[Federal Register Volume 66, Number 31 (Wednesday, February 14, 2001)]
[Proposed Rules]
[Pages 10249-10253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1562]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-101520-97]
RIN 1545-AV01


Return of Property in Certain Cases

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
return of property in certain cases. The proposed regulations reflect 
changes made to section 6343 of the Internal Revenue Code of 1986 by 
the Taxpayer Bill of Rights 2. The proposed regulations also reflect 
certain changes affecting levies enacted by the Internal Revenue 
Service Restructuring and Reform Act of 1998. The proposed regulations 
affect taxpayers seeking the return of property from the IRS.

DATES: Written comments and requests for a public hearing must be 
received by May 15, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-101520-97), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered to: 
CC:M&S:RU (REG-101520-97), room 5226, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC. Taxpayers may also submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.gov/prod/tax__regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Kevin B. Connelly, (202) 622-3630 (not 
a toll-free number).

[[Page 10250]]


SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Procedure and 
Administration Regulations (26 CFR part 301) relating to the return of 
property under section 6343 of the Internal Revenue Code (Code). 
Section 501(b) of the Taxpayer Bill of Rights 2 (TBOR2), Public Law 
104-168 (110 Stat. 1452), amended section 6343 to authorize the IRS to 
return property in certain cases and, to the extent possible, but 
without payment of interest, return the taxpayer to the same position 
as if the levy had not been issued. These proposed regulations reflect 
the amendments made by section 501(b) of TBOR2.
    These proposed regulations also reflect modifications made by the 
Internal Revenue Service Restructuring and Reform Act (RRA 1998), 
Public Law 105-206 (112 Stat. 685), which added new sections 6331(i) 
and (j) of the Code, prohibiting the issuance of levies during the 
pendency of proceedings for refund of divisible taxes or prior to 
completion of an investigation of the status of property (effective for 
unpaid tax attributable to tax periods beginning after December 31, 
1998). RRA 1998 also added section 6331(k), prohibiting levies during 
the period an offer-in-compromise is pending or an installment 
agreement is pending or in effect (effective for offers-in-compromise 
pending on or made after December 31, 1999, and for installment 
agreements submitted after July 22, 1998). In addition, the RRA 1998 
added section 6330, which provides in certain circumstances for notice 
and an opportunity for a hearing prior to the imposition of a levy.

Explanation of Provisions

    Section 6343(b) provides for the return of levied upon property, 
including levied upon money and money received from the sale of levied 
upon property, if the property was wrongfully levied upon. Section 
501(b) of TBOR2 enacted section 6343(d) of the Code authorizing the IRS 
to return levied upon property to the taxpayer in certain other 
prescribed circumstances. Property returned under new section 6343(d) 
will be returned in accordance with section 6343(b) of the Code as if 
the property had been wrongfully levied upon, except that no interest 
will be allowed. The provision is designed to permit the IRS, to the 
extent possible, to restore the taxpayer to a pre-levy position. These 
proposed regulations provide guidance on the circumstances under which 
levied upon property will be returned by the IRS and the manner in 
which a request for return of property must be made.
    The proposed regulations apply to the return of (1) levied upon 
money that has been applied toward the taxpayer's liability, (2) money 
received from the sale of levied upon property under section 6335 of 
the Code, and (3) levied upon property that the United States has 
purchased in a sale under section 6335 of the Code. This property may 
be returned if one of the conditions enumerated in paragraph (c) of the 
proposed regulations exists.
    The regulations also clarify that, other than as provided in 
Sec. 301.6343-1(b) and paragraph (d) of this section, the IRS, in its 
discretion, may return levied upon property in its possession pending 
sale. The return of levied upon property in the IRS's possession 
pending sale is not limited by these proposed regulations. The IRS has 
the authority to determine what property of the taxpayer to levy. As 
part of that authority, the IRS may release a levy and return levied 
upon property in its possession pending sale.
    Under paragraph (c) of the proposed regulations, the Commissioner 
may return levied upon property if one of the following conditions 
exist: (1) the levy was premature or otherwise not in accordance with 
the administrative procedures of the IRS; (2) the taxpayer has entered 
into an agreement under section 6159 of the Code to satisfy the 
liability for which the levy was imposed by means of installment 
payments, unless the agreement provides otherwise; (3) the return of 
property will facilitate collection of the tax liability; or (4) the 
return of property is in the best interest of the taxpayer, as 
determined by the National Taxpayer Advocate, and in the best interest 
of the United States, as determined by the Commissioner.
    Section 6343(d)(2)(D) authorizes the return of property if it is in 
the best interests of both the United States and the taxpayer. 
Therefore, two distinct determinations must be made before the 
Commissioner may return property based on these grounds. Under the 
proposed regulations the Commissioner (or his delegate) will determine 
whether the return of property is in the best interest of the United 
States. The National Taxpayer Advocate (or his delegate) generally will 
determine whether the return of property is in the best interest of the 
taxpayer; however, a finding by the Commissioner (or his delegate) that 
the return of property is in the best interest of the taxpayer, as well 
as the United States, will be sufficient to support the return of 
property. Only the National Taxpayer Advocate (or his delegate) is 
authorized to determined that the return of property is not in the 
taxpayer's best interest.
    Additionally, the proposed regulations provide that it is in the 
best interests of the United States and the taxpayer to release levies 
made in violation of the law. Any property received pursuant to a levy 
made in violation of the law will be returned unless the taxpayer gives 
permission to the IRS to keep the property. For example, section 
6331(k)(2) of the Internal Revenue Code of 1986 prohibits levies during 
the period an offer to enter into an installment agreement is pending 
(and for a 30-day period after rejection of the offer or while a timely 
appeal from the rejection of an offer to enter into an installment 
agreement is pending) and during the period an installment agreement is 
in effect. If property has been received by the IRS as the result of a 
levy that is prohibited under section 6331(k)(2), the IRS will return 
the property to the taxpayer pursuant to section 6343(d)(2)(D). It may, 
however, be advantageous for a taxpayer in some circumstances to allow 
the IRS to keep the levied upon property and apply the proceeds of that 
levy to the taxpayer's outstanding tax liabilities. These proposed 
regulations allow the taxpayer to give permission to the IRS to retain 
the levied upon property and apply the proceeds of that levy to the 
taxpayer's outstanding tax liabilities. Absent taxpayer consent, the 
IRS is required to return the levied upon property (or the proceeds if 
the property had been sold) to the taxpayer.
    Pursuant to the requirement of section 6343(d) that property to be 
returned under this provision be treated as if it were wrongfully 
levied upon, the proposed regulations also provide that if the United 
States purchases property, it will be treated as having received an 
amount of money equal to the minimum price determined by the 
Commissioner before the sale.
    Property other than money may be returned at any time. Money may be 
returned any time within 9 months after the date of the levy. In 
addition, when a timely request for the return of money is filed in 
accordance with these regulations, or a determination to return an 
amount of money is made before the expiration of the 9-month period, 
the money may be returned within a reasonable period of time after the 
9-month period if additional time is necessary for investigation or 
processing. This will ensure that if a timely request has been made, or 
the IRS timely decides to return money on its own initiative, the IRS 
will have

[[Page 10251]]

sufficient time for necessary investigation or processing.
    Under the proposed regulations a taxpayer may request the return of 
property by writing to the address on the levy form or to the 
Commissioner (marked for the attention of the Chief, Special Procedures 
Function) of the IRS office in which the levy was made. A written 
request for the return of property must include: (1) the name, current 
address, and taxpayer identification number of the taxpayer requesting 
the return of property; (2) a description of the property levied upon; 
(3) the date of the levy; and (4) the grounds upon which the return of 
property is being requested.
    The Commissioner must consider each taxpayer's request for the 
return of property, determine whether any of the conditions authorizing 
the return of property exist, and decide whether to return the 
property. The Commissioner also may return the property based on 
information received from a source other than the taxpayer. A decision 
to return the property is within the Commissioner's discretion, unless 
the levy was in violation of law, in which case the Commissioner must 
return the property.
    If the Commissioner returns property, and the taxpayer fails to pay 
the previously assessed liability for which the levy was made on the 
returned property, the Commissioner may administratively collect the 
liability. Collection may include levying again on the returned 
property provided statutory and administrative requirements are 
followed.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments that are submitted 
timely (preferably a signed original and eight (8) copies) to the IRS. 
Alternatively, taxpayers may submit comments electronically via the 
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or 
by submitting comments directly to the IRS Internet site at http://
www.irs.gov/prod/tax__regs/regslist.html. All comments will be 
available for public inspection and copying. A public hearing may be 
scheduled if requested in writing by a person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is Kevin B. Connelly, 
Office of Assistant Chief Counsel (General Litigation) CC:EL:GL, IRS. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 301.63 43-3 is added to read as follows:


Sec. 301.6343-3  Return of property in certain cases.

    (a) In general. If money has been levied upon and applied toward 
the taxpayer's liability, or property has been levied upon and sold, 
and the receipts have been applied toward the taxpayer's liability, or 
property has been levied upon and purchased by the United States and 
the United States still possesses the property, and the Commissioner 
determines that any of the conditions in paragraph (c) of this section 
exist, the Commissioner may return--
    (1) An amount of money equal to the amount of money levied upon;
    (2) An amount of money equal to the amount of money received by the 
United States from a sale of the property; or
    (3) The specific property levied upon and purchased by the United 
States.
    (b) Return of levied upon property in possession of the Internal 
Revenue Service (IRS) pending sale under section 6335. Other than as 
provided in Sec. 301.6343-1(b) or in paragraph (d) of this section, the 
Commissioner, in his or her discretion, may return levied upon property 
that is in the possession of the United States pending sale under 
section 6335.
    (c) Conditions authorizing the return of property. The Commissioner 
may return property upon determining that one of the following 
conditions exist:
    (1) Premature or not in accordance with administrative procedures. 
The levy was premature or otherwise not in accordance with the 
administrative procedures of the Secretary.
    (2) Installment agreement. Subsequent to the levy, the taxpayer 
enters into an agreement under section 6159 to satisfy the liability 
for which the levy was made by means of installment payments. If, 
however, the agreement specifically provides that already levied upon 
property will not be returned under section 6343(d), the Commissioner 
may not grant a request for return of property under this paragraph 
(c)(2).
    (3) Facilitate collection. The return of property will facilitate 
the collection of the tax liability for which the levy was made.
    (4) Best interests of the United States and the taxpayer--(i) In 
general. The taxpayer or the National Taxpayer Advocate (or his 
delegate) has consented to the return of property, and the return of 
property would be in the best interest of the taxpayer, as determined 
by the National Taxpayer Advocate (or his delegate), and in the best 
interest of the United States, as determined by the Commissioner.
    (ii) Best interest of the taxpayer. The National Taxpayer Advocate 
(or his delegate) generally will determine whether the return of 
property is in the best interest of the taxpayer. If, however, a 
taxpayer requests the Commissioner to return property and has not 
specifically requested the National Taxpayer Advocate (or his delegate) 
to determine the taxpayer's best interest, a finding by the 
Commissioner that the return of property is in the best interest of the 
taxpayer will be sufficient to support the return of property. Only the 
National Taxpayer Advocate (or his or her delegate) may determine that 
a return of property is not in the best interest of the taxpayer.

[[Page 10252]]

    (5) Examples. The following examples illustrate the provisions of 
this paragraph (c):

    Example 1. A owes $1,000 in Federal income taxes. The IRS levies 
on a broker with respect to a money market account belonging to the 
taxpayer and receives payment from the broker which it applies to 
the taxpayer's outstanding liability. However, the IRS failed to 
follow procedure provided by the Internal Revenue Manual (but not 
required by statute) with regard to managerial approval prior to the 
making of the levy. The Commissioner may return an amount of money 
equal to the amount of money the IRS levied upon and applied toward 
the taxpayer's tax liability.
    Example 2. B owes $1,000 in Federal income taxes. The IRS levies 
on a bank with respect to a savings account belonging to the 
taxpayer and receives funds from the bank which it applies to the 
taxpayer's liability. Subsequent to the levy, B enters into an 
installment agreement, under which it will pay timely installments 
to satisfy the entire liability. The installment agreement does not 
by its terms preclude the return of levied upon property. The 
revenue officer verifies that B is financially capable of paying the 
entire liability, including accruals, in the agreed-upon installment 
payments. The Commissioner may return an amount of money equal to 
the amount of money levied upon and applied toward the taxpayer's 
liability.
    Example 3. C owns a house that is deteriorating and in unsalable 
condition. C is in the process of renovating the house for sale when 
the IRS levies upon C's bank account for the payment of a $20,000 
outstanding Federal tax liability and receives funds in the amount 
of $3,000, which it applies toward C's liability. A notice of 
federal tax lien is the only lien encumbrancing the house. C 
requests that an amount of money equal to the amount seized from the 
bank account be returned so that C can complete the renovations on 
the house. Without the funds, C will be unable to complete the 
renovations and sell the house. Upon examination, the Commissioner 
determines that the IRS will be able to collect the entire tax 
liability if C's house is restored to salable condition. If the 
National Taxpayer Advocate, or the Commissioner in lieu of the 
National Taxpayer Advocate, determines that the return of the seized 
money is in the taxpayers best interest, the Commissioner may return 
an amount of money equal to the amount seized from the bank account 
in the best interest of the taxpayer and the United States.

    (d) Best Interests of the United States and the taxpayer to release 
levy and return of property where levy made in violation of law--(1) In 
General. If the Internal Revenue Service (IRS) makes a levy in 
violation of the law, it is in the best interest of the United States 
and the taxpayer to release the levy and the IRS will return to the 
taxpayer any property obtained pursuant to the levy. For example, the 
IRS will release the levy and return the taxpayer's property if the 
levy was made--
    (i) Without giving the requisite thirty-day notice of intent to 
levy under section 6330;
    (ii) During the pendency of a proceeding for refund of divisible 
tax in violation of section 6331(i);
    (iii) Before investigation of the status of levied upon property in 
violation of section 6331(j);
    (iv) During the pendency of offers-in-compromise in violation of 
section 6331(k)(1); or
    (v) During the period an offer to enter into an installment 
agreement is pending (or for 30 days following the rejection of an 
offer, or, if the rejection is timely appealed, during the period that 
the appeal is pending) or during the period an installment agreement is 
in effect (or during the 30 days following a termination or, if a 
timely appeal of termination is filed, during the period the appeal is 
pending) in violation of section 6331(k)(2).
    (2) Property may not be credited to outstanding liability without 
the taxpayer's permission. When the release of a levy and the return of 
property are required under this paragraph (d), the property or the 
proceeds from the sale of the property received by the IRS pursuant to 
the levy must be returned to the taxpayer unless the taxpayer requests 
otherwise. The property or proceeds of sale may not be credited to any 
outstanding tax liability of the taxpayer, including the one with 
respect to which the IRS made the levy, without the written permission 
of the taxpayer.
    (e) Time of return. Levied upon property in possession of the IRS 
(other than money) may be returned under paragraphs (c) and (d) of this 
section at any time. An amount of money equal to the amount of money 
levied upon or received from a sale of property may be returned at any 
time before the expiration of 9 months from the date of the levy. When 
a request for the return of money filed in accordance with paragraph 
(h) of this section is filed before the expiration of the 9-month 
period, or a determination to return an amount of money is made before 
the expiration of the 9-month period, the money may be returned within 
a reasonable period of time after the expiration of the 9-month period 
if additional time is necessary for investigation or processing.
    (f) Purchase by the United States. For purposes of paragraph (a)(2) 
of this section, if property is declared purchased by the United States 
at a sale pursuant to section 6335(e)(1)(C), the United States will be 
treated as having received an amount of money equal to the minimum 
price determined by the Commissioner before the sale.
    (g) Determinations by the Commissioner. The Commissioner must 
determine whether any of the conditions authorizing the return of 
property exists if a taxpayer submits a request for the return of 
property in accordance with paragraph (h) of this section. The 
Commissioner also may make this determination independently. If the 
Commissioner determines that conditions authorizing the return of 
property are not present, the Commissioner may not authorize the return 
of property. If the Commissioner determines that conditions authorizing 
the return of property are present, the Commissioner may (but is not 
required to, unless the reason for the return of property is that the 
levy was made in violation of law and is governed by paragraph (d) of 
this section) authorize the return of property. If the Commissioner 
decides independently to return property under paragraph (c)(4) of this 
section based on the best interests of the taxpayer and the United 
States, the taxpayer or the National Taxpayer Advocate (or his 
delegate) must consent to the return of property.
    (h) Procedures for request for the return of property--(1) Manner. 
A request for the return of property must be made in writing to the 
address on the levy form.
    (2) Form. The written request must include the following 
information--
    (i) The name, current address, and taxpayer identification number 
of the person requesting the return of money (or property purchased by 
the United States);
    (ii) A description of the property levied upon;
    (iii) The date of the levy; and
    (iv) A statement of the grounds upon which the return of money is 
being requested (or property purchased by the United States).
    (i) No interest. No interest will be paid on any money returned 
under this section.
    (j) Administrative collection upon default. If the Commissioner 
returns property under this section, and the taxpayer fails to pay the 
previously assessed liability for which the levy was made on the 
returned property, the Commissioner may administratively collect the 
liability. Collection may include levying again on the returned 
property as long as statutory and administrative requirements are 
followed.

[[Page 10253]]

    (k) Effective date. This section is applicable on the date final 
regulations are published in the Federal Register.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-1562 Filed 2-13-01; 8:45 am]
BILLING CODE 4830-01-P