Internal Revenue Bulletin:  2005-30 

July 25, 2005 

Rev. Rul. 2005-50


Discharge of property; refund action. This ruling clarifies that, in light of amendments to sections 6325 and 7426 of the Code made by the IRS Restructuring and Reform Act of 1998, a person not liable for the underlying tax may not file a refund action under the holding of United States v. Williams, 514 U.S. 527 (1995).

ISSUES

  1. Whether a third party can maintain a refund action under section 1346(a)(1) of Title 28 in light of the 1998 amendments to sections 6325 and 7426 of the Internal Revenue Code (the Code)?

  2. Whether a judicial remedy is available to a third party who seeks discharge of a federal tax lien under section 6325(b)(2) of the Code?

FACTS

Situation 1: The Service filed a notice of federal tax lien in County A listing an amount due of $100,000 for taxes assessed against Taxpayer. Taxpayer and Taxpayer’s spouse, Person A, who is not liable for the tax assessed against Taxpayer, jointly own real property in County A. The real property is valued at $150,000. After the notice of lien was filed, Taxpayer deeded her interest in the property to Person A pursuant to a divorce decree. Person A sought a discharge of the tax lien from the property and was informed by the Service that the value of the interest of the United States was $100,000. Person A deposited $100,000 with the Service, and the Service issued a certificate of discharge under section 6325(b)(4). Person A then requested the return of $25,000 of the deposit, arguing that the tax lien attached only to Taxpayer’s 50% interest in the property. The Service disagreed and declined to return any portion of the deposit. Person A did not file suit under section 7426(a)(4) within 120 days after the certificate of discharge was issued. Within 60 days after the 120-day period expired, the Service applied the $100,000 deposit to Taxpayer’s outstanding tax liability. Two hundred days after the certificate of discharge was issued, Person A filed an administrative claim for refund. The Service did not act on the claim and, six months later, Person A filed an action in district court pursuant to 28 U.S.C. § 1346(a)(1), seeking a refund of $25,000 of the deposited funds.

Situation 2: Same as above, except instead of depositing funds under section 6325(b)(4), Person A waived his right to make a deposit under section 6325(b)(4) under applicable Service procedures. The Service determined that the value of the lien interest of the United States was $75,000 and Person A made a partial payment in that amount under section 6325(b)(2). The Service issued a certificate of discharge pursuant to section 6325(b)(2). Person A filed an administrative claim for refund 200 days after issuance of the certificate of discharge, challenging the Service’s determination of the value of the lien interest of the United States. The Service did not act on the administrative claim and, six months later, Person A filed an action in district court seeking a refund of the $75,000 payment.

LAW AND ANALYSIS

Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay after notice and demand for payment, the amount due shall be a lien in favor of the United States on all property and rights to property, whether real or personal, belonging to that person. Section 6322 provides that once the federal tax lien has arisen, it continues until the tax liability giving rise to the lien is paid or becomes unenforceable by reason of lapse of time. See I.R.C. § 6502 (collection after assessment). In order for the lien imposed by section 6321 to be valid against certain persons, notice must be filed by the Service in accordance with section 6323.

Section 6325(b) provides several procedures for discharging property subject to a lien imposed by section 6321. Under section 6325(b)(2)(A), the Service may issue a certificate of discharge pursuant to which the government is paid the value of its lien interest in the property to be discharged. Persons who request a certificate of discharge under section 6325(b)(2)(A) may not seek judicial review of the Service’s valuation determination through a refund action under 28 U.S.C. § 1346(a)(1). See City of Richmond v. United States, 348  F. Supp. 2d 807, 813-14 (E.D. Ky. 2004). Persons who request a certificate of discharge under section 6325(b)(2)(A) also may not seek judicial review of the Service’s valuation determination through an action for substitution of value under section 7426(a)(4).

A second discharge procedure is set forth in section 6325(b)(4), under which the owner of property subject to a federal tax lien (other than the person liable for the tax) has the right to obtain a discharge upon either depositing cash or furnishing a bond acceptable to the Service in the amount the Service has determined to be the value of the lien interest of the United States. I.R.C. § 6325(b)(4)(A). The Service must refund the amount deposited or release the bond, to the extent that it determines that the taxpayer’s unsatisfied liability giving rise to the lien can be satisfied from a source other than property owned (or owned in part) by the third party, or to the extent that it determines that the value of the interest of the United States in the property is less than the Service’s prior determination of value. I.R.C. § 6325(b)(4)(B). Any amount not used to satisfy the liability shall be refunded to the owner of the property. I.R.C. § 6325(b)(4)(C).

The owner of the property has 120 days after the date the certificate of discharge under section 6325(b)(4) is issued to file a substitution of value action in district court challenging the Service’s determination of the value of the lien interest of the United States. I.R.C. § 7426(a)(4). If the owner of the property does not challenge the Service’s determination within the 120-day period, the Service shall, within 60 days after the expiration of the 120-day period, apply the amount deposited or collect on the bond to the extent necessary to satisfy the liability secured by the lien. If the owner successfully challenges the Service’s determination of the value of the lien interest of the United States, the court shall enter judgment ordering a refund of the amount deposited or a release of the bond to the extent that the amount of the deposit or bond exceeds the value of the lien interest determined by the court. I.R.C. § 7426(b)(5).

Sections 6325(b)(4) and 7426(a)(4) were enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, in response to the inadequate remedy problem identified by the Supreme Court in United States v. Williams, 514 U.S. 527 (1995). See  S. Rep. No. 105-174, at 54-55 (1998), reprinted in 1998-3 C.B. 537, 590-91. In Williams, the Court held that a third party who paid another person’s tax liability under protest had standing to bring a refund action under 28 U.S.C. § 1346(a)(1). The Court noted that the third party “had no realistic alternative to payment of a tax she did not owe, and we do not believe that Congress intended to leave parties in respondent’s position without a remedy.” 514 U.S. at 529 (footnote omitted).

Sections 6325(b)(4) and 7426(a)(4) provide the remedy that was unavailable to the third party in Williams. Section 7426(a)(4) specifically states that “[n]o other action may be brought by such person for such a determination.” Additionally, section 7426(a)(4) imposes a strict 120-day time limit for filing a substitution of value action in district court challenging the Service’s determination of value. Permitting a third party to bring another action, such as a refund suit, would conflict with the 120-day limit Congress imposed on actions brought under section 7426(a)(4). See City of Richmond, 348  F. Supp. 2d at 813-14.

The cause of action Congress provided in section 7426(a)(4) is limited to cases in which a third party has received a certificate of discharge from the Service under section 6325(b)(4). Wilson v. United States, 2004 WL 790220, at *2, 93 AFTR 2d 2004-1390 (E.D. Tenn. Feb. 24, 2004) (“On its face, 26 U.S.C. § 7426(a)(4) limits itself to permitting claims pursuant to 6325(b)(4).”). Courts lack subject matter jurisdiction over cases brought challenging the Service’s valuation determination if the certificate of discharge was sought under section 6325(b)(2), rather than section 6325(b)(4). Wilson, 2004 WL 790220, at *2.

HOLDINGS

Situation 1. Person A cannot maintain a refund action under 28 U.S.C. § 1346(a). If a discharge is obtained under section 6325(b)(4), the owner of the property has 120 days after the date the certificate of discharge was issued to bring a judicial action under section 7426(a)(4). Person A did not file a timely suit under section 7426(a)(4), and no other action may be brought.

Situation 2. Person A cannot maintain a refund action under 28 U.S.C. § 1346(a) or an action for substitution of value under section 7426(a)(4). A substitution of value action is available only to a third party who seeks a discharge and makes a deposit or furnishes a bond pursuant to section 6325(b)(4).

DRAFTING INFORMATION

The principal author of this revenue ruling is Deborah Grogan of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this revenue ruling, contact Ms. Grogan at (202) 622-3610 (not a toll-free call).


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