Rev. Rul. 73-365

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 5251, V11-2 C.B. 73 (1928).

Advice has been requested whether, under the circumstances described below, commissions earned by an employee-taxpayer and "expense money" advanced to him by his employer, are subject to levy and distraint for unpaid taxes under section 6331 of the Internal Revenue Code of 1954.

The employer has been crediting commissions earned by the taxpayer to his overdrawn account. The employer also advanced weekly sums of money designated as "expense money" to the taxpayer for the taxpayer's actual expenses that had to be accounted for to the employer. A Notice of Levy, Form 668-A, has been served on the employer.

Section 301.6331-1(a)(1) of the Regulations on Procedure and Administration provides 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 including receivables, bank accounts, evidences of debt, securities, and accrued salaries, wages, commissions, and other compensation. A levy extends only to property possessed and obligations which exist at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable, although the right to receive payment thereof may be deferred until a later date.

Section 6332(a) of the Code provides that any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the District Director, surrender such property or rights (or discharge such obligation) to the District Director.

Commissions earned by the taxpayer but retained in his employer's possession are in the nature of contract debts, within the purview of section 6331 of the Code, and pursuant to the provisions thereof are subject to levy under a warrant of distraint.

With respect to an employer who makes a practice of either paying commissions of employee taxpayer in advance or crediting such commissions to his account, the employer has the right to set off any debt due the employer from such employee against any accrued salary, wages, or commissions due the employee. United States v. Long Island Drug Co., 115 F.2d 983 (4th Cir. 1940). Thus, when an employee has overdrawn his account with his employer so that he is indebted to such employer, commissions earned by the employee may be applied by the employer to reduce this debt, and not until the debt is paid may commissions earned by the employee be subject to levy.

Accordingly, the amounts applied to the overdrawn accounts are not subject to levy.

The second question presented is whether the weekly sums paid as "expense money" may be distrained upon. The answer to this question depends upon the nature of the contract of employment between the taxpayer and the company.

Since the "expense money" was advanced to the taxpayer for his actual expenses and had to be accounted for by the taxpayer, the money advanced is the company's money given to the taxpayer for expenditure in its business and may not be distrained upon.

If the taxpayer is to be reimbursed for expenses actually incurred by him in connection with his duties as a salesman, the "expense money" is money due from the company to the taxpayer and therefore is subject to distraint. Likewise, if the taxpayer is to receive a stipulated amount weekly which is designated as "expense money" but for which he is not required to render any account to the company, the so-called expense money is merely compensation and as such may be distrained upon.

In both of the above-mentioned situations, if the amounts due the taxpayer were applied by his employer against the employee's overdrawn account and not actually paid to him, the same right of set-off by the employer would prevail as held above with respect to the commissions.

G.C.M. 5251 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.