IRC Levy Exemption for Disability Payments Ends Once Funds Hit Bank Account

The IRS’s levy powers are broad but not unlimited. One of the categories of payments that is protected from levy is disability payments relating to military service. The IRS has consistently argued that if a veteran receives disability payments and those funds comprise some or all of the money in a bank account, an IRS levy can reach those funds, unless the taxpayer can establish some other exemption.

Last year in Death and Taxes Keith discussed how “generally, the IRS takes the position that money in a bank account is fair game for its levy no matter what source, protected from levy or not, generated the funds in the bank account.” In his post Keith discussed that despite that general rule IRS decided to take an administrative pass on levying funds in a bank account if the funds in the account include money received by the taxpayers as COVID-19 Funeral Assistance funds provided by FEMA. A while back I discussed a 10th Circuit case that hinted at perhaps a disagreement with the IRS view that it could in fact levy on a veteran’s disability payments once they hit the account.

Earlier this month the Fifth Circuit in US v Charpia had occasion to revisit the issue of tracing, in a slightly different procedural path than typical cases we discuss.

read more...

Charpia had pled guilty to defrauding the Government.  Part of the sentencing included restitution of over $900,000. The district court issued an order of garnishment and Charpia appealed the garnishment order, claiming statutory exemptions for certain funds in her bank account.  Charpia’s bank account had about $65,000 due to a lump sum disability payment that related to her military service.

This all implicated Section 6334(a)(10) because the Mandatory Victims Restitution Act cross-references the IRC exemption for service related disability payments.

As I discussed a while back in Tenth Circuit Raises Possible Defense to IRS Levying Bank Account with Veteran’s Disability Payments Section 6334(a)(10) prevents levy on “any amount payable to an individual” relating to military disability payments. (Note that the same language exempts unemployment compensation and workers compensation). The Fifth Circuit noted that there is not a lot of caselaw on the meaning of “amount payable” but in finding for the government it distinguished other exemptions that extend more broadly to amounts “payable to or received by” an individual, such as the 6334(a)(9) exemption for wages. Moreover the Charpia opinion noted that the few cases that interpreted the (a)(10) exemption looked to a plain Black’s Law meaning of the term payable, which is an amount “[c]apable of being paid” or “suitable to be paid” rather than funds that had been paid and were sitting in an account.

Conclusion 

It was not a complete loss for Charpia, however. As an alternate argument, she leaned on the Consumer Credit Protection Act (CCPA), which provides a 25% cap on “aggregate disposable earnings of an individual for any workweek which is subjected to garnishment.”

The court held that the only reason why Charpia did not receive her disability payments periodically was because the government initially denied her request and she received a lump sum payment to make up for payments that “otherwise would have been paid periodically. ” As such, the court held that the partial exemption under the CCPA applied, and the government was only entitled to seize 25% of the funds in her account. 

While this was a partial victory for Charpia, it has limited use for traditional tax cases. The CCPA would not apply to a matter where the IRS were seeking to levy on the account, rather than the government seeking to collect under the Mandatory Victims Restitution Act,  because IRC 6334(c) provides that notwithstanding any other law, the only exemptions on the IRS’s levy power are found in IRC 6334(a)

Challenging Levy Compliance

The IRS regularly issues levies to banks and to employers.  Taxpayers subject to the levy have almost no way to stop the levy by suing the party receiving the levy.  Similarly, the party receiving the levy has almost no way to avoid making payment on the levy without running into trouble.  We have discussed the issue of suing to stop the levy before here (raising possibility that such a suit could prevail against a bank levy if the account was filled with funds exempt from levy).  Most cases in which taxpayers sue to stop a levy are relatively straightforward and today I write about one of those cases.  The Fourth Circuit recently affirmed the district court decision in the case of Nicholson v. Unify Financial Credit Union, No. 21-2095 (4th Cir. 2022) holding, per curiam, that the suit by the taxpayer against the credit union to stop the credit union from paying the IRS should be tossed.

read more...

Mr. Nicholson, acting pro se, brought a suit against his credit union related to the surrender of the money in his account to the IRS pursuant to a levy.  No doubt Mr. Nicholson was dismayed to find his account essentially wiped out by the levy; however, his effort to recover the money by suing the credit union does not fare well.  It does show, however, that in complying with the levy provisions the credit union has a good defense to such suits but still must engage lawyers to help it defend itself.  Occasionally, the US Attorney’s office might assist with the defense.

Mr. Nicholson alleges the credit union breached its fiduciary duty to him, violated IRS code provisions and violated the constitution by paying money over to the IRS in response to a levy.

The credit union countered that it had a mandatory obligation to comply with the levy under IRC 6332(c).  It further argues that IRC 6332(e) provides a complete shield of liability to Mr. Nicholson:

(e) Effect of honoring levy.

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

Because of the mandatory requirement to comply and the shield provided by IRC 6332(e), the credit union moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6). 

Mr. Nicholson responded with some standard tax protestor arguments that the income tax laws do not apply to him, but he also cited Treasury Regulation § 301.6332-1(c)(2)(3). The regulations cited by Plaintiff provide, in relevant part, that:

(2) Exception for certain incorrectly surrendered property. Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property.

(3) Remedy. In situations described in paragraphs (c)(1) and (c)(2) of this section, taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in section 6343(b) or may bring suit to recover the property under section 7426.

The court makes relatively quick work of his attempt to use the wrongful levy provisions in this case pointing out their inapplicability because he has an interest in the property.  He had previously sued the IRS seeking a return of his property.  He faces the additional problem that a wrongful levy action needs to be brought against the IRS and not the third party such as the credit union.  The statutory scheme essentially requires the third party to turn over the property to the IRS and then allows a party whose property was wrongfully taken to seek the return of that property from the IRS.

The court not only finds for the credit union but determines that Mr. Nicholson’s argument has so little merit that it does not afford him the opportunity to amend his complaint.  The court had some familiarity with Mr. Nicholson from prior tax protestor type litigation.  The failure of the district court or the Fourth Circuit to sanction Mr. Nicholson surprises me a little bit, but perhaps the courts knew that he had no ability to pay for any sanctions imposed.

While not remarkable, the case shows what should happen in a straightforward challenge of a levy.  The quick dismissal saves the credit union from the burden of additional expenses.  Mr. Nicholson can pursue his case against the IRS if he has one while allowing the party that received and paid the levy to stand on the sidelines of the dispute.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…

Today we welcome back Maria Dooner.  Maria is a practitioner-in-residence at the Janet R. Spragens Federal Tax Clinic at American University’s Washington College of Law.  She returns to help us understand the 9th Circuit’s recent decision regarding attorney’s fees.  Keith

As Keith discussed here, the Ninth Circuit recently issued its opinion on Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150. By finding the plaintiffs ineligible for an award of administrative and litigation costs, the court brought closure to the Dangs’ final pursuit of attorney’s fees. Yet, in doing so, it created some confusion (in its majority opinion) and clarity (in its concurrence) and provided another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

read more...

The Ninth Circuit’s Majority Opinion…

When explaining the Dangs’ ineligibility for administrative costs from the collection dispute, the court states the following:

…they are ineligible because no costs were incurred before the commencement date for the relevant administrative proceeding.

However, the parties were not simply disputing whether costs were incurred before the commencement datefor the relevant proceeding, which was a Collection Due Process (CDP) hearing. Rather, the parties were debating the definition of reasonable administrative costs – they were specifically disputing the starting point in which reasonable administrative costs were incurred, if at all, in the context of a CDP hearing. For example, the government argued that the starting point was the notice of determination, which is the conclusion of the administrative proceeding in a collections matter. According to the government, the Dangs were ineligible for administrative costs because no costs were incurred after the issuance of the notice of determination. 

In contrast, the Dangs argued that the commencement date for administrative costs in a collections matter was the 30-day letter, which allowed the taxpayer the opportunity for administrative review in the Internal Revenue Service Office of Appeals. The Dangs proclaimed that when Congress altered the definition of the commencement date within IRC § 7430(c)(2) to include the first letter of proposed deficiency (a 30-day letter)under the IRS Restructuring and Reform Act of 1998 this also encompassed a 30-day letter that provided an administrative review to a CDP hearing.

Unfortunately for the Dangs, this argument not only failed to resonate with the court, but it also confused them. The court felt the Dangs were contesting administrative costs in a former examination dispute and included the following in its opinion:

To the extent that they seek administrative costs for their examination dispute with the IRS, their request is untimely, and they were not the prevailing party.

But, at no point in the Dangs’ brief did they argue that they were entitled to administrative costs from the examination dispute. And, at no point did the government rebut this. The statement of issues was confined to the administrative and litigation costs related to the collection proceeding. (By way of background, the IRS erred in this proceeding and this was recognized by IRS Counsel as well as Judge Armen in the U.S. Tax Court.)

Within its majority opinion, the court missed an opportunity to define administrative costs and explain why the Dangs were ineligible to recover them. The court stated that the Dangs had not incurred any costs prior to the commencement of the relevant proceeding, but what was its opinion on the time (and costs) incurred during the CDP Hearing, which occurred after its commencement? Or, did the court agree with the government that the starting point was the notice of determination and that no costs were incurred after the notice of determination? 

Judge O’Scannlain’s Concurrence

Some clarity is provided within Judge O’Scannlain’s concurrence, which addresses the timing rule and the validity of the regulation (26 C.F.R. § 301.7430-3).

Judge O’Scannlain states that the regulation (26 CFR § 301.7430-3), which the government relies upon in its brief,is not a “permissible construction” of IRC § 7430. Though Judge O’Scannlain agrees with the government’s interpretation of the hanging paragraph, which precludes the recovery of administrative costs in collection hearings, he states that the regulation, which excludes collection hearings from the definition of administrative proceedings, contradicts the plain language of the statute.

Confusion over the recovery of attorney’s fees stems from the statute itself (IRC § 7430) and regulation (26 C.F.R. § 301.7430-3)

First, the statute is confusing with respect to the recovery of administrative costs from collection proceedings. The statute begins by stating that a prevailing party may be awarded administrative costs from an administrative proceeding (see IRC § 7430(a)(1)). Then, it proceeds to eliminate most administrative costs from collection proceedings due to a timing rule (see hanging paragraph of IRC § 7430(c)(2)). But then, it reiterates that administrative proceeding means any administrative proceeding (see IRC § 7430(c)(5)).

Second, taxpayers struggle to make sense of a confusing statute and tackle the timing rule.  For instance, the Dangs emphasized the statute’s broad coverage of administrative proceedings and how it explicitly includes the recovery of costs related to the collection of any tax (see IRC § 7430(a)(1)). To satisfy the timing rule, the Dangs stated that it is not the notice of determination that is relevant but the first letter of proposed deficiency because this is synonymous with any 30-day letter, which opens the door to an administrative proceeding. So rather than conflating a collection proceeding with a deficiency one (which may have been the belief of the court), the Dangs were essentially making a substance over form argument that if embraced by the court would have facilitated the recovery of the administrative costs from the CDP hearing.  

Third, the government places significant reliance on a regulation (26 C.F.R. § 301.7430-3) that redefines “administrative proceeding” and excludes most collection proceedings from this definition. As Judge O’Scannlain articulates in his concurrence, the regulation is not aligned with the statute. (Remember, this conflicts with the statute that defines administrative proceeding as any administrative proceeding and specifically references the collection of tax.) So, in addition to the statute, the regulation is also a source of confusion in these cases.  

This confusion is heightened by one of the regulation’s exceptions – it recognizes a CDP hearing, which specifically disputes the validity of the tax assessment under IRC § 6330 and IRC § 6320, as an administrative proceeding. (IRC § 6330(c)(2)(b) provides the opportunity for a taxpayer to contest the validity of the tax liability if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”) Here, the regulation changes the fundamental nature of a CDP hearing to fit its definition of an administrative proceeding. Under the regulation, a CDP hearing that involves a dispute over the underlying tax liability is considered an administrative proceeding (and not a collection action) whereas one that involves a pure collection dispute is not an administrative proceeding. This does not make logical sense because regardless of whether the taxpayer is disputing the underlying tax or providing a collection alternative within a CDP hearing, the taxpayer is still very much in the heart of a collection proceeding. The taxpayer is ultimately contesting a notice of intent to levy or notice of federal tax lien, has only 30 days (not 90 days) to petition to the U.S. Tax Court and still receives a notice of determination (not a notice of deficiency) at the end of the matter. IRC § 6330(d)(1).

Though the above exception is favorable to the taxpayer, there is also the question of how this exception satisfies the timing rule within IRC § 7430(c)(2). Ironically (for the Dangs), the IRS appears to be embracing a substance over form interpretation of the hanging paragraph of IRC § 7430(c)(2) and is viewing the notice of intent to levy or notice of federal tax lien as a notice of deficiency for those who did not have an opportunity to dispute their underlying tax under IRC § 6330(c)(2)(b). However, if taxpayers, such as the Dangs, attempt to raise this argument in their favor, such as viewing a 30-day letter, which provides an opportunity into a collection proceeding, as a first letter of proposed deficiency, they will most likely confuse the court.

The regulation (26 C.F.R. § 301.7430-3) should be altered…

While the government may believe it is simplifying (and perhaps streamlining) the law by relying on a regulation that eliminates most collection actions from the definition of administrative proceeding, the government’s reliance on this regulation only compounds the confusion that already stems from the statute. Since it is an inaccurate interpretation of the statute (as Judge O’Scannlain conveys in his concurrence), it forces an unnecessary dispute over the definition of an administrative proceeding when the real dispute should be over what constitutes reasonable administrative costs due to a timing rule.

Instead of defining the administrative proceeding as one that excluded most collection proceedings, the IRS should address the impact of statute’s timing rule within the regulation’s definition of administrative costs (26 CFR § 301.7430-4). By addressing it within “administrative costs,” the regulation would be more aligned with the statute.  Again, there is no limitation on the definition of administrative proceeding in the statute – in fact, the statute states any (see IRC § 7430(c)(5)). Further, it is the subsection on administrative costs (IRC § 7430(c)(2)) where the hanging paragraph on the timing rule resides.

But better yet, Congress should change the statute to encompass the recovery of administrative costs from collection proceedings…

Without a modification to the timing rule within the statute, it seems nearly impossible to recover administrative costs related to the collection of tax.

While a notice of proposed levy may be viewed as notice of deficiency when a taxpayer is disputing the validity of the tax in a collection proceeding (and did not have the opportunity to do so earlier), taxpayers (like the Dangs) who are purely disputing the proposed collection action (and not the underlying tax) will face an uphill battle when trying to convince a court that the first letter of proposed deficiency in the law should be viewed as any 30-day letter into a collection proceeding. 

Again, Congress could incorporate language, such as “the date of receipt by the taxpayer of a right to a Collection Due Process (CDP) hearing” into the hanging paragraph of IRC § 7430(c)(2). Though taxpayers will continue to face challenges related to the prevailing party rules and “substantial justification” exception for the government, this will at least facilitate an opportunity to recover administrative costs, such as in the Dangs’ case.

As a final reminder, the Dangs asked for a levy on their retirement, which would have paid the tax in full. While the IRS is cautious with levying retirement accounts as a matter of policy, resistance to it as a collection alternative (when a taxpayer specifically requests it) is at odds with its intention to collect taxes as efficiently as possible. The agency needs additional incentives to follow published guidance in collection due process hearings, and by not allowing the recovery of administrative costs, Congress may not only harm taxpayers but also the IRS. By allowing for the recovery of administrative costs from a CDP hearing, Congress may see an added benefit that goes beyond just discouraging overreaching and abusive actions by the IRS it may just enhance the efficiency of tax collection – a core purpose of the agency.

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy

Two cases we have written about previously in which the taxpayers won after the IRS took positions that were hard to justify have recently been appealed to the Ninth Circuit seeking attorney’s fees.  As we have discussed before, getting attorney’s fees is extraordinarily difficult in a tax case.

read more...

Dang

In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150, blogged here, oral argument before the Ninth Circuit took place on February 8, 2022.  You can listen to it here.  You can read the opening brief here, the government’s responding brief here, and the reply brief here.  Steve Milgrom, the Dangs’ pro bono representative, argued for both administrative and litigation costs.  As Maria Dooner points out in her post on this case, if someone in the Dangs’ circumstances cannot obtain attorney’s fees, it’s time to revisit the statute. That time may have come, because, unfortunately for the Dangs, the Ninth Circuit rendered a swift, and very brief, rejection of their claims for attorney’s fees and affirmed the Tax Court’s denial of the motion for costs. You can read the Ninth Circuit’s opinion here

The silver lining in the opinion is the recognition by Judge O’Scannlain in a concurring opinion that the regulation “is invalid because it is not ‘a permissible construction of’ 26 U.S.C. 7430.”  He finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute.  Specifically, he states that the IRS argument:

disregards the fact that what constitutes an administrative proceeding is relevant, not only to administrative costs, but to litigation costs as well. Subsection (c)(2) specifies that accumulation of costs is triggered by the earliest of notice of decision, notice of deficiency, and letter of proposed deficiency. Because the only document relevant to collection hearings is the notice of decision—received at the end of such a hearing—no administrative costs accumulate.

Jacobs

In Jacobs v. Commissioner, T.C. Memo 2021-51, blogged here, Mr. Jacobs filed his opening brief here and the tax clinic at Harvard filed an amicus brief here.  The responding brief for the government was originally due on February 25, 2022, but the government requested an extension to March 11, 2022, which was granted by the Court.  As we have reported in the blog posts linked above, only a miniscule number of cases receive attorney’s fees in the Tax Court.  We’ll see if this case can help to push that percentage upward, but the result in the Dang case makes me less optimistic.

Levy Action to Avoid IRC 72(t) Excise Tax

The Dang case involved an effort to get the IRS to levy on a taxpayer’s retirement account in order to allow the taxpayer to pay the outstanding liability without incurring the 10% excise tax for early withdrawal from such an account.  The revenue officer and the appeals officer exhibited little sympathy for the taxpayer’s argument requiring that the taxpayer withdraw the money in order to avoid – drumroll – a levy.  Ultimately, the Tax Court, after one remand made it clear that the IRS position was not reasonable.  I have a nearly identical case pending in which the Settlement Officer took the same position that the IRS would not levy on the client’s retirement account in order to avoid the excise tax on early withdrawal even though I provided the settlement officer with the Dang case.  Maybe the tax clinic at Harvard will soon get its own chance to pursue attorney’s fees, but with the Dangs’ failure, this seems unlikely.

Perhaps it’s time to take a harder look not only at the way the attorney’s fees statute is working but at the way the statute designed to allow taxpayers to avoid the 10% excise tax on early withdrawal is working out.  The IRS employees don’t want to levy on retirement accounts because they must get approval from higher levels.  IRM 5.11.6.3 provides the procedure for levying on retirement accounts and subsection (10) requires the IRS employee to secure approval of the Form 668-R, Notice of Levy on Retirement Plans, from the SB/SE Director in the Collection Area. On the other side, taxpayers may want the IRS to levy on their retirement account in order to avoid the 10% excise tax on early withdrawal (such levies are exempt from the 10% tax under IRC 72(t)(2)(A)(vii)). The IRM provision providing this exemption is contained in IRM 5.11.6.3(13). The manual could be changed to allow levy in a situation in which the taxpayer requests a levy.  While changing the results in obtaining attorney’s fees in tax cases may, at this point, require legislation, the ability to change the result to cause the IRS to levy on someone’s retirement account when they are requesting that the IRS do so should not be that hard.

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.

read more...

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.

10th Circuit Affirms That Nursing Homes and Other Entities Lack Protection from Levy for Hardship

In 2017, the Tax Court issued rulings in several cases regarding the application of IRC 6343(a)(1) to entities.  The lead case was Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (2017).  I blogged about the group of cases here in a post with a catchy tag line about rolling the wheelchairs and beds to the curb.  Lindsay Manor appealed the decision.  I wrote about the outcome of that appeal which basically vacated the decision because Lindsay Manor was in receivership at the time of the Tax Court’s decision.

Now, another nursing home in the same group of cases, Seminole Nursing Home, Inc., has made its way to the 10th Circuit after being told in the Tax Court that it did not qualify for hardship.  The 10th Circuit decision upholds the decision of the Tax Court and the validity of the Treas. Reg. 301.6343-1(b)(4)(i).  I don’t know if the nursing home has been keeping itself open in the four years since the Tax Court decision, but now it must either succeed in getting the Supreme Court to hear the case, pay the outstanding tax, work out some form of payment agreement or, potentially, watch the IRS shut it down.

read more...

This case came to the Tax Court as a Collection Due Process case.  IRS Appeals rejected Seminole’s offer of an installment agreement prior to the Tax Court case, stating:

Seminole had sufficient assets to pay its tax debt in full; and (2) it was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. The Office also rejected Seminole’s economic-hardship argument, explaining that Treasury Regulation § 301.6343-1(b)(4) limits economic-hardship relief to individual taxpayers. And it determined that “[i]n balancing the least intrusive method of collection with the need to efficiently administer the tax laws and the collection of revenue, . . . the balance favors issuance of the levy, and is no more intrusive than necessary.”

The 10th Circuit engaged in a Chevron analysis to determine if the regulation appropriately interpreted the statute.  Seminole argued that the Code provides an unambiguous answer at step one, citing to IRC 7701(a)(14) for support that entities are persons under the IRC.  That section defines person to include “an individual, a trust, estate, partnership, association, company or corporation.”  Seminole also pointed out that IRC 6343(a)(1)(D) makes no distinction between individual and corporate taxpayers.

While the language of the definitional provision in IRC 7701 appears favorable to Seminole’s argument, the 10th Circuit notes that the preface to the definitions says they apply “[w]hen used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof.”  It finds that the use of the word taxpayer elsewhere in the Code makes clear the word can be limited to individuals.  It says that corporations can experience economic hardship, citing an earlier case in which it made such a holding, but looking at the exemptions to levy in IRC 6343, it finds they all essentially apply to individuals and not to entities. 

The court finds it important that Seminole did not attempt to show what economic hardship for entities would look like.  It also noted that no one commenting on the regulation suggested the result for which Seminole argues.  Looking at the situation as a whole, it decides that the statute does not compel a result, leaving the Treasury free to apply its expertise in writing a regulation.

Seminole did not make the argument about disqualification of the Settlement Officer for looking at the file before the hearing that was made in the companion case of Lindsay Manor, but it did make a second argument using the reversal of the Lindsay Manor case as a basis for arguing the underlying Tax Court decision in its case lost its foundation upon the vacating of the Tax Court’s decision in Lindsay Manor for mootness.  The 10th Circuit says, however, that it did not vacate Lindsay Manor on the merits but only because of mootness at the time of the Tax Court’s ruling.  It finds that the adoption of the reasoning of Lindsay Manor to the facts of Seminole did not create an abuse of discretion.

The Seminole case fills the hole created by the mootness of Lindsay Manor.  While the outcome does not provide a surprise, this is a major victory for the IRS regarding the interpretation of the statute.  This doesn’t mean there will not be further challenges in other circuits.  The decision does, however, provide the kind of support that will greatly assist the IRS should those challenges arise.

Limiting economic hardship to individuals seems consistent with the statutory scheme of the levy provisions.  Because of the hardship that closing down a nursing home could create for the individuals living there, nursing home cases provide one of the best litigating vehicles for challenging the limits created by the regulation.  Still, the hardship is directly the hardship of the entity and not of the individuals who reside at the facility.  The situation becomes very sympathetic if the economic hardship experienced by the entity results from government delays.  Other cases have addressed the imposition of the trust fund recovery penalty upon nursing home operators who could not make the necessary tax payments because of significant delays in Medicare payments.  If the cause of the hardship is another part of the government, courts should look for ways to mitigate the taxpayer’s problem even where the taxpayer is an entity but limiting the concept of hardship to individuals generally seems appropriate.  It’s hard to say the 10th Circuit was wrong in upholding the regulation as a reasonable interpretation of the statute.

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.

read more…

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.

Buying Property from the IRS

A short Chief Counsel Advisory opinion provides a cautionary tale for those purchasing property from the IRS.  CCA 2021021011190596 explains that if the buyer at an IRS sale does not follow through and make all of the payments necessary to complete the purchase, the IRS can declare the sale null and void.  When it does so, the purchaser forfeits all of the payments made to that point and the IRS can resell the property.

read more...

When the IRS seizes real or tangible property, IRC 6335 governs the sale.  Subsection (a) provides:

As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.

The IRS created a special unit within the collection division to deal with sales because the rules governing sales are specific, the number of sales is not that great, and the effort of revenue officers (ROs) to follow the technical rules created too many problems and took the ROs too much time.  So, once the IRS seizes property, the RO in charge of collecting from the taxpayer turns the property over to the PALS unit for it to conduct the actual sale.  If the sale results in full satisfaction of the tax liability, then the RO is finished with the case.  If the sale does not result in full satisfaction, which is probably the more likely outcome, then the RO continues to pursue collection.

Since RRA 98, the IRS has conducted relatively few seizures and therefore holds relatively few sales.  Because these events occur infrequently, no one at the IRS becomes familiar with the process as a routine.  I suspect that certain ROs conduct most of the seizures and some never do so.  Similar to the lack of deep knowledge on the IRS side because of the low number of seizures and sales is the lack of deep knowledge on the buyer side.  Buyers must understand what they are purchasing if they buy property from the IRS and the failure to understand the rules that govern purchases can lead to unhappy outcomes.  Purchasing property from the IRS at one of these sales will look like a real bargain and it could be.  It could also be a trap for the unwary.

IRC 6335(b) provides the rules regarding the notice of sale that the IRS must give:

The Secretary shall as soon as practicable after the seizure of the property give notice to the owner, in the manner prescribed in subsection (a), and shall cause a notification to be published in some newspaper published or generally circulated within the county wherein such seizure is made, or if there be no newspaper published or generally circulated in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof. Whenever levy is made without regard to the 10-day period provided in section 6331(a), public notice of sale of the property seized shall not be made within such 10-day period unless section 6336 (relating to sale of perishable goods) is applicable.

IRC 6335(e) governs the manner of sale.  It is the rules set forth in this section that are the focus of the CCA.  The IRS should not seize and sell property that has no equity.  In order words, it cannot just seize property to cause the taxpayer an inconvenience.  It actually did that prior to 1980 as a way of disrupting businesses that were pyramiding their taxes.  Now, the RO needs to make a determination prior to seizure that the sale will bring positive dollars to the Treasury.  Instead of seizing property with no equity, the IRS now brings injunction action against taxpayers who pyramid and who it cannot shut down with administrative action as discussed here and here

Of course, the RO could make a mistake in determining value, but the RO cannot just seize property to thwart the taxpayer from conducting business.  One of the other reasons seizures are down since 1998 is that a willful failure by the RO in the seizure could trigger the application of sin number one of the 10 deadly sins resulting in possible termination of employment.  We have written about the 10 deadly sins here and here.  Some ROs do not want to take that risk, which means ROs will be, or certainly should be, very careful when deciding to seize property and following through.

The manner of sale rules under IRC 6335(e) provide:

(1) In general

(A) Determinations relating to minimum price.

Before the sale of property seized by levy, the Secretary shall determine—

(i)

a minimum price below which such property shall not be sold (taking into account the expense of making the levy and conducting the sale), and

(ii)

whether, on the basis of criteria prescribed by the Secretary, the purchase of such property by the United States at such minimum price would be in the best interest of the United States.

(B) Sale to highest bidder at or above minimum price

If, at the sale, one or more persons offer to purchase such property for not less than the amount of the minimum price, the property shall be declared sold to the highest bidder.

(C) Property deemed sold to United States at minimum price in certain cases

If no person offers the amount of the minimum price for such property at the sale and the Secretary has determined that the purchase of such property by the United States would be in the best interest of the United States, the property shall be declared to be sold to the United States at such minimum price.

(D) Release to owner in other cases

If, at the sale, the property is not declared sold under subparagraph (B) or (C), the property shall be released to the owner thereof and the expense of the levy and sale shall be added to the amount of tax for the collection of which the levy was made. Any property released under this subparagraph shall remain subject to any lien imposed by subchapter C.

In the case on which the CCA focuses, an RO has seized property, turned it over to the PALS who have sold it with a provision that the purchaser will pay something down and something over time.  The purchaser has defaulted on one of the subsequent payments.  The CCA determines that the appropriate IRS official can declare the purchaser in default and the purchase null and void.  This will give the IRS the chance to resell the property while keeping the payments it received from the first purchaser.  The CCA does not talk about who will benefit from the defaulted proceeds – the taxpayer or the IRS.  That’s governed by another provision.

The CCA notes that:

Discretion to return to the purchaser any portion of the amount paid is not stated in or implied in the Code or the Treasury Regulations. Both provide that any amount paid by a defaulting bidder “shall be forfeited.” I.R.C. § 6335(e)(3); Treas. Reg. § 301.6335-1(c)(9). Similarly, there is nothing in the IRM that suggests any circumstances under which the Service would have the ability to return any portion of the amount forfeited under section 6335(e)(3). In fact, the IRM has special accounting procedures for how the Service is to handle forfeited bid-in amounts. See I.R.M. 5.10.6.5.1(2) (cross-referencing I.R.M. 3.17.63).

The IRS will take the forfeited amounts and place them in the general treasury account, meaning that the taxpayer will not get the benefit of the forfeited payments, but instead, the general public gets those benefits.  The taxpayer may benefit if the next sale brings in more money or may lose if it does not.