It is important that the PALS emphasize that no warranties are made as to the validity of the title to the property to be sold. The property should be offered for sale "as is" and "where is " and without recourse against the United States.

The taxpayer’s property and rights to property are sold subject to any prior mortgages, encumbrances or liens in favor of third parties senior to the federal tax lien. Treas. Reg. § 301.6335-1(c)(5)(iii). It is the responsibility of the prospective bidders to investigate title to and encumbrances on the seized property. However, on request the government will provide prospective bidders information it has learned about encumbrances which have priority over the federal tax lien on Form 2434-B, Notice of Encumbrances Against Property Offered for Sale.

A certificate of sale is given to the purchaser of either personal or real property upon payment of the purchase price. A deed to real property is given to the purchaser or his/her assigns upon surrender of the certificate of sale after the redemption period expires. The certificate of sale of personal property transfers to the purchaser all the delinquent taxpayer’s right, title and interest in the property sold, and the certificate is prima facie evidence of the right of the Service to make the sale and is conclusive evidence of the regularity of the sale proceedings. IRC § 6339.

The certificate of sale constitutes authority for the transfer of corporate stock and title to motor vehicles. It also constitutes a receipt if the property sold is securities or other evidence of debt. Treas. Reg. § 301.6339-1.

A deed to real property is prima facie evidence of the facts stated therein and operates as a conveyance of all the taxpayer’s right, title and interest in the premises sold at the time the tax lien attached to the realty, provided the sale has been substantially in compliance with the provisions of the Code and regulations.

Some purchasers record the certificate of sale to preclude transfer by the taxpayer to a bona fide purchaser for value.

Any money realized by levy or sale of seized property, or sale of redeemed property, is applied first against the expenses of levy and sale; second, against any unpaid tax specifically imposed against the seized property by an internal revenue law (e.g., alcohol or tobacco tax); and third, against the tax liability for which the levy was made or the sale was conducted. IRC § 6342(a).

Any remaining, or surplus, proceeds are credited or refunded to the person or persons legally entitled to the surplus proceeds. IRC § 6342(b). If the United States cannot resolve conflicting claims to the surplus proceeds, the United States may bring an interpleader action in federal district court. See United States v. Sage , 566 F.2d 1114 (9th Cir. 1977) (the court held that surplus proceeds never go to satisfy senior lienors because the federal tax sale did not affect their interests.)

Pursuant to IRC § 6340, the IRS must keep a record of sales of personal and real property and of redemptions of real property. In addition, the IRS must provide an accounting to the taxpayer that includes a copy of the record of sale (other than the name of the purchaser), the amount of sale proceeds applied to the taxpayer's liability, and a statement including the amount of any remaining balance. See IRM 5.10.6.10 (Record 21, Record of Seizure and Sale).

In the case of real property sales, the IRS is not precluded from disclosing the names of purchasers to the taxpayers to enable the taxpayers to exercise their redemption rights.

The effect of a levy depends upon the nature of the taxpayer’s interest in real property. While, depending on state law, personal property may be held in the forms of ownership described below, issues related to forms of ownership arise most frequently with respect to real property.

An account is any right to monetary payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper. Art. 9-102(a)(2) of the Uniform Commercial Code. The party obligated is commonly referred to as the debtor. Levy is made on accounts by service of notice of levy on the debtor. After the levy on the debtor, the Service has the option of either administratively selling the account receivable or obtaining payment due the taxpayer. However, a levy does not accelerate the payment. See Cash v. United States, 961 F.2d 562 (5th Cir.), cert. denied, 506 U.S. 985 (1992).

When the Service levies on the debtor to obtain the payment for the accounts receivable, the taxpayer is not entitled to a credit for the fair market value of the accounts at the time of the levy. Cash , supra. The taxpayer's liability will be credited when the Service either administratively sells the accounts receivable or obtains payment from the debtor. If the Service, however, negotiates new payment terms with the debtor, then the taxpayer has an argument that his tax liability must be credited with the fair market value of the accounts at the time of the levy. In re Barlows Inc., 767 F.2d 1098 (4th Cir. 1985).

"Alimony" is an allowance paid by a husband or wife to the other spouse for support and maintenance pursuant to a court order. If the spouse receiving alimony owes a tax, a levy served on the other spouse reaches the alimony payments.

If the court decree designates a specific amount to be paid for child support, the receiving spouse does not have a right to that for personal use. Therefore, a levy served upon the paying spouse for the receiving spouse’s individual tax liabilities does not reach the amount attributable to child support. If the paying spouse is the delinquent taxpayer, amounts necessary for child support are likewise not subject to levy. IRC § 6334(a)(8).

Used here "bail" refers to the posting of security for a person’s appearance in court at a designated time and place.

Property deposited with a court as security for bail is in custodia legis. Nevertheless the federal tax lien attaches to the deposit and the property can be levied upon. A notice of levy may be served upon the clerk of the court. In such a case the clerk should be advised that full compliance with the levy is not required until such time that the property would otherwise be turned over to the taxpayer or someone claiming through him/her. If a dispute arises as to who owns the property, the government must establish the nature and extent of the taxpayers property interest in the property. The levy would be ineffective if there were a forfeiture of the deposited property for failure to comply with the conditions of bail. If a third person deposits property for the taxpayer, there might be a question as to whether the taxpayer has a property interest in the deposit. Area Counsel should be consulted in such instances.

Property a defendant-taxpayer deposits with a surety or the court clerk to secure his/her liability on a bond is subject to levy, provided the security is not forfeited by the defendant. United States v. Parker , 55-2 USTC 9677 (N.D. Tex. 1955).

The deposit of money in a bank generally creates a debtor-creditor relationship between the bank and depositor. (Other relationships might exist, such as bailor and bailee, agent and principal, etc., depending upon the circumstances.) A levy may be made upon the debt the bank owes to the taxpayer-depositor, as evidenced by the amount on deposit. To reduce a debt to the government’s possession, the notice of levy must be served on the debtor-bank. Note, however, deposits mistakenly credited to a taxpayer’s account are not subject to levy. Machinery Center, Inc. v. Kelly, 63-1 USTC 9187 (E.D.Mo. 1962).

Bank accounts may be savings, checking, special interest, certificate of deposit, etc. However, the United States may levy upon that property interest in the bank account regardless of the designation of a bank deposit if the taxpayer has property or rights to property as a depositor. United States v. National Bank of Commerce, 472 U.S. 713 (1985).

A bank honoring a levy is not entitled to deduct a service charge from the amount of deposit to cover its costs in honoring the levy, regardless of the right the bank may have to offset service charges against the taxpayer’s account in ordinary transactions. Also, the bank’s exercise of its right of offset after the service of a notice of levy upon the bank is not a defense to a suit for failure to honor a notice of levy. E.g., State Bank of Fraser v. United States, 861 F.2d 954 (1988).

In many situations the IRS will release a levy on a bank account if the bank proves that it has a superior lien interest in the account. Rev. Rul. 2006-42, 2006-35 IRB 337. Specifically, IRC § 6323(b)(10) provides a superpriority to a bank's security interest in a depositor's bank account, as long as the bank lacked actual notice and knowledge of the federal tax lien. A " security interest" is limited by IRC § 6323(h) to those interests that are protected under local law against subsequent judgment liens. Section 9-109 of Article 9 of the Uniform Commercial Code (UCC) allows a security interest to be created in personal property. Section 9-109(d)(13), however, excludes consumer deposit accounts from the scope of Article 9. Thus, a bank may obtain a security interest in a non-consumer deposit account, i.e., a business bank account. Section 9-314 provides that a security interest in a business deposit account may be perfected only by control. The bank is not required to file a financing statement to perfect its security interest in the account. Under § 9-104(a)(1), a bank automatically has control when the bank maintains the business deposit account. Section 9-104(b) provides that a depositor's right to withdraw funds from the deposit account does not eliminate the bank's control. In short, in many situations banks will qualify for a superpriority under IRC § 6323(b)(10). If the bank honors the levy, the bank may then file a wrongful levy suit to recover the amount of its superpriority.

If the deposit account is a consumer account or a bank had actual notice and knowledge of the federal tax lien, then no superpriority exists under IRC § 6323(b)(10). In this situation the bank must honor the levy without any further recourse against the Service. Moreover, if IRC § 6323(b)(10) does not apply and funds are deposited in the taxpayer's account after the levy and the bank makes a setoff, the IRS can still recover the funds under the argument that the bank has funds encumbered with the federal tax lien. United States v. Donahue Ind., 905 F.2d 1325 (9th Cir. 1990); United States v. Cache Valley Bank, 866 F.2d 1242 (10th Cir. 1989); United States v. Bank of Celina, 721 F.2d 163 (6th Cir. 1983).

A chose in action is an intangible personal right not reduced to possession, but recoverable by a suit at law. The right to sue for payment of a debt is a chose in action, not the overdue note which is merely evidence of the intangible debt. Since a chose in action is property and a right to property, a levy may be made upon the chose in action. See United States v. Citizens & Southern Nat’l Bank, 538 F.2d 1101 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1977). However, in levying on a chose in action, the government can seize no more than the taxpayer owns by virtue of the contract, transaction or occurrence that gave rise to the taxpayer’s property or right to property.

If a taxpayer-plaintiff has filed suit to recover on a chose in action, the Service may seize and sell the taxpayer’s chose in action. A notice of levy can also be served on the taxpayer’s attorney to seize any payment or settlement in the lawsuit. Notices of levy can also be served on the defendant and his/her attorney to seize the debt owed to the taxpayer.

Should the taxpayer-plaintiff obtain a judgment, notices of levy should again be served before payment is made by the defendant. If the defendant is the taxpayer and he/she files a counterclaim, a similar procedure should be followed. The revenue officer must remember that a right to sue for a debt is a chose in action which may be levied upon, but the debt, as distinguished from the chose in action, is not reduced to possession until a notice of levy is served upon the taxpayer’s debtor.

To the extent that a taxpayer has property or a right to property in a condemnation award, the award is subject to levy. However, the revenue officer may encounter difficulties when levying if not all of the joint owners of the condemned property are delinquent taxpayers or there is a cloud on the title to the property. If state law provides that the condemnation award shares the same character as the condemned property, the amount awarded must be so treated by the government contemplating a levy and seizure of the award. In such cases, the decision to levy on a condemnation award should be approached in the same manner as would be the case of levying on the real property itself.

A notice of levy should be served on the appropriate official of the governmental unit charged by the court to pay the award.

A debt owed a taxpayer is clearly subject to levy. The government reduces debts to its possession by serving a notice of levy upon the debtor. As stated previously, payment to the government is a complete defense to the debtor in any action brought against him/her on the debt. IRC § 6332(d). A debt may be levied on notwithstanding the fact that a state government is the taxpayer’s debtor or that the security for the debt may not be levied upon.

If there is joint and several liability on a debt, a levy may be served on any of the debtors to reach the entire debt owed the taxpayer. There is no legal requirement to levy on all the debtors to reduce the debt to possession. In addition, the government is not required to consider the equities between the debtors.

A taxpayer’s right to dividends declared on stock owned by the taxpayer is subject to levy. Rev. Rul. 75-554, 1975-2 C.B. 478. Dividends are distributions of earnings and profits to shareholders which have no effect on the shareholder’s proportionate interests in the corporation. Although the rights of shareholders are determined by the law of the corporate domicile, it is generally accepted that whenever a lawful dividend on stock is declared shareholders become creditors of the corporation with a right to be paid a certain sum at a future time.

Thus, the revenue officer is levying upon a debt. A notice of levy should be served on the corporation and on the paying agent designated by the corporation to disburse the dividend payments, once the corporation becomes indebted to the taxpayer-shareholder. Because dividends are usually payable to shareholders of record as of a certain date, it is advisable to levy on the corporation after the date of declaration and on the paying agent before the date set for payment. The revenue officer need not seize the taxpayer’s stock before he/she may levy to seize the debt. Problems may arise if the taxpayer has transferred his/her stock in the interim, but these should be referred to Area Counsel for an opinion on what property or right to property was, in fact, levied on.

Fixtures were considered when defining real property previously in this section. Fixtures may be levied upon depending upon who the taxpayer is, the relationship between the owner of the premises and the party utilizing the fixtures, and the intent of the parties as to the disposition of the chattels upon termination of the use of the premises. The law of the state the real property is located in determines the property interest, if any, the owner of the premises has in fixtures.

IRC § 6332(b) permits the government to levy against the cash loan value of a life insurance or endowment contract without resort to the foreclosure suit. A levy on an insuring organization with respect to a policy issued by such organization constitutes:

It is not necessary to surrender the contract document. However, the notice of levy must certify that a copy of the notice has been sent to the taxpayer. The insuring organization has 90 days from the date of service of notice of levy to pay over the required amount. This 90-day period provides time for the taxpayer to meet his/her tax liability by other means. In this event, the insurance company must be notified before the expiration of the 90-day period of the payment received from the taxpayer during the period.

The right of a taxpayer to occupy premises for a fixed period of time pursuant to a lease agreement is property that may be levied upon and sold, with the purchaser of the leasehold interest entitled to possession, notwithstanding a clause in the lease prohibiting the assignment thereof without the consent of the lessor. Stagecrafters Club v. District of Columbia Division , 110 F. Supp. 481 (D.D.C. 1953), aff'd, 211 F.2d 811 (D.C. Cir. 1954).

A "legacy" or "bequest" is disposition of personal property by will. If one dies intestate (without making a will) property passes according to state intestacy law. Although the government should not levy upon a decedent’s assets subject to the jurisdiction of a probate court, it should consider participating in the probate proceedings pursuant to state law to protect its interests as a creditor. Moreover, state law may permit the service of a notice of levy upon an executor or other representative once an order of distribution is made.

State law generally permits a beneficiary under a will or through intestate succession to file a disclaimer and renounce his/her right if there has been no acceptance of the testamentary gift. Under such circumstances, the renunciation usually relates back to the date of the bequest or devise, in which case the renouncer is not deemed to have accepted the property because he/she never had any rights to that property. However, for federal tax purposes, a taxpayer, who is a beneficiary or devisee, cannot disclaim his or her inheritance after the federal tax lien has arisen to prevent the federal tax lien from attaching to that property. The Supreme Court in Drye v. United States , 528 U.S. 49 (1999) held that the federal tax lien under IRC § 6321 attaches to the taxpayer’s right to inherit if the taxpayer later disclaimed his inheritance under state law. The Court held that the term property was intended to reach every species of right or interest protected by law and having an exchangeable value. A right to inherit or to "channel the inheritance to a close family member (the next lineal descendant)" cannot simply be written off as a mere personal right to accept or reject a gift, the Court concluded. That right was "property" or a "right to property " subject to the federal tax lien.

A license is a certificate or document authorizing or permitting the holder to engage in a particular type of activity (e.g., selling liquor, operating a child care center, etc.). A franchise is a grant by a sovereign or public authority of the privilege to an individual or corporation to engage in a particular activity or enterprise serving a public interest (e.g., interstate trucking, supplying gas or electric power, railroading, operating a fleet of taxicabs or a bus line, etc.).

If the license or franchise is a property right of the taxpayer-holder, it may be levied on and sold to satisfy taxes due. For state-created licenses, check local law to determine the taxpayer’s interest in the license. Even if local law does not treat the license as property, it may be property for purposes of the federal tax lien and levy. 21 West Lancaster Corp. v. Main Line Restaurant, Inc., 790 F.2d 354, 357-358 (C.A.3 1986) (although a liquor license did not constitute "property" and could not be reached by creditors under state law, it was nevertheless "property" subject to federal tax lien). See generally, Drye v. United States, 528 U.S. 49 (1999) (state law determines a taxpayer’s interests; federal law determines whether such interests amount to property).

A state statute providing that a license shall not be regarded as property does not control if the license, in fact, is something of value and possesses the attributes of property. See, e.g., Sea Girt Restaurant v. Sea Girt, 625 F. Supp. 1482 (D.N.J.) aff’d 802 F.2d 448 (3rd Cir. 1986). Generally, if the license, franchise or membership may be transferred, assigned, conveyed or bequeathed, the taxpayer should be considered as having a property right subject to levy, notwithstanding the necessity of the approval of the transferee, assignee, etc. by the issuing authority. The revenue officer must exercise great caution in determining whether the interest constitutes property. Contact Area Counsel for guidance.

If a license or franchise constitutes property or a right to property of a taxpayer, the purchaser at a sale must ordinarily comply with the rules and regulations of the issuing agency to effectuate a transfer of the property of the taxpayer to the buyer, but the conditions imposed must be proper and reasonable.

The fact that a license is not property subject to transfer under the state law does not eliminate all collection potential of a license. For example, although New York regards a liquor license as a mere privilege, the licensee-taxpayer may voluntarily surrender the license during its term and receive an allocable refund provided a verified petition is filed with the surrender of the license. Therefore, while the seizure of a liquor license is of no value, a levy served on the State Comptrollers Office when a refund has ripened into a property right reaches the refund.

Intangible, like tangible, property may be seized and reduced to possession after serving a levy. A levy served upon the taxpayer, taking physical possession of the liquor license certificate, and the mailing to the license owner and the government agency which issued the license, substantially identical notices of levy were held sufficient to be equivalent to possession of the intangible items of property. Division of Labor Law Enforcement v. United States, 301 F.2d 82 (9th Cir. 1962).

Money of a delinquent taxpayer constitutes property and may be levied on. Although money, due to its nature, is not sold to satisfy taxes, a levy must still be used to obtain possession The same is true for other forms of property that need not be sold such as a dividend, debt, check, etc.

A debt, evidenced by a note, payable in installments may be levied upon. The taxpayer’s debtor would be obligated to comply with the levy by paying the installments to the United States. The government, having no greater rights than the taxpayer in property seized, cannot seek an acceleration of the installment payments outside of the terms and conditions imposed in the note itself. United States v. Ragsdale, 206 F. Supp. 613 (W.D. Tenn. 1962). If a promissory note is payable in installments, successive levies need not be served on the maker of the note because at the time of the execution of the note, the holder has a fixed right to payment which is merely deferred over a future period of time. Rev. Rul. 55-210, 1955-1, C.B. 544

To obtain possession of the debt owed on a note, service of notice of levy on the maker would ordinarily be sufficient. However, if the government wishes to sell an installment note, the revenue officer must take physical possession of the physical paper representative of the promise to pay to accomplish a seizure. Matter of Frank, 55-2 USTC 9772 (S.D. Calif. 1955).

A partner’s interest in a partnership is determined under state law and the partnership agreement. Generally, a partner’s interest is a right to a proportionate share of the distribution of partnership profits or surplus after the payment of partnership debts. The Service may serve a notice of levy on the partnership to obtain a distribution of money that is owed to the taxpayer. If at the time of levy there is no distribution owed to the taxpayer, the levy would not seize any funds. As an alternative, the Service may seize the taxpayer’s partnership interest which may be sold to satisfy a partner’s individual tax liability.

The government may not seize and sell partnership property to collect taxes of an individual partner. Rev. Rul. 73-24, 1973-1 C.B. 602. Similarly, a levy on property or rights to property of a joint venture to satisfy a tax liability of one of the joint venturers has been held to be void. Stuart v. Willis, 244 F.2d 925 (9th Cir. 1957). But see, Economy Plumbing & Heating Co. v. United States, 470 F.2d 585 (Ct Cl. 1972). Furthermore, the contract balance due a joint venture cannot be offset against the amount due from one of the joint venturers. Economy Plumb & Heat. Co. v. United States, 456 F.2d 713, motion to amend den., 470 F.2d 585 (Ct. Cl. 1972).

If the tax liability is incurred by a partnership, the partnership property may be levied upon as well as the property of each partner, to the extent a partner is liable for partnership debts. Adler v. Nicholas , 166 F.2d 674 (10th Cir. 1948). The liability of a limited partner (one not participating in the management of the partnership) is dependent on state law and surrounding factual circumstances. Rev. Rul. 54-213, 1954-1 C.B. 285.

Although a multi-member limited liability company may be taxed as a partnership, the members are not liable for its debts. Thus, the IRS cannot treat the members like partners of a partnership and cannot collect the tax liability of the limited liability company from the members. Rev. Rul. 2004-41, 2004-1 CB 845.

The federal tax lien attaches to a participant’s interest in a retirement plan, such as profit-sharing, stock bonus, pension, cash or deferred (401(k)) plans, annuity plans under IRC § 403(a) and the Federal Thrift Savings Plan, if the participant has any vested benefit under the plan. Vesting occurs when the plan participant acquires a nonforfeitable right to part or all of his accrued benefits. In other words, vesting is the plan participant’s "ownership" of his accrued benefit, which results from the participant’s satisfaction of service or other requirements specified under the terms of the plan. Similarly, the federal tax lien attaches to a taxpayer’s individual retirement account.

The list of exemptions set forth in IRC § 6334 is exhaustive. Courts have held that a participant’s interest in a retirement plan is not exempt from levy under IRC § 6334. See, e.g., Traveler’s Insurance Co. v. Ratterman, 96-1 USTC 50,143 (S.D. Ohio 1996); Ameritrust Co., N.A. v. Derakhshan, 830 F. Supp. 406 (N.D. Ohio 1993); In re Jacobs, 147 B.R. 106 (Bankr. W.D. Pa. 1992); Shanbaum v. United States, 32 F.3d 180 (5th Cir. 1994).

Funds in a retirement plan that are currently being paid out to the taxpayer are reachable by levy. In addition, even if the retirement plan is not in pay status, if a present right to future payment on an obligation exists, the levy reaches that present right. See Rev. Rul. 55-210, 1955-1 C.B. 544 (lien attaches to entire unqualified right to receive future benefits; only one notice of levy needs to be served to effectively reach benefits subsequently payable).

Thus, a levy can reach a participant’s interest in a plan regardless of whether the participant’s right to receive benefits under the plan requires payments to be made immediately or not until sometime in the future. See, e.g., In re Wesche, 193 B.R. 76 (Bankr. M.D. Fla. 1996); In re Anderson, 149 B.R. 591 (9th Cir, BAP 1992); In re Evans, 155 B.R. 234 (Bankr. N.D. Okla. 1993); In re Perkins, 134 B.R. 408 (Bankr. E.D. Cal. 1991). However, levying on the present right to future payment would not require immediate distribution by the plan administrator. Honoring the levy only would be required if the benefits will have become payable to the participant under the terms of the plan. In addition, if a present right to elect distribution exists, the levy reaches that present right. Therefore, if a participant has, for example, the unqualified right to receive distribution because he has reached the minimum age required or because he has been a participant in the plan for the length of time required by a profit-sharing plan, that right is reachable by levy. With respect to minimum retirement age, this does not mean that the Service can compel a taxpayer to retire. Rather, if a taxpayer is retiring or has retired and therefore has the right to receive a distribution, the levy reaches that right, whether or not the taxpayer has elected distribution. Levying on the taxpayer’s right to receive reduced benefits immediately is actuarially equivalent to levying on the benefits at the time when the taxpayer would be entitled to full benefits.

Under federal law, for some retirement plans, there are significant limitations as to the form of benefit that the Service is entitled to elect on behalf of a taxpayer. Careful consideration must be given where the Service seeks collection from a retirement plan that, absent waiver, requires benefits to be paid in the form of a joint and survivor annuity. In these cases, the Service may only levy upon that joint and survivor annuity, and may not elect another form of benefit for collection purposes without the consent of a spouse. This rule is the same regardless of whether the tax liability is a separate liability of the plan participant or a joint tax liability.

Careful consideration should also be given if the participant is deceased. If a participant dies without ever having an immediate right to distribution of benefits under the terms of the plan, the Service may not levy on those assets after his death, even if the taxpayer’s interest was " vested." Moreover, even if a fully vested participant while living could have elected to receive distribution, the Service cannot levy on the plan after his death to assert that right. A levy after the participant’s death attaches to the rights of the participant’s estate.

Because of the complex issues which arise when levying on retirement plans, particularly where there is a spouse involved or the participant is deceased, you should contact Area Counsel for advice on how best to proceed.

The accrued salary, wages, fees, bonuses or commissions of an employee-taxpayer are subject to levy.

The accrued salaries of federal, state and other governmental employees are also subject to levy. Treas. Reg. § 301.6331-1(a)(4), Rev. Rul. 55-227, 1955-1 C.B. 551. If the proper disbursing officer refuses to honor a levy served upon him/her in his/her official capacity, he/she will be held personally liable under IRC § 6332.Sims v. United States , 359 U.S. 108 (1959). Laws prescribing a particular procedure to be followed by creditors levying or garnishing the wages of a governmental or other employee do not apply to the United States collecting taxes through levy. Hoye v. United States, 277 F.2d 116 (9th Cir. 1960). Further, state laws limiting the amount of wages which may be garnisheed by judgment creditors must yield to the provisions of the Code permitting the Secretary or his delegate to levy. The Consumer Credit Protection Act relating to restrictions on garnishment specifically exempts federal tax claims from its provisions. 15 USC § 1673(b)(1)(C); IRC § 6334 determines the exemptions allowed when collecting by levy.

Limited liability companies (LLCs) combine elements of a corporation and a partnership. The main difference from a partnership is that the owners of the LLC (known as members) do not have any personal liability for debts of the LLC.

Collection issues arise when the LLC does not pay its employment tax liability and does not have sufficient assets to pay the liability in full. Member-managers cannot be held directly liable for the employment taxes of the LLC because state law generally provides that members and managers are not liable for the debts of the LLC. This is true even in the case of an LLC that is treated as a partnership for income tax purposes. Rev. Rul. 2004-41, 2004-1 CB 845. However, member-managers of an LLC can be held liable for the trust fund portion of the employment taxes if they are responsible persons under IRC § 6672. In some cases it may be possible to assert an alternate basis of liability, such as a transferee liability, if property of the LLC was transferred to a member.

The general rule that members of an LLC are not personally liable for employment taxes of the LLC does not apply to single-member LLCs unless the LLC has elected to be treated as an association (i.e., a corporation). Single-member LLCs that do not make an election to be treated as associations may be disregarded under Treas. Reg. § 301.7701-3(b)(1). All income of the LLC should be reported on the individual’s return, and the individual is treated as the employer for the purposes of liability for any employment taxes of the LLC.

If a member of an LLC has a tax liability, the Service may levy and sell the taxpayer’s interest in the LLC. In some situations, the LLC shares may have little or no market value. In such cases, the Service must be careful that it does not make an uneconomical levy. IRC § 6331(f).

The taxpayer’s ownership interest in a corporation is subject to levy. Often, but not always, that interest is evidenced by stock certificates. If the interest is represented by certificates, the Service obtains the certificates for administrative sale.

Interests in mutual funds are also subject to levy. Most mutual fund shares are not represented by certificates. Record of ownership of these shares is maintained by electronic or book-entry systems The taxpayer has the right to redeem the shares for cash. The IRS requires the levy source to redeem the taxpayer’s interest and remit the funds to the IRS. Kane v. Capital Guardian Trust Co., 145 F.3d 1218 (10th Cir. 1998).

IRC § 6331(f) prohibits uneconomical levies. For shares of publicly traded securities, the Service will be able to ascertain the fair market value of the shares easily. For securities that are not publicly traded, it will be more difficult to determine the fair market value, and the possibility of an uneconomical levy increases.

A bona fide trust arises if a settlor transfers title and possession of property to a trustee for the benefit of one or more beneficiaries. The trust may be established during the lifetime of the settlor (inter vivos) or by will (testamentary trust). The property to which the trustee has legal title is referred to as either the trust res or corpus.

The extent, if any, to which a levy may be made on the corpus of the trust or on trust income to satisfy the tax liability of the trustee depends on the nature of the trust instrument and the relationship between the trust and the taxpayer. Because a trustee holds bare legal title for the benefit of others, neither the corpus nor income therefrom may generally be levied upon to satisfy the trustee’s individual tax liabilities. The exception is if the trustee-taxpayer is a beneficiary, which would permit a levy and seizure to be made of his/her property or rights to property in the trust, as would be the case if any other beneficiary was indebted to the United States for delinquent taxes.

If the settlor establishes a trust after the assessment of taxes against him/her, the tax liens, having attached to the property before the conveyance of legal title to the trustee, are not diminished or destroyed. United States v. Bess, 357 U.S. 51 (1958). A levy may be made upon the corpus of the trust.

A levy may be served upon the trustee to seize the taxpayer’s right to distribution if the taxpayer has a right to a distribution of trust corpus and this right is not subject to the discretion of the trustee. The same is true for distribution of income from trust property. A levy served upon a trustee for taxes owing by a beneficiary reaches not only payments then due but all subsequent payments that will become due, when the payments become due, if the taxpayer-beneficiary has an unqualified fixed right to receive the periodic payments at the time of service of levy. IRC § 6331(b);Rev. Rul. 55-210, 1955-1, C.B. 544.

Spendthrift trusts limit or restrain the alienation of trust distributions. Those limitations or restrictions do not affect the government’s right to levy on the taxpayer’s property interest in such trust, regardless of whether the prohibition on alienation is embodied in the trust instrument or created by state exemption statutes. United States v. Rye , 550 F.2d 682 (1st Cir. 1977).

Family trusts are particularly susceptible to abuse, and the government should scrutinize them carefully and consider using nominee liens and levies to reach the trust assets. See, e.g., Joan Whitesel Family Estate v. United States, 84-2 USTC 9890 (S.D. Ohio 1984).

Certain obligations of the United States, such as Treasury bills, notes, bonds, and savings bonds, as well as obligations of state and local governmental bodies, are property or rights to property to which federal tax liens attach, United States v. Ridley, 127 F. Supp. 3 (N.D. Ga. 1954), and may be levied on to collect the holder’s delinquent taxes. Treasury bills, notes, and bonds are held electronically; they are not paper securities like some savings bonds. After serving a notice of levy, the Service may choose to either sell the taxpayer’s interest or wait until the bill, note, or bond matures and obtain the money.

Federal law, rather than state law, controls the rights and duties of the United States on commercial paper issued by it, as well as all other obligations of the government. Clearfield Trust Co. v. United States, 318 U.S. 363 (1943). Therefore, determining the nature and extent of the taxpayer’s interest in a United States security will require examination of the law and regulations governing the specific security.

This is a complex field of law because it involves retained percentages on construction contracts, a defaulting contractor or subcontractor, substantial performance, setoff, public and private improvements, performance bonds, laborers and materialsmen bonds, competing sureties, sureties subrogated to the rights of laborers and materials men, mechanics liens, the doctrine of relation back, the no debt or no property theory, state property laws, and relative priorities under federal law. The variable elements make even a very general discussion here unproductive.

The revenue officer should remain mindful of several matters, however.

There are many other forms of intangible personal property (e.g., postal savings accounts, money orders, mortgage indebtedness, patents, royalties, copyrights, rental income) that may be levied upon to collect delinquent taxes. There are three essentials to bear in mind when contemplating levying upon intangibles:

Tangible personal property has been discussed only briefly in this section because by its nature it is easily identifiable and should present the revenue officer few difficulties.

The revenue officer must also be mindful of the government’s right to levy upon a taxpayer's property or rights to property, subject to a real property mortgage, chattel mortgage, pledge, conditional sales contract, bailment, etc. Further, although property subject to a lien prior to the federal tax lien may be seized and sold, practical considerations may dictate against the administrative collection method of levying and in favor of a suit to foreclose the tax lien.