Tuesday, December 7, 2010

IRS Claims Discretion in Minority Discounts in Lien Discharge Cases

CCA 201048036

There are at least two kinds of education.

I've been puzzled by the subject of my Monday post not generating more interest.  It concerns the IRS relaxing its position on releasing liens for short sales.  The most obvious possible explanation and one that has been given some credence by an e-mail I received from Richard Zaretsky who picked up on my post in his blog on short sales is that IRS liens are not a factor in all that many short sales. 

The other possible explanation I have come up with, while possibly less probable, is more entertaining, so I will share it.  I have noted here and there, that tax administration and, accordingly, tax practice can be divided into two very broad areas - determination of the correct tax and collection.  Hold that thought for a moment while I tell one of my stories.

When I was starting in public accounting one of my college classmates was starting his own law practice.  He explained to me that he would do somebody's will for $50 or handle their divorce for $100 if that was all they could afford because "Then I'm their lawyer.  And anybody can get hit by a car."  He spent more time in court than most lawyers I know, because that made the insurance companies more afraid of him.  I get the impression that focusing on collections creates an accounting practice that is more analgous to his practice than that of a larger firm that commands large retainers and has some proportion of its professional staff spending more time in the library (do whatever technological updat you choose on that image) than the courthouse, if they even know where the courthouse is. I further know that there are very few people who comb through the more obscure pronouncements like CCA's and PMTA's so they can blog on them. It's conceivable that none of them have practices that focus on collection.  So maybe the whole collection wing of the industry is going to start counting on me.

Doesn't seem very probable, but just in case I'm going to be more sensitive to collection issues.
 CCA 201048036, which I have decided to reproduce almost in full is also on the subject a liens.  It holds that IRS is not required to consider minority interest discounts in lien discharge cases.

There is nothing in the Code, the regulations, or the IRM that requires the Service to apply a minority interest discount in discharge cases.In fact, there is no reference at all to the discount with regard to valuationfor lien discharge purposes. Your email does not detail the basis of the attorney's conclusion that the discount (as well as force sale value) should apply here. I assume the attorney's reasoning relates to Rev.Rul.93-12 and the use of minority interest discounts in the gift and estate tax context. However, the revenue ruling is, here, not on point factually or with respect to its conclusion.

The regulations under section 6325 do provide some guidance regarding valuation of the government's lien interest for discharge purposes:

Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, 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 appropriate official 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 appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.

Treas. Reg. 301.6325-1(b)(6). IRM similarly provides for the discretionary use of forced sale value. Note that the application of forced sale valuation is not required-its -use is determined on a case-by-case basis: I had a conversation with a lien analyst in the NO, and she indicated that a lien advisor should determine whether, in a particular case, (and to what extent) forced sale value should be used. Therefore, use force sale value is a determination for the lien advisor to make. You mentioned that the lien advisor had a conversation with a PALS. That is a good starting point. The lien analyst mentioned that there are also Collection personnel in the NO who can be a resource in addressing valuation issues.

You did not raise, but we also note that the coowner of encumbered property can apply -for a discharge under section 6325(b)(4). That provision enables an owner (other than the taxpayer) to make a deposit (or provide a bond)in the amount determined by the Service, then seek judicial review under section 7426(a)(4).Discharge under any other provision is discretionary, andjudicial review under section 7426(a)(4) is available only for discharges issued under section 6325(b)(4).

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