Fall 2003 • Issue 11, page 13

Federal Tax Liens and the Receiver

By Rosen, Charles*

(This is Part One of a two- part series on handling Federal Tax Liens in a Receivership.)

It is not uncommon that a receiver will be appointed over real and/or personal property assets of a taxpayer against whom a Notice of Federal Tax Lien has been filed. What are the rights/priorities of that tax lien against the interests of a receivership estate and other parties who may claim an interest? The sobering answer that the tax liability may remain a lien on the property even if it is conveyed by the receiver, may become a lien against the receivership estate, or worst of all worlds, may become a lien against the receiver personally, if the lien is not properly handled. The careful receiver will take the time to identify and properly handle federal tax liens to avoid such consequences.

Creation and Notice of a Tax Lien
A Federal Tax Lien is created automatically when (1) an assessment has been made against a taxpayer for unpaid taxes, (2) the taxpayer has been given a notice of demand for payment of that assessed tax liability, and (3) the taxpayer has failed to pay the tax liability. Internal Revenue Code sec. 6321. [Unless otherwise stated, all code references are to the Internal Revenue Code, Title 26 U.S. Code.] Recordation is not required for the tax lien to exist. The tax lien lasts ten years from the date of assessment (sec. 6502), but may be extended for a variety of reasons, including “for the period the assets of the taxpayer are in the control or custody of the court . . . and for 6 months thereafter.” Sec. 6503(b). If the Federal tax lien is valid at the time the receivership is created over a taxpayer’s property, the running of the lien is tolled until the court removes the property from its jurisdiction, and is extended another six months thereafter (assuming that the tax lien has not been properly removed from the property during the receivership.)

But though a Federal tax lien - commonly referred to as a ‘secret lien’ - may exist, it is not effective against certain parties until public notice of the tax lien has been filed or recorded. These protected parties are commonly referred to as ‘priority’ lienors, and include purchasers of the property, holders of perfected security interests in the property, mechanic’s lienors, and judgment lien creditors. Sec. 6323(a).

There are also some ‘super-priority’ creditors whose claims may be superior to the Federal tax lien EVEN IF the Notice of Federal Tax Lien has been filed. These include securities, motor vehicles, personal property purchased at retail, personal property purchased at casual sale, personal property subject to a possessory lien, real property tax liens, residential property subject to a mechanic’s lien, attorneys’ liens, certain insurance contracts and deposit-secured loans. However, every priority and super-priority lienor must meet exacting criteria for their lien to ‘prime’ a filed Notice of Federal Tax Lien.

A Notice of Federal Tax Lien must be recorded in the proper government office in order for it to be fully effective. With respect to real property, or an interest in real property, it must be recorded in the county where the real property is located. If the property is other than real property (personal property, either tangible or intangible), it must be recorded “ . . . in one office within the State (or county, or other governmental subdivision), as designated by the laws of such State . . .” Sec. 6323(f). California has adopted the Uniform Federal Lien Registration Act and codified it at Code of Civil Procedures sec. 2100 (C.C.P. sec. 2100, et seq.). This requires that a Federal tax lien with respect to personal property is to be recorded either in the county where an individual taxpayer (that is, a real person) resides or was last known to reside, or for a partnership, corporation, LLC, trust, or decedent’s estate with the California Secretary of State.

If any property subject to a Federal tax lien is within a receivership estate the receiver should carefully review sec. 6323(b) of the Internal Revenue Code, the Treasury Regulations further defining these liens (see Treas. Reg. 301.6323(a) et seq.), and the substantial body of case law that has been developed from sec. 6323.

Investigating the Government Lien
Before doing anything with respect to government liened property, the receiver should secure a copy of the actual recorded notice of tax lien, and, if possible, secure from the I.R.S. a transcript of the account on which the tax lien is based, and a demand from the I.R.S. setting out the current balance due on the lien. The notice of the lien will be in the public record, easily secured from the local county recorder, the California Secretary of State, or from a title insurance company. Securing a copy of the transcript of account (usually called a ‘literal transcript’ but known in I.R.S. internal jargon as a MFTRA-X transcript) or a demand for the balance due may be a little more difficult. Non-public records of a taxpayer are restricted by law but may be disclosed in certain limited situations, as provided in sec. 6103. A written request for a transcript of the account should be directed to the nearest IRS Disclosure Office. In California, Disclosure Offices are located in Los Angeles, Oakland, Laguna Niguel, and San Jose.

More often than not, when contacting the Service you will need to convince the Service employee of your right to receive this information. In your request for the transcript of the account or demand you should reference Internal Revenue Code sec. 6103(e)(4)(B), which states that such records may be disclosed to a receiver “. . . if the Secretary [of the Treasury] finds that such . . . . receiver, in his fiduciary capacity, has a material interest which will be affected by information contained therein.” Your letter should state why you have a need for the information. You should also attach to the request a copy of your order of appointment by the court.

Resolving the Government Lien
If the receiver is selling real property, the proposed sale price either will or will not pay the tax lien in full. If full payment will result, the receiver should have the escrow officer send a written request to the local I.R.S. “lien desk” for a demand. In the past a standard beneficiary demand statement from the escrow officer was sufficient to get the necessary information. However, of late the Service has been attempting to follow its own more complicated procedures. Thus it may be necessary for the escrow officer to attach to the request for a demand an I.R.S. Form 12180, Third Party Contact Authorization Form signed by the receiver, with a copy of the receiver’s order of appointment attached.

If the sale will not result in full payment of the tax lien but the receiver wishes to go forward with the sale, it will be necessary to file with the Service an application for a discharge of the tax lien, in order to protect the buyer’s title and to satisfy the buyer’s title company. Procedures to obtain a discharge of the unpaid portion of the tax lien are found at sec. 6325(b) and I.R.S. Pub. 783 (don’t fret, the publication is only two pages long). The application is actually a letter, which should reference all of the information requested in Pub. 783. The application, to be signed under penalty of perjury, should also reference and have the following attached to it:

  1. A preliminary title report and all supplements to it;

  2. Escrow instructions;

  3. A copy of all beneficiary demands from lienors that are senior to the tax lien;

  4. Two independent appraisals of the property;
    (Note: Unless it is highly specialized property, only one appraisal need be a formal document prepared by a qualified appraiser whose qualifications have been attached to the appraisal. The other appraisal may be informal, such as from a qualified real estate broker in the area who is familiar with the type of property being sold.)

  5. A copy of the order appointing the receiver;

  6. An estimated escrow closing statement;

  7. A copy of the proposed title transfer document;

  8. Copies of all state and Federal tax liens.

If the receiver is refinancing rather than conveying the real property, the receiver should make application to the Service to subordinate the tax lien to the new borrowing. These procedures are found at sec. 6325(d) and I.R.S. Pub 784. Again, the application is actually a letter, which should reference all of the information requested in Pub. 784 and have attached to it the documents in the list set out above, plus a copy of all loan documents (i.e. loan disclosure statement, estimated loan settlement, or estimated closing statement).

A Conditional Letter of Federal Tax Lien Discharge [or Subordination] will be issued, usually with a life span of sixty (60) days, within which the transaction must be completed, if the application for a discharge or subordination is accepted. After the sale or refinancing is completed, a certified escrow closing statement and other requested documentation must be given to the Service, at which time the government will issue a recordable discharge or subordination document. Don’t worry. Title companies will accept the conditional letter and will allow title to transfer and the title to be insured. The I.R.S. does it in two steps because of past bad experiences in which escrow officers or others did not adhere to what was required of them and paid parties who were not legally senior to the tax lien. This two-step process provides the government with a better mechanism for retaining its lien rights without further assurances that only that which should have been paid, was actually paid.

Yes, But, Can A Receivership Be Funded From Proceeds of Tax-Liened Property?
Fortunately for receivers and receivership estates, reasonable costs of administering the receivership proceeding are allowed to prime a previously-recorded Federal tax lien. See, 31 U.S.C. sec 3713; Colorado Wool v. Monahan, 66 F2d 313 (10th Cir 1933); Kennebec Box v. O.S. Richards Corp., 5 F2d 951 (2nd Cir 1925). Note well that the receiver should make an application to the court and secure an order allowing payment of receivership fees and costs before a sale of tax-liened property is consummated, so that those expenses of the receivership may be deducted and paid from the sale (or refinancing) proceeds before funds are allocated to the tax lien. These allowed receivership expenses should be included in the estimated escrow closing statement that is provided to I.R.S. as part of the required application for a tax lien discharge or subordination.

*CHARLES F. ROSEN, ESQ. of the Law Offices of A. Lavar Taylor has substantial tax expertise involving receiverships and bankruptcy. For more than twenty years Mr. Rosen served as a bankruptcy advisor for the Special Procedures branch of the Internal Revenue Service.