Sixth Circuit Reverses District Court; Wrongful Levy Action Was Not Time Barred

(Parker Tax Publishing May 2019)

The Sixth Circuit reversed a district court and held that the statute of limitations under Code Sec. 6532 did not bar a music publishing company's wrongful levy action for royalties remitted by third parties to the IRS in 2016 pursuant to notices of levy served in 2012. The court found that the notices did not attach in 2012 to the company's right to receive future royalties because the royalties had not yet been generated and were, therefore, not fixed and determinable as required under Code Sec. 6331. Gold Forever Music, Inc. v. U.S., 2019 PTC 139 (6th Cir. 2019).

Background

Gold Forever Music, Inc. is a music publishing company that has agreements with various artists entitling it to half of the royalties collected for the sale and performance of those artists' work. Instead of directly licensing third parties to use music from its catalog, Gold Forever works with Broadcast Music, Inc. (BMI) and Universal Music Publishing to do so. These companies license others to use Gold Forever's music, collecting the royalties and remitting them to Gold Forever.

Edward Holland, Jr. is the sole owner of Gold Forever. Holland was a Motown artist and has co-written several famous songs. His music forms some, but not all, of Gold Forever's catalog. Holland owes millions of dollars to the IRS in taxes, interest and penalties.

In 2012, to collect on Holland's tax deficiency, the IRS served two notices of levy, one to BMI and one to Universal. The notices identified Gold Forever as the alter ego/nominee transferee of Holland. The notices of levy required the companies to remit to the IRS "property and rights to property ... that you have or which you are already obligated to pay" to Gold Forever.

Beginning in October 2016, BMI and Universal remitted $967,140 to the IRS. Gold Forever requested refunds within nine months of BMI and Universal remitting the funds. In December 2017, Gold Forever filed a wrongful levy action in a district court for the funds remitted beginning in October 2016. Gold Forever alleged that it had never been the alter ego or nominee of Holland and that most, if not all, of the money remitted by BMI and Universal belonged either to Gold Forever or to other artists. The government moved to dismiss the wrongful levy suit as untimely, arguing that it was filed after the statute of limitations had run. The district court agreed and dismissed the case. Gold Forever appealed to the Sixth Circuit.

Analysis

The IRS has several methods to collect funds owed by delinquent taxpayers, one of which is the power to levy under Code Sec. 6331(a). A levy can reach all property and rights to property belonging to the taxpayer. Under Code Sec. 6332(a), the IRS can also levy on property belonging to the taxpayer under another's control. In that case, the notice of levy creates a custodial relationship between the person holding the property and the IRS, and the government gains constructive possession of the property. Any person other than the taxpayer who claims an interest in the levied property may bring a wrongful levy action under Code Sec. 7426(a). When Gold Forever filed its complaint, Code Sec. 6532(c)(1) provided that the statute of limitations for filing a wrongful levy action was nine months from the date of the levy. A timely request for the return of the levied property extended the nine-month period by 12 months from the date of filing the request under Code Sec. 6532(c)(2).

Observation: The Tax Cuts and Jobs Act of 2017 extended the limitations period in Code Sec. 6532(c)(1) from nine months to two years.

Under Code Sec. 6331(b), a levy extends only to property possessed and obligations existing at the time of the levy. Reg. Sec. 301.6331-1(a) states that obligations exist when the liability is "fixed and determinable" even if the right to receive the payment is deferred until a later date. Thus, the 2012 notices of levy reached the royalties remitted to the IRS beginning in 2016 (and the statute of limitations began running at that time) only if they were fixed and determinable in 2012.

The Sixth Circuit noted that it had not previously addressed when an existing contractual obligation to pay the taxpayer in the future is sufficiently fixed and determinable such that a levy can attach to the future payment. Reviewing the case law of other circuits, the court found that such an obligation is fixed where performance is complete and all that remains under the contract is payment, and an obligation is determinable if, at the time the levy is served, the amount that the taxpayer will be owed can be ascertained with reasonable certainty. The court explained that this rule enables third parties to determine at the time they receive the notice of levy precisely what the levy reaches.

The Sixth Circuit reversed the district court, finding that (1) Gold Forever requested the return of the remitted funds within nine months of when the IRS seized Gold Forever's funds held by BMI and Universal, and (2) Gold Forever's complaint was filed within the 12-month extension period. The Sixth Circuit agreed with the district court that the service of a notice of levy can start the statute of limitations running for intangible property but reasoned that it is necessary for the notice to attach to the property that is the subject of the wrongful levy action before the statute can run. The Sixth Circuit noted that the government conceded there was insufficient information to determine whether Gold Forever's right to receive future royalties was attached by the 2012 levies.

The Sixth Circuit concluded that nothing remitted to the IRS in 2016 and beyond represented any obligation owed in 2012i.e., the royalties had not yet been generated and so there was more remaining to be done under the contract, such as finding licensees and collecting royalties, than to simply remit royalties to Gold Forever. In the court's view, all that existed in 2012 was the obligation to remit royalties generated in the future. Gold Forever's agreements with Universal and BMI, according to the Sixth Circuit, should have been construed by the district court as merely an obligation to attempt to sell some as-yet undetermined amount of property for an as-yet undetermined price to as-yet undetermined buyers. The court concluded that the earliest the statute of limitations could have begun running on Gold Forever's claim was when the IRS seized Gold Forever's funds held by BMI and Universal.

For a discussion of IRS levies, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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