IRS deed is exempt from county transfer tax

Plain-English summary

The IRS sold seized California real property and issued a deed after the taxpayer's redemption period expired. A county recorder refused to record the deed because it lacked information about the local documentary transfer tax. Chief Counsel advised that the tax could not be imposed because its legal incidence would fall on the federal government, contrary to the Supremacy Clause. The IRS could state on the deed or declaration that, as a federal agency, it is exempt from the county documentary transfer tax.

Ruling snapshot

• Question: Must the IRS pay a county documentary transfer tax when it issues a deed after selling seized real property?
• Outcome: Advice given, the IRS and its deed are exempt
• Key authorities: U.S. Const. art. VI, cl. 2; Cal. Rev. & Tax. Code §§ 11911, 11912, 11933

Full text (IRS public release)

ID: CCA-07131157-15 [Third Party Communication:

UILC: 6335.00-00, 6335.05-00 Date of Communication: Month DD, YYYY]

Number: 201535018
Release Date: 8/28/2015
From: -------------------------
Sent: Monday, July 13, 2015 11:57 AM
To: --------------------------
Cc: --------------------
Bcc:
Subject: Exemption from documentary transfer tax

---------,

You asked whether the IRS is exempt from paying a county
documentary transfer tax upon the sale of seized real property and, if
so, what it should include in a documentary transfer tax declaration on
the deed to indicate that it is exempt. We conclude that the IRS is
exempt and could include the following statement on the deed: “The
Internal Revenue Service, as an agency of the United States
government, is exempt from the county documentary transfer tax.”

The real property in question was seized in California and purchased at
an IRS tax sale. The IRS issued the purchaser a deed after the
taxpayer failed to redeem the property within 180 days. The purchaser
attempted to record the deed with the county recorder’s office, but the
office refused to do so because the deed did not contain required
information about a documentary transfer tax that must be paid by the
seller under local law.

In California, any county may impose a tax on each deed that conveys
land within the county. Cal. Rev. & Tax. § 11911. The tax must be paid
by the issuer of the deed. Cal. Rev. & Tax. § 11912. (Liability for the tax
is not shared between the parties to the transaction.) Recordation of
the deed is subject to payment of the tax, the amount of which must
appear in a declaration attached to the deed. Cal. Rev. & Tax. §
11933. If no tax is due, the declaration (or a separate signed
statement) must include the reason why.

2

The documentary transfer tax cannot be imposed on the deed. The IRS
issued the deed. It would therefore have to pay the transfer tax. A tax
is prohibited by the Supremacy Clause of the United States
Constitution when the incidence of the tax falls squarely on the federal
government. See United States v. New Mexico, 455 U.S. 720, 730-31
(1982); United States v. Mississippi, 421 U.S. 599 (1975); McCulloch v.
Maryland, 17 U.S. 316 (1819). Similar taxes have been held not to
apply to deeds in which the United States is a party. See United States
v. Dougherty, 199 F. Supp. 48 (M.D. Pa. 1961), aff’d 311 F.2d 627 (3rd
Cir. 1962). The transfer tax thus can’t be imposed upon the deed in this
case; the deed is exempt.

So if the buyer, wanting to record the deed, wants the IRS to indicate its
exemption from the transfer tax on a transfer tax declaration, the IRS
can do so. In Steshnko v. Gayrard, 2015 WL 1503651 at *7 (N.D. Cal.
Apr. 1, 2015), a seller put the following on statement on the declaration:
“exempt from Documentary Transfer Tax [because] this conveyance is
to secure a debt.” Here, if it chooses to do so, the IRS could use
something similar to either of the following statements: “No tax is due
because the Internal Revenue Service, as an agency of the United
States government, is exempt from the county documentary transfer tax
under the Supremacy Clause of the United States Constitution” or “The
Internal Revenue Service, as an agency of the United States
government, is exempt from the county documentary transfer tax.”

Let me know if you have any questions.