6.08 Federal Tax Liens

6.08.1

In General

Title 26 U.S.C.A. Section 6321 et seq. contains the law governing federal tax liens. Section 6321, entitled “Lien for Taxes”, provides as follows:

If any person liable to pay any tax neglects or refuses to pay the tax after demand, the amount, including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

Usually, federal tax liens are designated as general or special liens. The U.S. Code does not specifically create this distinction, except that when referring to Special Liens for Estate and Gift Taxes (Section 6324), the Code seems to establish by elimination that those liens not encompassed within the category of special are to be considered as general federal tax liens.

Special federal tax liens are of limited scope and attach only to certain property of the taxpayer. They are also commonly referred to as secret liens because their validity and priority does not depend upon the filing for record of a notice of the lien. Examples of special federal tax liens are those securing payment of federal estate taxes, federal gift taxes, and federal distilled spirits taxes.

The general federal tax liens are of unlimited scope and attach to all the property of the taxpayer, as well as to all the taxpayer’s right to property. Their validity and priority in relation to a nontaxpayer’s property or property rights depends upon the filing for record, in accordance with state law, of proper notices of the liens. The most encountered general federal tax liens are those arising from the nonpayment of federal income taxes, withholding taxes, and social security taxes.

6.08.2

Period Of Duration Of A Federal Tax Lien

Title 26 U.S.C.A. Section 6322 provides as follows:

Unless another date is specifically fixed by law, the lien imposed by Section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer unenforceable by reason of lapse of time.

In essence, the period of existence of a valid lien (other than for estate or gift taxes) is from the date the assessment of liability is formally made to the date the amount assessed is satisfied or becomes unenforceable by lapse of time. The Omnibus Reconciliation Budget Act of 1990 (H.R. 5835) became effective November 5, 1990. This Act extended the time that federal tax lien notices are effective (from six years and thirty days to ten years and thirty days). Under this Act, the federal tax lien notice is effective for a period of ten years and thirty days after assessment, unless prior to expiration of this period of limitations, the lien is properly refiled within the time allowed by law. The refiling continues the federal tax lien notice for an additional ten year period. The refiling must occur within the last year that the original filing is effective. In the alternate, if the assessment is properly and timely reduced to a judgment, the lien continues during the period in which the judgment is enforceable. There appears to be no federal period of limitations on enforceability of a judgment for taxes.

COMPANY POLICY: Require releases or discharges of all federal tax lien notices that have not expired. Also require releases or discharges of federal tax lien notices that state they expire on or after November 5, 1990, unless ten years and thirty days pass from date of assessment and unless the IRS does not refile the notice. For convenience, you may rely upon the recording date of the federal tax lien to calculate the time the notice is effective. If you rely upon recording dates, assume that the initial filing of federal tax lien is effective ten years and thirty days and assume the refiling is effective eleven years.

Any federal tax lien ceases to be a lien on real property upon the happening of any of the following:

·  The expiration, without refiling, of the period of duration of the lien.

·  The issuance by the District Director of Internal Revenue of a certificate of release, discharge, subordination, or nonattachment.

·  The elimination of the lien by a final, nonappealable decree of a court of competent jurisdiction in a suit to quiet title, a partition suit, a condemnation suit, or a suit in the nature of an interpleader, if the United States has been made a party defendant and has been properly served.

·  The elimination of the lien through the proper completion of judicial proceedings in the enforcement of a superior lien.

NOTE: The federal government has a one-year period to redeem, state law notwithstanding.

·  The specific consent of the United States that the property be sold free of its liens and the proceeds divided.

In view of the numerous instances in which the ten-year period may be tolled and for the purpose of considering the lien as discharged, Title Insurance companies disregard completely the time of assessment of a federal tax lien and rely exclusively on the time of recording of the notice of the lien.

Possibilities (1) and (2) must be supported by the following findings of record:

·  That proceedings were not instituted to enforce the lien.

·  That the lien was not refiled within the time allowed by law.

Possibilities (3) and (4) must be supported by the following findings of record:

“The United States did not exercise its right of redemption within the time allowed by law.”

6.08.3

Property Subject To The Lien Of A Federal Tax

  A federal tax lien is a blanket lien on all property and rights to property belonging to the delinquent taxpayer, including property acquired after the time in which the lien arises. In other words, unless otherwise excepted, the lien applies to any property owned by the taxpayer at anytime during the effective life of the lien. This rule applies even where the property is acquired or held in the name of a “straw”.

 

  However, the question as to whether property or rights therein are owned by a taxpayer, so as to be subject to a federal tax lien, is a question governed by state law. Federal law determines the priority of liens and when the lien arises, but state law determines the nature and extent of the ownership interests in property potentially subject to a federal tax lien and (ii) creates sufficient property interests in the taxpayer to satisfy the requirements of Section 6321. The tax consequences are dictated by federal law.

 

  Special Situations:

 

  State Homestead Exemption Laws

State homestead exemption laws have no effect whatsoever on the attachment of a federal tax lien. Furthermore, the United States Supreme Court has resolved that a United States District Court may, under Title 26 U.S.C.A. Section 7403, order the sale of homestead property to satisfy the tax liability of one spouse even though the nondelinquent spouse was still living and had an interest in the property. United States v. Rodgers, 461 U.S. 677, 103 Sup. Ct. 2132 (1985).

 

  Statutory Exemptions

State laws cannot create exemptions from attachment or execution in connection with the collection or enforcement of federal taxes. Under federal statutes, neither real property nor any interest in real property is exempted from levy in satisfaction of a tax liability.

 

  After-Acquired Property

A federal tax lien attaches to any after-acquired property of the delinquent taxpayer.

 

  Tenancies In Common

A federal tax lien attaches to the undivided interest owned by the taxpayer and may be enforced by a sale of all the undivided interest, with the owners of the undivided interest to which the lien did not attach, being required to accept their proportionate part of the amount available from the proceeds of the sale.

 

  Joint Tenancies

A federal tax lien attaches to the delinquent taxpayer’s interest and can be enforced either by a sale of all interests with distribution of the proceeds to the others in interest or by a sale of the interest owned by the delinquent taxpayer.

The federal tax lien is extinguished upon the death of the taxpayer-tenant and does not transfer to the survivor joint tenant(s) any interest in the property, UNLESS, under state law, a lien against a joint tenant automatically effects a severance of the joint tenancy in regard to the interest held by the delinquent taxpayer-tenant.

 

  Community Property

A federal tax lien attached to the interest owned by the spouse named in the notice of tax lien (taxpayer), even though the record title is in the spouse not named in the tax lien (nontaxpayer).

 

  Tenancies by the Entirety

Whether a federal tax lien attaches to the interest held by either the husband or the wife in property held by the tenancy by the entirety depends upon the law of the state where the land is located.

A characteristic incident of tenancy by the entirety in some jurisdictions is the immunity of the property from the individual debts of only one of the spouses. This concept is predicated upon the theory that title is held by the fictional unity, the marital relationship, and accordingly neither spouse has a separate interest therein. When this is the property law of the jurisdiction, a federal tax lien against only one spouse is not a lien on property held by husband and wife as tenants by the entirety. In this instance, the interest of a spouse is neither property nor the right to property to which a federal tax lien can attach. United States v. Hutcherson, 188 F.2d 326 (8th Cir.) 1951. However, this kind of insulation against federal tax liens does not operate in the event both the husband and wife are named as indebted taxpayers in a notice of lien. In these states, if the delinquent taxpayer survives their spouse, the lien attaches at the moment of the latter’s death and priorities will be based upon this date of attachment.

However, the U.S. Supreme Court decision in the case of United States v. Rodgers, 461 U.S. 677, 103 Sup. Ct. 2132 (1985) may have altered the law in this area. The court, in a case involving property held by a husband and wife under the Texas Homestead Law, ruled that the federal government, under Title 26 U.S.C.A. Section 7043, could sell property to satisfy a federal tax lien against one of the spouses even though the taxpayer’s spouse had a homestead interest in the property which, under Texas law, could not be reached by creditors.

By reason of this decision, Company policy is to require a release of federal tax liens against the seller unless:

 

  ·   The sellers (or mortgagors), as husband and wife, acquired title as tenants by the entireties in accordance with state law; and

 

  ·   The marital status of the sellers (or mortgagors has not changed since acquisition of the title and both spouses are joining in the deed or mortgage as husband and wife; and

 

  ·   The federal tax lien names only one spouse as a taxpayer; and

 

  ·   The sales price does not exceed $100,000 or the federal tax lien does not exceed $20,000; and

 

  Life Tenancies

A federal tax lien attaches to the interest of the life tenant during the life tenant’s lifetime, but is terminated upon the life tenant’s death. The lien does not affect the title or interest of any remaindermen.

 

  Partnerships

A federal tax lien filed against:

 

  ·   A limited partner

It does not attach on property vested in the name of the limited partnership.

 

  ·   A general partner

It does not attach to the partnership assets; it attaches to the partner’s right in or share of the surplus of the partnership assets unless it arises out of the partnership tax liability.

 

  ·   A partnership

It does attach to the partnership assets and also to any property owned by an individual partner.

 

6.08.4

Validity And Priority Of A Federal Tax Lien Against Persons Other Than the Taxpayer or Spouse

6.08.4.1
Interaction of Doctrines

The following doctrines operate interactively in the determination of the priority of a tax lien:

·  The “first in time, first in right” doctrine.

Based on this doctrine, any encumbrance or charge against a taxpayer's property that arises first has priority over liens or encumbrances arising subsequently thereto.

·  The “choateness” doctrine.

This doctrine requires that a nonfederal lien or encumbrance be choate in order to be granted first in time status. Thus, even if a nonfederal lien is established, but is not choate, it will be inferior to a subsequently attaching federal tax lien. A choate lien is a lien that is enforceable; that is, a lien in which the identity of the lienor, the property subject to the lien, and the amount of the lien are all established.

·  The “sovereign” doctrine.

This doctrine established that the federal government is not bound by the law of a state except where it has consented to be bound.

6.08.4.2
Instances in Which the Federal Government Has Consented to the Priority Loss of a Federal Tax Lien

·  NO NOTICE HAS BEEN FILED

Title 26 Section 6323(a) provides the following: “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.”

·  NOTICE HAS BEEN FILED

Title 26 Section 6323(b) provides the following:

“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) --

¨  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

¨  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.

Note: [(2), (3), (4) and (5) are not reproduced.]

·  (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 tax of general application levied by any taxing authority based upon the value of such property;

¨  a special assessment imposed directly upon property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement; or

¨  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) Residential property subject to a mechanic's lien for certain repairs and improvements. With respect to real property subject to a lien for repair and 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 $1,000.

Note: [(8), (9), and (10) are not reproduced.]

·  PROTECTION FOR CERTAIN:

Commercial transactions financing agreements;

Real property construction or improvement financing agreements; and

Obligatory disbursement agreements.”

Title 26 Section 6323(c) provides the following:

“(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 --

¨  is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting.

 a commercial transaction financing agreement,

 real property construction or improvement financing agreement, or

 (iii)an obligatory disbursement agreement, and

¨  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 --

¨  Definition. The term “commercial transaction financing agreement” means an agreement (entered into by a person in the course of his trade or business) --

 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

 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.

¨  Limitation on qualified property. The term, “qualified property”, when used with respect to a commercial transaction financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

¨  Commercial financing security defined. The term “commercial financing security” means:

 paper of a kind ordinarily arising in commercial transactions,

 accounts receivable,

 mortgages on real property, and

 inventory.

¨  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.

·  (3) Real property construction or improvement financing agreement. For purposes of this subsection --

¨  Definition. The term “real property construction or improvement financing agreement” means an agreement to make cash disbursements to finance.

 the construction or improvement of real property,

 a contract to construct or improve real property, or

 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.

¨  Limitation on qualified property. The term, “qualified property”, when used with respect to a real property construction or improvement financing agreement, includes only --

 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,

 in the case of subparagraph (A)(ii), the proceeds of the contract described therein, and

 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.

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.

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) filing.

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 --

 the term, qualified property, shall be treated as also including the proceeds of the contract the performance of which was ensured, and

 if the contract the performance of which was ensured was a contract to construct or improve all 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.

·  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 --

¨  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

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

·  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 --

¨  any interest or carrying charges upon the obligation secured,

¨  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,

¨  the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collecting or enforcing the obligation secured,

¨  the reasonable costs of insuring, preserving, or repairing the property to which the lien or security interest relates,

¨  the reasonable costs of insuring payment of the obligation secured, and

¨  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.

6.08.4.3
Definitions

Title 26 Section 6323(h) provides the following definitions for purposes of Section 6323 and Section 6324 are as follows:

“(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 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 they begin to furnish the services, labor or materials.

(3) Motor vehicle. The term motor vehicle, means a self- 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'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 lease of property,

·  a written executory contract to purchase or lease property,

·  an option to purchase or lease property or any interest therein, or

·  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.”

Note: A judgment lien creditor is not defined in the Federal Tax Lien Act of 1966. However, it can be stated that any judgment must:

¨  Emanate from a judicial proceeding.

¨  Be in the nature of a general lien, distinguished from a lien for taxes and assessments.

¨  Be perfected as a lien of record.

6.08.5

Filing And Indexing Of Notices Of Federal Tax Liens

Title 26 U.S.C.A. Section 6323(f) provides as follows:

(1) Place for filing. - A notice referred to in subsection (a) shall be filed --

Under State laws.

·  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

·  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;

·  In Texas, the federal tax lien must be filed in the county where the land is located; or

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

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.

Situs of property subject to lien. For purposes of paragraphs (1) and (4), property shall be deemed to be situated

·  Real property. In the case of real property, at its physical location; or

·  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.

Form. The form and content of the notice referred to in such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

Indexing required with respect to certain real property. In the case of real property, if:

·  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

·  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.

6.08.6

Refiling Of Notices Of Federal Tax Liens

Title 26 U.S.C.A. Section 6323(g) provides as follows:

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.

Place for filing. A notice of lien refiled during the required refiling period shall be effective only --

if --

·  such notice of lien is refiled in the office in which the prior notice of lien was filed, and

·  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

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 name 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.

Required refiling period. In the case of any notice of lien, the term “required refiling period” means --

·  the one-year period ending 30 days after the expiration of 10 years after the date of the assessment of the tax, and

·  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.

Timely refiling by the government preserves the original filing date as the priority date of the lien and continues its effect as notice for another ten years.

If the District Director fails to refile a notice of lien timely, the original notice of lien is no longer effective as against any person without regard to when the interest of that person in the property subject to the lien was acquired.

6.08.7

Enforcement Of Federal Tax Liens

Federal tax liens can be enforced through either of the following proceedings:

·  A summary nonjudicial sale process commonly known as administrative levy and distraint sale under the provisions of 26 U.S.C.A. Section 7403 et seq., or

·  A proper judicial foreclosure under the provisions of 26 U.S.C.A. Section 7403 et seq..

·  A federal tax lien may be refinanced using a Texas homestead property as collateral. The lien must be recorded to be refinanced.

6.08.8

Certificates Of Release, Discharge, Subordination, or Nonattachment

Subject to the regulations and provisions contained in Title 26 U.S.C.A. Section 6325, the District Director of Internal tax lien, to issue any of the following:

·  Certificate of Release (Section 6325(a)(g))

A certificate of release is conclusive evidence that the lien referred to in such certificate is extinguished.

·  Certificate of Discharge (Section 6325(b)(f))

A certificate of discharge is conclusive evidence that the property covered by such certificate is discharged from the lien.

·  Certificate of Subordination (Section 6325(d)(f))

A certificate of subordination is conclusive evidence that the lien or interest to which the lien or interest to which the lien of the United States is subordinated is superior to the lien of the United States.

·  Certificate of Nonattachment (Section 6325(e)(f))

A certificate of nonattachment is conclusive evidence that the lien of the United States does not attach to the property of the person referred to in such certificate.

The District Director of Internal Revenue is also authorized to revoke any certificate of release or nonattachment if issued erroneously or improvidently, or if a certificate of release of such lien was issued pursuant to a collateral agreement entered into in connection with a compromise under Section 7122 which has been breached, and if the period of limitation on collection after assessment has not expired.

6.08.9

Effect Of Foreclosures Of Liens On Federal Tax Liens

6.08.9.1
Foreclosures Of Liens That Have No Priority Over United States Liens

A sale to satisfy a lien inferior to one of the United States shall be made subject to and without disturbing the lien of the United States, unless the United States consents that the property be sold free of its lien and the proceeds divided as the parties may be entitled to. 28 U.S.C.A. Section 2410.

6.08.9.2
Judicial Foreclosures Of Liens That Have Priority Over United States Liens

The discharge or divestment of inferior federal tax liens in judicial foreclosures of prior liens is based on the provisions and conditions contained in title 26 U.S.C.A. Section 2475 and in 28 U.S.C.A. Section 2410. These provisions and conditions can be summarized as follows:

·  That the United States May be Named as a Party Defendant

The United States has consented to be named as a party defendant in certain civil actions affecting real or personal property on which the United States has or claims a mortgage or other lien. 28 U.S.C.A. Section 2410(a).

·  That a Judicial Sale Must be Sought

An action to foreclose a mortgage or other lien, naming the United States as a party, must seek judicial sale. A sale of real estate to satisfy a lien inferior to the lien of the United States shall be made subject to and without disturbing the lien of the United States, unless the United States consents that the property be sold free of its lien and the proceeds divided as the parties may be entitled. 28 U.S.C.A. Section 2410.

·  That the United States Must be Made a Party Defendant in the Judicial Proceedings

Title 26 U.S.C.A. Section 7425 provides that if notice of the federal tax lien has been properly filed and if the United States has not been named a party to the action, any judicial sale without notice to the United States will not disturb the lien of the United States. When the United States is joined as a party in a proceeding under title 28 U.S.C.A. Section 2410, the federal law does not alter the effect of local law on the extinguishment of the federal tax lien.

However, if no notice of a federal tax lien was filed prior to the recording of a notice of lis pendens in an action brought to foreclose a mortgage or deed of trust, the federal government need not be made a party defendant, the lien is divested upon judgment federal government to redeem the property from the sale.

·  That the United States be afforded the Right of Redemption Allowed by Law

6.08.9.3
Nonjudicial Foreclosures Of Liens That Have Priority Over United States Liens

Title 26 U.S.C.A. Section 7425(b)(c) prescribes the applicable rules relating to the discharge or divestment of tax liens in nonjudicial foreclosures.

“(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:

·  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

·  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

¨  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,

¨  the law makes no provision for such filing, or

¨  notice of such sale is given in the manner prescribed in subsection (c)(1).

Notice of sale. Notice of 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.

Forfeitures of land sales contracts. For purposes of subsection (b), a sale of property includes any forfeiture of a land sales contract.”

Based on the above, it can be summarized that, a sale of real estate on which the United States claims a tax lien pursuant to the provisions of a deed of trust that has priority over a federal tax lien does not divest such lien, unless:

·  The notice of federal tax lien was filed within thirty days of such sale, or

·  Notice of such sale is given in writing, by registered or certified mail, not less than twenty-five days prior to such sale, to the District Director for the internal revenue district in which the sale is to be conducted.

If a notice of the federal tax lien has been filed more than thirty days before the date of sale, the twenty-five-day notice referred to above must be given in order for the federal tax lien to be discharged or divested on the foreclosure. Whenever such notice is not given or where the lien being foreclosed is junior to the tax lien, any sale will be subject to and will not disturb the lien of the United States.

The twenty-five-day notice should be sent to the District Director (marked for the attention of the “Chief, Special Procedures Staff”) for the internal revenue district in which the sale is conducted. The twenty-five-day notice should contain all of the following information:

·  The name and address of the person submitting the notice of sale.

·  A copy of each Notice of Federal Tax Lien (Form 668) affecting the property to be sold, or the following information as shown on each such Notice of Federal Tax Lien --

The internal revenue district named thereon.
The name and address of the taxpayer, and
The date and place of filing of the notice;

With respect to the property to be sold, the following information should be included;

·  A detailed description, including location, of the property affected by the notice (in the case of real property, the street address, city, and state and the legal description contained in the title or deed to the property and, if available, a copy of the abstract of title),

·  The date, time, place and terms of the proposed sale of the property, and

·  In the case of a sale of perishable property described in paragraph (c) of this section, a statement of the reasons why the property is believed to be perishable; and

The approximate amount of the principal obligation, including interest, secured by the lien sought to be enforced and a description of the other expenses (such as legal expenses, selling costs, etc. which may be charged against the sale proceeds. Treas. Reg. 301 Section 7425-3(d) (1985)

6.08.9.4
Form Of Twenty-Five-Day Notice Letter Registered Mail-Return Receipt Requested

District Director of the Internal Revenue Service Attn: Chief, Special Procedures Section ___________________ Street

Re: Notice of Sale or Foreclosure of Lien Under Section 7425

Dear Sir or Madam:

Notice is hereby given in accordance with Section 7425(b) of the Internal Revenue Code of 1954, as amended, that (name of creditor/lienholder) intends to foreclose its lien on the real estate described below which foreclosure may by operation of local law extinguish or discharge the federal tax lien on such real estate.

Pursuant to Reg Section 301.7325 - 3(d)(1) the following information is submitted:

The name and address of the person submitting the notice of sale is:

A copy of each Notice of Federal Tax Lien (Form 668)

The legal description of the property to be sold is as follows:

(Insert Legal Description)

and the common address is [street, city and state]

The proposed sale will take place at _____ A.M. on the _____ day of _______________, l9_____ at __________________ and the terms of the proposed sale will be for cash to the highest bidder.

The approximate amounts of the principal obligation and interest secured by the lien sought to be enforced and a description of other expenses which will be charged against the sale proceeds are as follows:

Unpaid Principal Balance  $___________
Accrued and Unpaid Interest  ____________
Estimated Legal Expenses  ____________
Estimated Selling Costs  ____________
Other Costs (described)  ____________
Total     $___________
In accordance with Reg. Section 301.7425-3(d)(3), please acknowledge receipt of this notice on the enclosed copy of this notice and return it to the undersigned in the enclosed self-addressed stamped envelope.

Sincerely,

6.08.9.5
Consent to Sale of Property Free of the Lien or Title of the United States

Title 28 U.S.C.A. Section 2410(c) provides as follows:

“A sale to satisfy a lien inferior to one of the United States shall be made subject to and without disturbing the that the property may be sold free of its lien and the proceeds divided as the parties may be entitled.”

Title 26 U.S.C.A. Section 7425(c)(2) provides as follows:

“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 the title of the United States if the United States consents to the sale of such property free of such lien or title.”

In this regard, an instrument duly executed by a legally empowered government official, showing the consent to sale of property full of the lien of the United States, must be made a matter of record.

6.08.9.6
Redemption Rights Of The United States In Judicial Sale Foreclosure Sales

As provided in Title 28 U.S.C.A. Section 2410(c), where a judicial sale of real estate is made to satisfy a lien prior to that of the United States, and the United States has been made a proper party defendant, the United States shall have a right of redemption as follows:

·  If the U.S. lien does not arise under the internal revenue laws - ONE YEAR.

·  If the U.S. lien does arise under the internal revenue laws - 120 DAYS OR THE PERIOD ALLOWABLE FOR REDEMPTION UNDER STATE LAW, WHICHEVER IS LONGER.

·  If under the provisions of Section 505 of the Housing Act of 1950, as amended (12 U.S.C. 1701K), and subsection (d) of Section 1820 of title 38 of the United States Code, the right to redeem does not arise - NO RIGHT OF REDEMPTION.

6.08.9.7
Redemption Rights Of The United States In Nonjudicial Foreclosure

As provided in title 26 U.S.C.A. Section 7425(d)(1) where a nonjudicial sale of real estate is made to satisfy a lien prior to that of the United States, and the United States has been given proper and timely notice in accordance with the provisions of Section 7425(b)(1)(2), the United States shall have a right of redemption as follows:

“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.”

6.08.9.8
Insuring Title During the Period of Redemption by the United States

Any commitment or title policy to be issued after a judicial or nonjudicial foreclosure sale, but during the period of redemption in favor of the United States, must contain an appropriate exception in regard to said redemptive rights unless the United States had waived its rights of redemption or consented to the property being sold free and clear of its lien.

6.08.9.9
Waiver of the United States Right of Redemption

The right of the federal government to redeem property sold at either judicial or nonjudicial foreclosure sale may be waived by the execution of a proper Certificate of Release, a Certificate of Discharge of the Property, or a Certificate of Nonattachment, which fully describes the property.

6.08.9.10
Priority Of Purchase Money Mortgages Over Federal Tax Liens

Purchase money mortgages are not specifically given any priority under the provisions of title 26 U.S.C.A Section 6323. However, the Internal Revenue Service has ruled (Ruling 6857) that a purchase money security interest, valid under local law, is protected even though it may arise after notice of federal tax lien has been filed against the “MORTGAGOR”.

Caveats: The priority applies exclusively in regard to cases where:

·  Federal tax liens have been filed against a mortgagor in a purchase money transaction.

·  The validity, under local law, of the purchase money mortgage has been fully determined.


For purposes of issuing a loan policy insuring a true purchase money mortgage given by the purchaser to the seller, a federal tax lien should be shown as an exception.

The reason for showing the tax lien as an exception while at the same time describing it as subordinate to the insured mortgage, is based upon the necessity of the insured to be aware of the existence of the lien and its possible legal standing in the event of a future foreclosure of the mortgage or deed in lieu of foreclosure.