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Is Collateral Exempt from IRS Levy?

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Are funds held as collateral exempt from an IRS levy, or do these funds need to be included in the bank's response to the IRS levy received?
Answer: (09-14-2010)
Deposit Secured Loans
IRC Section 6323(b)(10) provides a super-priority status for a financial institution as described in IRC sections 581 or 591 that takes a deposit, share, or other account, to the amount of the loan made by the institution, provided the following conditions exist,

The loan is made to a depositor;
The depositor pledged an account as collateral;
The institution making the loan and the institution holding the account are one and the same;
The financial institution had no actual knowledge of the lien; and
The loan is a commercial loan.

If the lending institution did not have actual notice of the tax lien, then the super-priority status is valid against both the statutory lien and a filed notice of federal tax lien.

The bank is not required to have exclusive control over the deposit account; therefore, the debtor may have access to funds in the account, but the bank retains a super-priority interest to the extent of the funds on deposit.

Despite their similarity to checking accounts, cash management accounts held by a broker are specifically excluded from provisions relating to deposit secured loans.

The bank's super-priority is not a defense to a levy. However, the levy may be released in whole or in part if the bank satisfactorily proves the bank meets the state requirement for having a security interest and alleges that it had no actual knowledge of the Federal tax lien when the loan was made. If the bank fails to honor the levy and does not prove the above points, then consider initiating a suit for failure to honor a levy.

First published on 1/17/11

First published on 01/17/2011

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