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Obtaining Discharge of Tax Lien Under Wrong Code Section Costs Taxpayer $100,000
(Parker Tax Publishing: October 28, 2013)

The rules relating to tax liens and the discharge of a tax lien are quite complicated and extremely procedural. As the taxpayer in McGinley v. U.S., 2013 PTC 297 (D. N.J. 9/30/13) found out, not following those procedures to the letter can be costly. In this case, the discharge of a tax lien on property sold by the taxpayer was requested under Code Sec. 6524(b)(2)(A) rather than Code Sec. 6524(b)(4). The result was that the taxpayer was without remedy to collect approximately $100,000 that the IRS had taken from her sale of the property as a result of a lien against her ex-husband and that the IRS had previously agreed she did not owe.


Beth McGinley and her then husband, Kevin Kops, filed a joint tax return for 2000. The amount due, exclusive of penalty and interest, was $76,744. Subsequently, Beth and Kevin divorced, and in June 2004, a New Jersey court entered a judgment against Kevin requiring him to pay Beth child support. The judgment was filed and attached as a lien against Kevin's half-interest in the former marital home where Beth lived with the couple's children. In August of 2004, the IRS filed a $91,000 tax lien against Beth and Kevin, which attached to the former marital home. In the divorce, Beth was awarded the previously jointly owned marital home and title to it was deeded solely to Beth in 2005. As such, the property was no longer held jointly by Kevin.

In March 2006, the IRS determined that Beth was an innocent spouse and granted her relief under Code Sec. 6015 for the entire tax liability for the 2000 tax year. Thus, the IRS effectively determined that Beth had no responsibility for that year's tax liability. Accordingly, in July, the IRS released the previously filed tax lien as to Beth, but did not release its lien with respect to Kevin.

Beth's attorney worked to get relief from the tax lien. The IRS advised the attorney to file a request for a certificate of nonattachment, which he did on October 29, 2008. The IRS denied the request. The IRS also advised the attorney to file a request for a certificate of discharge, which was done on June 22, 2009. This request was also denied. According to Beth's attorney, each of these requests was prepared after he engaged in long conversations with multiple IRS agents with whom he dealt with on the matter as to proper IRS procedure. Beth's attorney said he received conflicting advice from the IRS as to how to proceed from a procedural perspective and was engaged in protracted negotiations with the IRS to find suitable relief for Beth, but such negotiations allegedly lagged due to the IRS's confusion and conflicting advice on how to move forward.

In June 2010, Beth entered into a contract to sell her home. With respect to the sale, the IRS took the position that Kevin still had an interest in the property because the tax lien was filed before the property was transferred solely to Beth. Beth's attorney contacted the IRS in an attempt to come to a settlement on the amount owed so that amount could be escrowed at the closing. Initially, the IRS agreed to permit the escrow of an amount of just over $162,000 so that Beth could sell the home and continue to dispute the amount owed. On the eve of the closing, the IRS changed its position with respect to escrowing the funds and advised Beth that it would require payment of $103,000, not escrow, in exchange for a discharge of the lien. Beth sold the home and paid the IRS $103,000 in November of 2011. The IRS then issued a certificate of discharge on November 10, 2011, with respect to the entire tax lien.

Beth then appealed to the IRS Appeals Office. She was advised that the IRS could not provide any relief because the tax was paid as part of the sale of real estate. However, an appeals officer suggested that she file a claim for refund on Form 843, Claim for Refund and Request for Abatement. Consequently, Beth filed a claim for a refund with the IRS, asserting, among other things, that no monies should have been collected by the IRS with respect to the lien because the June 2004 child support judgment had priority over the August 2004 federal tax lien. The amount of child support owing by 2010 had become $553,000.

While her claim for refund was pending, Beth, believing that her claim was covered by the two-year statute of limitations under Code Sec. 6511(b), filed a lawsuit on August 30, 2012, in a New Jersey district court as a protective measure.

Beth's attorney continued his discussions with the IRS and, around the beginning of October 2012, reached an agreement with a member of the IRS Taxpayer Advocate's Office, who agreed that the full amount of the payment would be refunded because the tax lien did not have priority over the child support judgment lien. The IRS advised Beth's attorney that New Jersey's probation department would have to send a letter to the IRS requesting the payment of the funds to the department directly. Accordingly, in November 2012, Superior Court of New Jersey, Family Part, Somerset County, entered an order requiring the IRS to pay the funds into court pending a formal application by Beth for release of those funds. The IRS refused to pay the funds, and Beth's suit against the IRS was heard in a New Jersey district court in 2013.

IRS Arguments

The IRS argued that the district court lacked jurisdiction over the case because the United States did not waive sovereign immunity. The government's argument was essentially two-fold. First, it contended that if Beth purported to bring a refund action under 28 U.S.C. Section 1346(a)(1) (permitting a civil action against the United States for the recovery of any tax alleged to have been erroneously or illegally assessed or collected), there was no jurisdiction because Beth was not a proper party under Code Sec. 7422 (addressing requirements for refund actions) to file the action. According to the IRS, Beth was not the taxpayer (i.e., the person who had the tax obligation) and, further, even if she was the taxpayer, the tax liability had to be paid in full before filing suit.

Second, the IRS argued that, to the extent Beth's action was considered one pursuant to Code Sec. 7426 (providing certain remedies for third parties), Beth's claim was late because that statute required her to file her action in district court within 120 days of the issuance of the certificate of discharge by the IRS.

Beth's Arguments

Beth argued that 28 U.S.C. Section 1346(A)(1) authorized her suit under the doctrine of the Supreme Court's decision in U.S. v. Williams, 514 U.S. 527 (S. Ct. 1995). Similar to Beth's case, the plaintiff in Williams paid her ex-husband's federal tax under protest in order to remove a tax lien on the house formerly owned jointly by both. Rejecting the IRS's argument that no waiver of sovereign immunity existed, the Williams Court concluded that 28 U.S.C. Section 1346(a)(1) authorized a tax-refund claim by a third party whose property was subjected to an allegedly wrongful tax lien. The Court's holding was based on the fact that no other remedy would have existed for the plaintiff in that case.

District Court's Opinion

Turning first to the IRS's not-the-taxpayer argument, the district court noted that the IRS provided little in the way of an explanation for its argument. Instead, it simply cited Code Sec. 7422 and, the court presumed that it was to infer that, under Code Sec. 7422, a party may not bring a refund action without first exhausting administrative remedies that, under Code Sec. 6511, only a taxpayer may exhaust, and that under Code Sec. 7701(a)(14), Beth was not a taxpayer for purposes of the refund action. The court noted that this argument was rejected by the Supreme Court in Williams under facts similar to Beth's situation and that it has been generally held that the ultimate holding in Williams has been superseded by statute. In response to the William's decision, Congress created a remedy for individuals in Beth's shoes by adding Code Sec. 7426(a)(4) and Code Sec. 6325(b)(4).

Under Code Sec. 6325(b)(4), the owner of a property subject to the federal tax lien of a third party can obtain a certificate of discharge from the IRS by providing a cash deposit or bond sufficient to protect the government's lien interest in the property (i.e., a substitution of value). Code Sec. 7426(a)(4) provides that if a certificate of discharge is issued under Code Sec. 6325(b)(4) and a property owner is dissatisfied the IRS's determination of the lien value, the property owner may bring suit within 120 days after issuance of the certificate discharge for a determination of whether the value of the interest of the United States (if any) in such property is less than the value determined by the IRS. Code Sec. 7426(a)(4) expressly provides, the court stated, no other action may be brought by such person for such a determination. In the time since the enactment of those provisions, the court stated, the majority of courts addressing the question have found that the amendments have superseded the holding in Williams, and taxpayers in Beth's situation must use the procedures set forth in Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4) before filing a claim in district court.

In finding that the holding in Williams did not apply to save Beth's claim, the district court rejected Beth's argument that her situation was identical to that of the Williams' plaintiff in that she was without a remedy. The court noted that Beth could have but failed to seek relief under Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4). With respect to Beth's argument that her ability to enter into a substitution of value arrangement required by these statutes was foreclosed by the IRS's eleventh-hour rejection of the escrow agreement, the court found no evidence that Beth had sought a discharge under Code Sec. 6325(b)(4). To the contrary, the court said, documentary evidence predating the IRS's last-minute payment demand showed that Beth, through her attorney, sought a certificate of discharge expressly under Code Sec. 6325(b)(2)(A), and not Code Sec. 6325(b)(4). Consistent with Beth's initial request, the certificate of discharge, on its face, states that it was issued pursuant to Code Sec. 6325(b)(2)(A). In addition to explicitly referencing Code Sec. 6325(b)(2)(A), the court observed, the certificate of discharge was issued on Form 669-B, which is used when the discharge is pursuant to Code Sec. 6325(b)(2)(A).

Finally, the court noted that case law and Rev. Rul. 2005-50 provide that if a third party obtains the discharge of a tax lien under Code Sec. 6325(b)(2)(A), there is no judicial review of the collection by the IRS in exchange for the certificate of discharge. Rev. Rul. 2005-50 specifically provides that persons who request a certificate of discharge under Code Sec. 6325(b)(2)(A) may not seek judicial review of the IRS's valuation determination through a refund action under 28 U.S.C. Section 1346(a)(1). As a result, Beth could not recover the $103,000 she paid to the IRS to discharge the tax lien. (Parker Tax Publishing Staff Writers)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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