When a Federal tax lien for one person is erroneously filed against another person’s property, that tax lien may cause an escrow company to pay the other person’s tax. To preserve the ability to challenge the tax lien’s attachment to this property, it is important that the proper procedures be followed. Otherwise, if you pay first and then attempt to file a refund claim as a third party, you may run into jurisdictional barriers. Courts have held that, in such cases, the remedy is not to file an administrative refund claim and a refund suit, but is exclusively to utilize the procedures under 26 U.S.C. §§ 6325(b)(4) and 7426(a)(4) by depositing with the IRS money or a bond equal to the value of the IRS’ interest and filing suit within 120 days.
The release or discharge of property from a federal tax lien is governed by 26 U.S.C. § 6325, titled, “Release of lien or discharge of property.” Paragraph (b)(4) of that section, entitled, “Right of substitution of value,” provides in subparagraphs (A) and (B):
(A) … At the request of any owner of property subject to any lien imposed by this Chapter, the Secretary shall issue a certificate of discharge of such property if such owner –
—(i) deposits with the Secretary an amount of money equal to the value of the interest of the United States (as determined by the Secretary) in the property; or
—(ii) furnishes a bond acceptable to the secretary in a like amount.
(B) Refund of Deposit with interest and release of bond.
The Secretary shall refund the amount so deposited …, and shall release such bond, to the extent that the Secretary determines that –
* * * *
—(ii) the value of the interest of the United States in the property is less than the Secretary’s prior determination of such value.
The request is made by submitting an application for certificate of discharge.[fn1] The regulations under section 6325 require the application to contain the information requested in the appropriate IRS publication.[fn2] IRS Publication 783, “Instructions on how to apply for Certificate of Discharge From Federal Tax Lien,” lists the required information and attaches the application form – IRS Form 14135, “Application for Certificate of Discharge of Property from Federal Tax Lien.” See www.irs.gov/pub/irs-pdf/p783.pdf. The correct deposit amount is determined by the IRS, as required by 26 U.S.C. 6325(b)(4)(A)(), taking into account the property’s value and encumbrances with priority over the tax lien.[fn3] When such amount is “submitted pursuant to the application,” it is treated as the deposit.[fn4]
Once the application is made and the appropriate sum is deposited with the IRS, the IRS has no discretion to refuse to issue the certificate of discharge.[fn5] In short, the difference between a third party who utilizes the administrative remedy under section 6325(b)(4) and obtains the discharge and one who gets the lien discharged by simply paying the taxes in full is the submission of an application for certificate of discharge prior to making the payment.
fn1. Treas. Reg. § 301.6325-1(b)(4).
fn2. Treas Reg. § 301.6325-1(b)(5).
fn3. Treas. Reg. § 301.6325-1(b)(6).
fn4. Treas. Reg. § 301.6325-1(b)(5).
fn5. WSB Walnut Assocs. v United States, 2006-2 U.S. Tax Cas. (CCH) P50,418, n. 5, 97 A.F.T.R.2d (RIA) 2553, n. 5, 2006 U.S. Dist. LEXIS 31793, n. 5 (N.D. Cal. 2006) (explaining how plaintiffs utilized section 6325(b)(4) and 7426(a)(4) to obtain jurisdiction).
The author of this blog post, Daniel W. Layton, is a former federal prosecutor and former IRS trial attorney. As an extern with the United States Attorney’s Office for the Northern District of California in San Francisco, he was involved in drafting motion work for WSB Walnut Associates v. United States. In addition, as an Assistant United States Attorney for the Central District of California in Los Angeles, he was the attorney of record for the government in Schuyler v. United States, 2012-1 U.S.T.C. ¶50,268, (Dec. 19, 2011), 2011 WL 7463964, involving a jurisdictional issue over third party refund claims when the deposit and discharge procedures were not utilized.