Return of Property in Certain Cases

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [REG-101520-97] RIN 1545-
AV01

TITLE: Return of Property in Certain Cases

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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

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

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

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

SUPPLEMENTARY INFORMATION:

Background

       This document contains proposed amendments to the Procedure
and Administration Regulations (26 CFR part 301) relating to the
return of property under section 6343 of the Internal Revenue Code
(Code). Section 501(b) of the Taxpayer Bill of Rights 2 (TBOR2),
Public Law 104-168 (110 Stat. 1452), amended section 6343 to
authorize the IRS to return property in certain cases and, to the
extent possible, but without payment of interest, return the
taxpayer to the same position as if the levy had not been issued.
These proposed regulations reflect the amendments made by section
501(b) of TBOR2.

       These proposed regulations also reflect modifications made by
the Internal Revenue Service Restructuring and Reform Act (RRA
1998), Public Law 105-206 (112 Stat. 685 ), which added new sections
6331(i) and (j) of the Code, prohibiting the issuance of levies
during the pendency of proceedings for refund of divisible taxes or
prior to completion of an investigation of the status of property
(effective for unpaid tax attributable to tax periods beginning
after December 31, 1998). RRA 1998 also added section 6331(k),
prohibiting levies during the period an offer-in-compromise is
pending or an installment agreement is pending or in effect
(effective for offers-in-compromise pending on or made after
December 31, 1999, and for installment agreements submitted after
July 22, 1998). In addition, the RRA 1998 added section 6330, which
provides in certain circumstances for notice and an opportunity for
a hearing prior to the imposition of a levy.

Explanation of Provisions

      Section 6343(b) provides for the return of levied upon
property, including levied upon money and money received from the
sale of levied upon property, if the property was wrongfully levied
upon. Section 501(b) of TBOR2 enacted section 6343(d) of the Code
authorizing the IRS to return levied upon property to the taxpayer
in certain other prescribed circumstances. Property returned under
new section 6343(d) will be returned in accordance with section
6343(b) of the Code as if the property had been wrongfully levied
upon, except that no interest will be allowed. The provision is
designed to permit the IRS, to the extent possible, to restore the
taxpayer to a pre-levy position. These proposed regulations provide
guidance on the circumstances under which levied upon property will
be returned by the IRS and the manner in which a request for return
of property must be made.

      The proposed regulations apply to the return of (1) levied
upon money that has been applied toward the taxpayer's liability,
(2) money received from the sale of levied upon property under
section 6335 of the Code, and (3) levied upon property that the
United States has purchased in a sale under section 6335 of the
Code. This property may be returned if one of the conditions
enumerated in paragraph (c) of the proposed regulations exists.

      The regulations also clarify that, other than as provided in
§301.6343-1(b) and paragraph (d) of this section, the IRS, in
its discretion, may return levied upon property in its possession
pending sale. The return of levied upon property in the IRS's
possession pending sale is not limited by these proposed
regulations. The IRS has the authority to determine what property of
the taxpayer to levy. As part of that authority, the IRS may release
a levy and return levied upon property in its possession pending
sale.

       Under paragraph (c) of the proposed regulations, the
Commissioner may return levied upon property if one of the following
conditions exist: (1) the levy was premature or otherwise not in
accordance with the administrative procedures of the IRS; (2) the
taxpayer has entered into an agreement under section 6159 of the
Code to satisfy the liability for which the levy was imposed by
means of installment payments, unless the agreement provides
otherwise; (3) the return of property will facilitate collection of
the tax liability; or (4) the return of property is in the best
interest of the taxpayer, as determined by the National Taxpayer
Advocate, and in the best interest of the United States, as
determined by the Commissioner.

      Section 6343(d)(2)(D) authorizes the return of property if it
is in the best interests of both the United States and the taxpayer.
Therefore, two distinct determinations must be made before the
Commissioner may return property based on these grounds. Under the
proposed regulations the Commissioner (or his delegate) will
determine whether the return of property is in the best interest of
the United States. The National Taxpayer Advocate (or his delegate)
generally will determine whether the return of property is in the
best interest of the taxpayer; however, a finding by the
Commissioner (or his delegate) that the return of property is in the
best interest of the taxpayer, as well as the United States, will be
Lfficient to support the return of property. Only the National
Taxpayer Advocate (or his delegate) is authorized to determined that
the return of property is not in the taxpayer's best interest.

       Additionally, the proposed regulations provide that it is in
the best interests of the United States and the taxpayer to release
levies made in violation of the law. Any property received pursuant
to a levy made in violation of the law will be returned unless the
taxpayer gives permission to the IRS to keep the property. For
example, section 6331(k)(2) of the Internal Revenue Code of 1986
prohibits levies during the period an offer to enter into an
installment agreement is pending (and for a 30-day period after
rejection of the offer or while a timely appeal from the rejection
of an offer to enter into an installment agreement is pending) and
during the period an installment agreement is in effect. If property
has been received by the IRS as the result of a levy that is
prohibited under section 6331(k)(2), the IRS will return the
property to the taxpayer pursuant to section 6343(d)(2)(D). It may,
however, be advantageous for a taxpayer in some circumstances to
allow the IRS to keep the levied upon property and apply the
proceeds of that levy to the taxpayer's outstanding tax liabilities.
These proposed regulations allow the taxpayer to give permission to
the IRS to retain the levied upon property and apply the proceeds of
that levy to the taxpayer's outstanding tax liabilities. Absent
taxpayer consent, the IRS is required to return the levied upon
property (or the proceeds if the property had been sold) to the
taxpayer.

       Pursuant to the requirement of section 6343(d) that property
to be returned under this provision be treated as if it were
wrongfully levied upon, the proposed regulations also provide that
if the United States purchases property, it will be treated as
having received an amount of money equal to the minimum price
determined by the Commissioner before the sale.

      Property other than money may be returned at any time. Money
may be returned any time within 9 months after the date of the levy.
In addition, when a timely request for the return of money is filed
in accordance with these regulations, or a determination to return
an amount of money is made before the expiration of the 9- month
period, the money may be returned within a reasonable period of time
after the 9-month period if additional time is necessary for
investigation or processing. This will ensure that if a timely
request has been made, or the IRS timely decides to return money on
its own initiative, the IRS will have Lfficient time for necessary
ivestigation or processing.

      Under the proposed regulations a taxpayer may request the
return of property by writing to the address on the levy form or to
the Commissioner (marked for the attention of the Chief, Special
Procedures Function) of the IRS office in which the levy was made. A
written request for the return of property must include: (1) the
name, current address, and taxpayer identification number of the
taxpayer requesting the return of property; (2) a description of the
property levied upon; (3) the date of the levy; and (4) the grounds
upon which the return of property is being requested.

      The Commissioner must consider each taxpayer's request for the
return of property, determine whether any of the conditions
authorizing the return of property exist, and decide whether to
return the property. The Commissioner also may return the property
based on information received from a source other than the taxpayer.
A decision to return the property is within the Commissioner's
discretion, unless the levy was in violation of law, in which case
the Commissioner must return the property.

      If the Commissioner returns property, and the taxpayer fails
to pay the previously assessed liability for which the levy was made
on the returned property, the Commissioner may administratively
collect the liability. Collection may include levying again on the
returned property provided statutory and administrative requirements
are followed.

Special Analyses

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

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

      The principal author of these regulations is Kevin B.
Connelly, Office of Assistant Chief Counsel (General Litigation)
CC:EL:GL, IRS. However, other personnel from the IRS and Treasury
Department participated in their development. List of Subjects in 26
CFR Part 301

      Employment taxes, Estate taxes, Excise taxes, Gift taxes,
Income taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations

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

PART 301--PROCEDURE AND ADMINISTRATION

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

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

      Par. 2. Section 301.6343-3 is added to read as follows:
§301.6343-3 Return of property in certain cases.

      (a) In general. If money has been levied upon and applied
toward the taxpayer's liability, or property has been levied upon
and sold, and the receipts have been applied toward the taxpayer's
liability, or property has been levied upon and purchased by the
United States and the United States still possesses the property,
and the Commissioner determines that any of the conditions in
paragraph (c) of this section exist, the Commissioner may return--

      (1) An amount of money equal to the amount of money levied
	  upon;

      (2) An amount of money equal to the amount of money received
by the United States from a sale of the property; or

      (3) The specific property levied upon and purchased by the
	  United States.

      (b) Return of levied upon property in possession of the
Internal Revenue Service (IRS) pending sale under section 6335.
Other than as provided in §301.6343- 1(b) or in paragraph (d)
of this section, the Commissioner, in his or her discretion, may
return levied upon property that is in the possession of the United
States pending sale under section 6335.

      (c) Conditions authorizing the return of property. The
Commissioner may return property upon determining that one of the
following conditions exist:

      (1) Premature or not in accordance with administrative
procedures. The levy was premature or otherwise not in accordance
with the administrative procedures of the Secretary.

      (2) Installment agreement. Subsequent to the levy, the
taxpayer enters into an agreement under section 6159 to satisfy the
liability for which the levy was made by means of installment
payments. If, however, the agreement specifically provides that
already levied upon property will not be returned under section
6343(d), the Commissioner may not grant a request for return of
property under this paragraph (c)(2).

       (3) Facilitate collection. The return of property will
facilitate the collection of the tax liability for which the levy
was made.

       (4) Best interests of the United States and the taxpayer--

(i) In general. The taxpayer or the National Taxpayer Advocate (or
his delegate) has consented to the return of property, and the
return of property would be in the best interest of the taxpayer, as
determined by the National Taxpayer Advocate (or his delegate), and
in the best interest of the United States, as determined by the
Commissioner.

       (ii) Best interest of the taxpayer. The National Taxpayer
Advocate (or his delegate) generally will determine whether the
return of property is in the best interest of the taxpayer. If,
however, a taxpayer requests the Commissioner to return property and
has not specifically requested the National Taxpayer Advocate (or
his delegate) to determine the taxpayer's best interest, a finding
by the Commissioner that the return of property is in the best
interest of the taxpayer will be Lfficient to support the return of
property. Only the National Taxpayer Advocate (or his or her
delegate) may determine that a return of property is not in the best
interest of the taxpayer. (5) Examples. The following examples
illustrate the provisions of this paragraph (c):

       Example 1. A owes $1,000 in Federal income taxes. The IRS
levies on a broker with respect to a money market account belonging
to the taxpayer and receives payment from the broker which it
applies to the taxpayer's outstanding liability. However, the IRS
failed to follow procedure provided by the Internal Revenue Manual
(but not required by statute) with regard to managerial approval
prior to the making of the levy. The Commissioner may return an
amount of money equal to the amount of money the IRS levied upon and
applied toward the taxpayer's tax liability.

       Example 2. B owes $1,000 in Federal income taxes. The IRS
levies on a bank with respect to a savings account belonging to the
taxpayer and receives funds from the bank which it applies to the
taxpayer's liability. Subsequent to the levy, B enters into an
installment agreement, under which it will pay timely installments
to satisfy the entire liability. The installment agreement does not
by its terms preclude the return of levied upon property. The
revenue officer verifies that B is financially capable of paying the
entire liability, including accruals, in the agreed-upon installment
payments. The Commissioner may return an amount of money equal to
the amount of money levied upon and applied toward the taxpayer's
liability.

       Example 3. C owns a house that is deteriorating and in
unsalable condition. C is in the process of renovating the house for
sale when the IRS levies upon C's bank account for the payment of a
$20,000 outstanding Federal tax liability and receives funds in the
amount of $3,000, which it applies toward C's liability. A notice of
federal tax lien is the only lien encumbrancing the house. C
requests that an amount of money equal to the amount seized from the
bank account be returned so that C can complete the renovations on
the house. Without the funds, C will be unable to complete the
renovations and sell the house. Upon examination, the Commissioner
determines that the IRS will be able to collect the entire tax
liability if C's house is restored to salable condition. If the
National Taxpayer Advocate, or the Commissioner in lieu of the
National Taxpayer Advocate, determines that the return of the seized
money is in the taxpayers best interest, the Commissioner may return
an amount of money equal to the amount seized from the bank account
in the best interest of the taxpayer and the United States.

       (d) Best Interests of the United States and the taxpayer to
release levy and return of property where levy made in violation of
law--

(1) In general. If the Internal Revenue Service (IRS) makes a levy
in violation of the law, it is in the best interest of the United
States and the taxpayer to release the levy and the IRS will return
to the taxpayer any property obtained pursuant to the levy. For
example, the IRS will release the levy and return the taxpayer's
property if the levy was made--

       (i) Without giving the requisite thirty-day notice of intent
to levy under section 6330;

       (ii) During the pendency of a proceeding for refund of
divisible tax in violation of section 6331(i);

       (iii) Before investigation of the status of levied upon
property in violation of section 6331(j);

       (iv) During the pendency of offers-in-compromise in violation
of section 6331(k)(1); or

       (v) During the period an offer to enter into an installment
agreement is pending (or for 30 days following the rejection of an
offer, or, if the rejection is timely appealed, during the period
that the appeal is pending) or during the period an installment
agreement is in effect (or during the 30 days following a
termination or, if a timely appeal of termination is filed, during
the period the appeal is pending) in violation of section 6331(k)
(2).

       (2) Property may not be credited to outstanding liability
without the taxpayer's permission. When the release of a levy and
the return of property are required under this paragraph (d), the
property or the proceeds from the sale of the property received by
the IRS pursuant to the levy must be returned to the taxpayer unless
the taxpayer requests otherwise. The property or proceeds of sale
may not be credited to any outstanding tax liability of the
taxpayer, including the one with respect to which the IRS made the
levy, without the written permission of the taxpayer.

       (e) Time of return. Levied upon property in possession of the
IRS (other than money) may be returned under paragraphs (c) and (d)
of this section at any time. An amount of money equal to the amount
of money levied upon or received from a sale of property may be
returned at any time before the expiration of 9 months from the date
of the levy. When a request for the return of money filed in
accordance with paragraph

(h) of this section is filed before the expiration of the 9-month
period, or a determination to return an amount of money is made
before the expiration of the 9-month period, the money may be
returned within a reasonable period of time after the expiration of
the 9- month period if additional time is necessary for
investigation or processing.

       (f) Purchase by the United States. For purposes of paragraph
(a)(2) of this section, if property is declared purchased by the
United States at a sale pursuant to section 6335(e)(1)(C), the
United States will be treated as having received an amount of money
equal to the minimum price determined by the Commissioner before the
sale.

       (g) Determinations by the Commissioner. The Commissioner must
determine whether any of the conditions authorizing the return of
property exists if a taxpayer submits a request for the return of
property in accordance with paragraph (h) of this section. The
Commissioner also may make this determination independently. If the
Commissioner determines that conditions authorizing the return of
property are not present, the Commissioner may not authorize the
return of property. If the Commissioner determines that conditions
authorizing the return of property are present, the Commissioner may
(but is not required to, unless the reason for the return of
property is that the levy was made in violation of law and is
governed by paragraph (d) of this section) authorize the return of
property. If the Commissioner decides independently to return
property under paragraph (c)(4) of this section based on the best
interests of the taxpayer and the United States, the taxpayer or the
National Taxpayer Advocate (or his delegate) must consent to the
return of property.

       (h) Procedures for request for the return of property--(1)
Manner. A request for the return of property must be made in writing
to the address on the levy form.

       (2) Form. The written request must include the following
	   information--

       (i) The name, current address, and taxpayer identification
number of the person requesting the return of money (or property
purchased by the United States);

       (ii) A description of the property levied upon;

       (iii) The date of the levy; and

       (iv) A statement of the grounds upon which the return of
money is being requested (or property purchased by the United
States).

       (i) No interest. No interest will be paid on any money
returned under this section.

       (j) Administrative collection upon default. If the
Commissioner returns property under this section, and the taxpayer
fails to pay the previously assessed liability for which the levy
was made on the returned property, the Commissioner may
administratively collect the liability. Collection may include
levying again on the returned property as long as statutory and
administrative requirements are followed.

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

Robert E. Wenzel 
Deputy Commissioner of Internal Revenue

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