Final regs update tax lien priority provisions T.D. 9520, 04/01/2011 , Reg. § 301.6323(b)-1 , Reg. § 301.6323(c)-2 , Reg. § 301.6323(f)-1 ,Reg. § 301.6323(g)-1 IRS has issued final regs on the priority of federal tax liens for various persons under Code Sec. 6323 —purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The final regs, which are effective Apr. 4, 2011, incorporate changes made in the IRS Restructuring and Reform Act of '98 (RRA '98) and make various other updates. They reflect that a notice of federal tax lien (NFTL) is extinguished if it contains a certificate of release and isn't timely refiled. The regs also clarify IRS's authority to file NFTLs electronically. Background. The holder of a security interest (including a mortgagee or pledgee) is protected against a general tax lien if, before IRS files notice of lien, the security interest is in existence, even if it came into existence after the tax lien arose. For this purpose, the holder of a security interest is protected against the tax lien, even if the holder had actual knowledge of the tax lien before acquiring the interest. ( Code Sec. 6323(a) ) Since '76, there have been numerous amendments to Code Sec. 6323 that have not been reflected in the existing regs, including changes made by the RRA '98 and the Revenue Act of '78. In addition, there have been several changes to IRS's practices that aren't reflected in the existing regs. In April of 2008, IRS issued proposed regs on the validity and priority of Federal tax lien under Code Sec. 6323 . The proposed regs would have updated the existing final regs to reflect changes in the law and in IRS's practices (see Weekly Alert ¶ 14 04/24/2008). Final regs. The final regs adopt the proposed regs with one revision, noted below. Accordingly, the final regs update the existing regs as follows. • A purchaser of property in a casual sale is protected against a filed tax lien if the sale price is less than $1,380 for 2010, adjusted for inflation in later years (i.e., reflecting the Code Sec. 6323(b)(4) limit). ( Reg. § 301.6323(b)-1(d)(1) ) For 2011, this limit is $1,400. ( Rev Proc 2010-40, 2010-46 IRB 663 ) • A holder of a mechanic lien is protected against a filed tax lien with respect to residential property in an amount not more than $6,890, adjusted for inflation later years (i.e., reflecting the Code Sec. 6323(b)(7) limit). ( Reg. § 301.6323(b)-1(g)(1)) For 2011, this limit is $6,990. ( Rev Proc 2010-40 ) • Household goods of the type described in Reg. § 301.6334-1(a)(2) (fuel, provisions, furniture and personal effects in a taxpayer's household, etc.) are exempt from levy to the extent they don't exceed $8,250 in value (i.e., reflecting the Code Sec. 6334(a)(2) limit). ( Reg. § 301.6323(b)-1(d)(3) , Ex. 3) For 2011, this limit is $8,370. ( Rev Proc 2010-40 ) The final regs provide that if an NFTL that contains a certificate of release is not timely refiled in each jurisdiction where it was originally filed, then the lien self-releases and is extinguished in all jurisdictions. The extinguishment of the lien invalidates NFTLs filed in other jurisdictions and requires IRS to file certificates of revocation, as well as new NFTLs, in each jurisdiction where NFTLs were previously filed. ( Reg. § 301.6323(g)-1(a) ) The proposed regs would have provided that for an NFTL that includes a certificate of release, failure to timely refile the NFTL in any jurisdiction where it was originally filed would extinguish the lien and render the NFTL ineffective with respect to property that is the subject matter of a suit to which the U.S. is a party that is begun before the required filing period expires, and property that has been levied upon by the U.S. before the refiling period expires. However, the final regs provide that neither failure to timely refile the NFTL, nor the release of the lien, will alter or impair any right of the U.S. to property or its proceeds that is the subject of a levy or judicial proceeding begun before the end of the refiling period or the release of the lien, except to the extent that a person acquires an interest in the property for adequate consideration after the beginning of the proceeding and does not have notice of, and is not bound by the outcome of, the proceeding. ( Reg. § 301.6323(g)-1(a)(3) ) § 6323 Validity and priority against certain persons. ________________________________________ (a) WG&L Treatises 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. (b) WG&L Treatises 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— (1) Securities. With respect to a security (as defined in subsection (h)(4) )— (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 (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. (2) Motor vehicles. With respect to a motor vehicle (as defined in subsection (h)(3) ), as against a purchaser of such motor vehicle, if— (A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and (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. (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. (4) New Law Analysis 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. (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. (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— (A) a tax of general application levied by any taxing authority based upon the value of such property; (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 (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. (7) New Law Analysis 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. (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. (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— (A) before such organization had actual notice or knowledge of the existence of such lien; (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 (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. (10) New Law Analysis 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. (c) WG&L Treatises Protection for certain commercial transactions financing agreements, etc. (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— (A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting— (i) a commercial transactions financing agreement, (ii) a real property construction or improvement financing agreement, or (iii) an obligatory disbursement agreement, and (B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation. (2) Commercial transactions financing agreement. For purposes of this subsection — (A) Definition. The term “commercial transactions financing agreement” means an agreement (entered into by a person in the course of his trade or business)— (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 (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. (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. (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. (D) Purchaser treated as acquiring security interest. A person who satisfies subparagraph (A) by reason ofclause (ii) thereof shall be treated as having acquired a security interest in commercial financing security. (3) Real property construction or improvement financing agreement. For purposes of this subsection — (A) Definition. The term “real property construction or improvement financing agreement” means an agreement to make cash disbursements to finance— (i) the construction or improvement of real property, (ii) a contract to construct or improve real property, or (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. (B) Limitation on qualified property. The term “qualified property”, when used with respect to a real property construction or improvement financing agreement, includes only— (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, (ii) in the case of subparagraph (A)(ii) , the proceeds of the contract described therein, and (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) . (4) Obligatory disbursement agreement. For purposes of this subsection — (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. (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 insubparagraph (A) ) property acquired by the taxpayer after tax lien filing. (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— (i) the term “qualified property” shall be treated as also including the proceeds of the contract the performance of which was ensured, and (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. (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— (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 (2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation. (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— (1) any interest or carrying charges upon the obligation secured, (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, (3) the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collecting or enforcing the obligation secured, (4) the reasonable costs of insuring, preserving, or repairing the property to which the lien or security interest relates, (5) the reasonable costs of insuring payment of the obligation secured, and (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. (f) WG&L Treatises Place for filing notice; form. (1) Place for filing. The notice referred to in subsection (a) shall be filed— (A) Under State laws. (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 (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; or (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 (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. (2) Situs of property subject to lien. For purposes of paragraphs (1) and (4) , property shall be deemed to be situated— (A) Real property. In the case of real property, at its physical location; or (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. (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. (4) Indexing required with respect to certain real property. In the case of real property, if— (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 (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 underparagraph (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. (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. (g) Refiling of notice. For purposes of this section — (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. (2) Place for filing. A notice of lien refiled during the required refiling period shall be effective only— (A) if— (i) such notice of lien is refiled in the office in which the prior notice of lien was filed, and (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 (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. (3) Required refiling period. In the case of any notice of lien, the term “required refiling period” means— (A) the one-year period ending 30 days after the expiration of 10 years after the date of the assessment of the tax, and (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. (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. (h) Definitions. For purposes of this section and section 6324 — (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. (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. (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. (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. (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. (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 — (A) a lease of property, (B) a written executory contract to purchase or lease property, (C) an option to purchase or lease property or any interest therein, or (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. (i) Special rules. (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. (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 . (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. (4) New Law Analysis 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— (A) such dollar amount, multiplied by (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. (j) Withdrawal of notice in certain circumstances. (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— (A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary, (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, (C) the withdrawal of such notice will facilitate the collection of the tax liability, or (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. (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. Reg §301.6323(b)-1. Protection for certain interests even though notice filed. Caution: The Treasury has not yet amended Reg § 301.6323(b)-1 to reflect changes made by P.L. 105-206, P.L. 99-514, P.L. 95-600, P.L. 94-455 (a) Securities. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid with respect to a security (as defined in paragraph (d) of §301.6323(h)-1) against— (i) A purchaser (as defined in paragraph (f) of § 301.6323(h)-1) of the security who at the time of purchase did not have actual notice or knowledge (as defined in paragraph (a) of §301.6323(i)-1) of the existence of the lien; (ii) A holder of a security interest (as defined in paragraph (a) of §301.6323(h)-1) in the security who did not have actual notice or knowledge (as defined in paragraph (a) of §301.6323(i)-1) of the existence of the lien at the time the security interest came into existence or at the time such security interest was acquired from a previous holder for a consideration in money or money's worth; or (iii) A transferee of an interest protected under subdivision (i) or (ii) of this subparagraph to the same extent the lien is invalid against his transferor. For purposes of subdivision (iii) of this subparagraph, no person can improve his position with respect to the lien by reacquiring the interest from an intervening purchaser or holder of a security interest against whom the lien is invalid. (2) Examples. The application of this paragraph may be illustrated by the following examples: Example (1). On May 1, 1969, in accordance with §301.6323(f)-1, a notice of lien is filed with respect to A's delinquent tax liability. On May 20, 1969, A sells 100 shares of common stock in X corporation to B, who, on the date of the sale, does not have actual notice or knowledge of the existence of the lien. Because B purchased the stock without actual notice or knowledge of the lien, under subdivision (i) of subparagraph (1) of this paragraph, the stock purchased by B is not subject to the lien. Example (2). Assume the same facts as in example (1) except that on May 30, 1969, B sells the 100 shares of common stock in X corporation to C who on May 5, 1969, had actual notice of the existence of the tax lien against A. Because the X stock when purchased by B was not subject to the lien, under subdivision (iii) of subparagraph (1) of this paragraph, the stock purchased by C is not subject to the lien. C succeeds to B's rights, even though C had actual notice of the lien before B's purchase. Example (3). On June 1, 1970, in accordance with §301.6323(f)-1, a notice of lien is filed with respect to D's delinquent tax liability. D owns 20 $1,000 bonds issued by the Y company. On June 10, 1970, D obtains a loan from M bank for $5,000 using the Y company bonds as collateral. At the time the loan is made M bank does not have actual notice or knowledge of the existence of the tax lien. Because M bank did not have actual notice or knowledge of the lien when the security interest came into existence, under subdivision (ii) of subparagraph (1) of this paragraph, the tax lien is not valid against M bank to the extent of its security interest. Example (4). Assume the same facts as in example (3) except that on June 19, 1970, M bank assigns the chose in action and its security interest to N, who had actual notice or knowledge of the existence of the lien on June 1, 1970. Because the security interest was not subject to the lien to the extent of M bank's security interest, the security interest held by N is to the same extent entitled to priority over the tax lien because N succeeds to M bank's rights. See subdivision (iii) of subparagraph (1) of this paragraph. Example (5). On July 1, 1970, in accordance with §301.6323(f)-1, a notice of lien is filed with respect to E's delinquent tax liability. E owns ten $1,000 bonds issued by the Y company. On July 5, 1970, E borrows $4,000 from F and delivers the bonds to F as collateral for the loan. At the time the loan is made, F has actual knowledge of the existence of the tax lien and, therefore, holds the security interest subject to the lien on the bonds. On July 10, 1970, F sells the security interest to G for $4,000 and delivers the Y company bonds pledged as collateral. G does not have actual notice or knowledge of the existence of the lien on July 10, 1970. Because G did not have actual notice or knowledge of the lien at the time he purchased the security interest, under subdivision (ii) of subparagraph (1) of this paragraph, the tax lien is not valid against G to the extent of his security interest. Example (6). Assume the same facts as in example (5) except that, instead of purchasing the security interest from F on July 10, 1970, G lends $4,000 to F and takes a security interest in F's security interest in the bonds on that date. Because G became the holder of a security interest in a security interest after notice of lien was filed and does not directly have a security interest in a security, the security interest held by G is not entitled to a priority over the tax lien under the provisions of subparagraph (1) of this paragraph. (b) Motor vehicles. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against a purchaser (as defined in paragraph (f) of §301.6323(h)-1) of a motor vehicle (as defined in paragraph (c) of §301.6323(h)-1) if— (i) At the time of the purchase, the purchaser did not have actual notice or knowledge (as defined in paragraph (a) of § 301.6323(i)-1) of the existence of the lien, and (ii) Before the purchaser obtains such notice or knowledge, he has acquired actual possession of the motor vehicle and has not thereafter relinquished actual possession to the seller or his agent. (2) Examples. The application of this paragraph may be illustrated by the following examples: Example (1). A, a delinquent taxpayer against whom a notice of tax lien has been filed in accordance with §301.6323(f)-1, sells his automobile (which qualifies as a motor vehicle under paragraph (c) of § 301.6323(h)-1) to B, an automobile dealer. B takes actual possession of the automobile and does not thereafter relinquish actual possession to the seller or his agent. Subsequent to his purchase, B learns of the existence of the tax lien against A. Even though notice of lien was filed before the purchase, the lien is not valid against B, because B did not know of the existence of the lien before the purchase and before acquiring actual possession of the vehicle. Example (2). C is a wholesaler of used automobiles. A notice of lien has been filed with respect to C's delinquent tax liability in accordance with § 301.6323(f)-1. Subsequent to such filing, D, a used automobile dealer, purchases and takes actual possession of 20 automobiles (which qualify as motor vehicles under the provisions of paragraph (c) of §301.6323(h)-1) from C at an auction and places them on his lot for sale. C does not reacquire possession of any of the automobiles. At the time of his purchase, D does not have actual notice or knowledge of the existence of the lien against C. Even though notice of lien was filed before D's purchase, the lien was not valid against D because D did not know of the existence of the lien before the purchase and before acquiring actual possession of the vehicles. (3) Cross reference. For provisions relating to additional circumstances in which the lien imposed by section 6321 may not be valid against the purchaser of tangible personal property (including a motor vehicle) purchased at retail, see paragraph (c) of this section. (c) Personal property purchased at retail. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against a purchaser (as defined in paragraph (f) of §301.6323(h)-1) of tangible personal property purchased at a retail sale (as defined in subparagraph (2) of this paragraph) unless at the time of purchase the purchaser intends the purchase to (or knows that the purchase will) hinder, evade, or defeat the collection of any tax imposed by the Internal Revenue Code of 1954. (2) Definition of retail sale. For purposes of this paragraph, the term “retail sale” means a sale, made in the ordinary course of the seller's trade or business, of tangible personal property of which the seller is the owner. Such term includes a sale in customary retail quantities by a seller who is going out of business, but does not include a bulk sale or an auction sale in which goods are offered in quantities substantially greater than are customary in the ordinary course of the seller's trade or business or an auction sale of goods the owner of which is not in the business of selling such goods. (3) Example. The application of this paragraph may be illustrated by the following example: Example. A purchases a refrigerator from the M company, a retail appliance dealer. Prior to such purchase, a notice of lien was filed with respect to M's delinquent tax liability in accordance with §301.6323(f)-1. At the time of the purchase A knows of the existence of the lien. However, A does not intend the purchase to hinder, evade, or defeat the collection of any internal revenue tax, and A does not have any reason to believe that the purchase will affect the collection of any internal revenue tax. Even though notice of lien was filed before the purchase, the lien is not valid against A because A in good faith purchased the refrigerator at retail in the ordinary course of the M company's business. (d) Personal property purchased in casual sale. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against a purchaser (as defined in § 301.6323(h)-1(f)) of household goods, personal effects, or other tangible personal property of a type described in §301.6334-1 (which includes wearing apparel; school books; fuel, provisions, furniture, arms for personal use, livestock, and poultry (whether or not the seller is the head of a family); and books and tools of a trade, business, or profession (whether or not the trade, business, or profession of the seller)), purchased, other than for resale, in a casual sale for less than $250 (excluding interest and expenses described in §301.6323(e)-1). For purposes of this paragraph, a casual sale is a sale not made in the ordinary course of the seller's trade or business. (2) Limitation. This paragraph applies only if the purchaser does not have actual notice or knowledge (as defined in paragraph (a) of §301.6323(i)-1)— (i) Of the existence of the tax lien, or (ii) That the sale is one of a series of sales. For purposes of subdivision (ii) of this subparagraph, a sale is one of a series of sales if the seller plans to dispose of, in separate transactions, substantially all of his household goods, personal effects, and other tangible personal property described in §301.6334-1. (3) Examples. The application of this paragraph may be illustrated by the following examples: Example (1). A, an attorney's widow, sells a set of law books for $200 to B, for B's own use. Prior to the sale a notice of lien was filed with respect to A's delinquent tax liability in accordance with § 301.6323(f)-1. B has no actual notice or knowledge of the tax lien. In addition, B does not know that the sale is one of a series of sales. Because the sale is a casual sale for less than $250 and involves books of a profession (tangible personal property of a type described in §301.6334-1, irrespective of the fact that A has never engaged in the legal profession), the tax lien is not valid against B even though a notice of lien was filed prior to the time of B's purchase. Example (2). Assume the same facts as in example (1) except that B purchases the books for resale in his second-hand bookstore. Because B purchased the books for resale, he purchased the books subject to the lien. Example (3). In an advertisement appearing in a local newspaper, G indicates that he is offering for sale a lawn mower, a used television set, a desk, a refrigerator, and certain used dining room furniture. In response to the advertisement, H purchases the dining room furniture for $200. H does not receive any information which would impart notice of a lien, or that the sale is one of a series of sales, beyond the information contained in the advertisement. Prior to the sale a notice of lien was filed with respect to G's delinquent tax liability in accordance with §301.6323(f)-1. Because H had no actual notice or knowledge that substantially all of G's household goods were being sold, or that the sale is one of a series of sales and because the sale is a casual sale for less than $250, H does not purchase the dining room furniture subject to the lien. The household goods are of a type described in § 301.6334-1(a)(2) irrespective of whether G is the head of a family or whether all such household goods offered for sale exceed $500 in value. (e) Personal property subject to possessory liens. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against a holder of a lien on tangible personal property which under local law secures the reasonable price of the repair or improvement of the property if the property is, and has been, continuously in the possession of the holder of the lien from the time the possessory lien arose. For example, if local law gives an automobile repairman the right to retain possession of an automobile he has repaired as security for payment of the repair bill and the repairman retains continuous possession of the automobile until his lien is satisfied, a tax lien filed in accordance with § 301.6323(f)(1) which has attached to the automobile will not be valid to the extent of the reasonable price of the repairs. It is immaterial that the notice of tax lien was filed before the repairman undertook his work or that he knew of the lien before undertaking the work. (f) Real property tax and special assessment liens. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against the holder of another lien upon the real property (regardless of when such other lien arises), if such other lien is entitled under local law to priority over security interests in real property which are prior in time and if such other lien on real property secures payment of— (i) A tax of general application levied by any taxing authority based upon the value of the property; (ii) A special assessment imposed directly upon the property by any taxing authority, if the assessment is imposed for the purpose of defraying the cost of any public improvement; or (iii) Charges for utilities or public services furnished to the property by the United States, a State or political subdivision thereof, or an instrumentality of any one or more of the foregoing. (2) Examples. The application of this paragraph may be illustrated by the following examples: Example (1). A owns Blackacre in the city of M. A notice of lien affecting Blackacre is filed in accordance with §301.6323(f)-1. Subsequent to the filing of the notice of lien, the city of M acquires a lien against Blackacre to secure payment of real estate taxes. Such taxes are levied against all property in the city in proportion to the value of the property. Under local law, the holder of a lien for real property taxes is entitled to priority over a security interest in real property even though the security interest is prior in time. Because the real property tax lien held by the city of M secures payment of a tax of general application and is entitled to priority over security interests which are prior in time, the lien held by the city of M is entitled to priority over the Federal tax lien with respect to Blackacre. Example (2). B owns Whiteacre in N county. A notice of lien affecting Whiteacre is filed in accordance with §301.6323(f)-1. Subsequent to the filing of the notice of lien, N county constructs a sidewalk, paves the street, and installs water and sewer lines adjacent to Whiteacre. In order to defray the cost of these improvements, N county imposes upon Whiteacre a special assessment which under local law results in a lien upon Whiteacre that is entitled to priority over security interests that are prior in time. Because the special assessment lien is (i) entitled under local law to priority over security interests which are prior in time, and (ii) imposed directly upon real property to defray the cost of a public improvement, the special assessment lien has priority over the Federal tax lien with respect to Whiteacre. Example (3). C owns Greenacre in town O. A notice of lien affecting Greenacre is filed in accordance with §301.6323(f)-1. Town O furnishes water and electricity to Greenacre and periodically collects a fee for these services. Subsequent to the filing of the notice of lien, town O supplies water and electricity to Greenacre, and C fails to pay the charges for these services. Under local law, town O acquires a lien to secure charges for the services, and this lien has priority over security interests which are prior in time. Because the lien of town O (i) is for services furnished to the real property and (ii) has priority over earlier security interests, town O's lien has priority over the Federal tax lien with respect to Greenacre. (g) Residential property subject to a mechanic's lien for certain repairs and improvements. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against a mechanic's lienor (as defined in §301.6323(h)-1(b)) who holds a lien for the repair or improvement of a personal residence if— (i) The residence is occupied by the owner and contains no more than four dwelling units, and (ii) The contract price on the prime contract with the owner for the repair or improvement (excluding interest and expenses described in §301.6323(e)-1) is not more than $1,000. For purposes of subdivision (ii) of this subparagraph, the amounts of subcontracts under the prime contract with the owner are not to be taken into consideration for purposes of computing the $1,000 prime contract price. It is immaterial that the notice of tax lien was filed before the contractor undertakes his work or that he knew of the lien before undertaking the work. (2) Examples. The application of this paragraph may be illustrated by the following examples: Example (1). A owns a building containing four apartments, one of which he occupies as his personal residence. A notice of lien which affects the building is filed in accordance with §301.6323(f)-1. Thereafter, A enters into a contract with B in the amount of $800, which includes labor and materials, to repair the roof of the building. B purchases roofing shingles from C for $300. B completes the work and A fails to pay B the agreed amount. In turn, B fails to pay C for the shingles. Under local law, B and C acquire mechanic's liens on A's building. Because the contract price on the prime contract with A is not more than $1,000 and under local law B and C acquire mechanic's liens on A's building, the liens of B and C have priority over the Federal tax lien. Example (2). Assume the same facts as in example (1), except that the amount of the prime contract between A and B is $1,100. Because the amount of the prime contract with the owner, A, is in excess of $1,000, the tax lien has priority over the entire amount of each of the mechanic's liens of B and C, even though the amount of the contract between B and C is $300. Example (3). Assume the same facts as in example (1), except that A and B do not agree in advance upon the amount due under the prime contract but agree that B will perform the work for the cost of materials and labor plus 10 percent of such cost. When the work is completed, it is determined that the total amount due is $850. Because the prime contract price is not more than $1,000 and under local law B and C acquire mechanic's liens on A's residence, the liens of B and C have priority over the Federal tax lien. (h) Attorneys liens. (1) In general. Even though notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against an attorney who, under local law, holds a lien upon, or a contract enforceable against, a judgment or other amount in settlement of a claim or of a cause of action. The priority afforded an attorney's lien under this paragraph shall not exceed the amount of the attorney's reasonable compensation for obtaining the judgment or procuring the settlement. For purposes of this paragraph, reasonable compensation means the amount customarily allowed under local law for an attorney's services for litigating or settling a similar case or administrative claim. However, reasonable compensation shall be determined on the basis of the facts and circumstances of each individual case. It is immaterial that the notice of tax lien is filed before the attorney undertakes his work or that the attorney knows of the tax lien before undertaking his work. This paragraph does not apply to an attorney's lien which may arise from the defense of a claim or cause of action against a taxpayer except to the extent such lien is held upon a judgment or other amount arising from the adjudication or settlement of a counterclaim in favor of the taxpayer. In the case of suits against the taxpayer, see §301.6325-1(d)(2) for rules relating to the subordination of the tax lien to facilitate tax collection. (2) Claim or cause of action against the United States. Paragraph (h)(1) of this section does not apply to an attorney's lien with respect to— (i) Any judgment or other fund resulting from the successful litigation or settlement of an administrative claim or cause of action against the United States to the extent that the United States, under any legal or equitable right, offsets its liability under the judgment or settlement against any liability of the taxpayer to the United States, or (ii) Any amount credited against any liability of the taxpayer in accordance with section 6402. (3) Examples. The provisions of this paragraph may be illustrated by the following examples: Example (1). A notice of lien is filed against A in accordance with §301.6323(f)-1. Subsequently, A is struck by an automobile and retains B, an attorney to institute suit on A's behalf against the operator of the automobile. B knows of the tax lien before he begins his work. Under local law, B is entitled to a lien upon any recovery in order to secure payment of his fee. A is awarded damages of $10,000. B charges a fee of $3,000 which is the fee customarily allowed under local law in similar cases and which is found to be reasonable under the circumstances of this particular case. Because, under local law, B holds a lien for the amount of his reasonable compensation for obtaining the judgment, B's lien has priority over the Federal tax lien. Example (2). Assume the same facts as in example (1), except that before suit is instituted A and the owner of the automobile settle out of court for $7,500. B charges a reasonable and customary fee of $1,800 for procuring the settlement and under local law holds a lien upon the settlement in order to secure payment of the fee. Because, under local law, B holds a lien for the amount of his reasonable compensation for obtaining the settlement, B has priority over the Federal tax lien. Example (3). In accordance with § 301.6323(f)-1, a notice of lien in the amount of $8,000 is filed against C, a contractor. Subsequently C retains D, an attorney, to initiate legal proceedings to recover the amount allegedly due him for construction work he has performed for the United States. C and D enter into an agreement which provides that D will receive a reasonable and customary fee of $2,500 as compensation for his services. Under local law, the agreement will give rise to a lien which is enforceable by D against any amount recovered in the suit. C is successful in the suit and is awarded $10,000. D claims $2,500 of the proceeds as his fee. The United States, however, exercises its right of set-off and applies $8,000 of the $10,000 award to satisfy C's tax liability. Because the $10,000 award resulted from the successful litigation of a cause of action against the United States, B's contract for attorney's fees is not enforceable against the amount recovered to the extent the United States offsets its liability under the judgment against C's tax liability. It is immaterial that D had no notice or knowledge of the tax lien at the time he began work on the case. (i) Certain insurance contracts. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid with respect to a life insurance, endowment, or annuity contract, against an organization which is the insurer under the contract, at any time— (i) Before the insuring organization has actual notice or knowledge (as defined in paragraph (a) of §301.6323(i)-1) of the existence of the tax lien, (ii) After the insuring organization has actual notice or knowledge of the lien (as defined in paragraph (a) of § 301.6323(i)-1), with respect to advances (including contractual interest thereon as provided in paragraph (a) of §301.6323(e)-1) required to be made automatically to maintain the contract in force under an agreement entered into before the insuring organization had such actual notice or knowledge, or (iii) After the satisfaction of a levy pursuant to section 6332(b), unless and until the district director delivers to the insuring organization a notice (for example, another notice of levy, a letter, etc.), executed after the date of such satisfaction, that the lien exists. Delivery of the notice described in subdivision (iii) of this subparagraph may be made by any means, including regular mail, and delivery of the notice shall be effective only from the time of actual receipt of the notification by the insuring organization. The provisions of this paragraph are applicable to matured as well as unmatured insurance contracts. (2) Examples. The provisions of this paragraph may be illustrated by the following examples: Example (1). On May 1, 1964, the X insurance company issues a life insurance policy to A. On June 1, 1970, a tax assessment is made against A, and on June 2, 1970, a notice of lien with respect to the assessment is filed in accordance with §301.6323(f)-1. On July 1, 1970, without actual notice or knowledge of the tax lien, the X company makes a “policy loan” to A. Under subparagraph (1)(i) of this paragraph, the loan, including interest (in accordance with the provisions of paragraph (a) of §301.6323(e)-1), will have priority over the tax lien because X company did not have actual notice or knowledge of the tax lien at the time the policy loan was made. Example (2). On May 1, 1964, B enters into a life insurance contract with the Y insurance company. Under one of the provisions of the contract, in the event a premium is not paid, Y is to advance out of the cash loan value of the policy the amount of an unpaid premium in order to maintain the contract in force. The contract also provides for interest on any advances so made. On June 1, 1971, a tax assessment is made against B, and on June 2, 1971, in accordance with section 6323(f)-1, a notice of lien is filed. On July 1, 1971, B fails to pay the premium due on that date, and Y makes an automatic premium loan to keep the policy in force. At the time the automatic premium loan is made, Y had actual knowledge of the tax lien. Under subparagraph (1)(ii) of this paragraph, the lien is not valid against Y with respect to the advance (and the contractual interest thereon), because the advance was required to be made automatically under an agreement entered into before Y had actual notice or knowledge of the tax lien. Example (3). On May 1, 1964, C enters into a life insurance contract with the Z insurance company. On January 4, 1971, an assessment is made against C for $5,000 unpaid income taxes, and on January 11, 1971, in accordance with §301.6323(f)-1, a notice of lien is filed. On January 29, 1971, a notice of levy with respect to C's delinquent tax is served on Z company. The amount which C could have had advanced to him from Z company under the contract on the 90th day after service of the notice of levy on Z company is $2,000. The Z company pays $2,000 pursuant to the notice of levy, thereby satisfying the levy upon the contract in accordance with section 6332(b). On February 1, 1973, Z company advances $500 to C, which is the increment in policy loan value since satisfaction of the levy of January 29, 1971. On February 5, 1973, a new notice of levy for the unpaid balance of the delinquent taxes, executed after the first levy was satisfied, is served upon Z company. Because the new notification was not received by Z company until after the policy loan was made, under paragraph (1)(iii) of this paragraph, the tax lien is not valid against Z company with respect to the policy loan (including interest thereon in accordance with paragraph (a) of § 301.6323(e)-1). Example (4). On June 1, 1973, a tax assessment is made against D and on June 2, 1973, in accordance with § 301.6323(f)-1, a notice of lien with respect to the assessment is filed. On July 2, 1973, D executes an assignment of his rights, as the insured, under an insurance contract to M bank as security for a loan. M bank holds its security interest subject to the lien because it is not an insurer entitled to protection under section 6323(b)(9) and did not become a holder of the security interest prior to the filing of the notice of lien for purposes of section 6323(a). It is immaterial that a notice of levy had not been served upon the insurer before the assignment to M bank was made. (j) Passbook loans. (1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §301.6323(f)-1, the lien is not valid against an institution described in section 581 or 591 to the extent of any loan made by the institution which is secured by a savings deposit, share, or other account evidenced by a passbook (as defined in subparagraph (2) of this paragraph) if the institution has been continuously in possession of the passbook from the time the loan is made. This paragraph applies only to a loan made without actual notice or knowledge (as defined in paragraph (a) of §301.6323(i)-1) of the existence of the lien. Even though an original passbook loan is made without actual notice or knowledge of the existence of the lien, this paragraph does not apply to any additional loan made after knowledge of the lien is acquired by the institution even if it continues to retain the passbook from the time the original passbook loan is made. (2) Definition of passbook. For purposes of this paragraph, the term “passbook” includes— (i) Any tangible evidence of a savings deposit, share, or other account which, when in the possession of the bank or other savings institution, will prevent a withdrawal from the account to the extent of the loan balance, and (ii) Any procedure or system, such as an automatic data processing system, the use of which by the bank or other savings institution will prevent a withdrawal from the account to the extent of the loan balance. (3) Example. On June 1, 1970, a tax assessment is made against A and on June 2, 1970, a notice of lien with respect to the assessment is filed in accordance with §301.6323(f)-1. A owns a savings account at the M bank with a balance of $1,000. On June 10, 1970, A borrows $300 from the M bank using the savings account as security therefor. The M bank is continuously in possession of the passbook from the time the loan is made and does not have actual notice or knowledge of the lien at the time of the loan. The tax lien is not valid against M bank with respect to the passbook loan of $300 and accrued interest and expenses entitled to priority under §301.6323(e)-1. Upon service of a notice of levy, the M bank must pay over the savings account balance in excess of the amount of its protected interest in the account as determined on the date of levy. ________________________________________ T.D. 7429, 8/20/76 . www.irstaxattorney.com 888-712-7690