Delivery confirmation does not satisfy nonjudicial sale notice rules

Plain-English summary

Chief Counsel considered whether notice of a nonjudicial sale sent by regular mail with delivery confirmation satisfies IRC § 7425(c). The advice concludes that it does not, because the statute requires registered or certified mail or personal service, and delivery confirmation does not require a signature for final delivery. When the notice is invalid, the federal tax lien remains attached to the property after the sale. The Service may also seek surplus sale proceeds, although state law governs the property rights of interested parties after the sale.

Ruling snapshot

• Question: Is regular mail with delivery confirmation valid notice under § 7425(c), and may the Service seek surplus proceeds when notice is invalid?
• Outcome: Advice given
• Key authorities: IRC § 7425; Colorado Property Acquisitions, Inc. v. United States; United States v. Tagliareni; Simon v. United States

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201043027
       Release Date: 10/29/2010
       CC:PA:03: MStilger
       POSTN-125527-10

UILC: 7425.04-01

date: August 27, 2010

 to:   Melissa C. Quale
       Attorney (San Francisco, Group 3)
       (Small Business/Self-Employed)

from: Pamela W. Fuller
Branch Chief, Branch 3
(Procedure and Administration)

subject: Notice of Nonjudicial Sale Under Section 7425

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.


                                               ISSUES

          1) Is notice sent by regular mail with delivery confirmation valid notice for purposes
             of 7425(c)?

          2) Assuming that the notice is invalid and the lien remains in place following the
             sale, is the Service also allowed to seek the surplus proceeds from the sale?



                                           CONCLUSIONS

          1)    No. Notice sent by regular mail with delivery confirmation does not meet the
                delivery requirement of section 7425(c).

          2)    Yes. The Service can seek the surplus proceeds from sale in addition to
                enforcing its lien on the property.

POSTN-125527-10 2

                                      FACTS

In a large number of cases, the Service has received notice of a nonjudicial sale by
regular mail with delivery confirmation. The Service receives the notices prior to the
sale and takes no subsequent action with regard to the notices or the sale. We
assume that the notices are otherwise correct and would be valid if sent by registered or
certified mail.

                              LAW AND ANALYSIS

Delivery Requirement in I.R.C. §7425(c)

I.R.C. § 7425 was added to the Internal Revenue Code of 1954 as part of the Federal
Tax Lien Act of 1966, for purposes of protecting the government’s interests in cases of
judicial and nonjudicial sales of a taxpayer’s real or personal property. Section 7425(b)
provides protection for the government where a nonjudicial sale of property on which
the government holds a lien takes place without notice to the United States. Under
subsection (b)(1), if notice of such lien was properly filed more than 30 days before a
nonjudicial sale and the government is not given proper notice of the sale at least 25
days prior thereto, such sale of real or personal property “shall…be made subject to and
not disturbing the lien.”

Section 7425(c) provides that “[n]otice…shall be given (in accordance with the
regulations prescribed by the Secretary) in writing, by registered or certified mail or by
personal service, not less than 25 days prior to such sale, to the Secretary.” The
requirement that such notice be made by registered or certified mail or by personal
service is also provided in the “Instructions for Preparing a Notice of Nonjudicial Sale of
Property and Application for Consent to Sale” See Publication 786 (Rev. 1-2006).

A key feature of both registered and certified mail service is that signature is required for
delivery. Although USPS’s delivery confirmation service is similar to certified mail,
signature confirmation is not required for final delivery with the delivery confirmation
service. Thus, the plain language of section 7425(c) specifically requires notice by
“registered or certified mail,” and such modes of delivery are distinguishable from the
delivery confirmation service.

In addition, courts that have addressed this issue have interpreted the notice
requirement of section 7425(c) as mandatory and allowed for no alternative to the
specified modes of delivery. Colorado Property Acquisitions, Inc. v. United States, 894
F.2d 1173 (10th Cir. 1990)(recognizing the harshness of this rule which “allows the IRS
to receive actual notice…ignore the notice and still retain the right to levy upon the
property”); See also United States v. Tagliareni, 2007 WL 1586156 (N.D. Ala.
2007)(applying the statutory interpretation from Colorado Property Acquisitions, Inc. and

POSTN-125527-10 3

finding the IRS lien valid and enforceable given the lack of valid notice). Thus, the
requirement that notice be sent by registered or certified mail is strictly construed, such
that notice sent by any other form (e.g., regular mail with delivery confirmation) is
invalid.

The Ability of the Service to Seek Surplus Proceeds from a Nonjudicial Sale Where
I.R.C. §7425 Notice Was Invalid

As discussed above, pursuant to section 7425(b) where a nonjudicial sale occurs
without notice to the United States, the Government’s lien remains on the property after
the sale. Nowhere in the statutory or regulatory scheme is there a provision limiting the
Service’s recovery to enforcement of the lien. It follows that the Service is also entitled
to seek the surplus proceeds from the nonjudicial sale of the property. See Simon v.
United States, 756 F.2d 696, 698 (9th Cir. 1985).

In Simon, the Simons purchased real property at a tax auction sale made by Los
Angeles County. The county tax collector failed to provide the Service with notice as
required by section 7425. Therefore, the Simons purchased the property subject to the
federal tax lien. In addition, the Service levied upon and was paid the surplus proceeds
from the sale. The Ninth Circuit rejected the Simons’ argument that they should be
subrogated to the rights of the government to the extent of the surplus proceeds, finding
that the surplus proceeds and the proceeds from the sale of the property by the
government were to be applied to reduce a legitimate federal tax lien. The holding in
Simon illustrates that the Government has the right to seek payment of surplus
proceeds from the nonjudicial sale, even though the Service retains its lien on the
property.

     CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

Ultimately the nature of the property rights of interested persons after a nonjudicial sale
is governed by state law. Therefore, a thorough analysis of the applicable state law
may be required to determine the property rights of each party after the sale.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call -------------------- if you have any further questions.