5.6.1. Collateral Agreements and Security Type Collateral

(1) A collateral agreement is a pledge, guaranteed by security, for the performance of a certain act, i.e., payment of a delinquency or the filing of a return.

(1) IRC 7101, Form of bonds.

(2) 26 CFR 301.7101-1, Form of bond and security required.

(1) The Director, Collection Policy is the executive responsible for the policies and procedures to be employed by collection personnel.

(2) Field Collection group managers, CEASO group managers, Field Collection territory managers, and CEASO territory managers are responsible for ensuring the guidance and procedures described in this IRM are complied with.

(3) Collection employees are responsible for following the guidance provided in the IRM.

(1) Program Reports.

• National Quality Review System (NQRS) Reports

• ICS Reports

• IRACS Report

(2) Program Effectiveness. The program effectiveness is measured by the following review types and by level of management.

• Case reviews are conducted by group managers and are recorded in the Embedded Quality Review System (EQRS) and national quality reviewers, and are recorded in the National Quality Review System (NQRS) to ensure compliance with this IRM.

• Operational reviews are conducted by territory managers and area directors annually to evaluate program delivery and conformance to administrative and compliance requirements.

• Program reviews are conducted by Headquarters Policy annually to evaluate program delivery and conformance to administrative and compliance requirements.

(1) Collateral agreements are monitored by these types of program controls:

• ICS open control

• Unique serial number

• Collateral agreements are input into the Interim Revenue Accounting and Control System (IRACS). The IRACS Unit in Ogden monitors these agreements.

• Actions relating to collateral agreements that require managerial approval.

(1) Frequently used terms within this IRM along with their definition include:

1. Bond. A bond is a debt investment in which an investor loans money to an entity which borrows the funds for a defined period of time at a variable or fixed interest rate.

2. Escrow Arrangements. An escrow arrangement defines the arrangement by which one party deposits an asset with a third person, who, in turn, makes a delivery to another party if and when the specified conditions of the contract are met.

3. Mortgages. A mortgage is a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of the title becomes void upon the payment of the debt.

4. Security. A security is a fungible, negotiable financial instrument that holds some type of monetary value.

(2) This table lists acronyms commonly used within this IRM and their definitions.

(1) Collateral agreement related resources include:

• IRM 10.5.2, Privacy Compliance and Assurance (PCA) Program

• Treasury Department Circular No. 570 may be found at https://fiscal.treasury.gov/surety-bonds/circular-570.html

• IRM 5.5.8.5.1, Bond/Lien Determinations for Estate Tax Deferred Under IRC 6166

• IRM 21.8.1.12.20, IRC 877A - Mark-To-Market Exit Tax, for complete guidance for expatriation and taxable consequences.

• All IRS personnel must be familiar with and responsible for execution of duties in accordance with taxpayer rights afforded by the provisions in the Internal Revenue Code, including the Taxpayer Bill of Rights (TBOR) listed in IRC 7803(a)(3). For additional information about TBOR, see https://www.irs.gov/taxpayer-bill-of-rights.

(1) A bond for the purpose of securing payment of internal revenue taxes is collateral security offered by the taxpayer, their representative or a third party, which satisfies the provisions of IRC 7101 and 26 CFR 301.7101-1.

(2) 26 CFR 301.7101-1(b)(1) and (2) specify the kinds of security acceptable for securing payment of internal revenue taxes as provided in Title 6, Section 15 of the United States Code.

(3) Treasury Department Circular No. 570, Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds, and as Acceptable Reinsuring Companies. Periodically lists the companies certified by the Secretary of the Treasury as acceptable sureties on Federal bonds. This list also shows the areas in which the companies are licensed to transact business and the underwriting limitations applicable to each company.

(4) A bond executed by a surety not holding a certificate of authority approved by the Secretary of the Treasury shall be accompanied by financial statements of the surety or sureties. The taxpayer's proposal to pay will be submitted with the bond.

(5) A bond is considered executed with satisfactory surety if it is secured by bonds or notes of the United States as provided in Treasury Circular No. 154, CFR 31 Part 225. Collection Field function (CFf) should contact area counsel, through CEASO, if you have any questions about whether the bonds or notes constitute satisfactory surety

(6) 26 CFR 301.7101 (b)(2) allows the area director to consider a bond as being executed with satisfactory security, in lieu of execution by an approved surety company or in lieu of being secured by bonds or notes of the United States, if it is:

1. Executed by a corporate surety (other than a surety company), so long as the corporate surety establishes that it is within its powers to act as a surety for another; or

2. Executed by two or more individual sureties, if each meet the conditions of 26 CFR 301.7101-1(b)(3). These provisions indicate that each must reside in the state in which the principal place of business or legal residence of the primary obligor lies; that each have property subject to execution of a fair market value equal to at least the penalty of the bond; that all real property offered as security must be located in the state of the primary obligor's principal place of business or legal residence; the surety must agree not to mortgage or otherwise encumber any property offered as security while the bond remains in effect (absent securing the area director's permission); and they must file an annual affidavit, on a form prescribed by the Secretary, describing the adequacy of their security;

3. Secured by a mortgage on real estate or personal property;

4. Secured by a certified, cashier's or treasurer's check drawn on a bank or trust company incorporated under the laws of the United States, a state, territory or possession of the United States or by the United States postal, bank, express or telegraph money order;

5. Secured by corporate bonds, stocks or by State or local Governmental bonds; or

6. Secured by any other acceptable collateral.

(7) Security must be submitted with a suitable bond agreement executed by the taxpayer and any third party which may be guaranteeing payment.

(8) Bond(s) executed with surety should be submitted in a format acceptable to the area director. Consult with CEASO for acceptable formats.

(9) Ascertain from area counsel, through CEASO, whether a time limitation for the validity of the types of checks below are provided by state laws in their respective state.

(10) For corporate stocks and/or bonds, especially unlisted securities:

1. Ascertain to the extent possible that market values will not fluctuate below levels sufficient to guarantee payment of the taxes.

2. Accept such collateral only when current market values are well above the amount of the outstanding taxes being secured.

3. Do not accept "Restricted" or "Letter" stock, which cannot be sold without a registration certificate from the Securities and Exchange Commission.

(1) A bond may be relevant in two situations related to fuel excise taxes (and excise tax credits and payments) and registration under IRC 4101 : (i) Form 637 Application for Registration (For Certain Excise Tax Activities) registration applications to be registered with the IRS for a particular fuel-related activity, and (ii) remedial actions related to a taxpayer’s existing registration for a particular fuel-related activity.

1. In general, IRC 4101(a) provides that every person required by the Secretary to register under IRC 4101 with respect to the tax imposed by IRC 4041(a) or IRC 4081, every person producing or importing biodiesel (as defined in 40A(d)(1)), and every person producing second generation biofuel (as defined in section 40(b)(6)(E)) must be registered with the Secretary according to the regulations.

2. A registration under IRC 4101 may be used only in accordance with the regulations prescribed under IRC 4101 . See IRC 4101(a) and 26 CFR 48.4101-1.

3. IRC 6426(a) generally provides that no credit is allowed in the case of the credits described in IRC 6426(d) (alternative fuel credit) and IRC 6426(e) (alternative fuel mixture credit) unless the taxpayer is registered under IRC 4101 .

4. Several notices, discussed under paragraph (2) below, require registration under IRC 4101 for certain fuel-related activities.

(2) The first situation is when a taxpayer applies to register under IRC 4101 for a specific activity letter through the Form 637 Application for Registration (for Certain Excise Tax Activities) application process.

1. The IRS may consider a bond as a factor in the acceptable risk test of 26 CFR 48.4101-1(f)(3) and in the adequate security test of 26 CFR 48.4101-1(f)(4). A bond also is a potential means for an applicant to meet the adequate security test of 26 CFR 48.4101-1(f)(4), in cases where the applicant does not have both adequate financial resources and a satisfactory tax history within the meaning of 26 CFR 48.4101-1(f)(4)(ii) and (iii). Under 26 CFR 48.4101(f)(1), the acceptable risk test and the adequate security test are applied to applicants listed in 26 CFR 48.4101-1(c)and (d) other than ultimate vendors, pipeline operators and vessel operators.  See26 CFR 48.4101-1. Generally, this will be Activity Letters K, S, and M.

2. Additionally, the IRS has issued subsequent guidance that either generally requires registration or requires registration in order to make a claim.  In either case the IRS will only register an applicant if the IRS is satisfied with the filing, deposit, payment, reporting, and claim history for all federal taxes of the applicant and any related person.  Since this is discretionary, a bond could (but is not required to) satisfy the IRS in this regard. Specifically, Notice 2005-4, 2(f) requires registration of biodiesel and alcohol producers (activities AB, AF, and NB) and reiterates the blending registration requirements (activity M); 4(f) requires registration of commercial aviation operators and full rate buyers (activity Y). Notice 2005-80, 4(d) requires registration of credit card issuers (activity CC). Notice 2006-92, 3(b)(1)(ii) and 4(b)(1)(iii) requires registration to make alternative fuel and alternative fuel mixture claims (activities AL and AM). See also IRC 6426 (a), which requires that claimants be registered under IRC 4101 in order to claim the IRC 6426 (d) alternative fuel credit or the IRC 6426 (e) alternative fuel mixture credit.

(3) The second situation is when 48.4101-1(i)(2)(ii) requires remedial action for registrants who are not ultimate vendors or ultimate vendors (blocked pump) if the registrant fails its affirmative duties under 48.4101-1(h) or made a false statement pertaining to its registration that creates a significant risk of nonpayment or late payment of tax.  This can be for other 4101 registrants besides K, M, S, and Y but it cannot be for UA, UB, UP, or UV.

(4) IRM 4.24.2.11 also discusses procedures and circumstances when the agent may recommend to the area director that a bond be required as a condition of registration.

(5) Refer to IRC 4101 (b) and 26 CFR 48.4101-1 (j) of the regulations for the form and amount of the bond.

(1) CEASO shall determine whether to require a bond or, in the alternative, suggest to the Executor, or other Estate representative, that a 6324A lien would be acceptable security for the deferred payment of estate tax. See IRM 5.5.6.2, IRC Section 6166.

(2) CEASO must first determine whether any security for extension of time to pay estate taxes is necessary based on the facts and circumstances of each estate. See IRM 5.5.8.5.1, Bond/Lien Determinations for Estate Tax Deferred Under IRC 6166.

(3) Bonds or other types of collateral accepted by CEASO from estates securing extensions of time to pay estate taxes under IRC 6161, IRC 6163, and IRC 6166will be maintained for safekeeping by the CEASO Estate Tax Group.

(4) Bonds and other types of collateral accepted by Estate & Gift from estates securing contingent estate tax liabilities under IRC 2056A relating to Qualified Domestic Trusts (QDOTs) will also be maintained for safekeeping by the CEASO estate tax group.

(5) The IRS cannot accept a Letter of Credit (LOC) in lieu of a bond when a decedent's estate elects to pay the estate tax in installments under IRC 6166.

(6) In the case of any proposed bond, CEASO will consult with area counsel for drafting (if needed) and review of the bond agreement.

(7) Area counsel will also be consulted when unusual assets are being considered as security on the lien agreement, such as art or collectibles, to recommend appropriate actions to secure the collateral.

(8) Stock offered as collateral may be accepted only when the statutory requirements of IRC 6324A(b)(1) and (2) are met. The requirements are:

1. The stock can be expected to survive the deferral period;

2. The collateral must be adequately identified in the agreement and can be submitted via Form 13925, IRC Section 6324A Lien Agreement Form; SeeIRM 5.5.8.5, Collateral from Estates with IRC 6166 Elections; and

3. The value of the stock must be enough to fully satisfy the estate tax liability plus the required interest amount.

Note: The IRS cannot reject closely held stock offered as collateral for the sole reason that it is closely held and hard to value. Consult with area counsel, through CEASO, on valuation issues.

(9) If stock certificates are pledged as collateral for the lien, the CEASO employee will secure the original stock certificates and store in an approved safe. This will prevent the sale of such certificates to third parties without regard for the 6324A lien.

(10) The IRS will file a NFTL,Form 668-J, Notice of Federal Estate Tax Lien Under Internal Revenue Code Section 6324A, for the special estate tax lien on the stock. Stock, in most instances, will be considered personal property under state law. With respect to personal property, a lien must be filed in the office designated by state law in which the personal property is located.

(11) Follow procedures in IRM 5.6.1.8, Preparing Form 2276, Collateral Deposit Record for the preparation of Form 2276, Collateral Deposit Record. The stock certificates will be shown as "Safekeeping" reflecting a "zero value" for RRACS purposes.

(1) When circumstances indicate a need to extend the period for collection of tax, the IRS will normally have the Department of Justice reduce the tax claim to judgment. In rare situations, to extend the time period in which the tax may be paid or to obtain a lien on a piece of property to which the federal tax lien never attached, the IRS may obtain a consensual lien (mortgage or deed of trust) from the taxpayer.

(2) In all situations where IRS personnel contemplate obtaining a consensual lien, area counsel, through CEASO, should be contacted as soon as possible and their approval secured.

(3) The advice and approval of area counsel for any anticipated consensual lien are vital. IRS personnel must recognize that state law determines if the consensual lien exists and if the lien will be enforceable. Failure to comply with state law may make the consensual lien invalid or unenforceable.

(4) These considerations limit the use of the consensual lien to rare circumstances. It may be appropriate when the federal tax lien does not attach to the property in question. For example, an assessment exists against only one spouse and the federal tax lien does not attach to real property held by the non-liable spouse. To avoid collection from property that the lien encumbers, the couple may decide to give the IRS a consensual lien on property held by the non-liable spouse.

(5) The IRS should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim to judgment or requiring that the taxpayer post a bond.

(6) The facts and circumstances of a case will determine the duration of the consensual lien. Area counsel must specifically advise the IRS concerning the state law issues regarding the duration of the lien and its refiling.

(7) The mortgage or deed of trust must be prepared by the taxpayer's counsel. The advice of private counsel negates later claims that the taxpayer did not know or understand their rights. The instrument must be executed in favor of the United States, as mortgagee, and should contain a clause expressly providing that it may be released by the area director, collection, IRS, for the geographic area in which the mortgage is recorded. Do not include the name of the official. All fees in connection with the instrument, including recording and releasing fees, must be paid directly by the mortgagor.

(8) Whenever possible, the instrument should provide that the taxpayer makes payments over the life of the mortgage, thereby reducing interest and principal.

(9) Revenue officers must ascertain whether there are any senior lienholders on the property being offered as collateral. Specific information obtained on any senior liens should include the current status of the lien interest and the potential for default by the taxpayer, which would then force the IRS to either redeem the property or lose its interest in the property held as collateral.

(10) The collection group manager receiving the mortgage/deed of trust will immediately contact the collateral advisor, for their review of the instrument and all related documents. If the group manager approves of the mortgage/deed of trust, these documents will be forwarded to the CEASO group manager for review and forwarding to area counsel for approval.

(11) If the CEASO group manager and area counsel approve the mortgage/deed of trust, the instrument will be returned to the initiating collection group managers to be filed as provided under local law.

(1) Explore escrow arrangements when prompt action is required to safeguard the Government's interests, to obtain cash security on which the tax lien has not attached, and/or allow the taxpayer to remain in business during the time required for:

• Judicial review of their case,

• Readjustment of their affairs,

• Releasing a levy.

(2) Make certain that the:

• Escrow agent is a disinterested and reliable person,

• Government's interest will always be protected,

• Costs in connection with the securing of an escrow agent and other related expenses will be paid directly by the taxpayer.

(3) Provide the following information to the CEASO group manager where an escrow agreement is to be executed:

• Name, identification number and address of taxpayer,

• Name and address of escrow agent,

• Taxpayer's business and location,

• Account information (type of tax, period, balance, period remaining under the collection statute, etc.),

• Condition of the arrangement,

• Terms of the agreement,

• Other pertinent information.

(1) A Letter of Credit (LOC) allows the taxpayer to remain in business and protects the Government's interest and is acceptable for:

• Forbearance in filing Notice of Federal Tax Lien,

• Releasing a levy,

• Deposit on redemption.

(2) Cases arising under IRC 6165 and IRC 6166.

• As indicated in IRM 5.6.1.3.3, Estate Tax Bonds and Other Collateral, letters of credit cannot be furnished in lieu of the bond required by IRC 6166.

• Previously, this prohibition did not extend to cases arising under IRC 6165 where the letter of credit was determined as appropriate substitute for bond.

• IRC 7101(1) further states that whenever a bond is required, it shall be in such form with such surety as prescribed by regulation. Letters of credit do not meet the surety criteria set forth in 26 CFR 301.7101-1(b)for any case where a bond is required.

• In cases where a letter of credit is proposed in lieu of bond, the proponent should be advised that the application is not acceptable.

• However, in accepted cases where a letter of credit has been substituted for a bond conforming to previous IRM procedures, the acceptance should not be revoked provided the proponent performs in accordance with the agreement.

(3) Consult with area counsel, through CEASO, regarding the terms, conditions and duration of the instrument.

(4) Costs in connection with securing and issuing the instrument and other related expenses must be paid by the taxpayer.

(5) To adequately protect the interest of the United States, the letter of credit must:

1. Specify the United States, by and through the area director of Internal Revenue Service, as beneficiary of the credit established under the Letter.

2. Be irrevocable, meaning that it cannot be revoked prior to its expiration date without the consent of the issuing institution, the taxpayer(s), and the area director.

3. Be "clean", meaning that no document of title is required to be presented by the area director in order to receive payment under the Letter of Credit.

(6) When a Letter of Credit is being considered, submit the following data to CEASO:

1. Name, identification number and address of taxpayer,

2. Name and address of proposed issuer of the Letter of Credit,

3. Taxpayer's business and location if different from that given in "a" above,

4. Account information (type of tax, period, balance, period remaining under the collection statute, etc.),

5. Condition of the arrangement,

6. Terms of the agreement,

7. Other pertinent information.

(1) CEASO will:

1. Check the appropriate block on the reverse of parts 4 and 5 of Form 2276.

2. Forward the collateral item together with part 4 to the initiator for return to the taxpayer.

3. Retain remaining parts of Form 2276.

4. Close out the open CEASO control module on ICS.

(1) Collateral inventory is controlled through RRACS. The inventory is maintained in the RRACS database. Refer to IRM 3.17.63.13.3 for additional information regarding RRACS collateral.

(2) This information is maintained by the RRACS Unit at the Ogden Campus and is reported to each CEASO Area monthly.

(1) The Tax Reform Act of 1984, section 129, 1984-83 (Vol. 1) C.B. 163, added section 1445 to the Internal Revenue Code (IRC) as a means of enforcing the tax imposed by IRC 897 on the disposition of investments in U.S. real property by foreign persons. The disposition of a U.S. real property interest by a foreign person (the transferror) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.

(2) See Rev. Proc. 2000-35, IRM 4.61.12, Foreign Investment in Real Property Tax Act and IRM 21.8.5, International, Miscellaneous Foreign Investment in Real Property Tax Act, (FIRPTA) Related Issues, for more detailed discussions of FIRPTA determination procedures.

(3) CEASO involvement consists in establishing a collateral agreement control when security is pledged as a condition for a large foreign corporation receiving a withholding certificate.

(4) The acceptable types of security are:

• Bond with surety or guarantor,

• Bond with collateral,

• Letter of Credit,

• Guarantee, or

• Any other security acceptable to CEASO territory managers under SBSE Del. Order 4.23.

(1) IRC 4371 imposes a tax the "insurance excise tax" on certain insurance or reinsurance policies. See Rev. Proc. 2003-78 for the procedures for entering into a closing agreement to obtain a waiver of the insurance excise tax under certain income tax treaties.

(2) In addition to a number of other requirements outlined in Rev. Proc. 2003-78 for obtaining a closing agreement, the foreign insurer must provide an irrevocable letter of credit (LOC) to be issued by a bank approved by the Service in the amount of $75,000.

(3) The Large Business and International (LB&I) business unit has responsibility for the implementation and execution of insurance excise tax provisions.

(4) CEASO has responsibility for the collateral agreement portion of the program with respect to the maintenance and disposition of the LOC. Program management is under the South Atlantic Territory in the Plantation CEASO office.

(1) An IRC 953(d)election allows a controlled foreign corporation (as defined in IRC 953(d)(1)(A)) that is engaged in an insurance business to elect to be treated as a U.S. corporation for income tax purposes, and, thus, to be subject to U.S. tax on its worldwide income.

1. Taxpayers that make the elections are corporations that are formed outside the U.S. The majority of income earned by such taxpayers is income that is effectively connected with a U.S. trade or business. Taxpayers make an IRC 953(d) election to avoid the branch profits tax or the branch level interest tax imposed by IRC 884.

2. A foreign corporation that makes the election granted under IRC 953(d) waives all benefits granted to it by the U.S. under any treaty between the U.S. and any foreign country. IRC 953(d) was added to the IRC section by the Technical and Miscellaneous Revenue Act of 1988.

(2) Rev. Proc. 2003-47; IRB 2003-28 provides the procedural rules for foreign insurance companies to make an election under IRC 953(d).

1. This revenue procedure replaces the procedural rules for making an IRC 953(d) election contained in Section II of Notice 89-79, 1989-2 C.B. 392. The substantive rules contained in Notice 89-79https://www.govinfo.gov/content/pkg/GOVPUB-T22-aaf296b1f844da19743e7a36ca791ec6/pdf/GOVPUB-T22-aaf296b1f844da19743e7a36ca791ec6-2.pdf continue to be effective. The election has been available for tax years beginning after December 31, 1987.

2. The taxpayer initiates the election process by filing a completed election statement with CEASO, South Atlantic Area, Plantation office.

(1) Section 301 of the Heroes Earnings Assistance and Relief Act of 2008, the "Act" added IRC 877A which applies to U.S. citizens who relinquish U.S. citizenship, and long-term residents (individuals who have been lawful permanent residents in at least 8 out of the 15 years) who cease to be U.S. residents of the United States, on or after June 17, 2008.

(2) See Notice 2009-85 and IRM 21.8.1.12.20, IRC 877A - Mark-To-Market Exit Tax, for complete guidance for expatriation and taxable consequences.

(3) See Form 8854, Initial and Annual Expatriation Information Statement, and Form W-8 CE, Notice of Expatriation and Waiver of Treaty Benefits, for reporting responsibilities for former U.S. citizens or long-term residents who are subject to the provisions of IRC 877A.