CCA 200851074: A continuing wage levy outranks an employer loan made after it was served

Plain-English summary

An employee whose wages are already under levy asks the employer for a loan, to be repaid out of each paycheck. The question is whose deduction comes first, and the release answers it twice: once on the law, once on how the Service chooses to behave.

The legal half is straightforward and the writer sets out the chain. After assessment and a failure to pay following notice and demand, a lien arises on all of the taxpayer's property and rights to property under section 6321. Ten days after notice and demand, the Service may collect by levy on all property and rights to property, salary and wages included, under section 6331(a). A levy on salary or wages is continuous from the date it is first made until released, under section 6331(e), and the regulation adds that such a levy attaches to salary or wages earned but not yet paid at the time of the levy and has continuous effect until release.

Put together, the employer must satisfy the levy each pay period before deducting anything to recoup its loan. The reason is one of timing. The continuing levy effectively seized the wages each pay period from the date it was first made, which was before the loan was ever requested. The employer is not competing with the Service for the same dollars so much as arriving after they have already been taken. This is also why the answer does not depend on the notices of federal tax lien in the facts: the levy alone decides it.

The second half is what the writer calls the extra-legal considerations, and it is the more useful part for the revenue officer holding the file. Policy Statement 5-25, in the Internal Revenue Manual, provides that although the levy legally reaches gross wages, the Service will treat it as attaching only to take home pay, unless the taxpayer is making voluntary allotments to an extent that would defeat the levy. Within that policy the writer suggests weighing the purpose of the proposed loan. The illustrations are deliberately far apart: a loan to feed the taxpayer's small children is one the Service may want to subordinate part of its claim to, while a loan to buy a sports car is one it obviously would not. The officer is also reminded that the taxpayer already has exemptions from levy allotted under section 6334, so a subsistence floor is built in before any discretion is exercised.

Two further prompts follow. The officer should look at the relationship between employer and employee, since a loan from a company the employee owns is not the arm's length arrangement it appears to be. And if there is a written loan agreement but the money has not yet changed hands, the Service may be able to levy on the agreement itself; once the proceeds reach the taxpayer, it may levy on those.

The closing sentence sets the tone for the whole: the Service is in a good position legally, and the facts of the particular case should still be considered as a matter of policy. Two features mark this out from the one-line notes elsewhere in this release batch. It opens by stating that the advice was reviewed by the writer's reviewer, and it recites the facts it depends on, drawn from an email and a phone conversation the same afternoon. The subject line refers to a section 6323 question, which is the lien priority provision, while the analysis is a levy analysis under sections 6321 and 6331; the priority framing appears to have been recast in the answer.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "to be payed back"; "Treas Reg." without the first full stop; the spaced ellipsis inside the quotation from the regulation; the unbalanced quotation marks in "between an \"independent\" employer,\""; the question about sole ownership ending in a full stop; and the triple dash in "made---before the employee requested the loan".

Ruling snapshot

• Question: Where a continuing wage levy is already in place, may the employer deduct repayments on a loan it later makes to the employee before satisfying the levy?
• Outcome: Advice given. No. The employer must satisfy the continuing wage levy each pay period before deducting to recoup its loan, because the levy effectively seized the wages each pay period from the date it was first made, before the loan was requested. As a matter of policy the revenue officer should still weigh the purpose of the loan, the taxpayer's exemptions, and the relationship between employer and employee, and the Service may consider subordinating part of its right to the wages.
• Key authorities: IRC sections 6321, 6331(a), 6331(e) and 6334; Treas. Reg. section 301.6331-1; Policy Statement 5-25 (IRM 1.2.14.1.6).

Full text (IRS public release)

ID: CCA_2008091215201442 Number: 200851074
Office: -------------- Release Date: 12/19/2008

UILC: 6331.00-00

From: ------------------
Sent: Friday, September 12, 2008 3:20:16 PM
To: --------------------------
Cc: ---------------------------------------
Subject: RE: Section 6323 question

This advice has been reviewed by my reviewer

Our response to your incoming email is based on the following factual situation from your email to us and our conversation this afternoon.

The IRS assesses a tax liability against the taxpayer and subsequently files notices of federal tax lien in the appropriate offices. The Service then serves a continuing wage levy on the taxpayer's employer. Subsequent to the serving of the wage levy, taxpayer requests a loan from the employer to be payed back through deductions from the taxpayer's bi-weekly pay.

Once the Service has assessed a tax liability and the taxpayer fails to pay the liability after notice and demand, a lien attaches to all property and rights to property of the taxpayer. I.R.C. 6321. If the taxpayer fails to pay a liability within ten days of notice and demand, the Service may collect the liability by levy on all property and rights to property of the taxpayer, including salary or wages. I.R.C. 6331(a). With respect to a levy on salary or wages, a levy shall be continuous from the date the levy is first made until it is released. I.R.C. 6331(e). Treas Reg. 301.6331-1 provides that a continuous "levy attaches to. .
. salary or wages earned but not yet paid at the time of the levy" and "has continuous effect from the time the levy originally is made until the levy is released."

Legally, the employer must satisfy the Service's continuing wage levy each pay period before it deducts money from the employee/taxpayer's wages to recoup its loan to the employee/taxpayer. The continuing wage levy effectively seized the employee/taxpayer's wages each pay period from the date the levy originally was made---before the employee requested the loan from the employer.

As we discussed on the phone, there are some extra-legal considerations. Policy Statement 5-25 (IRM 1.2.14.1.6) provides that although legally the levy attaches to the gross amount of the wages or salary, the Service will consider the levy as attaching only to the taxpayer's "take home" pay unless the taxpayer is voluntarily allotting his/her pay to an extent that would defeat the purpose of the levy. As a matter of policy in these situations, the RO should determine the purpose of the proposed loan. If its purpose is to feed the taxpayer's small children, as a matter of policy the Service may want to subordinate some of its right to the wages to the payment of the loan. If the taxpayer wants the loan to buy a sports car, the Service obviously would not be willing to subordinate its right to the wages. When considering this, also consider that the taxpayer already has been allotted wage and salary exemptions under section 6334.

The RO in a case like this should also consider the relationship between the employee and the employer. Is the proposed loan an arms length agreement between an "independent" employer," or is the "employer" solely owned by the employee. Finally, if the employer and employee have a written agreement for the loan but the loan has not yet been made, the Service may be able to levy on the loan agreement. And the Service may always levy on the taxpayer once he/she receives the loan proceeds.

Most importantly, the Service is in a good position here legally. The wage levy attached to all wages on the date it was made, effectively seizing the wages before any loan was ever considered; however, as a matter of policy, the facts of the particular case should be considered.