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Being a Motown artist behind famous songs like “Stop in the Name of Love” and “You Keep Me Hangin’ On” doesn’t excuse not paying millions of dollars in tax debt.
But did the IRS go too far when it placed a levy on royalties owed to Gold Forever Music on behalf of Edward J. Holland, Jr.?
A recent Circuit Court case takes up the issue.
Not everyone makes their money based on an hourly wage or a yearly salary. Many musicians rely on royalties to support themselves, and their craft. These royalties are paid by music publishing companies who agree to pay the musicians, or their agents, based on the licenses they sell to use their music. These royalties can come from radio plays, record sales (including digital downloads), or use rights in TV shows, movies, or video games. At their core, royalties represent a percentage of the amount each person or company pays for the right to use the musician’s intellectual property -- their music.
Because royalties can make up so much of an artist’s income, they can sometimes become targets of collection efforts when musicians fall behind on their taxes. That’s what happened after the IRS learned that Edward J. Holland, Jr., owed over $20 million in unpaid taxes.
Holland had made a name for himself as a Motown artist. He co-wrote several famous songs including “You Can’t Hurry Love” by the Supremes and Phil Collins and “You Keep Me Hangin’ On” by Vanilla Fudge and Kim Wilde. He was also the sole owner of Gold Forever Music, Inc., a music publishing company that licensed his music, and the music of several other artists, to larger companies like Broadcast Music, Inc. (BMI) and Universal Music Publishing (Universal).
In 2012, the IRS discovered that Holland wasn’t paying his taxes. He owed millions in back-owed taxes, penalties, and late fees from 1991 - 2012. After the IRS and Holland entered a consent order on the amount owed, the IRS went after everything the 78-year-old Motown artist had, including his social security payments and his royalty checks.
The IRS sent levies to BMI and Universal for everything owed to Gold Forever Music, Inc., which it said was the “alter ego/nominee transferee of Edward Holland, Jr.” Four years later, on October 6, 2016, BMI and Universal turned over $967,140.76 to the IRS.
On December 6, 2017, Gold Forever sued the IRS, claiming that part of the money surrendered didn’t belong to Holland. It belonged to the company and other artists the company represented. But the IRS said the complaint came too late to challenge the levy on royalties owed to third parties.
A levy is one tool the IRS can use to collect unpaid taxes. A tax levy can be issued against any property possessed by the taxpayer or to obligations that are “fixed and determinable” at the time the levy is issued, even if the taxpayer won’t be paid until later on. When an entity that owes a taxpayer money receives a notice of levy, that entity must turn the money or property over to the IRS instead of the taxpayer.
In 2017, when Gold Forever’s complaint was filed, a taxpayer only had 9 months after a levy was issued to challenge it. Now, that statute of limitations is two years. If an innocent third party filed a request for return of funds within that 9-month window, that third party then had 12 months to get to the courthouse and file a complaint for wrongful levy against the United States.
In Gold Forever’s case, the IRS said that 9-month window happened back in 2012, when BMI and Universal received their notices of levy. But in a recent decision, the Sixth Circuit Court said that the levy wasn’t “fixed and determinable” until the publishing companies sent in the money in 2016.
The court said the proceeds of contracts can be subject to levy if the obligation to pay the taxpayer was already set and the amount already certain. But that wasn’t the case with the levy on royalties sent to BMI and Universal. The court compared this case to others were levies were placed on salaries and wages based on future earnings of the parties (the statute has changed since that opinion was reached), and a levy sent to an auction house for the proceeds of a sale of personal property. It found:
“[N]othing remitted in 2016 and beyond represented any obligation owed in 2012—i.e., the royalties had not yet been generated and so there was more remaining to be done under the contract, such as finding licensees and collecting royalties, than to simply remit royalties to Gold Forever. . . .
“Gold Forever’s agreements with Universal and BMI, therefore should have been construed merely as ‘an obligation to attempt to sell some as yet undetermined amount of property for an as yet undetermined price to as yet undetermined buyers.’”
That meant until the money was turned over, the levy was not set, and Gold Forever had done what it took to protect its claim, and the claims of the musicians it represents, as an innocent third party to the tax levy.
When the IRS brings its full authority to collect a tax debt, it can sometimes sweep up third parties’ property along the way. When that happens, it is important that the people and entities affected speak to an experienced tax attorney right away to preserve their claims, protect their rights, and get their money and property back.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding tax levies or your rights as an innocent third party, contact Joe Viola to schedule a consultation.