[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR400.2-1]

[Page 764-765]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 400_TEMPORARY REGULATIONS UNDER THE FEDERAL TAX LIEN ACT OF 1966
--Table of Contents
 
Sec. 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

[[Page 765]]

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]