by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

FEDERAL INCOME TAX; LIENS; BROKER'S COMMISSION: A broker is entitled to a commission when a sale is consummated pursuant to a sales contract and, therefore, an earned but unpaid commission is "property or a right to property" which is subject to an IRS levy. U.S. v. Ruff, 99 F.3d 1559 (11th Cir. 1996).

A bankruptcy trustt hired a broker to assist the estate in selling the debtor's assets. The bankruptcy court order confirming the hiring provided that the commission would be payalbe "only if [the broker's] prospect is the successful buyer of the debtor's business." The commission agreement also provided that the commission was payable only after the broker had applied for it to the court and the court had approved the application. The trustee in fact did sell the property to the broker's prospect, and the broker filed an application for a $20,000 commission.

Meanwhile, the IRS had assessed a federal tax liability against the broker. Prior to the bankruptcy court's hearing on the broker's commission, the IRS served a notice of levy on the trustee. The levy was for "all property and rights to property belonging to the broker." The trustee reported back that she had no such property or rights, taking the position (without sharing her views with the IRS) that the broker had no "property" until the condition was satisfied that the bankruptcy court approve the commission.

Held: The broker did have a property right even before the bankrtupcy court hearing. Since the trustee did not report the right to the IRS, and foiled the levy, the trustee is personally responsible to the IRS for the $20,000.

The court cited the Florida rule that draws a distinction between when a commission is earned and when it is payable. In the typical case, a commission will be earned when a contract is formed with the broker's prospect, but not payable until closing. In this case, the commission was earned when the prospect bought the estate's property, but not payable until the bankruptcy court approved the payment.

Comment 1: The "earned/payable" distinction is an interesting one that is likely to have a number of applications.

But it is nevertheless difficult to credit the notion that the approval of a bankruptcy court is such a mere formality that the right to a commission arises prior to court approval. Imagine the extension of such a rule to other issues involving court approval, such as probate court. Perhaps in this case the fact that the court had already approved the commission agreement subject to certain objectively identifiable conditions provides a basis for the argument that the court approval was nothing more than a formality here. But anyone who has spent time slaving at the bankruptcy bar will attest that there are no guarantees in those courts. Bankruptcy courts have broad equitable discretion and are not shy about exercising it.

Comment 2: Want to think twice about that juicy little bankruptcy trustee appointment that you were just offerred?

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