5.17.2  Federal Tax Liens (Cont. 1)

5.17.2.6 
Priority of Tax Liens: Specially Protected Competing Interests

5.17.2.6.5 
Superpriorities

5.17.2.6.5.9  (03-27-2012)
Certain Insurance Contracts

  1. This "superpriority" protects an insurer in a life insurance, endowment or annuity contract with a taxpayer. IRC § 6323(b)(9).

  2. This "superpriority" applies under the following situations:

    1. If an insurer makes a policy loan on a life insurance policy after a notice of lien has been filed with respect to the property of the insured, the insurer is protected as against the tax lien if such insurer did not have actual notice or knowledge of the existence of the tax lien at the time the policy loan was made.

    2. The insurer, after actual notice or knowledge of a federal tax lien, will still have priority but only with respect to advances (including contractual interest) required to be made under an agreement entered into prior to such actual notice or knowledge.

    3. Thus, although an insurer will not have priority for policy loans made after the insurer has actual notice or knowledge that the policy is subject to a tax lien, the insurer may nevertheless continue to make automatic premium loans to maintain the contract in force and have priority over the federal tax lien with respect to such loans, if the agreement to make the automatic premium loans was entered into before the insurer had actual notice or knowledge.

5.17.2.6.5.10  (03-27-2012)
Deposit Secured Loans

  1. This "superpriority" protects a bank or building and loan association (bank) with regard to a loan, if the loan is secured by an account with the bank. IRC 6323(b)(10). the following requirements apply:

    1. The bank must make the loan without any actual notice or knowledge of the existence of the tax lien.

      Example: Assume John Doe asks Bank C for a loan and offers his savings account at the bank as collateral. Bank C does a credit check, discovers a NFTL filed against John, but still makes the loan. Bank C will not qualify for the IRC § 6323(b)(10) superpriority because it had actual notice or knowledge of the NFTL prior to the loan.

    2. IRC § 6323(b)(10) requires that the security interest be valid under state law. Under the Uniform Commercial Code (UCC) adopted in all 50 states, a bank cannot obtain a security interest in an account if the loan is made for a consumer transaction, i.e., it is not a business loan. UCC § 9-109(d)(13) (excluding consumer loans from the scope of Article 9).

      Example: Assume Bank C made a loan to John Doe so that he could purchase a television. Because the loan was made for a consumer transaction, Bank C does not meet the state law requirements, and consequently fails to qualify under IRC § 6323(b)(10).

    Note:

    The provisions of IRC § 6323(b)(10) apply to financial institutions described in IRC §§ 581 and 591.

  2. A superpriority is not a defense to a levy. Therefore, if a bank does qualify for an IRC § 6323(b)(10) superpriority, it should either:

    • honor the levy and seek a timely return of wrongfully levied property under IRC § 6343(b) , or

    • the bank may promptly request the Service to release the levy.

  3. If the bank timely proves that it has a IRC § 6323(b)(10) superpriority, the Service will generally release the levy. See Rev. Rul. 2006-42, 2006-2 C.B. 337.

5.17.2.6.5.11  (03-27-2012)
Purchase Money Security Interest (PMSI)

  1. A purchase money mortgage or security interest is defined under state law as a mortgage or security device taken to secure the performance of an obligation incurred in the purchase of real or personal property.

  2. While the Internal Revenue Code does not give a PMSI priority status, pursuant to Rev. Rul. 68-57, 1968-1 C.B. 553, the Service recognizes that property subject to a PMSI will have priority over the Service’s NFTL if the PMSI is valid under local law.

  3. With respect to personal property, Revised Article 9 of the Uniform Commercial Code defines the creation and perfection of a PMSI. State law must be checked to determine whether a valid PMSI exists.

  4. Creating the PMSI--Pursuant to a security agreement under UCC § 9-103, a PMSI arises when a creditor advances money or credit to enable the debtor-taxpayer to purchase goods (new tangible personal property), and the money loaned is actually used to acquire these specific goods. The newly purchased goods will serve as collateral for the loan. Generally, the PMSI arises in one of the following situations.

    1. Seller advances credit—Buyer obtains possession of the goods, giving seller a security interest in the goods pursuant to a security agreement. Seller has not received full payment.

    2. Bank/finance company advances money—Bank/finance company loans money to purchase goods after debtor-taxpayer signs security agreement with bank/finance company. Seller is fully paid. The burden is on the bank/finance company to prove that the money was actually used to purchase the goods. First Interstate Bank v. IRS, 930 F.2d 1521, 1526 (10th Cir. 1991). Typically, a bank/finance company meets this burden by drafting a check payable to the seller of the goods. If the bank/finance company cannot carry its burden, then it has a regular security interest, not a PMSI.

      Example: Bank loaned money to debtor-taxpayer to buy a tractor. Debtor-taxpayer misrepresented facts; debtor-taxpayer already owns a tractor. Instead, Debtor-taxpayer used the loan to purchase a trip to Europe. Here, Bank does not have a PMSI, so Rev. Rul. 68-57 does not apply.

  5. Perfecting the PMSI - In order to prime a NFTL, a creditor must perfect its PMSI. First National Bank v. Coxson, 76-1 USTC 9450 (D.N.J. 1976). This is generally not a burden for a PMSI in consumer goods: the PMSI is automatically perfected by the security agreement. There is no filing requirement. It’s an entirely different situation for a PMSI in business goods, which must be perfected within a short period from the date that the debtor-taxpayer obtains the collateral. See UCC §§ 9-317(e), 9-324(a) and (b). Questions regarding whether a creditor has timely perfected should be referred to Area Counsel.

  6. Losing a PMSI in consumer goods - Some states have adopted a transformation rule for consumer goods, i.e., a creditor may lose its PMSI in consumer goods if it allows the debtor-taxpayer to refinance or consolidate its debts. The reasoning behind the rule is that the debt restructuring transforms the "old" loan to a "new" loan with a security interest encumbering the debtor-taxpayer’s old assets. The debtor-taxpayer does not acquire any new goods with the new loan. Thus, the new loan could not create a PMSI, because, by definition, a PMSI exists only if the debtor-taxpayer acquires new goods.

    Example of transformation rule: Assume NFTL filed on January 2, 2006. Also assume finance company loans debtor-taxpayer funds to purchase a television for his personal use on February 2, 2006, and pursuant to the security agreement, finance company acquires a PMSI in the television. On April 1, 2006, because of debtor-taxpayer’s financial problems, finance company restructures the loan agreement, reducing monthly payments but extending the payment period. In some states, under the transformation rule, this would be a new loan agreement. The debtor-taxpayer did not use the new loan to acquire new consumer goods. Consequently, the creditor’s security interest under the new loan is only a regular security interest, not a PMSI. The PMSI from February 2, 2006 has been extinguished by the new agreement. Accordingly, in a lien priority dispute on June 1, 2006, the NFTL primes the finance company’s regular security agreement on the television.

  7. The transformation rule does not apply to a PMSI in nonconsumer goods under UCC § 9-103(b). Instead, a different rule, the dual status rule, applies. The dual status rule preserves the original PMSI in a restructuring or refinancing for the original PMSI goods. After the restructuring or refinancing, the creditor has both a PMSI in the original goods and a regular security interest in other existing goods.

    Example of dual status rule: Using the preceding example with some changes, assume that debtor-taxpayer purchases the television to entertain customers at his restaurant. In this situation, the television is not a consumer good; instead, it is business equipment. When the debtor-taxpayer restructures his loan agreement on April 1, 2006, the new security agreement gives creditor a security interest in the television as well as existing tables and chairs. In a lien priority dispute on June 1, 2006, under the dual status rule, the creditor has a PMSI in the television that primes the NFTL, but the creditor has only a general security interest in the chairs and tables. The NFTL primes the general security interest in the chairs and tables.

  8. Identifying the PMSI property - Even if a creditor establishes that a PMSI was created, in a lien priority fight the creditor must be able to identify the original property encumbered with the PMSI or traceable to the original property. E.g., Citizens Savings Bank v. Miller, 515 N.W.2d 7 (Iowa 1994).

5.17.2.6.6  (03-27-2012)
Protected Interests Arising from Certain Financing Agreements

  1. In limited situations, IRC § 6323(c) and (d) provide that certain claims may prime an earlier filed NFTL and act substantially in the same manner as superpriorities.

  2. IRC § 6323(c) has three different subsections that deal with different transactions. There are, however, prerequisites that apply to all three subsections. In order for any creditor to qualify for any of the protections in section 6323(c), the creditor must show the following:

    1. The security interest is in "qualified property." The definition of qualified property differs in each of the three subsections.

    2. There is a written agreement entered into before tax lien filing, which constitutes a commercial transactions financing agreement, a real property construction or improvement financing agreement, or an obligatory disbursement agreement.

    3. The security interest is protected under local law against a judgment lien arising, as of the time of the tax lien filing, out of an unsecured obligation.

5.17.2.6.6.1  (12-12-2014)
Commercial Transactions Financing Agreements

  1. IRC § 6323(c)(2) provides protection for commercial transactions financing agreements. Generally, these are loans to a taxpayer to operate a business. The creditor and the taxpayer, in the course of trade or business, agree that loans to the taxpayer will be secured by taxpayer’s commercial financing security. Security can include, but is not limited to, accounts receivable, mortgages on real property, and inventory. The agreement must be entered into before the NFTL is filed; however, priority will extend to commercial financing security acquired before the 46th day after the NFTL is filed and to advances made within 45 days of filing (or sooner if the creditor gains knowledge of the NFTL).

  2. Alternatively, a commercial transaction financing agreement could be the purchase of commercial financing security, other than inventory, acquired by the taxpayer in the ordinary course of the taxpayer’s trade or business. Note that both the lender/purchaser and the debtor-taxpayer must have entered into the loan/sale within the ordinary course of business. This protection exists, however, for a limited time period. To be protected, the creditor must loan the funds or purchase the property from the taxpayer within 45 days of the filing of the NFTL, or (if earlier) before the lender or purchaser had actual notice or knowledge of the notice of lien filing.

  3. The term "commercial financing security" is defined as (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory. IRC § 6323(c)(2)(C). General intangibles, such as patents or copyrights, are not included. Treas. Reg § 301.6323(c)-1(c)(1). In the case of loans to the taxpayer, commercial financing security also includes inventory. Inventory consists of raw material and goods in process, as well as property held by the taxpayer primarily for sale to customers in the ordinary course of business.

  4. Examples of commercial financing security priority disputes (See also Exhibit 5.17.2-1):

    1. 45-day rule: Assume T, a tool manufacturer, on June 14 2013, gives Bank a security interest in its accounts receivable and inventory for a loan of $10,000, and Bank files its security interest on that date. Service files a NFTL on July 5, 2013. On that date, Bank’s security interest would have priority over a judgment lien arising on July 5, 2013. On August 1, 2013, without knowledge of the NFTL, Bank loans $7,000 to T. On August 2, 2013, Bank learns of the NFTL, but still loans T $2,000. On October 31, 2013, Bank loans T $1,000. Lien priority is as follows:

      i. The loan made on August 1, 2013, for $7,000 has priority over the NFTL because it met all of section 6323(c)(2) prerequisites. T and the Bank entered into the loan in the ordinary course of business. The Bank’s security interest would have had priority over a judgment lien as of July 5, 2013. The Bank made the loan without actual knowledge of the NFTL. The loan was made within 45 days of filing of NFTL.

      ii. The NFTL has priority over the $2,000 loan made on August 2, 2013, because the bank had actual knowledge of the NFTL. The Bank fails to qualify under section 6323(c)(2) for a commercial financing security.

      iii. The NFTL has priority over the $1,000 loan made on October 31, 2013, because the bank had knowledge of the NFTL and the loan was made after the 45th day. The Bank fails the 45-day rule.

      iv. The 45-day rule also governs what inventory is included in the priority. For the loan made on August 1, 2013, the Bank has priority with respect to inventory acquired by the taxpayer before the 46th day after the NFTL was filed. This is because the inventory qualifies as commercial financial security to which the priority of the Bank extends for loans it made to T before having actual knowledge (August 2, 2013) of the NFTL filing. See IRC §§ 6323(c)(2)(B) and 6323(c)(2)(C).

    2. Purchaser under section 6323(c)(2): On June 14, 2013, T, a tool manufacturer, and P, a business entity that purchases accounts receivable and inventory, agree in writing that T will sell 1/4 of its accounts receivable and inventory to P each month. Pursuant to state law, P records the sales contract on June 14, 2013. On July 5, 2013, the Service files a NFTL against Taxpayer T. On August 1, 2013, P makes its monthly purchase of T’s accounts receivable and inventory without any actual knowledge of the NFTL. Lien priority is the following:

      i. P’s purchase of the existing accounts receivable primes the NFTL under section 6323(c)(2) requirements. T and P entered into the contract in the ordinary course of business before the filing of the NFTL. Also, section 6323(c)(2)(A)(ii) defines a commercial transaction financing agreement as including an agreement to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of business. Finally, P made the purchase within 45 days of the filing of the NFTL.

      ii. The NFTL primes P’s purchase of the inventory. Section 6323(c)(2)(A)(ii) explicitly excludes the purchase of inventory from the protection given to a purchaser of commercial transaction financing security. Accordingly, P purchased the inventory encumbered with the federal tax lien.

5.17.2.6.6.2  (12-12-2014)
Real Property Construction or Improvement Financing Agreement

  1. IRC § 6323(c)(3) provides protection for interests arising from written real property construction or improvement financing agreements entered into before a NFTL is filed and which interests are given priority under state law against a judgment lien creditor as of the time of the filing of the NFTL. This protection applies to 3 different situations:

    1. the owner's construction or improvement (including demolition) of real property;

    2. a contractor obtains financing, usually a bank loan, to construct or improve real property; or

    3. the raising or harvesting of a farm crop or the raising of livestock or other animals.

  2. The first subsection addresses a taxpayer’s financing and lien for construction or improvement of the taxpayer’s home or business. IRC § 6323(c)(3)(A)(i). Pursuant to such a financing agreement, the lender takes a mortgage/lien on the taxpayer’s property undergoing construction and agrees to make distributions in the future to finance the construction.

    1. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

    2. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL.

      Example: Assume Taxpayer and Lender, by contract, on January 3, 2013, agree to a mortgage for a total of $100,000 to finance construction on Taxpayer’s building. The mortgage lien is recorded on January 4, 2013. On February 1, 2013, the Service files a NFTL. On June 3, 2013, with actual knowledge of the existence of the NFTL, Lender makes a disbursement of $100,000 to taxpayer pursuant to contract. On August 1, 2013, there is a lien priority dispute. Lender’s mortgage for $100,000 primes the NFTL because Lender meets all of the requirements of section 6323(c)(3). There was a written agreement prior to the filing of the NFTL that created a mortgage which would have primed a judgment lien creditor on the filing date of the NFTL. Actual notice of the NFTL does not disqualify the lender.

  3. The second subsection addresses a contractor’s financing for a construction project. IRC § 6323(c)(3)(A)(ii).

    1. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

    2. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL. In return for financing on the construction project, the lender acquires a security interest in the contract proceeds, not the real estate.

      Note:

      There is a difference between section 6323(c)(3)(A)(i), a financing agreement for construction on real property, and section 6323(c)(3)(A)(ii), an agreement to finance a construction contract. In the former situation, the lender’s lien is on the real property undergoing construction. In the latter situation, the lender’s lien is on the proceeds of the construction contract only.

  4. The third subsection addresses a farmer’s financing to raise or harvest a crop/livestock. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

    1. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL.

    2. This subsection is relatively generous to the lender because it protects the lender's interest in not only the crop or livestock raised, but also in any of the taxpayer’s property existing as of the filing date of the NFTL, assuming that property was listed in the security agreement.

      Example: Assume that on January 2, 2013, Farmer and Lender sign a financing agreement in which Lender agrees to a loan of $10,000 to buy seed and fertilizer. Farmer gives Lender a lien on crops and all of Farmer’s current and future property. A financing statement is properly filed on January 2, 2013. On May 1, 2013, the Service files a NFTL. On May 15, 2013, with actual knowledge of the NFTL, Lender makes a $10,000 distribution to Farmer. On October 1, 2013, Farmer buys a tractor. Lien priority is the following:

      i. Lender has lien priority on Farmer’s crops and all of Farmer’s property held as of May 1,2013, the filing date for the NFTL.

      ii. The NFTL primes Lender’s lien on the tractor. Farmer did not own the tractor as of May 1, 2013, the filing date of the NFTL.

5.17.2.6.6.3  (03-27-2012)
Obligatory Disbursement Agreement

  1. IRC § 6323(c)(4) provides protections for interests arising from an obligatory disbursement agreement, which generally requires a lender to make a payment because someone other than a taxpayer has relied on that obligation. The lender must have entered into the obligatory disbursement agreement in the course of his trade or business. A general obligatory disbursement agreement requires that on the filing date of the NFTL, the lender's security interest must be protected against a hypothetical judgment lien creditor. Also, the taxpayer and the lender's written agreement must provide that the lender's duty to pay is triggered by the claim of a third party. In other words, the lender is typically paying a third party for property/services provided to the taxpayer. Under a general obligatory disbursement agreement, the protected security interest covers only two categories:

    1. all of the taxpayer’s property as of the filing date of the NFTL and

    2. after the filing date, any property traceable to the lender's payment.

  2. A letter of credit is a classic example of an obligatory disbursement agreement. A bank issues a letter of credit (a promise to pay the holder of the letter of credit) to Taxpayer. The Service then files a NFTL. Taxpayer later purchases property by giving the seller the letter of credit. The seller later presents letter of credit to the bank to obtain payment. The bank will have priority over the FTL with respect to all of Taxpayer’s property existing as of the date of the filing of the NFTL and the property purchased with the letter of credit after the filing of the NFTL.

  3. Section 6323(c)(4) provides extra protection to surety agreements. A surety agreement is a special type of obligatory disbursement agreement: The surety agrees to perform a contract if the taxpayer fails to perform. The taxpayer and the surety must meet all of the procedural requirements imposed on a general obligatory disbursement agreement. For example, there must be a written contract; the duty to perform must be triggered by the claim of a third party; and prior to the filing of a NFTL, the security interest must be perfected against the claim of a hypothetical judgment lien creditor.

  4. Sureties receive extra protection because section 6323(c)(4) expands the categories of collateral. Unlike a general obligatory disbursement that creates only two categories of collateral, a surety can look to four categories for collateral:

    1. All of the taxpayer’s property as of the filing of the NFTL (similar category for general obligatory payment).

    2. After the filing date, any of taxpayer’s property traceable to the surety’s payment (similar category for general obligatory payment).

    3. The proceeds of the contract for which performance was insured (an additional category).

    4. If the contract is to construct or improve real property, to produce goods, or to furnish services, any tangible personal property used by the taxpayer in performing the insured contract (an additional category).

  5. Example: Prior to the filing of the NFTL, Taxpayer and Surety agreed that, if Taxpayer defaulted, Surety will have a security interest in all of Taxpayer’s property in exchange for Surety’s agreement to complete construction of the building, if needed. The Service files a NFTL. Taxpayer bought a bulldozer, began work, and then defaulted on the building construction. Surety completed the construction contract. Surety primes the NFTL as to all of Taxpayer’s property existing prior to the NFTL, proceeds of the construction contract arising after the filing of the NFTL, and the bulldozer, which Taxpayer also acquired after the filing of the NFTL.

5.17.2.6.6.4  (03-27-2012)
IRC § 6323(d)

  1. IRC § 6323(d) protects a creditor’s security interest for disbursements made within 45 days after the filing of the NFTL or before the lender acquires knowledge of the NFTL, if before the 45th day. As discussed below, section 6323(d) is similar to section 6323(c)(2) in some ways, but is different in other ways.

  2. The section 6323(d) and section 6323(c)(2) commercial transaction financing protections are similar in that they both require the following:

    • Prior to the filing of the NFTL, the taxpayer and the lender must sign a written agreement that creates a security interest in the encumbered property.

    • As of the filing date of the NFTL, the lender’s security interest must prime a hypothetical judgment lien creditor.

    • After the filing of the NFTL, the lender must not have any actual knowledge of the NFTL when it makes the loan.

    • Such loan must be made within 45 days of the filing of the NFTL. If, within the 45 day period, the lender acquires knowledge of the NFTL before making the loan, then the 45 days is shortened to the day on which the knowledge is acquired.

  3. Section 6323(d) and section 6323(c)(2) differ as to the types of property and the time when the taxpayer acquired the property. Specifically, section 6323(d) applies to all of the taxpayer’s property as of the date of the filing of the NFTL. In contrast, section 6323(c)(2) applies to specific property acquired by the taxpayer before the 46th day after the filing of the NFTL. Section 6323(d) applies to a larger pool of property; section 6323(c)(2) may apply to property acquired after the NFTL is filed.

5.17.2.6.7  (03-27-2012)
Priority of Interest and Expenses

  1. Interest and certain expenses may enjoy the same priority as the lien or security interest to which they relate. This is the case if under local law they are added to and become a part of the lien or security interest. The types of interest listed in IRC § 6323(e) are the following:

    • Interest or carrying charges (including finance and service charges) on the obligation secured by a lien or security interest.

    • Reasonable expenses of an indenture trustee (such as a trustee under a deed of trust) or agent holding a security interest.

    • Reasonable expenses incurred in collecting by foreclosure and enforcing a secured obligation (including reasonable attorney’s fees).

    • Reasonable costs of insuring, (fire and casualty insurance for instance) and preserving or repairing the property subject to the lien or security interest.

    • Reasonable costs of insuring payment of the obligation secured (such as mortgage insurance).

    • Amounts paid by the holder of a lien or security interest to satisfy another lien on the property where this other lien has priority over the federal tax lien.

  2. An example of this last situation would be if both a security interest and a statutory lien for state sales taxes have priority over a federal tax lien. In that situation, the holder of the protected security interest may discharge the sales tax lien and increase the amount so expended, even though under local law he/she is not subrogated to the rights of the holder of the sales tax lien. However, if the holder of the security interest is, under local law, subrogated to the rights of the holder of the sales tax lien, he/she may also be entitled to any additional protection afforded by IRC § 6323(i)(2). Treas. Reg. § 301.6323(e)-1(d).

5.17.2.7  (12-12-2014)
Priority of Tax Liens: The Competing Choate Lien

  1. IRC § 6323 does not cover all of the competing lien interests that could attach to a taxpayer’s property, e.g., a state tax lien. To resolve the competing priority claims of these other interests, a court will use the choateness test, which was developed by Supreme Court case law. This test arises under federal law and applies federal rules to determine lien priority, not state rules.

  2. The choateness test follows the general rule for resolving lien priorities: the lien that is "first in time" is "first in right." The federal tax lien is choate as of the assessment date. (The filing of the NFTL is irrelevant under the choateness test.) However, to be considered first in time, the nonfederal lien must be "choate," that is, sufficiently specific, when the federal lien arises. A state-created lien is not choate until the following three elements are all established:

    1. the identity of the lienor,

    2. the property subject to the lien, and

    3. the amount of the lien.

    United States v. City of New Britain, 347 U.S. 81 (1954). Failure to meet any one of these conditions forecloses priority over the federal lien, even if under state law the nonfederal lien was enforceable for all purposes when the federal lien arose.

  3. In cases involving state and local tax liens, the Supreme Court has indicated that a state or local tax lien which attaches to "all property and rights to property" may be sufficiently choate so as to obtain priority over a later arising federal tax lien. United States v. State of Vermont, 377 U.S. 351 (1964). Therefore, state, county and municipal tax liens may be regarded as choate when: the identity of the lienor is known; the amount of the lien has been finally fixed; and the lien has attached to the taxpayer’s property by virtue of statute or ordinance so as to authorize enforcement by the state or local taxing authority without substantial further administrative remedy being available to the taxpayer. If the state or local tax lien meets these criteria, the rule of first in time, first in right, should then be applied to determine priorities.

  4. Today, most choateness litigation arises in lien priority disputes with states. Remember, choateness is a federal law test, not a state law test. In Re Priest, 712 F.2d 1326 (9th Cir. 1983), mod. 725 F.2d 477 (1984) (holding a state law ineffective which stated that a tax lien arose when the tax return was "due and payable" , or on the date the return was required to be filed). A state-created lien arises when the state takes administrative steps to fix the taxpayer's liability - mere receipt of a tax return does not make the state tax lien choate. Minnesota v. United States, 184 F.3d 725 (8th Cir. 1999), cert. denied, 528 U.S. 1075 (2000).

5.17.2.7.1  (03-27-2012)
Lien Priority Disputes Arranged by Topic

  1. The following subsections, arranged alphabetically, demonstrate how to determine the relative priorities between the federal tax lien and other competing liens/claims.

5.17.2.7.1.1  (03-27-2012)
Assignments

  1. An assignment is a transfer of intangible property, frequently an account receivable. An assignee, the party receiving the assigned rights, may meet the requirements of the definition of a purchaser under IRC § 6323(h)(6). Whether an assignee is a purchaser within the meaning of the above subsection is a federal question. See United States v. Gilbert Associates, 345 U.S. 361 (1953). An assignee who fails to qualify as a purchaser may try to argue that it has a security interest under IRC § 6323(h)(1).

5.17.2.7.1.2  (12-12-2014)
Attachment Liens

  1. An attachment lien, provided for under most state statutes, may arise upon the filing of a creditor’s suit and, under state law, will be taken as of the time the attaching creditor acquired a lien on the debtor’s property. This is done by the doctrine of "relation-back" which relates the subsequently acquired judgment lien back to the date of the attachment lien. This relation back doctrine does not apply to priority disputes with the federal tax lien. United States v. Security Trust and Savings Bank, 340 U.S. 47 (1950).

  2. In cases involving the determination of priority between a federal tax lien and such an attachment lien, the attachment lien is deemed inchoate until perfected by a final judgment.

    Example: Assume a creditor files suit in January 2013 seeking a judgment against the taxpayer and acquires an attachment lien; the Service files a NFTL in July 2013; and the creditor receives a judgment in November 2013. In this case, the NFTL has priority over the judgment lien because the judgment lien does not relate back to January 2013 for federal tax lien priority disputes.

5.17.2.7.1.3  (03-27-2012)
Circular Priority

  1. Circular priority describes a situation where A’s lien is senior to the federal tax lien; the federal tax lien is senior to B’s lien; but state law makes B’s lien senior to A’s lien.

  2. In United States v. City of New Britain, 347 U.S. 81(1954), the Supreme Court resolved the circular priority problem by providing:

    1. first, that the portion of the fund for which federal law creates a lien superior to that of the Government’s tax lien is set aside;

    2. second, the federal tax claim is paid; and

    3. third, the reserved portion of the fund is distributed among competing claimants according to state law.

    Today, circular priority situations generally arise in lien priority disputes with secured creditors under the UCC. Most potential circular priority issues were eliminated when the IRC § 6323(b) superpriority provisions were enacted.

5.17.2.7.1.4  (03-27-2012)
Dower and Curtesy

  1. The wife’s right of dower and the husband’s right of curtesy are limited estates in the real property of the respective spouses which some states still recognize at common law.

  2. Many states have abolished the common law dower and curtesy in favor of a statutory right of dower in either surviving spouse as to both real and personal property.

  3. Some states treat dower and curtesy as creating a property right as of the marriage: a spouse’s dower or curtesy interest or statutory rights cannot be defeated by the other spouse’s conveyances or alienations after the marriage or by a lien in favor of the other spouse’s creditors that becomes effective after the marriage. In these states, if the marriage occurred before the Service assesses the tax liability of one spouse, then the federal tax lien is junior to the non-liable spouse’s dower/curtesy interest. Rev. Rul. 79-399, 1979-2 C.B. 398.

5.17.2.7.1.5  (12-12-2014)
Foreclosure Costs

  1. As discussed in IRM 5.17.2.6.7, if the holder of a security interest or lien has priority over a federal tax lien, then certain expenses also will have priority, provided such expenses are "reasonable" and also would have priority under local law. IRC § 6323(e).

  2. In effect, both direct expenses of sale, such as advertising, auctioneer’s expenses and any other necessary expenses of the sale and items of cost which are included in IRC § 6323(e), which are not normally direct expenses, will now have priority over the federal tax lien if the original obligation is a security interest and has priority over the tax lien.

5.17.2.7.1.6  (12-12-2014)
Forfeited Property

  1. Most states have laws providing that property used in connection with the commission of a crime shall be seized; and if the accused is convicted of the criminal charge, the property is to be forfeited. IRC § 6323(i)(3) provides that a forfeiture under local law of property seized by a law enforcement agency of a state, county, or other local governmental subdivision shall relate back to the time of the seizure, except that this paragraph shall not apply to the extent that under local law the holder of an intervening claim or interest would have priority over the interest of the state, county, or other local governmental subdivision in the property.

  2. For example, assume that a state seizes taxpayer’s car in January 2013; the Service makes an assessment against taxpayer in February 2013, and the state obtains an order of forfeiture in August 2013. Also assume that under local law the holder of an intervening claim or interest would not have priority over the state’s interest in the car. In this situation, the forfeiture relates back to the seizure, so essentially the state owned the car as of January 2013 and the car would no longer be property of the taxpayer to which the federal tax lien would attach as of February 2013.

5.17.2.7.1.7  (03-27-2012)
Home Equity Line of Credit or Open-end Mortgage

  1. An "open-end" mortgage or home equity line of credit is different from a typical mortgage. Frequently, these mortgages provide for an initial loan at the time that the parties sign the mortgage, and the borrower has the discretion to request future advances after the mortgage is recorded.

  2. If the Service files a NFTL and the lender makes a future advance within 45 days of the filing of the NFTL, the lender may be entitled to protection under IRC § 6323(d). Bank of America v. Fletcher, 342 F.Supp.2d 1009 (N.D. Okl. 2004).

5.17.2.7.1.8  (03-27-2012)
Insurance Loans

  1. In the discussion of superpriorities, it was stated that a lien is not valid against life insurance, endowment or annuity contracts as against the insurer at any time before the insurer had actual notice or knowledge of the lien. Even if the company had such notice or knowledge, it could still make advances for automatic premium loans to maintain the contract if the agreement to make the advances was entered into before the insurer had actual notice or knowledge of the lien. In addition, if a levy had been served on the insurer and the levy was satisfied, the insurer would have priority for subsequent policy loans until a new notice of levy was served on the insurer.

  2. Policy loans are those loans made to an insured by an insurance company without causing the policy to be terminated. Automatic premium loans are loans for the payment of premiums made against the cash surrender value of the insured’s policy, but which the company is required to make by the terms of the contract of insurance itself by reason of the insured’s default in premium payments.

  3. Policy loans will prime the federal tax lien if they are made by the insurance company before the insurer has actual notice or knowledge of the existence of the federal tax lien. IRC § 6323(b)(9)(A).

  4. Automatic premium loans will prime the federal tax lien if the agreement to make advances was entered into before the insurer had actual notice or knowledge of the lien. IRC § 6323(b)(9)(B).

  5. If the Service serves a notice of levy on the insurer and that levy is satisfied by the insurer, then that notice of levy will not constitute a notice of a lien until the Service delivers a new notification of the lien to the insurance company. IRC § 6323(b)(9)(C). The notification may take any form but delivery will only be effective from the time the insurer actually receives the notification.

  6. Where the taxpayer assigns or pledges a life insurance policy as security for a loan from a bank or other third party, the lender will usually occupy the position of a holder of a security interest and the priority of his/her lien versus the federal tax lien will be governed by the first in time is first in right rule.

5.17.2.7.1.9  (03-27-2012)
Landlord's Liens

  1. State law generally gives landlords and lessors a statutory lien for unpaid rents against their tenant’s or lessee’s property located on the leased premises. When a landlord’s lien competes with a federal tax lien for priority, IRC § 6323(a) does not apply. Instead, the priority dispute is resolved under the "choateness test."

  2. In the case of United States v. Scovil , 348 U.S. 218 (1955), the Supreme Court held that the landlord did not have a choate lien until the landlord recovered a judgment. Prior to obtaining a judgment, the landlord’s lien was inchoate because the amount of the secured debt was not certain, i.e., the secured debt could increase as time progressed and the secured debt could be reduced by the landlord’s breach of contract. To have priority over a federal tax lien, a landlord would have to recover a judgment and then perfect the judgment lien on the personal property prior to the NFTL filing.

5.17.2.7.1.10  (12-12-2014)
Limited Liability Companies (LLCs)

  1. An LLC is a form of business created under state law. LLCs may be either multi-member or single member. Treas. Reg. § 301.7701-3 explains the federal taxation of LLCs. If an LLC is a multi-member, the members may elect to have the LLC taxed as a corporation. If the members do not make the election, then the LLC is treated as a partnership by default. Note, however, that members of a multi-member partnership are not liable for the debts, including federal tax liabilities, of the LLC. Rev. Rul. 2004-41, 2004-18 C.B. 845. A single-member LLC may also elect to be taxed as a corporation. If the election is not made, then by default the single member LLC will be disregarded, i.e., the single-member owner is the taxpayer.

  2. Treasury regulations affect the treatment of single-owner disregarded LLCs. See Treas. Reg. § 301.7701-3. The single-owner disregarded LLC is liable for excise taxes as of January 1, 2008; the single-owner disregarded LLC is liable for employment taxes as of January 1, 2009.

5.17.2.7.1.11  (03-27-2012)
Maritime Liens

  1. The Federal Maritime Lien Act provides that any person furnishing repairs, supplies, towage or other necessaries for a vessel shall have a lien upon the vessel for payment. Maritime liens arise under 46 USC §§ 31326 and 31342. Although the Internal Revenue Code does not provide a priority for maritime liens, courts have generally given maritime liens priority over the federal tax lien.

  2. Maritime liens have, throughout history, enjoyed a peculiar sort of priority because of the very nature of a ship, its usage and needs, and the needs of its crew. For example, taking on provisions in a foreign port will give rise to a lien against the ship, generally entitled to seniority over any non-maritime lien against the ship, whether arising prior to or subsequent to the maritime lien.

  3. The source of problems in this area is that federal law has created both maritime liens and the federal tax liens. Currently, the courts have generally taken the view that the maritime lien should prevail over both prior and subsequent federal tax liens, regardless of whether the Service has filed a NFTL. National Bank of North America v. S.S. Oceanic Ondine, 335 F. Supp. 71 (S.D. Tex. 1971), aff’d, 452 F.2d 1014 (5th Cir.1972); United States v. Flood, 247 F.2d 209 (1st Cir. 1957).

5.17.2.7.1.12  (12-12-2014)
Mechanics' Liens

  1. All state statutes provide liens for laborers (mechanics) and material suppliers (materialmen) for work performed or materials supplied with respect to real property. Local law governs the method by which such liens are perfected and their duration. Generally, a mechanic’s lien must be enforced within a certain specified time or it will be lost. Generally, a mechanic’s lien attaches to the real property under construction and the proceeds of the construction contract. In determining lien priority disputes under IRC § 6323(a), one must look to the definition of mechanic’s liens in IRC § 6323(h)(2), which limits the relief provided to persons who have a lien on real property under local law for services, labor, or material furnished in construction of the real property. IRC § 6323(h)(2) also provides that a mechanic’s lien arises on the later of –

    • The date on which the mechanic’s lien first becomes valid under local law against subsequent purchasers of the real property without actual notice, or

    • The date on which the mechanic’s lienor begins to furnish the services, labor, or materials.

  2. The following example demonstrates how to apply the above rules for determining the date that a mechanic’s lien arises under IRC § 6323(h)(2):

    Example: Assume that on February 1, 2013, Taxpayer A signs a contract for construction on his office building on property owned by him. On March 1, 2013, in accordance with Treas. Reg. § 301.6323(f)-1, a notice of lien for delinquent federal taxes owed by A is filed. On April 1, 2013, B, a lumber dealer, delivers lumber to A's property. On May 1, 2013, B records a mechanic's lien against the property to secure payment of the price of the lumber. Under local law, B's mechanic's lien is valid against subsequent purchasers of real property without notice from February 1, 2013, which is the date the construction contract was entered into. Because the date on which B's mechanic's lien is valid under local law against subsequent purchasers is February 1, and the date on which B begins to furnish the materials is April 1, the date on which B becomes a mechanic's lienor within the meaning of this paragraph is April 1, the later of these two dates. Under paragraph (a) of Treas. Reg. § 301.6323(a)-1, B's mechanic's lien will not have priority over the Federal tax lien, even though under local law the mechanic's lien relates back to the date of the contract.

  3. In addition to the above, issues may arise as to whether a payment is the taxpayer’s property. In many cases a subcontractor asserts a mechanic’s lien on construction payments in the main contractor’s possession. A main contractor may fail to pay both his federal tax liability and the subcontractors on a construction project. If the Service and the subcontractors make claims on construction payments, the first step in resolving this priority dispute is determining whether the funds in the general contractor’s possession are the general contractor’s property or rights to property. In many situations the funds will not be the property or rights to property of the general contractor because state law does not give the general contractor any interest in the funds when subcontractors have not been paid.

  4. In two landmark cases, the United States Supreme Court annunciated the now famous "no property" rule. Aquilino v. United States, 363 U.S. 509 (1960), and United States v. Durham Lumber Company, 363 U.S. 522 (1960). The "no property" rule means that in approaching any priority determination, the first question must be: "Does the taxpayer have any property to which the lien will attach?" The fundamental thrust of this inquiry is that if there is no property interest to which the federal tax lien attaches, then there is no need to even consider the question of priorities.

    1. In Aquilino, the Supreme Court remanded the case for a determination of whether the taxpayer-prime contractor, by virtue of a New York statute, held the funds against which the federal tax lien was asserted in trust for the payment of laborers and material suppliers.

    2. In Durham Lumber Company, the prime contractor-taxpayer, by virtue of the law of North Carolina, was held to have no property interest in funds due from the owner except in any surplus that might remain after the payment of the subcontractors.

5.17.2.7.1.13  (03-27-2012)
Miller Act Cases and Sureties

  1. Subcontractors and suppliers who agree to provide labor and materials to a prime contractor take the risk that they will not be paid by the contractor. To protect these subcontractors and suppliers, Congress enacted the Miller Act, codified at 40 USC §§ 3131-3132 in 1935. Specifically, the Miller Act requires that the prime contractor on all federal construction projects purchase both a performance and a payment bond.

  2. The Miller Act, however, does not set forth the priorities as between any claim of the surety and any government claim. In United States v. Munsey Trust Co, 332 U.S. 234, 239 (1947), the Court first held that the government, like any creditor, has the right to setoff amounts owed to a debtor against amounts the debtor owes to the government.

  3. The Court also stated that if the surety completed the job, the surety would be entitled to the "retained moneys in addition to progress payments," as otherwise a surety would rarely agree to complete a job if it knew that, by doing so, it would lose more money than if it had allowed the government to proceed. Munsey Trust, 332 U.S. at 244.

  4. Subsequently, lower courts have cited Munsey Trust to contrast a surety’s payments made pursuant to a payment bond with payments made pursuant to a performance bond. If the surety makes a payment pursuant to a payment bond, then the government has the right to setoff. Dependable Ins. Co., Inc. v. United States, 846 F.2d 65, 67 (Fed. Cir. 1988); United States Fid. & Guar. Co. v. United States, 475 F.2d 1377, 1383 (Ct. Cl. 1973); Barrett v. United States , 367 F.2d 834 (Ct. Cl. 1966). If a surety makes a payment pursuant to a performance bond, then the government does not have the right to setoff. See Aetna Cas. & Surety Co. v. United States, 845 F.2d 971, 976 (Fed. Cir. 1988); Aetna Cas. & Surety Co. v. United States, 435 F.2d 1082 (5th Cir. 1970); Trinity Universal Ins. Co., v. United States, 382 F.2d 317, 321 (5th Cir. 1967), cert. denied, 390 U.S. 906 (1968).

5.17.2.7.1.14  (12-12-2014)
Receivers

  1. A "receiver" is a disinterested third party (similar to a trustee) appointed by a court to receive and preserve property funds in litigation. In general, in determining the priority of the federal tax lien over court appointed receivers, the threshold consideration is determining the nature of the receiver’s interest in the insolvent’s property. Of course, if the taxpayer is divested of title prior to the time the federal tax lien arises, there is no property belonging to the taxpayer in the hands of the receiver to which a federal tax lien will attach. SEC v. Levine, 881 F.2d 1165 (2d Cir. 1989). If, however, the lien arises prior to the passing of title to the receiver, the property will pass burdened with the lien. See also IRM 5.17.13.10, Receiverships.

5.17.2.7.1.15  (03-27-2012)
Right of Setoff

  1. Setoff may be defined as the discharge or reduction of one demand by an opposite one. Practically speaking, this question usually arises in the case where a bank has loaned money to a taxpayer who also is the bank’s customer. If the customer/borrower fails to meet the required loan repayments, the bank will often assert a right of setoff against any funds the customer has on deposit.

    1. If the federal tax lien attaches to a taxpayer’s property prior to setoff, then the bank takes funds encumbered with a federal tax lien. The Government may levy on the bank to obtain the encumbered funds. United States v. Donahue Industries, Inc., 905 F.2d 1325 (9th Cir. 1990). Alternatively, the Government may file suit under IRC § 7403 to foreclose the tax lien on the property. United States v. Cache Valley Bank, 866 F.2d 1242 (10th Cir. 1989).

    2. If the bank setoff occurs prior to creation of the assessment lien, then the tax lien will not attach to the funds because the money no longer belongs to the taxpayer.

      Note:

      See also IRM 5.17.2.6.5 regarding the superpriority under IRC section 6323(b)(10) for deposit secured loans.

5.17.2.7.1.16  (12-12-2014)
State and Local Tax Liens

  1. Unlike the property tax, which has a superpriority status under IRC § 6323(b)(6), a state, county or municipal lien for taxes (e.g., sales taxes, income taxes, franchise taxes, etc.) can achieve priority over the federal tax lien only on the basis that such lien is a choate lien prior in time to the federal tax lien. Then the doctrine of "first in time, first in right" is applicable. United States v. City of New Britain, 347 U.S. 81 (1954).

  2. State and local liens may not achieve priority over a federal tax lien by being characterized by the local law as some interest in addition to a lien. Thus, the U.S. Supreme Court rejected the characterization by the New Hampshire Supreme Court of a municipal tax lien as constituting a judgment lien, thus bringing the lienor within the protection of IRC § 6323. United States v. Gilbert Associates, Inc., 345 U.S. 361 (1953).

  3. Similarly, a state’s characterization of its lien for taxes as an expense of sale in a mortgage foreclosure action was unavailing and the federal tax lien was held entitled to priority over the subsequent liens of the state on a first in time, first in right basis. United States v. Buffalo Savings Bank, 371 U.S. 228 (1963). Also, in determining the relative priorities of federal tax liens and state and local liens for taxes, the state’s characterization of its liens as choate is not conclusive for federal tax purposes. Illinois v. Campbell, 329 U.S. 362 (1946).

  4. The question of what constitutes "perfection" is particularly significant in this area. States vary in terms of how local tax liens are perfected. Generally speaking, state and local tax liens arise either at the time notice and demand is issued (similar to federal tax liens), or after administrative appeal procedures to contest the lien are exhausted. See Minnesota v. United States, 184 F.3d 725 (8th Cir. 1999) (holding that a state-created lien arises when the state takes administrative steps to fix the taxpayer's liability); Monica Fuel, Inc. v. IRS, 56 F.3d 508 (3d Cir. 1995), cert. denied, 528 U.S. 1075 (2000) (holding state tax liens to be choate when the time period to administratively appeal the lien expires).

  5. In any event, the principal inquiry in these cases is that of "perfection" of the competing state or local tax lien. If there is "nothing more to be done" in order for the state to enforce its tax lien prior to the attachment of the federal tax lien, then the state or local tax lien will have priority. However, if the state must still take administrative action to establish a taxpayer’s liability after the federal tax lien arises, then the federal tax lien will have priority.

5.17.2.7.1.17  (03-27-2012)
Subrogation

  1. The doctrine of subrogation involves the substitution of one person in the place of another with respect to a lawful claim or right. IRC § 6323(i)(2) allows creditors to argue subrogation in federal tax lien priority disputes. Specifically, IRC § 6323(i)(2) provides that where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by IRC § 6321 (relating to lien for taxes) or IRC § 6324 (relating to special liens for estate and gift taxes). In lien priority disputes, subrogation issues arise when a lien that is junior to the federal tax lien pays off a lien that is senior to the federal tax lien.

    Example: Assume that Bank has the first mortgage of $10,000 on Taxpayer’s property, the federal tax lien is second in the amount of $25,000, and Credit Union has the third lien of $30,000. Next, assume that Credit Union entirely pays the Bank’s first mortgage. If Credit Union meets the local law definition of subrogation and Taxpayer’s property is sold for $50,000, then Credit Union gets the first $10,000 because it stepped into the shoes of the Bank. The Service gets the next $25,000, and the Credit Union gets the last $15,000.

  2. There is no universal definition of subrogation under state law. Whenever a lienor claims the right of subrogation, state law must be carefully examined to determine if such a claim meets the state definition of subrogation. Consult with Area Counsel on questions regarding applicable state law. State definitions of subrogation may differ. For example, under California law, courts (e.g., United States v. Han, 944 F.2d 526 (9th Cir. 1991)) apply a five-factor guideline for determining equitable subrogation:

    1. Payment was made by the subrogee to protect his own interest.

    2. The subrogee has not acted as a volunteer.

    3. The debt paid was one for which the subrogee was not primarily liable.

    4. The entire debt has been paid.

    5. Subrogation would not work any injustice to the rights of others.

    Note:

    Do not confuse subrogation with subordination. Subordination is the act or process by which one person’s rights or claims are moved voluntarily to a position ranked below those of other claimants. This differs from the principal of subrogation, in which a creditor moves ahead of another claimant by operation of law. See IRM 5.17.2.8.6, below, for additional discussion of subordination.

5.17.2.7.1.18  (12-12-2014)
Uniform Commercial Code (UCC) Security Interest

  1. Many lien priority disputes arise between the lien as secured by the NFTL filing and UCC security interest holders. In order to determine priority, you need to understand the creation and perfection of a security interest under Revised Article 9 of the UCC.

    Note:

    Different versions of Article 9 of the UCC may have been adopted in different states. Consult with Area Counsel on questions regarding applicable state law.

  2. Creation of a security interest — Under state law, attachment is the term used to describe the creation of a security interest in the debtor’s collateral. Under UCC § 9-203, attachment generally requires the following three elements:

    1. creditor has given value to the debtor,

    2. the debtor has rights in the collateral, and

    3. an agreement.

    The above three elements may occur in any order. Note, however, that a security interest does not exist under the UCC until all three elements have been met. The definition of a security interest in IRC § 6323(h)(1) includes similar requirements to the above three elements. In short, if a debtor fails the state definition of attachment, the creditor will also fail the IRC § 6323(h)(1) definition of a security interest.

  3. Perfection of a financing statement — Under state law, in order to have priority against other lienors, the security interest not only must attach to the collateral but also must be perfected. UCC § 9-301 and the following sections provide that, depending on the facts and type of collateral, steps for perfection may occur under four different methods:

    1. filing a financing statement,

    2. taking possession of the collateral,

    3. for some types of collateral, particularly bank accounts, exercising control over the collateral,

    4. in limited situations, usually a purchase money security interest in consumer goods, automatic perfection exists, i.e., attachment of the security interest automatically perfects it. An example is when a store sells a television for personal use, taking a security interest in the television.

  4. A UCC security interest must have attached and must have been perfected in order to have priority over the Service’s later filed NFTL. Do not assume, however, that a creditor’s security interest is perfected just because a financing statement has been filed. The UCC allows a creditor to file a financing statement before the security interest has attached (come into existence), and creditors frequently do so. UCC § 9-308. The Official Comments to UCC § 9-308, number 2, explain that "If the steps for perfection have been taken in advance, as when the secured party files a financing statement before giving value or before the debtor acquires rights in the collateral, then the security interest is perfected when it attaches."

  5. For corporations, limited liability companies, and other business entities created under state law (registered organizations) do not assume that a UCC security interest is filed at the same location where the NFTL is filed. IRC § 6323(f)(2)(b) states that the location of personal property is the taxpayer’s residence, and the residence of a corporation is the principal executive office of the business. In contrast, a UCC security interest for a debtor-corporation is filed in the state of incorporation. For example, a UCC security interest on the inventory of a corporation with a principal executive office in California, which was incorporated in Delaware, would be filed in Delaware.

    Reminder:

    Different states have adopted different versions of the UCC, including Article 9, which deals with Secured Transactions. Check the State Law Guide for your particular state or contact Area Counsel if you have any questions regarding the perfection of a UCC security interest. Also remember to check the local law supplements that Counsel maintains on their web site called State Law Guides.

5.17.2.7.1.19  (12-12-2014)
Unrecorded Conveyances

  1. Unrecorded conveyances can interact with the federal tax lien at differing points in time. The interaction could be:

    1. After the accrual of the tax but before the tax is assessed;

    2. After the tax is assessed and the statutory lien arises, but before a Notice of Federal Tax Lien has been filed; or

    3. After a Notice of Federal Tax Lien has been filed.

  2. Prior to assessment, a tax lien does not attach to property the taxpayer has conveyed to a third party through a bona fide conveyance which divests the taxpayer's interest in the property at issue.

  3. Even where state law provides creditors with certain rights to property if there is an unrecorded conveyance, but all of the taxpayer's interest in the property was conveyed prior to assessment (i.e. the taxpayer retains no post-conveyance interest), the federal tax lien generally will not attach even if the conveyance is recorded after the lien arises. Filicetti v. United States, 2012-1 USTC ¶ 50,214 (D.Idaho 2012).

  4. In cases involving the determination of priority between a federal tax lien arising after an unrecorded conveyance that extinguishes all of the taxpayer’s interest in the property at issue, generally the federal tax lien does not attach and the lien has no priority position. This issue may come up when reviewing applications for Certificate of Discharge of Property From Federal Tax Lien resulting in a “no value” discharge. The issue might also come up reviewing applications for Certificate of Nonattachment of Federal Tax Lien.

    Example:

    A husband and wife divorce in December 2005.

    The court awards the principal residence to the wife with a contingent contractual right for the husband such that, if the wife sells the residence within three years of the final divorce decree, the wife will split the sale proceeds with the husband.
    Under applicable state law, a divorce decree is effective to convey title between the divorcing parties at the time the decree is entered by a court.
    The husband does not pay his 2005 taxes. The husband’s liability is assessed, the statutory lien arises, and subsequently a Notice of Federal Tax Lien is filed in September 2008.
    The wife does not sell the property by the end of 2008 but also does not record the divorce decree containing the real property conveyance until 2010.
    Even though the real property conveyance was unrecorded at the time the statutory lien arose and remained unrecorded at the time the Notice of Federal Tax Lien was filed, the federal tax lien, at best, would attach to the husband’s personal property interest in the contingent contractual right to monetary proceeds until that right expired.
    In this example, the contingent right expired in December 2008 and the federal tax lien never attached to a real property interest in the principal residence.
  5. The Service’s position on unrecorded conveyances is limited to any bona fide conveyance prior to the assessment and the statutory lien arising that extinguishes all of the taxpayer’s interest in the property at issue. A conveyance is not bona fide if the taxpayer retains control over the property or enjoys full use and benefit. Thus, the position on unrecorded conveyances does not apply to a transfer to a nominee or alter ego prior to assessment. If there are fraud indicators associated with a property transfer prior to the assessment and little evidence that the taxpayer controls or enjoys full use and benefit of the property, contact Area Counsel as soon as practicable to discuss making a suit referral to the Department of Justice.

5.17.2.8  (03-27-2012)
Relief from the Federal Tax Lien

  1. The law provides various mechanisms for relief from the federal tax lien.

    1. The most common types of relief from the federal tax lien are a discharge of property from the effect of the tax lien issued by the Service, a foreclosure by a senior competing lienor, and the Service’s release of the tax lien itself.

    2. The less common types of relief from the federal tax lien are a certificate of non-attachment, a certificate of erroneous lien, the subordination of the lien, and withdrawal of the NFTL.

  2. The above types of relief are separate and distinct, as discussed below.

5.17.2.8.1  (03-27-2012)
Discharge of Property From the Effect of the Tax Lien

  1. A discharge of the property means that the federal tax lien is removed from a particular piece of property. This occurs only in limited situations listed in IRC § 6325(b). A discharge of the property must not be confused with a release of the federal tax lien. When the Service releases the federal tax lien, the underlying tax lien is extinguished on all of the taxpayer’s property.

  2. The Internal Revenue Code provides that the Service may issue a certificate of discharge of property from the federal tax lien if one of the following conditions is met:

    1. If the fair market value of the taxpayer’s property remaining subject to the lien after the discharge is double the sum of the tax liability plus all other encumbrances on that property entitled to priority over the Government’s lien. IRC § 6325(b)(1).

    2. If the Service receives payment of an amount equal to the value of the Government’s interest in the property. IRC § 6325(b)(2)(A).

    3. If the Service’s interest in the property has no value. IRC § 6525(b)(2)(B).

      Note:

      If there is a short sale, meaning the senior lienholder agrees to accept less than the full amount of its lien, the government's lien has no value and the Service cannot require payment of a sum that would have been applied to junior real estate taxes as a condition of discharge. See SBSE Interim Guidance SBSE-05-1011-084.

    4. If all or part of the taxpayer's property is sold, and, pursuant to a written agreement with the Service, the proceeds of such sale are to be held as a fund subject to the liens and claims of the United States, in the same manner and with the same priority that such liens and claims had with respect to the discharged property. IRC § 6325(b)(3). This provision often assists in facilitating the sale of property whenever a dispute exists among competing lienors, including the Government, concerning their respective rights in the property.

    5. Under IRC § 6325(b)(4), the third-party owner of this property (previously owned by the taxpayer, against which the Service has a lien and has filed an NFTL) may obtain a certificate of discharge with respect to the lien on that property. The Service shall issue such a certificate of discharge of property from the federal tax lien if the third-party owner (but, not the taxpayer) either deposits the amount of the Service’s lien interest in the property (as determined by the Service) or posts an acceptable bond for that amount. IRC § 6325(b)(4). The third party then has 120 days to file a court action to determine the value of the Service’s lien interest in the property. IRC § 7426(a)(4). If the Service determines that the taxpayer’s liability can be satisfied by other sources, or the value of the property is less than the deposit or bond, then the Service will refund the deposit (with interest) and/or release the bond. IRC § 6325(b)(4)(B). If a Court determines the value of property is less than the Service's determination, it will order the same. IRC § 7426(b)(5). If the third party does not institute proper court proceedings within the 120 days after the Service issues the Certificate of Discharge, then the Service has 60 days within which to apply the amount deposited (or collect on the posted bond) to the amount the Service determined was secured by the lien, and refund (with interest) any remainder to the third party. IRC § 6325(b)(4)(C). See also Treas. Reg. § 301.6325-1(b)(4), for further procedures. Note that any person who co-owned the property with the taxpayer can also avail themselves of this remedy.

  3. In all of the above situations, value means either fair market value or forced sale value in appropriate cases and includes the situation where the interest of the Government in the property sought to be discharged has no monetary value, as in the case of property subject to prior encumbrances in a greater amount than the value of the property.

  4. A certificate of discharge is conclusive that the property covered by the certificate is discharged from the lien. IRC § 6325(f)(1)(B). However, if the taxpayer reacquires the property that has been discharged, the tax lien will again attach. IRC § 6325(f)(3).

5.17.2.8.2  (03-27-2012)
Foreclosure by Senior Competing Lienor

  1. When a senior lienholder sells a taxpayer’s property to enforce its lien, this "foreclosure sale" may discharge a federal tax lien in certain situations. Such foreclosure sales can be either a judicial sale (i.e., pursuant to a judicial proceeding) or a nonjudicial sale.

  2. See IRM 5.12.4 for more information regarding judicial and nonjudicial foreclosures.

5.17.2.8.2.1  (03-27-2012)
Discharge of Tax Lien in Nonjudicial Sale

  1. Most controversies involving the priority of the federal tax lien involve nonjudicial sales, which are sales made pursuant to one of the following:

    1. An instrument creating a lien on the property sold;

    2. A confession of judgment on the obligation secured by an instrument creating a lien on the property sold; or

    3. A statutory lien on the property sold.

  2. Nonjudicial sales include the divestment of a taxpayer’s interest in property by operation of law, by public or private sale, by forfeiture, or by termination under provisions contained in a contract for deed, land sale contract, or conditional sales contract. Treas. Reg. § 301.7425-2(a). The key point is that a court action is not needed to enforce the creditor's interest and to sell the property.

  3. The first step in analyzing a nonjudicial sale is determining whether the Service filed a NFTL more than 30 days before the sale. If the Service filed more than 30 days before the sale, then notice of the proposed sale must be given to the Service by the foreclosing party in order for the sale to discharge the federal tax lien. If proper notice is not given to the Service, then the federal tax lien will remain on the property. If the Service filed a NFTL less than 30 days before the sale, then the Service is not entitled to notice of the nonjudicial sale, which will generally discharge the property from the federal tax lien. IRC § 7425(b).

  4. If a senior lienor finds a NFTL and wishes to give notice to the Service of a pending nonjudicial sale, the Internal Revenue Code and regulations provide that notice of a nonjudicial sale shall be given in writing by registered or certified mail or by personal service, not less than 25 days prior to the date of sale, to the IRS official, office and address specified in IRS Publication 786, "Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale," or its successor publication. Treas. Reg. § 301.7425-3(a)(1)). The 25-day period is measured from the time of mailing of the notice and applies to the sale of all real and personal property except perishable goods.

  5. When a scheduled sale for which notice has been given is postponed to a later date, the seller of the property must give notice of the postponement to the appropriate Service official in the same manner as is necessary under local law with respect to other secured creditors. Treas. Reg. § 301.7425-3(2).

  6. The date of the sale is significant in order to compute the requisite notice period that the seller has to provide the Service of any anticipated nonjudicial sale of property encumbered by the federal tax lien. Under Treas. Reg. § 301.7425-2(b), the "date of sale" for purposes of notice to the Service arises in one of the following three situations:

    1. In the case of a public sale which divests junior liens on property, the date of the public sale is controlling.

    2. In the case of a private sale which divests junior liens on property, the date that title to the property is transferred is controlling.

    3. In all other cases (i.e., where there is a divestment of title or interest not resulting from a private or public sale), the date of sale is deemed to be the date on which junior liens in the property are divested under local law.

  7. The Service has authority to consent to a sale of property free and clear of the tax lien or title of the United States in a nonjudicial sale which does not meet the standard notice requirements for such sales. If the Service consents in the manner prescribed by the regulations, then the sale will discharge or divest the property from the federal tax lien notwithstanding a defect in the original notice of sale. Treas. Reg. § 301.7425-3(b).

  8. Special rules apply for the notice of sale requirements for perishable goods. These are set forth in Treas. Reg. § 301.7425-3(c).

5.17.2.8.2.2  (12-12-2014)
Discharge of Tax Lien in Judicial Sale

  1. A judicial sale may discharge property from a federal tax lien. 28 USC § 2410(c). Under IRC §7425(a), if the Service files a NFTL prior to commencement of the suit or civil action, the United States must be named as a party in the suit in order to discharge property from the federal tax lien. If the United States is not named as a party, the judicial sale will not discharge property from the federal tax lien. There may be situations in which the United States is not named as a party in the suit because a NFTL has not been filed prior to the filing of the suit, or the filing of a notice of lien is not provided by the IRC, such as in the case of estate or gift tax liens. In these situations, the judicial sale will discharge the federal tax lien as to the property sold.

5.17.2.8.2.3  (03-27-2012)
Redemption

  1. If either a nonjudicial sale or a judicial sale discharges real property from the federal tax lien, the Service has the right of redemption. This right enables the Service to redeem the real property from the party who purchased it at the foreclosure sale, and then sell it. For both judicial and nonjudicial sales, the Service may redeem the real property within 120 days of the date of sale or the redemption period under state law, whichever is longer. 28 USC § 2410(c) (redemption after judicial sales) and IRC § 7425(d)(1) (redemption after nonjudicial sales).

  2. For more information regarding redemptions, see IRM 5.12.5.

5.17.2.8.3  (12-12-2014)
Release of Lien

  1. There is a fundamental legal distinction between the "release" of a federal tax lien provided for by IRC § 6325(a) and the "discharge" of property from the tax lien provided for by IRC § 6325(b). The release of a lien extinguishes the federal tax lien itself. In other words, a release goes to the very existence of the federal tax lien. In contrast, a discharge will leave only a particular piece of property unencumbered by the federal tax lien.

  2. Before the Service can issue a certificate of release, the taxpayer must meet certain specified conditions. IRC § 6325(a); Treas. Reg. § 301.6325-1. A certificate of release of the federal tax lien is authorized under each of the following conditions:

    1. The amount assessed (plus interest) is paid.

    2. The amount assessed becomes legally unenforceable.

    3. A bond is furnished that is satisfactory in terms and sufficient in amount to secure the payment of the outstanding assessments plus interest.

  3. If either of the first two conditions are met and a Notice of Federal Tax Lien has been filed, a certificate of release must be issued. The Area Director may exercise discretion, substitute the bond for the lien, and issue a certificate of release for the third condition. Pursuant to the regulations, a tax lien must be released as soon as practicable, but not later than 30 days, after the Area Director has:

    • determined that the liability has been fully satisfied,

    • determined that the liability has become legally unenforceable, or

    • agreed to accept a bond for the release.

    Reminder:

    All NFTLs filed since December 1982 contain a self-releasing clause stating that the federal tax lien will automatically be released unless the NFTL is timely refiled. Also, the Service may file a certificate of release prior to the time a NFTL will self-release. In both situations, the release is conclusive that the tax lien referred to in the certificate is extinguished. IRC § 6325(f)(1)(A). To prevent the lien from self-releasing, the Service must refile the NFTL in every office in which a NFTL was originally filed. See IRM 5.17.2.3.3, Refiling of Notice, above.

  4. If the underlying tax liability has not been satisfied or is not legally unenforceable, the taxpayer is not entitled to release of the lien. See IRC §§ 6322, 6325(a).

  5. The effect of a release is extinguishment of the underlying statutory assessment lien. IRC § 6325(f). The release, in itself, does not extinguish the underlying liability. For example, if a release occurs due to acceptance of a bond or expiration of the collection statute, the liability remains while the assessment lien is extinguished. See also IRM 5.17.2.8.7.1, below, addressing withdrawal of the notice of federal tax lien following lien release.

5.17.2.8.4  (03-27-2012)
Certificate of Nonattachment

  1. The Service may issue a certificate of nonattachment of the federal tax lien if it determines that a person (other than the taxpayer) may be injured by the appearance of the Service’s NFTL. IRC § 6325(e). This situation typically arises when the name of the taxpayer is similar (or identical) to that of a taxpayer identified on a NFTL. The Service files this certificate in the same office where the Service filed the NFTL. It is conclusive that the lien of the Government does not attach to the property of the person referred to in the certificate. The Service may also revoke the certificate in the same manner as a certificate of release of lien. IRC § 6325(f)(2).

  2. The certificate of nonattachment is not related to the discharge of property or the release of a federal tax lien. The certificate of nonattachment is used only when, as a matter of fact and law, the federal tax lien never attached to the property involved because the taxpayer did not own it. The owner of certain property may be subjected to unnecessary hardship because of a lien against a taxpayer with a similar name, thus, perhaps, constituting a cloud on the former’s title to his/her property.

5.17.2.8.5  (12-12-2014)
Erroneously Filed NFTL

  1. Treas. Reg. sec. 301.6326-1 defines an erroneously filed NFTL as one which is filed during the presence of one of the following conditions:

    1. The tax liability was satisfied prior to the NFTL filing,

    2. The tax liability was assessed in violation of deficiency procedures in IRC sec. 6213,

    3. The tax liability was assessed in violation of the Bankruptcy Code, or

    4. The statute of limitations for collection expired prior to the filing of the NFTL.

  2. In situations where it has been determined that a NFTL was erroneously filed, a specially-worded Form 668(Z), Certificate of Release of Federal Tax Lien, and Letter 544, Letter of Apology - Erroneous Filing of Notice of Federal Tax Lien, will be issued. Pursuant to IRC sec. 6326, the release and letter should be issued within 14 days of the determination, when practical.

  3. Advisory is responsible for making erroneous NFTL determinations. When an erroneous NFTL is identified in the field, ACS, or other function, a memorandum outlining the facts and recommending the release should be immediately prepared and forwarded to Advisory. When circumstances dictate immediate action, the facts of the case may be given to Advisory by telephone; however, the memorandum must still be prepared and forwarded to Advisory. See IRM 5.12.3 for additional information.

5.17.2.8.6  (12-12-2014)
Subordination of the Tax Lien

  1. Subordination is the act or process by which one person’s rights or claims are moved voluntarily to a position ranked below those of other claimants. This differs from the principal of subrogation (discussed in IRM 5.17.2.7.1.17), in which a creditor moves ahead of another claimant by operation of law. Under IRC § 6325(d),the Service may issue certificates subordinating a tax lien to another interest if:

    1. payment is received in an amount equal to the amount with respect to which the tax lien is subordinated , or

    2. the Service believes that the subordination of the tax lien to another interest will ultimately result in an increase in the amount realized by the United States from the property subject to the lien and will aid in the collection of the tax liability.

  2. Subordination provides the Service with flexibility. In subordination by payment, the tax lien is being subordinated only to the extent the United States receives, on a dollar-for-dollar basis, an equivalent amount. The Government’s interest cannot be injured and a new procedure for collecting taxes is made available.

  3. In subordination to ultimately aid in the collection of the tax, there is a risk that the subordination will decrease collection. For example, the federal tax lien could be subordinated to a mortgage that would provide funds to repair a dilapidated building. The assumption is that the real estate market will not go down and that the increased value of the building would both satisfy the mortgage and increase the overall payment of the tax liability. The assumption may be incorrect; the real estate market may go down. After the mortgage is paid, the Service may receive less revenue because of its decision to subordinate.

  4. The Service must exercise good judgment in weighing the risks and deciding whether to subordinate the federal tax lien. The Service’s judgment is similar to the decision that an ordinarily prudent business person would make in deciding whether to subordinate his/her rights in a debtor’s property in order to secure additional long run benefits.

  5. Subordination of the tax lien is unnecessary if a creditor meets the requirements of subrogation or qualifies for protection as a purchase money security interest holder. See IRM 5.17.2.6.5.11, Purchase Money Security Interest.

5.17.2.8.7  (12-12-2014)
Withdrawal of Notice of Federal Tax Lien

  1. There is an important distinction between "releasing" a federal tax lien and "withdrawing" a filed notice of that lien. The release of a federal tax lien extinguishes the underlying statutory assessment lien. IRC § 6325(f). Not all releases occur after the liability has been satisfied. For example, unless an NFTL is timely refiled, the federal tax lien will self-release because all NFTLs filed since December 1982 contain a self-release clause. See IRM 5.17.2.8.3, above. The release does not, in itself, extinguish the underlying liability.

  2. The Service has authority to "withdraw" a notice of federal tax lien, in certain circumstances. IRC § 6323(j)(1). The withdrawal of the NFTL only withdraws public notice of the lien; it does not extinguish the underlying liability, nor does it release the underlying federal tax lien.

  3. The Service may withdraw a notice of federal tax lien if the appropriate official determines that one of the following four conditions is met:

    1. The Service’s filing of the NFTL was premature or otherwise not in accordance with administrative procedures. See IRM 5.12.9.3.1 for additional guidance.

    2. The taxpayer has entered into an installment agreement to satisfy the tax liability, unless the agreement provides otherwise. See IRM 5.12.9.3.2 for additional guidance.

      Note:

      In April 2011, the Service expanded its policy to allow withdrawals when a taxpayer enters a Direct Debit Installment Agreement and meets certain other conditions as specified in published guidance relative to IRM 5.12.9.

    3. The withdrawal of the NFTL will facilitate collection of the tax liability underlying the NFTL. See IRM 5.12.9.3.3 for additional guidance.

    4. The withdrawal of the NFTL would be in the best interest of the taxpayer, as determined by the National Taxpayer Advocate (NTA), and in the best interest of the United States, as determined by the appropriate official. See IRM 5.12.9.3.4 for additional guidance.

      Note:

      The Service needs the consent of the taxpayer or the NTA to withdraw a notice of federal tax lien as in the best interests of the United States. A withdrawal for one of the other reasons does not require consent. IRC § 6323(j)(1).

  4. The Service must file its notice of withdrawal of the NFTL at the same office as the withdrawn notice, and must provide a copy of the withdrawal to the taxpayer. Treas. Reg. 301.6323(j)-1. In addition, if requested in writing by the taxpayer, the Service must make reasonable efforts to give notice of withdrawal of the NFTL to creditors, credit reporting agencies, and financial institutions specified by the taxpayer. IRC § 6323(j)(2).

5.17.2.8.7.1  (12-12-2014)
Withdrawal of Notice of Federal Tax Lien after Lien Release

  1. IRC 6323(j) is primarily for situations in which the federal tax lien is still in effect; however, the Service is not legally prohibited from withdrawing the lien's notice (NFTL) after the lien has been released pursuant to IRC 6325(a). The IRS does not have general authority to withdraw a NFTL outside of the conditions of IRC 6323(j) but whether or not to grant a post-release withdrawal becomes a matter of policy.

  2. Written requests submitted under IRC § 6323(j)(1)(A) (the Service’s filing of the NFTL was premature or otherwise not in accordance with administrative procedures) will generally be granted after lien release if the taxpayer demonstrates the original NFTL filing was improper or not otherwise in accordance with IRS procedures. A withdrawal under this provision may be issued whether a certificate of release was issued or the lien self-released.

  3. Post-release NFTL withdrawals under IRC 6323(j)(1)(D) (best interest test) will generally be granted if the following conditions apply:

    1. The taxpayer requests the withdrawal in writing, and

    2. The taxpayer fully satisfied the liabilities on the NFTL.

      Note:

      Fully satisfied is defined here as:

      • Tax liability was fully resolved by payment or credit offset;

      • Most circumstances where the tax assessment was abated because the taxpayer is no longer liable for the tax (e.g., amended return filed, reconsideration of additional assessment, innocent spouse determination, identity theft, or judicial ruling);

      • Abatement of penalty and/or interest due to reasonable cause resulted in zero balance; or

      • The taxpayer completed terms of an offer in compromise, including any related collateral agreements.


      Note:

      Fully satisfied does not include:

      • Liabilities that are no longer collectable because of bankruptcy discharge or expiration of the collection statute.

    3. A certificate of release was issued.

      Note:

      Generally, withdrawals will not be granted under IRC § 6323(j)(1)(D) for self-releasing liens unless extenuating circumstances are present. See SBSE-05-0611-037 (June 20, 2011) for examples of extenuating circumstances.

    4. The taxpayer is in compliance with filing requirements.

      Note:

      If the taxpayer has an unfiled return for any of the past three years, or appears to be delinquent with FTDs or Estimated Tax Payments, further investigation may be necessary as determined on a case-by-case basis.
      The taxpayer will be considered to be in compliance if the return was, or can be, closed for one of the following reasons:

      1. Not liable for the tax period;

      2. Income below the filing requirement;

      3. Little or no tax due or due a refund;

      4. No longer liable for filing.



      The taxpayer may be requested to supply additional information, as necessary, to complete this determination.
  4. Liens that self-released in error when the releases are subject to revocation do not qualify for withdrawal under these procedures.

5.17.2.8.7.2  (12-12-2014)
Withdrawal of Notice of Federal Tax Lien When Direct Debit Installment Agreement (DDIA) is in Effect

  1. A request for lien withdrawal under IRC § 6323(j)(1)(B), related to an active DDIA, will generally be approved for the following types of taxpayers:

    • Individual Master File (IMF),

    • Business Master File (BMF) income tax only, and

    • Out of Business BMF for any type of tax,


    if the following conditions are met:

    1. Aggregate unpaid balances of assessment and pre-assessed taxes are $25,000 or less.

    2. Liability will be full paid in 60 months, or prior to collection statute expiration, whichever comes first.

    3. The withdrawal request is in writing.

    4. The taxpayer is in compliance with all other filing and payment requirements.

    5. At least three consecutive payments have been made on the DDIA and there have been no defaults in payment under this, or any previous, DDIA.

    6. The taxpayer has no previous lien withdrawals for any modules on the DDIA, excluding withdrawals relating to improper NFTL filing.

    7. If a taxpayer defaults on making payment under a DDIA after the NFTL is withdrawn, a new NFTL may be filed if appropriate.


    Note:

    If a taxpayer does not meet the criteria for withdrawal under IRM 5.12.9.3.2.1, the Service must still consider the withdrawal request under the general rule allowing for withdrawal if the taxpayer enters into an installment agreement set forth at IRC 6323(j)(1)(B). See IRM 5.12.9.3.2.

5.17.2.8.8  (12-12-2014)
Revocation of Release of Lien and Nonattachment of Lien

  1. If the Service made an error in releasing the federal tax lien or filing a nonattachment of tax lien, that error may be corrected if the collection period is still open. A lien may be found to have been released erroneously or improvidently when the lien self-releases because it was not timely refiled or not timely refiled in all locations where the original NFTL was filed, the Service erroneously files a certificate of release, or when an offer in compromise has been breached. The Service may correct such errors by revoking the certificate of release or nonattachment. IRC § 6325(f)(2).

  2. Because a released lien or a lien released pursuant to self-release language in an NFTL releases the underlying statutory lien, a release in one location invalidates any notice of that statutory lien (NFTL) filed elsewhere. There is only one statutory lien but there can be multiple notices filed for that one statutory lien. The revocation reinstates the statutory lien.

  3. The Service effects the revocation by mailing a notice of the revocation to the taxpayer’s last known address and by filing notice of the revocation in the same office(s) in which the notice of lien to which it relates was filed. If NFTLs or refiled NFTLs were filed in multiple offices, the notices of revocation must also be filed in each of those offices. Any release not cancelled by a revocation filing remains a release of the statutory lien and continues to invalidate any lien notice (NFTL) filed elsewhere.

  4. The effective date of reinstatement will be the date by which the Service has both mailed the notice of revocation to the taxpayer and properly filed the notice of revocation. Revocation does not restore the continuity of the original tax lien from the date of assessment, and there is a gap period between the original release and the revocation of that release within which other liens may arise. Other liens arising during the gap period may have priority over the "reinstated" federal tax lien.

  5. The reinstated lien will have the same force and effect as a general tax lien which arises upon assessment of the tax. IRC § 6321. The reinstated lien will not be in existence for a period longer than the period of limitation on collection after assessment of the tax liability to which it relates. The reinstated lien will not be valid against any holder of a lien or interest described in IRC § 6323(a) that perfected their lien or interest prior to the filing of the reinstated lien.Treas. Reg. § 301.6325-1(f)(2)(iii)(b). The Service must file a new NFTL pursuant to IRC § 6323 in every office where it wishes to establish priority.

  6. If the Service seeks to issue a notice of revocation of the certificate of release during a taxpayer’s bankruptcy, it should seek relief from the automatic stay of Bankruptcy Code § 362 to avoid the question of whether the revocation of a certificate of release constitutes a prohibited creation of a new lien interest while the debtor is subject to the automatic stay.

5.17.2.9  (03-27-2012)
Special Tax Liens Applicable to Estates and Gifts

  1. The Internal Revenue Code provides for a special estate tax lien and a gift tax lien, both of which are separate and independent of the general tax lien. IRC § 6324. The estate tax lien and the gift tax lien may exist simultaneously with the general lien provided for by IRC § 6321 or they may exist independently of the general lien under IRC § 6321. The estate and gift tax liens arise automatically, unlike the general tax lien. The following provides a summary of estate and gift tax liens. For more information on the Estate Tax and Gift Tax Liens, see IRM 5.5.8.

5.17.2.9.1  (12-12-2014)
The Estate Tax Lien

  1. When an individual dies, the estate tax lien automatically arises upon death for the estate tax liability. The Government does not have to take any action to create the estate tax lien. This means that the estate tax lien is in existence before the amount of the tax liability it secures is even ascertained. Detroit Bank v. United States, 317 U.S. 329 (1943).

  2. The estate tax lien is a function of the amount of the estate tax a decedent’s estate ultimately owes. The lien attaches to the decedent’s entire "gross estate," exclusive of property used to pay charges against the estate and administration expenses, for a period of ten years from the date of the decedent’s death. IRC § 6324(a)(1). The majority of courts have held that the ten-year estate tax lien is of absolute duration and thus, lien foreclosure must be completed before expiration of ten years. See United States v. Davis, 52 F.3d 781 (8th Cir. 1995); United States v. Cleavenger, 517 F.2d 230 (7th Cir. 1975). The Service follows this majority rule. On the other hand, an administrative levy is completed once the notice of levy is served or in the case of tangible property, when the notice of seizure is given. Thus, any suit outside the ten-year period to enforce a levy would not be barred.

  3. The estate tax lien attaches to the "gross estate" of the decedent. The gross estate, arising under federal law, includes certain types of property not included in the probate estate. For example, property held by trusts established by the decedent many years before death may be includible in the gross estate by reason of the trust instrument reserving to the decedent certain "powers," such as the power to revoke the trust, change beneficiaries, etc.

  4. Under IRC § 6324(a)(2), special rules exist for property included in the "gross estate" but not passing through probate. For nonprobate property, if the estate tax is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary of the estate is generally liable for the payment of the estate tax to the extent of the value of the estate’s property held by, or passing to, such person. IRC § 6324(a)(2). This means that the estate tax lien will encumber such property in the hands of persons within the above classes without regard to any filing of notice of lien or the need for a separate assessment of tax.

  5. If a spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary of the estate transfers nonprobate property to a purchaser or holder of a security interest, then that property is divested from the estate tax lien. IRC § 6324(a)(2). The Service, however, may still collect from the spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary of the estate. IRC § 6324(a)(2) provides that if a transfer of nonprobate property to a purchaser or holder of a security interest removes the estate tax lien, then a "like lien" shall attach to the transferor’s property.

  6. The statute of limitations applicable to the personal liability established by IRC § 6324(a)(2) is not the 10-year period from the date of death set forth in IRC § 6324(a)(1); rather it is 10 years from the date the assessment is made against the estate upon the filing of the estate tax return, in accordance with IRC § 6502(a). The section 6324(a)(2) personal liability arises independently of the estate tax lien; accordingly, it may be collected within the ordinary collection period of 10 years from the date of assessment. A separate assessment against the transferees is not required. See Estate of Mangiardi v. Commissioner, T.C.M. 2011-24 aff’d, 442 Fed. Appx. 526 (11th Cir., October 12, 2011); United States v. Bevan, 2008 WL 5179099 (E.D. Cal. 2008); United States v. Degroft, 539 F.Supp.42 (D.Md. 1981).

  7. If property is included in the estate under IRC § 2033 (probate assets), it is divested of the lien upon transfer to a purchaser or holder of a security interest only if the estate’s executor has been discharged from personal liability under IRC § 2204. See IRC § 6324(a)(3); United States v. Vohland, 675 F.2d 1071, 1075 (9th Cir. 1982); United States v. Estate of Young, 592 F.Supp. 1478, 1486 (E.D. Pa. 1984). See also Rev. Rul. 69-23, 1969-1 C.B. 302.

  8. As with the general tax lien, there are some exceptions to the special lien for estate taxes. IRC § 6324(c). Thus, the estate tax lien will not be valid as against a mechanic’s lienor and against the superpriorities listed under IRC § 6323(b) if the conditions set forth in that section are satisfied. In addition, if a lien or security interest has priority over the estate tax lien, interest and allowable expenses based on the lien or security interest will have priority based on state or local law. Thus, for example, if A has a valid mortgage on B’s real property, A’s priority over the special lien will include not only the amount of the mortgage debt owed but also the amount of interest and allowable expenses.

  9. IRC § 6324A creates a special lien for estate taxes deferred under IRC § 6166. The executor of the estate makes an election under IRC § 6166 to defer payment of the estate tax for a period of up to 14 years. This period can be extended if the estate requests an extension to make a payment under the deferral election pursuant to IRC § 6161(a)(2)(B). If an estate qualifies and elects to defer the payment of estate tax pursuant to IRC § 6166, the Service must evaluate whether a bond should be required as security for deferral or whether it will require any security at all based on the facts and circumstances of each case. See IRC § 6165; Estate of Roski v. Commissioner, 128 T.C. 113 (2007); IRM 5.5.5.5. The Service’s decision to require a bond can be appealed to the Tax Court. See IRC § 7479(a). See Notice 2007-90, 2007-46 I.R.B. 1003 regarding the factors the Service will consider in deciding to require security. If the Service does require security, the estate may elect to provide an IRC § 6324A special lien in lieu of the bond.

  10. IRC § 6324B creates a special lien for the pending additional estate tax attributable to the estate’s election to use a "special use value" for certain "qualified" property for estate tax calculations. See IRC § 2032A (valuation of farm real property and certain real property used in family business).

  11. IRC § 2057(i)(3)(P) also creates a special lien for the pending additional estate tax attributable to the estate's qualified family-owned business interest deduction. See IRC § 2057 (Family-Owned Business Interests). This lien operates similarly to the IRC § 6324B lien.

5.17.2.9.2  (03-27-2012)
The Gift Tax Lien

  1. The gift tax lien comes into existence upon the making of a gift by a donor, if the donor is, in fact, liable for a tax in respect to such gift, or any other in the same taxable year. The gift tax lien, like the estate tax lien, arises automatically, and requires no action by the Service. Unless the donor files a gift tax return, there is no statute of limitations on the gift and the Service may examine the gift at any time.

  2. The gift tax lien attaches only to the property which is the subject of the gift. It does not attach to any of the donor’s property. It may attach to the other property of the recipient of the gift in a manner similar to the way an estate tax lien may attach to other property of a decedent’s distributees or transferees. See IRM 5.17.2.9.1. This is because the recipient is made personally liable for any gift tax incurred by the donor on a gift, made during the calendar year, to the extent of the value of the property received if the tax is not paid when due.

  3. A separate assessment against the donee is not required to make the gift tax lien enforceable against the donee's property. Any part of the property which was the subject of the gift that is transferred by the recipient to a purchaser or holder of a security interest will be divested of the lien and, to the extent of the value of such transfer, the lien will attach to the property of the donee, including after-acquired property.

  4. As was pointed out above, property which comprises the gift or a portion of the gift in issue, which is transferred by the recipient to a purchaser or holder of a security interest is divested of the lien. Likewise the recipient’s own property to which the lien shifts, as explained above, is in turn divested of the lien if it is transferred to a purchaser or holder of a security interest. The exceptions for superpriorities applicable to estate tax liens also apply to gift tax liens.

5.17.2.10  (01-01-2015)
Federal Tax Lien and the Affordable Care Act’s (ACA) Shared Responsibility

  1. The INDIVIDUAL shared responsibility provision calls for each individual to have minimum essential health coverage (MEC), qualify for a coverage exemption, or make a Shared Responsibility Payment (SRP) when filing their Federal income tax return.

    1. SRP assessments post on the taxpayer’s account using a Master File Transaction Code (MFT) 35.

      Note:

      MFT 35, tax class 6 is still used on NFM for partnership returns Forms 1065.

    2. The IRC § 6321 statutory lien arises on an SRP/MFT 35 assessment. The duration of the statutory lien is for the period described in IRC § 6322
      (See IRM 5.17.2.2.1 and IRM 5.17.2.2.2)

    3. An IRC § 6323 Notice of Federal Tax Lien shall not be filed on an SRP/MFT 35 assessment even though a statutory federal tax lien exists.
      (See IRC § 5000A(g)(2)(B))

  2. The EMPLOYER Shared Responsibility provisions apply to employers with at least 50 full-time employees (including full-time equivalent employees). An employer subject to the Employer Shared Responsibility provisions will be liable for a Shared Responsibility for Employer assessment in two situations.

    One situation is where the employer does not offer health coverage to its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit.



    The second situation is where the employer offers health coverage that is not affordable or does not provide minimum value, and at least one full-time employee receives a premium tax credit.



    1. A Shared Responsibility for Employer assessment will post on the employer’s account using an MFT 43.

    2. The IRC § 6321 statutory lien arises on an MFT 43 assessment. (See IRM 5.17.2.2)

    3. An IRC § 6323 Notice of Federal Tax Lien may be filed on an MFT 43 assessment (See IRC § 4980H(d)(1) and IRM 5.17.2.3)

Exhibit 5.17.2-1 
Commercial Transaction Financing Agreement and Commercial Financing Security Example

This image is too large to be displayed in the current screen. Please click the link to view the image.

More Internal Revenue Manual