PORTFOLIO

Federal Tax Collection Procedure — Liens, Levies, Suits and Third Party Liability (Portfolio 637)

Tax Management Portfolio, Federal Tax Collection Procedure — Liens, Levies, Suits and Third Party Liability, No. 637-2nd, analyzes in depth the procedures followed by the IRS in collecting outstanding tax liabilities. Beginning with assessment of tax, notice and demand, and nonpayment by a taxpayer, the federal tax lien arises and attaches to all of the taxpayer's property and rights to property. In addition to the federal tax lien, there are other administrative collection devices that the IRS uses to enforce collection of unpaid tax liabilities. These include the federal tax levy and seizure and sale of a taxpayer's property. The IRS may also enforce collection of tax liabilities by instituting judicial proceedings. This Portfolio includes a detailed discussion of all of the administrative and judicial collections procedures available to the IRS.

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DESCRIPTION

Tax Management Portfolio, Federal Tax Collection Procedure — Liens, Levies, Suits and Third Party Liability, No. 637-2nd, analyzes in depth the procedures followed by the IRS in collecting outstanding tax liabilities. Beginning with assessment of tax, notice and demand, and nonpayment by a taxpayer, the federal tax lien arises and attaches to all of the taxpayer's property and rights to property. In addition to the federal tax lien, there are other administrative collection devices that the IRS uses to enforce collection of unpaid tax liabilities. These include the federal tax levy and seizure and sale of a taxpayer's property. The IRS may also enforce collection of tax liabilities by instituting judicial proceedings. This Portfolio includes a detailed discussion of all of the administrative and judicial collections procedures available to the IRS.
When the IRS enforces collection of taxes against the taxpayer's property, the interests of the taxpayer's creditors or others with claims or interests in this property may be affected. This Portfolio reviews the rules governing the priority of such competing interests. Under certain circumstances, third parties may also be responsible for payment of the taxpayer's tax liabilities. Third-party liability for payment of a taxpayer's tax liability is analyzed in detail in this Portfolio.
Taxpayers are not without defenses to enforced tax collection by the IRS. Taxpayers (and, in some situations, other third parties) have a variety of administrative and judicial procedures available to postpone or curtail collection activity by the IRS. Some of these procedures are discussed in this Portfolio. A more extensive analysis of the taxpayer's defenses is included in 638 T.M., Federal Tax Collection Procedure — Defensive Measures.


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AUTHORS

STEVEN R. MATHER
Steven R. Mather, University of Iowa (B.B.A., with highest distinction 1978; J.D., with distinction 1982); member, California Bar and Iowa Bar (inactive); Certified Public Accountant, Iowa, 1979 (inactive); Senior Attorney, District Counsel, Internal Revenue Service, Los Angeles 1983–87; Co-Director, Tax Court Pro Se Program (Los Angeles/Beverly Hills) 1988–present; lecturer, Federal Tax Procedure, Golden Gate University Masters in Taxation Program; member, Section of Taxation of California, Los Angeles County and Beverly Hills Bar Associations; author: 624 T.M., Audit Procedures for Pass-Through Entities; co-author: 638 T.M., Federal Tax Collection Procedure — Defensive Measures; contributor: The Tax Lawyer.

PAUL H. WEISMAN
Paul H. Weisman, University of California at Davis (B.A., cum laude 1979); Loyola Law School, Los Angeles (J.D. 1982); member, California Bar; Attorney, Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, Washington, D.C. 1982–83; Senior Attorney, District Counsel, Internal Revenue Service, Los Angeles 1983–87; Alternate Member, Los Angeles County Assessment Appeals Board; Co-Director, Tax Court Pro Se Program (Los Angeles/Beverly Hills) 1988–present; member, Beverly Hills Bar Association; co-author: 638 T.M., Federal Tax Collection Procedure — Defensive Measures; contributor: Taxation for Accountants and Journal of International Taxation.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Assessment of Tax

III. Federal Tax Liens

Introductory Material

A. Creation of Lien

1. Assessment

2. Notice and Demand

a. “Each Person Liable”

b. Last Known Address

c. Formality of Notice and Demand

d. Effect of No Notice and Demand

3. Nonpayment

4. Relation Back

B. Attachment of Lien to Property

1. General Rule

2. Effect of State Law

3. Specific Examples

a. Joint Tenancy and Tenancy in Common

b. Tenancy by the Entirety

c. Curtesy and Dower

d. Homestead

e. Community Property

f. Partnerships

g. Corporations

h. Trusts and Spendthrift Trusts

(1) Beneficiary's Interest

(2) Trustee's Interest

(3) Grantor's Interest

i. Contingent Interests

j. Executory Contracts

k. Future Interests or Rights

l. Terminable Interests

m. Embezzlement Proceeds and Constructive Trusts

n. Licenses, Franchises, and Other Intangibles

o. Assets in Custody of a Court

p. Insurance Policies and Proceeds

(1) Policies

(2) Proceeds

q. Bail Bonds and Seized Funds

r. Illegally Seized Property

s. Bank Accounts

(1) In General

(2) Joint Accounts

t. Individual Retirement Accounts

u. Pension Plans

v. Social Security Benefits

w. Alimony and Child Support

x. Construction Contracts

(1) When Contractor Is Taxpayer

(2) When Subcontractor Is Taxpayer

y. Foreign Property

z. Land Sale Contract

aa. Chose in Action

bb. Customer Lists

cc. Inheritance

dd. Royalties

C. Perfection of Tax Liens

1. Meaning of Perfection

2. Perfection by Levy

3. Purpose of NFTL Filing

4. Place of NFTL Filing

a. Real Property

b. Personal Property

(1) In General

(2) Corporations and Partnerships

(3) Lien on Vehicles

(4) Documented Vessels

c. District of Columbia Rule

5. Adequacy of NFTL Drafting

6. Refiling of NFTL

7. Effect of NFTL on Underlying Lien

D. Special Rule-Estate Tax Lien and Gift Tax Lien

1. Estate Tax Lien

2. Gift Tax Lien

3. Relationship to 6321 Federal Tax Lien

E. Other Tax Liens

1. Liens Under 6311-Payment by Commercially Acceptable Means

2. Excise Taxes

F. Priorities

1. In General

2. Priority of Interests Perfected Before NFTL Is Filed

a. Purchasers

b. Mechanic's Lienors

c. Holders of Security Interests

d. Judgment Lien Creditors

3. “Semi-super” Priorities

a. Real Property Construction or Improvement Financing Agreement

(1) Eligible Holders

(2) Priority Requirements

(3) Qualified Property

(4) Timing of Disbursement

b. Obligatory Disbursement Agreement

(1) Eligible Holders

(2) Priority Requirements

(3) Qualified Property

(4) Timing of Disbursement

(5) Special Surety Issues

c. Commercial Transactions Financing Agreement

(1) Eligible Holders

(2) Priority Requirements

(3) Qualified Property

(a) Paper of a Kind Which Ordinarily Arises in Commercial Transactions

(b) Accounts Receivable

(c) Mortgages

(d) Inventory

(e) Proceeds

(4) Timing of Disbursement

d. Forty-Five Day Period for Disbursements

(1) Eligible Holders

(2) Priority Requirements

(3) Qualified Property

(4) Timing of Disbursements

4. Super Priorities

a. Purchase or Secured Interest in Securities

b. Purchase of Motor Vehicles

c. Retail Purchase of Personal Property

d. Casual Sale of Personal Property

e. Possessory Lien on Personal Property

f. Real Property Tax and Special Assessment Liens

g. Mechanic's Liens on Residential Property

h. Attorneys’ Liens

i. Insurance Contracts

j. Deposit-Secured Loans

k. Purchase Money Security Interest and Conditional Sales Contracts

5. Other Priority Determinations

a. In General

b. State Tax Lien

6. Priority of Interest and Expenses

7. Simultaneous Attachment and Priority

8. Circular Priority

9. Insolvencies and Decedents’ Estates

a. Priority Rules

b. Procedural Issues

10. Bankruptcy

G. Relief from the Federal Tax Lien

1. Post-Filing Administrative Hearing

2. Certificate of Release of Erroneously Filed Lien

3. Certificate of Nonattachment of Lien

4. Notice of Inadvertently Filed NFTL

5. Removing the Federal Tax Lien from Property

a. Certificate of Release of Lien

(1) In General

(2) Satisfaction of Tax Liability

(3) Unenforceable Tax Liability

(4) Multiple Tax Liabilities

(5) Acceptance of Bond

(6) Failure to Release Lien in Timely Manner

(7) Erroneously Issued Certificate of Release

b. Certificate of Discharge

(1) Property Double the Amount of the Liability Plus Senior Encumbrances

(2) Payment of Value of IRS Interest

(3) Valueless IRS Interest

(4) Substitution of Proceeds of Sale

(5) Substitution of Value

(6) Procedural Issues

(7) Effect of Certificate of Discharge

6. Certificate of Subordination of Federal Tax Lien

7. Withdrawal of Tax Lien Notice

H. Foreclosure Sale as Discharge of Federal Tax Lien - 7425

1. Judicial Sales

2. Nonjudicial Sales

a. Significance of Notice of Sale

b. Notice of Sale Requirements

c. IRS's Right to Redeem

d. Elevation of IRS's Interest

(1) Equitable Subrogation

(2) Equitable Relief from Merger

(3) Unjust Enrichment

I. Duration of Lien

IV. Federal Tax Levy

A. General Requirements

1. Statute of Limitations Issues

2. Prohibitions on Levy

a. During Pendency of Certain Refund Proceedings

b. During Pendency of Offer in Compromise

c. During Term of Installment Agreement

d. Before Investigation of Status of Property

e. Uneconomical Levies

B. Procedural Requirements

1. Notice and Demand

2. Notice of Intent to Levy

3. Seizure

a. In General

b. Notice of Seizure

c. Seizures of Residences and Businesses

d. Writs of Entry

e. Status of Property After Seizure

C. Property Subject to Levy

1. In General

2. After-Acquired Property

3. Specific Types of Property

a. Wages, Salary, or Other Income

(1) In General

(2) Levies on Direct Deposit Accounts

(3) Levies on Severance Payments

b. Certain Government Payments

c. Bank Deposits and Certificated Securities

(1) In General

(2) Levies on Joint Accounts

(3) Levies on Certificates and Securities

(4) Levies Served on Foreign Branches

d. Mortgage Escrow Accounts

e. Retirement Plan Payments

f. Retirement Plan Accounts

g. Thrift Savings Plan (“TSP”) Accounts

h. Cash Value of Life Insurance

i. Property in Custody of Court

j. Lawsuit Proceeds

k. Air Force Pension Payments

4. Property Exempt from Levy

a. In General

b. Residences and Businesses

D. Effect of Levy on Taxpayer and Taxpayer Defenses

1. Effect of Levy

2. Taxpayer Defenses

a. Release of Levy

b. Bankruptcy Petition

c. Collection Appeals Program

d. Taxpayer Advocate

e. Return of Levied Property

E. Effect of Levy on Served Party and Served Party Defenses

1. Effect of Honoring Levy

2. Served Party Defenses

F. Effect of Levy on True Owner and True Owner Defenses

1. Effect of Levy on True Owner

2. True Owner Defenses

a. Administrative Claim

b. Wrongful Levy Suit

(1) Requirement of Levy

(2) Time Limits

(3) Recovery Available

(4) Jurisdictional Requirements

c. State Garnishment Suit

d. Quiet Title Suit

e. Refund Suit

V. Sale of Levied Property by IRS

Introductory Material

A. Notice of Sale

B. Sale Procedures

1. Time and Place of Sale

2. Minimum Price

C. Special Rules for Perishable Goods

D. Right of Redemption

E. Right to Surplus Proceeds

F. Buyer's Concerns

1. Certificate of Sale and Director's Deed

2. Practical Considerations

G. Other Secured Party Concerns

H. Adjournment of Sale

VI. Judicial Proceedings

Introductory Material

A. Suits Instituted by the Government

1. General Procedural Rules

a. Authorization

b. Subject Matter Jurisdiction

c. Personal Jurisdiction

d. Venue

e. Statute of Limitations

2. Specific Types of Suits

a. Suit to Reduce Tax Claim to Judgment

b. Lien Foreclosure or Enforcement Suit

c. Suit for Failure to Honor Levy

d. Suit to Establish Transferee Liability or to Set Aside Fraudulent Conveyance

e. Erroneous Refund Suits

(1) Deficiency Taxes

(2) Non-Deficiency Taxes

(3) Interest

(4) Statute of Limitations

f. Suit to Impose Receivership

g. Suit to Open Safe Deposit Box

h. Action to Quiet Title

i. Intervention Suits

j. Suit to Impose Lender Liability

k. Injunctions and Temporary Restraining Orders

l. Writ of Ne Exeat Republica

B. Suits Against the Government

1. General Procedural Rules

a. State Court Jurisdiction

b. Federal Court Jurisdiction

c. Personal Jurisdiction

d. Venue/Statute of Limitations

2. Types of Suits

a. Quiet Title

b. Declaratory Judgment

c. Foreclosure Action

d. Partition Suit

e. Condemnation Suit

f. Interpleader Suit

g. Wrongful Levy Suit

h. Suit for Surplus Proceeds

i. Suit for Substituted Sale Proceeds

j. Suit for Substitution of Value

k. Suit to Enjoin Collection of 6672 Penalty

l. Suit to Enjoin Collection of Erroneously Assessed Deficiency

m. Suit for Damages Against the IRS

n. Jeopardy Levy Review

o. Miscellaneous Suits

p. Tort Claims

q. Suits for Unauthorized Enticement of Information Disclosure

r. Suits for Constitutional Violations

C. Suits Against Third Parties

VII. Secondary and Derivative Liability

Introductory Material

A. Liability for Trust Fund Taxes

B. Liability of Payors Financing Payrolls

C. Liability for Transferees, Nominees, and Alter Egos

1. Substantive Rules

a. Transferee

(1) Actual Fraud

(2) Constructive Fraud

(3) Transfers in Contemplation of Insolvency

(4) IRS Priority in Applying Theories

b. Nominee

c. Alter Ego

2. Procedural Devices

a. Section 6901 Administrative Transferee Assessment

b. Nominee Lien and Nominee Levy

3. Suit to Set Aside Fraudulent Transfer

D. Personal Liability as Fiduciary Under 31 USC 3713


WORKING PAPERS

Working Papers

Table of Worksheets

Other Resources

Worksheet 1 Timing Summary

Worksheet 2 Suggested Certificate of Discharge of Property from Federal Tax Lien Under 6325(b)(3)

Worksheet 3 Deed of Real Property

Worksheet 4 Certificate of Nonattachment of Federal Tax Lien

Bibliography

OFFICIAL

Statutes and Regulations:

State Statutes:

Regulations:

Committee Reports:

Revenue Procedures and Rulings:

Cases:

UNOFFICIAL

Periodicals:

1987

1988

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003