Supreme Court won't review case allowing IRS to proceed against IRA based on pre-bankruptcy liens Miles v. Comm., (CA 9 10/07/2010), 106 AFTR 2d 2010-6563 , cert denied 4/18/2011 The Supreme Court has refused to review the decision of the Court of Appeals for the Ninth Circuit, that held that IRS could proceed with collection of taxpayer's tax liability from IRA funds which had been subject to IRS liens before the taxpayer's filing for bankruptcy. The preexisting liens on her IRA remained enforceable post-bankruptcy discharge. Background. Under Code Sec. 6321 , when a taxpayer fails to pay a tax liability after notice and demand, a lien arises that attaches to all the taxpayer's property and rights to property. Under Code Sec. 6331 , IRS is authorized to seize and sell the taxpayer's property and rights to property subject to a federal tax lien. Thus, IRS may seize any property or property right (unless it's exempt under Code Sec. 6334(a) ) of a delinquent taxpayer (whether held by him or someone else), sell it, and apply the proceeds to pay the unpaid taxes. Seized property may be real, personal, tangible, or intangible, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions or compensation. ( Code Sec. 6331(a) , Reg. § 301.6331-1(a) ) Facts. In '98 and '99, IRS filed federal tax liens for Corrie Miles' '97 and '98 tax liabilities that attached to her IRA. In 2003, she filed a petition under Chapter 7 of the U.S. Bankruptcy Code in the bankruptcy court, which discharged her '96, '97, and '98 tax liabilities in August of 2003. Appellate court. The Ninth Circuit, affirming the Tax Court, concluded that although the bankruptcy court discharged Miles' personal tax liability, the preexisting liens on her IRA remained enforceable post-discharge. Accordingly, IRS could proceed in rem against Miles' IRA to the extent of $142,545.90—the amount of the pre-petition funds in her IRA. The Ninth Circuit found that the Tax Court had properly concluded that the liens remained valid even after Miles allegedly transferred her IRA into an ERISA-qualified plan. The transfer of property following the attachment of a lien didn't affect the lien itself. Thus, Miles couldn't in effect extinguish the lien by transferring the IRA funds to a different account. Any funds Miles transferred from her IRA to an ERISA-qualified plan were subject to levy by the IRS underCode Sec. 6331 . The Ninth Circuit also found that the Tax Court properly rejected Miles' assertion that she had no existing property rights in an ERISA account that was not in “payout” status. No further review. On Apr. 18, 2011, the Supreme Court refused to review the decision of the Court of Appeals for the Ninth Circuit in Miles. Reg §301.6331-1. Levy and distraint. Caution: The Treasury has not yet amended Reg § 301.6331-1 to reflect changes made by P.L. 106-554, P.L. 105-206, P.L. 105-34 (a) Authority to levy. (1) In general. If any person liable to pay any tax neglects or refuses to pay the tax within 10 days after notice and demand, the district director to whom the assessment is charged (or, upon his request, any other district director) may proceed to collect the tax by levy. The district director may levy upon any property, or rights to property, whether real or personal, tangible or intangible, belonging to the taxpayer. The district director may also levy upon property with respect to which there is a lien provided by section 6321 or 6324 for the payment of the tax. For exemption of certain property from levy, see section 6334 and the regulations thereunder. As used in section 6331 and this section, the term “tax” includes any interest, additional amount, addition to tax, or assessable penalty, together with costs and expenses: Property subject to a Federal tax lien which has been sold or otherwise transferred by the taxpayer may be seized while in the hands of the transferee or any subsequent transferee. However, see provisions under sections 6323 and 6324(a)(2) and (b) for protection of certain transferees against a Federal tax lien. Levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions, or other compensation. A levy on a bank reaches any interest that accrues on the taxpayer's balance under the terms of the bank's agreement with the depositor during the 21-day holding period provided for in section 6332(c). Except as provided in §301.6331-1(b)(1) with regard to a levy on salary or wages, a levy extends only to property possessed and obligations which exist at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date. For example, if on the first day of the month a delinquent taxpayer sold personal property subject to an agreement that the buyer remit the purchase price on the last day of the month, a levy made on the buyer on the 10th day of the month would reach the amount due on the sale, although the buyer need not satisfy the levy by paying over the amount to the district director until the last day of the month. Similarly, a levy only reaches property in the possession of the person levied upon at the time the levy is made together with interest that accrues during the 21-day holding period provided for in section 6332(c). For example, a levy made on a bank with respect to the account of a delinquent taxpayer is satisfied if the bank surrenders the amount of the taxpayer's balance at the time the levy is made. The levy has no effect upon any subsequent deposit made in the bank by the taxpayer. Subsequent deposits may be reached only by a subsequent levy on the bank. (2) Jeopardy cases. If the district director finds that the collection of any tax is in jeopardy, he or she may make notice and demand for immediate payment of such tax and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in section 6331(a), the 30-day period provided in section 6331(d), or the limitation on levy provided in section 6331(g)(1). (3) Bankruptcy or receivership cases. During a bankruptcy proceeding or a receivership proceeding in either a Federal or a State court, the assets of the taxpayer are in general under the control of the court in which such proceeding is pending. Taxes cannot be collected by levy upon assets in the custody of a court, whether or not such custody incident to a bankruptcy or receivership proceeding, except where the proceeding has progressed to such a point that the levy would not interfere with the work of the court or where the court grants permission to levy. Any assets which under applicable provisions of law are not under the control of the court may be levied upon, for example, property exempt from court custody under State law or the bankrupt's earnings and property acquired after the date of bankruptcy. However, levy upon such property is not mandatory and the Government may rely upon payment of taxes in the proceeding. (4) Certain types of compensation. (i) Federal employees. Levy may be made upon the salary or wages of any officer or employee (including members of the Armed Forces), or elected or appointed official, of the United States, the District of Columbia, or any agency or instrumentality of either, by serving a notice of levy on the employer of the delinquent taxpayer. As used in this subdivision, the term “employer” means (a) the officer or employee of the United States, the District of Columbia, or the agency or instrumentality of the United States or the District of Columbia, who has control of the payment of the wages, or (b) any other officer or employee designated by the head of the branch, department, agency, or instrumentality of the United States or of the District of Columbia as the party upon whom service of the notice of levy may be made. If the head of such branch, department, agency, or instrumentality designates an officer or employee other than one who has control of the payment of the wages, as the party upon whom service of the notice of levy may be made, such head shall promptly notify the Commissioner of the name and address of each officer or employee so designated and the scope or extent of his authority as such designee. (ii) State and municipal employees. Salaries, wages, or other compensation of any officer, employee, or elected or appointed official of a State or Territory, or of any agency, instrumentality, or political subdivision thereof, are also subject to levy to enforce collection of any Federal tax. (iii) Seamen. Notwithstanding the provisions of section 12 of the Seamen's Act of 1915 (46 USC 601), wages of seamen, apprentice seamen, or fishermen employed on fishing vessels are subject to levy. See section 6334(c). (5) Noncompetent Indians. Solely for purposes of sections 6321 and 6331, any interest in restricted land held in trust by the United States for an individual noncompetent Indian (and not for a tribe) shall not be deemed to be property, or a right to property, belonging to such Indian. (b) Continuing levies and successive seizures. (1) Continuing effect of levy on salary and wages. A levy on salary or wages has continuous effect from the time the levy originally is made until the levy is released pursuant to section 6343. For this purpose, the term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. The levy attaches to both salary or wages earned but not yet paid at the time of the levy, advances on salary or wages made subsequent to the date of the levy, and salary or wages earned and becoming payable subsequent to the date of the levy, until the levy is released pursuant to section 6343. In general, salaries or wages that are the subject of a continuing levy and are not exempt from levy under section 6334(a)(8) or (9), are to be paid to the district director, the service center director, or the compliance center director (director) on the same date the payor would otherwise pay over the money to the taxpayer. For example, if an individual normally is paid on the Wednesday following the close of each work week, a levy made upon his or her employer on any Monday would apply to both wages due for the prior work week and wages for succeeding work weeks as such wages become payable. In such a case, the levy would be satisfied if, on the first Wednesday after the levy and on each Wednesday thereafter until the employer receives a notice of release from levy described in section 6343, the employer pays over to the director wages that would otherwise be paid to the employee on such Wednesday (less any exempt amount pursuant to section 6334). (2) Successive seizures. Whenever any property or rights to property upon which a levy has been made are not sufficient to satisfy the claim of the United States for which the levy is made, the district director may thereafter, and as often as may be necessary, proceed to levy in like manner upon any other property or rights to property subject to levy of the person against whom such claim exists or on which there is a lien imposed by section 6321 or 6324 (or the corresponding provision of prior law) for the payment of such claim until the amount due from such person, together with all costs and expenses, is fully paid. (c) WG&L Treatises Service of notice of levy by mail. A notice of levy may be served by mailing the notice to the person upon whom the service of a notice of levy is authorized under paragraph (a)(1) of this section. In such a case the date and time the notice is delivered to the person to be served is the date and time the levy is made. If the notice is sent by certificated mail, return receipt requested, the date of delivery on the receipt is treated as the date the levy is made. If, after receipt of a notice of levy, an officer or other person authorized to act on behalf of the person served signs and notes the date and time of receipt on the notice of levy, the date and time so noted will be presumed to be, in the absence of proof to the contrary, the date and time of delivery. Any person may, upon written notice to the district director having audit jurisdiction over such person, have all notices of levy by mail sent to one designated office. After such a notice is received by the district director, notices of levy by mail will be sent to the designated office until a written notice withdrawing the request or a written notice designating a different office is received by the district director. (d) Effective date. These regulations are effective December 10, 1992. ________________________________________ T.D. 6119, 12/31/54 , amend T.D. 6498, 10/24/60 , T.D. 7139, 8/11/71 , T.D. 7180, 4/12/72 , T.D. 7253, 2/23/73 , T.D. 7620, 5/11/79 , T.D. 7847, 11/9/82 , T.D. 7874, 3/9/83 , T.D. 8558, 7/29/94 . ________________________________________ www.irstaxattorney.com 888-712-7690