Final Regs Governing Holding Period for Bank Accounts Subject to Levy

 [4830-01]

 ACTION: Final Regulation.

 SUMMARY: This document contains final regulations regarding the surrender of property subject to levy in the case of banks. Section 6236(e)(1) of the Technical and Miscellaneous Revenue Act of 1988 amended section 6332(c) of the Internal Revenue Code by adding a new paragraph (c), which provides that banks shall surrender deposits in taxpayers' accounts (including interest thereon) only after 21 days after service of a levy. The regulations set forth the rules for compliance by banks, and also contain conforming amendments reflecting the new provision.

 DATES: These regulations are effective January 4, 1993 and apply with respect to levies made on or after January 4, 1993.

 FOR FURTHER INFORMATION CONTACT: Kevin B. Connelly, 202-622-3640 (not a toll-free call).

SUPPLEMENTAL INFORMATION:

BACKGROUND

This document contains final regulations amending the Procedure and Administration Regulations (26 CFR part 301) under section 6332 of the Internal Revenue Code (Code). The regulations reflect the amendment of section 6332 by section 6236(e)(1) of the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. No. 100-647, 102 Stat. 3342) (TAMRA).

EXPLANATION OF PROVISIONS

 The Internal Revenue Service published a notice of proposed rulemaking in the Federal Register on May 1, 1991, (56 FR 19963). Numerous commentators submitted written comments concerning the proposed regulations. However, no request for a hearing was received and no hearing was held. Each of the issues raised in the comments was fully considered during the formulation of the final regulations. The principal comments received by the Internal Revenue Service are discussed below.

 Section 6236(e)(1) of TAMRA amended section 6332 of the Code by redesignating paragraphs (c), (d), and (e) as paragraphs (d), (e), and (f), respectively, and by adding new paragraph (c). Under section 6332(c) banks (as defined in section 408(n) of the Code) shall surrender levied deposits, together with the interest accruing thereon, only after 21 days after a levy is made.

 The regulations provide that a levy on a bank account applies to those funds on deposit at the time the levy is made, up to the amount of the levy. No withdrawals may be made against the funds reached by the levy during the 21-day holding period. The bank must surrender the deposits on the first business day following the 21st calendar day after the levy is made, unless the bank receives notification from the district director of a release of levy or unless the district director has requested an extension of the holding period. In addition, the bank must surrender any interest which accrued on the deposits under the terms of its agreement with its customer, but in no event must the bank surrender an amount greater than the amount of the levy. Any interest that accrues and is turned over to the Internal Revenue Service is considered to be paid to the bank's depositor. The depositor may waive the 21-day holding period by notifying the bank of his or her intention to do so. However, where more than one depositor is listed as the owner of an account, all of the listed owners must agree to a waiver of the holding period. The regulations set forth examples illustrating the requirements for compliance with section 6332(c) under various circumstances, and define the term "bank" pursuant to section 408(n) of the Code.

 The regulations provide further that the bank's depositor may notify the district director to whom the assessment is charged of any errors with respect to the levied account by telephoning the telephone number listed on the face of the notice of levy. The district director may require any supporting documentation necessary to review an alleged error. Notification by telephone does not constitute or substitute for the filing by a third party of a written request for the return of wrongfully levied property.

 With respect to imposing liability under section 6332(d) for refusal or failure to surrender property subject to levy, the 21-day rule effectively changes the date of the making of a levy on bank deposits to the date of the expiration of the 21-day holding period or any extension of the period granted by the Internal Revenue Service.

 One commentator suggested that the regulations should discharge banks from liability to any third party that claims an interest in an attached account. This is beyond the narrow scope of section 6332(c) and these regulations. A bank's potential liability to the taxpayer or to third parties for surrendering deposits is governed generally by section 6332(e), which provides that any person who surrenders property or rights to property subject to levy to the Internal Revenue Service is discharged from any obligation or liability to the delinquent taxpayer or any other person. That section applies to banks that surrender deposits in accordance with section 6332(c) just as it applies to any other party that surrenders property pursuant to an Internal Revenue Service levy.

 The proposed regulations provide that the district director may extend the holding period beyond the initial 21 days if more time is necessary for the district director to resolve alleged errors with respect to attached deposits before the deposits are surrendered. One commentator suggested that extensions of the 21-day holding period should be limited to two 21-day extensions. Although it will be in the best interest of the Internal Revenue Service to resolve as quickly as possible any issues concerning whether deposits should be turned over, the length of extensions of the holding period will vary depending on the issues under consideration. Limiting the length or number of extensions could result in deposits being turned over before the district director has the time to resolve an alleged error, thereby defeating the purpose of section 6332(c).

 One commentator suggested that the regulations should include the language that banks must use to indicate that depositors have waived the 21-day holding period. There is no specific language that a bank must use to inform the Internal Revenue Service that depositors have waived the holding period. As long as the bank indicates that each depositor to an account has agreed to a waiver, the waiver is sufficient with respect to that account.

 Two commentators submitted questions concerning the effect of section 6332(c) on the terms of a bank's interest agreement with its depositor. The regulations provide that interest must be paid in accordance with the terms of a bank's agreement with its depositor. This provision is based on the fact that the Internal Revenue Service is entitled only to the amount to which the taxpayer would be entitled if the taxpayer withdrew the funds. If the taxpayer would not be entitled to interest, the Internal Revenue Service is not entitled to interest. This provision is illustrated by Examples 5 and 6, which deal with a certificate of deposit, the terms of which provide that the depositor must forfeit thirty days of interest in the event of early withdrawal.

 Numerous commentators noted that the calculation of interest on levied funds poses a burden on banks and suggested that banks either should not have to pay any interest or that the regulations should set a floor -- based on either the amount of interest due, the amount of the depositor's account balance, or the amount of the levy -- below which the bank would not have to pay interest. A prescribed floor below which no interest would have to be paid would effectively reduce the amount of the depositor's liability that is satisfied by the levy. In light of the detrimental impact on the interests of the depositor and the Service, together with the statute's explicit reference to the payment of interest, the final regulations do not contain the suggested exceptions.

 One commentator also suggested that a bank should be allowed to enforce against levied funds a contractual right to charge the depositor a fee for processing a levy or a garnishment. Again, the Internal Revenue Service is entitled to the amount to which the taxpayer is entitled. If the terms of the account do not allow the bank to charge a levy processing fee on a withdrawal by the depositor, the bank may not deduct such a fee from the amount subject to levy.

 One commentator suggested that banks should be given an additional 10 day period after the 21-day period expires in which to turn over levied funds. Once a bank receives a levy the bank knows exactly when the 21-day period will expire and the funds will become due. An extra 10-day period in which to turn over levied funds is unnecessary.

 Many comments that were submitted for consideration raise additional substantive issues that are unrelated to the 21-day rule or to procedural issues concerning the implementation of the 21-day rule. For example, a number of commentators submitted comments and questions concerning the types of accounts and deposits that are subject to an Internal Revenue Service levy. One commentator suggested that the regulations should describe the type of information that banks should and can legally divulge without violating financial privacy laws when informing the Service that a levy is unpostable, e.g., the levy is on a closed account. These issues are outside the scope of the regulations. Section 6332(c) and these regulations neither address nor affect the priority of competing claims to a taxpayer's deposits, the type of property to which a levy attaches, the type of financial information that a bank may divulge about a depositor's account, or a bank's responsibilities with respect to deposits (other than to provide that the bank must hold deposits for 21 days). To reflect the limited scope of these regulations, the caption has been changed to "The 21-day holding period applicable to property held by banks."

 Finally, one commentator suggested that the rule that interest surrendered to the district director is considered to be paid to the bank's customer and must be reported to the Internal Revenue Service, should be clarified to distinguish between the reporting of interest on IRA accounts and the reporting of interest on non-IRA accounts. While most interest paid to a depositor must be reported as interest, there are situations in which interest must be reported as some other type of payment. The purpose of this provision is to inform banks that the submission to the Internal Revenue Service of interest that accrues prior to and during the holding period should be treated as a payment to the bank's customer. Instead of accounting for each different characterization of interest in the Code and setting forth the different reporting requirements, the final regulation has been changed to provide simply that to the extent interest is accrued and surrendered such interest is considered to be paid to the bank's customer.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these proposed regulations is Kevin B. Connelly, Office of the Assistant Chief Counsel (General Litigation), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

Treasury Decision 8466

AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 301 is amended as follows:

Paragraph 1. The authority citation for part 301 continues to read in part:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.6332-1 is amended as follows:

1. In paragraph (a)(1) the language "and in section 301.6332-3, relating to property held by banks," is added immediately following the language "endowment contracts," and immediately before the language "any person."

2. The heading of paragraph (a)(2) is revised to read as set forth below.

3. In paragraph (b)(2), in the first sentence, the language "6332(c)(1)" is removed and the language "6332(d)(1)" is added in its place.

SECTION 301.6332-1 SURRENDER OF PROPERTY SUBJECT TO LEVY.

(a) * * *

(2) LEVY ON BANK DEPOSITS HELD IN OFFICES OUTSIDE THE UNITED STATES.

* * * * *

Par. 3. Section 301.6332-3 is added to read as follows:

SECTION 301.6332-3 THE 21-DAY HOLDING PERIOD APPLICABLE TO PROPERTY HELD BY BANKS

(a) IN GENERAL. This section provides special rules relating to the surrender, after 21 days, of deposits subject to levy which are held by banks. The provisions of section 301.6332-1 which relate generally to the surrender of property subject to levy apply, to the extent not inconsistent with the special rules set forth in this section, to a levy on property held by banks.

(b) DEFINITION OF BANK. For purposes of this section, the term "bank" means --

(1) A bank or trust company or domestic building and loan association incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions;

(2) Any credit union the member accounts of which are insured in accordance with the provisions of title II of the Federal Credit Union Act, 12 U.S.C. 1781 et seq.; and

(3) A corporation which, under the laws of the State of its incorporation, is subject to supervision and examination by the Commissioner of Banking or other officer of such State in charge of the administration of the banking laws of such State.

(c) 21-DAY HOLDING PERIOD -- (1) IN GENERAL. When a levy is made on deposits held by a bank, the bank shall surrender such deposits (not otherwise subject to an attachment or execution under judicial process) only after 21 calendar days after the date the levy is made. The district director may request an extension of the 21-day holding period pursuant to paragraph (d)(2) of this section. During the prescribed holding period, or any extension thereof, the levy shall be released only upon notification to the bank by the district director of a decision by the Internal Revenue Service to release the levy. If the bank does not receive such notification from the district director within the prescribed holding period, or any extension thereof, the bank must surrender the deposits, including any interest thereon as determined in accordance with paragraph (c)(2) of this section (up to the amount of the levy), on the first business day after the holding period, or any extension thereof, expires. See section 301.6331-1(c) to determine when a levy served by mail is made.

(2) PAYMENT OF INTEREST ON DEPOSITS. When a bank surrenders levied deposits at the end of the 21-day holding period (or at the end of any longer period that has been requested by the district director), the bank must include any interest that has accrued on the deposits prior to and during the holding period, and any extension thereof, under the terms of the bank's agreement with its depositor, but the bank must not surrender an amount greater than the amount of the levy. If the deposits are held in a non-interest bearing account at the time the levy is made, the bank need not include any interest on the deposits at the end of the holding period, or any extension thereof, under this paragraph. Interest that accrues on deposits and is surrendered to the district director at the end of the holding period, or any extension thereof, is treated as a payment to the bank's customer.

(3) TRANSACTIONS AFFECTING ACCOUNTS. A levy on deposits held by a bank applies to those funds on deposit at the time the levy is made, up to the amount of the levy, and is effective as of the time the levy is made. No withdrawals may be made on levied upon deposits during the 21-day holding period, or any extension thereof.

(4) WAIVER OF 21-DAY HOLDING PERIOD. A depositor may waive the 21-day holding period by notifying the bank of the depositor's intention to do so. Where more than one depositor is listed as the owner of a levied account, all depositors listed as owners of the account must agree to a waiver of the 21-day holding period. If the 21-day holding period is waived, the bank must include with the surrendered deposits a notification to the district director of the waiver.

(5) EXAMPLES. The provisions of this paragraph (c) may be illustrated by the following examples:

EXAMPLE 1. On April 2, 1992, a notice of levy for an unpaid income tax assessment due from A in the amount of $10,000 is served on X Bank with respect to A's savings account. At the time the notice of levy is served, X Bank holds $5,000 in A's interest-bearing savings account. On April 24, 1992, (the first business day after the 21-day holding period) X Bank must surrender $5,000 plus any interest that accrued on the account under the terms of A's contract with X Bank up through April 23, 1992, (the last day of the holding period).

EXAMPLE 2. The facts are the same as in Example 1 except that on April 3, 1992, A deposits an additional $5,000 into the account. On April 24, 1992, X Bank must still surrender only $5,000 plus the interest which accrued thereon until the end of the holding period, because the notice of levy served on April 2, 1992, attached only to those funds on deposit at the time the notice was served and not to any subsequent deposits.

EXAMPLE 3. The facts are the same as in Example 1 except that at the time the notice of levy is served on X Bank, A's savings account contains $50,000. On April 24, 1992, X Bank must surrender $10,000, which is the amount of the levy. The levy will not apply to any interest that accrues on the deposit during the 21-day holding period, because the entire amount of the levy is satisfied by the deposits existing at the time the levy is served.

EXAMPLE 4. The facts are the same as in Example 1 except that the amount of the levy is $5,002. Under the terms of A's contract with the bank, the account will earn more than $2 of interest during the 21-day holding period. On April 24, 1992, X Bank must surrender $5,002 to the district director. The remaining interest which accrued during the 21-day holding period is not subject to the levy.

EXAMPLE 5. On September 3, 1992, A opens a $5,000 six-month certificate of deposit account with X Bank. Under the terms of the account, the depositor must forfeit up to 30 days of interest on the account in the event of early withdrawal. On January 4, 1993, a notice of levy for an unpaid income tax assessment due from A in the amount of $10,000 is served with respect to A's certificate of deposit account. On January 26, 1993, the bank must surrender $5,000 plus the interest which accrued on the account through January 25, 1993, minus the penalty of 30 days of interest as provided in the deposit agreement.

EXAMPLE 6. Same facts as in Example 5 except that the notice of levy is served on X Bank on February 15, 1993. The certificate matures on March 2, 1993. On March 8, X Bank must surrender $5,000 plus the interest that accrued on the certificate without any reduction for penalties.

(d) NOTIFICATION TO THE DISTRICT DIRECTOR OF ERRORS WITH RESPECT TO LEVIED UPON BANK ACCOUNTS -- (1) IN GENERAL. If a depositor believes that there is an error with respect to the levied upon account which the depositor wishes to have corrected, the depositor shall notify the district director to whom the assessment is charged by telephone to the telephone number listed on the face of the notice of levy in order to enable the district director to conduct an expeditious review of the alleged error. The district director may require any supporting documentation necessary to the review of the alleged error. The notification by telephone provided for in this section does not constitute or substitute for the filing by a third party of a written request under section 301.6343-1(b)(2) for the return of property wrongfully levied upon.

(2) DISPUTES REGARDING THE MERITS OF THE UNDERLYING ASSESSMENT. This section does not constitute an additional procedure for an appeal regarding the merits of an underlying assessment. However, if in the judgment of the district director a genuine dispute regarding the merits of an underlying assessment appears to exist, the district director may request an extension of the 21-day holding period.

(3) NOTIFICATION OF ERRORS FROM SOURCES OTHER THAN THE DEPOSITOR. The district director may take action to release the levy on the bank account based on information obtained from a source other than the depositor, including the bank in which the account is maintained.

(e) EFFECTIVE DATE. These provisions are effective with respect to levies issued on or after January 4, 1993.