US v Clark explores whether the government can use its restitution powers to seize assets in an individual’s retirement accounts. While not a tax case, its analysis is dependent on the meaning of Section 6334(a)(8) which exempts from IRS levy “salary, wages, or other income . . . necessary to comply” with child-support orders.
The case involves Thomas Clark, who owes over a half million dollars in restitution stemming from Clark’s guilty plea from operating a chiropractic clinic that fraudulently billed insurance companies for services he performed without a license.
The Mandatory Victim Restitution Act (MVRA) allows the government to garnish a defendant’s property to satisfy a restitution order. The restitution statute in Title 18 borrows exemptions from Section 6334, which provides that certain property is exempt from levy.
The government sought to levy from assets in two of Clark’s retirement accounts. The Fifth Circuit has held that the MVRA generally permits the government to garnish assets held in a retirement account to satisfy a restitution order. The wrinkle was that Clark estimated that he owed approximately $1,000/month in child support. He argued that the property in his retirement accounts amounted to “other income” under 6334(a)(8) that was necessary for him to comply with his child support and thus exempt from garnishment.
The Fifth Circuit disagreed. In so doing it noted that the issue is somewhat complicated by the consequences of Clark withdrawing assets from the IRA; the withdrawal itself would trigger income tax consequences (unlike cash in a savings account). That suggests some support for Clark’s position.
Ultimately the court found for the government and relied on ejusdem generis, which provides that confronted with a list of specific terms that ends with a catchall phrase, courts should limit the catchall phrase to “things of the same general kind or class specifically mentioned.” (citing ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 199 (2012)). With that canon the court looked at 6334(a)(8) as a “textbook example” of ejusdem generis leading it to conclude that “we should read “salary, wages, and other income” as “salary, wages, and other [similar] income.”
For further support the court discussed Woods v. Simpson, 46 F.3d 21, 24 (6th Cir. 1995), which held that an inheritance was not exempt under 6334(a)(8) as it was not in the same category as salary or wages. Instead “other income” is limited to “items received by individuals for services rendered, such as bonuses, tips, commissions, and fees.”
Conclusion
Simply put the child support exemption relates to amounts received directly from a taxpayer’s labor. Once placed in an account, the protection disappears, and the government is free to use its collection powers.
The Clark decision finds direct support in Section 6334(c), which “provides that no property or rights to property shall be exempt from levy other than the property specifically made exempt by [Section 6334(a)].” Even if an asset itself is generating income, or would trigger income inclusion, or is funded with income which itself would have been exempt from levy, the government is not restricted from levying the underlying property.
In 2016 I discussed a related issue in Maehr v Koskinen; in that case the taxpayer/army veteran argued that the 6334(a)(10) protection against levy as applied to veterans service related disability benefits should extend to funds in an account that were solely comprised of those benefits. Shortly after my post Keith also discussed the reach of 6334(a)(10). My post flagged the issue in Maehr; a 2018 district court opinion at 121 AFTR 2d 2018-1198 and appellate opinion we did not discuss held that Section 6334(a)(10) did not protect funds that were already paid. I note as well that Congress has shown itself capable of using tracing method to free assets from levy—it has done so in the second round of economic impact payments and also uses broader language (“payable to or received by…” ) to protect a minimum amount of compensation from levy in 6334(a)(9).