the effect of a continuous levy on wages on the ten-year statute of limitations on collections.

That there is some confusion on the topic is not surprising.

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For example we have previously discussed problems the IRS has struggled to properly compute the SOL; see Keith’s post NTA Highlights Errors in IRS Calculation of Collection Statute of Limitations.

Taxpayers also can get hung up, especially when there is a levy that may relate to a fixed payment stream that may continue well beyond the ten-year period. See for example  Levy on Social Security Benefits: IRS Taking Payments Beyond Ten Years of Assessment Still Timely where I discussed Dean v US.  In Dean the taxpayer alleged that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten-year SOL on collections. 

Dean held that the ten-year collection statutes of limitation period does not prevent collection beyond ten years from assessment when there is a continuous levy relating to a fixed and determinable income stream that is made before the ten-year period expires.

The IRS is authorized to issue continuous levies on wages and certain other federal payments disbursed by U.S. Bureau of Fiscal Service.  One way to contrast the wage levy with one-time levy is to compare the wage levy with the levy on a bank account.  If the IRS levies on a bank account, it only recovers from the levy the funds in the account at the time the levy is issued.  If money comes into the bank account the next day, the debtor gets to keep it unless (until) the IRS levies again.

By contrast, a levy on salary is continuous from the date such levy is first made until such levy is released.  Most taxpayers cannot financially survive a wage levy.  In many ways a wage levy usually motivates otherwise recalcitrant taxpayers to work with the IRS.  The recent CCA briefly discusses some IRS confusion concerning the effect of a continuous levy on wages.

A continuous levy on salary and other recurring steams is continuous from the date such levy is first made until such levy is released. Unlike social security payments at issue in Dean, however, the right to receive wages is not fixed and determinable. The CCA notes that a revenue officer technical advisor had initially believed that a continuous wage levy under Section 6331(e) would remain in effect even if the collection statute (CSED) “had run so long as the levy was made prior to the end of the CSED.” 

As the CCA discusses, the taxpayer’s absence of a right to receive wages beyond the ten-year period means that once the ten year SOL runs, the IRS is required to release the continuous levy. Unless IRS goes to the bother of getting a judgment, the IRS cannot reach wages after the ten-year period elapses.

There are other payment streams that are fixed and determinable that will allow a continuous levy to remain in effect beyond the ten-year period. For example, when there are royalties relating to a published book an author has a fixed and determinable right to royalties. A levy reaches royalties for sales of those books in the future. A note payable provides another example of a stream of payments.  If the IRS levies on the note, it reaches all future payments whether or not the payments are due prior to the expiration of the statute of limitations.  The levy does not accelerate the payments but merely places the IRS in the shoes of the taxpayer.

The key inquiry is whether payment is not dependent upon the performance of future services. There can be disputes as to whether the stream is truly independent of future services, as Keith and I discuss in more detail in Saltzman and Book ¶14A.15, which addresses property exempt from levy.  Here, the IRS technical advisor confused the continuous nature of the wage levy with the effect of a levy on property for which the taxpayer is due a stream of payments.  The CCA sets the IRS employee straight, but the confusion is easy to understand.