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Seeking a Discharge of the Federal Tax Lien

Posted on Mar. 24, 2023

The case of Long v. United States, Dk. No. 2:22-cv-00176 (D. Utah 2023) examines the request for a discharge of the federal tax lien and declines to provide the relief requested. The factual background for the request for relief does not arise with great frequency but comes up often enough and always makes me feel bad for the spouse stuck with the tax liability of their ex-spouse because ex-spouse’s unpaid taxes have caused a lien to arise and attach to property now owned by the non-liable spouse who thought they had extricated themselves from their former partner’s financial shortcomings.

Ms. Long filed married filing separate returns while she was married. That suggests she had some insight into her former husband’s finances. She paid her taxes and he did not. They owned some real estate jointly. The IRS filed a notice of federal tax lien (NFTL) against Mr. Long in the county where the property was located. The filing of the NFTL perfected the lien interest of the IRS.

Mr. and Mrs. Long divorced at some point after the filing of the NFTL and she was awarded the property through a divorce decree. The opinion does not say what she knew or did not know about the NFTL at the time of the award. I hope that her divorce attorney, if she had one, would have helped her to understand the impact of the NFTL on the value of the property she received but that’s not clear.

After receiving the property, she requested a discharge of the lien; the IRS turned her down and she brought suit.

It’s worth taking a moment to digress from the case to discuss discharge in order to understand what she requested of the IRS. Many practitioners mix the concept of release and discharge when thinking about liens. In the context of the federal tax liens the two terms have distinct meaning. A release of the federal tax lien signifies satisfaction of the liability or unenforceability of the liability usually because of the expiration of the statute of limitations. Section 6325(a) governs release. Ms. Long did not seek a release and she made the right choice of remedies in requesting a discharge.

A person seeking a discharge of a federal tax lien does not need to show that the taxpayer satisfied the tax liability giving rise to the lien or that the tax liability has become unenforceable. The IRS grants a discharge when it has a lien against all of taxpayer’s property but the taxpayer, or a third party, seeks to move the lien from a specific piece of the property encumbered by the lien. Here, Ms. Long sought to remove, or discharge, the federal tax lien from the property she received as part of the divorce; however, granting her a discharge with respect to that property would not remove, or release, the federal tax lien from all of Mr. Long’s property.

In deciding whether to grant a discharge the IRS looks to IRC 6325(b). That section provides a few paths to discharge. The most common path to discharge results when the applicant fully pays the IRS its lien interest in the property or shows that the IRS has no lien interest. This path to relief is set out in IRC 6325(b)(2)(A) [paying the IRS its interest in the property] and (B) [showing the IRS it has no lien interest in the property] and happens routinely in the sale of real estate. When someone whose property is encumbered by the federal tax lien which has been perfected by an NFTL seeks to sell, the seller requests a discharge so that the purchaser can obtain a clean title. At closing, the closing agent calculates the value of the tax lien in the property, pays the IRS and the IRS issues a discharge. This happens multiple times every day.

Ms. Long chose a harder path to discharge since she did not offer to pay the IRS the value of its lien interest in the property.  She asked the IRS to remove the lien because the property she received in the divorce did not have value for the IRS. The opinion does not talk about the value of the IRS lien interest in the property. I strongly suspect the property had some equity to which the tax lien attached. If it did the IRS would turn down a discharge request submitted without payment of that value. She looked to the language of the statute that said the IRS “may” issue a discharge, but it doesn’t issue a discharge where value exists unless the party requesting the discharge remits an amount equal to that value.

Another possible path to discharge exists which Ms. Long did not pursue. Under IRC 6323(b)(1) the IRS may discharge property if the taxpayer’s remaining property has at least double the value of the outstanding liability. She didn’t choose this path because, I suspect, Mr. Long’s remaining property did not provide the IRS with the cushion required by the statute.

Having failed to convince the IRS to administratively discharge the lien from her property and no doubt being quite displeased with owning property encumbered by a lien for her ex spouse’s tax liability which she probably suspected he would not pay, she brought suit against the IRS seeking a court to order the IRS to discharge the lien. This suit seems like a bad idea to me, and it did to the court as well. I feel sorry for Ms. Long because she did not receive what she hoped for out of the divorce settlement; however, a transfer of this type simply doesn’t remove the lien.

She initially brought a quiet title action under 28 USC 2410 in which she also sought damages from the IRS under IRC 7432 for refusing to discharge the lien administratively. The IRS moved to dismiss her claim. The court agreed with the IRS since the federal tax lien attached to the property and nothing in IRC 6325(b) required the IRS to issue a discharge. With respect to the claim for damages, the court said she could not show the refusal was unlawful. Aside from the fact that the IRS refusal to discharge the lien appears correct on these facts, IRC 7432 does not apply in this situation. It provides a basis for seeking damages if the IRS fails to release a lien. It provides no relief for failure to discharge a lien.

After that loss she decided to back up and try again. She filed a motion to amend her complaint and seek a declaratory judgment. She wanted the court to order that the liens had no value. The IRS objected to the amendment because the court lacked subject matter jurisdiction and because she failed to state a claim on which relief could be granted. The court denied her request to amend as futile explaining that it lacked subject matter jurisdiction over her request.

The case demonstrates the need to understand the true value of property you receive in divorce. It also shows the near impossibility of trying to force the IRS to discharge a lien under the no value provision of 6325(b) if value exists or if the IRS perceives that value exists. Ms. Long doesn’t have any good options here. She can wait out the statute of limitations on collection. If the real property at issue is her home, a good chance exists that the IRS will not foreclose its lien interest in the property. If she needs to sell the property before the expiration of the collection statute, the discharge provisions will come back into play since the purchaser will want clear title. She will receive from the sale the equity in the property after payment of the value of the IRS lien interest.

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