Chief Counsel Advice 200835030
A new IRS Chief Counsel Advice (CCA) says that a limited liability company (LLC) may be required to honor a continuous wage levy on salary and wage payments to its sole owner. [Note: The CCA may not be used or cited as precedent.]
Facts. The taxpayer is a single owner of an LLC. The LLC provides daycare services to a county within the State of Ohio pursuant to a written contract. The county contracts with the LLC, rather than the entity’s owner, for daycare services. The contract requires the daycare service provider to submit invoices for child daycare services rendered to the county within 30 days of the close of a designated billing period. The county pays the invoices within 30 days of receipt. The contract characterizes the LLC’s owner as a self-employed independent contractor. The only potential asset source available to satisfy the single owner’s income tax liability is the income received from the LLC under the contract with the county.
Continuous wage levy. Individuals with steady jobs who fail to pay their federal income taxes may have their wages and other income seized by the IRS. These garnishments are called tax levies and are administered by the IRS under its tax collection authority. A levy generally extends only to property possessed and obligations existing at the time levy is made. However, the IRS provides an exception to this rule under IRC §6331(e) for a continuous levy on salary and wages. The levy on salary or wages that is payable, or is to be received by a taxpayer, is continuous from the date the levy is first made until the levy is released under IRC §6343.
What are salary and wages? IRC §6331(e) does not specify the types of remuneration that are covered by the term “salary or wages.” However, the IRS has determined that the term “salary or wages” includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. In addition, the federal courts have determined that “salary or wages” include the following payments: compensation due to state and municipal employees, severance pay paid by an employer to its former employee, Social Security payments, and future wages and fees.
Court rulings. In U.S. v. Jefferson-Pilot Life Insurance Co., CA4, 75 AFTR 2d 95-1529, 3/15/95, the U.S. Court of Appeals for the Fourth Circuit reviewed the Government’s action to enforce a continuous levy against an insurance company that paid commissions to an insurance salesman who was an independent contractor. The insurance company argued that the IRS only had the authority to serve it with a one-time levy because it was not the taxpayer’s employer. The Fourth Circuit ruled that the words “salary or wages payable to or received by a taxpayer” in IRC §6331(e) are not so restrictive as to exclude the possibility that Congress intended them to apply to a commission paid to an independent contractor. In United States v. Moskowitz, Passman, & Edelman, DC NY, 100 AFTR 2d 2007-6358, a federal district court held that amounts paid and payable to a member of a law firm, which was organized as a partnership, were subject to a continuing levy.
IRS ruling. The IRS cited Jefferson-Pilot and Moskowitz, and ruled that the payments the single owner received from the LLC as a share of the net profits may be subject to a continuing wage levy under IRC §6331(e).