I received a very gratifying email yesterday :
We are happily settled in our new home. Thank you for all your help.
The lady who sent it had been trying to purchase a home on a short sale where the seller was receiving a relocation grant. The seller had an outstanding IRS lien. The collection agent responsible for releasing the lien finally gave in after she sent him a copy of CCA 201102058 which she had learned about from my blog post. What is really intriguing is this particular development seems not to have attracted any notice to speak of. Check out this search. It seems like, except for one broken link, I'm the only one who has written on this.
My friend, Stephen McWilliam, a Florida realtor has suggested to me that this may be because the HAFA relocation money is not really flowing yet, making the problem more of a theoretical one. Stephen is a really smart guy. I have a pretty good aptitude for what I do and I have experience and focus. It's always a little humbling to realize that other people I meet in business and am able to help would probably be better at what I do than I am. Fortunately they chose other fields. I think in economics this is referred to as "comparative advantage". At any rate, Stephen mentioned something about the tax aspects of short sales that had never occurred to me. Presumably when you are behind on your mortgage you owe both interest and principal. When the short sale goes through for some transitory moment the money is yours even though your don't get to touch it. If the bank applies the proceeds to interest, you should potentially be able to deduct that interest and should be looking for a Form 1098. I usually try to tie my posts to specific pronouncements, but I haven't been able to find anything that addresses this head on.
This is separate from the issue of getting a Form 1099-C which may require you to recognize income on a short sale.
Showing posts with label short sales. Show all posts
Showing posts with label short sales. Show all posts
Sunday, February 20, 2011
Monday, January 24, 2011
Another Scoop for PAOO - Short Sale Relocation Assistance Does Not Create Lien Equity
CCA 201103045
So here is another bonus post. Last week I did a post on CCA 201102058. It concerns relocation grants under the HAFA program. As I understand the program a senior lien holder can pay an upside down property owner up to $3,000 in relocation assistance to facilitate a short sale. The CCA indicated that the IRS cannot require that this money be turned over to them as a condition of releasing their otherwise worthless lien.
CCA 201103045, which I reproduce in full below explains that the position on relocation assistance is similar to the position that was first enunciated in PMTA 2010-058. In that statement they discussed carve outs for transfer taxes, which also do not create equity.
Over the weekend I received an e-mail from someone whose short sale was being hung up because of this issue. I have yet to see any other commentary on it.
ID: CCA_2010121214444350
Release Date: 1/21/2011 Office: —————
UILC: 6325.00-00
From: ———————————- Sent: Sunday, December 12, 2010 2:44:46 PM To: ———————————- Cc: ———————————- Subject: RE: opinion
It's not really the same situation although the result is the same - i.e., they should not include the payment in computing the Service's interest in the property. The October IG [interim guidance] memo deals with carve-outs to junior lienholders from money that would otherwise go to the senior lienholders. The relocation assistance is not part of the sale proceeds, it's just a payment made directly to the taxpayer and, as such, is not part of the taxpayer's interest in the real property to be discharged from the lien. A new IG memo on this will be coming out soon.
If you have a short sale that is being hung, you may have to wait for the "new IG memo" to percolate through collection, but it might be worth referring to the Chief Counsel Advice. If this ends up being helpful, I'd appreciate you posting a comment on this blog.
So here is another bonus post. Last week I did a post on CCA 201102058. It concerns relocation grants under the HAFA program. As I understand the program a senior lien holder can pay an upside down property owner up to $3,000 in relocation assistance to facilitate a short sale. The CCA indicated that the IRS cannot require that this money be turned over to them as a condition of releasing their otherwise worthless lien.
CCA 201103045, which I reproduce in full below explains that the position on relocation assistance is similar to the position that was first enunciated in PMTA 2010-058. In that statement they discussed carve outs for transfer taxes, which also do not create equity.
Over the weekend I received an e-mail from someone whose short sale was being hung up because of this issue. I have yet to see any other commentary on it.
ID: CCA_2010121214444350
Release Date: 1/21/2011 Office: —————
UILC: 6325.00-00
From: ———————————- Sent: Sunday, December 12, 2010 2:44:46 PM To: ———————————- Cc: ———————————- Subject: RE: opinion
It's not really the same situation although the result is the same - i.e., they should not include the payment in computing the Service's interest in the property. The October IG [interim guidance] memo deals with carve-outs to junior lienholders from money that would otherwise go to the senior lienholders. The relocation assistance is not part of the sale proceeds, it's just a payment made directly to the taxpayer and, as such, is not part of the taxpayer's interest in the real property to be discharged from the lien. A new IG memo on this will be coming out soon.
If you have a short sale that is being hung, you may have to wait for the "new IG memo" to percolate through collection, but it might be worth referring to the Chief Counsel Advice. If this ends up being helpful, I'd appreciate you posting a comment on this blog.
Tuesday, January 18, 2011
More On Short Sales- Relocation Grants are For Relocation
CCA 201102058
Last month I wrote a post about IRS allowing that a carve-out by a lender for transfer taxes does not create equity in their lien. That burst of generosity is followed this month by even more beneficence. If under the Home Affordable Foreclosure Alternative program, the senior lender provides a taxpayer with $3,000 in relocation assistance, they can actually use that money to pay relocation expenses. The full text of the ruling is below:
In consultation with the Collection experts in Counsel, below is the answer to your question concerning whether the IRS can require a taxpayer to pay the IRS the amount of relocation expenses as a condition of discharge. Recently, the Treasury Department introduced the Home Affordable Foreclosure Alternatives (HAFA) program. The HAFA program took effect on April 5, 2010. Borrowers who participate in a HAFA transaction are eligible for $3,000 in relocation assistance. If the senior lender provides the taxpayer with the $3,000 relocation assistance required under the HAFA program, the IRS cannot require the taxpayer to turn the $3,000 over in exchange for the lien discharge. The HAFA program payment is a payment directly made to the taxpayer to assist in relocation. As such, the relocation payment has no bearing upon the taxpayer's equity in the property under a discharge analysis. Rather, this is just a payment to the taxpayer. Furthermore, under the terms of this program, since this is a required payment as a condition of participation in the program, it would likely be treated as an ordinary expense of sale to be allowed priority despite being reached by the federal tax lien. If a lender provides relocation assistance because the lender believes it makes good business sense and not because it is required under HAFA, the legal answer is the same. The IRS cannot require the taxpayer to pay the IRS the amount of the relocation expenses as a condition of discharge.
I don't know how we are ever going to solve the deficit if the Chief Counsel keeps giving away the store like this.
Last month I wrote a post about IRS allowing that a carve-out by a lender for transfer taxes does not create equity in their lien. That burst of generosity is followed this month by even more beneficence. If under the Home Affordable Foreclosure Alternative program, the senior lender provides a taxpayer with $3,000 in relocation assistance, they can actually use that money to pay relocation expenses. The full text of the ruling is below:
In consultation with the Collection experts in Counsel, below is the answer to your question concerning whether the IRS can require a taxpayer to pay the IRS the amount of relocation expenses as a condition of discharge. Recently, the Treasury Department introduced the Home Affordable Foreclosure Alternatives (HAFA) program. The HAFA program took effect on April 5, 2010. Borrowers who participate in a HAFA transaction are eligible for $3,000 in relocation assistance. If the senior lender provides the taxpayer with the $3,000 relocation assistance required under the HAFA program, the IRS cannot require the taxpayer to turn the $3,000 over in exchange for the lien discharge. The HAFA program payment is a payment directly made to the taxpayer to assist in relocation. As such, the relocation payment has no bearing upon the taxpayer's equity in the property under a discharge analysis. Rather, this is just a payment to the taxpayer. Furthermore, under the terms of this program, since this is a required payment as a condition of participation in the program, it would likely be treated as an ordinary expense of sale to be allowed priority despite being reached by the federal tax lien. If a lender provides relocation assistance because the lender believes it makes good business sense and not because it is required under HAFA, the legal answer is the same. The IRS cannot require the taxpayer to pay the IRS the amount of the relocation expenses as a condition of discharge.
I don't know how we are ever going to solve the deficit if the Chief Counsel keeps giving away the store like this.
Saturday, December 4, 2010
More on Lien Releases
IRSIG SBSE-05-1010-054
My Monday post on PMTA 2010-058 seems to have been my first scoop. It concerns the IRS position on aspects of releasing liens to facilitate short sales. The idea is that a lien on a property with a first mortgage far in excess of value is worthless and should be released. The IRS was taking the position, though, that they were superior to carve-outs for transfer taxes. This creates a Catch-22 that would prevent the short sale unless the taxpayer/owner could come up with the transfer taxes. The statement (PMTA stands for Program Manager Technical Assistance) retreats from that position and recognizes that the transfer taxes are really coming out of the first lienholder. It also mentioned homeowners associations dues as something that the first lienholder might decide to allow to be cleared.
All week long nobody else seems to have picked up on this. I found an attorney in Florida who has a blog dedicated to short sales, who wrote me that he had been in "shouting matches" on this very issue. He wrote a post on it, crediting me with the discovery. I also found that there is a lot of misinformation out there on this issue with many in the blogosphere believing that the IRS has a super priority that can never be released. Really astounding when you consider how reliable random websites and blogs are on most other issues. (My son tells me that irony doesn't come across well in text. What do you think ?)
I also found that subsequent to the PMTA there is another IRS document which I am reproducing in full since it is pretty crisp:
IRSIG SBSE-05-1010-054
Certificates of Discharge in Short Sale Situations
October 4, 2010
Control Number: SBSE-05-1010-054
Expiration Date: October 5, 2011
Impacted : IRM 5.12.3
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTOR, ADVISORY, INSOLVENCY, AND QUALITY
FROM:
Frederick W. Schindler /s/ Frederick W. Schindler Director,
Collection Policy
SUBJECT:
Certificates of Discharge in Short Sale Situations
The purpose of this memorandum is to issue interim guidance for processing and approving requests for certificates of discharge in short sale situations. The impacted section of IRM 5.12.3 , Certificates Relating to Liens, will be revised to include the information in this memorandum. Please ensure that this information is distributed to all affected employees in your organization.
The authority of the Internal Revenue Service (IRS) to issue a certificate of discharge of property subject to the federal tax lien is found in Internal Revenue Code (IRC) section 6325(b). Among other conditions, the IRS may issue a certificate of discharge when the interest of the United States in the such property is determined to have no value ( section 6325(b)(2)(B)).
A short sale occurs when the senior lien holder agrees to accept less than the total amount owed as satisfaction for its lien claim. For example, a bank has a priority mortgage claim for $600,000, but, due to the significant decline in the real property market, the bank agrees to a sale of the mortgaged property for $300,000. Because the senior lien attaches to all the equity in the property, generally the lien interest of the United States in short sale properties is valueless. Therefore, applications for discharge for properties subject to short sales should be considered under IRC 6325(b)(2)(B).
To facilitate the sale of the property in these situations, the senior lien holder might negotiate the payment of expenses to be taken from its settlement amount. In certain situations, these expenses might be greater than normal closing costs allowed by the IRS and might include creditors that would otherwise be junior to Certificates of Discharge in Short Sales the IRS. This action by the senior lien holder to carve proceeds out of its priority claim to pay these expenses does not create an equity interest on the part of the taxpayer which may be reached by the IRS lien. Provided there is no fraudulent aspect to the payment distribution and the lien interests of the IRS in other properties of the taxpayer is not being harmed, the IRS has no authority to require payment of the sum that otherwise would have gone to the senior lien holder.
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.
Therefore, upon receiving an application for discharge of a property subject to a short sale, follow standard procedures outlined in IRM 5.12.3 to investigate the statements made in the application regarding the transfer, encumbrances on the property, property values, and proposed distribution of the proceeds. Additional documentation to complete the investigation may be requested if the information has not otherwise been provided. Presuming no issues are identified, the discharge application can be approved following existing IRM procedures.
In normal (non-short) sale situations, where the lien claim of the bank is fully paid and the federal tax lien attaches to surplus proceeds, the IRS's lien interest must be satisfied in accordance with IRC 6325(b) before the property can be discharged from the lien. Creditors junior to the IRS interest are not entitled to payment from the proceeds before the IRS lien interest is fully paid.
If you have any questions, please contact me, or a member of your staff may contact Kyle Romick, Senior Program Analyst.
I have to admit that I don't know what IRSIG stands for. SBSE is small business self employment. This would be more embarrassing except for the fact that IRS employees testifying in Tax Court on internal documents that have been put in evidence sometimes can't explain what their codes mean.
My Monday post on PMTA 2010-058 seems to have been my first scoop. It concerns the IRS position on aspects of releasing liens to facilitate short sales. The idea is that a lien on a property with a first mortgage far in excess of value is worthless and should be released. The IRS was taking the position, though, that they were superior to carve-outs for transfer taxes. This creates a Catch-22 that would prevent the short sale unless the taxpayer/owner could come up with the transfer taxes. The statement (PMTA stands for Program Manager Technical Assistance) retreats from that position and recognizes that the transfer taxes are really coming out of the first lienholder. It also mentioned homeowners associations dues as something that the first lienholder might decide to allow to be cleared.
All week long nobody else seems to have picked up on this. I found an attorney in Florida who has a blog dedicated to short sales, who wrote me that he had been in "shouting matches" on this very issue. He wrote a post on it, crediting me with the discovery. I also found that there is a lot of misinformation out there on this issue with many in the blogosphere believing that the IRS has a super priority that can never be released. Really astounding when you consider how reliable random websites and blogs are on most other issues. (My son tells me that irony doesn't come across well in text. What do you think ?)
I also found that subsequent to the PMTA there is another IRS document which I am reproducing in full since it is pretty crisp:
IRSIG SBSE-05-1010-054
Certificates of Discharge in Short Sale Situations
October 4, 2010
Control Number: SBSE-05-1010-054
Expiration Date: October 5, 2011
Impacted : IRM 5.12.3
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTOR, ADVISORY, INSOLVENCY, AND QUALITY
FROM:
Frederick W. Schindler /s/ Frederick W. Schindler Director,
Collection Policy
SUBJECT:
Certificates of Discharge in Short Sale Situations
The purpose of this memorandum is to issue interim guidance for processing and approving requests for certificates of discharge in short sale situations. The impacted section of IRM 5.12.3 , Certificates Relating to Liens, will be revised to include the information in this memorandum. Please ensure that this information is distributed to all affected employees in your organization.
The authority of the Internal Revenue Service (IRS) to issue a certificate of discharge of property subject to the federal tax lien is found in Internal Revenue Code (IRC) section 6325(b). Among other conditions, the IRS may issue a certificate of discharge when the interest of the United States in the such property is determined to have no value ( section 6325(b)(2)(B)).
A short sale occurs when the senior lien holder agrees to accept less than the total amount owed as satisfaction for its lien claim. For example, a bank has a priority mortgage claim for $600,000, but, due to the significant decline in the real property market, the bank agrees to a sale of the mortgaged property for $300,000. Because the senior lien attaches to all the equity in the property, generally the lien interest of the United States in short sale properties is valueless. Therefore, applications for discharge for properties subject to short sales should be considered under IRC 6325(b)(2)(B).
To facilitate the sale of the property in these situations, the senior lien holder might negotiate the payment of expenses to be taken from its settlement amount. In certain situations, these expenses might be greater than normal closing costs allowed by the IRS and might include creditors that would otherwise be junior to Certificates of Discharge in Short Sales the IRS. This action by the senior lien holder to carve proceeds out of its priority claim to pay these expenses does not create an equity interest on the part of the taxpayer which may be reached by the IRS lien. Provided there is no fraudulent aspect to the payment distribution and the lien interests of the IRS in other properties of the taxpayer is not being harmed, the IRS has no authority to require payment of the sum that otherwise would have gone to the senior lien holder.
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.
Therefore, upon receiving an application for discharge of a property subject to a short sale, follow standard procedures outlined in IRM 5.12.3 to investigate the statements made in the application regarding the transfer, encumbrances on the property, property values, and proposed distribution of the proceeds. Additional documentation to complete the investigation may be requested if the information has not otherwise been provided. Presuming no issues are identified, the discharge application can be approved following existing IRM procedures.
In normal (non-short) sale situations, where the lien claim of the bank is fully paid and the federal tax lien attaches to surplus proceeds, the IRS's lien interest must be satisfied in accordance with IRC 6325(b) before the property can be discharged from the lien. Creditors junior to the IRS interest are not entitled to payment from the proceeds before the IRS lien interest is fully paid.
If you have any questions, please contact me, or a member of your staff may contact Kyle Romick, Senior Program Analyst.
I have to admit that I don't know what IRSIG stands for. SBSE is small business self employment. This would be more embarrassing except for the fact that IRS employees testifying in Tax Court on internal documents that have been put in evidence sometimes can't explain what their codes mean.
Thursday, December 2, 2010
PAOO Greatest Hits
I started this blog on December 28, 2009. I seeded it with a couple of unpublished articles I had written. One was of some practical import on the necessity for scrupulous transaction discipline if you wanted to have family limited partnerships respected. The other is on the tax aspects of transactions in the virtual world. The latter is currently of no practical value, but its time is coming. The blog did not begin in earnest until June of this year. I soon adopted a Monday, Wednesday, Friday schedule and a discipline of tying the posts to specific recent developments (sometimes the rope is pretty long).
Google provides me with a wealth of statistical information so I am able to identify the posts that have generated the most traffic. I'm relatively pleased with the ranking based on the peoples choice. The actual number of hits are of course a deep proprietary secret, but I feel safe in releasing the relative ranking. So the top five all time greatest posts based on traffic are
1.Does Tax Court Ruling on Gender Reassignment Go Far Enough ? This post owes its popularity to a plug from distinguished science fiction author and fellow Son of Xavier , John Sundman. I find it particularly gratifying. I am the longest serving board member of Just Detention International, formerly known as Stop Prisoner Rape. SPR had filed an amicus brief in the landmark decision Farmer v Brennan and frequently quoted the comment of Justice Blackmun:
The horrors experienced by many young inmates, particularly those who, like petitioner, are convicted of nonviolent offenses, border on the unimaginable. Prison rape not only threatens the lives of those who fall prey to their aggressors, but is potentially devastating to the human spirit
The plaintiff, Dee Farmer, was a pre-op male to female transsexual imprisoned in the general population of a male federal penitentiary. Transgendered persons, who are generally imprisoned based on their original biological gender, are among the groups most vulnerable to sexual exploitation in prison. So my work with JDI has made me sensitive to their issues.
The other thing that fascinates me about the case is that the taxpayer Rhiannon G. O'Donnabhain had changed her name from Robert Donovan. Is there some sort of connection between going from male to female and Irish American to Irish ?
2.Windfall For Unmarried Couples In this post I introduce Robin and Terry, the couple of indeterminate gender and marital status who were created to help me avoid awkward pronoun problems. The post concerns CCA 201021050 which discusses the federal tax implications of California community property laws on registered domestic partners. The ruling had received very little attention when I posted it. It may have been overshadowed by Perry vs. Schwarzenegger. I was also visiting California at the time so I was waiting for the call to be interviewed by Ellen. The call still hasn't come. My Robin and Terry posts did motivate an old friend to dub me "Friend of the Homosexual". I asked him if that was an official designation and he indicated it was so since then I have indicated that this is an "award winning" blog.
3.IRS To Stop Lousing Up Short Sales As I am writing, this post is still climbing. It is the closest I have come to a scoop. It concerns PMTA 2010-058 which relaxes IRS policy on releasing liens in short sale situations. It seems like there should be some interest in it and I have gotten some feedback that it is significant, but as of now (December 2, 2010), I seem to be the only person writing about it.
4. Incentive to Innovate This post deviated from my "current development" policy. I was at Mass Innovation Night and was surprised to learn that the special tax treatment of patents is not nearly as well known as it should be in those circles. The high traffic to this post was probably due to reciprocity since I mentioned a couple of presenters..
5. It's Over This was one of my favorites so I'm glad it did well. It concerns the failed tax shelters of EMC founder Richard Egan. It got me on a roll of historic metaphors and reflection on the tax business.
I have really enjoyed working on this blog and hope that you have enjoyed it also.
Google provides me with a wealth of statistical information so I am able to identify the posts that have generated the most traffic. I'm relatively pleased with the ranking based on the peoples choice. The actual number of hits are of course a deep proprietary secret, but I feel safe in releasing the relative ranking. So the top five all time greatest posts based on traffic are
1.Does Tax Court Ruling on Gender Reassignment Go Far Enough ? This post owes its popularity to a plug from distinguished science fiction author and fellow Son of Xavier , John Sundman. I find it particularly gratifying. I am the longest serving board member of Just Detention International, formerly known as Stop Prisoner Rape. SPR had filed an amicus brief in the landmark decision Farmer v Brennan and frequently quoted the comment of Justice Blackmun:
The horrors experienced by many young inmates, particularly those who, like petitioner, are convicted of nonviolent offenses, border on the unimaginable. Prison rape not only threatens the lives of those who fall prey to their aggressors, but is potentially devastating to the human spirit
The plaintiff, Dee Farmer, was a pre-op male to female transsexual imprisoned in the general population of a male federal penitentiary. Transgendered persons, who are generally imprisoned based on their original biological gender, are among the groups most vulnerable to sexual exploitation in prison. So my work with JDI has made me sensitive to their issues.
The other thing that fascinates me about the case is that the taxpayer Rhiannon G. O'Donnabhain had changed her name from Robert Donovan. Is there some sort of connection between going from male to female and Irish American to Irish ?
2.Windfall For Unmarried Couples In this post I introduce Robin and Terry, the couple of indeterminate gender and marital status who were created to help me avoid awkward pronoun problems. The post concerns CCA 201021050 which discusses the federal tax implications of California community property laws on registered domestic partners. The ruling had received very little attention when I posted it. It may have been overshadowed by Perry vs. Schwarzenegger. I was also visiting California at the time so I was waiting for the call to be interviewed by Ellen. The call still hasn't come. My Robin and Terry posts did motivate an old friend to dub me "Friend of the Homosexual". I asked him if that was an official designation and he indicated it was so since then I have indicated that this is an "award winning" blog.
3.IRS To Stop Lousing Up Short Sales As I am writing, this post is still climbing. It is the closest I have come to a scoop. It concerns PMTA 2010-058 which relaxes IRS policy on releasing liens in short sale situations. It seems like there should be some interest in it and I have gotten some feedback that it is significant, but as of now (December 2, 2010), I seem to be the only person writing about it.
4. Incentive to Innovate This post deviated from my "current development" policy. I was at Mass Innovation Night and was surprised to learn that the special tax treatment of patents is not nearly as well known as it should be in those circles. The high traffic to this post was probably due to reciprocity since I mentioned a couple of presenters..
5. It's Over This was one of my favorites so I'm glad it did well. It concerns the failed tax shelters of EMC founder Richard Egan. It got me on a roll of historic metaphors and reflection on the tax business.
I have really enjoyed working on this blog and hope that you have enjoyed it also.
Monday, November 29, 2010
IRS To Stop Lousing Up Short Sales
PMTA 2010-058
For the latest on this see my follow-up post
When I was a kid, my father worked on Wall Street. He was a Senior Order Clerk. I'm not sure whether his job still exists. It was not particularly lucrative, but I got these insights into high finance through the jokes that he used to tell me. Most of them I didn't "get" until I was in my thirties. One of my favorites is the little ditty "He who sells what isn't hissen, buys it back or goes to prison." That was about short sales as the term relates to securities.
The term means something else in real estate. If a property has a fair market value lesser than the mortgage, the secured party might let the property be sold for an amount lesser than the mortgage. This avoids the need for foreclosure. The owner may or may not remain liable for the balance, the discharge of which may or may not be a taxable event. Such is not the topic of this post.
When I was buying a condo, I found that buying property on a short sale tended to be fraught with delay. You would think that the pressure to sell would create pressure to move things along, but the pressure is not sufficient to overcome bureaucratic inertia. Not surprisingly people who have trouble paying their mortgages frequently have trouble paying their taxes. So it is not unusual for a property with an upside down mortgage to have IRS liens against it. In order for the property to transfer the IRS must release its lien.
Typically the first mortgage will have been in place before the IRS filed its liens. So the value of the lien is the lesser of the tax obligation or the taxpayers equity in the property. In the case of a short sale the latter amount is 0. So the IRS should release its worthless lien and let life go on. That is not what has happened though. Even though the IRS is behind the first mortgage, they are, or at least, believe they are ahead of everybody else :
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.
PMTA 2010-058 finds the above interpretation to be erroneous:
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).
Essentially they are saying that the carve-out for transfer taxes is coming out of the banks secured interest and does not create some sort of equity that makes the IRS lien worth something. This document a letter to the director of collection policy (PMTA stands for Program Manager Technical Assistance) was dated September 17, 2010, but only recently came up on RIA. I haven't seen anything else on this so I am making this a bonus post in the interest of timeliness. If you are involved in a short sale that is hanging because of the IRS, it might be a useful reference.
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. So this may be a problem that is peculiar to Florida although the principle is of general interest.
P.S.
In the comments below you will see feedback from Richard Zaretsky, an attorney specializing in short sales and related matters. He indicated to me that he has had shouting matches with the IRS on this issue. He has a blog dedicated to short sales. I've seen some misinformation on websites that would lead you to believe that an IRS lien will kill the possibility of a short sale. The relevant section of the Code is 6325(b)(2)(B) which indicates a lien with no value can be released and that in determining the lien's value other liens with priority will be taken into account.
For the latest on this see my follow-up post
When I was a kid, my father worked on Wall Street. He was a Senior Order Clerk. I'm not sure whether his job still exists. It was not particularly lucrative, but I got these insights into high finance through the jokes that he used to tell me. Most of them I didn't "get" until I was in my thirties. One of my favorites is the little ditty "He who sells what isn't hissen, buys it back or goes to prison." That was about short sales as the term relates to securities.
The term means something else in real estate. If a property has a fair market value lesser than the mortgage, the secured party might let the property be sold for an amount lesser than the mortgage. This avoids the need for foreclosure. The owner may or may not remain liable for the balance, the discharge of which may or may not be a taxable event. Such is not the topic of this post.
When I was buying a condo, I found that buying property on a short sale tended to be fraught with delay. You would think that the pressure to sell would create pressure to move things along, but the pressure is not sufficient to overcome bureaucratic inertia. Not surprisingly people who have trouble paying their mortgages frequently have trouble paying their taxes. So it is not unusual for a property with an upside down mortgage to have IRS liens against it. In order for the property to transfer the IRS must release its lien.
Typically the first mortgage will have been in place before the IRS filed its liens. So the value of the lien is the lesser of the tax obligation or the taxpayers equity in the property. In the case of a short sale the latter amount is 0. So the IRS should release its worthless lien and let life go on. That is not what has happened though. Even though the IRS is behind the first mortgage, they are, or at least, believe they are ahead of everybody else :
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.
PMTA 2010-058 finds the above interpretation to be erroneous:
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).
Essentially they are saying that the carve-out for transfer taxes is coming out of the banks secured interest and does not create some sort of equity that makes the IRS lien worth something. This document a letter to the director of collection policy (PMTA stands for Program Manager Technical Assistance) was dated September 17, 2010, but only recently came up on RIA. I haven't seen anything else on this so I am making this a bonus post in the interest of timeliness. If you are involved in a short sale that is hanging because of the IRS, it might be a useful reference.
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. So this may be a problem that is peculiar to Florida although the principle is of general interest.
P.S.
In the comments below you will see feedback from Richard Zaretsky, an attorney specializing in short sales and related matters. He indicated to me that he has had shouting matches with the IRS on this issue. He has a blog dedicated to short sales. I've seen some misinformation on websites that would lead you to believe that an IRS lien will kill the possibility of a short sale. The relevant section of the Code is 6325(b)(2)(B) which indicates a lien with no value can be released and that in determining the lien's value other liens with priority will be taken into account.
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