Rev. Rul. 79-38

ISSUE

Is a bank required to treat uncollected funds in a checking account of its customer as subject to levy?

FACTS

A owes $5,000 in unpaid federal income taxes, penalties, and interest for the years 1970 and 1971. Notice of levy by the Internal Revenue Service was received on May 3, 1976, by a bank in which A maintains a checking account. On that date, A had a balance of $5,000, which balance represents uncollected funds from a check deposited by A for which payment had not been received by the depositary bank.

By agreement with the bank, the entire amount of the items deposited to A's account, including checks, are immediately credited to that account so that A may draw against them, even though the amounts of these funds may not be collected by the bank for several days. If any of the items deposited by A are dishonored, the bank charges back against the account the amount of the dishonored item. If this chargeback results in an overdraft in A's account, A becomes liable to repay the amount to the bank together with service charges.

Under the applicable state law, section 4-201(1) of the Uniform Commercial Code, the general status of the bank is as an agent of the depositor and not as a creditor. This rule applies regardless of the form of endorsement or lack of endorsement and even though credit given for the item is subject to immediate withdrawal as of right or is in fact withdrawn; but the continuance of ownership of an item by its owner and any rights of the owner to proceeds of the item are subject to rights of a collecting bank such as those resulting from outstanding advances on the item and valid rights of setoff.

LAW AND ANALYSIS

Section 6331 of the Internal Revenue Code of 1954 grants the Secretary or the Secretary's delegate the authority to collect, by levy, taxes owed by a taxpayer who has refused to pay such taxes within 10 days following notice and demand by the Secretary or the Secretary's delegate. Levy may be made on all property or rights to property owned by the taxpayer and not otherwise exempt from levy.

Section 6332 of the Code, with exceptions not here relevant, requires 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, to surrender such property or rights (or discharge such obligation) to the Secretary or the Secretary's delegate.

Both federal and state courts look to state law to determine whether there is property or a right to property to which a tax levy may attach.

In many situations, the depositary bank acts merely as a collecting agent or sub-agent of the taxpayer-customer with regard to uncollected funds and does not credit the funds to the taxpayer-customer's account or permit the taxpayer-customer to draw against the uncollected funds until final settlement. In such cases, the levy is satisfied by a surrender of the balance in the account at the time of the levy not including uncollected items. See section 301.6331-1(a)(1) of the Regulations on Procedure and Administration and Rev. Rul. 73-310, 1973-2 C.B. 408.

An exception exists, however, when, by agreement or custom, the taxpayer-customer's account is credited by the bank with the amount of the uncollected items and the taxpayer-customer has the legal, fixed right to draw against the entire balance of the account. In such cases, the taxpayer has a property right in the entire balance in the account (including the uncollected funds) at the time of levy. Since the Government's levy attaches to rights to property possessed by the taxpayer, such levy reaches the entire balance in the account, whether or not the uncollected items later reach final settlement. See United States v. Euclid National Bank, 510 F. 2d 461 (6th Cir. 1975).

HOLDING

Accordingly, a bank is required to treat the funds in a customer's account as subject to levy if, by custom or agreement between the bank and the customer, the customer has a legal, fixed right to draw against uncollected funds.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 73-310 is amplified.