A short Chief Counsel Advisory opinion provides a cautionary tale for those purchasing property from the IRS. CCA 2021021011190596 explains that if the buyer at an IRS sale does not follow through and make all of the payments necessary to complete the purchase, the IRS can declare the sale null and void. When it does so, the purchaser forfeits all of the payments made to that point and the IRS can resell the property.
When the IRS seizes real or tangible property, IRC 6335 governs the sale. Subsection (a) provides:
As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.
The IRS created a special unit within the collection division to deal with sales because the rules governing sales are specific, the number of sales is not that great, and the effort of revenue officers (ROs) to follow the technical rules created too many problems and took the ROs too much time. So, once the IRS seizes property, the RO in charge of collecting from the taxpayer turns the property over to the PALS unit for it to conduct the actual sale. If the sale results in full satisfaction of the tax liability, then the RO is finished with the case. If the sale does not result in full satisfaction, which is probably the more likely outcome, then the RO continues to pursue collection.
Since RRA 98, the IRS has conducted relatively few seizures and therefore holds relatively few sales. Because these events occur infrequently, no one at the IRS becomes familiar with the process as a routine. I suspect that certain ROs conduct most of the seizures and some never do so. Similar to the lack of deep knowledge on the IRS side because of the low number of seizures and sales is the lack of deep knowledge on the buyer side. Buyers must understand what they are purchasing if they buy property from the IRS and the failure to understand the rules that govern purchases can lead to unhappy outcomes. Purchasing property from the IRS at one of these sales will look like a real bargain and it could be. It could also be a trap for the unwary.
IRC 6335(b) provides the rules regarding the notice of sale that the IRS must give:
The Secretary shall as soon as practicable after the seizure of the property give notice to the owner, in the manner prescribed in subsection (a), and shall cause a notification to be published in some newspaper published or generally circulated within the county wherein such seizure is made, or if there be no newspaper published or generally circulated in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof. Whenever levy is made without regard to the 10-day period provided in section 6331(a), public notice of sale of the property seized shall not be made within such 10-day period unless section 6336 (relating to sale of perishable goods) is applicable.
IRC 6335(e) governs the manner of sale. It is the rules set forth in this section that are the focus of the CCA. The IRS should not seize and sell property that has no equity. In order words, it cannot just seize property to cause the taxpayer an inconvenience. It actually did that prior to 1980 as a way of disrupting businesses that were pyramiding their taxes. Now, the RO needs to make a determination prior to seizure that the sale will bring positive dollars to the Treasury. Instead of seizing property with no equity, the IRS now brings injunction action against taxpayers who pyramid and who it cannot shut down with administrative action as discussed here and here.
Of course, the RO could make a mistake in determining value, but the RO cannot just seize property to thwart the taxpayer from conducting business. One of the other reasons seizures are down since 1998 is that a willful failure by the RO in the seizure could trigger the application of sin number one of the 10 deadly sins resulting in possible termination of employment. We have written about the 10 deadly sins here and here. Some ROs do not want to take that risk, which means ROs will be, or certainly should be, very careful when deciding to seize property and following through.
The manner of sale rules under IRC 6335(e) provide:
(1) In general
(A) Determinations relating to minimum price.
Before the sale of property seized by levy, the Secretary shall determine—
a minimum price below which such property shall not be sold (taking into account the expense of making the levy and conducting the sale), and
whether, on the basis of criteria prescribed by the Secretary, the purchase of such property by the United States at such minimum price would be in the best interest of the United States.
(B) Sale to highest bidder at or above minimum price
If, at the sale, one or more persons offer to purchase such property for not less than the amount of the minimum price, the property shall be declared sold to the highest bidder.
(C) Property deemed sold to United States at minimum price in certain cases
If no person offers the amount of the minimum price for such property at the sale and the Secretary has determined that the purchase of such property by the United States would be in the best interest of the United States, the property shall be declared to be sold to the United States at such minimum price.
(D) Release to owner in other cases
If, at the sale, the property is not declared sold under subparagraph (B) or (C), the property shall be released to the owner thereof and the expense of the levy and sale shall be added to the amount of tax for the collection of which the levy was made. Any property released under this subparagraph shall remain subject to any lien imposed by subchapter C.
In the case on which the CCA focuses, an RO has seized property, turned it over to the PALS who have sold it with a provision that the purchaser will pay something down and something over time. The purchaser has defaulted on one of the subsequent payments. The CCA determines that the appropriate IRS official can declare the purchaser in default and the purchase null and void. This will give the IRS the chance to resell the property while keeping the payments it received from the first purchaser. The CCA does not talk about who will benefit from the defaulted proceeds – the taxpayer or the IRS. That’s governed by another provision.
The CCA notes that:
Discretion to return to the purchaser any portion of the amount paid is not stated in or implied in the Code or the Treasury Regulations. Both provide that any amount paid by a defaulting bidder “shall be forfeited.” I.R.C. § 6335(e)(3); Treas. Reg. § 301.6335-1(c)(9). Similarly, there is nothing in the IRM that suggests any circumstances under which the Service would have the ability to return any portion of the amount forfeited under section 6335(e)(3). In fact, the IRM has special accounting procedures for how the Service is to handle forfeited bid-in amounts. See I.R.M. 18.104.22.168.1(2) (cross-referencing I.R.M. 3.17.63).
The IRS will take the forfeited amounts and place them in the general treasury account, meaning that the taxpayer will not get the benefit of the forfeited payments, but instead, the general public gets those benefits. The taxpayer may benefit if the next sale brings in more money or may lose if it does not.