Title Examination Standards
Chapter 1, App.
Chapter 25. Tax Liens
§25.3. Federal Estate Tax Special Liens under 26 U.S.C. § 6324A AND § 6324B.

Federal law provides in two situations for a special federal estate tax lien in lieu of the regular federal estate tax lien. In the case of real property valued for federal estate tax purposes at its current use value pursuant to an election under 26 U.S.C. § 2032A, the special estate tax lien attributable to the enhanced value based upon highest and best use continues until the lien is satisfied, becomes unenforceable by reason of lapse of time, or until it is established to the satisfaction of the Secretary that no further tax liability may arise under 26 U.S.C. § 2032A(c) with respect to such property.

In the case of an estate which has elected to pay taxes on a deferred basis in installments under 26 U.S.C. § 6166, the special estate tax lien attributable to the deferred taxes plus certain interest continues until satisfied or until unenforceable by reason of lapse of time. Such special lien continues notwithstanding the issuance of an estate tax closing letter and evidence of payment of tax shown thereon. The special federal estate tax lien is in lieu of the regular estate tax lien.

If notice of the special lien is not filed in the office of the county clerk of the county where the land is located by the Director of Internal Revenue or his delegate, the lien is not perfected and no release shall be necessary.

Authority: 26 U.S.C. §§ 2032A, 6166, 6324A & 6324B. Comment: Effective for estates of decedents dying after December 31, 1976, the Tax Reform Act of 1976 allows a personal representative to elect to value real property used for farming or in a closely held business, by the decedent or a member of decedent's family on the date of the decedent's death, based on its current value as a farm or in the closely held business rather than on the basis of its potential "highest and best" use for other purposes. The "qualified use" valuation cannot reduce the gross estate by more than $750,000; the maximum reduction amount was $500,000 prior to 1981, $600,000 in 1981 and $700,000 in 1982. When the personal representative elects under 26 U.S.C. § 2032A to value real property used for farming or in a closely held business on the basis of its current value, a lien equal to the adjusted tax difference attributable to the interest attaches to the property. The adjusted tax difference is the difference between the estate tax liability and what the liability would have been had the election not been made. The amount attributable to the interest is an amount that bears the same ratio to the adjusted tax difference as the excess of the fair market value of the property over the special value bears to the excess of the fair market value of all qualified property over the special value of all qualified property. Qualified replacement property purchased after an involuntary conversion of qualified real property is also subject to the special lien. The lien continues until the tax benefits are recaptured or potential liability ends, 26 U.S.C. § 6324B(b). The special lien can be subordinated if it is determined that the interests of the United States will be adequately secured after the subordination, 26 U.S.C. § 6325(d)(3). The estate tax closing letter does not disclose that an election under 26 U.S.C. § 2032A has been made; however, the Internal Revenue Service generally files a lien for the adjusted tax difference. Under 26 U.S.C. § 6166, as amended by the Economic Recovery Tax Act of 1981, an estate of a decedent dying after 1981 may defer estate taxes for up to fourteen years if the value of the decedent's closely held business interest exceeds 35% of the adjusted gross estate. The estate makes only annual interest payments during the first four years and pays the balance in ten annual installments of principal and interest, 26 U.S.C. § 6166. When the time to pay the estate tax has been extended under 26 U.S.C. § 6166, or under 26 U.S.C. § 6166A in the case of decedents dying before 1982, the personal representative can elect a lien for the taxes attributable to the closely-held business under 26 U.S.C.A. § 6324A in lieu of the regular estate tax lien under 26 U.S.C. § 6324A(a). All persons having an interest in the property must sign a written agreement consenting to the creation of the lien and designating an agent for dealing with the I.R.S., 26 U.S.C. § 6324A(c). The lien arises when the personal representative is discharged from liability and continues until the deferred amount is paid or becomes unenforceable through lapse of time, 26 U.S.C. § 6324A(2) & (3).

History: This standard was reworked completely and its adoption recommended by the Report of the Title Examination Standards Committee, 57 0.B.J. 2677, 2686-87 (1986). It was approved by the Real Property Section, November 20, 1986, and adopted by the House of Delegates, November 21, 1986.