[Federal Register Volume 68, Number 160 (Tuesday, August 19, 2003)]
[Proposed Rules]
[Pages 49729-49732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20473]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-140378-01]
RIN 1545-BA22


Property Exempt From Levy

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to regulations 
relating to property exempt from levy, currently published under 
Internal Revenue Code section 6334. The regulation has been revised to 
provide guidance with respect to the following items and reflect 
changes made by the IRS Restructuring and Reform Act of 1998 (RRA 98): 
procedures for obtaining prior judicial approval of certain principal 
residence levies; exemption from levy for certain residences in small 
deficiency cases and for certain business assets in the absence of 
administrative approval or jeopardy; applicable dollar amounts for 
certain exemptions and the relevant dates for calculating the inflation 
adjustment for certain exemptions; and changes in titles of certain 
employees as a result of the reorganization of the IRS mandated by that 
Act. The proposed regulations also permit levy on certain specified 
payments with the prior approval of the Secretary, reflecting changes 
made by the Taxpayer Relief Act of 1997.

DATES: Written comments and requests for a public hearing must be 
received by November 17, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-140378-01), Room 5203, 
Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 
20044. Submissions may be hand-delivered between the hours of 8 a.m. 
and 5 p.m. to CC:PA:RU (REG-140378-01), Courier's Desk, Internal 
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC or sent 
electronically, via the IRS Internet site at: http://www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Robin Ferguson at (202) 622-3610 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations amending the Procedure 
and Administration Regulations (26 CFR part 301) under section 6334 of 
the Internal Revenue Code of 1986. The proposed regulations provide 
guidance on the amendments to section 6334 made by the IRS 
Restructuring and Reform Act of 1998 (Public Law 105-206)(RRA 98), and 
the Taxpayer Relief Act of 1997 (Public Law 105-34)(TRA 97).

Explanation of Provisions

Overview

    Section 6334 enumerates items of property exempt from levy and 
provides special rules for levies. In RRA 98, Congress amended section 
6334 and created new requirements for levy upon certain residential 
property and business assets. Specifically, section 6334 was amended to 
provide for an exemption, in small deficiency cases, from levy for 
certain real property used as a residence by any individual; to require 
judicial approval of the levy of certain principal residences; to 
require administrative approval of the levy of certain business assets; 
to increase certain exemption amounts; and to make certain conforming 
amendments. RRA 98 also mandated an IRS reorganization, which changed 
or eliminated certain position titles. TRA 97 amended section 6334 to 
provide that certain payments shall not be exempt from levy if the 
Secretary approves. The proposed regulations provide guidance on each 
of these provisions.

Levy Exemption for Residences in Small Deficiency Cases

    As amended, section 6334(a)(13) provides an exemption from levy for 
any real property used as a residence by the taxpayer or any other 
individual (except for real property that is rented) if the amount of 
the levy does not exceed $5,000. The proposed regulations provide 
guidance on this exemption.

Judicial Approval for Levies of Certain Principal Residences

    Prior to RRA 98, section 6334(a)(13) provided that the principal 
residence of the taxpayer, within the meaning of section 121, was 
exempt from levy in the absence of jeopardy or certain approval. 
Section 6334(e) permitted levy if an IRS district director or assistant 
district director personally approved, in writing, the levy of 
property, or the Secretary determined that the collection of tax was in 
jeopardy.
    As amended, section 6334(a)(13)(B)(i) provides that the principal 
residence of the taxpayer, within the meaning of section 121, is exempt 
from levy except to the extent provided in section 6334(e). Section 
6334(e)(1)(A) provides that a principal residence shall not be exempt 
from levy if a judge or magistrate of a district court of the United 
States approves, in writing, the levy of such residence. Section 
6334(e)(1)(B) provides that the district courts of the United States 
shall have exclusive jurisdiction to approve such levy. Accordingly, 
judicial approval is required prior to levy of a taxpayer's principal 
residence (hereinafter referred to as the section 6334(e)(1) 
proceeding).
    The Conference Report for RRA 98 states that no seizure of a 
dwelling that is the principal residence of the taxpayer or the 
taxpayer's spouse, former spouse, or minor child will be allowed 
without prior judicial approval. The Conference Report further provides 
that notice of the judicial hearing must be provided to the taxpayer 
and family members residing in the property. The Conference Report also 
states that at the judicial hearing, the Secretary will be required to 
demonstrate (1) that the requirements of any applicable law or 
administrative procedures relevant to the levy have been met, (2) that 
the liability is owed, and (3) that no reasonable alternative for the 
collection of the taxpayer's debt exists. IRS Restructuring and Reform 
Act of 1998, Conference Report to Accompany H.R. 2676, H.R. Conf. Rep. 
No. 105-599, 105th Cong., 2d Sess., at 267.
    With respect to whether a liability is owed, these proposed 
regulations interpret the legislative history to require the IRS to 
demonstrate only that an assessed liability has not been satisfied. The 
proposed regulations specifically do not require the IRS to demonstrate 
the merits of the underlying liability. Treasury and the IRS have 
concluded that the purpose of a section 6334(e)(1) proceeding is to 
determine whether the proposed seizure is appropriate rather than to 
afford the taxpayer with an additional opportunity to contest the 
merits of the underlying tax liability. As discussed below, a section 
6334(e)(1) proceeding, therefore, looks to whether the IRS has followed 
applicable law and procedural rules relating to the levy and the 
existence of reasonable collection alternatives, in addition to whether 
an unsatisfied liability exists. Other provisions of the Code, such as 
the deficiency procedures for income taxes, provide taxpayers with the 
opportunity to challenge the merits of an asserted liability. In the 
levy context, section 6330 gives taxpayers the right to request a 
hearing prior to levy, including levies that also are the subject of a 
section 6334(e)(1) proceeding. Section 6330(c)(2)(B) specifically gives 
the taxpayer the right

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to challenge the merits of the underlying liability if the taxpayer did 
not receive the statutory notice of deficiency or did not otherwise 
have an opportunity to dispute the tax liability. In contrast, nothing 
in section 6334(e)(1) indicates that Congress intended to provide a 
taxpayer with a further opportunity to contest the merits of the 
underlying tax liability.
    Consistent with the language of section 6334(e)(1) and the 
legislative history, the proposed regulations provide that judicial 
approval is required prior to levy of the principal residence of the 
taxpayer, taxpayer's spouse, taxpayer's former spouse, or taxpayer's 
minor child. Also in accordance with this legislative history, the 
proposed regulations provide that the Government will request that the 
taxpayer be given notice and an opportunity to participate in the 
section 6334(e)(1) proceeding.
    The Government will initiate the section 6334(e)(1) proceeding by 
filing with a district court of the United States a petition seeking 
judicial approval of a principal residence levy. In its petition, the 
Government will set forth its prima facie case by demonstrating that 
(1) The underlying tax liability has not been satisfied, (2) the 
requirements of any applicable law or administrative procedure relevant 
to the levy have been met, and (3) no reasonable alternative for 
collection of the taxpayer's debt exists. The petition will ask the 
court to issue to the taxpayer an order to show cause why the principal 
residence property should not be levied and a notice of hearing.
    The taxpayer will be granted a hearing to rebut the Government's 
prima facie case if the taxpayer files an objection within the time 
period required by the court raising a genuine issue of material fact 
demonstrating that (1) The assessed tax liability has been satisfied, 
(2) the taxpayer has other assets from which the liability can be 
satisfied, or (3) the IRS did not follow the applicable laws or 
procedures pertaining to the levy. The taxpayer is not permitted to 
challenge the merits underlying the tax liability in the proceeding. 
Unless the taxpayer makes a timely and appropriate showing, the court 
would be expected to enter an order approving the levy of the principal 
residence property.
    If the property to be levied is the principal residence of the 
taxpayer's spouse, former spouse, or minor child, the Government will 
send each such person a letter providing notice of the commencement of 
the proceeding. The letter will be addressed in the name of the 
taxpayer's spouse or ex-spouse, individually or on behalf of any minor 
children. If it is unclear who is living in the principal residence 
and/or what such person's relationship is to the taxpayer, a letter 
will be addressed to ``Occupant''. The purpose of the letter is to make 
the family members aware that their living arrangements may be placed 
in jeopardy if the court approves levy of the principal residence 
property.
    The proposed regulations provide that family members who receive 
notice of the commencement of a section 6334(e)(1) proceeding may not 
be joined as parties to the proceeding. As noted above, Treasury and 
the IRS believe that the purpose of such notification is to ensure that 
family members living at the residence that is the subject of the 
proposed levy understand that their living arrangements may be placed 
in jeopardy. A levy by the IRS, however, can reach only the taxpayer's 
interest in property. The property rights (if any) of family members 
living at the residence are outside of the scope of that levy and are 
not at issue when an order approving the levy is sought from the court. 
Accordingly, because only the taxpayer's property rights are at issue 
in a section 6334(e)(1) proceeding, the proposed regulations do not 
permit other family members to contest a request for judicial approval 
of a principal residence levy. This rule is similar to those for 
actions by the IRS to foreclose on tax liens on property under section 
7403. In those actions, the Government names as defendants all 
individuals who may claim an interest in the property; residents who do 
not otherwise have a legal interest in property, such as by co-tenancy, 
are not named as defendants.
    The proposed regulations incorporate the procedures for obtaining 
judicial approval of a principal residence levy.

Prior Approval of Levies of Certain Business Assets

    In enacting RRA 98, Congress created new approval requirements for 
levies of certain business assets. Specifically, Congress enacted new 
section 6334(a)(13)(B)(ii), which provides that, except to the extent 
provided in section 6334(e), tangible personal property or real 
property (other than real property that is rented) used in the trade or 
business of an individual taxpayer shall be exempt from levy. Section 
6334(e) was amended to provide that such property shall not be exempt 
from levy if a district director or assistant district director of the 
IRS personally approves (in writing) the levy of such property, or the 
Secretary finds that the collection of tax is in jeopardy. Section 
6334(e)(2) of the Internal Revenue Code (Code). Section 6334(e) was 
further amended to provide that an official may not approve such levy 
unless the official determines that the taxpayer's other assets subject 
to collection are insufficient to pay the amount due, together with 
expenses of the proceedings.
    RRA 98 section 3445(c)(1) clarifies that, with respect to permits 
issued by a State and required under State law for the harvest of fish 
or wildlife in the trade or business of an individual taxpayer, the 
term other assets as used in section 6334(e)(2) includes future income 
that may be derived by such taxpayer from the commercial sale of fish 
or wildlife under such permit. RRA 98 section 3445(c)(2) provides that 
section 3445(c)(1) shall not be construed to invalidate or in any way 
prejudice any assertion that the privilege embodied in such permits is 
not property or a right to property under the Code.
    The proposed regulations provide guidance on the current 
requirements of section 6334(e) relating to the procedures for approval 
of the levy of certain business assets.

Exemption Amounts and Conforming Amendments

    In RRA 98, Congress amended section 6334(a)(2) and (a)(3) to 
increase the applicable exemption dollar amounts (which are indexed for 
inflation). Congress also enacted a conforming amendment to section 
6334(g)(1) to revise the dates to be used in calculating the inflation 
adjustment to the section 6334(a)(2) and (a)(3) exemptions. The 
proposed regulations provide guidance on these provisions.

IRS Reorganization

    Pursuant to the reorganization of the IRS after RRA 98, the titles 
of district director and assistant district director cited in section 
6334(e)(2)(A) no longer exist. The proposed regulations replace these 
titles with the current title, which is Area Director.

Levy on Certain Payments

    In TRA 97, Congress amended section 6334 by adding new section 
6334(f) and redesignating former section 6334(f) as section 6334(g). 
Section 6334(f) provides that any payment described in section 
6331(h)(2)(B) or (h)(2)(C) (certain payments upon which continuous levy 
may be authorized) shall not be exempt from levy if the Secretary 
approves the levy thereon under section 6331(h). The proposed 
regulations provide guidance on this provision.

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Proposed Effective Dates

    The proposed regulations will apply on the date corresponding final 
regulations are published in the Federal Register.

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) and the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply to these regulations, and, therefore, a 
Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the 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 Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of the proposed regulations is Robin Ferguson 
of the Office of Associate Chief Counsel, Procedure and Administration 
(Collection, Bankruptcy and Summonses Division).

Lists 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

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

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

    2. Section 301.6334-1 is amended as follows:
    1. Paragraphs (a)(2), (a)(3), (a)(8), (a)(13), (d), (e), and (f) 
are revised.
    2. Paragraphs (g) and (h) are added.
    The revisions and additions read as follows:


Sec.  301.6334-1  Property exempt from levy.

    (a) * * *
    (2) Fuel, provisions, furniture, and personal effects. So much of 
the fuel, provisions, furniture, and personal effects in the taxpayer's 
household, and of the arms for personal use, livestock, and poultry of 
the taxpayer, that does not exceed $6,250 in value.
    (3) Books and tools of a trade, business or profession. So many of 
the books and tools necessary for the trade, business, or profession of 
an individual taxpayer as do not exceed in the aggregate $3,125 in 
value.
* * * * *
    (8) Judgments for support of minor children. If the taxpayer is 
required under any type of order or decree (including an interlocutory 
decree or a decree of support pendente lite) of a court of competent 
jurisdiction, entered prior to the date of levy, to contribute to the 
support of that taxpayer's minor children, so much of that taxpayer's 
salary, wages, or other income as is necessary to comply with such 
order or decree. The taxpayer must establish the amount necessary to 
comply with the order or decree. The Service is not required to release 
a levy until such time as it is established that the amount to be 
released from levy actually will be applied in satisfaction of the 
support obligation. The Service may make arrangements with a delinquent 
taxpayer to establish a specific amount of such taxpayer's salary, 
wage, or other income for each pay period that shall be exempt from 
levy, for purposes of complying with a support obligation. If the 
taxpayer has more than one source of income sufficient to satisfy the 
support obligation imposed by the order or decree, the amount exempt 
from levy, at the discretion of the Service, may be allocated entirely 
to one salary, wage or source of other income or be apportioned between 
the several salaries, wages, or other sources of income.
* * * * *
    (13) Residences exempt in small deficiency cases and principal 
residences and certain business assets exempt in absence of certain 
approval or jeopardy--(i) Residences in small deficiency cases. If the 
amount of the levy does not exceed $5,000, any real property used as a 
residence of the taxpayer or any real property of the taxpayer (other 
than real property which is rented) used by any other individual as a 
residence.
    (ii) Principal residences and certain business assets. Except to 
the extent provided in section 6334(e), the principal residence (within 
the meaning of section 121) of the taxpayer and tangible personal 
property or real property (other than real property which is rented) 
used in the trade or business of an individual taxpayer.
* * * * *
    (d) Levy allowed on principal residence. The Service will seek 
approval, in writing, by a judge or magistrate of a district court of 
the United States prior to levy of property that is owned by the 
taxpayer and used as the principal residence of the taxpayer, the 
taxpayer's spouse, the taxpayer's former spouse, or the taxpayer's 
minor child.
    (1) Nature of judicial proceeding. The Government will initiate a 
proceeding for judicial approval of levy on a principal residence by 
filing a petition with the appropriate United States District Court 
demonstrating that the underlying liability has not been satisfied, the 
requirements of any applicable law or administrative procedure relevant 
to the levy have been met, and no reasonable alternative for collection 
of the taxpayer's debt exists. The petition will ask the court to issue 
to the taxpayer an order to show cause why the principal residence 
property should not be levied and will also ask the court to issue a 
notice of hearing.
    (2) The taxpayer will be granted a hearing to rebut the 
Government's prima facie case if the taxpayer files an objection within 
the time period required by the court raising a genuine issue of 
material fact demonstrating that the underlying tax liability has been 
satisfied, that the taxpayer has other assets from which the liability 
can be satisfied, or that the Service did not follow the applicable 
laws or procedures pertaining to the levy. The taxpayer is not 
permitted to challenge the merits underlying the tax liability in the 
proceeding. Unless the taxpayer files a timely and appropriate 
objection, the court would be expected to enter an order approving the 
levy of the principal residence property.
    (3) Notice letter to be issued to certain family members. If the 
property to be

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levied is owned by the taxpayer but is used as the principal residence 
of the taxpayer's spouse, the taxpayer's former spouse, or the 
taxpayer's minor child, the Government will send a letter to each such 
person providing notice of the commencement of the proceeding. The 
letter will be addressed in the name of the taxpayer's spouse or ex-
spouse, individually or on behalf of any minor children. If it is 
unclear who is living in the principal residence property and/or what 
such person's relationship is to the taxpayer, a letter will be 
addressed to ``Occupant''. The purpose of the letter is to provide 
notice to the family members that the property may be levied. The 
family members may not be joined as parties to the judicial proceeding 
because the levy attaches only to the taxpayer's legal interest in the 
subject property and the family members have no legal standing to 
contest the proposed levy.
    (e) Levy allowed on certain business assets. The property described 
in section 6334(a)(13)(B)(ii) shall not be exempt from levy if--
    (1) An Area Director of the Service personally approves (in 
writing) the levy of such property; or
    (2) The Secretary finds that the collection of tax is in jeopardy. 
An Area Director may not approve a levy under paragraph (e)(1) of this 
section unless the Area Director determines that the taxpayer's other 
assets subject to collection are insufficient to pay the amount due, 
together with expenses of the proceeding. When other assets of an 
individual taxpayer include permits issued by a State and required 
under State law for the harvest of fish or wildlife in the taxpayer's 
trade or business, the taxpayer's other assets also include future 
income that may be derived by such taxpayer from the commercial sale of 
fish or wildlife under such permit.
    (f) Levy allowed on certain specified payments. Any payment 
described in section 6331(h)(2)(B) or (C) shall not be exempt from levy 
if the Secretary approves the levy thereon under section 6331(h).
    (g) Inflation adjustment. For any calendar year beginning after 
1999, each dollar amount referred to in paragraphs (a)(2) and (3) of 
this section will be increased by an amount equal to the dollar amount 
multiplied by the cost-of-living adjustment determined under section 
1(f)(3) for the calendar year (using the language ``calendar year 
1998'' instead of ``calendar year 1992'' in section 1(f)(3)(B)). If any 
dollar amount as adjusted is not a multiple of $10, the dollar amount 
will be rounded to the nearest multiple of $10 (rounding up if the 
amount is a multiple of $5).
    (h) Effective date. This section will apply as of the date final 
regulations are published in the Federal Register.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-20473 Filed 8-18-03; 8:45 am]
BILLING CODE 4830-01-P