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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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IRS TAX LIENS FILED DURING REDEMPTION PERIOD Purchased property

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IRS TAX LIENS FILED DURING REDEMPTION PERIOD

Purchased property with 2 existing IRS liens at South Carolina tax sale. During 1 year redemption period IRS filed 2 completely new liens. Redemption period expired and deed received. County did not notify IRS on any lien. (not required in SC) Should the 2 liens filed during the redemption period be discharged? Does the lack of notice affect the discharge?

IRS language in 7425 seems contradictory:

7425 - DISCHARGE OF LIENS
7425(b) OTHER SALES. --Notwithstanding subsection (a) a sale of prop
7425(b)(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

7425(b)(2) shall have the same effect with respect to the discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if --

7425(b)(2)(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,

7425(b)(2)(B) the law makes no provision for such filing, o

5.12.4.4.1 (06-11-2010)
Determining the Date of Non-judicial Sale

The date of the sale shall be determined in accordance with the following rules:

in the case of divestment of junior liens on property resulting directly from a public sale, the date of sale is deemed to be the date the public sale is held, regardless of the date under local law on which junior liens on the property are divested or the title to the property is transferred,

7425(b)(2)(A) seems clear in that if lien was not required 30 days prior to date of sale (no mention of notice in this clause) it would seem that since these liens were not filed 30 days before the tax sale, they should be discharged.

However, later in the code IRS example seems to indicate is is the day the deed is recorded.
Example (6). The law of State Q contains a provision which permits a county to collect a delinquent tax assessment with respect to real property by the means of a tax sale of the property. After public notice is given, a "tax sale" of the real property is conducted. Upon payment of the delinquent taxes and interest, a purchaser obtains a tax certificate with respect to the real property. If there is no purchaser at the tax sale, the property is deemed to be bid in by the State. Because the obtaining of this tax certificate by a purchaser or State Q does not directly result in the divestment of either the owner's title or junior liens with respect to the property, the tax sale is not a nonjudicial sale described in section 7425(b). Following the tax sale, there is a three year period during which any person having an interest in the property may redeem the property by paying the holder of the tax certificate the amount of taxes, interest, and costs. Unless redeemed, the holder of the tax certificate may obtain an absolute title at the expiration of the period of redemption provided he serves a notice of the expiration of the redemption period upon the owner at least 60 days prior to the date of expiration. Because there is no public or private sale which directly results in the divestment of junior liens on the property, the date of sale, for purposes of computing a period of time determined with reference to the date of sale, is the date on which the holder of the tax certificate obtains absolute title. [Reg. §301.7425-2

Thoroughly confused. The actual deed itself call the tax sale date the "public sale". Logic says these junior liens should be discharged. But IRS seems to state the opposite.

If IRS example is correct, there is simply no protection from the IRS for a tax sale investor. They could simply swoop in, file a lien on any tax sale property during the redemption period and take the equity from the investor. I realize there are risks in tax sale investing. This one makes no sense.

Please advise! Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

I agree. See this:

NPVAdvisor :

 


(a) Invalidity of lien without notice. The lien imposed by section 6321 is not valid against any purchaser (as defined in paragraph (f) of §(NNN) NNN-NNNNh)–1), holder of a security interest (as defined in paragraph (a) of §(NNN) NNN-NNNNh)–1), mechanic's lienor (as defined in paragraph (b) of §(NNN) NNN-NNNNh)–1), or judgment lien creditor (as defined in paragraph (g) of §(NNN) NNN-NNNNh)–1) until a notice of lien is filed in accordance with §(NNN) NNN-NNNNf)–1. Except as provided by section 6323, if a person becomes a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor after a notice of lien is filed in accordance with §(NNN) NNN-NNNNf)–1, the interest acquired by such person is subject to the lien imposed by section 6321.

26 C.F.R. §(NNN) NNN-NNNNa)–1
NPVAdvisor :

And, sorry for the Data Dump to come here, but the examples in the code MAY help you to run your situation against the examples to clarify:

NPVAdvisor :


(a) Securities--(1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with §(NNN) NNN-NNNNf)–1, the lien is not valid with respect to a security (as defined in paragraph (d) of §(NNN) NNN-NNNNh)–1) against--




(i) A purchaser (as defined in paragraph (f) of §(NNN) NNN-NNNNh)–1) of the security who at the time of purchase did not have actual notice or knowledge (as defined in paragraph (a) of §(NNN) NNN-NNNNi)–1) of the existence of the lien;





(ii) A holder of a security interest (as defined in paragraph (a) of §(NNN) NNN-NNNNh)–1) in the security who did not have actual notice or knowledge (as defined in paragraph (a) of §(NNN) NNN-NNNNi)–1) of the existence of the lien at the time the security interest came into existence or at the time such security interest was acquired from a previous holder for a consideration in money or money's worth; or





(iii) A transferee of an interest protected under subdivision (i) or (ii) of this subparagraph to the same extent the lien is invalid against his transferor.




For purposes of subdivision (iii) of this subparagraph, no person can improve his position with respect to the lien by reacquiring the interest from an intervening purchaser or holder of a security interest against whom the lien is invalid.





(2) Examples. The application of this paragraph may be illustrated by the following examples:




Example 1. On May 1, 1969, in accordance with §(NNN) NNN-NNNNf)–1, a notice of lien is filed with respect to A's delinquent tax liability. On May 20, 1969, A sells 100 shares of common stock in X corporation to B, who, on the date of the sale, does not have actual notice or knowledge of the existence of the lien. Because B purchased the stock without actual notice or knowledge of the lien, under subdivision (i) of subparagraph (1) of this paragraph, the stock purchased by B is not subject to the lien.



Example 2. Assume the same facts as in example 1 except that on May 30, 1969, B sells the 100 shares of common stock in X corporation to C who on May 5, 1969, had actual notice of the existence of the tax lien against A. Because the X stock when purchased by B was not subject to the lien, under subdivision (iii) of subparagraph (1) of this paragraph, the stock purchased by C is not subject to the lien. C succeeds to B's rights, even though C had actual notice of the lien before B's purchase.



Example 3. On June 1, 1970, in accordance with §(NNN) NNN-NNNNf)–1, a notice of lien is filed with respect to D's delinquent tax liability. D owns 20 $1,000 bonds issued by the Y company. On June 10, 1970, D obtains a loan from M bank for $5,000 using the Y company bonds as collateral. At the time the loan is made M bank does not have actual notice or knowledge of the existence of the tax lien. Because M bank did not have actual notice or knowledge of the lien when the security interest came into existence, under subdivision (ii) of subparagraph (1) of this paragraph, the tax lien is not valid against M bank to the extent of its security interest.



Example 4. Assume the same facts as in example 3 except that on June 19, 1970, M bank assigns the chose in action and its security interest to N, who had actual notice or knowledge of the existence of the lien on June 1, 1970. Because the security interest was not subject to the lien to the extent of M bank's security interest, the security interest held by N is to the same extent entitled to priority over the tax lien because N succeeds to M bank's rights. See subdivision (iii) of subparagraph (1) of this paragraph.



Example 5. On July 1, 1970, in accordance with §(NNN) NNN-NNNNf)–1, a notice of lien is filed with respect to E's delinquent tax liability. E owns ten $1,000 bonds issued by the Y company. On July 5, 1970, E borrows $4,000 from F and delivers the bonds to F as collateral for the loan. At the time the loan is made, F has actual knowledge of the existence of the tax lien and, therefore, holds the security interest subject to the lien on the bonds. On July 10, 1970, F sells the security interest to G for $4,000 and delivers the Y company bonds pledged as collateral. G does not have actual notice or knowledge of the existence of the lien on July 10, 1970. Because G did not have actual notice or knowledge of the lien at the time he purchased the security interest, under subdivision (ii) of subparagraph (1) of this paragraph, the tax lien is not valid against G to the extent of his security interest.



Example 6. Assume the same facts as in example 5 except that, instead of purchasing the security interest from F on July 10, 1970, G lends $4,000 to F and takes a security interest in F's security interest in the bonds on that date. Because G became the holder of a security interest in a security interest after notice of lien was filed and does not directly have a security interest in a security, the security interest held by G is not entitled to a priority over the tax lien under the provisions of subparagraph (1) of this paragraph.




26 C.F.R. §(NNN) NNN-NNNNb)–1

NPVAdvisor :

Finally,

NPVAdvisor :

Remember McDermott -

NPVAdvisor :

The tax lien attaches to original owner's rights ... BUT security interest attaches, for purposes of the federal tax lien statute, when the investor perfected the interest. 26 USC §6323(h)(1). Generally speaking, therefore, and also considering McDermott – the tax lien wins. However, section 6323(a) ABOVE creates an exception from derivative title and gives priority to a security interest that attaches before the tax lien is filed.

NPVAdvisor :

I would speak with an a Real Property attorney in your state (especially one who has a good understanding of Debtor - Creditor law) and see whether IN YOUR JURISDICTION the investor has perfected interest.

NPVAdvisor :

Hope this helps

NPVAdvisor :

Lane

NPVAdvisor :

...let me know if you have questions'

Expert:  Lane replied 1 year ago.
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Customer: replied 1 year ago.

Thanks for the great information. After reviewing info you sent I found this:


6323(b)(6) REAL PROPERTY TAX AND SPECIAL ASSESSMENT LIENS. --With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of --


6323(b)(6)(A) a tax of general application levied by any taxing authority based upon the value of such property;


 


This seems pretty clear...does it make sense to attack IRS from this clause?


 

Expert:  Lane replied 1 year ago.

Yes, I really do think you have a case there, (not only because of the general tax POLICY underlying 6323(b)(6) and (b)(6)(A) ... the same policy that makes property taxes a tax deduction on schedule A) ...

... but because of the specific exemption in 26 C.F.R. §(NNN) NNN-NNNNb)–1

Lane
Customer: replied 1 year ago.

Tremendous!! Attacking the validity of the lien much better approach than attacking tax sale/lack of notice/date of sale issues loaded in IRC 7425. If the lien is not valid, these issues not applicable!


 


I am currently conversing with IRS on these liens and prior to my next contact (and armed with this new information), I have a few followup questions:


 


(NNN) NNN-NNNNb)1 refers to the "securities" and The IRC code defines: 6323(h)(4) SECURITY. --The term "security" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

 


IRC defines "security interest" as: 6323(h)(1) SECURITY INTEREST. --The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.


 


What exact wording would you use for describing my "security" as it applies to the above IRC definitions?


 


Same question on the exact wording for for describing my "security interest"?


 


Also, 6323(b)6 Real Property Tax states "as against a holder of a lien upon such property" I assume it means IRS lien is invalid against "me" the "holder of the lien" Since that was the case, it remains invalid against "me" now, as title holder. Is that correct? I believe I am really over thinking it, but I worry that the wording simply implies it is solely not a valid lien against the lien holder themselves. (and thus lien remains with property)???


 


And lastly:


 


It seems I have 2 approaches: attack knowledge of the lien with(NNN) NNN-NNNNb)1, or from the real estate tax 6323(b)6 and (b)6(a) angle. Any thought on which is better approach with IRS?


 


 


 


 


 


 

Expert:  Lane replied 1 year ago.


A security is an investment. (evidenced by a certificate, I imagine, in this case). ... A stock, for example, is a security that evidences ownership interest in a company. A bond is a security that evidences a creditor's status with regard to a company.

A security INTEREST is the right that you have. When you study real property law, for example you'll see that they tell you right up front that we don't OWN property... we have different types of interest in it. Fee Simple is the most absolute (very much like what we would call ownership) ... where an easement or profit or license is another type of interest in land, that grants a different type of right, a right of USE.

ON the lien, your assumption is correct. That whole section is about the exception that is created for lienholders who did not receive notice:

"
(ii) A holder of a security interest (as defined in paragraph (a) of §(NNN) NNN-NNNNh)–1) in the security who did not have actual notice or knowledge (as defined in paragraph (a) of §(NNN) NNN-NNNNi)–1) of the existence of the lien at the time the security interest came into existence or at the time such security interest was acquired from a previous holder for a consideration in money or money's worth; or..."

26 C.F.R. §(NNN) NNN-NNNNb)–1

That's you... the section of the code itself is TITLED ...

"§(NNN) NNN-NNNNb)–1 Protection for certain interests even though notice filed."

All three... point out all three ... attack on all fronts..
Say" referencing 6323(h)(4) SECURITY "I own ...," then "FURTHER, referencing 6323(h)(1) my interest ..." and what's more, I am covered directly under §(NNN) NNN-NNNNb)–1"


Customer: replied 1 year ago.

Thanks Lane. You have been a tremendous help. Final question (we hope!) and thought!. Your last response included no mention of the IRC. 6323(b)(6) REAL PROPERTY TAX etc. Should I include this clause along with the other 3 points you mention at end of your last response? If so, suggested wording?


 


Attacking with those 3 points is a slam dunk. My only concern is IRS claims that "security" and "security interest" only apply to securities in the more common sense, as in the stock/bond universe (all of the examples in IRC 6323(b)-1 are such) Or could claim they does not apply because of the separate Real Property Tax clause 6323(b)(6).



Do you have any thoughts on that.


 


 


 


 


Expert:  Lane replied 1 year ago.

Yes, sorry, that one is a given - (6) Real property tax and special assessment liens.

26 U.S.C.A. § 6323 (West)



And no, Security interest and security are applicable because you have invested in the lien.

Maybe this will make you feel better: http://en.wikipedia.org/wiki/Lien

Also see this: http://www.investopedia.com/articles/investing/061313/investing-property-tax-liens.asp




Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4379
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Hi,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane

(Positive feedback appreciated)
Customer: replied 1 year ago.

Lane:


 


Thanks for your followup. In process of presenting argument to the IRS. Hitting hard on the fact that liens are not valid based on "lack of notice or knowledge" on date I took security interest (day of tax sale).Since the 2 liens were filed after that date, I could not possibly be aware of them on that date! IRS seems to be hanging on their own terminology, hinting they do not think these definitions apply to real estate issues. Using their own terminology I stated security was the "certificate" issued by county "government" and is a " negotiable instrument. On security interest, I stated the tax certificate is a "contract; used for the purpose of "securing payment" of outstanding property taxes. I may throw some other definition sources like legal dictionary to see if I can sway them.


 


Will keep you posted. Any additional thoughts?

Expert:  Lane replied 1 year ago.

No, it sounds like you have your arms around it.

One thing that might buy you more time (although this is typically a path for those who have personal non-payment of tax issues, is to make an appeal to the appeals division of IRS ...

Would be unorthodox, but might get you out of being locked into a certain personality and give you someone else to talk to.

See this: Publication 1660, Collection Appeal Rights

Sometimes this can be a way to stop the locomotive AND you are the subject of a lien or levy, albeit indirectly.... From Pub 1660:

"You may appeal many IRS collection actions to the IRS Office of Appeals (Appeals). Appeals is separate from and independent of the IRS Collection office that initiated the collection action. Appeals ensures and protects its independence by adhering to a strict policy of prohibiting certain ex parte communications with the IRS Collection office or other IRS offices, such as discussions regarding the strengths or weaknesses of your case"

... doesn't change anything we've talked about, it just might be a way to diversify your METHOD of dealing with them.

Lane
Customer: replied 1 year ago.

Already there (sorry I failed to mention before). I submitted a discharge of lien request that they rejected based on lack of notice from the county. I am now dealing with a CAP Appeals advisor. Definitely a better method of dealing as I now at least have a back and forth with one individual. He is at least giving some creedance to my argument. I hope to hear back from him shortly and will keep you posted

Expert:  Lane replied 1 year ago.

Sounds good.

Good luck!

Let me know if I can help further.

I'll close this one out now.


If you'd like to work with ME again just say "FOR LANE ONLY," at the beginning of your next question.

Thanks again,
Lane
Customer: replied 1 year ago.

Fair enough..thanks again

Expert:  Lane replied 1 year ago.


Thanks.

Hope you'll understand.

This was a lot of work for $15

Thanks again for the business,
Lane
Customer: replied 1 year ago.

Seriously? Sorry I did not know how it worked for you. I just signed up for the 5 question deal. In the future, we will do one question at a time. I will make sure I put FOR LANE ONLY, in my followups to this and we can do one at a time.

Expert:  Lane replied 1 year ago.


No worries, I DO enjoy the work...

But yes, they DO take their piece :)

Thanks for that.

Lane

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Lane
Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986