Dragnet clause does not defeat purchase-money mortgage priority

Plain-English summary

Chief Counsel considered whether a cross-collateralization, or dragnet, clause prevents a deed of trust from qualifying as a purchase-money mortgage for federal tax lien purposes. The advice found no authority treating the clause as fatal to an otherwise valid purchase-money mortgage under local law. Purchase-money protection is limited to the purchase-money amount and related interest, however, and does not cover earlier debt, after-acquired property, or future advances. The memorandum also described the statutory grounds for lien subordination and the federal recognition of subrogation rights created by local law.

Ruling snapshot

• Question: Does a cross-collateralization clause prevent an otherwise valid mortgage from receiving purchase-money priority over a federal tax lien?
• Outcome: advice given that the clause does not defeat purchase-money status, but the protected amount remains limited
• Key authorities: IRC §§ 6323, 6325(d); Treas. Reg. § 301.6323(i)-1(b); Rev. Rul. 68-57

Full text (IRS public release)

ID:        CCA_2019032513041848
UILC:      6323.02-00

Number: 201933010
Release Date: 8/16/2019
From:
Sent: Monday, March 25, 2019 1:04:18 PM
To:
Cc:
Bcc:
Subject: purchase money mortgage - -----------------


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         You asked whether a cross-collateralization clause in a deed of trust that states
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---------------------------------------- prevents a security interest from being classified as a
purchase money mortgage. A cross-collateralization clause, sometimes referred to as a
dragnet clause, is a “provision wherein the mortgage secures not only a specifically
described obligation but also all other obligations between the mortgagor and the
holder, whether then existing or later contracted.” 59 C.J.S. Mortgages § 217.

        I.R.C. § 6323 sets out the validity and priority of the federal tax lien against
certain persons. The Federal Tax Lien Act of 1966 does not address the validity or
priority of purchase money mortgages or security interests in relation to a federal tax
lien. However, in Revenue Ruling 68-57, the Service adopted the position that “a
purchase money security interest or mortgage valid under local law is protected even
though it may arise after a notice of Federal tax lien has been filed.”

       We are unaware of a position that the inclusion of a cross-collateralization clause
in a deed of trust would ‘poison’ an otherwise valid purchase money mortgage such that
it would not be recognized as a purchase money security interest. However, the extent
of the purchase money security interest would be limited to the amount of the purchase
money and associated interest. The purchase money protection would not extend to
any antecedent debt, after-acquired property, or future advances. See I.R.C. § 6323(c-
d).




       You also mentioned that lien subordination had been requested by the Lender.
Under section 6325(d), a lien may be subordinated to another interest if: a) an amount
equal to the amount of the lien or interest to which the certificate subordinates the tax

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lien is paid; or b) the Service believes that subordination will ultimately result in an
increase in the amount realized by the government from the property. From the
information conveyed
                                                                         Section 6323(i)(2)
provides that if local law allows a subsequent lien holder to be subrogated to the rights
of a lien holder with priority over a FTL with respect to its newly created lien or interest,
the subsequent lien holder shall be subrogated to such rights under federal
law. Therefore, when a FTL is not valid with respect to a particular interest as against
the holder of that interest, then the tax lien also is not valid with respect to that interest
as against any person who, under local law, is a successor in interest to the holder of
that interest. Treas. Reg. § 301.6323(i)-1(b).

       Please let me know if you have any questions or would like to discuss this case
further.

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