The Internal Revenue Service (IRS) has broad powers to seize assets in payment of unpaid taxes, including income tax, excise tax, employment tax, and estate tax and donations. Assets that the IRS may seize in exercising its levying power are those that constitute “the property or proprietary rights” of the taxpayer as defined by local law. Assets in the equine industry that could be subject to foreclosure include real estate, equipment and the horses themselves, although horses worth less than $10,090 are exempt from levy. For example, in 2012 the IRS seized hundreds of horses to collect a tax debt from a defendant convicted of stealing millions of dollars from city funds. The defendant used the funds to finance the breeding and showing of American Quarter Horses. The government auctioned more than 400 of the seized horses to pay the defendant’s outstanding federal tax liability.
But because animals need food and veterinary care and can die, the IRS has specific procedures relating to the seizure of livestock, such as horses. If horses are considered “perishable goods”, Section 6336 of the Internal Revenue Code (the Code), which provides the legal requirements for the disposal of perishable goods, will apply. Under section 6336, if it is determined that the seized property is likely to perish, the IRS must assess the value of the property and either return it to the owner or put it up for immediate sale. The Internal Revenue Manual (IRM) provides additional guidance on what constitutes a perishable good. IRM 184.108.40.206 (12-20-2019) states that the property must be tangible personal property and have a short life expectancy or limited shelf life.
Prior to July 1, 2019, the definition of perishable goods included goods whose price or value may “be considerably reduced by reason of their preservation, or such goods cannot be preserved without great expense.” Horses seem to fall into one or the other of these categories. Now, under the revised definition of perishables, a debt collector would have to demonstrate that the horse had a short life expectancy.
A revenue officer seeking to seize perishable property must determine that the property cannot be held and sold at a public sale within the normal sale time limits provided in Code section 6335. Despite the change in the definition of perishable goods in 2019, the IRM suggests that examples of goods liable to perish “may be food, flowers, plants or cattle [emphasis added].” Once the revenue officer determines that the property is perishable, they must obtain approval for that finding. The determination is subject to high-level IRS review and planning, including an estimate of the net sale proceeds expected from a forced sale. If the tax official concludes that the property is not perishable, the sale of the seized property must proceed according to the normal procedures and within the time limits provided for by the Code.
A recent Bloomberg news article reported that the US government seized a 15-year-old Holsteiner that was purchased for $750,000. The horse was a show jumping champion. As expected, the cost of maintaining the horse was high. IRS agents determined that it would cost between $45,000 and $50,000 a year to feed the horse, not including any medical bills it might incur. The IRS also learned that the horse’s value had fallen sharply from its $750,000 purchase price. So, in an unusual deal, the government sold the horse to the taxpayer’s daughter (for whom it was originally purchased) for $25,000.
The considerations, planning, coordination, documentation, and approval of these types of sales can discourage a revenue officer from seizing perishable goods like horses where other assets can be more easily levied. Nevertheless, sometimes the IRS will take action to seize a horse perceived as valuable, such as with the Holsteiner, even though it is not considered perishable by the Code definition.
©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 236