Federal Tax Lien Seizure and Sale:
Survival of Other Liens
The nature of co-tenancy can lead to some involved underwriting questions. In a tenancy in common each tenant holds his or her interest individually. Each tenant's interest passes to his or her heirs upon death. Each can bring a partition action or convey, mortgage or encumber his or her interest. As a result, each can have the interest levied upon to enforce a lien.
Nevertheless, co-tenants stand in a fiduciary relationship to each other such that one cannot purchase a claim against another co-tenant for himself. Instead, the purchaser is presumed to acquire it for the benefit of all the other co-tenants. In the case of a tax sale, such a purchase is considered a redemption.
A tenancy by the entirety confers the right of survivorship on each tenant. A tenant by the entirety cannot alienate his or her interest in such a way as to affect the other's right of survivorship. Although a creditor of one spouse can levy on the debtor's interest and a court could order the interest to be sold the purchaser would only acquire that spouse's interest which is subject to the other spouse's right of survivorship. This means that the creditor stands to acquire the entire interest if the debtor's spouse dies but will be out of luck if the debtor dies.
With that in mind consider the following scenario:
- Deed to H and W 1975
- Mortgage by H and W 1984
- Federal Tax assessment (1) vs. H March 9, 1987
- Judgment filed vs. H April 10, 1987
- Notice of federal tax lien (1) vs. H May 13, 1987
- Federal tax assessment (2) vs. H March 13, 1989
- Commissioner of Labor Warrant vs. H June 19, 1990
- Notice of federal tax lien (2) vs. H July 13, 1992
- Commissioner of Taxation and Finance Warrant vs. H December 9, 1992
- Property seized by IRS November 2, 1994
- Publication November 17, 1994
- Sale to W December 15, 1994
- Deed to W June 15, 1995
Internal Revenue Code 6339 and Code of Federal Regulations 301.6335-1 provide that the right, title and interest of the taxpayer is sold pursuant to a seizure for a federal tax lien subject to outstanding encumbrances which are superior to the lien of the United States. Code section 6339 provides that junior liens are discharged. There is no mention of any notice requirement in order to extinguish them. What conclusion, then, can be drawn as to the status of the various liens in the above example? First it must be determined which encumbrances are superior and which junior.
The federal tax becomes a lien on the date of assessment although no notice is filed. A mortgage which predates an assessment is superior to the United States lien. Code section 6323 grants priority to a judgment filed between the date of assessment and the filing of the Notice of Federal Tax Lien. It does not afford such priority to the State's warrants.
Although the Code does not appear to require notice to cut off junior lienors' rights, Mennonite issues should immediately spring to mind. In fact, a review of the case law in this area turns up Verba v. Ohio Casualty Insurance Co. and the United States of America, wherein the 6th Circuit, relying on Mennonite, held that a judgment creditor is entitled to more notice than mere publication.
Internal Revenue Code 6340 requires the District Director to keep a record for each seizure sale and sets forth what information is to be included. For this purpose the Service uses a form entitled "Record of Seizure and Sale of Real Estate." However, it is usually referred to by its form "number": Record 21.
Lienors are listed on another form, Form 2434-B, which may or may not be attached to the Record 21. This form advises that the IRS "does not warrant the correctness or completeness of the...information. Bidders should...verify for themselves the validity, priority, and amount of encumbrances...each party listed...was mailed a notice of sale..."
A cautious examiner would, therefore, review the Record and Form 2434-B despite the Code's assertion that junior liens are discharged.
My request for the Record 21 for the case above was met with surprise. I was told by one individual that, in 16 years, no one had ever asked him for one. Even assuming that to be an exaggeration it is probable that very few are requested because title examiners may take 6339 at its word and consider the junior lienors' rights to be extinguished, without more.
Indeed, the person I spoke with stated that they send notices to lienors because they feel anyone with an interest "should" get a notice, but that they consider the liens discharged whether a notice is sent or not.
The Form 2434-B for the above case listed the mortgage, the first federal lien, the Commissioner of Labor warrant, the second federal lien, followed by the Commissioner of Taxation and Finance warrant. The judgment is not listed so presumably that creditor was not sent a notice.
Can an examiner conclude that the mortgage and the judgment remain liens and that the federal and state liens are gone?
In the ordinary case a purchaser at an execution sale would acquire H's interest free of the subordinate lienors who were notified but subject to W's right of survivorship. Here, however, W's purchase operates as a redemption, not only leaving H in title, but reviving the two warrants, as well.
Now assume the same facts as above with the added feature that the parties divorced in 1990. Same result. The tenancy by the entirety was severed by divorce, but the parties continued in a co-tenancy relationship as tenants in common. This made W's purchase a redemption which retained H's title. Both parties will be needed to convey and all the non-federal liens will survive. However, the U.S. could now force a sale of the entire property to satisfy H's tax liability, though only out of his share of the equity. W would be paid her share of the equity out of the proceeds.
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