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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4093
Experience:  35 years tax experience, including four years at a Big 4 firm.
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Customer Question

I am involved in a non performing real estate promissory note sale which is currently owned by an estate where the gentleman passed in Oct 2010. Th estate is valued well in excess of 5M. They have not filed a 706 or paid any estimated estate tax. However are stating they have an extension until Sept. 2012. The note sale is for a distressed property where the original note value far exceeds both market value and the agreed contract price for the note sale. I am being told that the estate tax lien will attach to the note if we do not file a form 4422. Our intentions are to acquire the note, foreclose the borrowers interest and retain properties as rentals.
Submitted: 4 years ago.
Category: Tax
Expert:  PDtax replied 4 years ago.
Welcome to the site. I will be helping you today.

So, you are an unrelated third party who wants to purchase the mortgage note, foreclose on the underlying property and take possession. IRS Form 4422 is normally used by the estate requesting a release of the IRS potential estate tax lien so the property, in this case a mortgage note, can be sold.

You are correct in that the form should be completed by the estate. The form (link: http://www.irs.gov/pub/irs-pdf/f4422.pdf) allows the estate to request IRS release its claim against the property. Because the 706 has not yet been filed, pay special attention to the filing instructions, as the form is filed with Estate and Gift at the IRS Center nearest the estate.

Because the estate has not yet filed returns, expect the IRS to be slow in granting approval. They may wait for the 706 to be filed before acting.

Thanks for asking at Just Answer. If you need anything more, please ask. If this answers your question, please leave positive feedback.

Customer: replied 4 years ago.

We are unrelated third party who wants to purchase the mortgage note, foreclose on the underlying property and take possession.

Define slow... 2 months, 6 months, a year ?

Are there any exceptions that would allow this sale to take place without the 4422 being filed ?

The concern we are trying to address is that the lien tax liability may follow the note and ultimately the underlying real estate collateral.

In the event the sale took place without the 4422 wouldn't the potential lien attach to the proceeds from the sale which will be retained by the estate to pay tax liability. It's effectively a swap at market value. Estate is taking an illiquid asset and covertly to liquid asset to help satisfy tax liability.



Expert:  PDtax replied 4 years ago.
Define slow... 2 months, 6 months, a year ? SLOW AS IN IRS MAY NEED TO HAVE THE 706 FILED AND REVIEW ITS POSITION, INCLUDING AUDIT.

Are there any exceptions that would allow this sale to take place without the 4422 being filed ? IF IT WAS A NO TAX ESTATE.

The concern we are trying to address is that the lien tax liability may follow the note and ultimately the underlying real estate collateral. YES IT WILL. IF YOU HAVE A $300,000 NOTE, BUT THE UNDERLYING PROPERTY IS WORTH $160,000, YOU WILL NEED A VALUATION TO SUPPORT THE VALUE.

In the event the sale took place without the 4422 wouldn't the potential lien attach to the proceeds from the sale which will be retained by the estate to pay tax liability. It's effectively a swap at market value. Estate is taking an illiquid asset and covertly to liquid asset to help satisfy tax liability. TO THE EXTENT IRS ARGUES THE ESTATE DID NOT GET ADEQUATE CONSIDERATION, OR DOESN'T PAY ITS TAX DEBT, ETC., ARE THE ONLY ISSUES THAT COULD MUDDY YOUR PURCHASE. YOU MIGHT NEVER HAVE A QUESTION ABOUT THE IRS LIEN ON THE ASSET YOU ARE BUYING.
Customer: replied 4 years ago.
In reading 5.5.8.1 (06-23-2005) there appears to be more exceptions than if it were just a "no tax estate."

The primary issue I am focusing on here is this specific language in the code
Assets of the gross estate can be sold or encumbered free of the IRC § 6324(a) lien if the proceeds from the sale or loan are used for the payment of charges against the estate or expenses of its administration that are allowed by any court having jurisdiction.

I would believe that we can put a provision in the mortgage loan sale agreement for the estate to warranty to purchaser "proceeds will be used for the payment of charges against the estate or expense of administration"
Expert:  PDtax replied 4 years ago.
I am sure there are more exceptions to the need for Form 4422 lien release. My answer was not to be considered exhaustive, just an example.

I did not research the possible ways out of filing; your original question makes no mention of your preference not to file it. Since that is clearly your preference, I suggest you seek out a tax pro in your area to confirm your research. You will find the cost well worth the peace of mind. We can only answer general questions here at Just Answer.

You will find, when you consult with your tax pro, that citing the Internal Revenue Manual as legal precedent may make him or her smile. IRM cites are not legally binding. IRM instructions are policy, and as such do not have the weight of law.

Please involve a tax pro, who can craft the purchase in a way that protects you from these transfer issues.

Thanks again from Just Answer.