The IRS levy is one of the IRS’s primary methods for collecting unpaid taxes.
The IRS’s levy power is broad, but it is not unlimited.
The IRS levy can attach to some amounts held by third parties that are owed to the taxpayer. It does not attach to future payments.
The recent Gold Forever Music Inc. v. United States, 2:17-cv-13927 (E.D. Mich. 2019) case addresses this limit on the IRS’s levy power.
Facts & Procedural History
The plaintiff is a music publishing company. It collected and disbursed royalties to various music artists. This included collecting and disbursing royalties to its owner, Edward Holland, Jr.
The plaintiff outsourced the royalty contracting and collecting to two separate companies, Broadcast Music, Inc. and Universal Music Publishing. These companies are in the business licensing music rights and collecting royalties for artists.
Mr. Holland owed $20 million in back taxes to the IRS. In 2012, the IRS issued levy notices to Broadcast Music, Inc. and Universal Music Publishing for amounts owed to the plaintiff. The levies were based on the premise that the plaintiff was the alter ego of Holland.
Broadcast Music, Inc. and Universal Music Publishing made payments to the IRS in 2013, 2016, and 2017 pursuant to the 2012 levy.
The plaintiff brought suit to recoup the amounts paid by Broadcast Music, Inc. and Universal Music Publishing to the IRS. The trial court dismissed the tax litigation case as being filed late.
The appeals court reversed and the case was back before the trial court. The IRS attempted to re-frame the case it lost on appeals, which is the subject of this trial court opinion.
The Wrongful Levy Suit
The trial court originally considered whether the plaintiff brought suit timely. A plaintiff has to bring a wrongful levy suit within nine months of an IRS levy to challenge the levy.
By arguing that the suit was brought late, the IRS opened the door for the court to conclude that the levy did not attach to the royalties the plaintiff collected after the levy in 2012.
The appeals court found that the 2012 levy only attached to the royalties the plaintiff received prior to the levy being served, not royalties received after the levy was served. This is consistent with other court cases that deal with IRS levies on third parties who owe money to a taxpayer with unpaid taxes.
This often comes up when a general contractor enters into a contract with a subcontractor and the subcontractor owes the IRS. The IRS levy should only reach the amounts owed to the subcontractor for services rendered prior to the IRS levy. Post-levy services shouldn’t be subject to the levy, even if the contract was entered into prior to the IRS levy.
But this case is different than a typical subcontractor case. The plaintiff, in this case, was a passive entity that wasn’t really providing services. It functioned merely as an entity that divided up royalties that others serviced and collected. Thus, it would seem that the performance of the contract was completed for any agreement entered into with the plaintiff before the 2012 levy, regardless of when the royalties were later collected.
But the appeals court reached the opposite conclusion. It did so by considering the precedent in other circuits.
Does IRS Levy Attach to Contractual Rights to Payments?
This brings us to the IRS’s argument in this case. Since it lost the issue on appeal, the IRS tried to change its argument on remand to the trial court. The IRS argued that “although the levy did not attach to each future payment under the agreement, it nonetheless attached to the contractual right to payment itself, thereby capturing all future payments.”
The trial court did not agree. It concluded that the appeals court decision foreclosed on this argument. Specifically, the trial court noted that the IRS levy can attach to contractual rights to payments, but that such a right is not fixed or determinable for a levy to attach to it.
This is a taxpayer-favorable ruling that solidifies that the IRS levy does not attach to any payments post levy, even for contracts entered into before the IRS levy.