Section 400.2-1 - Discharge of property by substitution of proceeds of sale; subordination of lien(a)Scope. This section provides rules under the provisions in section 6325(b)(3) which relate to the discharge of property from a tax lien by substitution therefor of a lien on the proceeds of the sale of the property, and in section 6325(d) which relate to the subordination of a tax lien. Section 6325 was amended by section 103(a) of the Federal Tax Lien Act of 1966 (80 Stat. 1133), effective after November 2, 1966.(b)Discharge of property by substitution of proceeds of sale. Pursuant to section 6325(b)(3), a district director may, in his discretion, issue a certificate of discharge of any part of the property subject to any lien imposed under chapter 64 of the Code if part of the property is sold and, pursuant to a written agreement with the district director, the proceeds of the sale are held, as a fund subject to the lien of the United States, in the same manner and with the same priority as the liens and claims had with respect to the discharged property. In order for the provisions of this paragraph to apply, the sale must divest the taxpayer of all right, title, and interest in the property sought to be discharged. Any person desiring a certificate of discharge under this paragraph shall submit an application in writing to the district director responsible for the collection of the tax. The application shall contain such information as the district director may require. 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 claims and liens.(c)Subordination of lien - (1)By payment of the amount of subordination. Pursuant to section 6325(d)(1), a district director may, in his discretion, issue a certificate of subordination of any lien imposed under chapter 64 of the Code upon any part of the property subject to the lien if there is paid over to the district director an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States. Under this provision, the tax lien may be subordinated to another lien or interest on a dollar-for-dollar basis. For example, if a notice of a Federal tax lien is filed and a delinquent taxpayer secures a mortgage on a part of the property subject to the tax lien and pays over the amount of the principal of the debt secured by the mortgage to a district director after an application for a certificate of subordination is approved, the district director will issue a certificate of subordination. This certificate will have the effect of subordinating the tax lien to the mortgage.(2)To facilitate tax collection -(i)In general. Pursuant to section 6325(d)(2), a district director may, in his discretion, issue a certificate of subordination of any lien imposed under chapter 64 of the Code upon any part of the property subject to the lien if the district director believes that the subordination of the lien will ultimately result in an increase in the amount realizable by the United States from the property subject to the lien and will facilitate the ultimate collection of the tax liability.(ii)Example. The provisions of this subparagraph may be illustrated by the following example: Example. A, a farmer, needs money in order to harvest his crop. However, a Federal tax lien, notice of which has been filed, is outstanding with respect to A's property. B, a lending institution is willing to make the necessary loan if the loan is secured by a first mortgage on the farm which is prior to the Federal tax lien. Upon examination, the district director believes that ultimately the amount realizable from A's property will be increased and the collection of the tax liability will be facilitated by the availability of cash when the crop is harvested and sold. In this case, the district director may, in his discretion, subordinate the tax lien on the farm to the mortgage securing the crop harvesting loan.
(3)Application for certificate of subordination. Any person desiring a certificate of subordination under this paragraph shall submit an application in writing to the district director responsible for the collection of the tax. The application shall contain such information as the district director may require.T.D. 6944, 33 FR 732, Jan. 20, 1968