5.17.3. Levy and Sale

(1) Internal Revenue Manual 5.17.3, Legal Reference Guide for Revenue Officers, Levy and Sale, contains legal references in relation to levy, seizure and sale. The references contained in this section relate to conditions required prior to levy or seizure, scope of the levy, general procedures, redemption, release of levy, sale, and types of property.

(1) For detailed authority specific to levy and seizure, see IRM 5.17.3.3, Authority. For detailed authority specific to sale, see IRM 5.17.3.7, Sale -- Authority. The authority of this IRM is based on the following:

• IRC 6331, Levy and Distraint

• IRC 7505, Sale of Personal Property Acquired by the United States

• IRC 7506, Administration of Real Estate Acquired by the United States

(1) The Director of Collection Policy is responsible for overseeing the policy and procedures regarding seizure and sale of assets.

(2) Revenue Officers are responsible for developing and conducting seizures as appropriate. Advisors are responsible for reviewing the file as outlined in IRM 5.10.2.2(10), Securing Managerial Approval of Seizure Actions, IRM 5.10.3.23(6), Contacting Advisory for Seizure Numbers, and IRM 5.10.6.11, Advisory Review of Seizure Files. The Property Appraisal and Liquidation Specialists (PALS) are responsible for conducting or coordinating all the auction sale activities.

(1) Program Reports: Per IRM 1.4.50, Collection Group Manager, Territory Manager and Area Director Operational Aid, and IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid, Group Managers are required to review ICS and Entity reports on a monthly basis to ensure cases are being effectively worked.

(2) Program Effectiveness: Collection Policy completes an annual seizure and sale review to identify trends and opportunities for improvement.

(1) The table below lists common acronyms used in this section.

(1) The Service must give the taxpayer a notice stating the amount of the tax liability and demanding payment of it as soon as practicable, but within 60 days after assessment of the tax. IRC § 6303(a).

(2) Notice and demand of the assessed tax is necessary prior to levy under IRC § 6331(a), and is also a prerequisite to the creation of the federal tax lien under IRC § 6321. However, pursuant to Treas. Reg. § 301.6303-1(a), the failure to give notice within 60 days does not invalidate the notice. Therefore, a late notice and demand given more than 60 days after assessment is a valid notice and demand for purposes of levy under IRC § 6331(a) and the creation of the federal tax lien under IRC § 6321.

(3) An immediate payment of the tax is normally not demanded unless delay would jeopardize collection. Bremson v. United States, 459 F. Supp. 128 (W.D. Mo. 1978). Notice and demand for immediate payment also should be made when the taxpayer's taxable period is terminated pursuant to IRC § 6851 before the expiration of the taxable period.

(4) Notice and demand need not personally be served upon the taxpayer to validate such notice. The notice and demand must be left at the dwelling or usual place of business of the taxpayer or mailed to his/her last known address. If doubt exists as to the dwelling, place of business or last known address, the notice should be delivered or mailed to all of the available addresses.

(5) Payment of only a portion of the tax after notice and demand represents neglect or refusal to pay. United States v. Wintner, 200 F. Supp. 157 (N.D. Ohio 1961), aff'd per curiam, 312 F.2d 749 (6th Cir. 1963), rev'd on other grounds, 375 U.S. 393 (1964). A levy made before the expiration of the 10-day period after notice and demand, as well as a levy made before notice and demand, is invalid. L.O.C. Indus. Inc. v. United States, 423 F. Supp. 265 (M.D. Tenn. 1976). A levy for a tax liability for which notice and demand was not made is invalid. Notification of a proposed assessment does not eliminate the need for notice and demand for payment of the tax once the assessment is made.

(1) The Service must provide a taxpayer with a 30-day notice of intent to levy. IRC § 6331(d)(2). The notice must be given in person, left at the taxpayer's dwelling or usual place of business, or sent by certified or registered mail to the taxpayer's last known address. Only a single notice is required to be given with respect to a particular liability, regardless of the number of levies made to satisfy the liability. This notice, either L 1058 or LT 11, is usually combined in one notice with the Collection Due Process (CDP) notice required by IRC § 6330. Area Offices use L 1058, and the Automated Collection System (ACS) uses LT 11.

(2) A levy made before the expiration of the 30-day period after notice of intent to levy is invalid absent a jeopardy determination or waiver by the taxpayer of the waiting period and right to a hearing. See IRM 5.11.1.3.3.11, Waiver of Notice of Intent to Levy/Notice of a Right to a Hearing.

(1) Prior to levy, the taxpayer is entitled to one (and only one) CDP hearing with respect to the tax and tax period. IRC § 6330; Treas. Reg. § 301.6330-1(b), Q & A-B4.

(2) The pre-levy notice sets forth in simple and non-technical terms:

1. the amount of the unpaid tax;

2. notification of the right to request a hearing;

3. a statement that the IRS intends to levy; and

4. the taxpayer’s rights with respect to the levy action, including a brief statement that describes:
   (1) the statutory provisions relating to the levy and sale of property;
   (2) the procedures applicable to the levy and sale of property;
   (3) the administrative appeals available to the taxpayer with respect to the proposed levy and the procedures relating to those appeals;
   (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements);
   (5) the statutory provisions relating to redemption of property and the release of liens on property; and
   (6) the procedures applicable to the redemption of property and the release of liens on property.

(3) The pre-levy notice must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by certified or registered mail, return receipt requested, to the taxpayer’s last known address.

(4) The notice under IRC § 6330 must be provided no less than 30 days prior to the date of the first levy with respect to the amount of the unpaid tax for the taxable period for which the levy may be made. Also, as noted in IRM 5.17.3.4.2(1), above, this notice is usually combined with the Notice of Intent to Levy required under IRC § 6331(d).

(5) The Service need not send the taxpayer a CDP notice prior to levy in three circumstances: (1) if the Service has levied on a state tax refund; (2) in a jeopardy levy situation; and (3) if the Service has made a "disqualified employment tax levy." A "disqualified employment tax levy" is a levy made with respect to an employment tax liability for a tax period beginning within 2 years after an employment tax period included in a previous request for a CDP hearing. However, the Service must provide the taxpayer with a notice containing substantially the same information as is contained in the pre-levy notice within a reasonable time after the levy (i.e., post-levy CDP notice). IRC § 6330(f); Treas. Reg. § 301.6330-1(a)(2). See IRM 5.1.9.3.14, Disqualified Employment Tax Levy, and IRM 5.11.1.5, Post-Levy Actions - Disqualified Employment Tax Levy, for more information regarding this exception.

(6) A taxpayer may request a CDP hearing by filing a written request within 30 days following delivery or mailing of the CDP notice. Treas. Reg. § 301.6330-1(c).

(7) A CDP hearing will be held by Appeals and, unless waived by the taxpayer, will be conducted by an employee or officer who has had no prior involvement with respect to the taxable period subject to the CDP hearing. IRC § 6330(d); Treas. Reg. § 301.6330-1(d).

(8) A taxpayer who fails to timely request a CDP hearing is not entitled to a CDP hearing. Such taxpayer may nevertheless request an administrative hearing with the Appeals Office. Such a hearing is referred to as an "equivalent hearing." The taxpayer must submit a written request for an equivalent hearing within the one-year period commencing the day after the date of the CDP notice issued under IRC § 6330. The equivalent hearing will be held by Appeals and will generally follow the procedures for a CDP hearing. See IRM 5.1.9.3.2.2, Equivalent Hearing (EH) and Timeliness of EH Requests.

(9) When an equivalent hearing is held, Appeals will issue a Decision Letter rather than a Notice of Determination. In an equivalent hearing, Appeals will consider the same issues that it would have considered at a CDP hearing on the same matter. Because the equivalent hearing is not a CDP hearing, the taxpayer is not entitled to obtain judicial review.

(10) The statute of limitations on collection is suspended for the period of the CDP hearing (but not the equivalent hearing) and any judicial appeal. In no event will the period expire before the 90th day after the day on which there is a final determination in a hearing.

(11) Levies are generally prohibited during the administrative hearing and during any judicial review and appeals, except where the court has granted a motion to permit levy.

(1) IRC § 6331(j) requires the Service to investigate the status of property before the levy or seizure of any property that will be sold under IRC § 6335.

(2) In the investigation of the status of the property, the Service must:

1. verify the taxpayer's liability;

2. analyze whether the amount of estimated sales-related expenses exceeds the fair market value of the property at the time of levy;

3. determine that the equity in the property is sufficient to yield net proceeds from the sale of the property to apply to the taxpayer’s liability; and

4. thoroughly consider alternative collection methods.

(1) IRC § 6331(k) provides that no levy may be made during the time an offer in compromise is pending. If an offer is rejected, no levy may be made during the 30 days after rejection (and, if an appeal of the rejection is filed within the 30 days, while the appeal is pending).

(2) IRC § 6331(k) provides that no levy may be made during the time an installment agreement is pending. If the installment agreement is rejected by the Service, no levy may be made during the 30 days after rejection (and, if an appeal is filed within the 30 days, during the time the appeal is pending). In addition, no levy may be made during the time an installment agreement is in effect and, if an agreement is terminated by the Service, during the 30 days after termination (and, if an appeal is filed within the 30 days, during the time the appeal is pending). For criteria identifying "pending" installment agreements, see IRM 5.14.1.3, Identifying Pending, Approved and Rejected Installment Agreement Proposals on IDRS.

(3) The Code prohibits levy on property if the amount of estimated sale-related expenses exceeds the fair market value of the property at the time of levy. IRC § 6331(f). This is referred to as an "uneconomical levy."

(4) Except where there has been a determination that collection is in jeopardy, IRC § 6331(g) prohibits levying on any day on which the taxpayer is required to appear in response to a summons issued by the IRS to collect any underpayment of tax.

(5) IRC § 6331(i) prohibits a levy (but not an offset under IRC § 6402) if the taxpayer has filed a refund proceeding to recover a divisible tax, unless jeopardy exists or the taxpayer waives his rights under this subsection.

(6) IRC § 6015(e)(1)(B) prohibits levy or proceeding in court with respect to a spouse who has requested innocent spouse relief under IRC § 6015(b) or (c) or who has requested equitable relief under IRC § 6015(f) (if the liability is unpaid as of December 20, 2006, or does not arise until after December 20, 2006),

1. until the taxpayer signs a waiver of the restrictions (Form 870-IS, Waiver of Collection Restrictions in Innocent Spouse Cases),

2. the 90 day period for petitioning the Tax Court expires, or

3. if a Tax Court petition is filed, until the Tax Court decision becomes final.

Note: Levy against the non-requesting spouse during this period is not prohibited.

(1) If the Area Director determines that collection of the tax is in jeopardy, the Service is not required to wait 10 days after giving the taxpayer notice and demand, 30 days after giving notice of intent to levy, or 30 days after the IRC § 6330 pre-levy notice. See IRM 5.17.15.4, Jeopardy Collection, and IRM 5.11.3, Jeopardy Levy without a Jeopardy Assessment, for further discussion of jeopardy levies.

(1) All property and rights to property (except that which is exempt under IRC § 6334) belonging to the person liable to pay the tax, or on which there is a tax lien, may be levied upon for payment of such tax.

(2) The property subject to levy may be real property or personal property. In addition, personal property susceptible to levy may be either tangible or intangible. The taxpayer need not have property in his/her possession before it may be levied upon. If it is discovered that property or rights to property are those of the taxpayer, such property is subject to levy no matter who is in possession.

(3) In determining a taxpayer’s property and rights to property, the Supreme Court has held that one must look initially to state law to determine what rights the taxpayer has in the property the government seeks to reach, then to federal law to determine whether the taxpayer's state delineated rights qualify as property or rights to property within the meaning of the federal tax lien statutes. Drye v. United States, 528 U.S. 49 (1999); Craft v. United States, 535 U.S. 274 (2002).

(4) At times an issue will arise regarding whether the taxpayer has a cognizable interest in the property. For example, when a taxpayer has obtained money through the commission of a crime, state law may provide that the taxpayer has no interest in or rights to such money. See, e.g., United States v. Ortiz, 140 F. Supp. 355 (S.D.N.Y. 1956) (illegally obtained money is not the taxpayer's property, therefore the money need not be surrendered by a police property custodian in response to a notice of levy).

(5) The tax lien attaches to after-acquired property. Glass City Bank v. United States, 326 U.S. 265 (1945). Therefore, use of a levy to collect taxes is not limited to property or rights to property of the taxpayer that exist when the assessment is made. If a federal tax lien has attached to the taxpayer’s property and the property is later transferred to a third party in a way that the lien would not be divested, the property remains subject to levy.

(6) During the time custody of seized property is in the United States, certain benefits may arise that are attributable to the seized property, e.g., rent from a seized building. Although it may be argued that a seizure of the property results in a seizure of the benefits, particularly if the benefit represents a fixed right at the time of the levy and seizure, a notice of levy should be served to remove any doubt as to whether the United States seized the right to benefits. For example, if stocks have been levied upon and before their sale a dividend is declared, a notice of levy should be served on the corporation after the record date but before the dividend is paid out. If real property is seized that is producing rental income, a notice of levy should be immediately served upon the lessee.

(1) IRC § 6331 provides that except for the continuing levy on salary or wages provided for in IRC § 6331(e) and a levy on certain government payments provided for in IRC § 6331(h), a levy shall extend only to property possessed or obligations existing at the time of the levy. Thus, service of a levy or notice of levy upon the taxpayer or a third person, respectively, results in a seizure of property or rights to property in possession of either party at the time of service of the levy. Should property come into possession of the taxpayer or third party later, another levy must be made to seize the property, regardless of the fact that the federal tax lien attaches automatically to after-acquired property. Rev. Rul. 55-210, 1955-1 C.B. 544. If, for example, a levy is made upon the bank account of a delinquent taxpayer and the bank surrenders the balance in the account at the time the levy is made, this levy has no effect upon subsequent deposits made in the bank by the taxpayer. Subsequent deposits may be reached only by subsequent levies. IRC § 6331(c) provides for successive levies upon property of the taxpayer until the amount due, together with all expenses, is fully paid.

(2) Similarly, a levy only reaches obligations that exist when the levy is made. Obligations are in existence when the liability of the obligor is fixed and determinable, even though the right to receive payment is deferred to a later date. Treas. Reg. § 301.6331-1(a)(1). This would include, for example, a right to receive future payments under a trust or contract, provided the right to receive such payments was not contingent upon the performance of future services. Rev. Rul. 55-210, supra. In other words, the right to future income, if it is a fixed or present right to property, is subject to levy, even though the taxpayer cannot receive the property until some future date. In re Orr, 180 F. 3d 656 (5th Cir. 1999).

(3) IRC § 6331(e) provides, however, that the effect of a levy on salary or wages payable to or received by a taxpayer is continuous from the date the levy is first made until the levy is released under IRC § 6343.

(4) IRC § 6331(h) provides for a continuous levy on certain federal payments, including Social Security benefits. The levy attaches up to 15% of the payment (and up to 100% in the case of vendors of goods or services sold or leased to the federal government). The power to make an IRC § 6331(h) levy has not been delegated to field personnel. The IRS makes an IRC § 6331(h) levy by sending an electronic transmission to Financial Management Service, another agency within Treasury. These provisions are exceptions to the rule that the levy only reaches obligations that are in existence at the time the levy is made.

(5) For purposes of determining the two year period under IRC § 6343(b) for the return of property, the "date of such levy" for continuous wage and salary levies under IRC § 6331(e) is the date the notice of levy is served. For federal payment levies under section 6331(h) that are transmitted electronically, The IRS should return only levy payments received during the two year period preceding the request for return of funds. See IRM 5.11.7.2.7, Returning FPLP Levy Proceeds, IRM 5.17.3.6.6 , Release of Levy and Return of Property, and IRM 5.17.3.6.6.3, Wrongful Levy, below, for additional information regarding IRC § 6343.

(1) In general, any tax may be collected by levy if such levy is made within 10 years after the assessment of the tax, or any extensions of the 10-year period. IRC § 6502(a). If the levy is served within the period of limitations, a suit to enforce the levy may be instituted after the 10-year period. This is true regardless of any state statutes of limitation. See United States v. Summerlin, 310 U.S. 414 (1940). IRC § 6502(a) permits levy after a judgment is secured for the life of the judgment. Therefore, a judgment based on a tax claim can be administratively collected by levy after the 10-year period would have otherwise expired. A judgment does not curtail the use of a levy to collect a liability. See IRM 5.17.4.6.2, Effect of Judgment on Collection Statute of Limitations.

(2) For personal property that will be sold, IRC § 6502(b) provides that a levy occurs on the date on which the notice of seizure provided in IRC § 6335(a) is given to the owner of the property and not the date the levy is made. In contrast, when the IRS levies on a bank account that will not be administratively sold, the levy occurs when the bank receives the notice of levy. United States v. Donahue Industries, 905 F.2d 1325 (9th Cir. 1990). Thus, it is important that if property is to be seized and sold, the notice of seizure must be given without delay if the statute of limitations on collection is imminent.

(3) Prior to the enactment of the Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA 98”), the collection period could be extended by the execution of a written waiver. This authority was curtailed by RRA 98. Currently, the taxpayer and the Service can only enter into an agreement to extend the collection statute in two situations:

1. if the extension is secured in connection with an installment agreement, or

2. if a levy was served prior to the expiration of the collection statute and the levy is subsequently released.

(4) Additionally, pursuant to a special transitional rule, extensions that were executed on or before December 31, 1999, may expire earlier than their original terms. An extension requested on or before December 31, 1999, expires on the latest of -

1. the last day of the original 10-year period,

2. December 31, 2002, or

3. in the case of an extension in connection with an installment agreement, the 90th day after the extension. RRA 98 § 3461(c)(2).

(5) IRC § 6502(a)(2)(A) provides that the statutory period for collection may be extended in connection with granting installment agreements. However, it is the Service's policy that CSED extensions are permitted only in conjunction with Partial Payment Installment Agreements and only in certain situations. See IRM 5.14.2, Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED).

(6) Although an agreement extending the period for collection must normally be executed before the statute of limitations expires, an agreement may be entered into after the 10-year statutory period if the consideration extended by the government is the issuance of a certificate of release of levy. However, the levy itself, for which the certificate of release is issued, must have been made within the statute of limitations and the waiver must have been executed prior to the release. IRC § 6502(a)(2)(B); Treas. Reg. § 301.6502-1(a)(2)(ii).

(1) Generally, a levy should not be used to enforce collection of taxes if assets of the taxpayer are in custodia legis (control of the court). However, assets may be seized if a levy would not interfere with the work of the court or the court grants permission to levy. Treas. Reg. 301.6331-1(a)(3). Therefore, upon the filing of a petition in bankruptcy, the death of a taxpayer and the probating of the estate, an assignment for the benefit of creditors, an adjudication of incompetency and appointment of a committee of one's property, and many other types of proceedings or situations if the court has control or custody of the property (actual or constructive) subject to such proceedings, a levy to enforce collection should not be made without prior consideration by Area Counsel.

(2) Property is not in custodia legis between the date of the filing of a petition in a state court for the appointment of a receiver and the date of the appointment; therefore, a levy made between those dates is valid. United States v. Allen, 328 F.2d 377 (5th Cir. 1964); Youngstown Sheet & Tube Co. v. Patterson-Emerson-Comstock of Ind., 227 F. Supp. 208 (N.D. Ind. 1963).

(3) For a more extended discussion of the effect of bankruptcy, receivership, other insolvencies and decedent estates on levy action, see IRM 5.17.3.6.2.2, Effect of Insolvency, and IRM 5.17.3.6.2.3, Effect of Bankruptcy, below. See also IRM 5.17.8, General Provisions of Bankruptcy; IRM 5.17.9, Chapter 7 Bankruptcy (Liquidation); IRM 5.17.10, Chapter 11 Bankruptcy (Reorganization); IRM 5.17.11, Chapter 13 Bankruptcy (Individuals with Regular Income) and Chapter 12 Bankruptcy (Family Farmers or Fisherman with Regular Income), and IRM 5.17.13, Insolvencies and Decedents' Estates.

(4) Merely because an officer of a court has possession of a taxpayer’s property, the property is not necessarily in custodia legis. If a United States Marshal is holding money of a taxpayer for safekeeping as a result of an arrest, to be returned upon posting a bond or acquittal, service of a notice of levy upon the United States Marshal is valid and must be honored, because the property is not in custody of the court. Simpson v. Thomas, 271 F.2d 450 (4th Cir. 1959); United States v. Bourbonnais, 602 F. Supp. 664 (E.D. Va 1985). If the property in possession of the United States Marshal is attached as a result of court process, it is generally in custodia legis and not subject to levy. Averill v. Smith, 84 U.S. (17 Wall) 82, 21 L.Ed. 613 (1872). Property seized in violation of the Fourth Amendment of the Constitution (unlawful search and seizure), although suppressed as evidence in a criminal proceeding, may be levied upon. Field v. United States, 263 F.2d 758 (5th Cir. 1959), cert. denied, 360 U.S. 918 (1959). Although property may be in custodia legis, the federal tax lien attaches to such property, even though the property may not be levied upon. Welsh v. United States, 220 F.2d 200 (D.C. Cir. 1955).

(5) Alimony payments made through a clerk of the court under a court order are not in custodia legis and may be levied upon. Property in the hands of an assignee for the benefit of creditors not under court supervision is subject to levy to the extent federal tax liens attached to the property before the assignment date. Notice of levy served upon a bank is ineffective to reach funds of a taxpayer the day following appointment by a court of a receiver of the taxpayer's assets. United States v. Peoples Sav. Bk. & Trust Co. of Wilmington, N.C., 55-2 USTC 55,683 (E.D.N.C. 1955).

(6) Where the taxpayer’s debtor is in bankruptcy and the taxpayer has filed a claim in the proceeding, there is no prohibition upon serving the bankruptcy trustee to reach the distribution the taxpayer is entitled to in the proceeding. In re Quakertown Shopping Center, Inc., 366 F.2d 95 (3d Cir. 1966); United States v. Ruff, 99 F.3d 1559 (11th Cir. 1996); Laughlin v. United States, 912 F.2d 197 (8th Cir. 1990), cert. denied, 498 U.S. 1120 (1991). However, Area Counsel should be consulted before serving such a levy.

(1) IRC § 6334(a)(13)(A) exempts from levy any real property of the taxpayer used as a residence by any individual (except for real property that is rented), if the levy amount does not exceed $5,000.

(2) In addition, IRC § 6334(e)(1) requires a court order before administrative seizure of certain principal residences owned by the taxpayer when seizure is otherwise permissible. These include the principal residence of:

• the taxpayer

• the taxpayer’s spouse

• the taxpayer’s former spouse

• the taxpayer’s minor child

(3) Written approval by the Area Director is required before seizure of any property used by the taxpayer, the taxpayer’s spouse or former spouse, or the taxpayer’s minor children, as a principal residence.

(4) After the required approval is obtained, a suit recommendation package should be prepared for Area Counsel. The procedures for preparing a seizure recommendation package for Area Director approval and for preparing the suit recommendation package are set forth in IRM 5.10.2.3, Judicial Approval for Principal Residence Seizures.

(5) IRC § 6334(e)(1) provides that there will be no levy on a principal residence unless approved by a judge or magistrate (in writing). At this hearing, the Service will be required to demonstrate that (1) the requirements of any applicable law or administrative procedures relevant to the levy have been met, (2) the liability is owed, and (3) no reasonable alternative for the collection of the taxpayer's debt exists.

(1) IRC § 6334(a)(13)(B)(ii) and IRC § 6334(e)(2) require the written approval of the Area Director or Assistant Area Director before seizure of certain business assets. "Business assets" is defined as any tangible personal property or real property (except for rental property) used in the trade or business of an individual taxpayer.

(2) This approval is not required if there has been a jeopardy determination.

(3) Approval may only be given after determining that the taxpayer’s other assets subject to collection are insufficient to pay the amount due, together with the expenses of the proceeding.

(4) With respect to the seizure of state permits for the harvest of fish or wildlife in the trade or business of an individual taxpayer, the term "other assets" includes future income that may be derived by the taxpayer from the commercial sale of fish or wildlife under the permit.

(5) This approval requirement is only for assets used in the trade or business of an individual taxpayer. Thus, this approval is not required before seizure of the business assets of a corporation or partnership.

(6) This approval requirement is only for tangible business assets. Tangible property is, in general, property that is physically seized for the purpose of being sold, such as inventory and vehicles. In general, intangible property represents property rights with no separate physical existence that are reached by levy, such as certificates of stock or copyrights. Any questions as to whether a certain business asset is tangible property and therefore, whether Area Director approval is required prior to seizure, should be referred to Area Counsel.

(1) IRC § 6334(a) exempts certain property from levy. In addition to residences/principal residences and certain business assets which may be exempt as discussed above, the following property is exempt from levy:

• wearing apparel and school books necessary for the taxpayer or members of his family

• fuel, provisions, furniture, and personal effects in the taxpayer’s household, up to a specified, inflation-adjusted amount

• books and tools of the trade, necessary for the trade, business or profession of the taxpayer, up to a specified, inflation-adjusted amount

• unemployment benefits

  Note: The unemployment benefit exemption has been strictly construed and does not encompass retirement and survivors benefits or disability insurance payments under the Social Security Act. Kane v. Burlington Savings Bank, 320 F.2d 545 (2d Cir), cert. denied, 375 U.S. 912 (1963).

• undelivered mail

• certain annuity or pension payments: payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by Army, Navy, Air Force, and Coast Guard Medal of Honor recipients, and annuities based on retired or retainer pay under chapter 73 of Title 10 of the United States Code

  Note: Although as a matter of policy, the Service has placed some administrative restrictions on levying on retirement income and retirement assets, those listed in IRC § 6334(a) are the only ones exempt from levy as a matter of law.

• workmen’s compensation (including amounts payable with respect to dependents)

• so much of the salary, wages, or other income as is necessary to comply with a judgment of a court requiring the taxpayer to contribute to the support of his/her minor children, but only if the judgment was entered before the date of the levy

• an amount determined under IRC § 6334(d) as a minimum exempt amount of wages, salary, or other income

• certain service-connected disability payments

• certain public assistance payments

• any amount payable under the Job Training Partnership Act

(1) If a levy is not honored or if the taxpayer or a third party interferes with the levy or seizure, it is imperative that constitutional guarantees and individual rights not be violated. Property should not be forcibly removed from the person of a taxpayer. Such conduct may expose a revenue officer to an action in trespass, assault and battery, conversion, etc. Larson v. Domestic and Foreign Commerce Corp., 337 U.S. 682, rehearing denied, 337 U.S. 682 (1949); Maule Industries v. Tomlinson, 244 F.2d 897, (5th Cir. 1957). If there is reason to suspect an interference with a levy, the matter should be referred for proper legal action against the offending party. See IRM 5.17.3.6.4, Interference With Levy, below.

(2) The Supreme Court in G.M. Leasing Corp. v. United States, 429 U.S. 338 (1977) held that an entry without a warrant by the Service onto private property of a person in which that person has a reasonable expectation of privacy for the purpose of seizing property to satisfy a tax liability is a violation of that person's rights under the Fourth Amendment to the Constitution. Before levies or seizures of property located on such property may be made, permission of the occupant of the premises on which the seizure is to take place must be obtained. If the occupant refuses to permit entry, the matter should be referred to Area Counsel to obtain a court order authorizing entry.

(3) The Fourth Amendment to the Constitution, forbidding unreasonable searches and seizures, does not guarantee that illegally seized property, although suppressed as evidence in a criminal proceeding, must be returned to the owner. Accordingly, such property may be levied upon. A similar result occurs if property is illegally seized by state or local authorities for purposes of criminal prosecution and is suppressed as evidence.

(1) A levy requires that the property levied upon be brought into legal custody through seizure. There must be actual or constructive physical appropriation of the property levied upon. Mere intent to reduce to possession and control is insufficient. Freeman v. Mayer, 152 F. Supp. 383 (D.N.J. 1957), aff’d, 253 F.2d 295 (3d Cir. 1958). If actual physical appropriation is not possible, i.e., as with a taxpayer's storefront, constructive seizure is effected through posting, tagging, and inventorying the property and by dispossessing the taxpayer of the property (e.g., by padlocking the doors). Physical dispossession might not be necessary depending on the type of property (e.g., a taxpayer's personal residence). Refer the case to Area Counsel if physical dispossession becomes an issue.

(1) The Code does not set forth the manner in which levy is to be made. IRC § 6331(b) merely defines the term "levy" as including the power of distraint and seizure by any means. Treas. Reg. § 301.6331-1(a)(1) states that levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy.

(2) The notices of levy used by the Service when levying on cash or cash-like property are the Notice of Levy (Form 668-A(c)(DO)) and the Notice of Levy on Wages, Salary, and Other Income (Form 668-W(c)(DO)). In addition, when a notice of levy is served upon a third party and there is no response or a refusal to comply, it is followed by, though not required by statute or regulation, a Final Demand (Form 668-C).

(1) A revenue officer attempting to levy on property of the taxpayer may experience interference by the taxpayer or a third party. Such interference may take the form of acts committed directly against the revenue officer, attempts to place property beyond the reach of levy through removal or secreting of the property, the institution of judicial proceedings to restrain the collection of a tax, or attempts to rescue or recover the property after its seizure.

(1) The person whose property has been seized may redeem both real and personal property at any time before its sale by paying the taxes due and any expense incurred in connection with the seizure and contemplated sale. IRC § 6337(a). The amount of the tax due must be paid and not merely an amount equal to the value of the property seized or the value of the government’s interest in the property.

(2) Once personal property is sold, the taxpayer no longer has any right to redeem the property. Real property, however, may be redeemed within 180 days from the date of sale by the taxpayer, his/her heirs, executors, or administrators, or any person having an interest in or a lien on the property, or any person on their behalf. IRC § 6337(b).

(3) When a certificate of sale is tendered after the expiration of the redemption period, the deed should be issued even if there is a contention that a qualified party has offered to redeem and been refused, since that party’s remedy is to seek judicial enforcement of the right to redeem.

(4) A tenant in common or a wife with an inchoate right of dower has sufficient interest to redeem. See, e.g., Babb v. Frank, 947 F. Supp. 405 (W.D. Wis. 1996); United States v. Lowe, 268 F. Supp. 190 (N.D. Ga. 1966), aff’d sub nom., Lowe v. Monk, 379 F.2d 555 (5th Cir. 1967), cert. denied, 389 U.S. 1039 (1968); Samet v. United States, 242 F. Supp. 214 (M.D.N.C. 1965). Similarly, the husband’s right of curtesy entitles him to redeem.

(5) The amount to be paid to the purchaser to redeem is the purchase price, together with interest at the rate of twenty percent (20%) per annum. IRC § 6337(b)(2).

(6) If the purchaser cannot be found in the county in which the property to be redeemed is located, payment is to be made to the Secretary or his delegate for use of the purchaser, his/her heirs or assigns. IRC § 6337(b). Redemption cannot be made through a suit attacking the validity of the tax and the sale itself for which the property was seized to satisfy the purported invalid tax. If the terms of the redemption statute are not complied with, there can be no redemption. Babb v. Frank, 947 F. Supp. 405 (W.D. Wis. 1996). If there is an assignment by the purchaser of property purchased at a sale, one entitled to redeem may, as a means of protection, deposit the amount to redeem in court and tender said sum to either the defendant-purchaser or his/her assignee, whoever is entitled to such.

(7) On occasion, real and personal property, or a number of tracts of real property may be purchased in the aggregate. Under such circumstances, the purchase price of the realty for purposes of redemption shall be the ratio, as of the time of sale, of the value of the realty to the total value of all property purchased. The minimum price or the highest bid price, whichever is higher, offered for the property separately or in groups shall be treated as the value. Treas. Reg. § 301.6337-1(b)(2).

(8) Questions concerning who is entitled to rents, profits and possession of real property during the statutory period of redemption should be referred to Area Counsel.

(1) The IRS is required to release a levy upon all or part of the property or rights to property levied upon under certain conditions. IRC § 6343(a).

(2) The Area Director is authorized to return any property which has been wrongfully levied upon to its rightful owner. In addition to this administrative procedure in IRC § 6343(b) to return wrongfully levied property, a person other than the taxpayer may file suit against the government to recover the property or obtain a judgment. IRC § 7426.

(3) In addition, IRC § 6343(d) authorizes the IRS to return levied upon property in certain situations other than wrongful levies:

• if the levy was premature or otherwise not in accordance with administrative procedures (e.g., the levy was made before the taxpayer was given CDP rights under IRC § 6630),

• the taxpayer has entered into an installment agreement under IRC § 6159 to satisfy the tax liability (unless the agreement provides otherwise),

• the return of the property will facilitate the collection of the tax liability, or,

• with the consent of the taxpayer or the National Taxpayer Advocate, the return of the property would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States.

(1) Sales of seized property are conducted by Property Appraisal and Liquidation Specialists (PALS). Under section 3443 of RRA ‘98, the revenue officer who seized the property may not participate in the actual sale of such property.

(2) As a matter of Service policy, revenue officers who have taken any collection action at any time against the taxpayer whose assets have been seized have the same limitations as the seizing RO.

(3) Prohibited acts by those revenue officers described in (1) and (2) above, include:

• Grouping property prior to sale after the Form 2433 has been completed

• Registering bidders

• Tabulating bids

• Assisting in collecting sales proceeds

• Issuing certificates of sale

• Answering sale-related questions

• Any other sale-related activity involving interaction with anyone attending or conducting the sale

(4) Revenue officers described in (1) and (2) above may perform limited ministerial acts without violating the prohibition on participation in sales.

(5) Post-seizure the revenue officer continues to be responsible for the collection of the outstanding tax liability and remains in communication with the PALS as necessary. For example, the revenue officer would contact the PALS if the liability were satisfied before the sale or if the taxpayer filed bankruptcy before the sale. In addition, given the continued collection responsibility, the revenue officer may be present at the sale (or otherwise available) to address alternative methods of collection with the taxpayer.

(6) As described in IRM 5.10, revenue officers do participate in post–sale procedures. For example, the revenue officer:

• inputs the transaction code to remove a module from inventory;

• works with the PALS to ensure that all expenses of seizure and sale are properly debited;

• maintains the ICS case file; and

• ensures that documents are forwarded to Advisory for inclusion in the seizure file and the permanent record.

(1) Sales of seized property must strictly adhere to the sale mechanics provided to avoid a charge of impropriety.

(2) Seized property may be sold either by public auction or by public sale under sealed bids. The PALS should select the method that will bring the highest price.

(3) Prospective bidders should be allowed a reasonable time to inspect the property to be sold insofar as possible. The terms and conditions of the sale, the announcement of a minimum bid price if applicable (announcement of the minimum bid price may be made before the sale begins if advantageous or it may be deferred until after the receipt of the highest bid, and if that bid is greater than the minimum bid price, no announcement will be made), the type of auction sale to be held, the manner of bidding, the conditions under which property is to be offered for sale, etc., should be clearly announced, except as indicated, before entertaining bids.

(1) It is important that the PALS emphasize that no warranties are made as to the validity of the title to the property to be sold. The property should be offered for sale "as is" and "where is" and without recourse against the United States.

(2) The taxpayer’s property and rights to property are sold subject to any prior mortgages, encumbrances or liens in favor of third parties senior to the federal tax lien. Treas. Reg. § 301.6335-1(c)(5)(iii). It is the responsibility of the prospective bidders to investigate title to and encumbrances on the seized property. However, on request the government will provide prospective bidders information it has learned about encumbrances which have priority over the federal tax lien listed on Form 2434-B, Notice of Encumbrances Against Property Offered for Sale.

(1) A certificate of sale is given to the purchaser of either personal or real property upon payment of the purchase price. A deed to real property is given to the purchaser or his/her assignees upon surrender of the certificate of sale after the redemption period expires. (If the purchaser cannot produce the certificate of sale, the purchaser must execute an affidavit of lost certificate, drafted by Area Counsel). The certificate of sale of personal property transfers to the purchaser all the delinquent taxpayer’s right, title and interest in the property sold, and the certificate is prima facie evidence of the right of the Service to make the sale and is conclusive evidence of the regularity of the sale proceedings. IRC § 6339.

(2) The certificate of sale constitutes authority for the transfer of corporate stock and title to motor vehicles. It also constitutes a receipt if the property sold is securities or other evidence of debt. Treas. Reg. § 301.6339-1.

(3) A deed to real property is prima facie evidence of the facts stated therein and operates as a conveyance of all the taxpayer’s right, title and interest in the premises sold at the time the tax lien attached to the realty, provided the sale has been substantially in compliance with the provisions of the Code and regulations.

(4) Some purchasers record the certificate of sale to preclude transfer by the taxpayer to a bona fide purchaser for value.

(1) Any money realized by levy or sale of seized property, or sale of redeemed property, is applied first against the expenses of levy and sale; second, against any unpaid tax specifically imposed against the seized property by an internal revenue law (e.g., alcohol or tobacco tax); and third, against the tax liability for which the levy was made or the sale was conducted. IRC § 6342(a).

(2) Any remaining, or surplus, proceeds are credited or refunded to the person or persons legally entitled to the surplus proceeds. IRC § 6342(b). If the United States cannot resolve conflicting claims to the surplus proceeds, the United States may bring an interpleader action in federal district court. See United States v. Sage, 566 F.2d 1114 (9th Cir. 1977) (the court held that surplus proceeds never go to satisfy senior lienors because the federal tax sale did not affect their interests).

(1) Pursuant to IRC § 6340, the IRS must keep a record of sales of personal and real property and of redemptions of real property. In addition, the IRS must provide an accounting to the taxpayer that includes a copy of the record of sale (other than the name of the purchaser), the amount of sale proceeds applied to the taxpayer's liability, and a statement including the amount of any remaining balance. See IRM 5.10.6.10, Record 21, Record of Seizure and Sale.

(2) In the case of real property sales, the IRS is not precluded from disclosing the names of purchasers to the taxpayers to enable the taxpayers to exercise their redemption rights.

(1) The effect of a levy depends upon the nature of the taxpayer’s interest in real property. While, depending on state law, personal property may be held in the forms of ownership described below, issues related to forms of ownership arise most frequently with respect to real property.

(1) An account is any right to monetary payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper. Art. 9-102(a)(2) of the Uniform Commercial Code. The party obligated is commonly referred to as the debtor. Levy is made on accounts by service of notice of levy on the debtor. After the levy on the debtor, the Service has the option of either administratively selling the account receivable or obtaining payment due the taxpayer. However, a levy does not accelerate the payment. See Cash v. United States, 961 F.2d 562 (5th Cir.), cert. denied, 506 U.S. 985 (1992).

(2) When the Service levies on the debtor to obtain the payment for the accounts receivable, the taxpayer is not entitled to a credit for the fair market value of the accounts at the time of the levy. Cash, supra. The taxpayer's liability will be credited when the Service either administratively sells the accounts receivable or obtains payment from the debtor. If the Service, however, negotiates new payment terms with the debtor, then the taxpayer has an argument that his tax liability must be credited with the fair market value of the accounts at the time of the levy. In re Barlows Inc., 767 F.2d 1098 (4th Cir. 1985).

(1) "Alimony" is an allowance paid by one spouse to the other for support and maintenance pursuant to a court order. If the spouse receiving alimony owes a tax, a levy served on the other spouse reaches the alimony payments.

(2) If the court decree designates a specific amount to be paid for child support, the receiving spouse does not have a right to that for personal use. Therefore, a levy served upon the paying spouse for the receiving spouse’s individual tax liabilities does not reach the amount attributable to child support. If the paying spouse is the delinquent taxpayer, amounts necessary for child support are likewise not subject to levy. IRC § 6334(a)(8).

(1) Used here, "bail" refers to the posting of security for a person’s appearance in court at a designated time and place.

(2) Property deposited with a court as security for bail is in custodia legis. Nevertheless the federal tax lien attaches to the deposit and the property can be levied upon. A notice of levy may be served upon the clerk of the court. In such a case the clerk should be advised that full compliance with the levy is not required until such time that the property would otherwise be turned over to the taxpayer or someone claiming through him/her. If a dispute arises as to who owns the property, the government must establish the nature and extent of the taxpayer's property interest. The levy would be ineffective if there were a forfeiture of the deposited property for failure to comply with the conditions of bail. If a third person deposits property for the taxpayer, there might be a question as to whether the taxpayer has a property interest in the deposit. Area Counsel should be consulted in such instances.

(3) Property a defendant-taxpayer deposits with a surety or the court clerk to secure his/her liability on a bond is subject to levy, provided the security is not forfeited by the defendant. United States v. Parker, 55-2 USTC 9677 (N.D. Tex. 1955).

(1) The deposit of money in a bank generally creates a debtor-creditor relationship between the bank and depositor. Other relationships might exist, such as bailor and bailee, agent and principal, etc., depending upon the circumstances. A levy may be made upon the debt the bank owes to the taxpayer-depositor, as evidenced by the amount on deposit. To reduce a debt to the government’s possession, the notice of levy must be served on the debtor-bank.

(2) Bank accounts may be savings, checking, special interest, certificate of deposit, etc. However, the United States may levy upon that property interest in the bank account regardless of the designation of a bank deposit if the taxpayer has property or rights to property as a depositor. United States v. National Bank of Commerce, 472 U.S. 713 (1985).

(3) A bank honoring a levy is not entitled to deduct a service charge from the amount of deposit to cover its costs in honoring the levy, regardless of the right the bank may have to offset service charges against the taxpayer’s account in ordinary transactions. Also, the bank’s exercise of its right of offset after the service of a notice of levy upon the bank is not a defense to a suit for failure to honor a notice of levy. E.g., State Bank of Fraser v. United States, 861 F.2d 954 (6th Cir. 1988).

(4) In many situations the IRS will release a levy on a bank account if the bank proves that it has a superior lien interest in the account. Rev. Rul. 2006-42, 2006-35 IRB 337. Specifically, IRC § 6323(b)(10) provides a superpriority to a bank's security interest in a depositor's bank account, as long as the bank lacked actual notice and knowledge of the federal tax lien. A "security interest" is limited by IRC § 6323(h) to those interests that are protected under local law against subsequent judgment liens.

1. Section 9-109 of Article 9 of the Uniform Commercial Code (UCC) allows a security interest to be created in personal property. Section 9-109(d)(13), however, excludes consumer deposit accounts from the scope of Article 9. Thus, a bank may obtain a security interest in a non-consumer deposit account, i.e., a business bank account.

2. Section 9-314 provides that a security interest in a business deposit account may be perfected only by control. The bank is not required to file a financing statement to perfect its security interest in the account. Under § 9-104(a)(1), a bank automatically has control when the bank maintains the business deposit account. Section 9-104(b) provides that a depositor's right to withdraw funds from the deposit account does not eliminate the bank's control.

(5) In short, in many situations banks will qualify for a superpriority under IRC § 6323(b)(10). If the bank honors the levy, the bank may then file a wrongful levy suit to recover the amount of its superpriority.

(6) If the deposit account is a consumer account or a bank had actual notice and knowledge of the federal tax lien, then no superpriority exists under IRC § 6323(b)(10). In this situation the bank must honor the levy without any further recourse against the Service. Moreover, if IRC § 6323(b)(10) does not apply and funds are deposited in the taxpayer's account after the levy and the bank makes a setoff, the IRS can still recover the funds under the argument that the bank has funds encumbered with the federal tax lien. United States v. Donahue Ind., 905 F.2d 1325 (9th Cir. 1990); United States v. Cache Valley Bank, 866 F.2d 1242 (10th Cir. 1989); United States v. Bank of Celina, 721 F.2d 163 (6th Cir. 1983).

(1) A chose in action is an intangible personal right not reduced to possession, but recoverable by a suit at law. The right to sue for payment of a debt is a chose in action, not the overdue note which is merely evidence of the intangible debt. Since a chose in action is property and a right to property, a levy may be made upon the chose in action. See United States v. Citizens & Southern Nat’l Bank, 538 F.2d 1101 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1977). However, in levying on a chose in action, the government can seize no more than the taxpayer owns by virtue of the contract, transaction or occurrence that gave rise to the taxpayer’s property or right to property.

(2) If a taxpayer-plaintiff has filed suit to recover on a chose in action, the Service may seize and sell the taxpayer’s chose in action. A notice of levy can also be served on the taxpayer’s attorney to seize any payment or settlement in the lawsuit. Notices of levy can also be served on the defendant and his/her attorney to seize the debt owed to the taxpayer.

(3) Should the taxpayer-plaintiff obtain a judgment, notices of levy should again be served before payment is made by the defendant. If the defendant is the taxpayer and he/she files a counterclaim, a similar procedure should be followed. The revenue officer must remember that a right to sue for a debt is a chose in action which may be levied upon, but the debt, as distinguished from the chose in action, is not reduced to possession until a notice of levy is served upon the taxpayer’s debtor.

(1) To the extent that a taxpayer has property or a right to property in a condemnation award, the award is subject to levy. However, the revenue officer may encounter difficulties when levying if not all of the joint owners of the condemned property are delinquent taxpayers or there is a cloud on the title to the property. If state law provides that the condemnation award shares the same character as the condemned property, the amount awarded must be so treated by the government contemplating a levy and seizure of the award. In such cases, the decision to levy on a condemnation award should be approached in the same manner as would be the case of levying on the real property itself.

(2) A notice of levy should be served on the appropriate official of the governmental unit charged by the court to pay the award.

(1) Under credit/debit card processing contracts, a processing company is generally obligated to pay the merchant/taxpayer for all credit card sales made. This obligation arises at the time of the sale, not later when the information is forwarded to the company or even later after daily settlement has occurred. While payments are not made to the merchant/taxpayer instantaneously, the obligation to pay is fixed and determinable, and the funds are owed to the merchant/taxpayer at least daily.

(2) Whenever a processing company is served with a levy, it is required to surrender any amounts owed the taxpayer for credit card sales at the time the levy is served. The processing company generally holds funds up to 24 hours and then electronically transmits the aggregate amount of the transactions that occurred during the 24-hour period to the merchant.

(3) Under credit/debit card processing contracts, processing companies also typically maintain funds in separate reserve or "charge back" accounts that are used to setoff any future "charge back" amounts against the merchant/taxpayer. Although the funds held in a reserve account belong to the merchant/taxpayer, under the typical contract, they are not available to the merchant/taxpayer until a specified amount of time after the contract is terminated. Where a processing company maintains amounts in a reserve or "charge back" account, the levy will attach to all funds held in that type of account. However, the processing company will not have to turn over those funds to the Service until the time period specified in the contract has expired.

(4) The paragraphs above notwithstanding, the processing company may have priority over the Service with respect to the funds in the reserve account if

1. the processing company has executed a setoff before receiving notice of levy,

2. the processing company has a security interest earlier in time than the Service's notice of federal tax lien under IRC § 6323(a), or

3. the processor has a superpriority under IRC § 6323(b)(10). See IRM 5.17.3.10.4(4), above.

(1) A debt owed a taxpayer is clearly subject to levy. The government reduces debts to its possession by serving a notice of levy upon the debtor. As stated previously, payment to the government is a complete defense to the debtor in any action brought against him/her on the debt. IRC § 6332(e). A debt may be levied on notwithstanding the fact that a state government is the taxpayer’s debtor or that the security for the debt may not be levied upon.

(2) If there is joint and several liability on a debt, a levy may be served on any of the debtors to reach the entire debt owed the taxpayer. There is no legal requirement to levy on all the debtors to reduce the debt to possession. In addition, the government is not required to consider the equities between the debtors.

(1) A taxpayer’s right to dividends declared on stock owned by the taxpayer is subject to levy. Rev. Rul. 75-554, 1975-2 C.B. 478. Dividends are distributions of earnings and profits to shareholders which have no effect on the shareholder’s proportionate interests in the corporation. Although the rights of shareholders are determined by the law of the corporate domicile, it is generally accepted that whenever a lawful dividend on stock is declared shareholders become creditors of the corporation with a right to be paid a certain sum at a future time.

(2) Thus, the revenue officer is levying upon a debt. A notice of levy should be served on the corporation and on the paying agent designated by the corporation to disburse the dividend payments, once the corporation becomes indebted to the taxpayer-shareholder. Because dividends are usually payable to shareholders of record as of a certain date, it is advisable to levy on the corporation after the date of declaration and on the paying agent before the date set for payment. The revenue officer need not seize the taxpayer’s stock before he/she may levy to seize the debt. Problems may arise if the taxpayer has transferred his/her stock in the interim, but these should be referred to Area Counsel for an opinion on what property or right to property was, in fact, levied on.

(1) Fixtures were considered when defining real property previously in this section. Fixtures may be levied upon depending upon who the taxpayer is, the relationship between the owner of the premises and the party utilizing the fixtures, and the intent of the parties as to the disposition of the chattels upon termination of the use of the premises. The law of the state the real property is located in determines the property interest, if any, the owner of the premises has in fixtures.

(1) The Service may levy on a taxpayer's Health Saving Account (HSA) established under IRC § 223. An HSA is a trust created exclusively for the purpose of paying the qualifying medical expenses of the account beneficiary, the individual who establishes the HSA. IRC § 223(c)(3) and (d)(1). Banks, credit unions, insurance companies, and other financial institutions serve as trustees or custodians for HSAs. IRC § 223(d)(1)(B).

(2) The account beneficiary (taxpayer) that establishes the HSA owns and controls the funds in his or her HSA. The taxpayer makes decisions regarding which qualified medical expenses are paid from the account and how the money in the account is invested. The taxpayer may receive a distribution at any time. Notice 2004-2, Q & A-24, 2004-1 C.B. 269.

(3) The HSA trustee or account custodian is not required to determine whether the distributions are used for qualified expenses. The taxpayer’s interest in the HSA is nonforfeitable under IRC § 223(d)(1)(E). In light of the foregoing, the taxpayer’s interest in an HSA constitutes "property" or "rights to property" that is subject to levy under IRC § 6331.

(4) A distribution from an HSA for any purpose other than qualified medical expenses is includible in the account beneficiary's gross income and subject to an additional ten percent tax under IRC § 223(f)(4). However, the ten percent additional tax does not apply if, at the time of the distribution, the account beneficiary was dead, had attained age 65, or was disabled. A levy on an HSA is not a distribution to pay qualified medical expenses. Therefore, unless one of the exceptions apply, a taxpayer would be liable for the additional ten percent tax on the amount of the levy.

(1) IRC § 6332(b) permits the government to levy against the cash loan value of a life insurance or endowment contract without resort to a foreclosure suit. See IRM 5.11.6.4, Notice of Levy in Special Cases, Insurance, for administrative procedures. A levy on an insuring organization with respect to a policy issued by such organization constitutes:

1. a demand by the Secretary or his delegate for payment of the cash loan value (with certain adjustments), and

2. the exercise of the right of the taxpayer to the advance of such amount.

(2) It is not necessary to surrender the contract document. However, the notice of levy must certify that a copy of the notice has been sent to the taxpayer. The insuring organization has 90 days from the date of service of notice of levy to pay over the required amount. This 90-day period provides time for the taxpayer to meet his/her tax liability by other means. In this event, the insurance company must be notified before the expiration of the 90-day period of the payment received from the taxpayer during the period.

(1) The right of a taxpayer to occupy premises for a fixed period of time pursuant to a lease agreement is property that may be levied upon and sold, with the purchaser of the leasehold interest entitled to possession, notwithstanding a clause in the lease prohibiting the assignment thereof without the consent of the lessor. Stagecrafter’s Club v. District of Columbia Division, 110 F. Supp. 481 (D.D.C. 1953), aff'd, 211 F.2d 811 (D.C. Cir. 1954).

(1) A "legacy" or "bequest" is disposition of personal property by will. If one dies intestate (without making a will) property passes according to state intestacy law. Although the government should not levy upon a decedent’s assets subject to the jurisdiction of a probate court, it should consider participating in the probate proceedings pursuant to state law to protect its interests as a creditor. Moreover, state law may permit the service of a notice of levy upon an executor or other representative once an order of distribution is made.

(2) State law generally permits a beneficiary under a will or through intestate succession to file a disclaimer and renounce his/her right if there has been no acceptance of the testamentary gift. Under such circumstances, the renunciation usually relates back to the date of the bequest or devise, in which case the renouncer is not deemed to have accepted the property because he/she never had any rights to that property. However, for federal tax purposes, a taxpayer, who is a beneficiary or devisee, cannot disclaim his or her inheritance after the federal tax lien has arisen to prevent the federal tax lien from attaching to that property. The Supreme Court in Drye v. United States, 528 U.S. 49 (1999) held that the federal tax lien under IRC § 6321 attaches to the taxpayer’s right to inherit if the taxpayer later disclaimed his inheritance under state law. The Court held that the term property was intended to reach every species of right or interest protected by law and having an exchangeable value. A right to inherit or to "channel the inheritance to a close family member (the next lineal descendant)" cannot simply be written off as a mere personal right to accept or reject a gift, the Court concluded. That right was "property" or a "right to property" subject to the federal tax lien.

(1) A license is a certificate or document authorizing or permitting the holder to engage in a particular type of activity (e.g., selling liquor, operating a child care center, etc.). A franchise is a grant by a sovereign or public authority of the privilege to an individual or corporation to engage in a particular activity or enterprise serving a public interest (e.g., interstate trucking, supplying gas or electric power, railroading, operating a fleet of taxicabs or a bus line, etc.).

(2) If the license or franchise is a property right of the taxpayer-holder, it may be levied on and sold to satisfy taxes due. For state-created licenses, check local law to determine the taxpayer’s interest in the license. Even if local law does not treat the license as property, it may be property for purposes of the federal tax lien and levy. 21 West Lancaster Corp. v. Main Line Restaurant, Inc., 790 F.2d 354, 357-358 (3d. Cir. 1986) (although a liquor license did not constitute "property" and could not be reached by creditors under state law, it was nevertheless "property" subject to federal tax lien). See generally, Drye v. United States, 528 U.S. 49 (1999) (state law determines a taxpayer’s interests; federal law determines whether such interests amount to property).

(3) A state statute providing that a license shall not be regarded as property does not control if the license, in fact, is something of value and possesses the attributes of property. See, e.g., Sea Girt Restaurant v. Sea Girt, 625 F. Supp. 1482 (D.N.J.) aff’d, 802 F.2d 445 (3d Cir. 1986). Generally, if the license, franchise or membership may be transferred, assigned, conveyed or bequeathed, the taxpayer should be considered as having a property right subject to levy, notwithstanding the necessity of the approval of the transferee, assignee, etc. by the issuing authority. The revenue officer must exercise great caution in determining whether the interest constitutes property. Contact Area Counsel for guidance.

(4) If a license or franchise constitutes property or a right to property of a taxpayer, the purchaser at a sale must ordinarily comply with the rules and regulations of the issuing agency to effectuate a transfer of the property of the taxpayer to the buyer, but the conditions imposed must be proper and reasonable.

(5) The fact that a license is not property subject to transfer under the state law does not eliminate all collection potential of a license. For example, although New York regards a liquor license as a mere privilege, the licensee-taxpayer may voluntarily surrender the license during its term and receive an allocable refund provided a verified petition is filed with the surrender of the license. Therefore, while the seizure of a liquor license is of no value, a levy served on the State Comptrollers Office when a refund has ripened into a property right reaches the refund.

(6) Intangible, like tangible, property may be seized and reduced to possession after serving a levy. A levy served upon the taxpayer, taking physical possession of the liquor license certificate, and the mailing to the license owner and the government agency which issued the license, substantially identical notices of levy were held sufficient to be equivalent to possession of the intangible items of property. Division of Labor Law Enforcement v. United States, 301 F.2d 82 (9th Cir. 1962).

(1) Money of a delinquent taxpayer constitutes property and may be levied on. Although money, due to its nature, is not sold to satisfy taxes, a levy must still be used to obtain possession. The same is true for other forms of property that need not be sold such as a dividend, debt, check, etc.

(1) A debt, evidenced by a note, payable in installments may be levied upon. The taxpayer’s debtor would be obligated to comply with the levy by paying the installments to the United States. The government, having no greater rights than the taxpayer in property seized, cannot seek an acceleration of the installment payments outside of the terms and conditions imposed in the note itself. United States v. Ragsdale, 206 F. Supp. 613 (W.D. Tenn. 1962). If a promissory note is payable in installments, successive levies need not be served on the maker of the note because at the time of the execution of the note, the holder has a fixed right to payment which is merely deferred over a future period of time. Rev. Rul. 55-210, 1955-1 C.B. 544

(2) To obtain possession of the debt owed on a note, service of notice of levy on the maker would ordinarily be sufficient. However, if the government wishes to sell an installment note, the revenue officer must take physical possession of the physical paper representative of the promise to pay to accomplish a seizure. Matter of Frank, 55-2 USTC 9772 (S.D. Calif. 1955).

(1) A partner’s interest in a partnership is determined under state law and the partnership agreement. Generally, a partner’s interest is a right to a proportionate share of the distribution of partnership profits or surplus after the payment of partnership debts. The Service may serve a notice of levy on the partnership to obtain a distribution of money that is owed to the taxpayer. If at the time of levy there is no distribution owed to the taxpayer, the levy would not seize any funds. As an alternative, the Service may seize the taxpayer’s partnership interest which may be sold to satisfy a partner’s individual tax liability.

(2) The government may not seize and sell partnership property to collect taxes of an individual partner. Rev. Rul. 73-24,1973-1 C.B. 602. Similarly, a levy on property or rights to property of a joint venture to satisfy a tax liability of one of the joint venturers has been held to be void. Stuart v. Willis, 244 F.2d 925 (9th Cir. 1957).

(3) If the tax liability is incurred by a partnership, the partnership property may be levied upon as well as the property of each partner, to the extent a partner is liable for partnership debts. Adler v. Nicholas , 166 F.2d 674 (10th Cir. 1948). The liability of a limited partner (one not participating in the management of the partnership) is dependent on state law and surrounding factual circumstances. Rev. Rul. 54-213, 1954-1 C.B. 285.

(4) See IRM 5.17.3.10.21, Shares of a Limited Liability Company, below, for information regarding LLCs.

(1) The federal tax lien attaches to a participant’s interest in a retirement plan, such as profit-sharing, stock bonus, pension, cash or deferred (401(k)) plans, annuity plans under IRC § 403(a) and the Federal Thrift Savings Plan, if the participant has any vested benefit under the plan. Vesting occurs when the plan participant acquires a nonforfeitable right to part or all of his accrued benefits. In other words, vesting is the plan participant’s "ownership" of his accrued benefit, which results from the participant’s satisfaction of service or other requirements specified under the terms of the plan. Similarly, the federal tax lien attaches to a taxpayer’s individual retirement account.

(2) The list of exemptions set forth in IRC § 6334 is exhaustive. Courts have held that a participant’s interest in a retirement plan is not exempt from levy under IRC § 6334. See, e.g., Travelers Insurance Co. v. Ratterman, 96-1 USTC 50,143 (S.D. Ohio 1996); Ameritrust Co., N.A. v. Derakhshan, 830 F. Supp. 406 (N.D. Ohio 1993); In re Jacobs, 147 B.R. 106 (Bankr. W.D. Pa. 1992); Shanbaum v. United States, 32 F.3d 180 (5th Cir. 1994).

(3) Funds in a retirement plan that are currently being paid out to the taxpayer are reachable by levy. In addition, even if the retirement plan is not in pay status, if a present right to future payment on an obligation exists, the levy reaches that present right. See Rev. Rul. 55-210, 1955-1 C.B. 544 (lien attaches to entire unqualified right to receive future benefits; only one notice of levy needs to be served to effectively reach benefits subsequently payable).

(4) Thus, a levy can reach a participant’s interest in a plan regardless of whether the participant’s right to receive benefits under the plan requires payments to be made immediately or not until sometime in the future. See, e.g., In re Wesche, 193 B.R. 76 (Bankr. M.D. Fla. 1996); In re Anderson, 149 B.R. 591 (9th Cir, BAP 1992); In re Evans, 155 B.R. 234 (Bankr. N.D. Okla. 1993); In re Perkins, 134 B.R. 408 (Bankr. E.D. Cal. 1991). However, levying on the present right to future payment would not require immediate distribution by the plan administrator. Honoring the levy only would be required if the benefits will have become payable to the participant under the terms of the plan. In addition, if a present right to elect distribution exists, the levy reaches that present right. Therefore, if a participant has, for example, the unqualified right to receive distribution because he has reached the minimum age required or because he has been a participant in the plan for the length of time required by a profit-sharing plan, that right is reachable by levy. With respect to minimum retirement age, this does not mean that the Service can compel a taxpayer to retire. Rather, if a taxpayer is retiring or has retired and therefore has the right to receive a distribution, the levy reaches that right, whether or not the taxpayer has elected distribution.

(5) Under federal law, for some retirement plans, there are significant limitations as to the form of benefit that the Service is entitled to elect on behalf of a taxpayer. Careful consideration must be given where the Service seeks collection from a retirement plan that, absent waiver, requires benefits to be paid in the form of a joint and survivor annuity. In these cases, the Service may only levy upon that joint and survivor annuity, and may not elect another form of benefit for collection purposes without the consent of a spouse. This rule is the same regardless of whether the tax liability is a separate liability of the plan participant or a joint tax liability.

(6) Careful consideration should also be given if the participant is deceased. If a participant dies without ever having an immediate right to distribution of benefits under the terms of the plan, the Service may not levy on those assets after his death, even if the taxpayer’s interest was "vested." Moreover, even if a fully vested participant while living could have elected to receive distribution, the Service cannot levy on the plan after his death to assert that right. A levy after the participant’s death attaches to the rights of the participant’s estate.

(7) Because of the complex issues which arise when levying on retirement plans, particularly where there is a spouse involved or the participant is deceased, you should contact Area Counsel for advice on how best to proceed.

(8) In levying on Social Security payments, the Service has the option of serving either a levy under IRC § 6331(a) or a continuous levy under IRC § 6331(h). Under section 6331(h), the Service is authorized to continuously levy on certain federal payments to reach 15 percent of the payments. This includes Social Security payments. A levy under section 6331(a) is not continuous like a levy under section 6331(h) or (e), but is continuous to the extent that the levy is on rights that are fixed and determinable. Therefore, a single levy reaches a future stream of Social Security payments. If the section 6331(a) option is chosen, the Service is not subject to the 15% limitation.

(1) The accrued salary, wages, fees, bonuses or commissions of an employee-taxpayer are subject to levy. "Salary and wages" used herein includes compensation for services paid in the form of fees, bonuses, commissions, or similar items. Treas. Reg. § 301.6331-1(b). A levy on salary or wages attaches to:

1. salary or wages earned but not yet paid at the time of the levy,

2. advances on salary or wages made after the date of the levy, and

3. salary or wages earned and becoming payable after the date of the levy.

(2) A levy on salary or wages is continuous from the date of the levy until the tax liability for which the levy was made is satisfied or becomes unenforceable. IRC § 6331(e).

(3) Periodic payments made on a recurring basis to a partner as compensation for services rendered to the partnership will constitute "salary or wages" subject to a continuous levy. See United States v. Moskowitz, Passman & Edelman, 603 F.3d 162 (2d Cir. 2010) (court rejects taxpayer's argument that payments were not salary or wages because a partner only realizes income on the last day of the partnership's taxable year).

(4) State laws limiting the amount of wages which may be garnished by judgment creditors must yield to the provisions of the Internal Revenue Code permitting the Secretary or his delegate to levy. In addition, the Consumer Credit Protection Act relating to restrictions on garnishment specifically exempts federal tax claims from its provisions. 15 USC § 1673(b)(1)(C); IRC § 6334 determines the exemptions allowed when collecting by levy.

(1) Limited liability companies (LLCs) combine elements of a corporation and a partnership. The main difference from a partnership is that the owners of the LLC (known as members) do not have any personal liability for debts of the LLC. See IRM 5.1.21, Collecting from Limited Liability Companies, for more information regarding LLCs; and IRM 5.1.21.6.3, Notice of Levy, and the provisions that follow for more information regarding levies involving LLCs.

(2) Collection issues arise when the LLC does not pay its employment tax liability and does not have sufficient assets to pay the liability in full. Member-managers cannot be held directly liable for the employment taxes of the LLC because state law generally provides that members and managers are not liable for the debts of the LLC. This is true even in the case of an LLC that is treated as a partnership for income tax purposes. Rev. Rul. 2004-41, 2004-1 C.B. 845. However, member-managers of an LLC can be held liable for the trust fund portion of the employment taxes if they are responsible persons under IRC § 6672. In some cases it may be possible to assert an alternate basis of liability, such as a transferee liability, if property of the LLC was transferred to a member.

(3) Final regulations were issued on August 16, 2007, which provide that single-owner eligible entities that are disregarded as entities separate from their owners for Federal tax purposes are treated as separate entities for employment tax purposes. See Treas. Reg. § 301.7701-2(c)(2)(iv) and (v). These entities continue to be treated as disregarded entities for income tax purposes. The regulations apply to single-owner LLCs that have not elected to be treated as an association taxed as a corporation, and apply to wages paid on or after January 1, 2009, for employment taxes, and to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008, for excise taxes. See Treas. Reg. § 301.7701-2(e)(5) and (6).

(4) If a member of an LLC has a tax liability, the Service may levy and sell the taxpayer’s interest in the LLC. In some situations, the LLC shares may have little or no market value. In such cases, the Service must be careful that it does not make an uneconomical levy. IRC § 6331(f).

(5) Another alternative collection method for LLCs is to charge the member's interest. See IRM 5.1.21.9.1, Charging the Member's Interest, for more information.

(1) The taxpayer’s ownership interest in publicly-traded corporate securities that are held in accounts managed by a brokerage firm or bank is subject to levy, whether the interest is certificated or not certificated. The firm or bank, upon levy, is required to liquidate the interest and turn over the funds to the Service.

(2) Interests in mutual funds are also subject to levy. Most mutual fund shares are not represented by certificates. Record of ownership of these shares is maintained by electronic or book-entry systems. The taxpayer has the right to redeem the shares for cash. The IRS requires the levy source to redeem the taxpayer’s interest and remit the funds to the IRS. Kane v. Capital Guardian Trust Co., 145 F.3d 1218 (10th Cir. 1998).

(3) IRC § 6331(f) prohibits uneconomical levies. For shares of publicly traded securities, the Service will be able to ascertain the fair market value of the shares easily. For securities that are not publicly traded, it will be more difficult to determine the fair market value, and the possibility of an uneconomical levy increases.

(1) Sometimes persons affiliated with a company, typically key employees, are granted stock options. In the case of non-qualified stock option plans, the terms of the plan are dictated by the particular contractual terms of the plan. The statutory requirements of federal law apply in cases of ERISA-qualified incentive stock option plans. Where the taxpayer has a vested right to the stock option, the taxpayer's interest in the stock option is subject to levy.

(2) Typically, non-qualified stock options contain restrictions on transferability. ERISA-qualified incentive stock option plans are subject to the restrictions on transferability contained in IRC § 422. Any restrictions on transfer of stock options applicable to the taxpayer would not apply to the Service: IRC § 6334(a) enumerates certain types of property that are exempt from levy under IRC § 6331, and neither non-qualified options or ERISA-qualified options are listed. Therefore, the Service can enforce a levy by selling such options to a third party.

(1) A bona fide trust arises if a settlor transfers title and possession of property to a trustee for the benefit of one or more beneficiaries. The trust may be established during the lifetime of the settlor (inter vivos) or by will (testamentary trust). The property to which the trustee has legal title is referred to as either the trust res or corpus.

(2) The extent, if any, to which a levy may be made on the corpus of the trust or on trust income to satisfy the tax liability of the trustee depends on the nature of the trust instrument and the relationship between the trust and the taxpayer. Because a trustee holds bare legal title for the benefit of others, neither the corpus nor income therefrom may generally be levied upon to satisfy the trustee’s individual tax liabilities. The exception is if the trustee-taxpayer is a beneficiary, which would permit a levy and seizure to be made of his/her property or rights to property in the trust, as would be the case if any other beneficiary was indebted to the United States for delinquent taxes.

(3) If the settlor establishes a trust after the assessment of taxes against him/her, the tax liens, having attached to the property before the conveyance of legal title to the trustee, are not diminished or destroyed. United States v. Bess, 357 U.S. 51 (1958). A levy may be made upon the corpus of the trust.

(4) A levy may be served upon the trustee to seize the taxpayer’s right to distribution if the taxpayer has a right to a distribution of trust corpus and this right is not subject to the discretion of the trustee. The same is true for distribution of income from trust property. A levy served upon a trustee for taxes owing by a beneficiary reaches not only payments then due but all subsequent payments that will become due, when the payments become due, if the taxpayer-beneficiary has an unqualified fixed right to receive the periodic payments at the time of service of levy. IRC § 6331(b); Rev. Rul. 55-210, 1955-1 C.B. 544.

(5) Spendthrift trusts limit or restrain the alienation of trust distributions. Those limitations or restrictions do not affect the government’s right to levy on the taxpayer’s property interest in such trust, regardless of whether the prohibition on alienation is embodied in the trust instrument or created by state exemption statutes. United States v. Rye , 550 F.2d 682 (1st Cir. 1977).

(6) Family trusts are particularly susceptible to abuse, and the government should scrutinize them carefully and consider using nominee liens and levies to reach the trust assets. See, e.g., Joan Whitesel Family Estate v. United States, 84-2 USTC 9890 (S.D. Ohio 1984).

(1) Certain obligations of the United States, such as Treasury bills, notes, bonds, and savings bonds, as well as obligations of state and local governmental bodies, are property or rights to property to which federal tax liens attach, United States v. Ridley, 127 F. Supp. 3 (N.D. Ga. 1954), and may be levied on to collect the holder’s delinquent taxes. Treasury bills, notes, and bonds are held electronically; they are not paper securities like some savings bonds. After serving a notice of levy, the Service may choose to either sell the taxpayer’s interest or wait until the bill, note, or bond matures and obtain the money.

(2) Federal law, rather than state law, controls the rights and duties of the United States on commercial paper issued by it, as well as all other obligations of the government. Clearfield Trust Co. v. United States, 318 U.S. 363 (1943). Therefore, determining the nature and extent of the taxpayer’s interest in a United States security will require examination of the law and regulations governing the specific security.

(1) This is a complex field of law because it involves retained percentages on construction contracts, a defaulting contractor or subcontractor, substantial performance, setoff, public and private improvements, performance bonds, laborers and materialsmen bonds, competing sureties, sureties subrogated to the rights of laborers and materials men, mechanics liens, the doctrine of relation back, the no debt or no property theory, state property laws, and relative priorities under federal law. The variable elements make even a very general discussion here unproductive.

(2) The revenue officer should remain mindful of several matters, however.

• First, a notice of levy served upon the taxpayer’s debtor will reduce the taxpayer’s property interest to the government’s constructive possession if the taxpayer-contractor or subcontractor under state law has property or rights to property in amounts withheld under a construction contract.

• Second, because there may be numerous claimants to withheld funds, a suit to foreclose the federal tax lien may be more advantageous than a suit for failure to honor levy. However, the revenue officer should levy to protect the government’s interest.

• Finally, the complexity of the problems involved requires the revenue officer to carefully investigate all the factual information and circumstances surrounding the contract, if the government is to succeed in collecting either by levy or by enforcing its tax lien in a court proceeding.

(3) See IRM 5.11.6.6, Federal Contractors, for information on levying payments owed to federal contractors. See IRM 5.1.14.1 and IRM 5.17.7.3 for information relating to performance bonds and holding sureties liable for unpaid employment taxes.

(1) There are many other forms of intangible personal property (e.g., postal savings accounts, money orders, mortgage indebtedness, patents, royalties, copyrights, rental income) that may be levied upon to collect delinquent taxes. There are three essentials to bear in mind when contemplating levying upon intangibles:

• First, the revenue officer must investigate and determine the taxpayer’s property or rights to property.

• Second, the revenue officer must determine the steps necessary to seize the intangible and reduce it to constructive possession.

• Third, the revenue officer must resolve whether one levy is adequate, or whether successive levies must be made.

(2) Tangible personal property has been discussed only briefly in this section because by its nature it is easily identifiable and should present the revenue officer few difficulties.

(3) The revenue officer must also be mindful of the government’s right to levy upon a taxpayer's property or rights to property, subject to a real property mortgage, chattel mortgage, pledge, conditional sales contract, bailment, etc. Further, although property subject to a lien prior to the federal tax lien may be seized and sold, practical considerations may dictate against the administrative collection method of levying and in favor of a suit to foreclose the tax lien. See IRM 5.10.1, Pre-Seizure Considerations.