IV. Collecting the Judgment
A. An Overview
Collection of a judgment should be pursued promptly, vigorously, uniformly, and fairly. The trial attorney should make every effort to collect as much of the judgment as is feasible within nine months after its entry. Before assuming that enforced collection will be necessary, however, the attorney should explore obtaining voluntary payment.
The trial attorney's work can be summarized:
Once a trial attorney determines that enforced collection will be necessary, the attorney should look to the IRS for assistance in locating assets and income and seizing and liquidating them. At this point, if not done earlier, the taxpayer's income tax returns for at least the five most recent years should be obtained. (See § II.G., supra, discussing how to request returns.) On request, IRS Technical Support42 will assign a revenue officer to the collection matter (if one is not already assigned) to act as the Tax Division's field representative. This person can do much leg work, such as conducting an assets investigation, checking land records, preparing and serving IRS levies, and advising of other local developments that bear on collection efforts.
Similarly, the trial attorney may be able to obtain substantial assistance from the United States Attorney's office. Most United States Attorneys' offices have Assistant United States Attorneys and paralegals who specialize in judgment collection. These people are a valuable source of information on matters of local law and custom.
B. Demand for Payment and Instituting Rule 69 Discovery
The first step in the collection process is simply to ask the debtor to pay. A letter demanding payment should be sent ten days after judgment has been entered in favor of the Government in the district court.43 This is so regardless of whether the taxpayer intends to appeal, unless the taxpayer has obtained a stay of collection.
A sample demand letter is attached as Exhibit 8. To the extent feasible, however, demand letters should be adapted and personalized to suit the particular case, in light of the trial attorney's knowledge about the case's collection potential; using a form demand letter is most appropriate where the Division's attorneys have had no previous discussion or contact with the taxpayer's representative or the taxpayer concerning collectibility. The less a demand letter looks like standard boilerplate, which may be safely ignored, the more effective the request for payment will be. Accordingly, if administrative collection is possible, remind the taxpayer of that in the letter. If the taxpayer owns a home that normally would be exempt from creditors' process, remind the taxpayer that state exemption statutes do not bind the United States.44 If there is a potential for recovering the 28 U.S.C. § 3011 ten-percent surcharge (discussed at § III.D., infra), say so.
If you have already ascertained that the taxpayer has no intention of paying anything towards any judgment that may be entered, early service of Rule 69 interrogatories (seeking information as to financial condition, see discussion of Rule 69 discovery, infra) will eliminate wasted time and start the running of the taxpayer's 30-day period for answering much sooner. Thus, although not required at this point, you should consider sending Rule 69 interrogatories with the demand letter or shortly after it is sent. Of course, if the debtor satisfies the judgment within the 21-day period as requested in the demand letter the interrogatories need not be answered.
In addition to seeking payment, the demand letter should also, if it has not already been done, either request that the judgment debtor fill out a Form 433-A (Rev. 5-2001) (Collection Information Statement for Wage Earners and Self-Employed Individuals) within 21 days, or be accompanied by Rule 69 interrogatories and a document request seeking financial information. See Exhibit 9 for a copy of Form 433-A and Privacy Act Statement45 and Exhibits 10 and 11 for sample Rule 69 interrogatories and a document request. A complete Form 433-A or Rule 69 interrogatory answers may be the starting point for negotiating a compromise of the judgment on the basis of collectibility.
Since Rule 69 interrogatories can seek the same financial information as is sought by a Form 433-A, the only significant difference between the two is that a debtor cannot be compelled to submit a Form 433-A. In contrast, answers to Rule 69 discovery, like prejudgment discovery, can be compelled pursuant to Fed. R. Civ. P. 37. On balance then, Rule 69 interrogatories are preferable unless there is good reason to believe that a completed Form 433-A will be promptly submitted.
The trial attorney should ensure that any Rule 69 interrogatory answers or completed Form 433-A are made part of the litigation file. Often in the past, collection efforts have been hampered because financial information collected in discovery has been lost or mislaid, particularly in situations where one or more trial attorneys have left the Division before collection efforts have been completed.
Even if the taxpayer has submitted Rule 69 interrogatory answers or a Form 433-A, the attorney should proceed with informal or formal discovery to supplement and verify the information provided, as discussed in the next section.
C. More on Finding Taxpayers' Assets
Ingenuity and diligence are the trial attorney's and paralegal's chief tools in locating a judgment debtor's assets. Judgment debtors who are collectible range from those who are able and willing to pay the judgment immediately, to those who have designed their financial affairs so that if ever a Tax Division trial attorney sought to collect the taxes owed, it would be impossible because all assets would be hidden. Needless to say, the latter type of judgment debtor (and many others) will not submit complete and accurate Rule 69 interrogatory answers or Form 433-A and voluntarily disclose assets. Fortunately, there are sources of information about a debtor's assets which do not depend on the cooperation or honesty of the judgment debtor.
1. Tax Returns
Tax returns provide a good source of information concerning the taxpayer's financial situation. For example, dividend income reported on a return indicates the ownership of stock; interest income indicates the ownership of bank accounts, bonds, or other debt obligations; and deductions for real estate taxes or mortgage interest indicate ownership of real estate. Returns filed over a period of time may also indicate the disappearance of assets and possible fraudulent transfers. For this reason, if copies of tax returns were not obtained at the pre-judgment stage, the paralegal should request the IRS to furnish copies of all federal income tax returns (or copies of tax returns) that were filed for the last five years. (See § II.G., supra, discussing how to request returns.) In some cases, it may be advisable to obtain copies of the income tax returns for all years beginning with the year to which the liability relates in order to look for a possible fraudulent conveyance. This request should be renewed annually, so that you will have the most current information.
2. Additional Rule 69 Discovery
Rule 69, Fed. R. Civ. P., provides that a judgment creditor may obtain discovery from any person, including the judgment debtor, "in the manner provided in these rules" in aid of collection of a judgment.46 This means that a judgment creditor may use the full panoply of discovery as provided in Fed. R. Civ. P. 26 through 36 and may enforce a failure to comply with discovery in the manner provided in Rule 37. Moreover, nonparty witnesses may be subpoenaed to attend a deposition (and produce documents) pursuant to Rule 45.
The ability to conduct (and, if necessary, compel) discovery in aid of collection pursuant to Rule 69 is a key collection tool that is not available to the IRS when it is pursuing administrative collection efforts.47 Accordingly, as soon as it is apparent that a judgment debtor does not intend to satisfy a judgment voluntarily, a trial attorney should begin to plan how to use the available discovery tools to locate income and assets. In most cases, interrogatories and requests for production of documents to the judgment debtor are the recommended first step.48 Nevertheless, if the trial attorney knows or suspects that the debtor has certain assets or income, the Rule 69 interrogatories should be tailored to fit the circumstances of the case.
If the Rule 69 interrogatories are not answered within the 30 days allowed by Rule 33, the trial attorney should promptly request answers and, if necessary, follow up with a motion to compel answers, since ignoring a failure to answer sends a message to the debtor that the Government is not serious about collecting the debt. (See Exhibit 12 for a sample motion to compel responses to Rule 69 discovery and Exhibit 13 for a sample discussion of authorities in support of a motion to compel and in response to various objections to discovery, including 5th Amendment claims.)
Most important, once the interrogatory answers are received, the trial attorney should promptly review them and determine whether any income or assets are identified that might be a possible source of collection. The trial attorney should also review the interrogatory answers with a view towards pursuing additional discovery, such as depositions and document requests.
As in pretrial discovery, depositions are one of the most effective postjudgment discovery tools. A Rule 69 deposition of the debtor (and possibly third parties) is advisable if:
(1) the amount of the judgment exceeds $100,000; or
(2) the trial attorney suspects that the debtor has the ability to satisfy the judgment; or
(3) the attorney suspects that assets or income have been or are being concealed or fraudulently transferred.
A document request should be sent before the deposition notice in time for the attorney to review the documents before the deposition. Among the documents ordinarily requested are the debtor's bank statements, loan applications, documents evidencing consideration allegedly furnished for property transferred by the debtor, and documents indicating amounts held in IRAs, pension plans, mutual funds, and the like. In many cases, depositions of (or document subpoenas issued to) the debtor's employer, bank(s), and possible transferees or nominee owners of assets are also advisable.49
3. Fraudulent Conveyances & Nominee Ownership
The paralegal and trial attorney should be alert to look for assets which may have been fraudulently conveyed by the taxpayer or which are held in the name of a nominee. When the IRS requests institution of a suit to reduce an assessment to judgment, it will generally authorize whatever other litigation is then known to be necessary, such as a foreclosure of a lien on realty, or a suit to satisfy a fraudulent conveyance, or a nominee suit. Sometimes, however, even when the IRS has been vigorously pursuing collection, the IRS may overlook a fraudulent conveyance, or property held in the name of a nominee. In cases involving counterclaims, the IRS may never have investigated the possibility of a fraudulent conveyance, and it is the trial attorney's responsibility (assisted, of course, by the IRS) to determine whether any occurred.
For purposes of determining whether a debtor's transfer of an asset rendered him insolvent, a liability accrues when it is incurred. For example, a liability for income taxes for the year 2003 accrues by the end of 2003, even though it may not be assessed until much later.50
The federal fraudulent conveyance statute is based upon the Uniform Fraudulent Transfer Act, but it contains relatively short statutes of limitations, 28 U.S.C. § 3304, generally six years after the transfer (plus, for intent to defraud, two years after the transfer reasonably should have been discovered). These statutes of limitation will be troublesome in a tax context because the legislation does not include any suspension during periods in which a criminal investigation or Tax Court or bankruptcy litigation is pending. Accordingly, a fraudulent conveyance case brought by the Tax Division will normally be based on state law, instead of the federal statute. While the federal legislation is the exclusive remedy for most Government claims, state remedies are still available in aid of collection of taxes, 28 U.S.C. § 3003(b)(1), and state statutes of limitation do not bind the United States.51 A state law statute of limitations extinguishing a claim after a certain period of time likewise is not binding on the United States.52
4. More on Nominees, Alter Egos and Successors
Trial attorneys seeking to locate and attach a judgment debtor's assets may need to determine whether such assets are being held by the debtor's nominees, alter egos, or successors. And where such doctrines can be employed, the trial attorney will have to determine whether separate proceedings may have to be commenced to enforce existing judgments (or tax liens). A discussion of these three theories and some of the major cases is set forth in Exhibit 14.
5. Using Computerized Database Services to Locate Debtors' Assets
Once the judgment has been perfected (i.e., an Abstract of Judgment is filed with the appropriate state office), and before formal discovery is served on the judgment debtor, trial attorneys should avail themselves of various electronic databases containing information about a judgment debtor's assets. This may assist trial attorneys in framing Fed. R. Civ. P. Rule 69 discovery (i.e., document requests, interrogatories, and/or deposition questions) to the judgment debtor, and may provide important leads about the debtor's assets as well. For assistance in electronic searches, please consult with The Tax Division librarian at 202-307-6518 or 616-5564, who has a wealth of knowledge, information, and experience.
A summary of some electronic sources follows:
LEXIS/NEXIS is an excellent source for doing asset searches. There are numerous databases. For example, LEXIS/NEXIS has databases that include people, business and asset locators, public records (liens and judgments), company records, financial reports about companies (e.g., Experian Business Reports), filings with numerous Department of States and with the Securities and Exchange Commission.53 There are also motor vehicle databases. LEXIS/NEXIS databases, however, do not cover every state or every category. One catchall database that is particularly helpful is SmartLinx. When researching individual judgment debtors, submit the name of a judgment debtor in the LEXIS/NEXIS library and file entitled " SmartLinx Person Summary Reports " (additional information such as an address and/or social security number can also be added) to obtain descriptive reports which include name variations, current and prior addresses, telephone numbers, a summary of assets, and "attributes."54 The search results may also show multiple addresses for the judgment debtor in more than one state. Information pertaining to the judgment debtor's real property may include the price the debtor paid (or received) for the property, the legal description of the property, the current assessed value of the property, and other details about the property. To search for business information, the library and file entitled SmartLinx Business Summary Reports can be used to obtain similar information.
WESTLAW also provides another source for doing asset searches; but it, too, does not include information from all 50 states. WESTLAW and LEXIS/NEXIS databases are similar but not identical. Locating a judgment debtor or witnesses having relevant information can be found by consulting the People Finder Name Tracker , People Finder Social Security Alert , and People Finder Skip Tracer databases. Motor Vehicle records can be found on both LEXIS/NEXIS and WESTLAW.
There are many other databases available through the Department of Justice Library system. Please consult the guide Finding Information on U.S. Companies that is provided through the Virtual Library. The table of contents includes a description of print sources, online sources, mostly free Internet sources, and search engines.
Other Electronic Databases:
Dun & Bradstreet Business Information Reports (currently only available through the Tax Division's Reference Librarian). A "D&B" report provides information and analysis in order to evaluate a firm's operations and profitability. This is where a credit rating for a company may be obtained.
Powerfinder Government & Public Agency Edition CD-ROM (located in the Tax Library in Room 7607, JCB). Provides business and personal names, addresses, and telephone numbers.
Dialog (available through the Tax Division's Reference Librarian). Dialog is a network which provides access to a myriad of academic, business, technical and scientific, and trade databases. Some databases are bibliographic and others provide full-text documents.
DOJ Virtual Library Although many of the anticipated searches may involve individuals, the Justice Librarians have put together a number of guides that can assist you with public records research. Use the Guide to Corporation Records to access Department of State databases (often more up-to-date and accurate than Westlaw and Lexis). Some states even provide the full text of annual reports and other corporate documents online. Link to Web Pacer and electronic filing databases for federal courts through the Guide to Court Resources. Many counties provide extensive property databases for free through the Web. These and other state and local public records resources can be accessed through the State Legal Resource Center, Library Links Page to Public Records. The DOJ Virtual Library link to Directories dedicated to finding a person or business may also be useful.
Please note that as with any free and private company Web site, the information obtained is neither warranted nor obtained over a secure link.
Search Engines on the Internet The DOJ Virtual Library provides a guide entitled Guide to Web Searching Tools. Access to search engines such as Google, Altavista, subject directories such as Yahoo, and many more can be easily accessed here.
A discussion by Lynn Peterson entitled Super Searchers Go to the Source: Lynn Peterson: Public Records "To the Ends of the Earth," Part 1 and Part 2 provides the researcher with an in-depth understanding of the subject.
Trial attorneys may also wish to consult with the Financial Litigation Units ("FLU") of the US Attorneys Office in the districts where they have obtained judgments. The FLUs may subscribe to databases such as CDB InfoTech n/k/a ChoicePoint, and FLU's can obtain credit reports regarding judgment debtors. Also, many of the FLUs have access to the major credit reporting agencies, such as TRW, Trans Union, and Equifax. These can give you current addresses, employment information, and credit scoring, and can often help to locate banks with which a debtor does business. The Department of Justice librarians can now conduct ChoicePoint searches. Please contact The Tax Division librarian at 202 307-6518 or 616-5564 for details.
6. Other Sources of Information on Collecting Judgments
Attached as Exhibit 15 is a bibliography of books and articles on collecting judgments and locating assets offshore. Most of these materials can be obtained through the Tax Division library.
D. Evaluating Collection Potential
Once the trial attorney finds assets, the next step is to ascertain whether they are available for collection. Some assets or income may be exempt from collection or subject to the prior claims of other creditors.
In evaluating collection potential you must take into account, among other things:
(1) the priority of the Government's underlying federal tax lien, and whether a notice of federal tax lien has been timely filed and remains perfected;
(2) the protection afforded by the judgment lien;
(3) the effect, if any, of state exemption statutes; and
(4) the extent to which the tax claims covered by the judgment will survive bankruptcy.
1. Priority: The Federal Tax Lien
In collecting a judgment for taxes, the trial attorney can rely upon either the judgment lien or the federal tax lien, or both.55 Since the federal tax lien will usually pre-date the judgment lien, normally the United States will rely upon the federal tax lien.56 Thus, the trial attorney must be familiar with when a federal tax lien arises and the filing requirements relative to federal tax liens.
The first step in the creation of a federal tax lien involves the making of an assessment. An assessment of a federal tax is made by recording the liability of the taxpayer in the office of the Secretary of the Treasury. I.R.C. § 6203. Pursuant to the Treasury Regulations, an assessment is made by an assessment officer signing the summary record of assessment. Treas. Reg. § 301.6203-1. Section 6303 of the I.R.C. provides that as soon as practicable, and within 60 days after the making of an assessment, notice of the assessment and demand for payment of the assessment must be given to the taxpayer.57
If the taxpayer neglects or refuses to pay the tax after demand, then, pursuant to I.R.C. §§ 6321 and 6322, a federal tax lien comes into existence and attaches to all property and rights to property belonging to the taxpayer. The tax lien dates from the date of assessment, and continues until the tax liability has been satisfied or becomes unenforceable by reason of lapse of time.58 The federal tax lien attaches not only to all property or rights to property belonging to the taxpayer on the date the tax lien arose, but also attaches to all after-acquired property or rights to property.59
State law determines the nature of the interest the taxpayer has in property, but once it has been determined that the taxpayer has an interest in property under state law, federal law determines the priority of competing liens asserted against the taxpayer's property.60
Except as provided under I.R.C. § 6323, in order for a state-created lien to compete against a federal tax lien, the state-created lien must be "choate." A state-created lien is choate when the identity of the lienor, the property subject to the lien, and the amount of the lien have all been established.61 Once a state-created lien has become choate, then the priority between the state-created lien and the federal tax lien is determined by the principle that the first in time is the first in right.62
With respect to certain interests listed in I.R.C. § 6323(a), the federal tax lien imposed by § 6321 is not valid until such time as a notice of federal tax lien has been filed. The interests are those of a purchaser, holder of a security interest, mechanic's lienor, and judgment lien creditor. Once a notice of federal tax lien has been filed, the priority of the listed interest with respect to the federal tax lien is determined by the same principle of "first in time is first in right." In deciding whether the federal tax lien is first in time, however, you look to the date the notice of federal tax lien was filed, not the date the federal tax lien arose under § 6322.63
The notice of federal tax lien is filed in the one office within the state (or the county or other governmental subdivision) designated by the laws of that state where the property is situated.64 I.R.C. § 6323(f)(1)(A). Real property is deemed to be situated at the place of its physical location.65 I.R.C. § 6323(f)(2)(A). Personal property is deemed to be situated at the residence of the taxpayer at the time the notice of federal tax lien is filed. I.R.C. § 6323(f)(2)(B). The residence of a corporation or partnership is deemed to be the place at which their principal executive office is located. Id. The residence of a taxpayer whose residence is outside of the United States is deemed to be the District of Columbia. Id. If the state in which the property is situated fails to designate the one office required by § 6323(f)(1)(A), then the notice of federal tax lien must be filed in the office of the clerk for the United States District Court for the judicial district in which the property is located. I.R.C. § 6323(f)(1)(B).
In order for the notice of federal tax lien to remain effective, it must be refiled during the refiling period specified in I.R.C. § 6323(g)(3).66 The first refiling period is the one-year period ending 30 days after the expiration of ten years after the date of the assessment of the tax. The second refiling period, as well as all other subsequent refiling periods, is the one-year period ending with the expiration of ten years after the close of the preceding required refiling period.
Thus, if a federal tax assessment is made on March 1, 1989, the first refiling period for any filed notice of federal tax lien with respect to that tax would be April 1, 1998, through March 31, 1999. The second refiling period would be from April 1, 2008, through March 31, 2009. A timely refiled notice of federal tax lien is effective as of the date the original notice of federal tax lien to which the refiled notice relates was effective. Treas. Reg. § 301.6323(g)-1(a)(2). If the notice of federal tax lien is filed after the required refiling period, then the notice of federal tax lien will only be effective from the date of the subsequent refiling.
2. Priority: The Judgment Lien
As previously noted, with most tax judgments the underlying federal tax lien will give the Government a better priority position than will the judgment lien. Nevertheless, the trial attorney should ensure that the United States obtains a judgment lien on the taxpayer's real property by filing an abstract of judgment in case the IRS fails to refile the notice of federal tax lien. Creation of a judgment lien is especially important in those cases in which the underlying liability of the judgment debtor to the United States is not secured by a federal tax lien, e.g., liability under I.R.C. §§ 3505 and 6332(c) and erroneous refunds.
3. Effect, if any, of State Exemption Statutes
State laws and interpretations are not determinative regarding property rights and the reach of the federal tax lien. State-law exemptions for homesteads and tenancies by the entirety do not prevent the tax lien from attaching to such property and the Government foreclosing such lien.67 Labels that state laws place on property rights are irrelevant to the federal question of which bundle of rights constitute property that may be attached by a federal tax lien.68
At the election of a debtor under 28 U.S.C. § 3014, Government claims generally will be subject to the various exemptions from creditor's process enacted in each state or to the federal exemptions specified in § 522(d) of the Bankruptcy Code.69 With respect to federal taxes, however, the only exemptions generally available (outside of bankruptcy) are those provided under I.R.C. § 6334. This is particularly significant in jurisdictions that have a generous homestead provision. While property listed in § 6334 is exempt from levy, such property is not exempt from the federal tax lien that is created at the time of assessment.70
Some of our collection cases do not involve an assessed tax so that a tax lien does not exist and the IRS does not have the power to levy. Examples are suits to enforce levies, actions under I.R.C. § 3505 (relating to derivative liability for withholding taxes), actions to recover erroneous refunds, and tortious conversion-of-lien suits. In attempting to effect collection of judgments in such cases, the state exemption rules may apply pursuant to 28 U.S.C. § 3014. The state exemption provisions likewise will apply to the use of judgment enforcement procedures to collect costs, sanctions, and attorney's fees. An alternative course of action for avoiding the state exemption rules when collecting costs, sanctions, and attorney's fees is to request their assessment and collection by the IRS under I.R.C. § 6673(b). Collection of these amounts by levy is not subject to state exemptions, but only to the I.R.C. § 6334 exemptions.
4. Extent of Survival of Tax Claims After Bankruptcy
Another important consideration is the possibility that the taxpayer may file a bankruptcy petition. Counsel for taxpayers frequently threaten to file bankruptcy when attempting to negotiate a settlement of a tax debt. A mere threat of bankruptcy should not cause the Tax Division to waive collection of amounts that would be discharged in bankruptcy. Nonetheless, the degree to which a tax claim would be satisfied or discharged in bankruptcy is a relevant consideration in evaluating a settlement proposal.
Whether certain taxes of an individual are dischargeable in a bankruptcy proceeding sometimes depends upon whether the proceeding is one under Chapter 7, 11, 12, or 13. Section 523(a) of the Bankruptcy Code provides exceptions to the normal discharge provisions with respect to an individual in a case under Chapter 7, 11, or 12.71 Pursuant to § 523(a), a tax claim which is entitled to priority under § 507(a)(8) of the Bankruptcy Code will not be discharged in a proceeding under Chapter 7, 11, or 12.72 Further, tax claims will not be discharged in an individual's case under Chapter 7, 11, or 12 if the claims relate to a tax debt with respect to which a return, if required, was not filed or was filed late and two years or less before the date of the filing of the bankruptcy petition. Section 523(a) also provides for the nondischarge of certain tax penalties. Also, certain tax liabilities will be nondischargeable under § 523(a)(1)(C).
A discharge granted under § 1328(a) of the Bankruptcy Code is different. A debtor who receives a discharge under § 1328(a) is discharged, with certain exceptions not applicable to this discussion, from all debts provided for by the plan or disallowed under § 502. Thus, trust fund recovery penalty liabilities have been held to be discharged in a Chapter 13 proceeding when the plan provided for payment of all allowed tax liabilities but–because the IRS's proof of claim had not been timely filed–the liability did not in fact have to be paid.73
A corporation is not entitled to a discharge in a Chapter 7 proceeding. Bankruptcy Code § 727(a)(1). A corporation will also not be able to discharge its tax liabilities in a Chapter 11 proceeding if the plan provides for the liquidation of all or substantially all of the property of the estate and the corporation does not engage in business after consummation of the plan of reorganization. Bankruptcy Code § 1141(d)(3). If a corporation files a Chapter 12 proceeding, Bankruptcy Code § 1228(a)(2) provides for the nondischarge of any debt of the kind specified in § 523(a).
E. Liquidating Assets
There are a number of different techniques the trial attorney can employ to convert assets in the hands of the taxpayer or his associates to cash in the coffers of the United States.
1. Administrative Collection by the IRS
One effective collection technique that the trial attorney should always attempt to employ is the IRS administrative levy. See I.R.C. § 6331. Current law regarding the use of levies requires the IRS to issue the taxpayer a notice of the proposed levy and the taxpayer's rights to a hearing with the IRS Office of Appeals. I.R.C. § 6330(a). The taxpayer then has thirty days to request the hearing. If the eventual determination by the IRS Office of Appeals is adverse to his position, the taxpayer can then file an action with either the U.S. Tax Court or a district court, depending on the type of tax liability the IRS seeks to collect. I.R.C. § 6330(d). The IRS is prohibited from actually issuing the levy and seizing the property unless and until the IRS Office of Appeals proceeding, and any subsequent court proceeding, are first resolved in its favor.
If the trial attorney can identify income or assets in the taxpayer's name, he or she should always ask the IRS to issue the thirty-day notice. If the taxpayer does not file the appeal, the levy can be issued. If the taxpayer does file an appeal, other means of collection can be employed. If the taxpayer receives salary or wages, the garnishment procedures of FDCPA § 3105 can be employed. If an asset can be located, a judicial foreclosure proceeding can be initiated.
2. Sale of Property
There are several methods of selling property for application of the proceeds to tax liabilities. Under the authority of I.R.C. §§ 7402, 7403, the court may appoint a receiver to arrange for the sale of real or personal property, or to liquidate the assets of a corporation, pay its debts, and distribute any remainder on equity. In addition, property can be sold privately or at auction under 28 U.S.C. §§ 2001, 2002, and 2004. The court can also order that property be sold by the IRS Property Appraisal/Liquidation Specialist (PALS). An execution sale pursuant to 28 U.S.C. § 3203 is available in all cases in which the United States obtains a money judgment: however, these are rarely used in the Division. Finally, either with or without filing a court action seeking judicial foreclosure, we can agree to let the property owner sell the property within a specified time period and subject to our approval of the sale price.
Consultation with a supervisor may be necessary in order to determine the method of sale most appropriate in each case. Using a local real estate broker appointed as a receiver is likely to be the best way to maximize the recovery from real property. In some instances, however, it may be necessary to complete a sale relatively quickly. A public auction sale by the U.S. Marshal or IRS PALS may be appropriate in those circumstances.
A district court has broad powers under I.R.C. § 7402(a) to issue orders to ensure the orderly sale of property. For example, the court can require the judgment debtor to refrain from damaging the property, from filing deeds, liens or other documents, or taking any other action that might tend to interfere with the sale. It is a good idea to request such restrictions in all orders of sale. They are particularly useful in cases where one might anticipate the debtor will attempt to hinder the sale. Attached as Exhibits 16 and 17 are a motion for order of sale and a proposed order for sale. The court can also order the current resident to vacate the property, and such an order should be entered in every case in which the current resident may not vacate voluntarily.
Having a receiver appointed to sell property pursuant to I.R.C. § 7402(a) and 7403(d) is the method of sale that is most likely to yield the highest sale price. Section 7402(a) gives a district court broad authority to enter any order necessary or appropriate for the enforcement of the internal revenue laws, while § 7403(d) specifically provides for the appointment of a receiver to enforce the federal tax lien, including, upon certification by the IRS that it is in the public interest, the appointment of a receiver with all the powers of a receiver in equity. This certification is necessary if the receiver is to take over an ongoing business or rental real property, but not if the receiver is merely taking over vacant real property. A sample of such a certification is attached as Exhibit 18.
Because most real estate brokers are always eager to be allowed to list new property in order to gain the accompanying sales commission, the trial attorney should have no problem finding a reputable local real estate broker willing to serve as receiver. The broker should be compensated at the usual local rate for real estate commissions. The broker should be required to pay out of his pocket for utilities, maintenance, locksmith fees, trash removal, cleaning, and any other appropriate expenses associated with the property that are incurred between the date of his appointment and the closing of the sale. He will be reimbursed for those costs at closing. A sample Motion for Appointment of Receiver and Order Appointing Receiver are attached as Exhibit 19 and 19A.
Because only the court can confirm a sale to a particular buyer at a specific price, neither the receiver nor the trial attorney should sign a real estate sales contract, if one is submitted by a potential buyer. Rather, once the trial attorney and the section chief, after consulting with the receiver, believe that a particular offer is the best one likely to be received, a letter should be sent to the offeror or his representative stating that we will ask the court to confirm the sale on the terms set forth in the offer. A sample of such a letter is attached as Exhibit 20. A sample Motion for Order of Confirmation and Order Confirming Sale are attached as Exhibit 21 and Exhibit 21A. The order of confirmation should also include a Receiver's Deed, a sample of which is attached as Exhibit 22.
Once the sale has been confirmed and a closing date has been set, the trial attorney should determine how the proceeds of the sale should be distributed and submit a Motion for Order of Distribution and a proposed Order of Distribution, samples of which are attached as Exhibit 23 and Exhibit 23A. The trial attorney should obtain a summary of the expenses incurred by the receiver and compute his fee. If there are any liens with priority over our federal tax liens, including local real estate taxes, the trial attorney should obtain payoff figures for them as of the closing date. The title company that handles the closing will also likely have some relatively small fees, such as the cost of title insurance. If the amounts to be distributed are known in advance, the motions and orders for confirmation and distribution can be combined.
In selling a residence that is not being rented out, it will generally be necessary for the trial attorney to get the current resident to vacate the property. Potential buyers will be reluctant to pay full price if they have any doubts as to whether they will get possession of the property at closing. It will also be easier for the broker to maintain and show the property if it is vacant. If the resident cannot be persuaded to move out voluntarily, it will be necessary to obtain an order to vacate, which should include a provision for the U.S. Marshals Service to enforce the order if necessary. A sample Motion for Order to Vacate and Order to Vacate Real Property are attached as Exhibit 24 and Exhibit 24A.
A receiver can also be used in a situation where we are foreclosing the federal tax lien against a taxpayer's stock in a closely-held corporation. If the tax lien has attached to a majority of the stock, a general equity receiver can be appointed to take over control of the corporation, collect its income, and liquidate its assets, satisfy its debts, and distribute the net proceeds to the United States and the other shareholders in the proportion of stock ownership. A reputable local attorney experienced in business transactions will probably be willing to serve as receiver if an appropriate commission can be negotiated.
b. Auctions and Private Sales Under 28 U.S.C. §§ 2001, 2002, and 2004
Section 2001(a), 28 U.S.C., provides the procedures for a public auction sale of real property, while § 2001(b) specifies the procedures for a private sale. Section 2001(a) provides that a public sale is to be conducted at the courthouse of the county in which the greater part of the property is located, or upon the premises of the property itself. Section 2002 provides that notice of the public sale must be published once a week for at least four weeks in a newspaper regularly issued and of general circulation in the area where the realty is located. Section 2004 deals with the sale of personal property, providing that it shall be sold in the same manner as real property is sold under § 2001. While historically the Tax Division has used the U.S. Marshal's Service to conduct public auction sales, the statutes allow the auction to be conducted by other persons as well.
In a public sale under these provisions, the judge enters an "Order of Sale" directing the auction sale of a specific piece of property, at a specific time and place, under specified terms and conditions, and with notice by newspaper publication. The trial attorney should also probably request the court to establish a minimum bid price for the property being sold. The terms and conditions of sale are discretionary with the court. If the tax liens are superior to those of other creditors, the IRS may make a bid for the property. This requires special authorization, which may take some time to obtain. Judicial confirmation of the auction sale is required. Because notice by publication is not as effective as the multiple listing service used by real estate brokers, the sale of residential real property at public auction is not likely to yield as high a sales price as using a local real estate broker as a receiver.
Property can also be sold privately without an auction under 28 U.S.C. Section 2001(b) sets forth notice, publication, and appraisal requirements which must be satisfied, however, before a private sale can be confirmed by the court. The expense and administrative burden of these procedures weigh against the use of this method. To avoid the burden and expense of these procedures, however, the parties can stipulate to a private sale waiving the notice, publication, and appraisal requirements of § 2001(b). While not specifically authorized by statute, such a procedure is in essence a settlement of the action that is agreed to by all parties.
Some attorneys have had the court order property sold pursuant to 28 U.S.C. §§ 2001, 2002, or 2004 by the IRS Property Appraisal/Liquidation Specialist (PALS). A PALS is an IRS employee who specializes in the appraisal, marketing, and sale of both real and personal property. The trial attorney can obtain the name and phone number of the local PALS through Technical Support. Normally, a PALS sells property that was administratively seized by IRS. A PALS can also be used to sell real or personal property as part of a judicial proceeding to collect on a judgment, including meeting the advertising and other requirements of 28 U.S.C. §§2001, 2002. A PALS can also assist in determining a minimum bid for an auction sale by the U.S. Marshal. Unlike a receiver, a PALS will not charge a commission, and advertising and sale costs should come out of the IRS PALS budget rather than from the sales proceeds. As a generalist that may not have unique knowledge of the market for the particular type of property being sold, however, a PALS might not be able to get as high a sales price as a receiver with specialized knowledgeable of the market would. Use of a PALS might be particularly appropriate for selling tangible personal property, such as vehicles, works of art, or a coin collection.
d. Selling Securities
Two federal government agencies (listed below) can assist in selling stocks, bonds, notes, and other securities that a trial attorney obtains through enforced collection of a judgment. These agencies have contracts with brokers that can sell the securities.
United States Department of Treasury
Bureau of the Public Debt
Office of Public Debt Accounting
Hintgen Building, Room 114
200 Third Street
Parkersburg, West Virginia 26101-5312
contact: Veronica Lowther
Financial Accounting Branch Manager
Telephone: (304) 480-5161
website address: www.publicdebt.treas.gov
United States Marshal Service Headquarters
Assets Forfeiture Office
Suite 402, CS3
3610 Pennsy Drive
Landover, Maryland 20785
contact: Leonard Briskman
Deputy Chief for Business Management
Telephone: (202) 305-9414
Once the agency agrees to sell the security, the trial attorney must arrange to deliver the security to the agency. Once the security is sold, the funds should be wired to Agency Location Code 15030001. The trial attorney should also request that the following information be included with the code so that the deposit can be identified as one belonging to the Tax Division: TAX CMN (number).
3. The Federal Debt Collection Procedures Act
The Federal Debt Collection Procedures Act of 1990, 28 U.S.C. §§ 3001 through 3308, is an important tool for collecting civil judgments in favor of the United States. An understanding of the Act and its relationship to tax liens and levies, judicial sales, and state judgment execution procedures is essential to the effective collection of tax judgments.
Until the enactment of the Federal Debt Collection Procedures Act, all civil judgments in federal court, including judgments in favor of the United States, were collected pursuant to state judgment execution laws. Variations in these laws and in state exemption laws resulted in great disparities from jurisdiction to jurisdiction in the ability of the United States to collect debts. The Act eliminated many of the procedural disparities by providing uniform prejudgment remedies, judgment execution procedures, and fraudulent transfer rules, for judgments entered in favor of the United States.74 State limitations on collection from jointly owned property, such as tenancies by the entirety, and state exemption laws have not been preempted, however, and will continue to apply to such judgments. (See § IV.D.3, supra, for a fuller discussion of state exemption statutes.)
While the Act is generally the exclusive remedy for the collection of judgments in favor of the United States, it provides special treatment for collecting taxes. Pursuant to 28 U.S.C. § 3003(b), the remedies contained in the Internal Revenue Code and state judgment collection remedies are still available for the collection of taxes, in addition to the procedures contained in the Act. Moreover, the Act does not affect either federal tax liens or the procedures relating to "judicial sales," although it does provide new federal provisions for "judgment execution sales." See discussion, pp. 36-39, supra.
Judgments in suits that do not involve an assessed tax, and in which the tax lien and levy procedures are therefore not available, must be collected under the procedures contained in the Federal Debt Collection Procedures Act (or under procedures provided by state law).
The Federal Debt Collection Procedures Act provides three remedies for enforcing judgments: execution, garnishment, and installment payment orders. The court can issue any other writs under 28 U.S.C. § 1651 to support these remedies.
a. Notice and Other Preconditions
Section 3202(b), 28 U.S.C., imposes several preconditions and restrictions on the judgment enforcement remedies available under the Act. At the time that an application is made for a writ of execution, a writ of garnishment, or an installment payment order, the United States is required to prepare a form of notice to the taxpayer and submit the notice to the clerk of the court for issuance. A sample notice for a writ of execution or garnishment is attached as Exhibit 25. A sample notice and motion for court-ordered installment payments is attached as Exhibit 26 and 26A.
The notice advises the judgment debtor that property has been seized, identifies the debt owing to the United States, describes potentially applicable exemptions, explains the procedure and time for requesting a hearing, and gives notice of the intent to sell the property. Since state-law exemptions differ from jurisdiction to jurisdiction, the trial attorney should obtain from the appropriate United States Attorney's office a copy of the notice used by that office. The rule for determining which state's exemption law is applicable is set forth in 28 U.S.C. § 3014(a)(2)(A), which provides that the applicable law is the law of the state in which the debtor's domicile was located for the 180 days immediately preceding the date on which the application is filed (or the state in which the domicile was located for a longer portion of such 180-day period than in any other state).
The notice, along with a copy of the motion, must be served on the judgment debtor and on anyone believed, after diligent inquiry, to have an interest in the property to which the writ or application relates.
The judgment debtor must request a hearing within 20 days of receiving the notice, and the property in question cannot be sold before the hearing. The hearing is supposed to be held within five days of the debtor's request. The debtor is only permitted to raise issues concerning: (1) exemption claims; (2) procedural defects relating to issuance of the enforcement remedy; and (3) for default judgments, the validity of the claim and good cause for setting the judgment aside.
Garnishment is a procedure for levying upon property of a debtor that is in the possession, custody, or control of a third party. To obtain a writ of garnishment, the United States must file an application that includes information about the amount due under the judgment and indicates a belief that the garnishee possesses property in which the debtor possesses a substantial nonexempt interest. A wage garnishment is limited to 25% of disposable income. In other words, 75% of disposable income is exempt. A garnishment writ has continuing effect.
The writ is issued by the court ex parte. Notice of the writ is given to both the garnishee and the debtor. The writ directs the garnishee to withhold the property and file an answer with the court. In addition, instructions are given to the garnishee about filing an answer and to the debtor about filing objections to the garnishee's answer and for requesting a hearing.
The garnishee has ten days in which to answer. The answer must list the property of the debtor being held, its value, prior garnishments, and information about future indebtedness of the garnishee to the debtor. The debtor and the United States have 20 days in which to object to the garnishee's answer and to request a hearing. The court is supposed to hold the hearing within ten days.
If a timely request for a hearing is not made, the court will enter an order directing the garnishee as to the disposition of the debtor's nonexempt interest in the property. The United States must give both the debtor and the garnishee an annual accounting of the proceedings. Upon termination of the writ, the United States must give a cumulative written accounting to both the debtor and the garnishee.
c. Court-Ordered Installment Payments
Court-ordered installment payments can be a very effective collection tool with a judgment debtor who has income but refuses to make payments towards a tax debt. Court-ordered installment payments can be particularly effective against self-employed debtors such as lawyers, doctors, accountants, and consultants, who are effectively immune from IRS wage levies or FDCPA garnishments.
In many cases, Rule 69 discovery will be necessary in order to gather sufficient information about the debtor's income to justify an installment payment order. To obtain an installment payment order under § 3204, the trial attorney should file a motion with the court demonstrating either that the judgment debtor has substantial earnings from self-employment, or that he is diverting or concealing earnings. An installment payment order cannot be obtained if there is a writ of garnishment in effect for the same earnings and based on the same debt.
A motion for installment payment order should probably request that payments be made monthly, although a shorter period may be appropriate in some cases. Although a motion for an installment payment order can request that payments be made in specified amounts, if the debtor's income fluctuates, it may make more sense to request either that the debtor be required to pay over all of his earnings in excess of a certain floor amount, or that he be required to pay over a percentage of his earnings. That way, if the debtor's earnings are high for a particular month, our debt will be paid off faster; while if the debtor's income is low, he will not find himself involuntarily in contempt of court for failing to pay over earnings that he did not receive. In any case in which an installment payment order is obtained, the debtor should also be required to provide a sworn statement as to the dates, amount, and sources of all of his receipts for the applicable period. The district court has the power to require him to provide such a statement under I.R.C. § 7402(a). Section 3204(b) specifically provides that either a change in the debtor's financial circumstances, or the discovery of previously undisclosed assets of the debtor, can justify a modification of the amount or frequency of the installment payments, or even require immediate payment of the remaining amount of the debt.
A sample motion for installment payment order, along with a proposed order setting a hearing, and a proposed order requiring installment payments and disclosure of receipts, is attached as Exhibit 26. The motion should be filed with the court that entered the judgment, and notice of the motion must be served on the judgment debtor in the same manner as a summons, or by registered or certified mail. If the debtor has moved to another judicial district, the debtor may seek to have proceedings on the motion transferred to that district pursuant to 28 U.S.C. § 3004(b)(2).
If a judgment debtor fails to comply with an installment payment order, the judgment creditor's remedy is to obtain contempt sanctions from the court. Generally, a court can impose a fine or conditional imprisonment against a judgment debtor for civil contempt. These sanctions are not punitive but are designed to encourage the contemnor to comply with the court's order. Of course, fines will generally be of little use against debtors who already owe the Government substantial tax liabilities. The prospect of incarceration unless and until payment is made, however, is a strong incentive to pay promptly.
Some states (e.g., Michigan and New York) have their own statutes authorizing court-ordered installment payments. In most situations you will want to rely on 28 U.S.C. § 3204 because of its uniform applicability in all states. You should, however, check the law of the state where you are seeking the order to see if you might be able to obtain better results using that state's installment payment order statute.
4. Collecting Specific Assets
a. IRAs and Other Retirement Funds
Retirement accounts and funds, such as Individual Retirement Accounts and § 401(k) plan funds, are frequently the largest and the only liquid asset in the hands of a judgment debtor. Such funds may not be subject to judicial garnishment or execution, yet the IRS can use its broad levy power under I.R.C. § 6331 to attach retirement accounts, which are not made specifically exempt from levy.75 The Internal Revenue Manual does provide, however, that retirement plans "will be levied upon judiciously."76 While the IRS Manual does not define the term "judiciously," its guidelines generally exempt from levy retirement funds with annual benefits of $6000 or less.77 Accordingly, the trial attorney should consider asking the IRS to levy on retirement funds (or the income from the funds) only in accordance with the pertinent provisions of the IRS Manual.
b. Securities and Notes
Service of a notice of levy or a writ of execution on the maker of a note is sufficient to obtain possession of the debt owing on the note. In order to sell an installment note or securities, however, there must be actual physical possession of the stock certificates or paper representing the promise to pay for seizure to be accomplished. See Rev. Rul. 75-355, 1975-2 C.B. 478.78
The need to physically seize securities and notes is dictated by the ease with which securities, notes, and similar documents pass like money in the channels of business activity. Congress recognized the needs of the marketplace when it accorded the purchasers of securities and holders of security interests in securities a "superpriority" status under certain circumstances. I.R.C. § 6323(b)(1) provides that even though a notice of lien has been filed, the lien is not valid with respect to a security (as defined in § 6323(h)(4)) either as against a purchaser of the security or as against a holder of a security interest (as defined in § 6323(h)(1)) in a security who, at the time of the purchase or at the time the security interest came into existence, did not have actual notice or knowledge of the existence of the lien. If the trial attorney learns of a planned stock transfer or grant of a security interest, the trial attorney should notify the potential purchaser or holder of the security interest of the existence of the tax liens. This notification should be performed by certified mail, return receipt requested, so as to provide solid proof of actual notice.
When the trial attorney cannot determine who is in possession of stock certificates or installment notes so that they may be levied upon or when ownership of stock or the existence of loans is unclear, I.R.C. §§ 7402(a) and 7403 may provide a means of collection. A court may order the taxpayer to turn over stock certificates and notes to a receiver so that they may subsequently be sold.79 It should be kept in mind, however, that where the taxpayer owns a controlling interest in the corporation, it may be more advantageous for the receiver to vote the stock to liquidate the corporation so that the assets may be sold to satisfy the judgment.80
If a taxpayer has employment income, an IRS levy on wages is a very effective way to collect a judgment. Unlike most other IRS levies, the effect of an IRS wage and salary levy is continuous, meaning that the employer must continue to pay the appropriate amount to the IRS each payday without the need for the IRS to continue to serve additional levies each pay period. I.R.C. § 6331(e).
An IRS levy (including a wage levy) requires, except in a situation where collection is in jeopardy, a 30-day notice of intent to levy. I.R.C. § 6331(d). The taxpayer has the right to protest the proposed levy to the IRS Office of Appeals, and even go to court, if Appeals disallows his protest. See IV.E.1, infra. Section 6334(d) provides for certain exemptions from a wage levy. The formula for determining the exempt amount is based on the standard deduction and the aggregate amount of the deductions for personal exemptions allowed the taxpayer under I.R.C. § 151 in the year in which the levy occurs. The weekly exempt amount is the sum of the standard deduction and of the total amount of deductions for exemptions to which the taxpayer is entitled, divided by 52. Section 6334(d)(2) provides that–unless the taxpayer submits verification to the contrary–the IRS can assume that the taxpayer is married, filing a separate return, and has one exemption.
An alternative to an IRS wage levy is a garnishment of wages pursuant to 28 U.S.C. § 3205. (See discussion of garnishment, § IV.E.3.b., supra.) Because a court must issue a writ of garnishment and because a garnishment is subject to state exemptions, however, an IRS wage levy may be easier and more effective. See also the discussion of installment payment orders, § IV.E.3.c., supra, for an explanation of how to deal with a self-employed debtor.
d. Co-owned Property
Frequently a delinquent taxpayer/judgment debtor co-owns property81 with one or more other persons (most commonly a spouse or other relative) who are not indebted to the Government. In other situations, the delinquent taxpayer may own only a life estate or a remainder interest in the property. Also, in most states the spouse of a judgment debtor has dower, curtesy, or homestead rights in some or all property of the debtor. The federal tax lien, of course, attaches only to the taxpayer's interest in the property and not to any interest held by a non-debtor.
While co-ownership of property between a taxpayer/debtor and a non-debtor complicates the Government's efforts to sell the property in order to collect the delinquent tax, the Government may be able to sell the entire property in a judicial sale and then allocate the sale proceeds between the taxpayer's interest (which goes to the Government) and the interest of the non-debtors who have an interest in the property. (Almost always, a sale of the entire property with an allocation of the sale proceeds commensurate with the co-owners' interests will yield the Government a greater amount than could be obtained by selling only the taxpayer's interest in the property.)
I.R.C. § 7403(a) authorizes the United States to bring an action in Federal District Court to enforce a federal tax lien "or to subject any property, of whatever nature, of the delinquent [taxpayer], or in which he has any right, title, or interest, to the payment of such tax or liability." (Emphasis added.) The Supreme Court, in United States v. Rodgers, 461 U.S. 677, 692-94 (1983), held that § 7403, as a general rule, allows the Government to sell the entire property in which the delinquent taxpayer has "an interest."82 The Court noted, however, that § 7403 "does not require a district court to authorize a forced sale under absolutely all circumstances, and ... some limited room is left ... for the exercise of reasoned discretion." Id. at 706. The Court provided examples of factors a district court should consider in exercising its limited discretion not to order a sale of the entire property. Id. at 709-11. See United States v. Bierbrauer, 936 F.2d 373 (8th Cir. 1991), for an analysis of the application of these factors in a particular case.
Before bringing a § 7403 lien foreclosure suit in a situation where non-liable third parties have ownership interests in the property along with the taxpayer, a Tax Division trial attorney should consider the factors listed in Rodgers.
6 Qualified pension, profitsharing, stock bonus, IRA plans and retirement plans benefitting self-employed individuals, or interest earned on these plans, are not exempt from levy. However, because the plans are established for the taxpayer's future welfare, they will be levied upon judiciously.
Retirement plan benefits (income) receivable from a qualified pension fund or account, generally will not be levied upon if the annual benefits are $6000 or less ($500 or less per month).