Final Regs Provide Rules on Consequences of Honoring IRS Levy

 DEPARTMENT OF THE TREASURY

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations regarding the consequences of honoring an Internal Revenue Service levy. These regulations are necessary to reflect changes to the tax law by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). TAMRA amended section 6332(e) of the Internal Revenue Code, to provide that any person who surrenders property to the Internal Revenue Service pursuant to a levy, is discharged from any obligation or liability to the delinquent taxpayer or to any other person arising from the surrender of such property. Before section 6332(e) was amended by TAMRA, a person who surrendered levied upon property was discharged from liability to the taxpayer, but not to a third party. The final regulations provide that if a taxpayer has an apparent interest in property in the possession of someone else, and if the possessor makes a good faith determination that the property has been levied upon by the Internal Revenue Service, the possessor is relieved of liability to a third party that has an interest in the property, even if it is subsequently determined that the property is not properly subject to levy.

 DATES: These final regulations are effective on January 11, 1993. However, persons surrendering property to the Internal Revenue Service may rely on the regulations with respect to levies issued after November 10, 1988.

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

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains final regulations amending the Procedure and Administration Requirements (26 CFR part 301) under section 6332 of the Internal Revenue Code (Code). These final regulations reflect the amendment of section 6332 by sections 1015(t)(1)(A) and (B) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) (Pub. L. 100-647).

 The Internal Revenue Service published a notice of proposed rulemaking in the Federal Register on October 16, 1991 (56 FR 51855) providing proposed rules under section 6332 of the Code. Several parties submitted written comments concerning the regulations. Some of the issues raised in the public comments either had been considered prior to publication of the proposed regulations or fell outside the scope of the regulations. The following is a description of the provisions of the final regulations and a discussion of some of the comments received by the Internal Revenue Service with respect to the proposed regulations.

EXPLANATION OF PROVISIONS

 As amended by sections 1015(t)(1)(A) and (B) of TAMRA, section 6332(e) of the Code provides that any person who surrenders levied upon property in that person's possession to the Internal Revenue Service, is discharged from any obligation or liability to the delinquent taxpayer, and also to any other person. Prior to the amendment, the Code provided no such protection from liability to third parties. Accordingly, the regulations under section 6332 of the Code in existence at the time TAMRA was enacted provide that any person who mistakenly surrenders to the Internal Revenue Service property or rights to property not properly subject to levy is not relieved from liability to a third party who owns the property. Under those regulations, a person in possession of property that ostensibly belonged to a taxpayer frequently was faced with competing claims of ownership in the property and had to make a determination, at his or her peril, whether the property was properly subject to levy under the provisions of the Code and the provisions of state law.

 The final regulations conform the existing regulations under section 6332 of the Code to the changes in the statutory language by providing that if a taxpayer has an apparent interest in property in the possession of someone else, a possessor who makes a good faith determination that such property has been levied upon by the Internal Revenue Service and who surrenders such property to the Internal Revenue Service in response to the levy is relieved of any liability or obligation to a third party who has an interest in the property, even if it is subsequently determined that the property was not properly subject to levy. If, however, a person surrenders property in which the taxpayer has no apparent interest and that property is not properly subject to levy, the person is not relieved of liability to a third party that owns the property. These new rules do not provide relief from liability to the taxpayer because such relief is unnecessary. (If, despite an apparent interest in levied upon property, the taxpayer in fact does not own the property, the taxpayer has no property rights that could be violated.) In addition, the relief provision does not apply to deposits a bank improperly surrenders before the end of the 21 day holding period mandated by section 6332(c).

 The final regulations also clarify that the owners of surrendered property may seek to have the property returned through the administrative relief provided in section 6343(b) of the Code, or may bring suit to recover the property under section 7426 of the Code. The final regulations set forth examples illustrating the effect of honoring a levy.

 Section 6332 of the Code was further amended by the deletion of language providing that an insuring organization that satisfies a levy with respect to a life insurance or endowment contract is discharged from any obligation or liability to any beneficiary of such contract. This language was superfluous in light of the more general protection from liability to third parties now provided with the enactment of TAMRA sections 1015(t)(1)(A) and (B). The final regulations remove the corresponding language in the existing regulations to conform to the statutory amendment.

 Several written comments were received and considered. First, one of the commenters expressed general concern about the proposed retroactive effective date of the regulations. This concern, however, seems misplaced. These regulations benefit levied upon parties because they interpret a statutory amendment that provides a federal defense to wrongful turnover of property rather than forcing reliance on state law. At the same time, these regulations do not unfairly disadvantage taxpayers whose property has been erroneously levied upon. Therefore, although the effective date has been revised to be January 11, 1993, persons surrendering property they possess to the Internal Revenue Service prior to January 11, 1993, may rely on the regulations with respect to levies issued after November 10, 1988.

 One of the commenters suggested that in paragraph (c)(1) of the regulations, the phrase "pursuant to section 6331 and regulations thereunder" be added for clarification after the phrase "levy has been made." However, the same language is present in the existing regulations and has not been a source of confusion. Accordingly, this comment has not been adopted.

 Another commenter expressed concern that the regulations might be interpreted as creating a new federal cause of action. The new provision, however, does not give rise to a federal cause of action. To the contrary, the statutory change codified the result reached in United States v. National Bank of Commerce, 472 U.S. 713 (1985), and created a federal defense for a levied upon party who turns over property to the Internal Revenue Service pursuant to a levy. No changes were made to the final regulations as a result of this comment.

 One of the commenters recommended that the regulations allow a levied upon party to make a good faith determination of the taxpayer's apparent interest in the property based solely upon the books and records in possession of the levied upon party. Conversely, the same commenter suggested that the regulations provide that the levied upon party would be relieved of liability to the Internal Revenue Service if the party's books and records supported an erroneous determination that the taxpayer did not have an apparent interest in the property.

 Neither of these comments was adopted. Apparent interest is an objective test. If an apparent interest exists, the possessor must act in good faith in determining whether the property in question has been levied upon by the Internal Revenue Service. The determination of whether these two requirements for relief from liability are met depends on the relevant facts and circumstances. For example, a bank generally may rely on its books and records to determine if the taxpayer has an apparent interest in an account and in making a good faith determination that the account has been levied upon by the Internal Revenue Service. Additionally, the issue of relief from liability to the Internal Revenue Service is beyond the scope of these regulations.

 One commenter suggested that the regulations provide that a bank would be relieved of liability only if the bank notified all persons with an apparent interest in the property within 1O days of receipt of the levy. If a person so notified failed to respond by the 21st day, the bank would be automatically relieved of liability to that third party. This comment was not adopted for two reasons. First, it would impose an undesirable administrative burden on banks and other taxpayers. Second, the information obtained by this process might be inaccurate.

 Finally, one commenter suggested eliminating the requirement that a person in possession of property make a good faith determination that the property has been properly levied upon by the Internal Revenue Service. In the commenter's opinion, the good faith requirement is burdensome and beyond the scope of the amendment. The proposed regulations were revised in response to this comment. As indicated above, the good faith determination a possessor of property must make is not that the property is properly subject to levy but rather that the property has been levied upon by the Internal Revenue Service.

SPECIAL ANALYSES

 It has been determined that these regulations 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 final regulations, and, therefore, an initial Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking was 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 final regulations is Susan B. Watson, 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 developing the regulations on matters of both substance and style.

LIST OF SUBJECTS

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 8467

ADOPTION OF 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(c) is revised to read as follows:

SECTION 301.6332-1 SURRENDER OF PROPERTY SUBJECT TO LEVY.

(c) EFFECT OF HONORING LEVY -- (1) IN GENERAL. Any person in possession of, or obligated with respect to, property or rights to property subject to levy and upon which a levy has been made who, upon demand by the district director, surrenders the property or rights to property, or discharges the obligation, to the district director, or who pays a liability described in paragraph (b)(1) of this section, is discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to the property or rights to property arising from the surrender or payment.

(2) EXCEPTION FOR CERTAIN INCORRECTLY SURRENDERED PROPERTY. Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property. However, if the delinquent taxpayer has an apparent interest in property or rights to property, a person who makes a good faith determination that such property or rights to property in his or her possession has been levied upon by the Internal Revenue Service and who surrenders the property to the United States in response to the levy is relieved of liability to a third party who has an interest in the property or rights to property, even if it is subsequently determined that the property was not properly subject to levy.

(3) REMEDY. In situations described in paragraphs (c)(1) and (c)(2) of this section, taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in section 6343(b) or may bring suit to recover the property under section 7426.

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

EXAMPLE 1. M Bank is served with a notice of levy for an unpaid tax liability due from A in the amount of $2,000. M Bank holds $2,000 in a checking account in the names of A or B or C. Although all of the deposits into the account were made by B and C, A has an unrestricted right to withdraw the funds from the account. M Bank surrenders the entire account to the district director at the end of the holding period provided in section 6332(c). Under paragraph (c)(1) of this section, M Bank is not liable to B or C for any amount, even if B or C prove that the funds in the account did not belong to A, because A's unrestricted right to withdraw the funds is an interest which is subject to levy. B or C may, however, seek the return of the funds from the United States as provided in sections 6343(b) and 7426 of the Internal Revenue Code.

EXAMPLE 2. A is indebted to B for $400. Unbeknownst to A, B has assigned his right to receive payment to C. A is served with a notice of levy for an unpaid tax liability due from B for $400. A, acting with no knowledge of the assignment to C, surrenders $400 to the district director. A is discharged from his obligation to pay B, the taxpayer. Under paragraph (c)(2) of this section, because B had an apparent interest in the funds that A owed to B, and because A determined in good faith that those funds had been levied upon, A is also discharged from any liability to C, even though the money is not properly subject to levy. C may, however, seek return of the payment from the United States as provided in sections 6343(b) and 7426 of the Internal Revenue Code.

EXAMPLE 3. M Bank is served with a notice of levy for an unpaid tax liability due from "John H. Smith, Sr." in the amount of $5,000. M Bank fails to read the notice of levy carefully. When searching its records, M Bank finds the name of "John H. Smith, Jr." and looks no further. M Bank surrenders $5,000 from John H. Smith, Jr's checking account to the district director. M Bank is not discharged from liability under section 6332(e) of the Internal Revenue Code because the delinquent taxpayer (John H. Smith, Sr.) had no apparent interest in the account of John H. Smith, Jr. (Generally, John H. Smith Jr. may seek return of the payment from the United States as provided in sections 6343 and 7426 of the Internal Revenue Code.)

EXAMPLE 4. M Bank is served with a notice of levy for an unpaid tax liability due from "Robert A. Jones" in the amount of $5,000. M Bank searches its records and identifies four separate accounts of $1,000 each in the name of "Robert A. Jones." All four accounts list different addresses and social security identification numbers. M Bank surrenders all four accounts totalling $4,000 in response to the levy. M Bank could not in good faith have determined that all four accounts were levied upon. Therefore, M Bank is not discharged from liability to any person other than the taxpayer whose account was levied upon.

(5) EFFECTIVE DATE. Paragraph (c) of this section is effective January 11, 1993. However, persons surrendering property to the Internal Revenue Service may rely on the regulations with respect to levies issued after November 10, 1988.