CCA 1231001: Chief Counsel approves a bond-backed collateral agreement in lieu of an NFTL

Plain-English summary

Chief Counsel considered whether the IRS could accept a collateral agreement secured by a bond instead of filing a Notice of Federal Tax Lien against a corporation that could not immediately pay its tax liability. It concluded that a bond-backed collateral agreement was appropriate under the circumstances, provided the agreement included the required terms in IRM § 5.6.1. The advice also concluded that interest must accrue at the large corporate underpayment rate, which can change during the payment period, and must compound daily rather than at the fixed monthly rate proposed by the taxpayer. It noted an additional failure-to-pay issue that needed to be addressed.

Ruling snapshot

• Question: May the IRS accept a collateral agreement and bond instead of filing a Notice of Federal Tax Lien?
• Outcome: Advice given
• Key authorities: IRC §§ 6621, 6622, and 7101; Treas. Reg. § 301.7101-1; IRM § 5.6.1.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201231001
       Release Date: 8/3/2012
       CC:PA:04 :DSkinner
       GL-105093-12

UILC: 7101.00-00

date: April 13, 2012

 to:   Michael R. Fiore
       Associate Area Counsel (Boston, Group 2)
       (Small Business/Self-Employed)

from: Mitchel S. Hyman
Senior Technician Reviewer, Branch 3
(Procedure & Administration)

subject: Bond in lieu of Notice of Federal Tax Lien

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

       ISSUES

       Whether it is appropriate for the Service to accept a collateral agreement and bond in
       lieu of the Service’s filing a Notice of Federal Tax Lien (NFTL)?

       FACTS

       The taxpayer is a privately-owned C Corp. that sells insurance and provides completion
       and other bonds to contractors ---------------------------------. The Service examined the
       taxpayer for its ------ tax year, and the primary issue was its method of accounting. The
       taxpayer agreed to a change to its accounting method and to an audit assessment for tax
       year -------. The revenue agent agreed not to impose any accuracy-related penalties, and
       the Service assessed the agreed deficiency in ------------------.

       The taxpayer paid $----------- of the liability. Its financial statements show the
       corporation does not have the ability to currently full pay, and its sole shareholder does
       not have sufficient assets or equity to currently full pay. The corporation does have the
       ability to make monthly payments, and it proposes to pay the remaining liability over

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three years. The remaining liability is over $-------, which includes some $----------- of
accrued interest.

The taxpayer is offering a bond from -----------------------------------and a collateral payment
agreement in lieu of the Service’s filing an NFTL. The taxpayer alleges that filing an NFTL
would ruin its business and prevent it from paying the taxes owed. The amount of the bond it
offers is $------------------.

The taxpayer has submitted sample payment bond language and a proposed amortization
schedule for its proposed collateral payment agreement. The proposal includes interest at 3%
and calls for the first payment of $--------- on -----------------. The taxpayer paid $--------- when
it submitted the proposal in ------------------. The proposed payment schedule calls for 12
monthly payments of $---------, beginning -----------------; then 24 monthly payments of
$---------, beginning -----------------; and a final payment of $------------- on -----------------.

LAW AND ANALYSIS

IRM 5.6.1 addresses collateral agreements, and provides in 5.6.1(1)

   A collateral agreement is executed by the taxpayer and "collateral security"
   ensures that the taxpayer performs the terms of the agreement. A collateral
   agreement is a pledge, guaranteed by security, for the performance of a certain
   act, i.e., payment of a delinquency or the filing of a return. A collateral
   agreement does not compromise the tax liability and should not be confused with
   collateral agreements in the context of offers in compromise.
   collateral agreements in the context of offers in compromise.

The taxpayer is offering a collateral agreement secured by a bond from ---------------------
---------------------------------------. Section 7101 provides for bonds in such form and with
such sureties as may be prescribed by regulations. Treas. Reg. 301.7101-1(a) requires
execution of a bond on an appropriate form prescribed by the Service and with a satisfactory
surety. Treas. Reg. 301.7101-1(b)(1) provides that a surety holding a certificate of authority
from the Secretary as an acceptable surety on Federal bonds is a satisfactory surety. The
Treasury Department lists approved sureties on its Circular 570. ----------- is listed on
Circular 570. Thus ----------- is a satisfactory surety, and the bond the taxpayer offers is
satisfactory collateral surety, provided it is adequate in terms and amount.

IRM 5.6.1(5) requires that the taxpayer be advised that “failure to keep the terms of the
collateral agreement will result in the IRS taking the necessary action to liquidate the
collateral.” IRM 5.6.1(6) includes additional terms which are required for a valid collateral
agreement. The additional terms relevant to this case are:

c. A condition that the IRS intends to offset any refunds to the delinquent account
covered by the agreement until accounts are paid in full or otherwise satisfied.

GL-105093-12 3

d. Provision that the taxpayer must remain current on filing and must not incur any
   further delinquencies during the term of the collateral agreement.
e. A term that the Service has a unilateral right to liquidate the collateral upon the
   failure to keep the terms of the agreement.

As required by IRM 5.6.1(4), the taxpayer has outlined the specific dates on which it intends
to make payments. However, it proposes amortizing the liability at 3% interest, compounded
monthly.

Section 6622 provides that interest on tax liabilities compounds daily. Section 6621(a)(2)
provides that the underpayment interest rate is computed by adding 3% to the Federal short-
term rate. Section 6621(c)(1) provides that the underpayment rate for large corporate
underpayments is the Federal short-term rate plus 5%. Section 6621(c)(3)(A) defines a large
corporate underpayment as any underpayment of tax by a C Corporation for any taxable period
if the amount of the underpayment exceeds ---------
-------------. The Federal short-term rate for the first and second quarters of 2012 is 0%,
and the large corporate underpayment rate for the first and second quarters of 2012 is 5%.
Rev. Ruls. 2011-32, 2012-8.

The taxpayer is a C Corporation, and its liability for tax year ------- exceeds ------------.
Thus, the large corporate underpayment interest rate will apply—currently 5%.

The taxpayer’s proposal includes an amortization schedule that includes a fixed interest rate,
compounded monthly. However, the large corporate underpayment interest rate varies monthly,
depending on the Federal short-term rate, and the Internal Revenue Code requires that interest
compound daily, not monthly.1

Conclusion:

We conclude that a collateral agreement with a bond is appropriate under these
circumstances. However, the collateral agreement should include the terms required by IRM
section 5.6.1, and interest will accrue at the large corporate underpayment rate, which should
be expected to vary during the term of the agreement.

1
We note that the revenue officer’s memorandum recommending acceptance of the
collateral agreement states that the revenue agent agreed not to assess any accuracy-
related penalties but that § 6662 penalties were assessed and are being abated.
However, neither the proposed amortization schedule nor the revenue officer’s memo
addresses the § 6651(a)(2) failure-to-pay addition to tax, which would amount to 0.5%
of the liability each month for up to 50 months, to a maximum of 25%. Have the Service
and the taxpayer reached an agreement with respect to this addition? If not, this will
significantly increase the amount of the taxpayer’s total payments. This issue should be
clearly addressed.

GL-105093-12 4

Please call (202) 622-3630 if you have any further questions.