IRS advice on applying a lien-discharge deposit

Plain-English summary

Chief Counsel advice addresses when a deposit made in connection with a lien discharge should be applied to a tax liability. It concludes that, when a third party brings an action under section 7426(a)(4), the funds should be applied when the Service's entitlement to retain them is finally determined, such as when a favorable district court judgment becomes final. The advice contrasts this with the timing rules that apply when no action is filed. It also discusses the related suspension of the collection statute expiration date.

Ruling snapshot

• Question: When should a lien-discharge deposit be applied after a third party action?
• Outcome: Advice given.
• Key authorities: IRC §§ 6325, 7426, and 6503; Treas. Reg. § 301.6325-1.

Full text (IRS public release)

ID: CCA_2012052414145247 Number: 201235013
Release Date: 8/31/2012
Office: --------------
UILC: 6325.28-01, 7426.00-00

From: ----------------------
Sent: Thursday, May 24, 2012 2:15:05 PM
To: ------------------
Cc: ---------------------
Subject: FW: IRC 6325(b)(4) & application of funds -- ----------------------

Hi ----------sorry about the delays in getting back to you on this one. My reviewer concurs in my response
below:

I have also been unable to find anything that specifically addresses how the funds are applied after the
Service wins in a section 7426(a)(4) action, but I think the answer must be that the funds should be
applied as of the date the district court judgment is final.

Section 6325(b)(4)(C) provides that where no action is filed under section 7426(a)(4) within the period
prescribed (120 days), the amount of the deposit is to be applied to the tax liability within 60 days of the
expiration of that period. See also 301.6325-1(b)(4)(iv), which further provides that if the appropriate
official has not completed the application of the deposit before that 60-day period, the deposit will be
deemed to have been applied to the unsatisfied liability as of the 60th day.

It is consistent with this to conclude that, where an action is filed under section 7426(a)(4), the deposit
should be applied to the tax liability as of the date it is finally determined that Service is entitled to retain
the funds. Whether or not the third party files an action under section 7426(a)(4), the funds should be
applied as of the date it is determined that the Service can keep the proceeds: whether that date is after
the period to file suit has expired, or after there is a final judgment in the Service's favor.

It would seem inconsistent to take the position that where suit is filed, the funds could be applied as of an
earlier date (date of receipt) than if no suit were filed. Further support for this position can be found in the
regs. The introductory explanation for the NPRM for the revised 6325, 6503 and 7426 regs (2007-1 C.B.
618) supports concluding that the deposit would not be applied to the taxpayer account until final
resolution of judicial action. In particular, there is a discussion of deeming a request for discharge from a
third party owner to be a 6325(b)(4) request, rather than a 6325(b)(2) request (unless the third party
owner expressly states otherwise). Similarly, an amount received from a third party owner will be deemed
a "deposit" under (b)(4)(A) rather than a "payment" of liability under (b)(2), unless the third party in writing
expresses otherwise and expressly waives the right to file a 7426(a)(4) suit for refund. This is to protect
the third party who would not be entitled to bring the suit if the discharge is under (b)(2).

The intro then states "Amounts paid under section 6325(b)(2) do not constitute deposits and are
immediately credited to the taxpayer account once paid by the taxpayer or another person." In other
words, distinguishing (b)(2) discharges as a case when the third party funds may be immediately credited
to the taxpayer account, unlike (b)(4) deposits.

In a later section of the intro, the Service's use of deposit where a judicial action is not filed is discussed.
Regarding the deemed processing of the deposit as of the 60th day after the 120-day period for purposes
of applying payments to the taxpayer's accounts, it states "This means that if the IRS has not either
applied or refunded any part of the deposit within the 180-day period, the IRS will be prohibited from
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charging the taxpayer interest and penalties on an outstanding liability to which the deposit should have
been applied under section 6325(b)(4)(C)(i)."

Again, this seems to support the interpretation that the funds are applied to the tax liability at the 180-day
period for purposes of accrual of interest and penalties. (If the funds were applied as of the date of
deposit, there would be no concerns about deeming the processing to occur at 180 days so the taxpayer
can't be charged unnecessary interest and penalties.)

In addition, section 6503(f)(2) looks to 2 dates in determining the cessation of suspension of the CSED
under 6325(b)(4) and/or 7426(b)(5): either the earliest date the Service no longer holds an amount in
deposit because it has been used to satisfy the liability (or refunded), or the date a judgment under
section 7426(b)(5) becomse final. In other words, the suspension of the CSED ends on the date the
Service's entitlement to the funds is finally determined. The dates of suspension of the CSED should be
consistent with the dates the funds are applied to the tax liability. In other words, the statute should be
suspended pending application of the funds to the taxpayer account. The date the suspension should
end should be the date the Service has applied the funds to the tax liability. Section 6503(f)(2) provides
this is the date a judgment becomes final.

Let me know if you have any further questions.