Final Regs Provide Rules on Property Exempt From IRS Levy

 AGENCY: Internal Revenue Service (IRS), Treasury.

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations regarding property exempt from levy. These regulations reflect changes made by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) and other public laws to section 6334 concerning the determination of property exempt from levy. The regulations affect taxpayers whose wages, salary, or other income are the subject of a levy by the Internal Revenue Service.

 DATES: These regulations are effective October 21, 1994.

These regulations apply to levies made on or after July 1, 1989.

 FOR FURTHER INFORMATION CONTACT: Jerome D. Sekula, 202-622-3640 (not a toll-free call).

 SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains final regulations amending the Procedure and Administration Regulations (26 CFR part 301) under section 6334 of the Internal Revenue Code (Code). The regulations reflect the amendment of section 6334 by sections 1015(o) and 6236(c) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, as well as the Tax Reform Act of 1986, Pub. L. 99-514, the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, and the Tax Reform Act of 1976, Pub. L. 94-455, which had not previously been reflected in the regulations.

 On May 27, 1992, a notice of proposed rulemaking relating to property exempt from levy was published in the Federal Register (57 FR 22189). Written comments responding to this notice were received. No public hearing was requested or held. After consideration of all the comments, the proposed regulations under section 6334 are adopted as revised by this Treasury decision.

EXPLANATION OF REVISIONS AND SUMMARY OF COMMENTS

 One commentator suggested that the final regulations provide that ALL retirement plans be exempt from levy, not only those plans enumerated in section 6334 of the Code. This suggestion is not adopted. Congress has specifically provided that certain property is exempt from levy. In fact, section 6334(c) provides that no property is exempt from levy other than property specifically enumerated in the Code.

 The proposed regulations provide that where an individual is paid or receives wages, salary, or other income on a one-time basis, the exempt amount is computed as if the taxpayer had been paid for the one-week period ending on the day of payment. One commentator raised questions concerning the application of this "one time basis" rule where an individual was paid on a recurrent, but irregular, basis. Another commentator questioned whether the proposed rule is a correct interpretation of section 6334(d)(3). This commentator argued that under section 6334(d)(3) the exemption amount should be calculated using the total time period over which the wages, salary, or other income was earned.

 The proposed regulations have been revised to address the concerns of these commentators. Under the final regulations, when taxpayers are paid on a one-time basis or are paid on a recurrent, but irregular, basis which does not comport with an established calendar period regularly used by the employer or other person being levied upon, taxpayers are entitled to the exempt amount for each week to which the payment received is attributable.

 One commentator raised a concern regarding levies that span more than one calendar year where the standard deduction or the amount of the personal exemption changes by operation of law (such as by indexing or otherwise). Under the proposed regulations, the exempt amount remains the same in the second year. The commentator stated that this could cause hardship for employers with automated payroll systems because those employers might have to maintain separate, manual accounts for those employees who had been levied upon in a preceding year. The commentator suggested that employers should be required to calculate and use the new exempt amount when a change in the standard deduction amount or personal exemption amount occurs by operation of law.

 While the suggested change might be beneficial to some employers, the Service and Treasury are concerned that it could result in a hardship to other employers (particulary smaller employers) who would be required to reexamine the statement of each employee who files for exemption and recompute a new exempt amount each time a change in the law occurs. In order to accommodate these conflicting concerns, under the final regulations a taxpayer may submit a new verified statement to his or her employer to claim a new exempt amount based on law changes effective in the year in which the claim is filed. This permits a taxpayer to claim an additional exempt amount but avoids burdening businesses with the requirement to reexamine the statement of each employee who files for exemption and automatically recompute a new exempt amount based on law changes alone. However, employers who wish to use the new exempt amount can request that their employees submit new verified statements in order to recompute new exempt amounts based on the changes in the law.

 Under the proposed regulations, when payments are made on the basis of a daily pay period, the exempt amount is calculated on the basis of 360 days. The final regulations provide that the exempt amount is calculated on the basis of 260 days, the number of work days in a year (assuming a five day work week and 52 work weeks in a year). This change increases the exempt amount available to a taxpayer who works on a daily pay-period basis. The Service and Treasury believe that this change is consistent with the requirement of section 6334(d)(3) of the Code.

EFFECTIVE DATE

 These regulations are effective for levies made on or after July 1, 1989. However, any reasonable attempt to comply with the statutory amendments addressed by these regulations prior to February 20, 1995, will be considered as meeting the requirements of these regulations.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has 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 Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking was submitted to the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

 The principal author of these final regulations is Jerome D. Sekula, Office of the Assistant Chief Counsel (General Litigation), IRS. 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

 Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Treasury Decision 8568

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 as follows:

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

Par. 2. Section 301.6334-1 is amended as follows:

1. In paragraph (a)(2), in the first sentence, "$500" is removed and "$1,650 ($1,550 for levies issued prior to January 1, 1990)" added in its place.

2. In paragraph (a)(3), "$250" is removed and "$1,100 ($1,050 for levies issued prior to January 1, 1990)" added in its place.

3. In paragraph (a)(8), the last sentence is removed.

4. In paragraph (a)(9), "section 301.6334-6" is removed and "section 301.6334-4" added in its place.

5. Paragraphs (a)(10) through (a)(13), (d) and (e) are added to read as follows:

SECTION 301.6334-1 PROPERTY EXEMPT FROM LEVY.

(a) * * *

(10) CERTAIN SERVICE-CONNECTED DISABILITY PAYMENTS. Any amount payable to an individual as a service-connected (within the meaning of section 101(16) of title 38, United States Code (U.S.C.)) disability benefit under --

(i) Subchapters II (wartime disability compensation), III (wartime death compensation), IV (peacetime disability compensation), V (peacetime death compensation), or VI (general compensation provisions) of chapter 11 of title 38, U.S.C.; or

(ii) Chapters 13 (dependency and indemnity compensation for service commenced deaths), 21 (specially adapted housing for disabled veterans), 23 (burial benefits), 31 (vocational rehabilitation), 32 (post-Vietnam era veterans' educational assistance), 34 (veterans' educational assistance), 35 (survivors' and dependents' educational assistance), 37 (home, condominium, and mobile home loans), or 39 (automobiles and adaptive equipment for certain disabled veterans and members of the armed forces) of title 38, U.S.C.

(11) CERTAIN PUBLIC ASSISTANCE PAYMENTS. Any amount payable to an individual as a recipient of public assistance under --

(i) Title IV (relating to aid to families with dependent children) or title XVI (relating to supplemental security income for the aged, blind, and disabled) of the Social Security Act, (42 U.S.C. 301 et seq.); or

(ii) State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test.

(12) ASSISTANCE UNDER JOB TRAINING PARTNERSHIP ACT. Any amount payable to a participant under the Job Training Partnership Act (29 U.S.C. 1501 et. seq.) from funds appropriated pursuant to such Act.

(13) PRINCIPAL RESIDENCE EXEMPT IN ABSENCE OF CERTAIN APPROVAL OR JEOPARDY. Except to the extent provided in section 6334(e), the principal residence (within the meaning of section 1034) of the taxpayer whose tax liability is being sought to be collected upon.

* * * * *

(d) LEVY ALLOWED ON PRINCIPAL RESIDENCE. The principal residence of the taxpayer is not exempt from levy if --

(1) A district director or an assistant district director personally approves, in writing, the levy on such property; or

(2) The district director determines that the collection of tax is in jeopardy.

(e) EFFECTIVE DATE. These provisions are effective with respect to levies made on or after July 1, 1989. However, any reasonable attempt by a taxpayer to comply with the statutory amendments addressed by these regulations prior to February 20, 1995, will be considered as meeting the requirements of these regulations.

Par. 3. Sections 301.6334-2, 301.6334-3 and 301.6334-4 are revised to read as follows:

SECTION 301.6334-2 WAGES, SALARY, AND OTHER INCOME.

(a) IN GENERAL. Under section 6334(a)(9) and (d) certain amounts payable to or received by a taxpayer as wages, salary, or other income are exempt from levy. This section describes the income of a taxpayer that is eligible for the exemption from levy (paragraph (b) of this section) and how exempt amounts are to be paid to the taxpayer (paragraph (c) of this section). Section 301.6334-3 describes that sum that will be exempt from levy for each of the taxpayer's pay periods. Pay periods are described in section 301.6334-3. For the amounts exempt from levy, see section 301.6334-3.

(b) ELIGIBLE TAXPAYER INCOME. Only wages, salary, or other income payable to the taxpayer after the levy is made on the payor may be exempt from levy under section 6334(a)(9). No amount of wages, salary, or other income that is paid to the taxpayer before levy is made on the payor will be so exempt from levy under section 6334(a)(9). The provisions of this paragraph (b) may be illustrated by the following example:

EXAMPLE. Delinquent taxpayer A, an individual, is employed by the M Corporation and is paid wages on Friday of each week. Accordingly, A is paid wages on Friday, February 16, 1990. On Saturday, February 17, A deposits these wages into his personal checking account at Bank N. On Tuesday, February 20, a notice of levy is served on the M Corporation and also on Bank N. Amounts payable to A as wages on Friday, February 23, 1990, and any payday thereafter may be exempt from levy under section 6334(a)(9). No amount of wages A deposited in his account at Bank N on February 17, 1990, is exempt from levy under section 6334(a)(9).

(c) PAYMENT OF EXEMPT AMOUNTS TO TAXPAYER -- (1) FROM WAGES, SALARY, OR INCOME FROM OTHER SOURCES WHERE LEVY ON ALL SOURCES NOT MADE. In the case of a taxpayer who has more than one source of wages, salary, or other income, the district director may elect to levy on only one or more sources while leaving other sources of income free from levy. If the wages, salary, or other income that the district director leaves free from levy equal or exceed the amount to which the taxpayer is entitled as an exemption from levy under section 6334(a)(9), computed in accordance with section 301.6334-3 (and are not otherwise exempt), the district director may treat no amount of the taxpayer's wages, salary, or other income on which the district director elects to levy as exempt from levy. In such a case, the district director must notify the employer or other person upon whom the levy is served that no amount of the taxpayer's wages, salary, or other income is exempt from levy. The employer or other person upon whom the levy is served may rely on such notification in paying over amounts pursuant to the levy. In the absence of such notification from the district director, however, the employer or other person upon whom the levy is served must determine the amount exempt from levy pursuant to section 301.6334-3 as if that employer or other person upon whom the levy is served is the only source of wages, salary, or other income. Amounts not exempt from levy are to be paid to the district director in accordance with the terms of the levy. The provisions of this paragraph (c)(1) may be illustrated by the following example:

EXAMPLE. Delinquent taxpayer C is an employee of O Corporation and is paid wages totalling $450 on Friday of each week. C also performs services for P Corporation and is paid a salary of $250 on Friday of each week. On Tuesday, February 20, 1990, a levy is served on O Corporation with respect to the wages payable to C. A levy is not served on P Corporation. C's filing status is single and C is entitled to 1 personal exemption. Under section 301.6334-3, C is entitled to an exemption from levy under 6334(a)(9) totalling $101.92 for each weekly pay period. However, because levy has not been made on C's salary paid by the P Corporation ($250 per week) and that salary exceeds the weekly amount ($101.92) to which C is entitled as exempt from levy, the district director may treat no amount of C's wages paid by the O Corporation as exempt from levy. If the district director requires such treatment, the district director must notify O Corporation that no amount of C's wages is exempt from levy and O Corporation may rely on such notification; in the absence of such notification O Corporation must treat $101.92 as exempt from levy.

(2) WHERE SOURCES NOT LEVIED UPON ARE LESS THAN EXEMPT AMOUNT. If the taxpayer's income upon which the district director does not levy is less than the amount to which the taxpayer is entitled as exempt from levy, then an additional amount, determined to be exempt from levy pursuant to section 301.6334-3, may be paid to the taxpayer from the sources of wages, salary, or other income upon which levy has been made. In such a case, the district director must designate those wages, salary, or other income from which the exempt amount is to be paid to the taxpayer, and must notify the employer or other person upon whom the levy is served of the amount of the taxpayer's wages, salary, or other income that is exempt from levy. The employer or other person may rely on such notification in paying over amounts pursuant to the levy. In the absence of such notification from the district director, the employer or other person upon whom the levy is served must determine the amount exempt from levy pursuant to section 301.6334-3 as if that employer or other person upon whom the levy is served is the only source of wages, salary, or other income. Amounts not exempt from levy are to be paid to the district director in accordance with the terms of the levy. The provisions of this paragraph (c)(2) may be illustrated by the following example:

EXAMPLE. Delinquent taxpayer C is an employee of O Corporation and is paid wages totalling $50 on Friday of each week. C also performs services for P Corporation and is paid a salary of $75 on Friday of each week. On Tuesday, February 20, 1990, a levy is served on P Corporation with respect to the wages and salary of C. C's filing status is single and C is entitled to 1 personal exemption. Under section 301.6334-3, C is entitled to an exemption from levy under section 6334(a)(9) totalling $101.92 for each weekly pay period. The district director may notify P Corporation that only $51.92 of C's wages is exempt from levy and P Corporation may rely on such notification; in the absence of such notification, P Corporation must treat the entire $75 salary as exempt from levy.

(d) EFFECTIVE DATE. These provisions are effective with respect to levies made on or after July 1, 1989. However, any reasonable attempt by a taxpayer to comply with the statutory amendments addressed by these regulations prior to February 20, 1995, will be considered as meeting the requirements of these regulations.

SECTION 301.6334-3 DETERMINATION OF EXEMPT AMOUNT.

(a) INDIVIDUALS PAID ON WEEKLY BASIS. In the case of any individual who is paid or receives all of his or her wages, salary, and other income on a weekly basis, the amount of wages, salary, and other income payable to or received by him or her during any week that is exempt from levy under section 6334(a)(9) is the exempt amount.

(b) TERM DEFINED. The term EXEMPT AMOUNT means an amount equal to --

(1) The sum of --

(i) The standard deduction (including additional standard deductions on account of age or blindness); and

(ii) The aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which such levy occurs;

(2) Divided by 52.

(c) WRITTEN AND PROPERLY VERIFIED STATEMENT. Unless the taxpayer submits to the employer for forwarding to the district director a written and properly verified statement (as described in section 301.6334-4) specifying the facts necessary to determine the proper amount under paragraphs (b)(1)(i) and (ii) of this section, paragraphs (b)(1)(i) and (ii) of this section must be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

(d) INDIVIDUALS PAID ON BASIS OTHER THAN WEEKLY -- (1) IN GENERAL. In the case of an individual who is paid or receives wages, salary, and other income other than on a weekly basis, the amount payable to that individual during any applicable pay period that is exempt from levy under section 6334(a)(9) is the amount that as nearly as possible will result in the same total exemption from levy for such individual over that period of time other than weekly as that to which the individual would have been entitled under paragraph (b) of this section if, during such period of time, the individual were paid or received such wages, salary, and other income on a regular weekly basis.

(2) SPECIFIC PAY PERIODS OTHER THAN WEEKLY. In the case of wages, salary, or other income paid to an individual on the basis of an established calendar period regularly used by the employer or other person levied upon for payroll or payment purposes, the exempt amount of wages, salary, and other income payable to or received by an individual during an applicable pay period other than weekly equals --

(i) The sum of --

(A) The standard deduction (including additional standard deductions on account of age or blindness); and

(B) The aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which such levy occurs;

(ii) Divided by --

(A) 260 in the case of a daily pay period;

(B) 26 in the case of a bi-weekly pay period;

(C) 24 in the case of a semi-monthly pay period; and

(D) 12 in the case of a monthly pay period.

(3) NONSPECIFIC PAY PERIODS. In the case of wages, salary, or other income paid to an individual on a one-time or a recurrent but irregular basis and which is not paid on the basis of an established calendar period regularly used by the employer or other person levied upon for payroll or payment purposes, the exempt amount of wages, salary, and other income payable to or received by an individual equals the exempt amount defined in paragraph (b) of this section multiplied by the number (but not more than 52) of full weeks (consisting of seven calendar days) to which such payment is attributable. The provisions of this paragraph (d)(3) may be illustrated by the following example:

EXAMPLE. Taxpayer A's exempt amount per week (as determined under paragraph (b) of this section) is $100. Taxpayer A is hired by Corporation X to perform a specific task for Corporation X at a flat fee of $1,500 which is to be paid at the completion of the task. Taxpayer A completes the task in 10 weeks. The total exempt amount is $1,000 and $500 is subject to levy.

(e) LEVIES CONTINUING INTO FOLLOWING YEARS. The exempt amount is computed on the basis of the standard deduction (including additional standard deductions on account of age or blindness) for the taxpayer's filing status and the amount of the deduction for a personal exemption in effect in the taxable year in which the original notice of levy is served. Unless the taxpayer submits a new verified statement in accordance with section 301.6334-4, the exempt amount remains the same for pay periods following the pay period in which the notice of levy is served even if there is a change in the taxpayer's factual situation or a change by operation of law (such as by indexing or otherwise) to the standard deduction or personal exemption amounts.

(f) EFFECTIVE DATE. These provisions are effective with respect to levies made on or after July 1, 1989. However, any reasonable attempt by a taxpayer to comply with the statutory amendments addressed by these regulations prior to February 20, 1995 will be considered as meeting the requirements of these regulations.

SECTION 301.6334-4 VERIFIED STATEMENTS.

(a) IN GENERAL. For purposes of sections 301.6334-2 and 301.6334-3, the amount of wages, salary, or other income that is exempt from levy must be determined on the basis of a written and properly verified statement submitted by the taxpayer to his or her employer for submission to the district director specifying the facts necessary to determine the standard deduction and the aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which the levy is served. In the absence of submission of such statement, the amount that is exempt from levy must be determined as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

(b) CONTENT OF STATEMENT. The statement in paragraph (a) of this section must be a written statement signed under penalty of perjury, and dated, containing the following information --

(1) The filing status of the taxpayer as either:

(i) Single;

(ii) Married filing a joint return;

(iii) Married filing a separate return;

(iv) Head of household; or

(v) Qualifying widow or widower with dependent child;

(2) The name, relationship, and Social Security Number of each individual whom the taxpayer can claim as a personal exemption on the taxpayer's income tax return; and

(3) Any additional standard deductions that the taxpayer can claim on account of age (65 or older) or blindness on the taxpayer's income tax return.

(c) SUBMISSION OF VERIFIED STATEMENT -- (1) OBLIGATION OF EMPLOYER. An employer upon whom a notice of levy for wages, salary, or other income of a taxpayer is served must promptly notify the taxpayer of the fact that a notice of levy has been served. Unless otherwise indicated on the face of the notice of levy, the employer must request the taxpayer to provide the employer with a written statement signed under penalty of perjury, and dated, containing the information set forth in paragraph (b) of this section, and this statement must be submitted by the employer to the district director. The employer must submit this statement to the district director at the time the employer first responds to the notice of levy.

(2) SUBMISSION BY TAXPAYER. The taxpayer must provide the employer upon whom the notice of levy has been served with a verified statement complying with paragraph (b) of this section. Unless the taxpayer provides a verified statement, the amount that is exempt from levy must be determined as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

(3) ADDITIONAL STATEMENTS. A taxpayer may submit a verified statement to his or her employer at any time. Except as otherwise provided in paragraph (d) of this section, such verified statement will be effective for any payment of wages, salary, or other income made after the date of submission and will replace any previously submitted verified statement. The employer must provide the district director with the statement on the next occasion on which the employer responds to the notice of levy.

(d) EFFECT OF VERIFIED STATEMENT -- (1) A verified statement submitted by an employee is effective upon receipt by the employer, and the employer is required to compute the exempt amount on the basis of the information contained in the verified statement unless notified to the contrary by the Internal Revenue Service.

(2) The Internal Revenue Service may find that a verified statement submitted by an employee contains a materially incorrect statement, or it may determine, after written request to the employee for verification of information contained in the verified statement, that it lacks sufficient information to determine whether the verified statement is correct. If the Internal Revenue Service so finds or determines, and notifies the employer in writing that the verified statement is defective, upon receipt of such notice the employer shall consider the verified statement to be defective for purposes of computing the exempt amount.

(3) If the Internal Revenue Service notifies the employer that the verified statement is defective, the Internal Revenue Service will, based upon its finding, advise the employer that the employer is to compute the exempt amount as if no verified statement had been submitted by the employee or will describe upon what basis the exempt amount is to be computed. The Internal Revenue Service will also specify which Internal Revenue Service office to contact for further information.

(4) In addition to any notice furnished to the employer for the employer's use, the Internal Revenue Service will provide the employer with a copy for the employee of each notice it furnishes the employer.

(5) The employer must promptly furnish the employee with a copy of any Internal Revenue Service notice with respect to a verified statement submitted by the employee.

(6) Once paragraph (d)(3) of this section applies, the employer must continue to compute the exempt amount on the basis of the written notice from the Internal Revenue Service until the Internal Revenue Service by written notice advises the employer to compute the exempt amount on the basis of a new verified statement (as described in paragraph (d)(7) of this section) and revokes its earlier written notice.

(7) Once paragraph (d)(3) of this section applies, the employee may submit a new verified statement together with a written explanation of any circumstances of the employee which have changed since the Internal Revenue Service's earlier written notice, or any other circumstances or reasons as justification or support for the claims made by the employee on the new verified statement. The employee may submit the new verified statement and written explanation either --

(i) To the Internal Revenue Service office specified in the notice furnished to the employer under paragraph (d)(3) of this section; or

(ii) To the employer, who must forward the new verified statement and written explanation to the Internal Revenue Service office specified in the notice earlier furnished to the employer on the next occasion on which the employer responds to the notice of levy.

(e) EFFECTIVE DATE. These provisions are effective with respect to levies made on or after July 1, 1989. However, any reasonable attempt by a taxpayer to comply with the statutory amendments addressed by these regulations prior to February 20, 1995, will be considered as meeting the requirements of these regulations.

SECTIONS 301.6334-5, 301.6334-6 AND 301.6334-7 [REMOVED]

Par. 4. Sections 301.6334-5 through 301.6334-7 are removed.