Rev. Rul. 75-554

Various questions have been asked as to the obligation of a corporation under section 6332 of the Internal Revenue Code of 1954, to surrender property subject to levy upon which a notice of levy has been made.

In order to provide a clear statement of a corporation's obligation under section 6332 of the Code, several questions with the answers thereto concerning the transfer of title in stocks and bonds by the registered owner and the payment of dividends and interest after the service of a notice of levy are presented.

Section 6331(a) of the Code provides that if any person liable to pay tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful to collect such tax by levy upon all property and rights to property belonging to such person or on which there is a lien for the payment of such tax.

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 surrender such property or rights (or discharge such obligation) to the Secretary or his delegate.

Section 6332(c) of the Code sets forth the extent of personal liability and the penalty for failure of any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand.

Section 301.6331-1(a)(1) of the Regulations on Procedure and Administration provides that 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. Similarly, a levy only reaches property subject to levy in the possession of the person levied upon at the time the levy is made.

Question 1. In the case of a corporation's shareholder, would the Service assert liability against the corporation under section 6332 of the Code if--

(a) A notice of levy is served on the corporation before the share is received by the corporation for transfer on its books, or the notice of levy is served after the share is received by the corporation for transfer on its books but before the transfer is completed on the corporation's books? Is it relevant whether the transferee is a purchaser without actual notice or knowledge of the existence of the Federal tax lien?

Answer: The Service cannot assert any liability against the corporation for transferring the stock regardless of whether the notice of levy is served before or after the share is received by the corporation for transfer on its books. The share that is received by the corporation for transfer is no longer the property of the shareholder that is indebted to the government for taxes but would be the property of that person to whom the share of stock was transferred. It is irrelevant to the corporation whether the transferee had actual notice of the Federal tax lien.

(b) The corporation makes a dividend payment to the dividend payee of a share of stock registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the declaration date for that specific dividend?

Answer: Section 301.6331-1 of the regulations provides that a levy extends only to property possessed and obligations that 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.

When a notice of levy is served before the declaration date, the liability of the obligor is not fixed and determinable. Therefore, since the corporation has no obligation which exists at the time of the levy, the Service could not assert liability against the corporation under section 6332 of the Code. Neither would the Service assert any tort liability against the corporation if a dividend was paid in the ordinary course of business before another notice of levy was served even though the corporation possessed actual notice or knowledge of the existence of a Federal tax lien.

(c) The corporation makes a dividend payment to the dividend payee of a share of stock registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made on or after the declaration date but before the record date for that specific dividend?

Answer: State law determines the nature and extent of the taxpayer's property or rights to property. The Internal Revenue Code does not create property rights, but rather attaches consequences to property or rights to property created by state law. Aquilino v. United States, 363 U.S. 509 (1960), Ct. D. 1856, 1960-2 C.B. 477.

In a majority of states no vested right to a declared dividend arises until the record date. In those states a stockholder may become a creditor of the corporation on the declaration date but does not acquire a vested property right to the dividend. If the stockholder transfers the stock prior to the record date, the corporation is obligated to pay the dividend to whoever is the registered owner of stock on the record date. Upon purchase the transferee acquires a property right in the dividend to be paid at a future time and the corporation would not be liable under section 6332 of the Code on payment of the dividend to the transferee.

On the other hand, if under state law a vested right to a dividend arises on the declaration date, the corporation would be liable under section 6332 of the Code if a dividend payment was made.

Question 2. In the case of a corporation's registered bondholder, would the Service assert liability against the corporation if--

(a) A notice of levy is served on the corporation before the bond had been received by the corporation for transfer on its books, or the notice of levy is served after the bond is received by the corporation for transfer on its books, but before the transfer is completed on the corporation's books? Is it relevant whether the transferee is a purchaser without actual notice or knowledge of the existence of the Federal tax lien?

Answer: The bond that is received by the corporation for transfer on its books is no longer the property of the bondholder that is indebted to the government for taxes, but would be the property of that person to whom the bond was transferred. In United States v. Davis, 61-1 USTC 80,022 (N.D. Ill. 1961), it was held that the corporate issuer of debenture bonds, that were subject to the government tax liens, was in no way involved in the determination of ownership except as its records reflect the holder of the bond.

Therefore, the government could not assert any liability against the corporation for transferring the bond regardless of whether the notice of levy is served before or after the bond is received by the corporation for transfer on its books. It is irrelevant to the corporation whether the transferee had actual notice of the Federal tax lien.

(b) The corporation makes an interest payment to the interest payee of a bond registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the record date for that interest payment?

Answer: As previously indicated, a notice of levy extends only to property possessed and obligations that exist at the time of the levy. However, obligations exist when the obligor's liability is fixed and determinable although the right to receive payment may be deferred until a later date. Generally, when a corporation issues a bond, the bondholder has an unqualified fixed right through a chose in action to receive periodic payments. Thus, a present obligation is created when the bond is issued. In such a situation, a Federal tax lien attaches to the taxpayer's entire right and, if a notice of levy is served, it is effective to reach, in addition to payments due at the time the notice of levy is served, existing rights to receive any subsequent payments that become due under the obligation. See, section 301.6331-1(a)(1) of the regulations and Rev. Rul. 55-210, 1955-1 C.B. 544. The taxpayer's right to periodic payments will terminate only under certain conditions, e.g., when the bond matures or it is transferred.

Therefore, if the corporation makes an interest payment to the interest payee of a bond registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the record date for that interest payment, the corporation would be liable under section 6332 of the Code for failure to honor a notice of levy.

Question 3. In the case of the corporation's shareholder or bondholder, if the share or bond is registered in more than one name, for example, as tenants in common, tenants by the entireties, or joint tenants with right of survivorship, and the notice of levy relates to less than all the registered owners, what is the position of the Service with respect to the corporation's responsibility under section 6332 of the Code?

Answer: As previously mentioned, the nature and extent of the taxpayer's property or rights to property are determined by state law. If the notice of levy relates to less than all the registered owners, the law of the state in which the registered owners are domiciled will determine their rights in respect to the share of stock or the bond. Their rights under state law will determine the position of the Service with respect to the corporation's responsibility under section 6332 of the Code.