Continuing levy notice held applicable to commissions due independent contractor.

The Fourth Circuit recently affirmed a district court's holding that commissions paid to an independent contractor may be subjected to a continuing levy under Sec. 6331(e) (Jefferson-pilot Life Insurance Co., 1995). In light of this decision, a taxpayer that fails to comply with a continuing levy notice from the Service, which would require monitoring future payments due an independent contractor, could face severe consequences. The taxpayer could be held personally liable for such failure for an amount equal to the value of property or rights not turned over to the government. In addition, under See. 6332(d), a 50% penalty could be assessed if the failure to honor the levy was without reasonable cause.

The IRS served Jefferson-Pilot with a notice of levy for an independent insurance salesman's wages, salary or other income. The terms of the levy notice stated that it applied to "(1) all wages and salary for personal services of this taxpayer that you now possess or for which you are obligated, from the date you receive this notice of levy until a release of levy is issued, and (2) other income belonging to this taxpayer that you now possess or for which you are obligated."

Jefferson-Pilot returned the notice of levy to the Service without making a payment, stating that the notice constituted a one-time levy, and that no amounts were due and owing to the independent contractor as of the date of the notice. Subsequent payments were made to the salesman and the IRS commenced an action to enforce the levy.

Pursuant to Sec. 6331(e), the effect of a levy on salary or wages payable to a taxpayer is continuous from the date the levy is first made until the levy is released by the Service. This is in contrast to other levies under Sec. 6331(b), which reach only property or property rights in existence at the time the notice of levy is served.

The statutory provision does not contain a definition for either the term "salary" or "wages." Regs. Sec. 301.6331-2(c) defines the terms to include "compensation for services paid in the form of fees, commissions, bonuses, and similar items." The IRS interprets this regulation to include commissions of independent contractors. The Fourth Circuit agreed with the Service's interpretation, holding that deferene must be given to administrative interpretations of statutory language so long as (1) the statute does not clearly express a different congressional intent and (2) the interpretation is a permissible construction of the statute.

The court dismissed Jefferson-Pilot's argument that the deference accorded the IRS's interpretation of Sec. 6331(e) is not required in reviewing the Service's interpretation of its own regulation to include the commissions of independent contractors (because the regulation does not directly address this issue).

The court found unconvincing the extreme administrative burden Jefferson-Pilot indicated it would face if required to track continuing levies on remuneration owed to various types of independent contractors. The court noted that similar administrative burdens would befall the Service if successive notices were necessary to levy recurring payments due independent contractors.

Note that, under Sec. 6332(e), third parties honoring an IRS levy are discharged from any obligation or liability to the delinquent taxpayer (or other persons with respect to such property) for surrendering the taxpayer's property. Third parties taking a position contrary to the Jefferson-Pilot decision, that only property belonging to the delinquent taxpayer at the time of the levy notice must be surrendered, are needless liability exposure.

From Steven M. Friedman, CPA, J.D., Washington, D. C.