EMPLOYER PROTECTED FROM LIABILITY FOR IRS LEVY ON EMPLOYEE WAGES

The IRS issued a levy to US Airways in regard to the tax liability of an employee. US Airways garnished the wages of the employee and paid them over to the IRS.

The employee was not pleased, and sued US Airways, claiming it should not have complied with the levy. Two reasons were provided. The first was that US Airways failed to ensure the levy was valid. The second was that the employee had indicated on his W-4 that his wages were exempt, and thus should not have been subject to garnishment.

The District Court threw out the lawsuit. Code §6332(e) provides protection to persons satisfying an IRS levy. It reads:

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1) ) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

Valid or not, the employer had no responsibility for challenging the levy, and indeed had no standing to do so even if it wanted to. The fact that the employee’s wages were characterized on the W-4 as “exempt” did not change the employer’s obligation to comply with the IRS’ levy.

All this makes perfect sense from a policy standpoint. If property holders can contest levies they receive relating to property they hold of a taxpayer, collection by the IRS would be impaired by persons without a direct interest in the subject property. That being said, a grant of immunity to the party receiving the levy for complying with a levy that they have no ability to contest is both necessary and proper.

Gust v. US Airways, 108 AFTR 2d ¶2011-5603 (DC NC 12/16/2011)

PENALTIES ON UNREPORTED FOREIGN TRUSTS MUST BE PAID IN FULL TO OBTAIN DISTRICT COURT OR CLAIMS COURT JURISDICTION

Taxpayers that desire to contest an IRS assertion of tax liability in Federal district court or the Court of Federal Claims must first FULLY pay the asserted tax liability, and then sue for a refund. If the liability is high enough, a taxpayer may be unable to afford to do this.

However, under the “divisible tax” analysis, some tax penalties may be divisible from others – when that analysis applies, the taxpayer can only pay some and not all of them, and still get to court by suing for a refund. In a recent Chief Counsel Advice, the issue was raised whether Code §6048 penalties failures to report contributions to, ownership of, and distributions from foreign trusts are “divisible taxes” that would allow for less than all asserted penalties to be paid and still allow a refund suit.

At first, such penalties would appear to be divisible, since different penalties arise under Code §6048 for different types of failures to report, and because multiple tax years may be involved. Nonetheless, the IRS concluded that Code §6048 penalties are NOT divisible. Thus, taxpayers seeking to get to district court or the Claims Court will need to first prepay all asserted penalties in full.

The theory of the CCA was that if payment of only one portion of the penalty was sufficient for jurisdiction, the court nonetheless would have full jurisdiction of all the asserted penalties. Further, different reasonable cause defenses against different portions of the penalty could be argued by the taxpayer. The CCA concluded that this was inconsistent with the theory of a “divisible tax,” and thus partial payment would not give rise the sought after jurisdiction.

There are two important provisos to this determination. First, this is only the IRS’ position, and thus a taxpayer could contest that determination in court. Second, the CCA notes that if the taxpayer is willing to drop its opposition to the unpaid tax portion, it could proceed to obtain court jurisdiction over a portion of the penalties asserted by paying just those penalties first.

Chief Counsel Advice 201150029

SOUTH FLORIDA PRESENTATION – FORM 8939 FOREIGN FINANCIAL ASSET DISCLOSURES – THE WHO, WHAT & HOW, INCLUDING COMPLIANCE TRAPS AND TIPS

For those readers who are situated in South Florida, I am giving you first crack at seats to a complementary small group presentation I will be giving at our firm office on several Fridays in January on the above topic. As you may be aware, substantial new reporting requirements relating to foreign financial assets apply to income tax returns due for the 2011 tax year.

Click the link to download the full invite which will go out to a broader audience in the next few days. The invite has the dates and times and RSVP information. Since space is limited, please call or email (the instructions are on the invite) as soon as practicable to reserve a space if you are interested.

For any larger organizations within decent driving range (Palm Beach to Ft. Lauderdale) that have 5 or more interested persons, I would be happy to schedule a visit to your office to make the presentation (if my schedule permits) – feel free to contact me at crubin@floridatax.com in that regard.

Invitation