IR-2008-141 provides a new expedited procedure by IRS to discharge certain IRS tax liens. Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS. IRS News Release IR-2008-141, December 17, 2008. [Code Secs. 6323 and 7425] Federal tax lien: Subordination of tax lien: Discharge of tax lien:

The Internal Revenue Service announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

"We don't want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes," said Doug Shulman, IRS commissioner.

"We realize these are difficult times for many Americans," Shulman said. "We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions."

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution's, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency's Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.



SEC. 7425. DISCHARGE OF LIENS.
7425(a) JUDICIAL PROCEEDINGS. --If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or a judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a lien under the provisions of this title --

7425(a)(1) shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced, or

7425(a)(2) shall have the same effect with respect to the discharge or divestment of such lien of the United States as may be provided with respect to such matters by the local law of the place where such property is situated, if no notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced or if the law makes no provision for such filing.

If a judicial sale of property pursuant to a judgment in any civil action or suit to which the United States is not a party discharges a lien of the United States arising under the provisions of this title, the United States may claim, with the same priority as its lien had against the property sold, the proceeds (exclusive of costs) of such sale at any time before the distribution of such proceeds is ordered.

7425(b) OTHER SALES. --Notwithstanding subsection (a)[, a] sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property --

7425(b)(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

7425(b)(2) shall have the same effect with respect to the discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if --

7425(b)(2)(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,

7425(b)(2)(B) the law makes no provision for such filing, or

7425(b)(2)(C) notice of such sale is given in the manner prescribed in subsection (c)(1).

7425(c) SPECIAL RULES. --

7425(c)(1) NOTICE OF SALE. --Notice of a sale to which subsection (b) applies shall be given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary.

7425(c)(2) CONSENT TO SALE. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property shall discharge or divest such property of the lien or title of the United States if the United States consents to the sale of such property free of such lien or title.

7425(c)(3) SALE OF PERISHABLE GOODS. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property liable to perish or become greatly reduced in price or value by keeping, or which cannot be kept without great expense, shall discharge or divest such property of the lien or title of the United States if notice of such sale is given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, to the Secretary before such sale. The proceeds (exclusive of costs) of such sale shall be held as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as such liens and claims had with respect to the property sold, for not less than 30 days after the date of such sale.

7425(c)(4) FORFEITURES OF LAND SALES CONTRACTS. --For purposes of subsection (b), a sale of property includes any forfeiture of a land sales contract.

7425(d) REDEMPTION BY UNITED STATES. --

7425(d)(1) RIGHT TO REDEEM. --In the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

7425(d)(2) AMOUNT TO BE PAID. --In any case in which the United States redeems real property pursuant to paragraph (1), the amount to be paid for such property shall be the amount prescribed by subsection (d) of section 2410 of title 28 of the United States Code.

7425(d)(3) CERTIFICATE OF REDEMPTION. --

7425(d)(3)(A) IN GENERAL. --In any case in which real property is redeemed by the United States pursuant to this subsection, the Secretary shall apply to the officer designated by local law, if any, for the documents necessary to evidence the fact of redemption and to record title to such property in the name of the United States. If no such officer is designated by local law or if such officer fails to issue such documents, the Secretary shall execute a certificate of redemption therefor.

7425(d)(3)(B) FILING. --The Secretary shall, without delay, cause such documents or certificate to be duly recorded in the proper registry of deeds. If the State in which the real property redeemed by the United States is situated has not by law designated an office in which such certificate may be recorded, the Secretary shall file such certificate in the office of the clerk of the United States district court for the judicial district in which such property is situated.

7425(d)(3)(C) EFFECT. --A certificate of redemption executed by the Secretary shall constitute prima facie evidence of the regularity of such redemption and shall, when recorded, transfer to the United States all the rights, title, and interest in and to such property acquired by the person from whom the United States redeems such property by virtue of the sale of such property.



Validity and Priority Against Third Parties: Priority over recorded mortgage

An IRS lien had priority over a reinstated mortgage lien where the federal tax lien was filed prior to the reinstatement of the mistakenly released mortgage lien.

B.E. Haas, CA-11, 94-2 USTC ¶50,496, 31 F3d 1081. Cert. denied, 6/19/95.

So long as the security devise used by the Veterans Administration in guaranteeing property purchases is in the true nature of a purchase money mortgage, the lien created by such devise is superior to the lien of the Federal Government against a property purchaser who acquires title after the VA lien is brought into effect.

General Counsel's Opinion 13-60, August 11, 1960, 617 CCH ¶6307.

Hart, CA-8, 53-2 USTC ¶9612, 207 F2d 813. Cert. denied, 347 US 919.

A collateral mortgage note, pledged before the government's tax lien was recorded, had priority over and outranked the tax lien.

Rex Finance Co., CA, State of La., 63-1 USTC ¶9319.

A "trust mortgage" executed to certain trustees for the benefit of unsecured creditors of a taxpayer is not a mortgage within the purview of Code Sec. 6323. Therefore, the trustees under such a "trust mortgage" do not have priority over a subsequently recorded federal tax lien.

Kobiela, DC, 57-2 USTC ¶9948, 152 FSupp 489.

The contrary position taken in the case of United States v. Benjamin Gargill, Trustee, 218 F2d 556, 55-1 USTC ¶9164, will not be accepted by the Internal Revenue Service as a precedent in the disposition of other cases involving similar fact situations.

Rev. Rul. 56-592, 1956-2 CB 945.

A mortgage of restaurant properties, which was a voluntary assignment for the benefit of unsecured creditors, made at a time when business prospects were extremely poor, did not take precedence over a Federal lien for unpaid income and employment taxes where the following two conditions existed: (1) the mortgagor did not have a substantial equity of redemption, and (2) control over the mortgaged property was relinquished to trustees.

H. Wing, DC, 62-2 USTC ¶9584, 208 FSupp 5.

Security given to a corporation in order to defraud the IRS was inferior to the U.S. interests.

Sea Ventures Holdings, DC Me., 88-1 USTC ¶9226.

An unrecorded tax lien was subordinate to a recorded mortgage on a vessel.

Runyan Machine & Boiler Works, Inc., DC, 56-1 USTC ¶9179.

The government had a valid and preferential tax lien against all property owned by the taxpayers to the extent that each of them was principally liable or liable as a transferee. However, for one piece of real property, a deed of trust running against the property and securing a loan owing by the taxpayer-wife was held to be prior in right to the government's tax lien.

Payne, DC, 56-2 USTC ¶9996. Aff'd and rev'd on other issues, CA-8, 57-2 USTC ¶9889, 247 F2d 481.

A security interest in an Illinois land trust was superior to a federal tax lien.

G.C. Canellis, DC, 80-2 USTC ¶9715.

Similarly. It is immaterial that, at the time the mortgage was executed, the parties knew of the assessment of the tax liability.

Beaver Run Coal Co., CA-3, 38-2 USTC ¶9540, 99 F2d 610.

Profaci, N.Y. SCt, Kings County, 54-2 USTC ¶9683.

A mortgage company's existing mortgage on certain community real property had priority over the Government's tax lien.

J.A. Overman, DC, 69-1 USTC ¶9251.

A contract for the conditional sale of property under which title to the property was retained by the seller was security of a mortgagee within the meaning of Code Sec. 6323 which became specific and perfected upon execution. As such, it was entitled to priority over a Federal tax lien filed after execution of the contract.

J.C. Gauvey, CA-8, 61-1 USTC ¶9478, 291 F2d 42.

The government's tax lien attached to the taxpayer's equitable estate in the property (right of redemption) where taxpayer executed a security deed conveying title to the property to secure a debt and containing a power of sale, which deed was recorded prior to the filing of the tax lien.

Cox, DC, 54-1 USTC ¶9136, 119 FSupp 147.

Similarly.

Rahar's Inn, Inc., DC, 65-1 USTC ¶9411, 243 FSupp 459.

Although income tax lien notice was filed prior to filing of a mortgage lien on the property, the lien of the government was not superior thereto where the proceeds of the mortgage loan were used to pay off another mortgage filed prior to the tax lien.

Bigley, DC, 46-1 USTC ¶9161, 64 FSupp 389.

A mortgagee, the Territory of Hawaii and the United States Government claimed priority of their respective liens. The order of priority was determined: (1) the U.S. tax liens filed prior to the recording of the chattel mortgage, (2) the balance due on the note and mortgage (the fund set apart for this purpose, however, should first satisfy the Territory for its general excise tax liens before being applied to satisfy the mortgagee), and (3) the other U.S. tax liens filed after the recording of the mortgage and the Territory compensation and dividend tax liens, in their respective order, based on the dates when the liens arose.

A.A. Smith, DC, 54-1 USTC ¶9256.

A.A. Smith, DC, 53-2 USTC ¶9533.

Where property is encumbered in its full value prior to filing by U.S. of a lien for unpaid tax, the U.S. has no equity in the property, and the holders of the superior lien, having foreclosed and taken title, are entitled to a decree removing the cloud of the lien from their title.

Minnesota Mutual Life Insurance Co., DC, 2 USTC ¶682, 47 F2d 942.

Although a mortgagee could have paid delinquent real estate taxes and water rent, with the amount so paid becoming part of the mortgage debt covered by the mortgage lien, it did not do so and a City, to whom the debts were owed, could not obtain priority over antecedent federal tax liens. Since such debts were not specifically provided for in the statute, the first-in-time, first-in-right rule prevailed.

City of New Britain, Conn., SCt, 54-1 USTC ¶9191, 347 US 81, vac'g and rem'g Conn. SCt of Errors.

Followed, on remand,

L. Brown, Conn. SCt, 55-1 USTC ¶9427, 113 A2d 601.

The principles of law set out in City of New Britain, Conn., will be followed by the IRS.

Rev. Rul. 61-101, 1961-1 CB 715.

Where a mortgagee paid taxes owed by the mortgagor in order to protect the mortgaged property against a threatened sale by the government, he was entitled to refund of the taxes paid where it was shown that the mortgage lien had priority.

Halton Tractor Co., CA-9, 58-2 USTC ¶9774, 258 F2d 612.

Edmundson, 50-1 USTC ¶9318.

Plains Motors, Inc., DC, 52-2 USTC ¶9441.

To the contrary.

R. Brown, DC Ga., 53-2 USTC ¶9534.

A federal tax lien had priority over a landlord's earlier lien for unpaid rent, bolstered by a chattel mortgage in the lease. The unrecorded chattel mortgage was invalid as to creditors, a status held by the Government.

Mason City and Clear Lake Railroad Co., DC, 57-2 USTC ¶9736, 152 FSupp 145.

The Government's lien for taxes against the taxpayer was perfected prior to the creditor's judgment, and therefore the United States was held to have a prior lien.

Macatee, Inc., CA-5, 54-2 USTC ¶9550, 214 F2d 717.

Federal tax liens were held to be superior to local real estate tax liens because the Federal liens were perfected earlier.

Marsh, DC, 54-2 USTC ¶9606.

Federal tax liens were subordinate to a mortgagee's claim to proceeds from the sale of mortgaged property, even though the affidavit for extending the mortgage (which had expired) was filed shortly after the notice of the tax liens was filed.

W.F. Eagle, DC, 59-2 USTC ¶9656.

Under Sec. 6323 a Federal tax lien was specifically and expressly subordinate to an unrecorded chattel mortgage which was valid between the parties to it and antedated the filing of the tax lien.

Gauvey, DC, 60-2 USTC ¶9634, 185 FSupp 374.

An oral contract that created a mortgage was binding between the parties and, thus, the mortgagee was entitled to priority over a subsequently filed tax lien.

Roberts, DC, 73-1 USTC ¶9300, 358 FSupp 392.

Where the United States filed its claim of lien for tax after a third party had made a loan to the property owner, said lien was inferior and subordinate to the third party's right to exact from the property full payment of the debt which the property secured.

Bank of America, Natl. Tr. & Savings Ass'n, DC, 49-2 USTC ¶9405.

An existing FDIC lien did not extend to vehicles owned by the taxpayer because the lien only attached to inventory and the vehicles were equipment used in the taxpayer's business.

Travelers Petroleum, Inc., BC-DC Okla., 88-1 USTC ¶9266, 86 BR 246.

The government had a valid tax lien on a delinquent taxpayer's one-half interest in two lots of real property. However, a mortgage on one of the two lots took priority over the tax lien because the mortgage was recorded before the notice of tax lien was filed.

J.F. McKeown, DC Ind., 94-1 USTC ¶50,217. Aff'd on another issue, CA-7 (unpublished opinion), 97-1 USTC ¶50,291.

Title to real property was subject first to a mortgage lien and then to a U.S. tax lien that was recorded after the mortgage was recorded. A title insurance search conducted by the mortgage company revealed that no liens existed against the mortgagor's real property. It had no actual or constructive knowledge that the property was encumbered by any IRS lien.

Associates Financial Services Co. of Alabama, Inc., DC Ala., 94-2 USTC ¶50,557.

A taxpayer's mother-in-law held a valid assignment of first mortgage on his property, which had priority over federal tax liens, where she received it in exchange for cash used to settle a lawsuit between the taxpayer and his first wife. Although the assignment was not recorded, state (Pennsylvania) law did not require mortgage assignments to be recorded to have priority over subsequent creditors.

H.I. Green, DC Pa., 98-1 USTC ¶50,348. Aff'd on another issue, CA-3, 2000-1 USTC ¶50,151, 201 F3d 251.

For purposes of Code Sec. 6323(a), a purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor is protected against a statutory tax lien for which a notice of federal tax lien has not been filed, notwithstanding actual knowledge of the lien.

Rev. Rul. 2003-108, 2003-2 CB 963.

Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS.

Discharge of Liens: Lien extinguished

Certain actions by two mortgagees in a "title" State, whereby they conducted nonjudicial sales of the mortgaged properties without giving notice to the IRS, elevated two junior tax liens on the taxpayer-mortgagor's equitable rights of redemption to first liens on the realty. When the mortgagees purchased the properties at the foreclosure sales, the doctrine of merger operated to extinguish the mortgage indebtedness and the related liens. No equitable considerations precluded the harsh result because the result could have been easily avoided by the mortgagee-purchasers and it was consistent with the plain language of Code Sec. 7425, its legislative history, and the overall purpose of the tax collection system. In addition, State law was inapplicable and, therefore, the mortgagee-purchasers' contention that the government only held a statutory right of redemption after the sales was meritless.

Southern Bank of Lauderdale County, CA-11, 85-2 USTC ¶9670, 770 F2d 1001. Cert. denied, 106 SCt 2890.

Followed.

Great Western Savings, DC Calif., 87-1 USTC ¶9364.

The district court erred by characterizing the sellers' state action as a confirmation of the sellers' rights under a real estate sales contract rather than an action to quiet title under Washington law, because the contract sellers did not declare a forfeiture upon the contract buyer's delinquency, which would have extinguished the tax liens, but instead they elected to have a Washington court restore them to possession and terminate the contract buyer's right of redemption and his equitable interest in the property.

S. Winterburn, CA-9, 85-1 USTC ¶9119.

A federal tax lien was extinguished following the cancellation or termination of a contract for deed, since the court determined that under the applicable state law a forfeiture was not considered a nonjudicial sale within the meaning of Code Sec. 7425(b) and notice to the federal government was not required. In so holding the court followed the reasoning enunciated in F.M. Hedlund, DC Wash., 81-2 USTC ¶9744, 520 FSupp 81, and later approved by the Ninth Circuit in Brookbank Inc., CA-9, 83-2 USTC ¶9507, that Treas. Reg. §301.7425-2 was invalid to the extent that it mandated that such forfeitures be treated as nonjudicial sales. Furthermore, in reaching this conclusion, the court contrasted the treatment of a contract for deed with that of a mortgage under state law and noted that in the case of the former the seller retains legal title until the buyer fully discharges his obligations under the contract while in the latter the mortgagor holds legal title. Finally, the court denied the seller's motion for attorney's fees.

A.B. Johnson, CA-8, 86-2 USTC ¶9643.

A district court's holding that a tax lien was extinguished by a nonjudicial foreclosure sale of the property was based on an erroneous conclusion that the lien was junior to a bank's lien. The Court of Appeals determined that, under state law, the bank's interest in the property under a defectively acknowledged deed of trust was not protected against a subsequent judgment creditor. Therefore, the judgment was reversed.

Metropolitan Natl. Bk., CA-5, 90-1 USTC ¶50,331, 901 F2d 1297.

Where property was purchased at a regular judicial sale pursuant to a judgment in a civil action in which the Government's claimed lien could have been asserted and no notice of the lien had been filed locally at commencement of the action, the provisions of Code Sec. 7425(a)(2) applied, and the interests of the Government were subordinated under Texas law to those of taxpayer. The Government also failed to prove that the purchase price was inadequate.

L. Von Cseh, DC, 73-1 USTC ¶9238, 354 FSupp 315.

Vendors were entitled to summary judgment with respect to federal tax liens on real property sold on contract to a vendee that had attached while the contract was in effect. The vendors had declared a forfeiture under the contract and such a declaration was not a sale of property within the meaning of Code Sec. 7425(b), which provides for the nondischargeability of tax liens. Reg. Sec. 301.7425-2(a), defining a nonjudicial sale to include a forfeiture or termination under the provisions of a real estate sales contract, was invalid since it enlarged the scope of the statute and failed to give consideration to the modifying phrase "under a statutory lien on such property," which restricts the meaning of a "judicial sale" to one authorized by a statute providing for a lien on property.

F.M. Hedlund, DC, 81-2 USTC ¶9744, 520 FSupp 81.

A taxpayer was held not to have a superior lien to truck property because he had not perfected his security interest in the property prior to the tax sale to a third party. Although the taxpayer argued that the tax lien was junior to his interest, the district court determined that it would be inequitable to permit him to recover the truck property since he had taken no steps to perfect his security interest under state law and because the debtor had transferred the property to trust, with the permission of the taxpayer, which had extinguished any security interest the taxpayer might have had.

C.L. Hess, DC, 80-2 USTC ¶9693.

Although a public trustee did not deliver a deed until some time later, the date of sale of property occurred under Colorado law, as of the time the purchaser paid for the property and received a certificate of purchase, and the IRS's junior lien was extinguished by a lack of a timely redemption.

San Miguel Investment Co., DC, 81-2 USTC ¶9589.

A tax lien that was based on taxes owed by contractors for the purchase of property and that was filed against that property was extinguished when the contract for deed to that property was cancelled. Since the cancellation of a contract for deed was not a non-judicial sale for the purpose of section 7425(b), the government did not have to be notified before extinction could occur. The property owner's motion for summary judgment to declare the tax lien extinguished was granted.

B. Sigel, DC Minn., 86-2 USTC ¶9514.

Failure by a purchaser of real property to make payments as provided in the contract for sale, which resulted in a declaration of forfeiture on the contract, was not considered a nonjudicial sale requiring notice of discharge of tax liens that attached to the property. The district court ruled that under state law, a declaration for forfeiture is not a sale of property within the meaning of the Code. Consequently, judgment was entered in favor of the government against the delinquent taxpayers for the amount of the liens, plus interest, penalties and other additions to tax but not as against the property.

R.F. Aden, DC Wyo., 86-2 USTC ¶9618.

Property purchased by the taxpayers at a nonjudicial foreclosure sale was taken subject to federal tax liens imposed by the government because notice of the nonjudicial foreclosure sale had not been sent to the proper district director.

G.L. Musick, DC Calif., 87-2 USTC ¶9632.

An IRS lien was discharged when another creditor gave the IRS proper notice that it had repossessed and sold the property. Under state law (Kentucky), a lien similar to the IRS's would not have continued in the surplus proceeds of a nonjudicial sale if the claimant had not (as the IRS had not) demanded satisfaction before distribution of the sale proceeds.

D.W. Cope, DC Ky., 87-2 USTC ¶9651.

A federal tax lien was extinguished by redemption of the property following a tax sale by a person who held a senior lien.

L. Black, DC Ala., 88-1 USTC ¶9207, 683 FSupp 770.

Similarly.

J. Espinoza, DC Colo., 90-1 USTC ¶50,073.

Federal tax liens, which were discharged from real property sold, attached to the proceeds of sale.

M. Caldwell, Jr., DC Ga., 90-1 USTC ¶50,100, 742 FSupp 650.

A judgment creditor was entitled to the proceeds of a sheriff's sale of the debtor's personal property, despite the fact that the IRS had a senior tax lien. Under state (Arkansas) law, the debtor had no rights with respect to the proceeds to which the IRS's lien could attach. Finally, the court had jurisdiction over the appeal because the lower court's order was final. The lower court decided who was entitled to the proceeds, the sole issue for decision, and the fact that it refused to rule on the validity or priority of the liens of the numerous other intervening claimants did not undermine the finality of that decision.

R.A. Miller, CA-8, 92-2 USTC ¶50,524, 975 F2d 547.

An IRS junior tax lien was extinguished at a property's foreclosure sale because the mortgage holder who purchased the property provided adequate notice of the sale to the IRS and acted in good faith. In addition, the redemption period following the foreclosure sale had expired.

E.D. Edmundson, DC La., 95-2 USTC ¶50,345, 886 FSupp 1314.

A third-party purchaser of property subject to a tax lien was granted summary judgment in its quiet title case against the IRS. The property subject to the tax lien was sold by the local county collector for past due real estate taxes. Although the purchaser timely notified the IRS of the sale as required by Code Sec. 7425, and although the IRS received the notice, the notice was incorrectly addressed. The IRS argued that the purchaser's failure to correctly address the notice made the notice fatally inadequate and, therefore, its obligation to notify the petitioner of any inadequacies in the notice never arose. However, the court determined that, under Reg. §301.7425(d)(2), the timely notice of sale triggered the IRS's duty to provide notice of any inadequacy to the foreclosing party. The IRS could not use a technical deficiency to disregard its obligation to provide notice of inadequacy and sit back and wait for the sender of the notice to "fall into its trap."

Glasgow Realty, LLC, DC Mo., 2005-1 USTC ¶50,124.

Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS.

6323(a) PURCHASERS, HOLDERS OF SECURITY INTERESTS, MECHANIC'S LIENORS, AND JUDGMENT LIEN CREDITORS. --
The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.




6323(b) PROTECTION FOR CERTAIN INTERESTS EVEN THOUGH NOTICE FILED. --
Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid --




6323(b)(1) SECURITIES. --
With respect to a security (as defined in subsection (h)(4)) --

6323(b)(1)(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and

6323(b)(1)(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien.




6323(b)(2) MOTOR VEHICLES. --
With respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if --

6323(b)(2)(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and

6323(b)(2)(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.




6323(b)(3) PERSONAL PROPERTY PURCHASED AT RETAIL. --
With respect to tangible personal property purchased at retail, as against a purchaser in the ordinary course of the seller's trade or business, unless at the time of such purchase such purchaser intends such purchase to (or knows such purchase will) hinder, evade, or defeat the collection of any tax under this title.




6323(b)(4) PERSONAL PROPERTY PURCHASED IN CASUAL SALE. --
With respect to household goods, personal effects, or other tangible personal property described in section 6334(a) purchased (not for resale) in a casual sale for less than $1,000, as against the purchaser, but only if such purchaser does not have actual notice or knowledge (A) of the existence of such lien, or (B) that this sale is one of a series of sales.




6323(b)(5) PERSONAL PROPERTY SUBJECT TO POSSESSORY LIEN. --
With respect to tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of such property, as against a holder of such a lien, if such holder is, and has been, continuously in possession of such property from the time such lien arose.




6323(b)(6) REAL PROPERTY TAX AND SPECIAL ASSESSMENT LIENS. --
With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of --

6323(b)(6)(A) a tax of general application levied by any taxing authority based upon the value of such property;

6323(b)(6)(B) a special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement; or

6323(b)(6)(C) charges for utilities or public services furnished to such property by the United States, a State or political subdivision thereof, or an instrumentality of any one or more of the foregoing.




6323(b)(7) RESIDENTIAL PROPERTY SUBJECT TO A MECHANIC'S LIEN FOR CERTAIN REPAIRS AND IMPROVEMENTS. --
With respect to real property subject to a lien for repair or improvement of a personal residence (containing not more than four dwelling units) occupied by the owner of such residence, as against a mechanic's lienor, but only if the contract price on the contract with the owner is not more than $5,000.




6323(b)(8) ATTORNEYS' LIENS. --
With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.




6323(b)(9) CERTAIN INSURANCE CONTRACTS. --
With respect to a life insurance, endowment, or annuity contract, as against the organization which is the insurer under such contract, at any time --

6323(b)(9)(A) before such organization had actual notice or knowledge of the existence of such lien;

6323(b)(9)(B) after such organization had such notice or knowledge, with respect to advances required to be made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge; or

6323(b)(9)(C) after satisfaction of a levy pursuant to section 6332(b), unless and until the Secretary delivers to such organization a notice, executed after the date of such satisfaction, of the existence of such lien.




6323(b)(10) DEPOSIT-SECURED LOANS. --
With respect to a savings deposit, share, or other account, with an institution described in section 581 or 591, to the extent of any loan made by such institution without actual notice or knowledge of the existence of such lien, as against such institution, if such loan is secured by such account.




6323(c) PROTECTION FOR CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS, ETC. --

6323(c)(1) IN GENERAL. --To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which --

6323(c)(1)(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting --

6323(c)(1)(A)(i) a commercial transactions financing agreement,

6323(c)(1)(A)(ii) a real property construction or improvement financing agreement, or

6323(c)(1)(A)(iii) an obligatory disbursement agreement, and

6323(c)(1)(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

6323(c)(2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT. --For purposes of this subsection --

6323(c)(2)(A) DEFINITION. --The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business) --

6323(c)(2)(A)(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, or

6323(c)(2)(A)(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;

but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

6323(c)(2)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

6323(c)(2)(C) COMMERCIAL FINANCING SECURITY DEFINED. --The term "commercial financing security" means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory.

6323(c)(2)(D) PURCHASER TREATED AS ACQUIRING SECURITY INTEREST. --A person who satisfies subparagraph (A) by reason of clause (ii) thereof shall be treated as having acquired a security interest in commercial financing security.

6323(c)(3) REAL PROPERTY CONSTRUCTION OR IMPROVEMENT FINANCING AGREEMENT. --For purposes of this subsection --

6323(c)(3)(A) DEFINITION. --The term "real property construction or improvement financing agreement" means an agreement to make cash disbursements to finance --

6323(c)(3)(A)(i) the construction or improvement of real property,

6323(c)(3)(A)(ii) a contract to construct or improve real property, or

6323(c)(3)(A)(iii) the raising or harvesting of a farm crop or the raising of livestock or other animals.

For purposes of clause (iii), the furnishing of goods and services shall be treated as the disbursement of cash.

6323(c)(3)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to a real property construction or improvement financing agreement, includes only --

6323(c)(3)(B)(i) in the case of subparagraph (A)(i), the real property with respect to which the construction or improvement has been or is to be made,

6323(c)(3)(B)(ii) in the case of subparagraph (A)(ii), the proceeds of the contract described therein, and

6323(c)(3)(B)(iii) in the case of subparagraph (A)(iii), property subject to the lien imposed by section 6321 at the time of tax lien filing and the crop or the livestock or other animals referred to in subparagraph (A)(iii).

6323(c)(4) OBLIGATORY DISBURSEMENT AGREEMENT. --For purposes of this subsection --

6323(c)(4)(A) DEFINITION. --The term "obligatory disbursement agreement" means an agreement (entered into by a person in the course of his trade or business) to make disbursements, but such an agreement shall be treated as coming within the term only to the extent of disbursements which are required to be made by reason of the intervention of the rights of a person other than the taxpayer.

6323(c)(4)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to an obligatory disbursement agreement, means property subject to the lien imposed by section 6321 at the time of tax lien filing and (to the extent that the acquisition is directly traceable to the disbursements referred to in subparagraph (A)) property acquired by the taxpayer after tax lien filing.

6323(c)(4)(C) SPECIAL RULES FOR SURETY AGREEMENTS. --Where the obligatory disbursement agreement is an agreement ensuring the performance of a contract between the taxpayer and another person --

6323(c)(4)(C)(i) the term "qualified property" shall be treated as also including the proceeds of the contract the performance of which was ensured, and

6323(c)(4)(C)(ii) if the contract the performance of which was ensured was a contract to construct or improve real property, to produce goods, or to furnish services, the term "qualified property" shall be treated as also including any tangible personal property used by the taxpayer in the performance of such ensured contract.




6323(d) 45- DAY PERIOD FOR MAKING DISBURSEMENTS. --
Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest --

6323(d)(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

6323(d)(2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.




6323(e) PRIORITY OF INTEREST AND EXPENSES. --
If the lien imposed by section 6321 is not valid as against a lien or security interest, the priority of such lien or security interest shall extend to --

6323(e)(1) any interest or carrying charges upon the obligation secured,

6323(e)(2) the reasonable charges and expenses of an indenture trustee or agent holding the security interest for the benefit of the holder of the security interest,

6323(e)(3) the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collecting or enforcing the obligation secured,

6323(e)(4) the reasonable costs of insuring, preserving, or repairing the property to which the lien or security interest relates,

6323(e)(5) the reasonable costs of insuring payment of the obligation secured, and

6323(e)(6) amounts paid to satisfy any lien on the property to which the lien or security interest relates, but only if the lien so satisfied is entitled to priority over the lien imposed by section 6321,

to the extent that, under local law, any such item has the same priority as the lien or security interest to which it relates.




6323(f) PLACE FOR FILING NOTICE; FORM. --

6323(f)(1) PLACE FOR FILING. --The notice referred to in subsection (a) shall be filed --

6323(f)(1)(A) UNDER STATE LAWS. --

6323(f)(1)(A)(i) REAL PROPERTY. --In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and

6323(f)(1)(A)(ii) PERSONAL PROPERTY. --In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated, except that State law merely conforming to or reenacting Federal law establishing a national filing system does not constitute a second office for filing as designated by the laws of such State;

6323(f)(1)(B) WITH CLERK OF DISTRICT COURT. --In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A); or

6323(f)(1)(C) WITH RECORDER OF DEEDS OF THE DISTRICT OF COLUMBIA. --In the office of the Recorder of Deeds of the District of Columbia, if the property subject to the lien is situated in the District of Columbia.

6323(f)(2) SITUS OF PROPERTY SUBJECT TO LIEN. --For purposes of paragraphs (1) and (4), property shall be deemed to be situated --

6323(f)(2)(A) REAL PROPERTY. --In the case of real property, at its physical location; or

6323(f)(2)(B) PERSONAL PROPERTY. --In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

6323(f)(3) FORM. --The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

6323(f)(4) INDEXING REQUIRED WITH RESPECT TO CERTAIN REAL PROPERTY. --In the case of real property, if --

6323(f)(4)(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

6323(f)(4)(B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens,

then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

6323(f)(5) NATIONAL FILING SYSTEMS. --The filing of a notice of lien shall be governed solely by this title and shall not be subject to any other Federal law establishing a place or places for the filing of liens or encumbrances under a national filing system.




6323(g) REFILING OF NOTICE. --
For purposes of this section --

6323(g)(1) GENERAL RULE. --Unless notice of lien is refiled in the manner prescribed in paragraph (2) during the required refiling period, such notice of lien shall be treated as filed on the date on which it is filed (in accordance with subsection (f)) after the expiration of such refiling period.

6323(g)(2) PLACE FOR FILING. --A notice of lien refiled during the required refiling period shall be effective only --

6323(g)(2)(A) if --

6323(g)(2)(A)(i) such notice of lien is refiled in the office in which the prior notice of lien was filed, and

6323(g)(2)(A)(ii) in the case of real property, the fact of refiling is entered and recorded in an index to the extent required by subsection (f)(4); and

6323(g)(2)(B) in any case in which, 90 days or more prior to the date of a refiling of notice of lien under subparagraph (A), the Secretary received written information (in the manner prescribed in regulations issued by the Secretary) concerning a change in the taxpayer's residence, if a notice of such lien is also filed in accordance with subsection (f) in the State in which such residence is located.

6323(g)(3) REQUIRED REFILING PERIOD. --In the case of any notice of lien, the term "required refiling period" means --

6323(g)(3)(A) the one-year period ending 30 days after the expiration of 10 years after the date of the assessment of the tax, and

6323(g)(3)(B) the one-year period ending with the expiration of 10 years after the close of the preceding required refiling period for such notice of lien.

6323(g)(4) TRANSITIONAL RULE. --Notwithstanding paragraph (3), if the assessment of the tax was made before January 1, 1962, the first required refiling period shall be the calendar year 1967.




6323(h) DEFINITIONS. --
For purposes of this section and section 6324 --

6323(h)(1) SECURITY INTEREST. --The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

6323(h)(2) MECHANIC'S LIENOR. --The term "mechanic's lienor" means any person who under local law has a lien on real property (or on the proceeds of a contract relating to real property) for services, labor, or materials furnished in connection with the construction or improvement of such property. For purposes of the preceding sentence, a person has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials.

6323(h)(3) MOTOR VEHICLE. --The term "motor vehicle" means a self-propelled vehicle which is registered for highway use under the laws of any State or foreign country.

6323(h)(4) SECURITY. --The term "security" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

6323(h)(5) TAX LIEN FILING. --The term "tax lien filing" means the filing of notice (referred to in subsection (a)) of the lien imposed by section 6321.

6323(h)(6) PURCHASER. --The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. In applying the preceding sentence for purposes of subsection (a) of this section, and for purposes of section 6324 --

6323(h)(6)(A) a lease of property,

6323(h)(6)(B) a written executory contract to purchase or lease property,

6323(h)(6)(C) an option to purchase or lease property or any interest therein, or

6323(h)(6)(D) an option to renew or extend a lease of property,

which is not a lien or security interest shall be treated as an interest in property.




6323(i) SPECIAL RULES. --

6323(i)(1) ACTUAL NOTICE OR KNOWLEDGE. --For purposes of this subchapter, an organization shall be deemed for purposes of a particular transaction to have actual notice or knowledge of any fact from the time such fact is brought to the attention of the individual conducting such transaction, and in any event from the time such fact would have been brought to such individual's attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.

6323(i)(2) SUBROGATION. --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 section 6321 or 6324.

6323(i)(3) FORFEITURES. --For purposes of this subchapter, 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 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.

6323(i)(4) COST-OF-LIVING ADJUSTMENT. --In the case of notices of liens imposed by section 6321 which are filed in any calendar year after 1998, each of the dollar amounts under paragraph (4) or (7) of subsection (b) shall be increased by an amount equal to --

6323(i)(4)(A) such dollar amount, multiplied by

6323(i)(4)(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting "calendar year 1996" for "calendar year 1992" in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10, such amount shall be rounded to the nearest multiple of $10.




6323(j) WITHDRAWAL OF NOTICE IN CERTAIN CIRCUMSTANCES. --

6323(j)(1) IN GENERAL. --The Secretary may withdraw a notice of a lien filed under this section and this chapter shall be applied as if the withdrawn notice had not been filed, if the Secretary determines that --

6323(j)(1)(A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary,

6323(j)(1)(B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the lien was imposed by means of installment payments, unless such agreement provides otherwise,

6323(j)(1)(C) the withdrawal of such notice will facilitate the collection of the tax liability, or

6323(j)(1)(D) with the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States.

Any such withdrawal shall be made by filing notice at the same office as the withdrawn notice. A copy of such notice of withdrawal shall be provided to the taxpayer.

6323(j)(2) NOTICE TO CREDIT AGENCIES, ETC. --Upon written request by the taxpayer with respect to whom a notice of a lien was withdrawn under paragraph (1), the Secretary shall promptly make reasonable efforts to notify credit reporting agencies, and any financial institution or creditor whose name and address is specified in such request, of the withdrawal of such notice. Any such request shall be in such form as the Secretary may prescribe.