Federal tax lien – IRS proposed priority

IRS proposed regs would update federal tax lien priority provisions for holders of security interests

Preamble to Prop Reg 04/16/2008, Prop Reg § 301.6323(b)-1, Prop Reg § 301.6323(c)-2, Prop Reg § 301.6323(f)-1, Prop Reg § 301.6323(g)-1

Mike Habib, EA


IRS has issued proposed regs on the priority of federal tax liens against certain persons under Code Sec. 6323 purchasers, holders of security interests, mechanic’s lienors, and judgment lien creditors. The proposed regs, which would be effective when finalized, would incorporate changes made in the IRS Restructuring and Reform Act of ’98 (RRA) and make various other updates. They would also reflect that a notice of federal tax lien (NFTL) would be extinguished if it contains a certificate of release and isn’t timely refiled. The proposed regs would 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 and the Revenue Act of ’78. In addition, there have also been several changes to IRS practice that aren’t reflected in the existing regs.

Proposed regs. The proposed regs would update the existing regs to indicate that:

    • a purchaser of property in a casual sale is protected against a filed tax lien if the sale price is less than $1,000 (i.e., reflecting the Code Sec. 6323(b)(4) limit). For 2008, this $1,000 limit, as indexed for inflation, is $1,320. (Prop Reg § 301.6323(b)-1(d)(1))
    • a holder of a mechanic lien is protected against a filed tax lien with respect to residential property in an amount not more than $5,000 (i.e., reflecting the Code Sec. 6323(b)(7) limit). For 2008, this $5,000 limit, as indexed for inflation, is $6,600. (Prop Reg § 301.6323(b)-1(g)(1))
    • household goods (fuel, provisions, furniture and personal effects in a taxpayer’s household, etc.) are exempt from levy to the extent they don’t exceed $6,250 in value (i.e., reflecting the Code Sec. 6334(a)(2) limit). For 2008, this $6,250 limit, as indexed for inflation, is $7,900. (Prop Reg § 301.6323(b)-1(d)(3))

    The proposed regs would clarify that a NFTL (Form 668) may be filed either in paper form or electronically, and specifically define transmission by fax and e-mail as electronic, as opposed to paper, filings. The proposed regs would reflect the IRS’s authority to file NFTLs electronically in all situations and would allow IRS to work with local jurisdictions to receive electronically-filed NFTLs if they have the capacity to do so without obtaining the state’s permission. (Prop Reg § 301.6323(f)-1(d)(2))

    The proposed regs would provide that, with regard to 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 that when an NFTL is filed in more than one jurisdiction, certificates of revocation as well as new NFTLs would have to be filed in all the jurisdictions for the lien to be reinstated. (Prop Reg § 301.6323(g)-1(a))

    The proposed regs would indicate that there is generally a 10-year period (reflecting the period in Code Sec. 6502) for instituting a proceeding in court or serving a levy to collect a properly assessed tax. (Prop Reg § 301.6323(g)-1)

    The proposed regs would also amend the examples in the existing regs under Code Sec. 6323(c), Code Sec. 6323(g), and Code Sec. 6323(h) to reflect that a notice of federal tax lien isn’t treated as meeting the filing requirements until it is both filed and indexed in the office designated by the state (in the case of real property located in a state where a deed is not valid against a purchaser until the filing of such deed has been entered and recorded in the public index). (Prop Reg § 301.6323(c)-2(d), Ex. 1, Ex. 4)

    The proposed regs would also remove Reg. § 301.6323(b)-1(j) because it is misleading and unnecessary in light of changes to Code Sec. 6323(b)(10) which made the reference to “passbook accounts” obsolete. Code Sec. 6323(b)(10) currently protects from a federal tax lien certain institutions holding deposit-secured loans, to the extent of any loan made without actual notice or knowledge of the federal tax lien.

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