If the IRS issued a levy notice to a third party to attempt to collect a tax debt, the third party is generally obligated to pay over to the IRS any money owed to the taxpayer. But how long does this obligation continue? Does it apply to future payments that the third party becomes indebted to the taxpayer after the IRS levy? The court considers this in Gold Forever Music, Inc. v. United States, 18-1789 (6th Cir. 2019).

Facts & Procedural History

The taxpayer is a corporation that collects and remits royalties owed to musical artists. It charges the artists a percentage of the royalties it collects.

The taxpayer contracts with the two largest organizations that license and collect royalties. Thus, these companies would collect for the taxpayer and then remit the royalties to the taxpayer. The taxpayer would take its fee and pass the rest on to the artists.

The individual who owned the taxpayer corporation owed back taxes. The IRS issued nominee levies to the two collection organizations in 2012. These organizations did not honor the levies initially, but did so in 2016. They remitted close to $1 million to the IRS in 2016.

Litigation ensued as the taxpayer sought to recoup the $1 million from the IRS. The question for the court was whether the taxpayer brought suit timely. To answer this question, the court had to first determine whether the IRS’s levy attached to the royalties received after 2012.

About the IRS Levy

The IRS has broad levy powers. These powers generally afford it the right to collect taxes without the necessity of first obtaining a court order.

But the IRS’s levy powers are limited. For example, the IRS levy only attaches to certain property or rights to property the taxpayer owned at the time the levy is made.

But when is a levy made? This is an easy question to answer when the levy is on cash. It is generally the day the cash is taken or when the taxpayer no longer has access to the cash. But what about intangibles, like in this case, where the levy is on a right to payment in the future?

The court noted that the IRS levy is made when the IRS levy notice is issued. In this case, this was 2012. Then, according to the court, the IRS levy would only attach to the taxpayer’s future income from the two royalty collecting companies if the royalties were fixed and determinable.

The IRS Levy Didn’t Attach to the Future Income

Given the procedural posture of the court case, the court concluded that the post-2012 monies, those paid to the IRS in 2016, were not fixed and determinable as of 2012. This means that the IRS levy did not attach to these post-levy-notice monies.

This makes sense as the royalties likely had not yet been paid to the two royalty collection companies. They would be for music played and royalties eared long after the IRS levy notice was issued.

The IRS’s Ability to Issue Subsequent Levies

Whether an IRS levy reaches payments made after the IRS levy notice can be difficult. This case helps clarify this point for intangibles. But the holding is limited. The IRS has the authority to issue as many subsequent levies as it deems necessary. So in this case, in theory, the IRS could have simply re-issued levy notices periodically after the 2012 notice was issued. This would allow the IRS to collect monies due to the taxpayer at the time the levy notices were issued.

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