IRS LIENS ON SHORT SALE PROPERTY - RESOLVING PHANTOM VALUE CLAIMS

One of the weirder roadblocks we have been seeing is the clearing of IRS liens against a taxpayer (property seller) when the taxpayer is trying to short sell a property.  Typically if an IRS lien is on a property the attorney or accountant will present to the IRS a waiver of lien request with requisite proposed settlement statement, recent appraisal of the property, and reason for the lien waiver request.  But the IRS started interpreting a rule that caused the IRS to demand the monies that were to pay the transfer (in Florida the "documentary stamps") tax to instead be paid to the IRS because it was a "value" upon which the IRS had a superior lien.  I have previously written on the need for IRS lien waivers in SHORT SALES AND IRS LIENS, which interestingly was my very first blog.

The problem was that the money for the transfer tax in a short sale is coming from the buyer's funds,(being the contract price less credits and prorations on the closing statement), and if the money for the transfer tax goes to the IRS, there is no money for the transfer tax. If there is no money for the transfer tax, the sale cannot occur. Catch 22?

In a recent and apparently obscure letter directive called PMTA 2010-58 (PMTA means Program Manager Technical Assistance), the IRS changes its stand on this policy.

The IRS policy on the matter is described as follows:

Applications for Discharge Which Include Requests for Payment of Real Estate Transfer Tax....In cases where a filed notice of federal tax lien has perfected the interest of the United States in such property, the Service is asked to issue a certificate of discharge of federal tax lien to allow payment of the state's claim at closing. It is the Service's position that such taxes have no priority status under I.R.C. §6323(b)(6) against the filed notice of federal tax lien. ... Priority of the federal tax lien is defined exclusively in I.R.C. §6323. Under no circumstances will a discharge of federal tax lien be issued for less than the full value of the Service's claim on the equity in the subject property. The transfer tax will not be accorded priority status or treated as an expense of sale. Applications that include such provisions will be rejected.

Under this interpretation, the taxpayer (property owner) has to come up with the transfer taxes in order to move the transaction on because the IRS said the transfer tax was essentially additional consideration and thus additional value and the IRS has a lien on everything the bank does not have a lien on. Typically payment of this sum cannot happen twice because of either lender short sale criteria rules or the lack of the seller to have funds to do so.

The IRS (through PMTA 2010-058 letter issued September 17, 2010) now has apparently re-directed the interpretation to the realism of the short sale transaction:

We disagree with the conclusion that the designation by the senior lienholder of some of its proceeds to be used to pay real estate transfer taxes in connection with short sales of real property somehow creates an equity interest in the property on the part of the taxpayer. Rather, these are expenses that the senior lienholder agrees to carve out of its priority lien claim as a matter of business prudence in order to facilitate the sale. Because this does not create an equity interest on behalf of the taxpayer that is subject to the federal tax lien, the authority of the Service to issue a certificate of discharge is under section 6325(b)(2)(B), where the interest in the United States is valueless. The Service has no authority under section 6325(b)(2)(B) to require payment of the sum that otherwise would be applied to junior real estate transfer taxes as a condition of discharge. Because the interest of the United States is valueless, the result would be the same even if the senior lienholder was choosing to use a portion of its mortgage proceeds to pay a junior creditor of the taxpayer (such as payment of homeowner's association fees).

According to Peter Reilly who gave me the heads-up on this particularly annoying interpretation employed at least by South Florida IRS personnel, the letter was sent to the Director of Collection Policy for Small Business/ Self Employed.  It was copied to Special Counsel of the National Taxpayer Advocate Program, Assistant Division Counsel (SBSE) and Associate Area Counsels for Ft. Lauderdale and Jacksonville.

Should this directive be accepted (ie: used) by area personnel that give us those IRS lien releases, it willbe a much needed reversal of the absurd policy previously giving us practitioners unnecessary aggravation.

NOTE: ON OCTOBER 4TH THE DEPARTMENT OF THE TREASURY ISSUED ITS FORMAL LETTER INSTRUCTION (click on previous phrase).  Thanks again Peter!  The IMPORTANT crux example states:

Following the previous example, the bank determines that out of the $300,000 sales price, it will allow $15,000 of expenses to be paid. Most of the $15,000 is for normal closing costs, but $5,000 of it is for a homeowner's association fee, which is junior in priority to the IRS, and $2,000 is for state transfer taxes. Because the payments made for the homeowner's association fee and the state transfer taxes are made from proceeds attributable to the bank's priority lien interest and the interest of the IRS in the property to be discharged is valueless, the IRS cannot condition discharge upon payment of any part of the amount going to these expenses.

Oh, what a relief that is...........!

Copyright 2010 Richard P. Zaretsky, Esq.

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Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  email: RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com. 

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