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
Creation and Notice of
a Tax Lien
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
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 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:
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
*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.