Opinion ID: 72468
Heading Depth: 3
Heading Rank: 1

Heading: Salary or wages under Section 6331(e)

Text: The term “salary or wages” is not defined in the levy statute. A Treasury Regulation elaborates on the phrase: [T]he term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. The levy attaches to both salary or wages earned but not yet paid at the time of the levy, advances on salary or wages made subsequent to the date of the levy, and salary or wages earned and becoming payable subsequent to the date of the levy, until the levy is released pursuant to section 6343. 26 C.F.R. § 301.6331-1(b)(1). The regulation does not provide guidance on what types of payments constitute “similar items” of compensation for the purposes of a continuing levy. See Meehan v. Comm’r of Internal Revenue, 122 T.C. 396, 401 (2004). Mission contends that payments made to a member of an LLC do not constitute items sufficiently similar to salary or wages to allow use of Section 6331(e) to levy on them. The interpretation of Section 6331(e) is a matter of first impression in this Circuit. In fact, only one of our sister circuits has analyzed the “salary or wages” provision of the statute. See United States v. Jefferson-Pilot Life Ins. Co., 49 F.3d 1020 (4th Cir. 1995). The Fourth Circuit held Section 6331(e) to be ambiguous, noting that the term “salary or wages” is not so specific as to exclude 5 Case: 09-60402 Document: 00511062860 Page: 6 Date Filed: 03/25/2010 No. 09-60402 the possibility that Congress intended the statute to cover similar though not identical payments. Id. at 1022. The court instead relied on the Treasury Regulation we have quoted to hold that commissions paid to an independent contractor are “salary or wages” and thus subject to a continuing levy. Id. While the payments in Jefferson-Pilot were different in character than those made here, the opinion is instructive. Like the defendants in JeffersonPilot, Mission argues that Section 6331(e) ought to be interpreted in accordance with its plain language. Essentially, Mission invites this Court to accept the label Mission has assigned to the disputed payments while rejecting the Treasury Regulation interpreting the statute. We decline to do so. As did the court in Jefferson-Pilot, we will focus on the “critical characteristics” of the payments rather than on their label. Id. at 1022. Accordingly, we turn to our own precedent interpreting provisions of the Tax Code for guidance in determining which characteristics of “salary or wages” are relevant. In one appeal, a corporate taxpayer wished to deduct the salary paid to its president from its tax liability to the IRS. Bramlette Blg. Corp., Inc. v. Comm’r of Internal Revenue, 424 F.2d 751, 753-54 (5th Cir. 1970). Such deduction was only permitted if the disputed payments were actually salary and not dividends. Id. at 754. We identified four factors to be considered in distinguishing between payments of dividends and a salary: (1) whether the services performed were more like those performed by an employee or a shareholder; (2) whether there was corporate authorization for the payment of salaries; (3) whether book entries showed periodic payments or lump sum payments; and (4) whether the payments bear a relationship to the earnings of the corporation. Id. The district court applied each factor to this case in the light most favorable to Mission and concluded that the disputed payments were salary or wages. 6 Case: 09-60402 Document: 00511062860 Page: 7 Date Filed: 03/25/2010 No. 09-60402 Two of the Bramlette factors emerge as particularly compelling. First, the payments to Stanley were made periodically, rather than in a lump sum. Although the payments were not made at set intervals, they were paid frequently. Second, the disbursements to Stanley were directly proportionate to his own work product, and not to an ownership share. There is a direct correlation between Stanley’s labors and the payment he received. Additionally, the evidence demonstrates that Mission’s overall profitability did not directly impact the amount of Stanley’s receipts. Mission contends that the deduction of overhead fees and costs from Stanley’s distributions means that the payments were not directly proportionate to his work. The relevant question, though, is whether the disbursements to Stanley depended on the work performed for Mission. We find that they did. In fact, in the absence of the work performed, Stanley would have received nothing from Mission. Thus, the disputed funds were more akin to wages than to a pure distribution of profits. The final two Bramlette factors are not as persuasive but are nonetheless relevant. The services Stanley rendered for Mission could just as easily have been performed by an employed physician as by a member. Stanley merely rendered services for Mission which resulted in income, much like an employee or an independent contractor. Further, although Mission did not explicitly pay “salaries,” its practice was to pay its members periodically and frequently in the manner of a salary. All of these characteristics support the conclusion that the payments to Stanley were “salary or wages” within the meaning of Section 6331(e).