Seeking a Discharge of the Federal Tax Lien

The case of Long v. United States, Dk. No. 2:22-cv-00176 (D. Utah 2023) examines the request for a discharge of the federal tax lien and declines to provide the relief requested. The factual background for the request for relief does not arise with great frequency but comes up often enough and always makes me feel bad for the spouse stuck with the tax liability of their ex-spouse because ex-spouse’s unpaid taxes have caused a lien to arise and attach to property now owned by the non-liable spouse who thought they had extricated themselves from their former partner’s financial shortcomings.


Ms. Long filed married filing separate returns while she was married.  That suggests she had some insight into her former husband’s finances.  She paid her taxes and he did not.  They owned some real estate jointly.  The IRS filed a notice of federal tax lien (NFTL) against Mr. Long in the county where the property was located.  The filing of the NFTL perfected the lien interest of the IRS.

Mr. and Mrs. Long divorced at some point after the filing of the NFTL and she was awarded the property through a divorce decree.  The opinion does not say what she knew or did not know about the NFTL at the time of the award.  I hope that her divorce attorney, if she had one, would have helped her to understand the impact of the NFTL on the value of the property she received but that’s not clear.

After receiving the property, she requested a discharge of the lien; the IRS turned her down and she brought suit.

It’s worth taking a moment to digress from the case to discuss discharge in order to understand what she requested of the IRS.  Many practitioners mix the concept of release and discharge when thinking about liens.  In the context of the federal tax liens the two terms have distinct meaning.  A release of the federal tax lien signifies satisfaction of the liability or unenforceability of the liability usually because of the expiration of the statute of limitations.  Section 6325(a) governs release.  Ms. Long did not seek a release and she made the right choice of remedies in requesting a discharge.

A person seeking a discharge of a federal tax lien does not need to show that the taxpayer satisfied the tax liability giving rise to the lien or that the tax liability has become unenforceable. The IRS grants a discharge when it has a lien against all of taxpayer’s property but the taxpayer, or a third party, seeks to move the lien from a specific piece of the property encumbered by the lien.  Here, Ms. Long sought to remove, or discharge, the federal tax lien from the property she received as part of the divorce; however, granting her a discharge with respect to that property would not remove, or release, the federal tax lien from all of Mr. Long’s property.

In deciding whether to grant a discharge the IRS looks to IRC 6325(b).  That section provides a few paths to discharge.  The most common path to discharge results when the applicant fully pays the IRS its lien interest in the property or shows that the IRS has no lien interest.  This path to relief is set out in IRC 6325(b)(2)(A) [paying the IRS its interest in the property] and (B) [showing the IRS it has no lien interest in the property] and happens routinely in the sale of real estate.  When someone whose property is encumbered by the federal tax lien which has been perfected by an NFTL seeks to sell, the seller requests a discharge so that the purchaser can obtain a clean title.  At closing, the closing agent calculates the value of the tax lien in the property, pays the IRS and the IRS issues a discharge.  This happens multiple times every day.

Ms. Long chose a harder path to discharge since she did not offer to pay the IRS the value of its lien interest in the property.  She asked the IRS to remove the lien because the property she received in the divorce did not have value for the IRS.  The opinion does not talk about the value of the IRS lien interest in the property.  I strongly suspect the property had some equity to which the tax lien attached.  If it did the IRS would turn down a discharge request submitted without payment of that value.  She looked to the language of the statute that said the IRS “may” issue a discharge, but it doesn’t issue a discharge where value exists unless the party requesting the discharge remits an amount equal to that value.

Another possible path to discharge exists which Ms. Long did not pursue.  Under IRC 6323(b)(1) the IRS may discharge property if the taxpayer’s remaining property has at least double the value of the outstanding liability.  She didn’t choose this path because, I suspect, Mr. Long’s remaining property did not provide the IRS with the cushion required by the statute.

Having failed to convince the IRS to administratively discharge the lien from her property and no doubt being quite displeased with owning property encumbered by a lien for her ex spouse’s tax liability which she probably suspected he would not pay, she brought suit against the IRS seeking a court to order the IRS to discharge the lien.  This suit seems like a bad idea to me, and it did to the court as well.  I feel sorry for Ms. Long because she did not receive what she hoped for out of the divorce settlement; however, a transfer of this type simply doesn’t remove the lien.

She initially brought a quiet title action under 28 USC 2410 in which she also sought damages from the IRS under IRC 7432 for refusing to discharge the lien administratively.  The IRS moved to dismiss her claim.  The court agreed with the IRS since the federal tax lien attached to the property and nothing in IRC 6325(b) required the IRS to issue a discharge.  With respect to the claim for damages, the court said she could not show the refusal was unlawful.  Aside from the fact that the IRS refusal to discharge the lien appears correct on these facts, IRC 7432 does not apply in this situation.  It provides a basis for seeking damages if the IRS fails to release a lien.  It provides no relief for failure to discharge a lien.

After that loss she decided to back up and try again.  She filed a motion to amend her complaint and seek a declaratory judgment.  She wanted the court to order that the liens had no value.  The IRS objected to the amendment because the court lacked subject matter jurisdiction and because she failed to state a claim on which relief could be granted.  The court denied her request to amend as futile explaining that it lacked subject matter jurisdiction over her request.

The case demonstrates the need to understand the true value of property you receive in divorce.  It also shows the near impossibility of trying to force the IRS to discharge a lien under the no value provision of 6325(b) if value exists or if the IRS perceives that value exists.  Ms. Long doesn’t have any good options here.  She can wait out the statute of limitations on collection.  If the real property at issue is her home, a good chance exists that the IRS will not foreclose its lien interest in the property.  If she needs to sell the property before the expiration of the collection statute, the discharge provisions will come back into play since the purchaser will want clear title.  She will receive from the sale the equity in the property after payment of the value of the IRS lien interest.

Avoiding the Federal Tax Lien in Bankruptcy

In United States v. Warfield (In re Tillman), No. 21-16034 (9th Cir. 2022) the Ninth Circuit reversed the lower courts and determined that the chapter 7 trustee could not avoid the federal tax lien on the debtor’s homestead.  The trustee filed a motion for rehearing en banc and the 9th Circuit has ordered a response from Appellant by December 4.  A copy of the response is attached here.  So, the discussion below may not be the end of the story.


Ms. Tillman purchased a house in Prescott, Arizona.  Prior to the filing of the bankruptcy petition the IRS filed a notice of federal tax lien on the property stemming from a penalty she owed.  Ms. Tillman claimed a $150,000 homestead exemption in the house under Arizona law.  The trustee sued to avoid the tax lien on the exempt property in order to obtain the benefit of the lien for the bankruptcy estate.  At the time of the bankruptcy, she had paid off the underlying taxes set out in the lien notice but owed about $25,000 in penalties.

The issue pits different bankruptcy codes sections against each other that deal with exemptions and with the treatment of penalties in chapter 7 cases.

BC 522 generally permits a debtor to claim certain property as exempt.  The amount of property is almost always dictated by the state in which the debtor lives at the time of filing bankruptcy.  Arizona has a generous homestead provision which Ms. Tillman claimed.  Under almost all circumstances a debtor gets to keep the exempt property which cannot be used to satisfy the claims of creditors in the bankruptcy case; however, claiming property as exempt protects it from the claims of unsecured creditors not those who have a security interest in the property claimed as exempt.

BC 522(c)(2)(B) holds that exempting property does not protect it from a tax lien where the IRS has properly filed the notice before the bankruptcy petition.  The notice of federal tax lien would not specifically mention a taxpayer’s real estate but attaches to all property and rights to property belonging to the taxpayer.  To perfect the lien against a taxpayer’s real estate, the IRS would need to file the lien in the locality in which the property was located.  If, prior to the filing of a bankruptcy case, the IRS filed the notice in the city or county in which the property was located and if the notice properly identified the taxpayer, the IRS would have a perfected lien that would survive the debtor’s attempt to claim the property as exempt.  It would not receive payment for its lien in the bankruptcy case but would have the ability to pursue the property after bankruptcy.  Because the IRS is reluctant to administratively or judicially take taxpayer’s homes, sometimes taxpayers get to keep their homes safe from other creditors because of the federal tax lien’s priority, and then the IRS never pursues the property allowing some lucky taxpayers to walk away from both their tax obligations and their other debts.

Chapter 7 trustees do not have the same reluctance or policies regarding debtor’s homes that the IRS does.  The trustees carefully review debtor’s schedules and other available information to determine if selling the debtor’s home or other assets would bring a benefit to the unsecured creditors of the bankruptcy estate (as well as a commission to the trustee.)  Here, the trustee sought to use the existence of the tax lien combined with BC 724 and 726(a)(4) to sell the property for the benefit of the unsecured creditors.

BC 724(a) says that a chapter 7 trustee can avoid a “lien that secures a claim of a kind specified in section 726(a)(4)” for the benefit of the estate.  BC 726 describes how property in a chapter 7 case should be distributed to creditors, providing first for claims listed in BC 507 which would include the unsecured claims to which Congress has given priority, second to unsecured claims with no priority, third to unsecured claims filed late, and fourth to claims for penalties, whether secured or unsecured.

The trustee reasoned that because the underlying tax had been paid, the IRS’s claim (secured by the notice of federal tax lien) was merely a claim for a “penalty” within the meaning of BC 726(a)(4), and therefore under BC 724 the lien could be avoided.  The bankruptcy code disfavors penalty tax claims allowing the avoidance of the liens for these claims through the procedures described in BC 724 and 726.

However, the trustee had one more hoop to jump through: under BC 551 the property preserved must be property of the estate. This requirement was key to the government’s argument.  Section 551 comes immediately after the bankruptcy code provisions allowing for the avoidance of certain transfers.  It seeks to preserve the property avoided for the bankruptcy estate unless the property would not have met the definition of property of the estate described in in BC 541.  In other words, the avoidance provisions cannot transform property that would otherwise have remained outside the estate into property of the bankruptcy estate.

The bankruptcy and district courts held that the trustee could avoid the federal tax lien, rejecting:

The government’s argument that the court’s holding would cause inequitable results for the Debtor, because the Debtor’s exemption could be reduced twice as a result of the same lien—first, as a deduction from the amount that Debtor could exempt, and then, again, when the Debtor is required to satisfy the value of the lien to the IRS. The Bankruptcy Court reasoned that the Debtor would not have to unfairly pay twice on the same lien because the IRS Tax Lien “never attached to the Debtor’s homestead exemption.” “[T]he value of the Debtor’s exemption was always subordinate to the Tax Lien” and “[w]hen the Tax Lien is avoided, the Trustee steps into that avoided position.” Therefore, the court explained, “[i]f it so happens that the IRS’s now unsecured claim is also nondischargeable, it is no different than any other nondischargeable claim which will need to be paid by the Debtor.”  

Essentially, the IRS argued that the debtor’s homestead exemption withdrew the exempt property from the bankruptcy estate which would mean it is unavailable for the unsecured creditors of the estate.  The Ninth Circuit finds that:

When a debtor properly exempts a property interest under § 522, the exemption withdraws that property interest from the estate and, thus, from the reach of the trustee for distribution to creditors….

In reaching our holding, we conclude that the Bankruptcy Court erred by overlooking the key question of first impression before us: whether a trustee may use § 724(a) to avoid a lien secured by a debtor’s exempt

property. The Bankruptcy Court did not analyze this question. Instead, the Bankruptcy Court appears to have assumed that the Trustee could use § 724(a) to avoid a lien on the Debtor’s exempt property.

The majority was especially concerned that its result kept the debtor from having to pay the debt twice.  The majority took pains to distinguish the decision in Hutchinson v. IRS (In re Hutchinson), 15 F.4th 1229 (9th Cir. 2021).  I wrote about the bankruptcy and district court opinions in that case here and here.  It’s difficult to find a light of daylight between the two opinions except that the government did not raise the issue in Hutchinson but merely conceded that the result the trustee sought could attach.

I agree with the majority in Tillman.  While it may look like the avoidance provision seeks to preserve property for other creditors, in this instance applying the law as was done in the lower court opinions puts debtors in the bad position of paying twice since the exempt property will now be used to pay unsecured creditors who would otherwise not have the opportunity to get paid from this property while the debt owed to the IRS is not extinguished and can be collected after the bankruptcy.  The existence of the tax lien should not create a benefit for the unsecured creditors.

The dissent looks to the powers of the trustee to avoid liens and to the position of the IRS when it has a lien claim.  It finds the majority’s concern with the consequence of avoidance of the lien to be a troubling result does not matter because what matters is the language of the bankruptcy code.  The defense finds that the plain text supports the position of the lower courts.

Contrary to the IRS and majority’s view, the trustee’s authority to avoid a federal tax penalty lien isn’t nullified because it encumbers exempt property. The majority incorporates § 726’s reference to the distribution of the “property of the estate” to bar a trustee’s avoidance authority. The IRS instead relies on § 551’s limitation of preservation of liens “only with respect to property of the estate.”

This issue will not go away easily and may soon result in a successful Supreme Court petition.

Ken Weil, who knows a lot more about tax issues in bankruptcy than me and who occasionally writes guest posts for PT, sent me this case.  When I sent him my draft, he offered these comments which provide a slightly different, and probably better, perspective on the case:

The IRS objected to the trustee’s use of BC 724(a), presumably because it determined that collection of the nondischargeable tax penalty would be more difficult without the NFTL attached to the property. The tax year at issue was 2015.  The taxpayer filed for bankruptcy in January 2019.  Tax penalties in Chapter 7 are dischargeable after three years from the due date of the return, including extensions, for the failure to file penalty, or three years from the payment due date for the failure to pay penalty.  BC 523(a)(7); and see United States v. Wilson, No. 15-1448, Docket entry No. 10 (N.D. Cal. 2016) (opinion withdrawn as parties settled) (tax year at issue 2008; petition filed July 2012; 2008 return filed on extension; parties agreed that failure-to-pay penalty was discharged; held, failure-to-file penalty not discharged).  One has to wonder why the bankruptcy filing was not delayed until after April 15, 2019, at the least. 

The IRS argued that exempt property is not property of the bankruptcy estate.  Schwab v. Reilly, 560 U.S. 770, 775-776 (2010).  For avoidance to be available to the trustee, BC 724(a) and 551 require that the property in question be property of the bankruptcy estate. 

More precisely, an exempt interest in property is not property of the bankruptcy estate.  Schwab v. Reilly, 560 U.S. 770, 794-795 (estate retained interest in property beyond the exempt amount) (2010).  In other words, while the value of the homestead left the bankruptcy estate, the rest of the house remained in the bankruptcy estate.  In that situation, what is the property of the estate?  Does the trustee have the authority to use BC 724(a) if the part of the real property against which the trustee can avoid the IRS lien is out-of-the-bankruptcy estate yet the property itself remains property of the bankruptcy estate?  Without diving into the Schwab v. Reilly issue, the Circuit Court found that the applicable property interest was not property of the estate, and BC 724(a) was not available to the trustee.  The dissent felt that the house was property of the estate, and, under the literal terms of the statute, the IRS lien could be avoided.

As a policy matter, the IRS argued, and the lower courts agreed, that allowing the trustee to avoid the lien as to the homestead would cause a double payment by the taxpayer.  This is a true statement, but also this argument is a red herring.  If the secured tax obligation is nondischargeable, there is always the potential for a double payment, regardless of whether the property at issue is exempt property.  The first payment is made from property that otherwise would have paid the tax debt, and that money is spread among all creditors.  The second payment potentially comes postpetition from the debtor to the taxing authority because the debtor’s tax obligation was not discharged.

Here, the trustee could have potentially avoided the issue at-hand by timely filing an objection to the homestead exemption.  Then, the argument as to whether the homestead interest had left the bankruptcy estate would not have been available.  Instead, the argument would be whether the trustee can object to the exemption because the trustee has rights in the property under BC 724(a).

Ken also offered the following fact pattern as a way to think about the problem:

Suppose, Taxpayer

>Files for bankruptcy;

>Taxpayer has a nice car;

>Taxpayer makes a claim of exemption in an interest in that car, which exemption claim does not cover the entire value of the car, and the trustee does not object; and

>The IRS only has a FTL and not a NFTL.

The claim of exemption would scrub the FTL from that interest in the car but the FTL would remain attached to the rest of the car, which is property of the bankruptcy estate and subject to the trustee’s control.

Don’t know that there is anything to come of this because the trustee can avoid the FTL.  But, I suppose the trustee could decide the car was not worth administering and abandon it.  Then, the debtor gets the car back, and it is partially lien-free and partially subject to the FTL.

Some Interesting Data from this Year’s TIGTA Federal Tax Lien Filing Review

In the Restructuring and Reform Act of 1998 Congress required the Treasury Inspector General for Tax Administration (TIGTA) to conduct annual reviews of certain IRS activities.  The law requires TIGTA to annually determine if the notices of federal tax lien (NFTL) the IRS files comply with the requirements of IRC 6320.  This year TIGTA had some findings about the IRS lien filing that might be of interest.

I will start with the one TIGTA mentioned last which concerns the liens the IRS chose not to file.  The IRS has pegged $10,000 in tax debt as the point at which it will generally file an NFTL.  I think that dollar amount is too low and that the IRS should generally not file the NFTL until the amount rises to about $25,000 or more. If the taxpayer owes $10,000 or more the general guidance from the IRM would cause someone at the IRS to trigger the filing of the NFTL unless there is a decision not to do so. 


It could also just be that NFTL filings are down in the year covered by the report because of the pandemic.  Almost certainly the pandemic plays a role.  Here is a chart showing the number of NFTLs filed in the past five years: 

TIGTA created a detailed chart showing the amount owed for the 1,337,932 individual and business taxpayers who owed more than $10,000 at the time of their review. 

TIGTA also did a cross reference to cases with balances due where a Form 1098 for mortgage interest was reported since real property ownership is generally where the IRS gets the biggest bang for its buck with the NFTL. 

The failure to file the NFTL in these cases, particularly the ones over $100,000, suggest the IRS may lose an easy opportunity to collect on its outstanding debt.  The cost of filing and servicing the NFTL is low compared to the possible return on the investment in cases where it is known that the taxpayer owns real property.

Because of the low number of revenue officers, most cases with liabilities below $75,000 or $100,000 are handled by the Automated Call Sites (ACS) and not by Revenue Officers (RO).  This means that decisions on many NFTL filings are made by people with less collection experience.  It appears that the IRS is failing to make a decision and failing to file the NFTL.  The failure to file the NFTL may be good for the first category of cases in the chart.  Perhaps this reflects a de facto decision by the IRS that it’s not worth the time and effort to try to file a lien but it could also be bad for the other cases in the chart where there are a decent number of high dollar delinquent accounts where the IRS does not perfect its priority by filing the NFTL.  I cannot imagine why the IRS would not file the NFTL on almost all of the 3,000 cases over a million dollars in delinquent debt.

In addition to the finding that the IRS is neglecting to file the NFTL, the report made a few other findings of significance.  When the IRS files an NFTL for the first time in a tax year, it must provide the taxpayer with Collection Due Process (CDP) rights.  Unlike the notice sent with respect to levies, the notice in lien cases is sent after the filing of the NFTL in order to keep taxpayers from selling or encumbering property before the IRS files the NFTL. TIGTA found that the Collection failed to send the CDP notice to the correct address in 5 of 34 cases in which the notice went undelivered.  This makes it hard for taxpayers to contest the filing of the NFTL.

In addition to failing to send the CDP notice correctly to taxpayers, TIGTA found that the IRS did not send the notice to the taxpayer’s representative in six of 57 sample cases – about 11% of the time.  The failure to notify the representative severely compromises a taxpayer’s ability to request a CDP hearing within the short 30-day time period provided in the statute.  It will be interesting to see how this might play out after Boechler when taxpayers request additional time because of the failure of the representative to receive notification.

The study found that the IRS fails to do the appropriate research to find the taxpayer’s current address and to find information regarding taxpayer’s representatives. These should not be difficult things to fix but these should not be items that need fixing at this point.

In cases where the IRS fails to send the NFTL notice to the taxpayer’s last known address the taxpayer’s ability to get a CDP hearing would be impacted but the validity of the notice would not be impacted.  I know of no cases striking down the notice as invalid based on a failure of notice to the taxpayer after the filing of the NFTL. 

Once the bad mailing came to light the taxpayer should receive another letter which would trigger CDP rights or should be able to come into the CDP process more than 30 days after the bad mailing.  When I say bad mailing I mean a mailing where the notice to the taxpayer of the filing of the NFTL was not sent to the taxpayer’s last known address.

Some of the cases in which the taxpayer did not receive the notice in the TIGTA report may have been situations in which the IRS would win on whether the notice was sent to the taxpayer’s last known address.  TIGTA did not get into the weeds on the validity of the notice from that perspective.

If the IRS sent the letter to the taxpayer’s last known address but the taxpayer did not receive the letter, there should be no question about the validity of the NFTL.  The ability of the taxpayer in that situation to obtain a CDP hearing might depend on where the equitable tolling case law in CDP cases goes.  TIGTA rightly points out that maybe the IRS should try to reach out to taxpayers when it learns that their “last known address” was not in fact their address because the correspondence was returned.  Deciding how far to go in these situations has long been a challenge for the IRS.

Maybe the report is good news for those taxpayers who have not had a NFTL filed against them.  If they are lucky, the statute of limitations on collection will run before the NFTL is filed or the IRS takes other collection action.

Filing a Notice of Federal Tax Lien For Personal Property

Today PT contributor Bob Probasco brings us a recent case that demonstrates the value of verifying that the IRS followed proper procedures in filing a Notice of Federal Tax Lien.

A recent decision by a bankruptcy court, In re: Vanessa Catherine Stephenson, (docket no. 21-22684 in the Western District of Tennessee), is a reminder of potential pitfalls for the IRS when filing a notice of federal tax lien (NFTL).  The IRS identified part of its claim as secured by the debtor’s personal property, based on an NFTL filed on August 21, 2018.  The debtor/taxpayer objected, arguing that the entire claim was unsecured because the NFTL was not filed properly and did not attach.  The court identified this as issue of first impression.  After two hearings and additional briefing, the court agreed with the debtor.  The NFTL was filed in the wrong county and therefore not effective/invalid.  The entire IRS claim was unsecured.



Ms. Stephenson moved around the country a lot during 2016 – 2018: Longmont, Colorado; Fort Mills, South Carolina; Keeling, Virginia; Semora, North Carolina; and finally Shelby County, Tennessee, where she resided when the NFTL was filed.  However, she filed her 2017 tax return using her mother’s address, in Benton County, Tennessee.  She also used that address for employment purposes and as a result received W-2s showing that address.  The IRS, using the information it had, filed the NFTL in Benton County rather than Shelby County.

Where to file an NFTL

Section 6323(f)(1) specifies that an NFTL is to be filed in the appropriate office of the state (or county or other subdivision), as designated by the state, where the property is situated.  Where is the property situated?  Section 6323(f)(2) specifies that as the physical location (for real property) or the taxpayer’s residence at the time the lien is filed (for personal property). 

Corwin Consultants, Inc. v. Interpublic Group of Cos., 512 F.2d 605 (2d Cir. 1975) pointed out that prior to the Federal Tax Lien Act of 1966, there was “some dispute as to where personal property, both tangible and intangible, was situated” but in most cases intangibles were located at the taxpayer’s domicile.  For section 6232(f)(2), the drafters deliberately chose residence instead of domicile “because of the difficulty in determining a person’s domicile, based as it is on (among other things) his state of mind” (quoting the legislative history).  The district court in Corwin decided that the debtor/taxpayer’s residence could not be determined but treated the NFTL as valid because of due diligence and substantial compliance by the IRS. 

The Second Circuit rejected that decision as premature and remanded for the district court to try again to determine the facts.  It acknowledged that might not be obvious, because residence “when used in a sense other than domicile, is one of the most nebulous terms in the legal dictionary.”  It also noted the importance of other creditors receiving notice as to possible claims by the IRS.

In light of this purpose, the residence of a delinquent taxpayer is a question of fact to be determined by various criteria: Among them are the taxpayer’s physical presence as an inhabitant and not a mere transient; the permanence of that presence; the reason for his presence; and the existence of other residences.  In general, for this statute, where a taxpayer resides is where he dwells for a significant amount of time and where creditors would be most likely to look for him.  What proportion of time is “significant” is not capable of exact definition and must be determined on a case by case basis, at all times keeping the purpose of the filing requirement in mind.

One of the judges on the Corwin panel concurred with remanding to the district court but disagreed with the burden of proof (or reasonable effort/due diligence) that should be placed on the government.  He would have construed section 6323(f)(2)(B)

to mean that, where the government cannot through reasonable inquiry ascertain a taxpayer’s actual residence, it may satisfy the statute’s requirement by filing notice of its judgment lien with the state-designated office within the jurisdiction of the taxpayer’s last known or verifiable abode.  This practical construction seems to me to be in accord with the purpose of the statute, which is to put other creditors on notice, since they too would be most likely to inquire about liens in the county of the last residence of the taxpayer that could be ascertained by reasonable effort.

It would not be enough, though, to rely on the last address shown on IRS tax records, which can’t readily be determined by other creditors.  Additional effort would be required to determine the “last publicly known address of a taxpayer.”  The concurring opinion did not go into further detail.

Compare to notices of deficiency

Even the standard set forth in the Corwin concurring opinion is more challenging that the IRS requirement for mailing a notice of deficiency.  Section 6212(b)(1) specifies that the notice of deficiency for income taxes, with limited exceptions, be sent to the “last known address.”  Absent clear and concise notification by the taxpayer, courts allow the IRS to use the address on the taxpayer’s most recently filed tax return.  (For the definition of “last known address” and how taxpayers can provide the clear and concise notification, refer to Regulation § 301.6212-2 and Rev. Proc. 2010-16.  It’s also worth revisiting Audrey Patten’s PT post on the Gregory case.)

Courts generally impose an obligation to do more only if the IRS becomes aware of an address change prior to mailing the notice.  For example, if the notice itself is returned by the Post Office, the IRS may try to find a different address – but the Tax Court will not require the IRS to do that.  Tucker v. Commissioner, T.C. Memo 1989-408 has a good summary of caselaw on this.  It also describes a few practices the IRS may use to find a different address: rechecking IRS records, checking with credit rating agencies, and checking with the Post Office for a forwarding address.

It is reasonable to treat notices of deficiency and NFTLs differently in terms of how much effort is required from the IRS.  The “last known address” rule for notices of deficiency protects only the taxpayer.  If the taxpayer has not notified the IRS of a new address, or taken steps to have mail forwarded, it’s only the taxpayer injured by that inaction.  The “residence” rule for NFTLs is primarily aimed at protecting other creditors.  They don’t have access to IRS records, to know where the IRS might have filed an NFTL and would be disadvantaged if they don’t realize the IRS is likely to, and can, file elsewhere.

Back to the Stephenson case

The IRS argued that it should be entitled to use the mother’s address for the NFTL because Ms. Stephenson had “held out” that as her home address on tax returns and W-2.  The court rejected that argument because it  found “no binding legal support that the IRS was entitled to use the address Ms. Stephenson held out as her home address as the place Ms. Stephenson resided when it was not in fact the address where she physically resided.”  It cited another bankruptcy case, affirmed by the Eleventh Circuit, that rejected the “last known address” interpretation because it would “read . . . additional language into the statute.”  (It also referred to the concurring opinion in Corwin.)  Based on the testimony at trial, Ms. Stephenson did not reside in Benton County when the NFTL was filed there.  The NFTL was invalid and the entire IRS claim was unsecured. 

Even if this was a “case of first impression,” I think the opinion is consistent with most practitioners’ understanding or interpretation of the statute.  It creates problems for the IRS, for example, when the taxpayer has moved but not yet filed a tax return.  This case points out another example, when the taxpayer doesn’t use her actual residence for her tax returns.  That may not be common, but it certainly happens.  Whether it’s worth additional IRS effort to identify the taxpayer’s actual residence before filing the NFTL, or it’s better to just lose occasional bankruptcy disputes over priority, is another question.

The process is intended to provide notice to parties who subsequently provide the taxpayer credit (or purchase real property).  If such parties wouldn’t be able to find the NFTL through a lien search, the IRS should not be given a place in the line ahead of those parties.  Courts generally won’t apply a strict compliance standard.  They focus on whether a purchaser or subsequent creditor could have found the lien, even with some errors in the lien filing, through reasonable care and diligence during a search.  Here’s an example: U.S. v. Z Investment Properties, LLC, 921 F.3d 696 (7th Cir. 2019).

The “residence” rule generally does a good job of protecting other creditors; at least the lien will be reported in the proper county.  However, it’s not perfect.  Even if the IRS has the right address initially, that won’t help later creditors after the taxpayer has moved.  Filing the NFTL in the county where the taxpayer resides at the time means it will attach to the personal property even after she moves.  But other creditors in the new location would have no warning that they needed to check lien registries in previous places the taxpayer lives.  That’s not the only problem with notice of a lien, but it’s a significant one.  Keith’s proposal of a national tax lien registry seems a much better solution for both the IRS and other creditors.

Power of Federal Tax Lien

Before discussing today’s case, I want to provide some information on a fellowship opportunity that Tax Analysts (the publisher of Tax Notes) is generously sponsoring in partnership with the ABA Tax Section.  This new two-year Fellowship will fund an attorney to work at a non-profit agency. Unlike other fellowships, this one is geared towards seasoned attorneys including those seeking to move into the public interest sector. In future years, the Fellow will select the public interest sponsoring organization. For this inaugural year, Tax Analysts selected the organization, The La Posada Tax Clinic in Twin Falls, Idaho. Run by Bob Wunderle, the clinic – and Bob — do amazing tax controversy work with the farm worker community in that area. Bob is a national leader in this practice.  You can learn more about Bob’s cutting edge work by listening to the podcast which is part of the Tax Notes Talk series. This is a unique opportunity in a beautiful part of the country. Application materials are available here.  Keith

The recent case of United States v. Sadig, Dk. No. ___ (N.D. Ill. 2022) demonstrates the power of the tax lien and tells a sad tale regarding a home that once was.  The district court provides a thorough explanation of the lien interest of the IRS in reaching the conclusion that the property to which the lien attaches may be sold.


Before moving to a discussion of the lien interest, I want to mention the local rule regarding summary judgment that exists in the Northern District of Illinois.  The IRS moved for summary judgement here.  Because Mr. Sadig was pro se, the local rule required the IRS to explain to him what he must do to respond to the motion:

Local Rule 56.1 governs the procedures for filing a motion for summary judgment. The moving party must file a “statement of material facts that complies with LR 56.1(d) and that attaches the cited evidentiary material.” See L.R. 56.1(a)(2). “Each asserted fact must be supported by citation to the specific evidentiary material, including the specific page number, that supports it.” See L.R. 56.1(d)(2).

Local Rule 56.1 also explains how to respond to a motion for summary judgment. The non-moving party must file a “response to the LR 56.1(a)(2) statement of material facts that complies with LR 56.1(e).” See L.R. 56.1(b)(2). That response “must consist of numbered paragraphs corresponding to the numbered paragraphs” of the movant’s statement of facts. See L.R. 56.1(e)(1). So, by way of illustration, imagine if the movant filed a statement of material facts with 15 paragraphs. The non-movant must file a response that addresses each of those 15 paragraphs, and must do so paragraph by paragraph, one at a time.

To help pro se litigants, the Local Rules require parties to serve a notice that explains the procedure, so that they are not lost at sea. See L.R. 56.2. That way, unrepresented parties will receive clear instructions about what they need to file, and how they need to do it.

Mr. Sadig did not properly respond to the motion for summary judgment despite the government’s compliance with the local rule providing him with clear instructions on what to do.  I doubt that it mattered in this case whether he responded appropriately given the facts, but the local rule does provide a model that other courts might adopt in summary judgment settings to give pro se litigants a better chance to provide the court with appropriate information.  Of course not every pro se litigant will follow the instructions but having the moving party give them instructions directly tailored to the response they need to provide seems like a great idea.

Mr. Sadig’s problems begin sometime before the years at issue in this case because the court makes passing reference to the expiration of the collection statute of limitations on a 2004 liability of over $90,000.  The years in this case begin with his failure to file returns for 2005 and 2006.  Although not directly stated in the opinion, I suspect that the IRS made assessments against him based on the substitute for return procedures.  The assessments occurred in 2010 and totaled about $40,000.  He then had problems with paying taxes again in 2012 and 2013.  By the time of the case he owed about $100,000.

Mr. Sadig and his wife bought a home in a Chicago suburb in 2002 for almost $300,000.  He made substantial renovations to the home; however, the renovations failed spectacularly creating not only structural problems with the house but, I suspect, severe structural problems with the marriage:

Sadig’s renovations failed, catastrophically. His project compromised the structural integrity of the house. In December 2013, the City of Park Ridge sent him a notice that the residence was “not in compliance with the health and safety code due to structural issues.” The letter explained that, given its current state, the property may need to be demolished.

In fact the house was demolished in June, 2014 and divorce ensued in October, 2016.  In the meantime, Mr. Sadig transferred his interest to his wife in May, 2014 for no consideration.  At that time, the assessments for 2005, 2006 and 2012 existed and the IRS had filed a notice of federal tax lien in February 2014.  In September, 2018, his ex-wife transferred the property to a trust for no consideration.

The foreclosure case is a slam dunk for the years assessed before the transfer to his wife.  Even without the filing of the notice of federal tax lien, the lien continued to attach to property transferred for no consideration.  Because of the existence of the notice, the government’s case was lock tight.  The discussion of the lien issue for those years took the court little effort.

The assessment for 2013 occurred shortly after the transfer.  The court walked through the Illinois Uniform Fraudulent Transfer Act to show that the transfer of the property met the definition of constructive fraud with respect to the 2013 liability, which existed at the time of the transfer.  The existence of the unassessed liability coupled with the transfer for no consideration and his insolvency at the time of transfer met the statutory requirements.

The court then turned to the effect of the ex-wife’s transfer of the property to the trust.  It finds the trust serves as her nominee after walking through the nominee provisions.  She maintained the sole power to possess, manage and physically control the property.

Finally, the court examined the factors set out in United States v. Rodgers, 461 U.S. 677, 703-05 (1983) which it must do whenever the IRS seeks to foreclose property of one owner of property in a forced sale that will impact non-liable owners.  Because the property is now a vacant lot, it is very hard for her to stop the sale in the application of these factors:

In accounting for innocent third-party interests during forced property sales, courts look to four non-exhaustive factors: “(1) the prejudice to the government’s interest as the result of a partial, rather than a total, sale; (2) whether the third party with a non-liable separate interest in the property would, in the normal course of events have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors; (3) the prejudice to the third party as the result of a total sale; and (4) the relative character and value of the non-liable and liable interests held in the property.”


The case does not present new law.  The existence of the local rule seeking to protect pro se litigants facing a motion for summary judgment is interesting and instructive.  While I do not believe that a different outcome would have resulted had Mr. Sadig properly responded, such a rule does provide pro se litigants with a better chance of making a winning argument than having to do so without good instructions on how to respond.