Once the revenue officer has seized the property he must begin preparations to sell it. In fact, he has already begun preparations for it by taking a detailed inventory at the time of seizure. In addition to the inventory, he must take a number of other preliminary steps before he conducts the actual sale. The preliminary steps include the following:
- Establishing the fair market value (“FMV”) for the property;
- Determining the equity in the property;
- Establishing the minimum bid price;
- Determining if he has a conflict of interest;
- Determining the method of sale;
- Grouping of property by lots (if applicable);
- Setting the time and place for the sale; and
- Preparing and posting notices of sale.
In the case of more specialized property, such as machinery and equipment, an appraiser may be used, either a private appraiser or IRS' valuation engineer. There are many private appraisers available, but they all charge fees. Some are more competent than others, though none are perfect. Appraising is still at least as much art as it is science. Even the most competent include disclaimers with their appraisals. As to IRS' valuation engineers, they are probably no worst than most appraisers. The problem with them is their availability to the revenue officers. Because of their workload, they may not be able to get around to appraising the revenue officer's seized property for many months. A revenue officer cannot wait that long.
Therefore, as a practical matter, the revenue officer must do what many football teams do after they fail to advance the requisite ten yards within the first three downs, ie: punt. The revenue officer often takes some band aids and chewing gum to come up with a fair market value, especially if the property seized is ordinary and without a large intrinsic value, such as office furniture and equipment. In those cases the revenue officer establishes the value himself based on his experience or the experience of another revenue officer or the group manager. If the taxpayer is cooperative after the seizure, which, interestingly enough, he often is, he helps to establish the FMV.
The problem with a taxpayer assisted appraisal, however, is that it may not be very realistic. First, the taxpayer has a personal attachment to it. He acquired the property through his own sweat and toil and his “pride of ownership” tends to make him biased on the high side. Second, he wants the IRS to receive the highest amount possible for the property. The more the IRS receives from the sale, the less will be the balance due after it applies the proceeds to the tax liability. This is especially true if the tax liability stems from payroll taxes. The taxpayer may be held personally liable for a large portion of any unpaid tax. (This, by the way, is often a factor in the taxpayer's “altruistic” cooperation with the IRS after the seizure.)
The revenue officer, on the other hand, is interested in establishing the lowest value possible. The FMV is the starting point for establishing the minimum bid (to be discussed later). The lower the minimum bid, the easier it will be to sell the property. If he sets an unrealistically high minimum bid the property may not be sold. If that happens, he will either have to abandon the sale or reschedule it for another sale based on a lower minimum bid. That's a lot of work and effort for someone who is overloaded with work to begin with.
Therefore the revenue officer will welcome the cooperation of the taxpayer in establishing the FMV, but that is usually only the starting point. Once the taxpayer gives him some numbers, the revenue officer then treats them as ball park figures and adjusts them according to his sense of what will work. Typically IRS' sales fetch very little, something akin to the take at neighborhood garage sales.
2. DETERMINING EQUITYThe determination of equity in the seized property is generally made even before the property is seized. As was disussed in Chapter 1, that is one of the pre-requisites to the seizure. However, prior to the actual seizure, the revenue officer may not have an accurate inventory of the taxpayer's property. The pre-seizure knowledge of the property is often based on the taxpayer's representations which are not always accurate. In addition, the valuation of the property may also be based on the taxpayer's representation or on the book value shown on the taxpayer's financial statements. The book value may have very little to do with the FMV, especially if the property has been partially or fully depreciated. Therefore, the revenue officer must make an effort to re-examine his original estimates after the seizure has taken place. He should also call any secured lenders to determine the balances due. They may have changed since before the seizure. The taxpayer may have made some additional payments since then or, in case of banks, they make have offset bank account balances of the taxpayer against his outstanding loan balances.
The outstanding balances due secured lenders on all property to be sold are listed on Form 2433-B, “Notice of Encumbrances Against or Interest in Property Offerd for Sale.” This is usually attached to Form 2434, “Notice of Public Auction Sale” or to Form 2434-A, “Notice of Sealed Bid Sale,” as will be discussed later. This is an important document to potential bidders. It helps them to determine the equity in the property and, thus, the amount they should bid. However, they would be well advised to do an independent due dilligence review. The revenue officers are not always thorough in their searches, nor does the IRS guarantee the accuracy of such searches. At the bottom of Form 2434-B there is a clear, if not a prominent disclaimer of the form's correctness or completeness.
Determining equity in the seized property may become even trickier if it is not wholly owned by the taxpayer. If the taxpayer owns it it joint tenancy or tenancy in common and the other owner or owners do not owe any taxes to the IRS, the revenue officer must reduce the FMV even further. To be realistic, the revenue officer must reduce the FMV by more than the proportionate amount. The FMV of a one half interest in real property, for example, will generally not be 50%. Any potential bidder will not be prepared to pay 50% of the full price since he cannot readily sell his 1/2 interest except, perhaps, to the other owner(s). That severely limits the marketability of the property and, therefore, its FMV.
In addition, even though the taxpayer owns only a partial interest in the property, he is almost always jointly and severally liable to the secured lender. That means that while he may own only a part of the property he is indebted to the lender for the entire balance due on the note. Thus when the revenue officer computes the FMV he must discount 100% of the balance due on the note while attributing only a percentage of the full value to the taxpayer. This reduces the equity even further.
(To complicate matters even further, some states have tenancy by the entirety or community property statutes. If the taxpayer holds real or personal property by either of those two forms of ownership, the IRS may not be even able to seize the property if only one of the spouses owes taxes – much less sell it. States like Illinois and Missouri, for example, prohibit the seizure and sale of property owned in tenancy by the entirety if only one of the spouses owes money to a creditor. New York and Alaska, on the other hand, allow one spouse's interest to be reached by creditors. In community property states, such as California and Texas, the law varies and must be carefully researched by the revenue officer before any effort is made to seize and sell the property for the tax liabilities of only one spouse.)
Of course, somewhere between pre-seizure and sale, the revenue officer must ascertain that the taxpayer is, in fact, the true and rightful owner of the property. This may not be as self evident as it may seem. Much equipment today is leased under either true leases or, more commonly, under lease-purchase agreements. In either case, the legal title to the property remains in the hands of the lessor and/or lender. While the taxpayer may accrue some equitable interest in the property over a period of time, as a practical matter this equitable interest is usually small and not determinable without a judicial proceeding. Therefore the revenue officer would be wise not to attempt to sell the property.
In some cases, the taxpayer may only be a bailee of the property. Vending machines and water coolers are common examples of this. In case the taxpayer is a garage, body shop or other repair or maintenance facility, he may likely have cars or other machinery that belong to his clients, not to him. The revenue officer must be careful to ascertain true ownership, either through the help of the taxpayers or the true owners. Documentary evidence of ownership often becomes important in those situations.
3. ESTABLISHING THE MINIMUM BID PRICEIRC §6335(e)(1)(A) requires the revenue officer to establish a minimum bid for the property to be sold and authorizes the IRS to purchase the property on behalf of the United States if the minimum bid is not met. As a matter of practice, the IRS hardly ever bids in on behalf of the U.S. The difference between the FMV of the property and the minimum bid is hardly ever big enough to warrant the risk, expense, time and paperwork required to acquire the property on behalf of the government. All the more reason for the revenue officer to establish a low minimum bid.
After the FMV is determined, the revenue officer than reduces it to the forced sale value. This is almost always 25%. The rationale is that the property is being sold at auction under distressed conditions and cannot fetch anywhere near the FMV. The IRS further reduces the value by another 20% on top of that. The rationale for the further reduction is not explained clearly in the IRM, nor why IRS treats this as a two step process. [See IRM Sec. 56(35)5.1] It does require the revenue officer to document his or her rationale, which is usually some perfunctory notation about the poor condition of the property or the limited market for it. As a matter of practice, IRS is being realistic about it because, as I mentioned earlier, IRS' sales are rarely the exciting kinds of events held by Sotheby's or even the local auction houses that sell lamps and furniture of deceased farmers.
The revenue officer further reduces the minimum bid by any recorded encumbrances ahead of the IRS, either by virtue of having been recorded first or due to their “super priority” status (to be discussed later). The final figure is the minimum bid.
All the above numbers and computations are detailed on Form 4585 (IRS has forms for everything), which is approved by the revenue officer's manager and delivered to the taxpayer. The taxpayer has 10 days to object to the numbers. If he can show that there are other encumbrances ahead of the IRS or that other factors increase or decrease the value of the property, the revenue officer will take them into consideration. If these factors are meritorious, the revenue officer can prepare a revised minimum bid. This right to object to the minimum bid is administrative rather than statutory and the taxpayer has no legal recourse if the IRS does not agree with him.
4. DETERMINING CONFLICT OF INTERESTSomewhere before the pre-seizure considerations and the sale of the seized property, the revenue officer and others, including managers, must disqualify themselves from involvement in a case if their personal relationship with the taxpayer or potential bidders may give the appearance of partiality in the proceedings. [See IRM 56(14)1.2] For that matter, it is common practice for employees of the IRS to disqualify themselves at the earliest stages of the collection process if there is some personal connection to the taxpayer or related parties. The revenue officers are usually overworked anyway and it doesn't take much effort to persuade them to give up a case. This is one of the few examples of procedure and reality conciding for the benefit of the greater good.
5. DETERMINING THE METHOD OF SALEPrior to conducting the sale, the revenue officer must decide on the method of sale. IRC §6335(e)(2)(A) provides for two methods: by open auction or by sealed bid. The open auction is the usual one we are all familiar with and involves an auctioneer (usually the revenue officer who seized the property) and voice bidding. Depending on the thespian attributes and confidence of the revenue officer, it may also involve the usual “going once, . . . going twice . . . sold to this gentleman for ‘x' dollars.”
The sealed bid method involves the opening of sealed bids previously mailed in by the bidders. The revenue officer opens the bids at the time of the sale and declares the highest bidder. As with all IRS procedures, however, the concept is simpler than the execution. The bidder must get Form 2222 from the IRS and mail it to the revenue officer (or bring it in to the sale and give it to him before the sale) along with a bank check for at least 20% of the bid. The bid must be enclosed in a sealed envelope with the bidder's name, address and time and place of sale and other notations on the upper left hand corner. [See Federal Tax Regulation §301.6335-1(c)(5)(ii) and IRM 56(13)7.3(2)]
The method to be chosen by the revenue officer depends on the facts and circumstances of each particular case. One of the factors to consider is which method is expected to yeld a higher amount for the property. [See IRM 56(17)3.5(1)] However, since no one method is intrinsically more profitable than the other, other factors may come into play. For example, if the taxpayer is particularly angry and is expected to disrupt any open auction proceedings, the revenue officer might be well advised to consider an auction by sealed bid. [See IRM 56(14)4.1] More likely than not, the method chosen will be the open auction. It is the least confusing to the bidders and allows them to hold on to their money until the very last moment. Many of these sales are confusing and fraught with tension. The bidders are reluctant to part with their money until after they've had a chance to examine or re-examine the property being sold and otherwise see what's going on. They want to see how many other bidders shows up and if they know any of them. They want to see who the revenue officer is and how he or she conducts himself or herself. Sometimes sales are postponed or adjourned and they would rather not part with their money until it's clear that the sale will, in fact, take place.
The revenue officers generally prefer the open bidding as well. It involves less paperwork than the sealed bid method and makes it less likely that the sale will be challenged on technical grounds.
6. GROUPING OF PROPERTY§6335(e)(2)(B) of the IRC authorizes the grouping of seized property in order to maximize the benefit to the government. The seized property may be sold as separate items, as groups of items, in the aggregate, or both as separate items and in the aggregate. [Also see Treasury Reg §301.6335-1 and IRM 56(13)6.2] These options become an issue when IRS seizes a business with many miscellaneous items, such as machinery, equipment, inventory, tools and supplies. Rather than selling each nail, screwdriver, lathe and/or drill seprately, the revenue officer groups the items into some sort of logical order in order to avoid an interminably long sale. On the other hand, the revenue officer wants to keep the lots small enough in order to encourage participation by the small bidders. Their participation drives up the bidding. If the property were sold in only one or two large lots, the bigger players (affectionately known among the revenue officers as “Ali Baba and the forty thieves”) would be able to dominate the bidding due to their buying power and thus keep the bidding down.
Usually the miscellaneous property is sold twice, first in lots and then in the aggregate. The revenue officer announces at the beginning that there will be the two sales and that the binding one will not be declared until after he computes which method brings in the larger amount. In theory this combines the best of both worlds and brings in the maximum amount to the government. The reality, however, is far from this ideal. My experience has been that the professional bidders (ie: the forty thieves) cooperate among each other in order to hold down the bidding. They designate one among them to be the front man. The others stay out of the bidding. The front man holds off bidding on the smaller lots, hoping to keep the bidding low. He just keeps close track of the bids with his calculator. After the sale by lots is completed, the front man bids in one dollar above the total of the individual lots for the aggregate. If his bid equals or exceeds the minimum bid set by the revenue officer, he becomes the successful bidder. He then divides the property with the others based on some predetermined formula.
One such sale I was involved in had a twist to it. While I was selling the property by lots, the front man circulated among the non-professional bidders whispering to them, right in my view, to stay out of the bidding. He told them to see him after the sale, promising to sell them just the items they wanted at a good price.
The bidding for the lots was hardly spirited, but, short of posponing the sale, there was not much I could do. After it was concluded, I opened the bidding for all the property in the aggregate. The front man bid in one dollar above the total for the lots. The bid in the aggregate was above the minimum bid I had computed and, therefore, I had to sell him the property. I did not want to bid in for the government. I could not have sold it for a higher amount in the future. Due to advertising expenses, storage fees and other costs, the net yeld to the government would probably have been even less.
7. SETTING THE TIME AND PLACE FOR THE SALEIRM §6335(d) requires that the time of the sale be not less than 10 nor more than 40 days from the time that public notice of the sale (to be discussed) is made. This is echoed by Federal Tax Regulation §301.6335-1(c)(1) and IRM 56(14)1.1.
The next question is, how long after the seizure must the public notice of sale be made? The answer is, “as soon as practicable.” [See IRC §6335(b)] IRM §56(13)7.1 requires the revenue officer to issue the notice of sale within 30 days after the seizure, though it allows for articulated exceptions to this rule. This leaves IRS with room to hold off announcing the sale. From time to to time, IRS does delay announcing the sale. Why IRS does that is not entirely clear. It's usually due to bureaucratic bungling, work overload or some technical complications.
In most cases, any delay is irrelevant to the taxpayer. After the seizure, which usually results in the collapse of his business, the taxpayer could care less about what IRS does with the property – other than apply the proceeds to his tax liability. However, in some cases any delay in the sale may be prejudicial to the taxpayer. For example, the taxpayer, or his surrogates, may want to buy the property in order to start another business. (He can purchase it at a fraction of its fair market value) In those cases the taxpayer may request the IRS to sell the property within 60 days. IRC §6335(f) requires that IRS comply with such a request unless it determines that such compliance would not be in the best interest of the United States. Federal Tax Regulation §301.6335-1(d) spells out the details for making such a request – which must be in writing.
In some cases, however, it is the IRS that may want to avoid delay. Those cases usually involve perishable goods, such as refrigerated food in a restaurant, animals in a pet store or plants at a florist's shop. If a revenue officer seizes perishable goods he/she must make an effort to sell them expeditiously. IRC §6336 relaxes some of the requirements of §6335 in order to facilitate that. For example, the revenue officer may sell the property back to the taxpayer for the appraised value without holding a public auction. If the taxpayer does not or cannot buy the property back, the revenue officer may announce the sale without regard to the 10/40 day waiting period. IRM56(14)5 spells out additional details that the revenue officer must follow in perishable goods cases, including getting approval of the sale under IRM §6336 from the group manager.
The place of sale, whether the property is perishable or non-perishable, must be in the county in which the property was seized, unless the IRS feels that it could get more money for it in another county. [See IRC §6335(d), Federal Tax Regulation §301.6335-1(c)(1) and IRM §56(14)1.1(4)]
8. PREPARING AND POSTING NOTICES OF SALEIRC §6335(b) requires the IRS to deliver a notice of the sale to the taxpayer, either in person or by mail. In addition, it requires that such notice be published in a newspaper generally circulated within the county. If there is no newspaper in the county, the IRS is required to post the notice at the post office nearest to the seizure location and two other public places. One of the public places is usually IRS' own office. IRM 56(13)7.1 recommends additionally that the revenue officer post a notice at the premises of the seized property, if it will facilitate the sale, and possibly mail them out to prospective bidders – if they are known to the IRS. (Revenue officers sometimes maintain their own lists)
Posting of notices on the premises is often a source of friction between the IRS and the taxpayer who may view it as a provocation. If the taxpayer is a business, a notice of seizure on the premises is a source of embarrasment to the taxpayer, and quite possibly will result in a loss of business. Clients may not be keen on frequenting a place that obviously has problems with the IRS.
The revenue officer sometimes uses this as a weapon. He may extract additional concessions or money from the taxpayer in exchange for withholding the posting of notices on the premises.
The notice is required to specify the property to be sold, and the time, place, manner and condition of the sale. Generally IRS' form 2434, Public Auction Sale, or form 2434-A, Sealed Bid Sale, is used for this purpose.
WHAT HAPPENS ON THE DAY OF THE SALE?Usually the revenue officer in charge of the case arrives at the location of the sale perhaps an hour before the sale is to begin. This allows him to prepare for the sale and make last minute decisions. Among the decisions he may have to make, for example, is whether to postpone the sale. Perhaps only a few bidders, or even no bidders, have shown up and he may want to schedule another time for the sale. Perhaps the taxpayer shows up with the full amount of the money due and wishes to redeem the property before it is sold. He may do so under authority of IRC §6337(a), provided he pays the full amount due together with accrued interest, penalties and expenses of the sale.
These last minute redemptions do not occur very often. They occur about as often as a last minute pardon of a criminal sentenced to be executed. When they do occur, however, they are made-for-drama events, though not quite as dramatic as the last minute pardons made popular by the James Cagney and other such genre movies of the 30s and 40s.
More likely the taxpayer may just show up to observe the sale. In some cases he may even attemp to disrupt the sale, though this is rare. Sometimes lienholders may show up. The junior lienholders may want to bid in on the property in order to protect their interest. Senior lienholders may wish to make an announcement of their lien priority in order to give notice to the bidders that they are purchasing the property subject to their liens. A third party may show up, claiming that the property, or some of it, belongs to him and not to the taxpayer. If he shows sufficient proof to the revenue officer, the revenue officer may release the property to the third party under authority of IRC §6343(b). (It always struck me as ironic that IRS would need statutory authority to release property that it seized wrongfully. I would think that giving back something that you have no right to is inherently legal)
Early arrival by the revenue officer also allows prospective bidders to examine the property being sold and ask questions about the property or the sale procedures. This gives them and the revenue officer an opportunity to become comfortable with the situation prior to commencement of the proceedings which require a certain amount of formality. The revenue officer is usually accompanied by another revenue officer or another employee of the IRS, perhaps even his manager. The other employee helps to answer questions from the bidders, helps in the tabulation of the bids and serves as a witness as to the regularity of the proceedings in the event that the sale is subsequently challenged in court.
The sale is usually conducted by the revenue officer in charge of the case, though, under certain circumstances, the IRS may retain the services of a professional auctioneer. [See IRM 56(13)3] This is rare, however, as most sales are not profitable enough to warrant the expense of an auctioneer.
When the time for the sale arrives, the revenue officer calls everyone to order and usually announces the conditions under which the property will be sold. If it is an open auction he will solicit bids. At his option, he may choose to announce the minimum bid before hand. If he does so, the bids will begin at that price. If he does not, he will continue to solicit bids until the highest one is reached.
If the property is being sold by lots and in the aggregate, he will hold off announcing the successful purchaser until the aggregate is calculated to determine which method brings in the most for the government. Whichever method is used, however, the bid(s) must equal or exceed the minimum bid(s) determined by the revenue officer. If the minimum bid is not reached, the revenue officer has several options. He may declare the property purchased for the United States at the minimum bid price, he may release the property to the taxpayer, or he may adjourn the sale to another date in anticipation of selling it at a higher price.
Purchasing the property on behalf of the government is rare. Very few properties will yeald more than what would be received at a public auction, taking into account the costs and expenses related to the maintenance of the property after it is acquired by the government. In addition, the revenue officer must devote an inordinate amount of time to maintenance and security of the property – time which he can ill afford to devote given the demand of his other cases. Also he must prepare to sell the property all over again at some future date. Few revenue officers want to be saddled with acuired properties.
The simplest thing is to release the property back to the taxpayer, though that is not a viable option either. There is a stigma attached to releasing the property back to the taxpayer. It usually means that the revenue overestimated the minimum bid or failed otherwise in some fashion. It takes away his thunder with the taxpayer who may now view him as a pussycat. And the revenue officer must continue to deal with the taxpayer since he still has all those unpaid accounts.
The more common procedure is to adjourn the sale to another time in hopes of getting new bidders and higher bids. Sometimes the revenue officer adjourns the sale in order to prepare a new minimum bid; however, IRS' procedures prohibid lowering of the minimum bid solely for the purpose of facilitating a sale.[See IRM §§56(13)5.1(6) and 56(14)1.4(6)]
If the revenue officer decides to adjourn the sale, he must announce the new date to the bidders. If the new date is within one month of the original sale date, or within the 40 day time period of the original public notice, the sale does not need to be renoticed. If it is beyond those parameters, the revenue officer must prepare a new notice and follow the procedures as if it were a new sale. The same rules apply if the sale is postponed before the bidding begins.
If the successful bid(s) equal to or exceed the minimum bid, the revenue officer makes the following announcement: “In accordance with the provisions of section 6335 of the Internal Revenue Code, I hereby declare this property sold to the highest bidder for the sum of $ _____.” If the property is being sold by sealed bid, the procedure is somewhat different. To begin with, the bids should have been mailed in or handed to the revenue officer before the sale on form 2222 in a sealed envelope together with 20% of the bid price included in the form of a cashier's check or certified funds. [See IRM §56(14)4.1] At the time of sale, the revenue officer announces that he will be opening the sealed bids. He then opens them in the presence of everyone and announces the successful bidder if the minimum bid price is reached. The other remittances are returned to the unsuccesful bidders, if they are present at the sale, or mailed to them by certified mail. [See IRM §56(14)4.2]
Whatever method of sale is used, however, the successful bidder must pay either in cash, by money order or by certified, cashier's or treasurer's check drawn on any state or federal bank chartered in the United States. [See IRM §56(14)3.4(1)] The terms of the sale may require payment in full upon acceptance of the bid or, more commonly, a portion of the sale price. The portion is usually 20%, with the balance at a specified time, usually within 24 to 48 hours, though never more than 30 days. [See IRM §56(14)3.4(2)]
If the bidder defaults on the payment of the bid price, or the balance of the bid price, he usually forfeits any downpayment he made. If default is made in a cash sale, the revenue officer declares the property sold to the next higher bidder, if it is above the minimum bid. If the default is made in a deferred payment sale, the revenue officer declares the sale null and void and adverises for a new sale. [See IRC §6335(e)(3), FTR §301.6335-1(c)(8) and IRM §56(14)3.6]
Upon receipt of the full sales price, the revenue officer prepares and issues form 2435, Certificate of Sale of Seized Property, to the purchaser. The certificate is prima facie evidence of the bidders right, title and interest to the property as well as the discharge of all liens, encumbrances and title over which the IRS' lien had priority. The property is still subject to any liens and encumbrances superior to the IRS' federal tax lien. [See IRC §6339(a), Sec. 338.65 of the Legal Reference Guide and IRM §56(14)6.2]
Upon receipt of the certificate, the bidder is allowed to remove the personal property. The obligation to protect the property and the risk of loss passes to the purchaser. If real property is sold, however, the bidder may not take possession of it for at least six months. It is subject to the statutory right of redemption.
DOES THE TAXPAYER HAVE THE RIGHT OF REDEMPTION?IRC §6337 permits the owner of any real property sold by the IRS to redeem it within 180 days after the sale. In order to redeem it, the owner must pay the purchaser the amount he paid, plus interest computed at the rate of 20% per year. If the purchaser cannot be found in the county in which the property was sold, the owner may redeem it by paying the redemption amount to the IRS.
The redemption, if any, must occur within 180 days after the property is declared sold, not necessarily from the date of the Certificate of Sale. The Certificate may be issued a day or more after the sale if the purchaser does not pay the full amount on the date of the sale. If the property is not redeemed within that period, the IRS issues a deed to the purchaser in exchange for the Certificate of Sale.
It should be noted that the right of redemtion belongs not only to the owner of the property, but to his heirs, executors or administrators, or to any person having an interest in the property, such as a lienholder, mortgagee or a person with homestead rights, or to any agents of the owner or the interested parties. It should also be noted that there is no priority of redemption. The first qualified party to pay the purchaser his purchase price, plus the statutory interest, acquires an equitable lien in the property. [See §336.3 of the Legal Reference Guide of the IRM] This presents the interesting scenario of a person other than the owner redeeming the property. Once the property is redeemed by someone other than the owner, the owner no longer has the statutory right of redemtion. He reaquires title to the property, but the redeemer acquires an equitable lien equal to the cost of redemption. The equitable lien is superior to the federal tax lien and to all other encumbrances inferior to it. Id.
If the redeemer is a family member, this should generally present no problem to the owner. If, however, the redeemer is an unrelated third party, such as a mortgagee or a judgment lienor, the situation may become adversarial. The redeemer has invested a certain sum of money in the owner's property which is not earning him any interest. He may want to sell the property in order to get his money out. However, he has no title to the property and cannot evict the owner without foreclosing on it. In fact, he does not even have a certificate of redemtion to record against the property. All the redeemer has, if he reported it to the IRS, is IRS' record of the sale of the property and his redemption of it. He would have to get a certified copy of that record and sue in a state or federal court to get a deed and possession of the property. That would entail a lot of time, effort and expense.
Legally speaking, the purchaser of the property at the tax sale does not fare much better than the redeemer or the owner. After the 180 day redemption period expires, the purchaser gets a deed from the IRS, but he must still go to court to evict the owner if he refuses to leave. Also, if the owner is shrewd, he could sell the property to a third party after it is sold to the purchaser at the tax sale. The chain of title still shows the taxpayer as the owner of record. It also shows no IRS lien since the IRS releases its federal tax lien after the property is sold to the purchaser. Therefore it would behoove the purchaser to record the certificate of sale at the county recorder's office after he purchases the property from the IRS. This would put any third party and the title company on notice of a possible break in the chain of title. That is just one reason, incidentally, why sales of property by the IRS yield so little. Unless the property is redeemed from him, the purchaser may likely be looking at incurring substantial legal costs to protect his investment.
As a practical matter, however, all sorts of strange things happen – largely because this is an arcane area of the law and the parties involved (and even their attorneys) are not sure of their rights and the procedures. I know of one case where the taxpayer attempted to redeem her property from the purchaser who paid several thousand dollars for it. The purchaser advised her that she could get it back if she paid him $5,000.00, far above the 20% annual interest allowed under IRC §6337(b)(2). Not having the advice of a knowledgeable attorney, she paid it. In another case, a purchaser paid about $170,000.00 to the IRS for real property whose equity, after the superior first mortgage, was less than $100,000.00. The owner could not redeem the property from the purchaser unless he was prepared to pay far in excess of the value of the property.
In one case I was involved in, the IRS sold the taxpayer's one half interest in residential real property. The wife of the taxpayer attempted to redeem it from the purchaser. After weighing the various risks, cost and possible complications, we negotiated an assignment of the certificate of sale to the wife from the purchaser for a price above the 20% annualized interest the purchaser was entitled to. After the expiration of the 180 day redemption period, she secured a deed from the IRS in exchange for the certificate of sale and, presumably, united the title of the property in her name by recording it at the county recorder's office.
© Tony Mankus, Mankus & Marchan, Ltd.