Chief Counsel advises that a state-court receiver's fee is not a reasonable expense payable ahead of federal tax liens

Plain-English summary

This is informal Chief Counsel advice, sent by email, about a property sale in a state-court receivership where the IRS held federal tax liens. The receiver proposed to take a fee out of the sale proceeds before the IRS was paid. Under Treasury Regulation § 301.6325-1(b)(3), only reasonable and necessary expenses of the sale and of administering the proceeds may be paid ahead of federal tax liens, and the Internal Revenue Manual (IRM 5.12.10.7.4) lists the kinds of costs that qualify (title and appraisal fees, realtor or auctioneer commissions, recordation and transfer fees, and similar). The attorney advised that the receiver's fee here fell outside those allowable expenses, and a National Office lien analyst agreed the fee did not seem reasonable. The bottom line: the receiver's plan was not workable, and its fee could not be paid before the federal tax liens. This matters to anyone administering a receivership or foreclosure sale where the government has a lien, because it shows the IRS will not treat every cost of the sale as coming off the top.

Ruling snapshot

• Question: May a state-court receiver's fee be paid from sale proceeds ahead of the federal tax liens as a reasonable and necessary expense of sale?
• Outcome: advice given (no; the receiver's fee is not an allowable expense payable before the federal tax liens)
• Key authorities: Treas. Reg. § 301.6325-1(b)(3); IRM 5.12.10.3.4 and 5.12.10.7.4; IRC § 7430(c)(1)(B)(iii) (attorney-fee rate cap); Rev. Proc. 2014-61

Full text (IRS public release)

ID: CCA_2021072716595096
UILC: 6325.03-00

Number: 202150017
Release Date: 12/17/2021
From: ---------------------
Sent: Tuesday, July 27, 2021 4:59:50 PM
To: --------------------
Cc: --------------------------
Bcc:
Subject: RE: Request for Informal Advice re: State Court Receivership Private Sale, Public Auction;
Effect on Liens

Good afternoon.

Following up on the earlier email, in our view, what the receiver proposes is not
workable. In some situations, expenses can be paid prior to payment to the
Service. The Treasury Regulations provide, in part:

     Any reasonable and necessary expenses incurred in connection with the sale of
     the property and the administration of the sale proceeds shall be paid by the
     applicant or from the proceeds of the sale before satisfaction of any Federal tax
     liens or claims of the United States.

Treas. Reg. 301.6325-1(b)(3). The IRM provides similarly. IRM 5.12.10.3.4. The IRM
also addresses what are allowable expenses. See IRM 5.12.10.7.4 below. However,
the receiver fee here falls outside what we believe would be an allowable expense. I
contacted the NO lien analyst, and his response is attached. He indicated that the
amount of the fee didn't seem reasonable.

If you would like to discuss this, please contact me.

     5.12.10.7.4
     (09-30-2015)
     Allowable expenses
     (1) Certain expenses may be treated as reasonable and necessary expenses for
     the financial transaction and should be considered in calculating the amount of
     the government's interest. These expenses, which do not have to be present,
     may include, but are not limited to, the following items:
     • Fees related to the application process, such as title report and appraisal
     • Fees inherent to the transaction, such as realtor commission or loan origination
     fee
     • Costs associated with the administration of the proceeds
     • Recordation fees
     • Costs related to the property transfer including ad valorem taxes,
     "document stamp fees", "transfer stamps," and "transfer fees," if their assessment
     and collection is required on sales in the jurisdiction where the

sale occurs
Exception: See IRM 5.12.10.7.4.1 below regarding transfer taxes assessed at
closing.
(2) Allowance of the expenses listed in (1) is prohibited if any of the following conditions
are present:
• Monies were or will be paid to the taxpayer,
• The fees are not mandated by state, county or other local jurisdictional law,
• The fees are not applied to all sales of the same type, or
• The fees are excessive or unusual.
(3) Attorney fees are allowable expenses if they are incurred as part of the subject
transaction or application process and they are reasonable in amount. Attorney
fees are not allowable for representation unrelated to the subject transaction
(e.g., litigation against third party, representation on other tax matters). The
amount of attorney fees is generally considered reasonable if it does not
exceed the limitations established under IRC § 7430(c)(1)(B)(iii).
Note: The IRS publishes an inflation-adjusted rate cap on an annual basis. Per
Rev. Proc. 2014-61, the attorney fee limitation for fees incurred in calendar
year 2015 is $200 per hour.
(4) In certain sale situations, the buyer and seller may agree to a slightly higher
selling price in exchange for the seller paying additional closing costs.
Normally, this is done to facilitate the loan process of the buyer but may also
be used to enhance the marketability of the property. These seller (i.e.,
taxpayer) paid costs may be allowable as an expense if, among other factors,
they:
• were specifically negotiated in the sales contract,
• are reasonable given the selling price and the amount of other normal
expenses allowed,
• are in accordance with local laws and standards, and
• do not significantly impact the equitable interest of the government or the
amount that might otherwise be realized from the transaction.
(5) If expenses are incurred (sometimes called "staging" expenses by realtors)
and it is demonstrated that they either hastened the sale or increased the
amount received at sale, then allow the expenses. In particular, if prevailing
economic conditions are poor, and "staging" assists in selling a property,
providing a taxpayer with an avenue to make payment on their taxes, allow
these expenses so long as the expense is reasonable and ordinary in the state
where the property was, or is being, sold.
(6) Fees for auctioneering services are allowable if they are reasonable and
necessary for the sale of the property. If a realtor employs the services of an
auctioneer (or similar vendor) to facilitate a sale, the sum total of the realtor
and auctioneer fees should not exceed the amount generally allowable for the
realtor's commission alone.
(7) The determined interest of the United States necessary for issuance of a
discharge or subordination should not be reduced in order to allow payment to
an interest that is junior to the federal tax lien.