5.17.3  Levy and Sale (Cont. 1) 
Sale -- Authority 
Certificate of Sale -- Deed of Property  (01-07-2011)
Delivery of Possession

  1. A certificate of sale is issued upon payment of the purchase price and, at that time, possession of personal property must be delivered to the successful bidder. Delivery should not be made if any deferred payments have not been made.


    Possession of personal property may remain in the government as security for the purchase price, but the cost of caring for the property and the risk of loss are borne by the purchaser. Treas. Reg. § 301.6335-1(c)(8).

  2. The PALS should not attempt to interfere if other parties assert a right to the property and attempt to gain possession from the buyer. However, if a third party alleges a wrongful seizure, the third party should be advised that under IRC § 6343 that party has nine months from the date of the levy to file an administrative request for return of wrongfully levied property and under IRC § 7426 has nine months to bring a wrongful levy action (unless an administrative claim has been made, in which case the period is extended the shorter of 12 months from the date the request was filed or six months from the date the Service disallowed the request.)

  3. Whether a purchaser of real property is entitled to possession following the sale or at the time he/she obtains a deed from the Area Director after the redemption period depends on state law applicable to a purchaser at a levy of execution sale.


    In addition, whether the purchaser is entitled to any rents from the property before the expiration of the redemption period is also a question of state law. Area Counsel should be consulted regarding who has a right of possession of real property from the date of sale to the expiration of the statutory period of redemption.  (01-07-2011)
United States as Purchaser

  1. If no one offers the minimum bid price at the sale and the Service has determined that the purchase of the property would be in the best interest of the United States, the property will be declared sold to the United States at the minimum bid price. IRC § 6335(e)(1)(C).

  2. A certificate of sale or deed of conveyance is given to the United States in the same manner as if another party had been the successful bidder, and the certificate, or deed, has the same force and effect as to the validity of the sale and the property interest transferred or conveyed. IRC § 6338(e).

  3. The deed to real property declared purchased by the United States at such sale is to be executed by the Secretary or his delegate and duly recorded in the proper registry of deeds.  (01-07-2011)
Junior and Senior Lienors

  1. IRC § 6339(c) provides that a Certificate of Sale of personalty or a deed to real property discharges the property from all liens over which the tax lien had priority. Liens senior to the federal tax lien, however, are not extinguished by a sale even when the United States is declared purchaser of the property. Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983), although not a federal tax case, sets the constitutional due process standards for notice by publication. In Mennonite, the U.S. Supreme Court held that notice by publication of a county tax sale was inadequate notice to a senior lienor of record where Indiana state law provided that the tax sale extinguished all liens on the property. In Verba v. Ohio Casualty Ins. Co., 851 F.2d 811 (6th Cir. 1988), the court applied Mennonite to the Service's notice by publication of its administrative tax sale and held that such notice violated the due process rights of a lienor whose junior lien was extinguished under sale. The Service has procedures in place to provide notice to all junior lienholders and interests of record. See IRM, Delivery of Notice of Sale.

  2. A junior lien attaching to personal property is extinguished as of the date such personalty is sold, not necessarily the date a certificate of sale is actually given to the buyer. A junior lien on real property is extinguished after the expiration of the 180-day statutory period of redemption.

  3. The successful bidder takes the property or rights to property subject to all senior liens and encumbrances. Senior liens and encumbrances are not extinguished by a sale even where the United States is declared the purchaser of the property.  (01-07-2011)
Application of Proceeds

  1. 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).


    The taxpayer does not have the right to direct the application of the sale proceeds as the payment was made involuntarily. O’Dell v. United States, 326 F.2d 451 (10th Cir. 1964).

  2. 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).  (01-07-2011)
Expenses of Sale

  1. The expenses of levy and sale include expenses or liabilities incurred to protect and preserve property during the period following service of a levy (insurance, police or private guards, custodial or maintenance help, rent or storage, utilities, trucking, etc.) as well as actual expenses incurred in connection with the sale (advertising, etc.). Treas. Reg. § 301.6341-1. If both real and personal property or several tracts of real property are sold in the aggregate, the IRS must properly allocate the expenses to the real property or to each tract.

  2. Often, a landlord may demand that the government pay rent for the use and occupancy of a building, leased by the taxpayer, which had been padlocked by the IRS until the sale of the seized taxpayer-tenant’s property located within the building. In one case, the United States was found liable for the rental value of the premises that had been padlocked following seizure of the taxpayer’s personal property located on the premises when it prevented the landlord from exercising his state-given right to reenter and take possession, or to commence an action for recovery of possession of the premises without formal demand or reentry, after the lessee became 5 days in arrears in his rent. Smith v. United States, 458 F.2d 1231 (9th Cir. 1972). This decision should not be construed as affecting the basic position that where the taxpayer's assets are seized on leased premises lawfully in the taxpayer’s possession, the government has no obligation to the lessor until the lessor legally becomes entitled to possession, absent any contractual arrangement between the IRS and the lessor. Area Counsel should be consulted if questions arise concerning the payment of rent.

  3. Payments for use and occupancy are proper expenses of levy and sale. Therefore, should a surplus result from a levy sale and it can be anticipated that the United States will be sued for the value of use and occupancy which the government denies it owes, the surplus proceeds should be retained until the matter in dispute is resolved.  (01-07-2011)
Tax Liabilities

  1. The amount remaining after payment of expenses and special taxes relating to the property sold is then applied against the tax liability in respect of which the levy was made or the sale of redeemed property was conducted. IRC § 6342(a)(3).

  2. If the government seizes and sells property to enforce several outstanding tax liens, the proceeds must be applied toward satisfaction of the tax liens in the order of their priority

  3. If the United States is declared the purchaser of property, the amount of the minimum bid must be applied toward the tax indebtedness after payment of expenses of sale, notwithstanding the fact that the United States may realize nothing from the property through the subsequent foreclosure of a lien prior to that of the tax lien. Therefore, the minimum bid price should take into consideration this possibility where the property to be seized is subject to liens or encumbrances superior to the tax lien.  (01-07-2011)

  1. The person or persons legally entitled to the surplus sale proceeds (including those from the sale of redeemed property) may be the taxpayer, his/her assignee, mortgagee, creditor or other lienor. However any party other than the taxpayer claiming a right to the surplus proceeds must establish a superior claim over that of the taxpayer. Treas. Reg. § 301.6342-1(b).


    Any interest of a lien holder that is superior to the federal tax lien remains on the property after the sale and accordingly, would not prime a claim to surplus proceeds.

  2. If a party’s claim to surplus proceeds is denied, the claimant may institute an action against the United States for such proceeds. IRC § 7426(a)(2). The taxpayer, of course, can bring a refund action against the government for the surplus.

  3. When the government cannot resolve conflicting claims to the surplus proceeds, the matter should be referred to Area Counsel for an opinion on the relative priorities of the competing claims. If the government remains uncertain as to which claimant is entitled to the surplus proceeds, it may institute an interpleader action making all claimants parties. The court would then determine which claimants are entitled to the surplus proceeds.  (01-07-2011)
Record of Sale

  1. 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, Record 21, Record of Seizure and Sale.

  2. 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.  (01-07-2011)

  1. The following sections define and describe different types of property and forms of property ownership. The discussion is limited to general principles and definitions. Bear in mind that in addressing property issues, it is always important to refer to the applicable state law. For more information regarding property laws in specific states, see the State Law Guides on the My SB/SE Counsel website at http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx.  (01-07-2011)
Real Property

  1. Real property consists of those things that in law are permanent, fixed, and generally immovable except as otherwise modified by state law. Real property consists of land, tenements and hereditaments.


    What may be real property in one state may not be such under another state’s law. Questions that arise should be referred to Area Counsel. The characterization of property as real or personal property may determine (1) whether property belongs to the taxpayer or to a third party; (2) whether the IRS may levy against it; and (3) redemption rights. This characterization will also determine where the Notice of Federal Tax Lien is filed.

  2. Land includes the earth in its natural condition (surface, soil, minerals, trees, water, etc.) as well as those things annexed thereto in the form of permanent improvements, such as buildings, fences, and other types of fixtures. Air space above the land, at least so much as can reasonably be used, is also considered part of land. Air space is very important in large cities where, due to congestion, buildings are erected on air rights. When the government establishes a minimum bid on real property to be sold at a sale, it should consider the value of air rights if particular circumstances indicate potential development of the air rights.

  3. The term "tenements" refers to land held by freehold (an interest in real property that is or can become possessory), an estate or holding of land.

  4. The term "hereditaments" refers to that which may be inherited, whether corporeal (such as land and fixtures) or incorporeal (such as rents and easements). The term embraces real property or personal property such as a right to a product or benefit of the land, or a right over the land.

  5. An improvement is an addition to real estate through the expenditure of money or labor to render real property useful for another purpose or more useful for the same purpose. If the owner makes the improvements, e.g., erection of a building or an addition thereto, etc., there is little doubt that they become part of the real property to which they become affixed and as such, are property of the owner of the land.

  6. The owner of the land acquires ownership of improvements erected on the land by another, absent a contract to the contrary. A building erected by a lessee for trade purposes may be a trade fixture removable by the lessee as his/her property unless the leasehold agreement provides otherwise. Whether improvements made by a lessee become property of the owner upon expiration of the lease or remain property of the lessee is a question of intent to be derived from the terms of the lease-contract. However, it is imperative to know the law of the state controlling ownership of an improvement to real property.

  7. A fixture is a chattel so annexed to realty that it may be regarded as legally a part of it. Some authorities regard articles that, though annexed to the land, are removable by the tenant as personalty, but the majority view is that they are fixtures and constitute a part of the land until the tenant actually removes them. The tests generally applied in determining whether a chattel has become a part of the realty are:

    1. whether there was an annexation (real or constructive) of the chattel to the realty,

    2. whether the chattel was so attached that its removal would leave an unfinished gap in the realty,

    3. whether the chattel was specifically fitted or adaptable to the use or purposes of the realty to which it is connected, and

    4. most importantly, whether the party making the annexation intended the chattel to become a permanent part of the realty.

  8. The fact that a chattel has become a part of the realty does not preclude its subsequent severance from the realty, thus again becoming personal property (e.g., removing a boiler to install a new one). The same is true if trees are cut down or a house is severed from the realty to be moved to another location. Though an article is not actually detached or removed, it may resume or continue its chattel character through constructive severance by an express or implied agreement of the landowner, as when the landowner sells it as a chattel apart from the land, or mortgages, or conveys the land with a reservation of the article. To be valid, however, the landowner’s agreement must be by a writing that complies with the statute of frauds since it involves a transfer of real property.

  9. Trade fixtures, articles annexed by the tenant for trade purposes, are usually removable by the tenant even if the landlord contests the removal. It is of public utility that a tenant be able to improve the property for the purpose of his/her trade, without forfeiting his/her improvements.

  10. "Chattel Real" is used to denote interests in or arising out of real property, of a fixed and determinate duration, such as a lease for 10 years or 1,000 years. A lease for one’s lifetime, however, is not a chattel real as the duration of the lessee’s life cannot be determined.  (01-07-2011)
Forms of Ownership

  1. 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.  (01-07-2011)
Joint Tenancy

  1. A joint tenancy may be created by devise or conveyance through a sale or by a gift. The interests of the tenants are identical, must be created by the same instrument, commence at the same time, and be held by the same undivided possession.

  2. The joint tenants also enjoy a right of survivorship in the property (relating back to the date of the original conveyance): One tenant’s interest cannot be inherited, but terminates upon his death.

  3. Unlike a tenancy by the entirety (discussed below), the tenants may, but need not, be spouses. Also, the tenancy may be composed of any number of persons. Historically, the most important difference between the two estates has been that a joint tenant’s interest in the jointly held real and personal property is severable and subject to sale during the tenant’s lifetime.

  4. State laws on joint tenancy vary. Many states require definite language to be employed in the instrument of conveyance to establish a joint tenancy, absent which a tenancy in common is created. A few states have virtually abolished an estate in joint tenancy, but most states recognize a joint tenancy in both real and personal property.

  5. Only the taxpayer’s property right in the joint estate can be sold at a sale made pursuant to levy. Although the joint tenants may be considered to constitute one person among themselves, each is entitled to share equally in the rents, income and profits from the estate. A joint tenant does not have a distinct interest in the whole estate unless the interest becomes separate by some act, in which case, the joint tenancy ceases. The tenants would then hold interests as tenants in common.

  6. A conveyance of one tenant’s interest, partition, or a sale under a levy of execution may sever a joint tenancy. The severance must occur during the lifetime of the tenants, and when it does, the party who succeeds to such interest holds as a tenant in common with the other tenant or tenants, notwithstanding a continued unity of possession. Another distinction between a tenancy by the entirety and a joint tenancy is that in the latter, the right of survivorship is destroyed by an act of severance, voluntary or involuntary, of one of the tenants during his or her lifetime.

  7. Therefore, a levy may be made upon a tenant's interest in a joint tenancy, and upon sale of the tenant's interest, the estate ceases to exist and the right of survivorship in the tenants is terminated. If there are three joint tenants, a sale of one tenant's interest does not destroy the right of survivorship to two-thirds of the property between the other two tenants, who together hold the estate as tenants in common with the purchaser at the sale. It is this termination of the right of survivorship which results in higher sale proceeds than in the case of the sale of a tenant's interest in an estate by the entirety where the buyer must assume the risk of one tenant surviving the taxpayer-spouse.

  8. As in the case of entirety property, if the tax liability is outstanding against all the joint tenants, the whole property may be levied upon, seized and sold to enforce collection. If one of two tenants dies and tax assessments are outstanding against the surviving tenant, the entire property may be levied upon. In most cases, should the taxpayer-tenant predecease the surviving tenant, the tax lien is extinguished and does not attach to the estate in the survivor. However, in some states (e.g., Wisconsin and Connecticut) the federal tax lien will survive the death of the taxpayer-joint tenant.  (01-07-2011)
Tenancy by Entirety

  1. A tenancy by the entirety is very similar to a joint tenancy except it can exist only between spouses. In the majority of the jurisdictions recognizing tenancy by the entirety (often called full bar states), creditors cannot attach entireties property to satisfy the debts of only one spouse. The other entireties jurisdictions (referred to as partial bar states) permit creditors to attach one spouse’s interest in entireties property for the debts of only that spouse, subject to the rights of the non-liable spouse. However, state law on attachment of liens against entireties property is not effective against the federal tax lien.

  2. In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court held that a federal tax lien attached to a taxpayer's right to property in a tenancy by the entirety for the tax liability of only one spouse, even though local law (Michigan’s) insulates such property from the claims of the creditors of only one spouse. The Court reasoned that, under Michigan law, a tenant by the entirety has numerous rights, including the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the other tenant's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the other tenant's consent, and the right to block the other tenant from selling or encumbering the property unilaterally. These state law-defined rights, the Court found, are sufficient to constitute a property or rights to property for federal tax purposes. Thus, a taxpayer's tenancy by entirety interest is subject to levy and sale.

  3. To create a tenancy by the entirety, the spouses must receive the property in a single instrument at the same time during the marriage. A number of states among those recognizing a tenancy by the entirety, permit the estate to exist as to personal as well as real property. At one time an estate by the entirety could only be created by the conveyance of real property to spouses. In some states, divorce severs the tenancy by the entirety, and the spouses become tenants in common.

  4. On certain occasions entirety property may be converted into cash through condemnation proceedings, destruction by fire or a mortgage foreclosure. Generally, even in those states not recognizing an entirety estate in personal property, the proceeds are constructively real property held in the entirety by both spouses, and the general principles set forth above equally apply to the funds in question. If the tenants voluntarily sold the entirety property, treatment of the sale proceeds as being held by the entirety or otherwise is often a question of the intent of the spouses.

  5. It has always been the case in tenancy by the entirety jurisdictions that where there is a joint tax liability, the real or personal property is subject to levy to enforce collection. See, e.g., In re Butcher, 63 B.R. 30, 32 (Bankr. E.D.Tenn. 1986); United States v. Ragsdale, 206 F. Supp. 613 (W.D. Tenn. 1962); Augello v. United States, 93-2 USTC 50,391 (M.D. Pa. 1993). If a tax liability is outstanding against one tenant, upon the death of the liable tenant’s spouse, the federal tax lien attaches to the entire property, United States v. American Nat’l Bank of Jacksonville, 255 F.2d 504 (5th Cir.), cert. denied, 358 U.S. 835 (1958); Theo H. Davies & Co. v. Long & Melone Escrow, 876 F. Supp. 230 (D. Haw. 1995); and the property may be levied on and sold.  (01-07-2011)
Tenancy in Common

  1. An estate in common may exist between two or more persons and may consist of the holding of an estate in land by persons under different titles, but there must be a unity of possession among the tenants. That is, each tenant must have the right to occupy the whole premises in common with the co-tenants. There is no unity of possession and thus, no tenancy in common if each tenant possesses a definite part of the real property to the exclusion of the other tenants. The unities of title, interest and time are not necessary as in a joint tenancy, although one or more of these unities may exist with the unity of possession.

  2. A tenancy in common may generally exist as to both real and personal property. There is no right of survivorship. Upon the death of one tenant, his/her interest in the property passes by his/her will or by state law of descent and distribution. A tenant may seek to partition the property or convey or assign his/her interest to his/her co-tenant. The tenancy in common is terminated upon the occurrence of either event. The estate in common also ceases if all the tenants convey to a third party. But where a tenant conveys his/her interest to one of several co-tenants or to a stranger, the tenancy in common continues to exist. Each co-tenant need not own an undivided equal interest in the entire property to create or preserve a tenancy in common.

  3. A levy may be made upon a co-tenant’s property or right to property in common property. The purchaser at a levy sale holds the property as a tenant with the other tenant or tenants. Since a tenant’s interest in an estate in common is not terminated or extinguished by death, the property may be levied upon and sold subsequent to the tenant-taxpayer’s death to enforce collection of a tax assessed prior to the tenant’s death or to enforce the estate tax lien arising at the date of death of the deceased tenant.


    Although only a tenant’s interest in common property may be administratively levied upon to enforce collection of the tenant’s delinquent taxes, the interest may be foreclosed upon as part of a judicial suit and the entire property sold. United States v. Rodgers, 461 U.S. 677 (1983).


    If the co-tenants are jointly liable, the entire premises may be administratively seized and sold.  (01-07-2011)
Community Property

  1. Community property systems, which have been adopted by nine states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin), are created by state law as an incident of marriage. See, generally, IRM , Community Property Law, and IRM 25.18.4, Collection of Taxes in Community Property States. Because these systems are created by state law, there is a lack of uniformity in the laws of the various community property states. For more information regarding community property laws in specific states, see the State Law Guides on the My SB/SE Counsel website at http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx.

  2. Community property generally includes all property acquired by a married couple, except property acquired after marriage by gift or inheritance. It generally does not include property that was owned by either spouse before the marriage. Thus, the revenue officer attempting to collect by levy may first encounter the problem of determining what constitutes community property and what constitutes separate property. The time and source of funds the spouse uses to acquire the property are important to resolving this issue.

  3. The revenue officer must also consider:

    • the nature of the rents, income, profits, etc. (i.e., are they derived from separate or community property);

    • the commingling of property (e.g., if the property is acquired with both community and separate property or where an account contains both community and separate funds);

    • the nature of income derived from separate property through the efforts of both spouses;

    • the execution of any agreements between the spouses changing the character of separate or community property;

    • the effect of one spouse taking sole title to community property;

    • the liability of community property for the individual debts of either spouse incurred both before and after marriage; and

    • the disposition of community property upon the death of either spouse or upon divorce.

  4. Resolution of the issues above is necessary before levy. Because each of the various community property states has its own laws, the revenue officer, in deciding whether a levy should be made or a suit instituted to foreclose a federal tax lien, should consult Area Counsel whenever a legal opinion is needed.  (01-07-2011)

  1. Most states have abolished dower and curtesy in favor of statutory or elective shares equally available to surviving spouse of either sex as to both real and personal property. The revenue officer should carefully consider the law of wills and intestate descent and distribution of the particular state because these laws vary state to state. Area Counsel should be consulted when necessary.

  2. Under common law, dower is generally a life estate given to a widow in one third of all inheritable real property which her deceased spouse owned during their marriage. The right of the widow/widower vests or becomes property upon the death of the spouse. Marriage does not vest an absolute right to dower, but is an incident thereof, dependent upon the widow/widower surviving his/her spouse. It is not necessary that the decedent acquire an inheritable interest in real property subsequent to his/her marriage to create a dower estate in the spouse, nor need the decedent own such property at death. The decedent must merely own the property at some time during marriage. Because the estate arises out of a marital relationship, the marriage must be legally recognized. The decedent as owner of real property has the right to possession and the rents, income and profits to the exclusion of the spouse.

  3. Although the spouse’s dower estate is a mere expectancy, it generally cannot be destroyed by any other act of the decedent (e.g. a conveyance, or execution sale of lands by judgment-creditor). Nor may the spouse assign, convey or transfer the dower to another party. He/she may, however, release the dower, such as by joining in a conveyance of property with the decedent. The dower expectancy does attach to the decedent's interest in a tenancy in common, but there is no dower in estates by the entirety or joint tenancy. There is no dower in community property. Divorce may or may not terminate the dower interest depending on state law.

  4. A right of dower cannot be levied upon to satisfy the survivor's individual tax liabilities, because the so-called right is a mere expectancy dependent upon surviving his/her spouse. There is no property or right to property in the spouse until the death of his/her spouse, at which time there is a non-transferable chose in action until the dower interest in the decedent's estate is determined and set aside. Likewise, a tax lien against the decedent arising subsequent to the marriage of the parties and after the acquisition of real property by the decedent cannot affect the dower interest in the property, because the dower right generally cannot be impaired or defeated by any act of the decedent. Rev. Rul. 79-399, 1979-2 C.B. 398.  (01-07-2011)

  1. This is a common law estate somewhat similar to dower. It differs from dower in that the married couple must have a child during marriage. Upon the death of the spouse, the survivor has a life estate in all real property. The revenue officer must refer to state law, as in the case of dower, to ascertain the extent to which this estate is recognized today. Moreover, the discussion on levy, divorce, etc. in the dower section above, applies to a curtesy estate.  (01-07-2011)

  1. The term homestead refers to certain land and improvements exempt from the claims of particular creditors against the head of the family. This privilege does not extend to all debts incurred by the head of the family. Where the homestead is merely an exemption provision of state constitutions or legislative enactments, the right of the United States to levy on real property for taxes of the head of the family is unaffected. Herndon v. United States, 501 F.2d 1219 (8th Cir. 1974).

  2. Some states, while recognizing that a homestead is not an estate in land, view it as a special interest in land belonging to both spouses jointly and indivisibly. These states see it as an interest that is only lost by death or abandonment, and that may not be compromised by the other spouse. Other states treat a homestead as a mere expectancy similar to dower that cannot vest in either spouse until one survives the other. Weitzner v. United States, 309 F.2d 45 (5th Cir. 1962), cert. denied, 372 U.S. 913. (1963); United States v. Benn, 73-1 USTC 9415 (S.D. Fla. 1973).

  3. The revenue officer must refer to state law to determine whether a homestead is merely an exemption from the claims of creditors or a vested property interest. The revenue officer must also consider:

    • the conditions precedent to the establishment of a homestead right,

    • the real as well as personal property in which a homestead may be created,

    • the person or persons in whose favor a right of homestead is created,

    • events that may terminate a homestead claim, and

    • other factors relating to the nature and incidents of a homestead.  (01-07-2011)
Future Interests

  1. Future interests, interests in land in which possession will or may occur in the future, is one of the most complex areas of law. Briefly, if the future interest represents property or a right to property of the taxpayer, it may be levied upon and sold. If the interest is contingent or a mere expectancy, there is no property interest to which the levy can attach. The revenue officer should consult Area Counsel whenever of a future interest arises.  (01-07-2011)
Personal Property

  1. Personal property is any tangible or intangible thing that is subject to ownership and not real property. Tangible property is that which may be felt or touched and is either real or personal property. Intangible property is that which cannot be touched or perceived and usually applies only to personal property. For example, the paper on which a promissory note is written is tangible personal property, while the right to payment that such note evidences is intangible personal property. Of course, there are areas in which it is difficult to distinguish between real and personal property, and Area Counsel should be consulted if a determination as to the nature of property is needed.

  2. Personal property can be owned by more than one person. Some states permit a married couple to hold personalty as tenants by the entirety with the same incidents of ownership as in the case of real property held by the entirety. Most states recognize either or both joint and common estates in personalty.

  3. The following sections discuss, in general terms, some types of personal property. As with all property issues, always refer to specific applicable state law.  (01-07-2011)

  1. 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).

  2. 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).  (01-07-2011)

  1. "Alimony" is an allowance paid by one spouse to the other 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.

  2. 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).  (01-07-2011)

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

  2. 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 taxpayer's property interest. 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.

  3. 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).  (01-07-2011)
Bank Accounts

  1. 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.

  2. 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).

  3. 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 (6th Cir. 1988).

  4. 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.

    1. 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.

    2. 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.

  5. 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.


    A superpriority is not a defense to levy, Virgin Islands Bureau of Internal Revenue v. Chase Manhattan Bank, 312 F.3d 131, 138 (3d Cir. 2002), and a superpriority does not extend the period for filing a timely wrongful levy action. Thus, if a bank has not resolved the levy before the expiration of the period for filing a wrongful levy suit, it may be in a predicament: the bank’s IRC § 6323(b)(10) superpriority is not a defense to a levy and the bank has no wrongful levy claim that can be asserted in court.

  6. 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).  (01-07-2011)
Joint Account

  1. Generally, a bank account may be held jointly by two or more persons, although statutory or other particular language must be used (e.g., A and B, either or survivor) to effect this type of ownership. Moreover, the unities of interest, time, title and possession must be present. The property interest of a taxpayer in a joint account may be levied upon.

  2. The Supreme Court has defined a delinquent taxpayer’s interest in a joint bank account to include all of the funds in the joint account, if the taxpayer has an unqualified right to withdraw the funds under his contract with the bank and under state law. United States v. National Bank of Commerce, 472 U.S. 713 (1985). In National Bank of Commerce, the Court allowed the IRS to levy upon a joint bank account even though the IRS did not know whether the delinquent taxpayer, one of the joint depositors, actually had any money in the account at all. The Court found that the taxpayer’s unrestricted state-law "right to withdraw" constituted the "property" or "rights to property" "belonging to" the taxpayer. The taxpayer had an unrestricted "right to withdraw" under state law, subject to later claims by his co-depositors; the government therefore had the right to levy, subject to a later claim by a co-depositor.

  3. If local law or the contract between the bank and the joint tenants does not grant an unqualified right of withdrawal, the joint account may still be levied upon. In those cases, the joint account is subject to levy only to the extent of the delinquent taxpayer’s interest in it, which will be determined from the facts of each case.

  4. Because minors in many situations cannot open bank accounts in their own names, the bank accounts list a parent's name, even when the children are the owners of the funds deposited. A levy on such an account to collect a parent's tax liability would be a wrongful levy, unless it can be shown that a federal tax lien encumbered the funds before they were deposited in the child's account.  (01-07-2011)
Trusts or Special Account

  1. A bank account of the taxpayer may be designated as a special account; but absent evidence that a trust was created, a bank must honor a levy served on the special account.

  2. A savings account may be in the name of the taxpayer in trust for another party. This type of account is commonly referred to as a Totten trust. A trust is nothing more than another means of disposing of property by the party establishing the trust (called a settlor). Usually, the deposit in a Totten trust is held to be that of the settlor-trustee during the period he/she maintains control over the account with the freedom to make deposits and withdrawals at will. However, the Totten trust becomes a true trust when title of the beneficiary is no longer subject to revocation; for example, upon the death of the depositor without having revoked the trust. Thus, whether a levy will reach a Totten trust depends upon who the taxpayer is (depositor or beneficiary) and whether or not an irrevocable trust was established. It has been held that a levy served upon a bank to reach an amount in a Totten trust was ineffective where the taxpayer-beneficiary predeceased the party establishing the trust because the tentative trust was terminated by the taxpayer’s failure to survive the depositor.

  3. Trying to prove whether a bank deposit is a true trust or not will present difficulties that are not limited to Totten trusts. It is important to determine who owns the trust account before serving a notice of levy upon the bank.  (01-07-2011)
Outstanding and Deposited Checks

  1. A bank, by custom or agreement, may allow the taxpayer-depositor to draw against checks before they clear. In such a situation, the bank is required to treat the amounts in clearance as funds in the taxpayer-depositor’s account subject to levy. Rev. Rul. 79-38, 1979-1 C.B. 406.

  2. A bank is required to pay over the funds actually on hand at the time the notice of levy is served, not the amount indicated by the bank in its acknowledgment of service. Rev. Rul. 73-310, 1973-2 C.B. 408.  (01-07-2011)
Branch Banks

  1. If a levy is served on a branch of a bank and a bank employee states that the branch has no property of the taxpayer because the taxpayer banks at another branch, the revenue officer must determine whether the taxpayer has the right to withdraw funds from the levied upon branch. As with any other levy source, if a branch bank is in possession of property or rights to property of the taxpayer or is obligated with respect to the same, it has to honor the levy.

  2. If, by law and pursuant to the terms of the contract with the bank, the levied upon branch is not in possession of or obligated with respect property or rights to property of the taxpayer, the revenue officer should immediately levy at the appropriate branch. It may be necessary to serve a summons to obtain that information.

  3. There may be cases in which a branch served with a levy will refuse to honor the levy alleging that levies on the bank should be served on a central location. However, a bank's preference that levies be mailed to a central location does not render ineffective a levy served on a branch in possession of or obligated with respect property or rights to property of the taxpayer.  (01-07-2011)
Other Negotiable Paper

  1. A levy on a delinquent taxpayer’s funds represented by other negotiable paper such as drafts, certificates of deposit and warehouse receipts can be made only by presenting and surrendering the negotiable paper to the maker. Rev. Rul. 75-355, 1975-2 C.B. 478. The service of a Notice of Levy (Form 668-A) is insufficient. The negotiable paper must also actually be seized and then presented and surrendered to the maker. The revenue officer should consider a suit to foreclose the federal tax lien if actual seizure is not practical.  (01-07-2011)
Chose in Action

  1. 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.

  2. 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.


    Levies served before a judgment or settlement seize obligations that are fixed and determinable as of the date of the levy. Treas. Reg. § 301.6331-1(a)(1).

  3. 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.  (01-07-2011)
Condemnation Award

  1. 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.

  2. A notice of levy should be served on the appropriate official of the governmental unit charged by the court to pay the award.  (01-07-2011)
Credit/Debit Card Processing Contracts

  1. Under credit/debit card processing contracts, a processing company is generally obligated to pay the merchant/taxpayer for all credit card sales made. This obligation arises at the time of the sale, not later when the information is forwarded to the company or even later after daily settlement has occurred. While payments are not made to the merchant/taxpayer instantaneously, the obligation to pay is fixed and determinable, and the funds are owed to the merchant/taxpayer at least daily.

  2. Whenever a processing company is served with a levy, it is required to surrender any amounts owed the taxpayer for credit card sales at the time the levy is served. The processing company generally holds funds up to 24 hours and then electronically transmits the aggregate amount of the transactions that occurred during the 24-hour period to the merchant.

  3. Under credit/debit card processing contracts, processing companies also typically maintain funds in separate reserve or "charge back" accounts that are used to setoff any future "charge back" amounts against the merchant/taxpayer. Although the funds held in a reserve account belong to the merchant/taxpayer, under the typical contract, they are not available to the merchant/taxpayer until a specified amount of time after the contract is terminated. Where a processing company maintains amounts in a reserve or "charge back" account, the levy will attach to all funds held in that type of account. However, the processing company will not have to turn over those funds to the Service until the time period specified in the contract has expired.

  4. The paragraphs above notwithstanding, the processing company may have priority over the Service with respect to the funds in the reserve account if

    1. the processing company has executed a setoff before receiving notice of levy,

    2. the processing company has a security interest earlier in time than the Service's notice of federal tax lien under IRC § 6323(a), or

    3. the processor has a superpriority under IRC § 6323(b)(10). See IRM, above.  (01-07-2011)

  1. 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.

  2. 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.  (01-07-2011)

  1. 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.

  2. 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.  (01-07-2011)

  1. 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.  (01-07-2011)
Health Savings Accounts

  1. The Service may levy on a taxpayer's Health Saving Account (HSA) established under IRC § 223. An HSA is a trust created exclusively for the purpose of paying the qualifying medical expenses of the account beneficiary, the individual who establishes the HSA. IRC § 223(c)(3) and (d)(1). Banks, credit unions, insurance companies, and other financial institutions serve as trustees or custodians for HSAs. IRC § 223(d)(1)(B).

  2. The account beneficiary (taxpayer) that establishes the HSA owns and controls the funds in his or her HSA. The taxpayer makes decisions regarding which qualified medical expenses are paid from the account and how the money in the account is invested. The taxpayer may receive a distribution at any time. Notice 2004-2, Q & A-24, 2004-1 C.B. 269.

  3. The HSA trustee or account custodian is not required to determine whether the distributions are used for qualified expenses. The taxpayer’s interest in the HSA is nonforfeitable under IRC § 223(d)(1)(E). In light of the foregoing, the taxpayer’s interest in an HSA constitutes "property" or "rights to property" that is subject to levy under IRC § 6331.

  4. A distribution from an HSA for any purpose other than qualified medical expenses is includible in the account beneficiary's gross income and subject to an additional ten percent tax under IRC § 223(f)(4). However, the ten percent additional tax does not apply if, at the time of the distribution, the account beneficiary was dead, had attained age 65, or was disabled. A levy on an HSA is not a distribution to pay qualified medical expenses. Therefore, unless one of the exceptions apply, a taxpayer would be liable for the additional ten percent tax on the amount of the levy.  (01-07-2011)

  1. IRC § 6332(b) permits the government to levy against the cash loan value of a life insurance or endowment contract without resort to a foreclosure suit. See IRM, Notice of Levy in Special Cases, Insurance, for administrative procedures. A levy on an insuring organization with respect to a policy issued by such organization constitutes:

    1. a demand by the Secretary or his delegate for payment of the cash loan value (with certain adjustments), and

    2. the exercise of the right of the taxpayer to the advance of such amount.


    A lien foreclosure action may be used to collect the cash surrender value of an insurance policy. However, a suit to foreclose the tax lien on life insurance policy is disadvantageous to both the government and the taxpayer. Such a suit is a cumbersome method of collection. The consequences are more serious for the taxpayer as the suit, if successful, cancels the policy and completely eliminates the insurance coverage.

  2. 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.  (01-07-2011)
Satisfaction of Levy

  1. The insurance company must pay over the amount the taxpayer could have had advanced to him/her 90 days after service of notice of levy increased by the amount of any policy loans made to the taxpayer on or after the date the insurance company had actual notice or knowledge of the existence of the lien and before the satisfaction of the levy. However, the insurer may, at any time, make automatic premium loans which keep the policy in force if such loans are made under an agreement entered into before the insurer had such notice or knowledge.

  2. If the policy does not contain an automatic premium loan provision, but does provide that the policy is automatically converted to paid up term insurance with no cash value upon default in the premium payment, the amount generally required to be paid over is the cash loan value as of the date of the service of notice of levy. Treas. Reg. § 301.6332-2(c). However, the two circuits that have addressed the issue have held that if the automatic conversion provision is in effect due to a default in payment of premiums, there is no cash loan value as of 90 days after service of notice of levy and nothing is required to be paid over. See United States v. Equitable Life Assurance Co. of the United States, 78-2 USTC 9749 (2d Cir. 1978); United States v. Prudential Insurance Co. of America, 461 F.2d 208 (5th Cir. 1972).

  3. The provisions governing the amount the insurance company must pay over recognize the superpriority status accorded certain insurance contracts by IRC § 6323(b)(9). That section further provides that once the levy is satisfied, the insurance company is to have priority for any subsequent policy loans until the Secretary or his delegate delivers to the insurer another notification executed after the date of satisfaction of the prior levy, that a tax lien exists against the property or rights to property of the taxpayer. Notification may be made by any means (e.g., a letter, etc.), but delivery will be deemed to be effective only from the time of actual receipt by the insurance company. A notice of levy form should generally not be used to put the insurance company on notice of the tax lien, because the use of this form will restrict the notice to 90 days.

  4. If the insurance company honors the levy, it is discharged from any obligation or liability to any beneficiary under the policy or to the taxpayer-insured with respect to the payment made. IRC § 6332(d).  (01-07-2011)
Taxpayer is Beneficiary

  1. If the beneficiary is the delinquent taxpayer, a levy may be served upon the insurer to reach the proceeds payable to the beneficiary-taxpayer. State law determines whether a beneficiary-taxpayer has a vested property interest upon which a levy may be made. Payment of premiums by a beneficiary alone does not vest title to the policy in the beneficiary, particularly if the insured retains the right to change the beneficiary and to withdraw the cash surrender value. United States v. Fried, 309 F.2d 851 (2d Cir. 1962); United States v. McWilliams, 234 F. Supp. 117 (D.C. Conn. 1964).  (01-07-2011)
Other Benefits

  1. Numerous types of insurance policies exist to cover various types of losses, such as destruction, loss or theft of property, or injury to the person, or loss of income, as well as marine insurance, title insurance, and accident or health insurance, etc. A policy might be of the type where the insurer agrees to guarantee or indemnify the insured for loss upon the occurrence of a certain event (e.g., embezzlement of funds by employee, loss of building by fire, destruction of automobile following a collision, etc.). If the taxpayer has property or rights to property under any such insurance coverage, a levy may be utilized to collect outstanding taxes.  (01-07-2011)

  1. 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).  (01-07-2011)

  1. 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.

  2. 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.  (01-07-2011)

  1. 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.).

  2. 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 (3d. Cir. 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).

  3. 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 (3d 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.

  4. 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.

  5. 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.

  6. 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).  (01-07-2011)

  1. 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.  (01-07-2011)

  1. 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

  2. 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).  (01-07-2011)
Partnership Interest

  1. 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.


    If a partner receives periodic payments as compensation for services rendered to the partnership, these payments constitute salary or wages and are subject to a continuous levy for the partner's individual tax liability. See IRM, Salary, below.

  2. 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).

  3. 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.

  4. See IRM, Shares of a Limited Liability Company, below, for information regarding LLCs.  (01-07-2011)
Pension and Retirement Benefits

  1. 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 Federal Retirement Thrift Investment Board has claimed that TSP accounts are exempt from levy. However, the Department of Justice, Office of Legal Counsel, issued a memorandum to the Chief Counsel concluding that TSP accounts are subject to federal tax levies. Area Counsel should be consulted if you have any questions regarding levies on TSP accounts.

  2. 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).

  3. 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).

  4. 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.


    As a matter of administrative policy, the IRS has put in place approval requirements and extensive procedures for levying on the corpus of (as opposed to the income from) retirement accounts. See IRM and Delegation Order 5-3.

  5. 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.

  6. 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.

  7. 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.

  8. In levying on Social Security payments, the Service has the option of serving either a levy under IRC § 6331(a) or a continuous levy under IRC § 6331(h). Under section 6331(h), the Service is authorized to continuously levy on certain federal payments to reach 15 percent of the payments. This includes Social Security payments. A levy under section 6331(a) is not continuous like a levy under section 6331(h) or (e), but is continuous to the extent that the levy is on rights that are fixed and determinable. Therefore, a single levy reaches a future stream of Social Security payments. If the section 6331(a) option is chosen, the Service is not subject to the 15% limitation.


    The paragraphs above discuss applicable law with respect to levying on pension and retirement benefits. Because levying upon these types of benefits, including Social Security payments, is a sensitive area, ensure that current, applicable IRM provisions specifically addressing the particular type of benefit to be levied upon are followed. For example, see IRM, Retirement Income, IRM, Social Security, and IRM, Funds in Pension or Retirement Plans.  (01-07-2011)

  1. The accrued salary, wages, fees, bonuses or commissions of an employee-taxpayer are subject to levy. "Salary and wages" used herein includes compensation for services paid in the form of fees, bonuses, commissions, or similar items. Treas. Reg. § 301.6331-1(b). A levy on salary or wages attaches to:

    1. salary or wages earned but not yet paid at the time of the levy,

    2. advances on salary or wages made after the date of the levy, and

    3. salary or wages earned and becoming payable after the date of the levy.

  2. A levy on salary or wages is continuous from the date of the levy until the tax liability for which the levy was made is satisfied or becomes unenforceable. IRC § 6331(e)(1).

  3. Periodic payments made on a recurring basis to a partner as compensation for services rendered to the partnership will constitute "salary or wages" subject to a continuous levy. See United States v. Moskowitz, Passman & Edelman, 603 F.3d 162 (2d Cir. 2010) (court rejects taxpayer's argument that payments were not salary or wages because a partner only realizes income on the last day of the partnership's taxable year).

  4. State laws limiting the amount of wages which may be garnished by judgment creditors must yield to the provisions of the Internal Revenue Code permitting the Secretary or his delegate to levy. In addition, 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.  (01-07-2011)
Shares of a Limited Liability Company (LLC)

  1. 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. See IRM 5.1.21, Collecting from Limited Liability Companies, for more information regarding LLCs; and IRM, Notice of Levy, and the provisions that follow for more information regarding levies involving LLCs.

  2. 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 C.B. 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.

  3. Final regulations were issued on August 16, 2007, which provide that single-owner eligible entities that are disregarded as entities separate from their owners for Federal tax purposes are treated as separate entities for employment tax purposes. See Treas. Reg. § 301.7701-2(c)(2)(iv) and (v). These entities continue to be treated as disregarded entities for income tax purposes. The regulations apply to single-owner LLCs that have not elected to be treated as an association taxed as a corporation, and apply to wages paid on or after January 1, 2009, for employment taxes, and to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008, for excise taxes. See Treas. Reg. § 301.7701-2(e)(5) and (6).

  4. 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).

  5. Another alternative collection method for LLCs is to charge the member's interest. See IRM, Charging the Member's Interest, for more information.  (01-07-2011)
Shares in Corporations and Mutual Funds

  1. 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.


    If a revenue officer cannot obtain the taxpayer’s stock certificates from a stockbroker after serving a notice of levy and the taxpayer refuses to direct the stockbroker to sell the certificates, consideration should be given to requesting that a suit be filed to foreclose the federal tax lien on the taxpayer’s interest, as well as filing suit for failure to honor the levy. To prevent the taxpayer from selling the shares during the pendency of a lien foreclosure suit, the government would seek an injunction from the court directing the taxpayer to retain the shares or deposit them with the clerk of the court.


    The taxpayer’s ownership interest in a corporation is also administratively sold if the interest is not evidenced by certificates.

  2. 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).

  3. 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.  (01-07-2011)
Stock Options

  1. Sometimes persons affiliated with a company, typically key employees, are granted stock options. In the case of non-qualified stock option plans, the terms of the plan are dictated by the particular contractual terms of the plan. The statutory requirements of federal law apply in cases of ERISA-qualified incentive stock option plans. Where the taxpayer has a vested right to the stock option, the taxpayer's interest in the stock option is subject to levy.

  2. Typically, non-qualified stock options contain restrictions on transferability. ERISA-qualified incentive stock option plans are subject to the restrictions on transferability contained in IRC § 422. Any restrictions on transfer of stock options applicable to the taxpayer would not apply to the Service: IRC § 6334(a) enumerates certain types of property that are exempt from levy under IRC § 6331, and neither non-qualified options or ERISA-qualified options are listed. Therefore, the Service can enforce a levy by selling such options to a third party.  (01-07-2011)

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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).

  6. 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).  (01-07-2011)
United States Obligations

  1. 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.

  2. 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.  (01-07-2011)
Withheld Amounts--Construction Contracts

  1. 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.

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

    • First, a notice of levy served upon the taxpayer’s debtor will reduce the taxpayer’s property interest to the government’s constructive possession if the taxpayer-contractor or subcontractor under state law has property or rights to property in amounts withheld under a construction contract.

    • Second, because there may be numerous claimants to withheld funds, a suit to foreclose the federal tax lien may be more advantageous than a suit for failure to honor levy. However, the revenue officer should levy to protect the government’s interest.

    • Finally, the complexity of the problems involved requires the revenue officer to carefully investigate all the factual information and circumstances surrounding the contract, if the government is to succeed in collecting either by levy or by enforcing its tax lien in a court proceeding.

  3. See IRM, Federal Contractors, for information on levying payments owed to federal contractors. See IRM and IRM for information relating to performance bonds and holding sureties liable for unpaid employment taxes.  (01-07-2011)

  1. 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:

    • First, the revenue officer must investigate and determine the taxpayer’s property or rights to property.

    • Second, the revenue officer must determine the steps necessary to seize the intangible and reduce it to constructive possession.

    • Third, the revenue officer must resolve whether one levy is adequate, or whether successive levies must be made.

  2. 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.

  3. 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. See IRM 5.10.1, Pre-Seizure Considerations.

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