New Estate Tax Lien Discharge Procedures — Give the IRS All the Monies

In early April, the IRS issued updated guidance relating to the processing of the estate tax liens after June of 2016. See SBSE-05-0417-0011.   In June of 2016, various changes were made to the administration of the estate tax, including which groups in SBSE handled requests for the discharge of the estate tax lien.  The changes to the discharge were fairly drastic in some ways, and the Service took a significant amount of time getting around to announcing the changes (which it states is actually just the correct implementation of the law, perhaps implying the prior handling was incorrect).  The new provisions appear to force prepayment of tax, or at least handing over the funds, in exchange for the discharge of the lien in a broader range of situations, potentially creating a significant hardship for estates.  This has caught many estate administration lawyers off guard, altering sales, and angering many in the professional community.

The estate tax lien is somewhat different than other tax liens, and arises in every estate (you just don’t know it most of the time).  Under Section 6324(a), a lien is immediately imposed on all property in the “gross estate” of the decedent.  This includes property passing through the estate, but also most property passing directly to a beneficiary by operation of law, such as property held joint with right of survivorship, and most property passing by beneficiary designation.  As stated in the IRS guidance:

Unlike other tax liens, no assessment, no notice and no demand for payment are necessary to create the estate tax lien. It attaches at the time of the decedent’s death, before the tax is determined, and is security for any estate taxes that may be determined to be due. It is referred to as the “silent lien” and does not have to be recorded to be enforced.

Sneaky stuff, but arguably provides important protection for the Fed.  This lien attaches and remains in place for ten years after the date of death unless discharged.  There are some provisions extending the lien in circumstances where the estate tax is deferred, such as under Section 6166, but otherwise the use-by date is set at ten years.  As a side note, it is possible for a general tax lien to also be imposed under Section 6321, which could be in place longer, so in dealing with a lien estate tax practitioner must determine if one or both are in place.  See IRM  For those looking to learn more about this lien, Keith and Les recently drafted chapter 14A.20 in SaltzBook, which covers the lien in depth, along with the transferee liability, how to request discharge, and various other interesting aspects of the “silent lien.”


As indicated above, the lien is imposed immediately, while the audit could take months or years to occur, if ever at all.  Various situations would not be audited or do not require returns.  This can create issues, especially for illiquid estates, that need funds for administration costs.  If a fiduciary sought to transfer assets, especially when finicky title insurance and mortgage companies were involved, assurances would be needed that the property could be transferred free and clear.

Under the old rules, release or discharge was handled by different groups depending on whether a return was filed or audit was occurring.  If no return was filed or a return was under audit, Exam reviewed the request. This used to be outlined in IRM, which has subsequently been updated to indicate Exam will no longer be handling discharge requests.  Specialty Collection Advisory used to handle all other requests relating to the estate tax lien, which was covered under IRM 5.5.8 and IRM 5.12.10.

The prior procedures would allow the fiduciary to request a discharge of the lien on the property to be sold by filing a Form 4422, Application for Certificate of Discharging Property Subject to the Estate Tax Lien. This was fairly routine in the past and occurred quickly, allowing property to be sold and estates to obtain the proceeds.  This was allowed under Section 6325 if the lien was “fully satisfied or provided for.”  Presumably, the “provided for” language was what was relied upon prior to payment and the issuance of a closely letter.  The regulations added some additional requirements regarding “necessity” of the estate.

In SBSE-05-0417-0011, the Service outlined the new procedures for requesting discharge, and it appears the conditions for obtaining discharge have become a bit more strict.  Beginning in June of 2016, responsibly for all discharge applications of the estate tax lien were shifted to Advisory to be handled by its “Estate Tax Lien Group.”   Information about requesting the discharge, including the address to send such requests, is found on the IRS webpage here.  The directions provide that such requests must be filed “at least 45 days before the transaction date”, which is roughly a month or more longer than such requests used to take.  This is irksome, but not as problematic as some other changes that have been made.

After noting discharge is completely discretionary, the advice indicates considerations that Advisory may take into account, including situations where Advisory does not need to consult with Exam prior to issuing a discharge, stating:

In many instances, decisions concerning the discharge application can be made from the information provided on the Form 706 (if applicable) and the Form 4422 without the need to coordinate with Examination Estate & Gift. For example, if based on the information provided with the Form 4422 and internal account records you are able to determine that the estate tax liability has been paid, or the estate is not subject to a Form 706 filing requirement, or the value of other property disclosed on the Form 4422 that will remain subject to the estate tax lien is more than ample to protect the government’s interest in the payment of the estate tax, coordination with Examination Estate &Gift is not ordinarily necessary (emph. added).

The advice goes on to cover situations where Advisory will need to coordinate with Exam or Chief Counsel when considering discharge.  I emphasized some language in the above quote, because that language would seem to indicate discharge is appropriate where there is clearly more than sufficient other assets to timely pay the estate tax, which historically occurred.  Other language would give the same impression:

In many instances, in determining whether to grant an estate tax lien discharge, the issue you will need to consider is whether the estate tax liability is adequately provided for, meaning that the government’s interest in collecting the estate tax is secured… In determining whether an estate tax liability is adequately provided for, you have discretion and should exercise your judgment in making that decision based on the particular circumstances…[and] you may also consider the criteria in IRC § 6325(b) as a guideline in making your decision as the estate tax liability will generally be adequately provided for when one or more of the IRC § 6325(b) criteria set forth below is satisfied. In addition, there may be other circumstances where you and your manager determine that the estate tax liability has been adequately provided for under the particular circumstance involved.

This again would indicate payment at the time of discharge is not required, although gets a little thornier perhaps by reference to Section 6325(b), which allows for discharge in various circumstances, such as having double the potential liability available, partial payment, substitution of proceeds at sale, substitution of other assets (deposits, bonds, etc.).

The advice then covers some common scenarios.  For instance, if no Form 706 is required to be filed, no discharge is offered, and instead  Letter 1352 is issued indicating no return must be filed.  When a return is required, but no tax is due, the advice indicates escrow may not be needed.  But, if there are questions as to the veracity of the claim, additional research may be needed, and perhaps escrow.

Then  it starts to get problematic, stating:

if the Form 4422 shows an estimated estate tax greater than the net proceeds from the property being sold, and no estimated payment has been made, then the net proceeds should be paid or escrowed before granting the discharge.

For an estate that is illiquid, holding only real property or closely held business interests, this could be very problematic.  And, anecdotally, it appears some estates are running into this issue.  Although the estate tax is a priority claim, there are various other administration costs that can be paid first (my fave, attorneys’ fees).  It could also impact the payment of state death taxes, the timing of which can be more important that federal taxes.  In Pennsylvania, for instance, prepayment of inheritance tax at the three month mark will provide a five percent discount off the tax bill.  At least one tax practitioner has requested some type of hardship request from having to pay over the funds, and been rebuffed.

It also brings into question what will happen for someone who would have requested an extension to pay tax under Section 6161 or Section 6166.  I suppose the funds could be escrowed until the return is filed, but the funds may have been needed to run a closely held company or pay another debt.

I do not necessarily begrudge the IRS attempting to ensure payment, but this seems like an attempt to solve a problem that may not have existed.  I would be interested in seeing whether or not the IRS often gets stiffed on federal estate tax by people who request a discharge and have indicated tax may be due (my suspicion is no, but I could be wrong).  If this is not a problem, it seems like this change that can drastically and negatively impact estate administration (and potentially the value of estate assets) is misguided.  It would also be good if the IRS became a bit more flexible on a case by case basis – there cannot be that many of these per year — which the guidance seems to still allow.  From the anecdotal evidence, it would seem that the factors in Section 6325(b) may have been applicable in having assets worth double the tax debt still under the lien, but funds have still had to be paid or escrowed.

The take away for now is that 1) you have to apply much more in advance from closing and 2) if you need the proceeds from the sale, you probably need to make a compelling argument under Section 6325(b) why the fisc would be lighter for it.

District Court Blesses Sale of Marital House to Satisfy Other Spouse’s Tax Liability

What happens when a spouse or other third party co-owns a house with someone who has a sizable federal tax liability? IRS seizures to satisfy an assessment are relatively rare. IRS attempts to enforce a lien and foreclose on a home are even rarer. And forced sales of homes when one of the co-owners of the house owes none of the taxes probably occurs only a handful of times a year.

We are in the process of reviewing cases and other developments that we have read over the past few months as we gear up to complete the last of the three updates we do annually for the Thomson Reuters treatise IRS Practice and Procedure. Earlier this year I read US v Tannenbaum, a case out of the Eastern District in New York where the IRS sought to enforce its lien and foreclose and sell upon a marital home in Brooklyn that was shared by the Tannenbaums, Sarah and Gershon. I flagged Tannenbaum for inclusion in our discussion of the government’s authority to force the sale of co-owned property under Section 7403.


Including interest and penalties Gershon unfortunately had run up a couple of million dollars in income tax liabilities. I am not sure if he filed MFS or if Sarah were relieved of the liabilities via Section 6015; the opinion is silent but Sarah was not on the hook for those assessments. Since 1977, the Tannenbaums jointly owned a house in Brooklyn that had an appraised value of over $1.2 million (a far cry from the Brooklyn home values when I was born and lived there in the days of Mayor Lindsay).

While the tax assessment only related to Gershon, both had some history with the government. In the mid 90’s both Sarah and Gershon had been indicted for conspiracy to defraud or commit an offense against the US and for false statements made to the IRS. Gershon pleaded guilty to the conspiracy charges and Sarah entered into a deferred prosecution agreement and all charges were dropped against her. Gershon had been sentenced to a year and a day and supervised release.

That background takes us to the case at hand and likely matters in terms of how the government approached this case. IRS sought to enforce the assessment against Gershon by foreclosing on and forcing the sale of their Brooklyn house. Both lived in the house, where they raised their children and also now lived with Sarah’s disabled mom. The house was specially set up to accommodate Sarah’s mom, who was in her 80’s and bound to a wheelchair.

This takes us to an issue that we discuss heavily in the Saltz/Book treatise, courtesy of Keith who has taken the lead oar as primary author on the revised collection chapters. Under Section 7403, a federal district court can “determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property,…, and a distribution of the proceeds of such sale according to the findings of the court.

Yet that power to force a sale and distribution of the proceeds is limited. In the 1983 case US v Rodgers the Supreme Court said that while the government has broad discretion to force a sale, “Section 7403 does not require a district court to authorize a forced sale under absolutely all circumstances, and that some limited room is left in the statute for the exercise of reasoned discretion.” Keith has discussed the application of Rodgers in prior posts here and here

To assist courts in exercising that discretion, Rodgers identifies factors:

1) “the extent to which the Government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes[;]”

(2) “whether the third party with a nonliable separate interest in the property would, in the normal course of events (leaving aside § 7403 and eminent domain proceedings, of course), 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 likely prejudice to the third party, both in personal dislocation costs and … practical undercompensation [;]” and

(4) “the relative character and value of the nonliable and liable interests held in the property ….”

The Tannebaum opinion applies these factors to the case at hand. While I will not discuss all the factors here, usually the most interesting part of these cases considers the prejudice to the non liable party if there is a forced sale. Of course, when the government comes in and kicks you out of your marital residence (and one that here was the marital home for close to 40 years) there is going to be prejudice.

What is too much in terms of prejudice? Sarah starts off at an atmospheric disadvantage because of her (and Gershon’s) prior history with the government. It did not help that Gershon’s mother had bequeathed a condo to Sarah and Gershon’s sister in what looks like an attempt to transfer assets outside the reach of creditors, including Uncle Sam. In addition, the opinion suggests that Sarah had other assets at her disposal and upon sale of the Brooklyn house, she would be entitled to about $600,000, as the government offered to split the sale proceeds of the Brooklyn house equally.

Those facts led the court to conclude that there was little prejudice to Sarah if the government would go ahead with the sale, as Sarah could find somewhere else to live.

Despite those facts that were stacked up against Sarah I did find one aspect of her prejudice argument to be interesting. She emphasized that in thinking about prejudice the court should “consider intangible factors” and “other common sense special circumstances.” In particular, Sarah noted that the forced sale would also impact her elderly and disabled mom, who lived with Gershon and Sarah in Brooklyn. She also pointed to the unique character of the neighborhood, which was predominantly Orthodox Jewish, as were the Tannenbaums. To top it off, she included in her papers an affidavit from a local real estate broker who noted that there was little market turnover in the neighborhood and that the house had additional value to elderly residents due to its proximity to a hospital.

The court agreed with Sarah on the principle that intangible factors matter but in the end concluded that the mom’s presence and the neighborhood’s character did not tip the scales on prejudice. First, on the mom:

The Court sympathizes with Sarah Tannenbaum concerning the care of her mother. But the evidence does not support Sarah Tannenbaum’s argument that she is short on resources. First, her financial resources are not limited to her salary, an amount that she has not disclosed.

The opinion then discussed that she and her sister in law sold the condo they inherited from Gershon’s mom and that all things considered Sarah (and her mom) would be ok if the IRS sold the marital home given the assets she had at her disposal:

Nonetheless, her share of the Condo sales proceeds, $350,000, plus the approximately $600,000 that she is anticipated to receive from the sale of the Home, mean that Sarah Tannenbaum will have $950,000 to lease or buy another home that can accommodate the Tannenbaums and Sarah Tannenbaum’s mother. Although neither side presented any evidence of the cost of leasing or buying an apartment or house in this neighborhood, the Court finds that $950,000 should suffice where the Tannenbaums can look for a smaller home, and the amount is not far off from the $1.2 million estimated market value of the Home. The Court is not aware of any controlling law, nor does Sarah Tannenbaum bring any to the Court’s attention, holding that a non-liable party is prejudiced if that party has to lease rather than buy a home.

The opinion noted that there were other Orthodox communities even if there were few alternates in the specific neighborhood. At the end of the day, however, while the court acknowledged the relevance of Sarah’s special circumstances, her resources were enough to tip that factor in favor of the government.


After applying all the Rodgers factors, the district court held that IRS had the right to force the sale of the Brooklyn house. Interestingly, the government argued that one of the factors in its favor was the prejudice to the government if it did not permit the forced sale. It is hard to force a sale of half a house, so there is always some prejudice if a court does not permit the sale of the entire property.

But there is more. Here the government pointed out that under NY law if Gershon were to die the US would not have the right to collect because its lien would be extinguished. Earlier this year and in fact prior to the court order setting the sale Gershon in fact did pass away (See Brooklyn, NY – Jewish Community Mourns The Sudden Loss Of Rabbi Gershon Tannenbaum ). The court was not aware of his passing when it wrote the opinion as the opinion noted Gershon failed to file any responsive papers. I suspect that the rabbi’s passing may then have extinguished the government’s interest in the residence, which would allow Sarah to remain in the house and give her the relief she sought. After the court issued its opinion, Sarah in fact filed a motion effectively asking the court seeking relief from a final judgment; the government has yet to respond and last week filed a motion seeking additional time to respond.





Two Notices of Deficiency, One Abatement, One Lien Release – Taxpayer Still Owes

The recent bankruptcy case of Lewis v. IRS  caught my eye for the number of procedural gears in motion.  The focus of the case is on the impact of the release of the federal tax lien, but much more happens in the case and following the action plus, wondering why the IRS chose a certain path makes for an interesting discussion of what happens when the IRS makes a mistake and how it goes about correcting that mistake.


Mr. Lewis had a business installing water lines for the city of Haynesville, Alabama. Apparently, the city did not have its own public works department with the capacity to do this and it contracted with Mr. Lewis to get this done.  In 2004, he installed enough water lines to earn $429,251.50.  Unfortunately, Mr. Lewis did not have time to file a federal tax return for that year.  The IRS prepared a substitute for return for him and issued a notice of deficiency.  He defaulted on the notice of deficiency, allowing the IRS to assess.  Based on the assessed liability, the IRS filed a notice of federal tax lien in 2010.  This fact pattern repeats itself all too often and presents nothing unusual.  Mr. Lewis has a case much like that of several clients of the Harvard Tax Clinic.

At almost the same time the IRS decided to file the notice of federal tax lien, Mr. Lewis “got religion” and decided to file his 2004 tax return. He did not get a whole lot of religion, however, because the Form 1040 that he sent to the IRS did not include the $429,251.50 he received for installing water lines and reported no income tax due.  When I first read that he filed the Form 1040 after the SFR assessment, I thought that perhaps he was trying to set the year up for a discharge in bankruptcy; however, he would not leave off the income from the installation of water lines if bankruptcy drove the filing of this return.  So, I cannot speculate why he filed this very late return and why he reported no tax liability on it.  Nonetheless, the IRS processed the return and abated the liability assessed as a result of the SFR.  The IRS routinely processes returns filed after SFRs and abates the SFR assessments down to the amount on the late filed return; however, the IRS usually gives some thought to the information reported on the SFR.  Here, the IRS appears to have given no thought to the late return before abating the assessment based on the SFR.

The abatement of the assessment created a zero balance on the account which triggered the release of the notice of federal tax lien as well as the refund of some of the money the IRS has collected to that point. The following year, the IRS awoke from its slumber on this case and began an audit of the 2004 return that failed to report any of the money on the Form 1099 issued by the city.  Not surprisingly, the IRS determined that he should have reported that amount and issued him a new notice of deficiency offering him what must have been at least his third chance to go to the Tax Court (the filing of the notice of federal tax lien would have given him a chance as well as the first notice of deficiency and I do not know if he also received a CDP notice for intent to levy though I would expect that he did.)  Mr. Lewis again chose not to go to Tax Court and the IRS again assessed the tax.  On January 23, 2015, the IRS filed a second notice of federal tax lien for 2004 and, I assume, gave him another CDP notice since this was a separate assessment.

Mr. Lewis filed a Chapter 13 petition on March 18, 2015 and eventually objected to the large proof of claim filed by the IRS. Mr. Lewis argued that the release of the federal tax lien had the effect of “extinguish[ing] any and all tax liability stemming from the tax period 2004.”  Mr. Lewis is not the first person against whom the IRS has improvidently released the federal tax lien.  A long list of cases exists deciding essentially the same argument he makes in this case – that the statute absolves him from all future liability for the period.  Unfortunately for taxpayers making this argument, that is not exactly what the statute says.  Section 6325(a)(1)(A) says that

“If a certificate is issued pursuant to this section by the Secretary and is filed in the same office as the notice of lien to which it relates… such certificate shall have the following effect:

(A)  In the case of a certificate of release, such certificate shall be conclusive that the lien referred to in such certificate is extinguished.”

Having the lien extinguished and having the liability extinguished are obviously not the same thing, and the Court walked through several cases making that point. I did not read all of those cases but suspect that few of them involved the fact pattern here in which the IRS actually went to the trouble to reassess the liability and file a new notice of federal tax lien.  A footnote in the opinion states that the IRS briefed the issue of whether the lien release barred the IRS from issuing a second notice of deficiency but the Court found it did not need to reach that issue.

Because the IRS not only released the first lien but abated the assessment, I think the court reached the right result using the wrong analysis. The first lien no longer mattered by the time Mr. Lewis filed bankruptcy.  The IRS might have tried to reverse the abatement – something it can do under the right circumstances – and revoke the release of the first lien but it did not.  Instead, it used its authority to issue another notice of deficiency.  The lien on which the IRS based its claim in the bankruptcy case had never been released.  Unless the court found that the release of the first lien barred the IRS from taking any further action with respect to the tax year 2004, which is the argument advanced by Mr. Lewis, the court did not need to cite to the line of cases holding that the release of the tax lien only extinguishes the lien but not the underlying liability.

Sometimes, a mistake by the IRS prevents it from collecting the tax at issue. Here, it had several avenues to use to continue pursuing collection of the tax.  It lost the priority position it held based on the original lien.  Several years passed before it filed the second lien.  The case does not provide enough facts to allow me to determine if other creditors benefited from the loss of the lien position.  The case also does not provide enough details to make it clear whether the IRS will collect on the outstanding liability, but it is clear that the claim filed by the IRS will withstand a challenge simply trying to argue that a mistaken release bars the IRS from further collection for the year at issue.


Procedure Grab Bag – Making A Grab for Attorney’s Fees and Civil Damages

Your clients love the idea, and always think the government should pay, but it isn’t that easy.  Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.


3rd Party Rights

The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430.  The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA.  The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party.  It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case.  This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.

As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.

When You Are Rich Is Important

In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM.  Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs.  That is extended to trusts by Section 7430(c)(4)(D).  The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed.  That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.”  At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital.  And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.

Key Questions: Are you the Taxpayer?  Did you Exhaust the Administrative Remedies?

The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger.  In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes.  Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets).  The taxpayer’s wife paid a portion, and then sued for a refund.  As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.

In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her.  Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…”  The Court found that the spouse was not “such taxpayer”, and likely did not have a claim.  Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).

Qualifying as a Qualified Offer

The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument.  In Simpson, the wife received a substantial recovery in an employment lawsuit.  The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that).  The Tax Court held 90% was income.  This was upheld.  The 9th Circuit held that the taxpayer was clearly not successful on its primary claim.  They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded.  The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time.  Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time.  Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made.  Something to keep in mind when making an offer.

Making the Granite State Stronger – No Fees For FOIA

Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier.  The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case.  That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.”  The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”

Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians.  It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA.  Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied.  Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents.  The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.

The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire.  As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.

Treasury Inspector General Report on Timeliness of Lien Notices

On July 7 the Treasury Inspector General for Tax Administration (TIGTA) issued a report on the timeliness of the IRS in sending out notice to taxpayers and to their representatives after it files the notice of federal tax lien (NFTL).  Section 6320, creating Collection Due Process (CDP) rights following the filing of the NFTL, requires that the IRS send notice of the filing of the NFTL within 5 business days after the filing of the NFTL.  IRS procedures and seemingly Section 6304  require that notice of the NFTL also go to the taxpayer’s representative.  If the IRS fails to send out the notice of the NFTL to the taxpayer who is the subject of the lien or to the taxpayer’s representative, the failure can have consequences to the taxpayer in the effort to pursue rights.

During the past year, I had two cases in which I represented taxpayers against whom the IRS filed an NFTL. In those cases, the notice of the filing was not sent to me until several days after it was mailed to the taxpayer.  By the time I received the notice, 10 days or more of the 30 day period to request a CDP hearing had run.  Because of my experience, I read the TIGTA report with interest.  As discussed below, the Tax Court has held that the failure to notify the representative does not extend the time period within which the taxpayer must exercise their CDP rights.  This makes the study of the IRS effectiveness in providing notice to representatives all the more important.


TIGTA found that of a sample of “162 undelivered lien notices identified nine cases for which lien notices were not timely sent to the taxpayers last known addresses because the lien notices were sent to the taxpayers’ old addresses even though IRS systems reflected their new addresses.” With respect to the notice sent to representatives, TIGTA found that for “six of the 37 sample cases for which the taxpayer had an authorized representative, the IRS did not notify the taxpayers’ representatives of the NFTL filings.  TIGTA estimated that 22,866 taxpayers may have been adversely affected.”

What happens when the representative does not receive a copy of the Notice of Deficiency and the taxpayer fails to timely petition the Tax Court? The failure to send the notice to the representative does not give the taxpayer a basis for getting into the Tax Court after the 90-window has closed, see McDonald v. Commissioner, Bond v. Commissioner (a CDP case refusing to allow taxpayers to raise the merits of a liability based on the failure of the IRS to send the statutory notice of deficiency to petitioner’s representative), Houghton v. Commissioner, and Allen v. Commissioner.

What happens when the representative does not receive a copy of the CDP notice? Unlike the Notice of Deficiency which deals with examination issues, the CDP notice concerns collection.  In 2015, the Tax Court in Godfrey said the failure to provide notice to the authorized representative in a CDP case has the same consequences as the failure to provide notice when sending the notice of deficiency, which is to say that no consequences to the IRS result from that failure.  We posted on Godfrey here, here, and here.  Godfrey does not appear to have appealed the decision.

IRC 6304(a)(2) provides that the IRS “Without the prior consent of the taxpayer given directly to the Secretary or the express permission of a court of competent jurisdiction, the Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax . . . if the Secretary knows the taxpayer is represented by any person authorized to practice before the Internal Revenue Service with respect to such unpaid tax and has knowledge of, or can readily ascertain, such person’s name and address, unless such person fails to respond within a reasonable period of time to a communication from the Secretary or unless such person consents to direct communication with the taxpayer…”

In a 2001 Chief Counsel Advisory opinion discussed in the Godfrey post, Chief Counsel’s office takes the position in footnote 7 that the 6320 (or 6330) notice must go to the taxpayer by statute and that Section 6304 prohibition on communication with the taxpayer without the consent of the representative does not does not alter that requirement.  A more nuanced argument exists concerning the impact of using the IRS power of attorney form and whether the language of the POA form gives the Service additional rights.

The TIGTA report contains a chart of NFTL filings in the five year period running from 2011 through 2015. NFTLs have dropped by almost half during that period.  The biggest drop resulted from the change in the threshold for filing as a result of the Fresh Start initiative from $5,000 to $10,000.  That change is not hard and fast, as the IRS can file the NFTL at any dollar level and it is not required to file the NFTL at any dollar level; however, in general, IRS employees will follow the manual guidance to the extent they have the ability to work a case.  The dropoff in the most recent years probably reflects some reduced enforcement action due to the reduced staff.

The TIGTA report on providing notice to taxpayers after the filing of the NFTL is one of a number of reports Congress required TIGTA to perform on an annual basis in the Restructuring and Reform Act of 1998 (RRA 98).  TIGTA notes that over the past five years it has found that the IRS almost always complies with the requirement to provide timely notice to the taxpayer but has not always met internal guidelines with respect to practitioner notice.  The report does not address the legal requirement provided in IRC 6304 concerning practitioner notice probably because of the Chief Counsel guidance that IRC 6304 does not create a requirement here.

The error rate for providing notice to authorized representatives in 2016 was consistent with the error rate over the past five years and shows that one in five notices of the filing of the NFTL does not get sent to the authorized representative despite internal guidance and a statute that specifically provide that the notice must be sent to the representative. TIGTA did not make any recommendations concerning the failure to notify authorized representatives this year because it had made them in the past and the IRS system for fixing the problem did not get implemented until after the sample period.  TIGTA indicated that it would revisit the issue next year.

If you do not receive notice as a representative on any collection case in which you have a power of attorney on file with the IRS and have checked the box that you want copies of correspondence, then the IRS has failed to meet its statutory, not internal, requirement. We have posted about IRC 6304 before here, here, and here.  Given the relatively high percentage of cases in which the IRS has not sent out the notice to the POA, a number of these cases should exist.  TIGTA does not address the timeliness of sending out the copy of the notice to the representative.  My impression from the report was the significantly delayed notices I received would count toward the 84% of the cases in which the IRS complied and were not measured by TIGTA as a form of IRS non-compliance.  Yet, a significant delay when the taxpayer has only 30 days to act can have a significant influence on the outcome of a matter.

If you are concerned about receipt of the notice of the filing of an NFTL either by yourself as the representative or by your client, you may want to read this report and possibly some of the prior reports. If Congress is going to require TIGTA to provide us with this information, we should find ways to use it in situations in which the IRS fails to comply with the requirements.  The failure to comply with notice requirements in collection cases may eventually lead to a different outcome than the failure to comply in examination cases.  Godfrey may not be the final word in this litigation.  IRC 6304 does not come with any directions about the remedy for failure to comply with its provisions and little litigation exists in the tax context.  If you seek a remedy because of a violation of IRC 6304, you might look to litigation in the consumer debt collection area after which the statute is patterned.

Collecting Partnership Debt from General Partners

The 9th Circuit recently sustained the district court which sustained the bankruptcy court in the case of Pitts v. United States.  The taxpayer sought a determination that the taxes claimed against her in the bankruptcy proceeding were discharged.  The courts determined that the taxes were not discharged, rejecting various arguments that she presented.  The case breaks no new legal ground but serves to highlight how the IRS collects from general partners.  If you have this issue, you might look at IRM Part 5, specifically 5.1.21, 5.17.7, and 5.19.14.


Ms. Pitts was the general partner of DIR Waterproofing. DIR failed to pay its employment taxes including both trust fund and non-trust fund portions. The IRS would typically make some effort to collect from the partnership and then seek to collect from the partners. The opinion does not describe the efforts made here, but the IRS did issue a notice of federal tax (NFTL) against Ms. Pitts. In these situations the IRS does not go through a separate assessment process for Ms. Pitts but uses the assessment made against the partnership in order to pursue collection against her. The NFTL would reference the partnership debt although it would make clear that the lien is against her. Because the debt arose through the partnership, she argued that it was a state law debt and the IRS was limited to collect as a state law creditor. The 9th Circuit made three separate explanations of why her arguments failed.

First, the court pointed out that under IRC 6321 Ms. Pitts was a person liable to pay any tax and, as such a person, a lien arises under federal law which attaches to all of her property and rights to property once the IRS makes demand for payment and payment is not made. This is federal law and not state law creating the lien. The court cited several cases in support of its position.

Next, the court found that the IRS can use all of its administrative enforcement tools because she is secondarily liable on this debt. The court cited to a Supreme Court decision, United States v. Galletti, 541 U.S. 114 (2004) that may have caused Ms. Pitts to make the arguments she made here but which should also have suggested to her that these arguments would likely fail. In Galletti, similarly situated taxpayers to Ms. Pitts went into bankruptcy where the IRS filed a proof of claim based on the assessment against the partnership in which they were general partners. The Gallettis argued that no debt existed against them because the IRS had not made an assessment against them (and the statute of limitations on assessment of the partnership debt had run by the time of the bankruptcy.) In that case, the bankruptcy court, the district court, and the 9th Circuit agreed with the Gallettis. These opinions relied upon the definition of ‘taxpayer’ in IRC 7701 and looked to the separate nature of the partners as taxpayers from the partnership. The IRS pushed the case to the Supreme Court, which held that the IRS did not need to make a separate assessment because the Gallettis were liable under state law as general partners of the partnership.

Writing for a unanimous Court, Justice Thomas said:

“Under a proper understanding of the function and nature of an assessment, it is clear that it is the tax that is assessed, not the taxpayer. See §6501(a) (“the amount of any tax … shall be assessed”); §6502(a) (“[w]here the assessment of any tax”). And in United States v. Updike, 281 U. S. 489 (1930), the Court, interpreting a predecessor to §6502, held that the limitations period resulting from a proper assessment governs “the extent of time for the enforcement of the tax liability,” id., at 495. In other words, the Court held that the statute of limitations attached to the debt as a whole. The basis of the liability in Updike was a tax imposed on the corporation, and the Court held that the same limitations period applied in a suit to collect the tax from the corporation as in a suit to collect the tax from the derivatively liable transferee. Id., at 494-496. See also United States v. Wright, 57 F. 3d 561, 563 (CA7 1995) (holding that, based on Updike‘s principle of “all-for-one, one-for-all,” the statute of limitations governs the debt as a whole).

Once a tax has been properly assessed, nothing in the Code requires the IRS to duplicate its efforts by separately assessing the same tax against individuals or entities who are not the actual taxpayers but are, by reason of state law, liable for payment of the taxpayer’s debt. The consequences of the assessment–in this case the extension of the statute of limitations for collection of the debt–attach to the tax debt without reference to the special circumstances of the secondarily liable parties.”

Ms. Pitts wants the courts to recognize that the assessment only applies to her because of the operation of state law and since it is the operation of state law causing her to become liable she wants the debt treated as state law debt and not tax debt with the exceptions to discharge applicable to tax debts. The 9th Circuit, perhaps still remembering the Galletti outcome, does not allow her to split hairs in this manner. State law plays an important role in creating the liability but her liability is for a federal tax debt.

The 9th Circuit rejects her argument that state law creates the statute of limitations. It also rejects her argument that the continuation by the IRS of its efforts to collect this debt violates the discharge injunction. I did not go back and read the earlier opinions to see the age of the debt. The trust fund portion of the partnership’s unpaid employment taxes will always be excepted from discharge because B.C. 507(a)(1)(C) will always make this a priority debt in bankruptcy and that will always make it excepted from discharge under B.C. 523(a)(1)(A). The non-trust fund portion of the partnership employment tax debt should become dischargeable for bankruptcy petitions filed more than three years after the employment tax return due date, assuming it timely filed the returns. The court engages in no analysis of this issue making me think that she is not entitled to a discharge of the non-trust fund portion; however, depending on the timing of the debt and the bankruptcy petition, this portion of her debt could potentially be discharged in her bankruptcy just as in the bankruptcy of the partnership itself.

This case demonstrates how the IRS will proceed to collect from a general partner. It simply uses the assessment against the partnership to open the full range of administrative collection tools given to it under the Code. The effort by Ms. Pitts to use the Galletti opinion to argue that the operation of state law which lets the IRS go after the general partners without a separate assessment should also limit the IRS in its ability to collect. The 9th Circuit rejects that limitation on the power of the IRS in this situation and, I think, its decision is correct. The issue brings up in another context the interplay between state law which creates certain rights and obligations and the federal tax collection law which builds upon the state created rights and obligations.

Federal Court Punts Ball Back to State Court on DOJ’s Lien Priority Suit

US v Schwartz, a recent case out of a federal district court in South Carolina, highlights the question of whether parallel proceedings in state probate court should lead the district court to decline to exercise its jurisdiction under the Declaratory Judgment Act to resolve lien attachment and priority issues. It is an issue I had not considered before, and the opinion raises some questions which I am not sure how to answer. I will briefly summarize the facts and the reasons for the court’s decision to let a county probate court decide whether the US interests have priority over other creditors.


A quick summary of the facts will tee up the issue. The decedent Margaret Knapp died in 2008. At the time of her death Knapp owned two interests in South Carolina real properties, one of which as the linked obituary indicates she had moved into shortly before her death. Probate proceedings in Charleston County South Carolina commenced after she passed away.

The opinion describes multiple proceedings in probate court:

a petition in the Charleston County Probate Court to invalidate a 2008 will executed by the decedent, reinstitute a 2006 will because of undue influence, and remove co-defendant Marc Knapp as personal representative of the estate; (2) an action in the South Carolina Court of Common Pleas for Charleston County to set aside a deed to unrelated property previously owned by the decedent; (3) a second action in the South Carolina Court of Common Pleas seeking partition of the unrelated property; and (4) the appointment of Schwartz [the defendant in the federal case] as special representative of the estate.

While the estate’s personal representative filed a Form 706, the estate tax due of over $400,000 was unpaid. IRS assessed the estate tax and made demand for payment. The decedent’s estate also filed 2007 and 2008 income tax returns on behalf of Knapp, also without payment of over $150,000 in tax. IRS also assessed and made demand for payment of the income tax. The estate and income taxes remained unpaid; to ensure priority of its interest the government filed notices of federal tax lien (NFTL) in the public records of Charleston County for both the income and estate taxes.

On the same day in 2016 that the US filed its NFTL, the estate’s personal representative Schwartz filed a Petition to Sell Real Estate and for Approval of Priority of Application of Proceeds in the Probate Court seeking an order allowing him to sell the South Carolina real properties free and clear of the United States’ tax liens.

About six weeks after Schwartz filed his petition in probate court, United States filed the action in district court, “seeking a declaratory judgment that: (1) its tax liens attach to two real properties located in Charleston County; and (2) those liens have priority over the other parties named in this action.”

The suit in federal court did not seek enforcement; rather it relates to priority and “contends that its estate tax liens have priority over claims by the special administrator Schwartz and co-defendant Marc Knapp. The United States further contends that its income tax liens for 2007 have priority over any other party’s interest in the Properties.” In the complaint the US asks the federal court to “declare that the proceeds of any sale of the subject properties be paid first to the United States to be applied in satisfaction of the Estate of Margaret Lee Knapp’s unpaid federal estate and income tax liabilities.”

About a month after filing the federal action, the US also filed a motion for injunctive relief, asking the court “to issue an injunction prohibiting Schwartz from selling the Properties unless he deposits all sale proceeds into the Court’s registry pending a final determination of the relative priorities of the parties’ interests.”

Schwartz objected claiming that the district court did not have subject matter jurisdiction and also arguing that the state court should have jurisdiction under Colorado River Water Conservation District v US. Colorado River is a 1970’s Supreme Court case which provides the basis for one of the many federal abstention doctrines that govern when a federal court should decline to proceed even if it did have subject matter jurisdiction when there is a related state court proceeding. (As an aside, for those who share an interest in mundane civil procedure doctrines as well as tax procedure, a Shriver Center on Poverty Law manual has a nice description of the various federal abstention doctrines, including the Colorado River doctrine).

The federal district court opinion decides in favor of Schwartz and his efforts to remove the case from federal court, but not on subject matter jurisdiction grounds or on the specific application of the Colorado River abstention doctrine. Instead, the district court judge discusses its power to issue declaratory judgments and also for its general discretion to not that exercise judicial power, and then applies both to the messy facts in the case at hand:

The Court has “great latitude in determining whether to assert jurisdiction over declaratory judgment actions.”. The Declaratory Judgment Act provides in pertinent part that “[i]n a case of actual controversy within its jurisdiction,… [the Court] … may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 220l(a) (emphasis added). “This power has consistently been considered discretionary.” Centennial Life Ins. Co. v. Poston , 88 F.3d 255, 256 (4th Cir. 1996) [liberal citation omissions here and throughout]

A declaratory judgment action “is appropriate ‘when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and … when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.’” Poston , 88 F.3d at 256 (quoting Quarles, 92 F.2d at 325).

After providing the context for its power to act, the opinion also notes that sometimes exercising discretion not to act when there is a related state proceeding is appropriate:

At the same time, whenever a parallel proceeding is pending in state court, district courts must also take into accounts ‘considerations of federalism, efficiency, and comity.’”

The opinion notes that the Fourth Circuit has provided four factors for the Court to consider in balancing the state and federal interests:

  • whether the state has a strong interest in having the issues decided in its courts;
  • whether the state courts could resolve the issues more efficiently than the federal courts;
  • whether the presence of overlapping issues of fact or law might create unnecessary entanglement between the state and federal courts; and
  • whether the federal action is mere procedural fencing, in the sense that the action is merely the product of forum-shopping.

While noting that the record did not suggest that the US was forum shopping it felt that the other three factors “weigh heavily” in favor of dismissal:

The decedent’s estate has already been opened in the Charleston County Probate Court, and several issues related to the decedent’s estate have been and continue to be addressed in the South Carolina state court system. Resolving conflicting claims to a decedent’s estate is one of the primary functions of a probate court, and this Court has no doubt that the Charleston County Probate Court is the more suitable forum to handle the United States’ claim.

Parting Thoughts

 The opinion (and this post) barely scratch the surface when considering some of the knotty jurisdictional issues when there are state court proceedings that relate to in some ways federal tax assessments. I note that the factors discussed in Schwartz vary somewhat from the Colorado River doctrine, and while no expert in that area it seems they provide for more flexibility for federal courts to punt in deciding these priority issues while there is a related state court proceeding. This seems like a case more appropriate for federal court to decide, and one certainly that the government would want to make sure generally is resolved.

Keith was puzzled by this case,  wondering why Justice did not simply remove the lien priority case to district court instead of bringing a declaratory judgment and injunction case, though he was unsure if there was something unique about probate cases but that generally the US has a right to remove cases to federal courts when it is a defendant. As Keith notes, this decision seems to leave to the state court the ability to make a determination regarding the priority of two federal tax liens. That is unusual and something the government never wants.


Credit Scores and the Federal Tax Lien

A recent article suggests that credit agencies are preparing to reduce the hit on a credit score that the notice of federal tax lien (NFTL) creates. You can find other articles here and here.   I have written about withdrawal of the notice of federal tax lien previously.

This is good news for taxpayers where the IRS has filed the notice of federal tax lien.  I do not know if the change will have much impact on the value of the lien to the IRS in bringing in revenue.  The change seems unlikely to impact revenue to the IRS and may simply represent a great consumer victory for taxpayers.  Another possible outcome is that because the NFTL no longer hurts taxpayers as much, the IRS may feel it can return to its preFresh Start days and file the NFTL at lower dollar levels.    I think that would be a mistake for reasons I discussed in an article several years ago and am not suggesting that the IRS contemplates doing that, but one of the reasons for pulling back on the number of lien filings, among many others, was the damage to taxpayer’s credit ratings and balance between that and the benefit to the IRS.


The issue that has long puzzled me regarding the NFTL and the credit reporting agencies concerns their willingness to boost a credit score when the taxpayer gets the lien withdrawn but not when the taxpayer gets the lien released.  The National Taxpayer Advocate has written on this subject several times (see here, here, and here), as have others (see here and here), and the NTA has worked hard to get the IRS to be more generous in withdrawing the NFTL.  Local taxpayer advocates regularly work with taxpayers to obtain lien withdrawals.  I understand why removing the notice of federal tax lien through withdrawal provides some boost to a taxpayer which could or should get reflected in their credit score but having the NFTL released provides a far more positive outcome to the taxpayer generally since it reflects the end of the federal tax lien.  Yet, credit agencies have not embraced the release as a trigger point for upgrading someone’s credit score.

Withdrawal of the NFTL simply removes the notice of the lien and the benefits to the IRS provided by defeating the four parties enumerated in IRC § 6323(a) but it does not eliminate the lien itself.  The taxpayer still owes the money.  The unfiled federal tax lien continues to attach to all of their property and rights to property.  The fact that the NFTL was on file still provides creditors notice that the taxpayer has outstanding tax debts and should make creditor wary.  The IRS can still levy or offset or file suit.  All withdrawal does is remove the debt from the public eye, but credit agencies embraced it as a reason for improving the taxpayer’s credit score.

Until lien withdrawal went into the Code 20 years ago, the IRS had no way to pull back an NFTL once it was filed.  There can be many good reasons to pull back the NFTL and the statute provides flexibility to the IRS to deal with those situations.  The withdrawal provision received more attention than I thought it deserved because of the credit reporting agencies decision to boost scores upon lien withdrawal.  That decision, which seems to make little sense, caused the National Taxpayer Advocate and others to push for lien withdrawals in many cases not contemplated by Congress when the withdrawal provision came into existence.  I applaud the NTA and others for helping taxpayers but it always seemed to me that the action was driven by a misguided view of the benefits of withdrawal on the part of the credit reporting agencies.

Congress has also passed sections requiring the IRS to release the NFTL quickly and provided some minor remedies when it does not do so.  One aspect of lien release that may cause credit agencies to ignore it as an important event may stem from the way release occurs.  Starting in the ealy 1980s, the IRS began filing self releasing liens.  Almost all, if not all, NFTLs contain this self releasing feature.  That can make it difficult to know when the release has actually occurred since you must read the NFTL to know when it releases.  Unlike mortgages which get formally released with the filing of a document or a margin release clearly indicating the release of the mortgage, NFTLs that release because of the passage of time have nothing that clearly signals the release has occurred.  Credit reporting agencies may avoid making decisions on releases because it requires a little bit of work to discover when it occurs as opposed to lien obligations terminated with a specific document.

I like to focus more on release because that is where the taxpayer receives a tangible benefit.  The release signals the end of the liability.  That is something to celebrate and something that deserves attention from the credit reporting agencies.  I hope that as the credit reporting agencies pay attention to the NFTL and how it should impact a credit score, they will focus on the importance of release and recognize that importance with a credit boost at that point.  Their old rules caused taxpayers and their representatives to spend a fair amount of time chasing the goal of a withdrawal rather than keeping their eyes on the real prize of release.  Focusing on how to obtain a release, rather than a withdrawal, would benefit taxpayers more and deserves more recognition.