Rev. Rul. 54-171

Advice is requested whether the Federal Government, in the collection of Federal taxes, will follow the provisions of a State statute which, among other things, exempts from levy, execution, attachment, or any other remedy whatsoever provided for the collection of debt, unemployment benefits payable to a taxpayer by the State employment commission.

State exemption laws are inapplicable per se to debts, including taxes, due from a citizen to the United States. United States v. Howell , 9 Fed. 674. However, they become applicable when made so by Congress itself. Fink v. O'Neil , 106 U.S. 272, 276. The matter was summarized in Bank of the United States v. Halstead , 23 U.S. 51, 63, where the Supreme Court of the United States said:

An officer of the United States cannot, in the discharge of his duty, be governed and controlled by State laws, any farther than such laws have been adopted and sanctioned by the legislative authority of the United States.

Section 1601 of the Internal Revenue Code, relating to credits against tax on employers of eight or more, provides in part as follows:

(a) CONTRIBUTIONS TO STATE UNEMPLOYMENT FUNDS.-

(1) The taxpayer may. to the extent provided in this subsection and subsection (c), credit against the tax imposed by section 1600 the amount of contributions paid by him into an unemployment fund maintained during the taxable year under the unemployment compensation law of a State which is certified for the taxable year as provided in section 1603.

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(c) LIMIT ON TOTAL CREDITS.-The total credits allowed to a taxpayer under this subchapter shall not exceed 90 per centum of the tax against which such credits are allowable.

Section 1603 of the Code provides, in part, as follows:

(a) REQUIREMENTS.-The Social Security Board now the Secretary of Labor shall approve any State law submitted to it, within 30 days of such submission, which it finds provides that-

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(4) All money withdrawn from the unemployment fund of the State shall be used solely in the payment of unemployment compensation, exclusive of expenses of administration, and for refunds of sums erroneously paid into such fund and refunds paid in accordance with the provisions of section 1606(b) * * *.

The above-quoted provisions of the Internal Revenue Code evidence a Congressional intent that State unemployment compensation laws shall be approved and certified for purposes of securing the tax credit under section 1601(a) of the Code only if the requirements under section 1603(a) of the Code are met. Thus, it appears that Congress has expressly provided that State laws to be approved and certified must require, among other things, that all money withdrawn from the unemployment fund shall be used solely in payment of unemployment of unemployment compensation and certain refunds. Accordingly, for a State unemployment compensation agency to use this money to satisfy outstanding Federal tax liabilities would appear to contravene Congressional intent.

Under the provisions of section 1603(c) of the Code, the State laws are certified each year, which indicates that the provisions thereof and the way in which they are administered are examined annually by the Department of Labor for the purpose of determining whether the above-mentioned requirements are met. In the instant case the State law has been approved and duly certified. (For certification as to 1953, see 19 F.R. 147, dated January 8, 1954.)

In the light of the foregoing, it is clear that Congress intended the State employment commissions to use the money from the unemployment funds solely for the payment of unemployment compensation and certain refunds, and not for any other purpose. Accordingly, notices of levy to collect delinquent Federal taxes should not be served upon the State employment commission for the purpose of reaching weekly benefits payable to an unemployed taxpayer.