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Guest Article
(From the July 14, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
IRS May Not Exercise Participant's Early Distribution Election to Collect on Levy
IRS Office of Chief Counsel issued an Advice Memorandum concluding that the Service is not entitled to exercise a taxpayer's right to suspend membership in a state retirement fund in order to obtain immediate distribution where the taxpayer has not reached retirement age. Office of Chief Counsel, Internal Revenue Service, Memorandum No. 200819001, Released May 9, 2008.
The Office of Chief Counsel reasoned that, although upon service of a levy the IRS steps into the shoes of the taxpayer and acquires whatever property rights the taxpayer possesses, the levy only reaches the taxpayer's rights "as it finds them" and does not entitle the IRS to compel the taxpayer's election to take immediate distribution. Previously IRS had reached a different conclusion, reasoning that when the IRS acquires the rights of the taxpayer they include "the right to elect to receive a plan benefit ... when the participant has failed to do so." (See PLR 200426027.)
Under the Advice Memorandum, a fifty-year-old taxpayer with an unpaid income tax liability had an account with a state retirement fund. Although the taxpayer was no longer employed with the state, shehad not elected to receive her benefits from the fund. In fact, the taxpayer was working for another employer and had not retired. According to the terms of the fund, she could elect to suspend her membership and take distribution. If she did not make such an election, upon reaching retirement age she would be eligible to receive her retirement benefits.
The IRS issued notice of a levy and attempted to collect the taxpayer's assets in the fund. The fund refused to distribute the assets unless the taxpayer elected to suspend membership. The issue before the Office of Chief Counsel was whether the IRS could "elect" to suspend membership in the fund on the taxpayer's behalf.
The Memorandum examined case precedent and reasoned:
Upon service of a notice of levy, the Service steps into the shoes of the taxpayer and acquires whatever rights to the property the taxpayer had possessed prior to the notice of levy. Nat'l Bank of Commerce, 472 U.S. at 725. However, the levy only reaches the taxpayer's rights "as it finds them." United States v. Sullivan, 333 F. 2d 100, 110 (3rd Cir. 1964). Accordingly, the levy only reaches property rights that exist at the time of the levy. Thus, for example, in Sullivan the Service levied on the taxpayer's insurance policy. The insurance policy had a cash surrender value. The court held that the Service's levy did not require the insurance company to turn over the cash surrender value of the policy. The court reasoned that the levy reached only the taxpayer's basic right under the policy to receive the benefits upon the policy's maturation. The Service had no authority, through its levy, to exercise the taxpayer's right to cancel the policy. Id. at 108-119. |
Based upon that reasoning, the Memorandum similarly concluded that the Service could not compel suspension of the taxpayer's membership in the fund.
Chief Counsel Advice Memoranda are issued to field or service center employees of the IRS or Office of Chief Counsel. Like Private Letter Rulings, they generally can not be used or cited as precedent pursuant to IRC § 6110(k)(3). However, they serve as useful indicators of the IRS's view on a particular matter.
| The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte. |
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