[2000-2 USTC ¶50,638] Darlene Kugler, Executrix of the Estate of Ernest J. Kugler, Jr., Plaintiff v. United States of America, Defendant

U.S. District Court, West. Dist. Pa., Civ. 99-533, 7/13/2000

[Code Secs. 6325 and 7433 ]

Civil suit: Damages: IRS employee: Tax lien: Certificate of subordination, failure to issue.--An individual's suit alleging that an IRS revenue agent recklessly or intentionally disregarded the procedure for issuing a certificate of subordination set forth in Reg. §301.6325-1(d) was dismissed for failure to state a claim. The agent did not overstep his authority when he advised them that he would not recommend that a certificate be issued to them, because the authority to grant or deny the issuance of a certificate only extended to written applications properly filed with the district director, which the taxpayer failed to do. Moreover, the record showed that the agent merely advised the taxpayer that he would recommend that the certificate not be issued, which did not amount to a formal decision not to issue it.

MEMORANDUM

I.

STANDISH, District Judge:

In this civil action, plaintiff asserts a cause of action pursuant to 26 U.S.C. §7433. ¹ Plaintiff alleges that defendant, acting through the employees and agents of the Internal Revenue Service ( IRS ), conducted unauthorized tax collection activities that disregarded the Internal Revenue Code, 26 U.S.C. §1, et seq. (IRC), or regulations promulgated thereunder. Presently, before the court is the motion of defendant to dismiss plaintiff's amended complaint pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). For reasons which follow, the court will grant defendant's motion.

II.

The procedural and factual history of this case can be summarized as follows:

Plaintiff is the widow of Ernest J. Kugler, Jr. and she is the executrix of his estate. Defendant United States of America is the governmental entity responsible for the collection of individual federal income taxes. This undertaking is accomplished through the IRS .

In 1981, 1982, 1984, and 1986 through 1995, plaintiff and Mr. Kugler were unable to pay individual income taxes. In addition, Mr. Kugler incurred sole proprietorship liabilities stemming from his business.

Plaintiff and Mr. Kugler filed for Chapter 13 bankruptcy for the years 1990 and 1993. In 1993, plaintiff and Mr. Kugler, in an effort to satisfy their tax liability, agreed to make monthly payments over a five year period to the IRS . However, in 1995, Mr. Kugler suffered injuries which made him unable to work. As a result, plaintiff and Mr. Kugler defaulted on their payment plan.

The IRS subsequently began collection procedures which included, inter alia, placing liens on the Kuglers' home and seizing the settlement proceeds from a personal injury action in which Mr. Kugler had been involved. In response to the placement of the liens on their residence, the Kuglers expressed to IRS Revenue Officer John Marker their interest in obtaining a mortgage or loan, the proceeds of which would be used to partially satisfy their tax liabilities. By letter dated October 9, 1996, Mr. Marker informed the Kuglers that he would not recommend the issuance of a certificate of subordination that the lending institution would require for such a loan. Mr. Marker indicated that his "decision" was based on the deficiency of the mortgage proceeds in comparison to the Kuglers' tax liability.

By March of 1997, the Kugler's tax liability had increased to approximately $157,000.00. The majority of that liability was comprised of accrued interest and penalties. Subsequently, the IRS directed the Kuglers to sell their home by April 16, 1997 in order to pay a portion of their debt. As a result, the Kuglers filed for Chapter 11 bankruptcy on April 3, 1997.

On May 15, 1997, plaintiff attended a meeting with the IRS concerning the Chapter 11 bankruptcy. Mr. Kugler refused to attend the meeting because of his previous dealings with the IRS . Sometime later, Mr. Kugler committed suicide.

On April 6, 1999, plaintiff filed a complaint in the present case. In response to the complaint, defendant filed a motion to dismiss. On December 27, 1999, this court granted defendant's motion and dismissed plaintiff's complaint without prejudice to her right to file an amended complaint on or before January 7, 2000. Plaintiff filed her amended complaint on January 7, 2000.

III .

A

A motion to dismiss for lack of subject matter jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(1), tests the power of a court to hear the particular type of claim asserted by a plaintiff. On a defendant's Fed.R.Civ.P. 12(b)(1) motion to dismiss, the plaintiff has the burden of showing jurisdiction exists. Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3rd Cir. 1991). In deciding a motion to dismiss for lack of subject matter jurisdiction, the court may consider the pleadings and evidence outside the pleadings. Mortensen v. First Federal Sav. & Loan Ass'n, 549 F.2d 884, 891 (3rd Cir. 1977). Also, the court may "weigh the evidence and satisfy itself as to its power to hear the case." Mortensen, 549 F.2d at 891.

B

A motion to dismiss for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6), tests the sufficiency of a complaint. See Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). In deciding a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the court accepts as true the facts pleaded in the complaint and any reasonable inferences derived from those facts. Unger v. Nat'l Residents Matching Program, 928 F.2d 1392, 1400 (3d Cir. 1991). Additionally, the court is to construe the complaint in the light most favorable to the plaintiff. Colburn v. Upper Darby Twp., 838 F.2d 663, 665 (3d Cir. 1988), cert. denied, 489 U.S. 1065 (1989). However, the court is not required to accept as true legal conclusions or unwarranted factual inferences. Resolution Trust Corp. v. Farmer, 823 F.Supp. 302, 305 (E.D. Pa. 1993) (citation omitted).

IV.

An analysis of plaintiff's claims begins with consideration of Title 26, United States Code, Section 7433. Section 7433 provides in pertinent part as follows:

§7433. Civil damages for certain unauthorized collection actions

(a) In general.--If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

26 U.S.C. §7433(a). Plaintiff's amended complaint refers to the conduct of Revenue Officer John Marker, conduct allegedly evincing a reckless or intentional disregard of Treasury Regulation §301.6325-1(d), as the primary basis for her cause of action under 26 U.S.C. §7433.

In support of its motion to dismiss, defendant presents two arguments. First, defendant argues that the cited regulation contains no procedural framework that would include recommendations from a Revenue Officer. Second, defendant argues that any action taken by a district officer with respect to issuing a certificate of subordination is discretionary in nature, precluding a finding of reckless or intentional disregard of the IRC or Treasury Regulations.

In response, plaintiff argues that Mr. Marker's October 9, 1996 letter to the Kuglers' attorney, in which Mr. Marker stated that he would not recommend the issuance of a certificate of subordination, is evidence of Mr. Marker's reckless disregard of Treasury Regulation §301.6325-1(d). Plaintiff's argument is without merit.

Treasury Regulation §301.6325-1(d) sets forth the procedure for applying for a certificate of subordination.

§301.6325-1 Release of lien or discharge of property.

(d) Subordination of lien

(4) Application for certificate of subordination. Any person desiring a certificate of subordination under this paragraph shall submit an application therefor in writing to the district director responsible for the collection of the tax. The application shall contain such information as the district director may require.

Treas. Reg. §301.6325-1(d)(4).

Plaintiff concedes that neither she nor Mr. Kugler submitted a written application to the district director as required by the regulation. (Amended Complaint ¶41(f)); (Br. at 7). However, plaintiff argues as follows:

. . . based upon the Treasury Regulation and the related Revenue Procedure, the District Director has the discretionary authority to grant or issue a certificate of subordination. It is also apparent that a Revenue Officer does not have discretionary authority to recommend or deny the issuing of a certificate of subordination. This is the gist of Plaintiff's Amended Complaint.

(Br. at 6).

The court agrees with plaintiff's argument that the regulation does not permit a revenue officer to deny a written application for a certificate of subordination. However, it does not follow that plaintiff has stated a claim upon which relief can be granted.

The district director cannot exercise her discretionary authority to issue a certificate of subordination unless an applicant submits a written application to her. It is not possible to conceive how Mr. Marker usurped the district director's discretionary authority when the district director had no authority to issue a certificate in plaintiff's case because plaintiff never submitted a written application to her.

Moreover, plaintiff's "request" for a certificate of subordination, a request made to Mr. Marker, was either oral or written. If oral, Mr. Marker could not have usurped the district director's discretionary authority to issue a certificate of subordination because that authority extends only to written applications.

A similar result obtains from a written application improperly filed with Mr. Marker. Setting aside that the fact that any written application was improperly filed with the revenue officer, the court observes that plaintiff's amended complaint accurately alleges that Mr. Marker indicated in his letter dated October 9, 1996 that he was not going to recommend the issuance of a certificate of subordination. Mr. Marker's language is clear: although he refuses to recommend the issuance of a certificate of subordination, he nowhere indicates that he is rejecting the Kuglers' request. The court is unable to ascertain how a mere refusal to recommend amounts to usurpation of the district director's discretionary authority to issue a certificate of subordination. ²

It is clear from the foregoing that Mr. Marker did not act in reckless or intentional disregard to any provision of the IRC or the regulations promulgated thereunder. Accordingly, the court will grant defendant's motion to dismiss. ³

An order follows.

¹ Plaintiff's complaint is comprised of two counts. Count I is designated as a wrongful death action "to recover damages for the wrongful death of Ernest J. Kugler, Jr. pursuant to the provisions of 42 Pa. C.S. §8301 . . . and to recover damages on behalf of the Estate of Ernest J. Kugler, Jr. pursuant to the provisions of 42 Pa. C.S. §8302." (Amended Complaint ¶¶33-34). Count II is designed as a survival action in which plaintiff seeks "damages pursuant to the provisions of 42 Pa. C.S. §8302." (Amended Complaint ¶49). However, it is clear that plaintiff's cause of action falls under Section 7433 of the IRC and not Pennsylvania's Wrongful Death and Survival statutes. (See Amended Complaint ¶4, stating that "[t]his is an action by the Plaintiff against the United States of America acting through the officers and employees of the Department of the Treasury, Internal Revenue Service alleging unauthorized tax collection activities pursuant to 26 U.S.C. §7433 which resulted in the wrongful death of Ernest J. Kugler, Jr.).

² To the extent that plaintiff complains of Mr. Marker's failure to forward the Kuglers' request to the district director, plaintiff's claim is not one upon which relief can be granted.

Plaintiff has cited no clause of Treasury Regulation §301.6325-1(d) or any other Treasury Regulation that requires revenue officers to forward improperly-filed written applications to the district director. Thus, even if plaintiff submitted a written application, Mr. Marker's failure to forward that application is not actionable conduct.

³ In addition to her claim based upon Mr. Marker's alleged usurpation of the district director's discretionary authority to issue a certificate of subordination, plaintiff asserts a claim based upon the Kuglers' inability to submit an offer in compromise to the IRS due to Mr. Marker's alleged usurpation. Becau

Revenue Procedure 68-8 ¹, 1968-1 CB 754

(Also Part I, Section 6325; 26 CFR 400.2-1.)
Application for subordination of lien by payment of the amount of subordination under section 6325(d)(1) or to facilitate tax collection under section 6325(d)(2) of the Internal Revenue Code of 1954.

[Text]

SECTION 1. PURPOSE.

This Revenue Procedure contains the information which is required by a district director in an application by any person for subordination of a tax lien under section 6325(d)(1) or (2) of the Internal Revenue Code of 1954.

SEC . 2. BACKGROUND.

Pursuant to section 6325(d)(1) of the Code and paragraph (c)(1) of section 400.2-1 of the Temporary Regulations, T.D. 6944, page 854, this Bulletin, under the Federal Tax Lien Act of 1966, P.L. 89-719, C.B. 1966-2, 623, a district director may, in his discretion, issue a certificate of subordination of any lien imposed under chapter 64 of the Code upon any part of the property subject to the lien if there is paid over to the district director an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States. Pursuant to section 6325(d)(2) of the Code and paragraph (c)(2) of section 400.2-1 of the regulations a district director may, in his discretion, issue a certificate of subordination of any lien imposed under chapter 64 of the Code upon any property subject to the lien if the district director believes that the subordination of the lien will ultimately result in an increase in the amount realizable by the United States from the property subject to the lien and will facilitate the ultimate collection of the tax liability.

SEC . 3. APPLICATION FOR CERTIFICATE OF SUBORDINATION.

Any person desiring a certificate of subordination under paragraph (c)(1) or (2) of section 400.2-1 of the regulations shall submit a written application, containing the information set forth in section 4 of this Revenue Procedure, in triplicate to the district director (marked for the attention of the chief, special procedures section) responsible for the collection of the tax, declaring that the application is made under penalties of perjury and requesting that the certificate be issued.

SEC . 4. INFORMATION REQUIRED IN APPLICATION.

.01 The name and address of the applicant, the name and address of the taxpayer, and the family relationship, if any, of the applicant to the taxpayer.

.02 Whether the certificate of subordination is sought under paragraph (c)(1) (relating to payment of amount of subordination) or paragraph (c)(2) (relating to facilitating tax collection) of section 400.2-1 of the regulations.

.03 A detailed description, including location, of the property with respect to which the certificate is sought (in the case of real property, the street address, city, and State and the same description as is contained in the title or deed to the property).

.04 A copy of each Notice of Federal Tax Lien (Form 668) affecting the property, or the following information with respect to each such Notice of Federal Tax Lien:

(1) The internal revenue district named thereon,

(2) The name and address of the taxpayer, and

(3) The date and place of filing of each notice.

.05 A copy of the proposed instrument under which the encumbrance to which the tax lien is to be subordinated will arise, or a description of the encumbrance, including the amount of the encumbrance, the nature of the encumbrance (such as mortgage, assignment, etc.), and the date the transaction is to be completed.

.06 A list of the encumbrances upon the property with respect to which the certificate is sought showing for each encumbrance--

(1) The name and address of the holder of the encumbrance,

(2) A description of the encumbrance,

(3) The date of the agreement under which the encumbrance arose,

(4) If recorded, the date and place of recordation,

(5) The original principal amount of the encumbrance and the rate of interest,

(6) If known, the principal amount due as of the date of application (with a separate statement of costs and accrued interest), and

(7) The family relationship, if any, of the applicant to the holder of any other encumbrance on the property.

.07 An estimate by the applicant of the fair market value of the property with respect to which the certificate is sought.

.08 In the case of an application described in section 400.2-1(c)(1) of the regulations, the amount to be paid to the United States.

.09 In the case of an application described in section 400.2-1(c)(2) of the regulations, a complete statement showing how, in the opinion of the applicant, the amount realizable by the United States will ultimately be increased, and how the collection of the tax liability will be facilitated.

.10 Any other information which in the opinion of the applicant might have a bearing upon the determination to be made.

.11 The name and address of the applicant's attorney or representative, if any.

.12 The signature of the applicant.

SEC . 5. PAYMENTS.

.01 Since the amount to be paid for the issuance of a certificate under section 400.2-1(c)(1) or (2) of the regulations is a matter for determination by the district director after consideration of the facts and law involved, no sum of money or check should be submitted with an application.

.02 In the case of a subordination under section 400.2-1(c)(1) or (2) of the regulations, the district director will, after approval and upon receipt of the amount to be paid to the United States, issue a certificate of subordination. All remittances should be in cash, or by a certified or cashier's check drawn on any bank or trust company incorporated under the laws of the United States, or under the laws of any State or possession of the United States, or by bank, express, telegraph, or United States postal money order. If the remittance is not in the form described in the preceding sentence, the issuance of the certificate of subordination will be held in abeyance pending clearance of the tendered remittance.

SEC . 6. ADDITIONAL INFORMATION.

In addition to the information required to be submitted under section 4 of this Revenue Procedure, after submission of the application the district director may require the applicant to furnish such additional information as the district director may deem necessary.

---------- [Footnotes] ----------

¹ Also released as Technical Information Release 961, dated Jan. 26, 19 68.

§301.6325-1. Release of lien or discharge of property

(a) Release of lien

(1) Liability satisfied or unenforceable. --Any district director may issue a certificate of release of a lien imposed with respect to any internal revenue tax, whenever he finds that the entire liability for the tax has been satisfied or has become unenforceable as a matter of law (and not merely uncollectible or unenforceable as a matter of fact). Tax liabilities frequently are unenforceable in fact for the time being, due to the temporary nonpossession by the taxpayer of discoverable property or property rights. In all cases the liability for the payment of the tax continues until satisfaction of the tax in full or until the expiration of the statutory period for collection, including such extension of the period for collection as may be agreed upon in writing by the taxpayer and the district director.

(2) Bond accepted. --The district director may, in his discretion, issue a certificate of release of any tax lien if he is furnished and accepts a bond that is conditioned upon the payment of the amount assessed (together with all interest in respect thereof), within the time agreed upon in the bond, but not later than 6 months before the expiration of the statutory period for collection, including any period for collection agreed upon in writing by the district director and the taxpayer. For provisions relating to bonds, see sections 7101 and 7102 and the regulations thereunder.

(b) Discharge of specific property from the lien

(1) Property double the amount of the liability

(i) The district director may, in his discretion, issue a certificate of discharge of any part of the property subject to a lien imposed under chapter 64 of the Code if he determines that the fair market value of that part of the property remaining subject to the lien is at least double the sum of the amount of the unsatisfied liability secured by the lien and of the amount of all other liens upon the property which have priority over the lien. In general, fair market value is that amount which one ready and willing but not compelled to buy would pay to another ready and willing but not compelled to sell the property.

(ii) The following example illustrates a case in which a certificate of discharge may not be given under this subparagraph:

Example. The Federal tax liability secured by a lien is $1,000. The fair market value of all property which after the discharge will continue to be subject to the Federal tax lien is $10,000. There is a prior mortgage on the property of $5,000, including interest, and the property is subject to a prior lien of $100 for real estate taxes. Accordingly, the taxpayer's equity in the property over and above the amount of the mortgage and real estate taxes is $4,900, or nearly five times the amount required to pay the assessed tax on which the Federal tax lien is based. Nevertheless, a discharge under this subparagraph is not permissible. In the illustration, the sum of the amount of the Federal tax liability ($1,000) and of the amount of the prior mortgage and the lien for real estate taxes ($5,000 + $100 = $5,100) is $6,100. Double the sum is $12,200, but the fair market value of the remaining property is only $10,000. Hence, a discharge of the property is not permissible under this subparagraph, since the Code requires that the fair market value of the remaining property be at least double the sum of two amounts, one amount being the outstanding Federal tax liability and the other amount being all prior liens upon such property. In order that the discharge may be issued, it would be necessary that the remaining property be worth not less than $12,200.

(2) Part payment; interest of United States valueless

(i) Part payment. --The district director may, in his discretion, issue a certificate of discharge of any part of the property subject to a lien imposed under chapter 64 of the Code if there is paid over to him in partial satisfaction of the liability secured by the lien an amount determined by him to be not less than the value of the interest of the United States in the property to be so discharged. In determining the amount to be paid, the district director will take into consideration all the facts and circumstances of the case, including the expenses to which the Government has been put in the matter. In no case shall the amount to be paid be less than the value of the interest of the United States in the property with respect to which the certificate of discharge is to be issued.

(ii) Interest of the United States valueless. --The district director may, in his discretion, issue a certificate of discharge of any part of the property subject to the lien if he determines that the interest of the United States in the property to be so discharged has no value.

(iii) Valuation of interest of United States. --For purposes of this subparagraph, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the district director shall give consideration to the value of the property and the amount of all liens and encumbrances thereon having priority over the Federal tax lien. In determining the value of the property, the district director may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.

(3) Discharge of property by substitution of proceeds of sale. --A district director may, in his discretion, issue a certificate of discharge of any part of the property subject to a lien imposed under chapter 64 of the Code if such part of the property is sold and, pursuant to a written agreement with the district director, the proceeds of the sale are held, as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as the lien or claim had with respect to the discharged property. This subparagraph does not apply unless the sale divests the taxpayer of all right, title, and interest in the property sought to be discharged. Any reasonable and necessary expenses incurred in connection with the sale of the property and the administration of the sale proceeds shall be paid by the applicant or from the proceeds of the sale before satisfaction of any lien or claim of the United States.

(4) Application for certificate of discharge. --Any person desiring a certificate of discharge under this paragraph shall submit an application in writing to the district director responsible for collection of the tax. The application shall contain such information as the district director may require.

(c) Estate or gift tax liability fully satisfied or provided for

(1) Certificate of discharge. --If the district director determines that the tax liability for estate or gift tax has been fully satisfied, he may issue a certificate of discharge of any or all property from the lien imposed thereon. If the district director determines that the tax liability for estate or gift tax has been adequately provided for, he may issue a certificate discharging particular items of property from the lien. If a lien has arisen under section 6324B (relating to special lien for additional estate tax attributable to farm, etc., valuation) and the district director determines that the liability for additional estate tax has been fully secured in accordance with §20.6324B-1(c) of this chapter, the district director may issue a certificate of discharge of the real property from the section 6324B lien. The issuance of such a certificate is a matter resting within the discretion of the district director, and a certificate will be issued only in case there is actual need therefor. The primary purpose of such discharge is not to evidence payment or satisfaction of the tax, but to permit the transfer of property free from the lien in case it is necessary to clear title. The tax will be considered fully satisfied only when investigation has been completed and payment of the tax, including any deficiency determined, has been made.

(2) Application for certificate of discharge. --An application for a certificate of discharge of property from the lien for estate or gift tax should be filed with the district director responsible for the collection of the tax. It should be made in writing under penalties of perjury and should explain the circumstances that require the discharge, and should fully describe the particular items for which the discharge is desired. Where realty is involved each parcel sought to be discharged from the lien should be described on a separate page and each such description submitted in duplicate. In the case of an estate tax lien, the application should show the applicant's relationship to the estate, such as executor, heir, devisee, legatee, beneficiary, transferee, or purchaser. If the estate or gift tax return has not been filed, a statement under penalties of perjury may be required showing (i) the value of the property to be discharged, (ii) the basis for such valuation, (iii) in the case of the estate tax, the approximate value of the gross estate and the approximate value of the total real property included in the gross estate, (iv) in the case of the gift tax, the total amount of gifts made during the calendar year and the prior calendar years subsequent to the enactment of the Revenue Act of 1932 and the approximate value of all real estate subject to the gift tax lien, and (v) if the property is to be sold or otherwise transferred, the name and address of the purchaser or transferee and the consideration, if any, paid or to be paid by him.

(d) Subordination of lien

(1) By payment of the amount subordinated. --A district director may, in his discretion, issue a certificate of subordination of a lien imposed under chapter 64 of the Code upon any part of the property subject to the lien if there is paid over to the district director an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States. For this purpose, the tax lien may be subordinated to another lien or interest on a dollar-for-dollar basis. For example, if a notice of a Federal tax lien is filed and a delinquent taxpayer secures a mortgage loan on a part of the property subject to the tax lien and pays over the proceeds of the loan to a district director after an application for a certificate of subordination is approved, the district director will issue a certificate of subordination. This certificate will have the effect of subordinating the tax lien to the mortgage.

(2) To facilitate tax collection

(i) In general. --A district director may, in his discretion, issue a certificate of subordination of a lien imposed under chapter 64 of the Code upon any part of the property subject to the lien if the district director believes that the subordination of the lien will ultimately result in an increase in the amount realized by the United States from the property subject to the lien and will facilitate the ultimate collection of the tax liability.

(ii) Examples. --The provisions of this subparagraph may be illustrated by the following examples:

Example (1). A, a farmer, needs money in order to harvest his crop. A Federal tax lien, notice of which has been filed, is outstanding with respect to A's property. B, a lending institution, is willing to make the necessary loan if the loan is secured by a first mortgage on the farm which is prior to the Federal tax lien. Upon examination, the district director believes that ultimately the amount realizable from A's property will be increased and the collection of the tax liability will be facilitated by the availability of cash when the crop is harvested and sold. In this case, the district director may, in his discretion, subordinate the tax lien on the farm to the mortgage securing the crop harvesting loan.

Example (2). C owns a commercial building which is deteriorating and in unsalable condition. Because of outstanding Federal tax liens, notices of which have been filed, C is unable to finance the repair and rehabilitation of the building. D, a contractor, is willing to do the work if his mechanic's lien on the property is superior to the Federal tax liens. Upon examination, the district director believes that ultimately the amount realizable from C's property will be increased and the collection of the tax liability will be facilitated by arresting deterioration of the property and restoring it to salable condition. In this case, the district director may, in his discretion, subordinate the tax lien on the building to the mechanic's lien.

Example (3). E, a manufacturer of electronic equipment, obtains financing from F, a lending institution, pursuant to a security agreement, with respect to which a financing statement was duly filed under the Uniform Commercial Code on June 1, 1970 . On April 15, 1971 , F gains actual notice or knowledge that notice of a Federal tax lien had been filed against E on March 31, 1971 , and F refuses to make further advances unless its security interest is assured of priority over the Federal tax lien. Upon examination, the district director believes that ultimately the amount realizable from E's property will be increased and the collection of the tax liability will be facilitated if the work in process can be completed and the equipment sold. In this case, the district director may, in his discretion, subordinate the tax lien to F's security interest for the further advances required to complete the work.

Example (4). Suit is brought against G by H, who claims ownership of property the legal title to which is held by G. A Federal tax lien against G, notice of which has previously been filed, will be enforceable against the property if G's title is confirmed. Because section 6323(b)(8) is inapplicable, J, an attorney, is unwilling to defend the case for G unless he is granted a contractual lien on the property, superior to the Federal tax lien. Upon examination, the district director believes that the successful defense of the case by G will increase the amount ultimately realizable from G's property and will facilitate collection of the tax liability. In this case, the district director may, in his discretion, subordinate the tax lien to J's contractual lien on the disputed property to secure J's reasonable fees and expenses.

(3) Subordination of section 6324B lien. --The district director may issue a certificate of subordination with respect to a lien imposed by section 6324B if the district director determines that the interests of the United States will be adequately secured after such subordination. For example, A, a qualified heir of qualified real property, needs to borrow money for farming purposes. If the current fair market value of the real property is $150,000, the amount of the claim to which the special lien is to be subordinated is $40,000, the potential liability for additional tax (as defined in section 2032A(c)) is less than $55,000, and there are no other facts to indicate that the interest of the United States will not be adequately secured, the district director may issue a certificate of subordination. The result would be the same if the loan were for bona fide purposes other than farming.

(4) Application for certificate of subordination. --Any person desiring a certificate of subordination under this paragraph shall submit an application therefor in writing to the district director responsible for the collection of the tax. The application shall contain such information as the district director may require.

(e) Nonattachment of lien. --If a district director determines that, because of confusion of names or otherwise, any person (other than the person against whom the tax was assessed) is or may be injured by the appearance that a notice of lien filed in accordance with §301.6323(f)-1 refers to such person, the district director may issue a certificate of nonattachment. Such certificate shall state that the lien, notice of which has been filed, does not attach to the property of such person. Any person desiring a certificate of nonattachment under this paragraph shall submit an application therefor in writing to the district director responsible for the collection of the tax. The application shall c ontain such information as the district director may require.

(f) Effect of certificate

(1) Conclusiveness. --Except as provided in subparagraphs (2) and (3) of this paragraph, if a certificate is issued under section 6325 by a district director and the certificate is filed in the same office as the notice of lien to which it relates (if the notice of lien has been filed), the certificate shall have the following effect --

(i) In the case of a certificate of release issued under paragraph (a) of this section, the certificate shall be conclusive that the tax lien referred to in the certificate is extinguished;

(ii) In the case of a certificate of discharge issued under paragraph (b) or (c) of this section, the certificate shall be conclusive that the property covered by the certificate is discharged from the tax lien;

(iii) In the case of a certificate of subordination issued under paragraph (d) of this section, the certificate shall be conclusive that the lien or interest to which the Federal tax lien is subordinated is superior to the tax lien; and

(iv) In the case of a certificate of nonattachment issued under paragraph (e), the certificate shall be conclusive that the lien of the United States does not attach to the property of the person referred to in the certificate.

(2) Revocation of certificate of release or nonattachment

(i) In general. --If a district director determines that either --

(a) A certificate of release or a certificate of nonattachment of the general tax lien imposed by section 6321 was issued erroneously or improvidently, or

(b) A certificate of release of such lien was issued in connection with a compromise agreement under section 7122 which has been breached,

and if the period of limitation on collection after assessment of the tax liability has not expired, the district director may revoke the certificate and reinstate the tax lien. The provisions of this subparagraph do not apply in the case of the lien imposed by section 6324 relating to estate and gift taxes.

(ii) Method of revocation and reinstatement. --The revocation and reinstatement described in subdivision (i) of this subparagraph is accomplished by --

(a) Mailing notice of the revocation to the taxpayer at his last known address (see §301.6212-2 for further guidance regarding the definition of last known address); and

(b) Filing notice of the revocation of the certificate in the same office in which the notice of lien to which it relates was filed (if the notice of lien has been filed).

(iii) Effect of reinstatement

(a) Effective date. --A tax lien reinstated in accordance with the provisions of this subparagraph is effective on and after the date the notice of revocation is mailed to the taxpayer in accordance with the provisions of subdivision (ii)(a) of this subparagraph, but the reinstated lien is not effective before the filing of notice of revocation, in accordance with the provisions of subdivision (ii)(b) of this subparagraph, if the filing is required by reason of the fact that a notice of the lien had been filed.

(b) Treatment of reinstated lien. --As of the effective date of reinstatement, a reinstated lien has the same force and effect as a general tax lien imposed by section 6321 which arises upon assessment of a tax liability. The reinstated lien continues in existence until the expiration of the period of limitation on collection after assessment of the tax liability to which it relates. The reinstatement of the lien does not retroactively reinstate a previously filed notice of lien. The reinstated lien is not valid against any holder of a lien or interest described in §301.6323(a)-1 until notice of the reinstated lien has been filed in accordance with the provisions of §301.6323(f)-1 subsequent to or concurrent with the time the reinstated lien became effective.

(iv) Example. --The provisions of this subparagraph may be illustrated by the following example:

Example. On March 1, 19 67, an assessment of an unpaid Federal tax liability is made against A. On March 1, 19 68, notice of the Federal tax lien, which arose at the time of assessment, is filed. On April 1, 19 68, A executes a bona fide mortgage on property belonging to him to B. On May 1, 19 68, a certificate of release of the tax lien is erroneously issued and is filed by A in the same office in which the notice of lien was filed. On June 3, 19 68, the lien is reinstated in accordance with the provisions of this subparagraph. On July 1, 19 68, A executes a bona fide mortgage on property belonging to him to C. On August 1, 19 68, a notice of the lien which was reinstated is properly filed in accordance with the provisions of §301.6323(f)-1. The mortgages of both B and C will have priority over the rights of the United States with respect to the tax liability in question. Because a reinstated lien continues in existence only until the expiration of the period of limitation on collection after assessment of the tax liability to which the lien relates, in the absence of any extension or suspension of the period of limitation on collection after assessment, the reinstated lien will become unenforceable by reason of lapse of time after February 28, 1973 .

(3) Certificates void under certain conditions. --Notwithstanding any other provisions of subtitle F of the Code, any lien for Federal taxes attaches to any property with respect to which a certificate of discharge has been issued if the person liable for the tax reacquires the property after the certificate has been issued. Thus, if property subject to a Federal tax lien is discharged therefrom and is later reacquired by the delinquent taxpayer at a time when the lien is still in existence, the tax lien attaches to the reacquired property and is enforceable against it as in the case of after-acquired property generally.

(g) Filing of certificates and notices. --If a certificate or notice described in this section may not be filed in the office designated by State law in which the notice of lien imposed by section 6321 (to which the certificate or notice relates) is filed, the certificate or notice is effective if filed in the office of the clerk of the United States district court for the judicial district in which the State office where the notice of lien is filed is situated. [Reg. §301.6325-1.]

� [T.D. 6119, 12-31-54. Amended by T.D. 6425, 11-10-59; T.D. 6498, 10-24-60; T.D. 6700, 1-6-64; T.D. 7429, 8-20-76; T.D. 7847, 11-9-82 and T.D. 8939, 1-11-2001.]