IRC 6331

The United States District Court for the District of Massachusetts ruled in Marshall F. Newman, trustee of the Angelo C. Todesca, Jr. Family Trust II v. United States of America v. Albert M. Todesca, filed August 9, 2023 as Civil Action No. 20-10632-FDS, that pursuant to IRC 6331, a Trustee’s failure to subdivide property in accordance with trust terms does not impair the IRS’s ability to levy taxpayer’s right to distribution. In 2009, Albert Todesca pleaded guilty to tax evasion for failing to remit taxes withheld from employee wages to the IRS.  He was then assessed the trust fund recovery penalty, along with assessments for personal income tax liabilities. The IRS then placed two levies on family trust assets for which he was a beneficiary held at Santander Bank, N.A. The trustee of the trust, Marshall F. Newman, then sued the bank and the U.S. government arguing the levies were illegal.  The trust at issue was established by the taxpayer’s father, who was now deceased. Taxpayer and his brother were beneficiaries. The trustee was to divide the trust into two separate trusts at the death of taxpayer’s father.  However, he never did so. Both trusts were to provide net income, or principal distributions, at the beneficiary’s request or at the trustee’s discretion. The trust held cash and real property, primarily. The IRS ultimately issued levies to the bank for the approximate total of $379,000.00  The bank froze the funds in the accounts and turned them over to the Court. Pursuant to IRC section 6331, after notice and demand, the IRS may collect tax by “levy upon all property and rights to property,” of the taxpayer who owes the government taxes. The Court took up the issue of whether or not the lien attached to an interest of the taxpayer, in the Trust. The Court explained that the language of the statute is broad and that Congress meant to reach every interest in property that a taxpayer might have.  In this case, the Court applied Massachusetts law to determine what interest the taxpayer has in the trust, and ultimately what interest the federal tax lien attaches to. This was a fact specific analysis that looked at the following factors: transferability, pecuniary value, control and enjoyment. While this may not be the rule in all jurisdictions, it is extremely difficult for a trust to protect assets from the reach of the federal tax lien, while the beneficiary retains some level of control. The Court even comments on spendthrift provisions…generally used to protect beneficiaries from creditors. Fundamentally, the Court explained that a beneficiary’s interest is not immunized from the federal tax lien by using this common tool. Ultimately, the Court allowed the government to succeed on its relevant actions in this matter.