Tax Brake with Robert G. Nath, Esq.

Background: The IRS has always had broad authority to seize property for back taxes. This includes stocks, bonds and any other securities. All the IRS has to do is send a notice of levy to the broker holding your securities, and the broker is required by law to sell enough stock to pay the IRS (up to the amount in your account, and minus their usual and modest fees.) See Chapter 4 of The Unofficial Guide to Dealing with the IRS for more on tax levies.

In Christian, the IRS sent a levy to Christian's broker for back taxes. Christian had check-writing authority on his account. (This is typical in margin accounts where you can take out a margin loan by simply writing a check.) But instead of selling Christian's stocks for the back taxes, the broker sent the IRS a check, as if Christian had written such a check on his account. In effect, the IRS levy compelled Christian to take out a margin loan! And, the court said, that was OK!

Does the law allow the IRS do this? It's not clear. The court's decision may be appealed. What is clear is that this “compelled loan” gambit is very new, and so is the government's insistence, in court, that the IRS could in fact do this. Normally the IRS takes the position that it cannot compel you to take out a loan, nor can it force you to exercise a line of credit, nor take out a home equity loan, etc. The Christian case appears to be the first instance where the IRS has compelled the taxpayer to do just that.

So, until the law is clarified, watch out if you have back taxes and a margin account at a broker. And be careful, in divorce situations, if you have a home equity or other line of credit.

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