part5-119

The federal tax lien arises when any “person”
liable
to pay any federal tax fails to pay the tax after a demand by the Government
for payment. IRC § 6321. For federal
tax law purposes, a “person”
is defined to include individuals,
trusts, estates, partnerships, associations, companies, and corporations.
The lien is effective from the date the Government assesses the tax, even
though the notice and demand for payment ordinarily gives the taxpayer an
additional 10 days after assessment to pay the tax. Thus, if the taxpayer
neglects or refuses to pay the assessed tax, then the lien is deemed to relate
back to the assessment date. IRC § 6322.
The Service is not required to file a NFTL in order for the tax lien to attach.
As discussed later in the text, the Service may file a NFTL in order to have
priority over the taxpayer’s other creditors.

The federal tax lien continues until the liability for the amount assessed
is satisfied or becomes unenforceable by reason of lapse of time, i.e., the
collection period expires. IRC § 6322.
Generally, after assessment, the Service has ten years to collect the tax
liability. IRC § 6502. However, there
are some circumstances which may extend or suspend the ten-year collection
period.

IRC § 6502 provides for an extension
of the collection period in 2 situations. Collection action may be taken if:

IRC § 6503 provides for the suspension
of the collection period in several situations. The more common situations
are the following:

.

If the United States files suit and reduces the tax claim to judgment,
then the collection period does not expire until the judgment has been satisfied. United States v. Overman, 424 F.2d 1142 (9th Cir. 1970); United States v. Hodes, 355 F.2d 746 (2nd Cir. 1966).

State statutes of limitations cannot affect the duration or existence
of the federal tax lien. Overman, 424 F.2d at 1147.

The filing of a NFTL is not a step required to give rise to or to perfect
the lien against the taxpayer. The act of filing protects the Government’s
right of priority as against certain third parties, typically a purchaser,
holder of a security interest, mechanic’s lienor, or judgment lien creditor.
IRC § 6323(a). Generally speaking, unless
the Service first properly files a notice of its federal tax lien, the purchaser
will take the property free of the federal tax lien. Similarly, unless the
Service first files a NFTL, the holder of a security interest, mechanic’s
lienor, and judgment lien creditor will have priority over the federal tax
lien.

IRC § 6323(f)(4) requires that
in some states a NFTL must be indexed in order to be treated as filed. Indexing
will be required in a state in which a deed must be indexed in order to be
valid against a later bona fide purchaser. Hanafy v. United
States, 991 F. Supp. 794 (N.D. Tex. 1998). If you have any question
as to whether IRC § 6323(f)(4) applies
to your case, contact Area Counsel.

IRC § 6323(f) and state law determine
the correct place to file a NFTL. If the Service files the NFTL in the wrong
office, then the NFTL will not have priority over a later purchaser, holder
of a security interest, mechanic’s lienor, or judgment lien creditor.

Different filing rules apply for real property and personal property.
IRC § 6323(f) provides that states may
designate one office for filing the NFTL for real and personal property.

If a state fails to provide an office or designates more than one office
for filing a NFTL, then IRC § 6323(f) provides
that the NFTL is to be filed in the office of the clerk of the United States
District Court for the judicial district in which the property subject to
the lien is situated. Currently, Massachusetts is the only state where the
Service files a NFTL for personal property in federal district court.

IRC § 6323(f)(5) provides that
the filing of a NFTL is governed solely by the Internal Revenue Code and is
not subject to any other Federal law establishing a place or places for the
filing of liens or encumbrances under a national filing system, e.g., airplanes
or vessels. For purposes of determining whether a state has designated more
than one office for filing a NFTL, state law that merely adopts or reenacts
a Federal law establishing a national filing system, e.g., airplanes or vessels,
is not counted. IRC § 6323(f)(1)(A)(ii).
See also Treas. Reg. § 301.6323(f)-1(a)(2).
For example, if a state
adopts a federal law requiring that liens against airplanes must be filed
with a national registry, and state law also provides that liens against personal
property must be filed with the county recorder in the county in which the
taxpayer resides, the state has designated only one office for the filing
of liens against personal property for purposes of IRC § 6323(f). The
requirement to file liens against airplanes in a national registry does not
constitute a second place of filing. Accordingly, a NFTL against an airplane
would be filed with the county recorder’s office in the county where
the taxpayer resides, and not with the United States District Court. Also,
the Service would not file a NFTL with the national registry under IRC §
6323(f). See Treas. Reg. § 301.6323(f)-1(e), Examples 5 & 6.

The Revised Uniform Federal Tax Lien Registration Act (1966), which
has been adopted by many states, provides, among other things, a clear rule
for the personal property of corporations and partnerships: NFTLs should be
filed in the Office of the Secretary of State. This rule applies in states
that have adopted the Act.

All NFTLs must be refiled within the required refiling period to retain
priority as of the initial filing date. If this is not done, most NFTLs filed
after December 1982 will self release thirty days after the date ten years
after the assessment, regardless of any extension or suspension of the collection
statute of limitations.

The NFTL may be refiled during the one-year period ending 30 days after
the expiration of ten years after the assessment date of the tax. IRC § 6323(g)(3)(A). For example, assume that the
Service assessed T’s liability on March 1, 1993. On July 1, 1993, the
Service filed a NFTL, showing a self-releasing date of March 31, 2003. For
all of 1998 and 1999, T’s bankruptcy case stayed the running of the
collection period. The period for refiling began on April 1, 2002, and continued
until March 31, 2003. In this case, the Service timely refiled on January
2, 2003, so the assessment lien and NFTL filed on July 1, 1993, continue to
be valid and have priority as of July 1, 1993.

If the collection period continues to be suspended or extended after
the initial refiling, the Service may have to refile again.
IRC § 6323(g)(3)(B). This second refiling must be made in
the one-year period ending with the expiration of 10 years after the close
of the preceding required refiling period.

Frequently, the NFTL is filed in multiple offices. When the Service
refiles, it must refile in each of the offices in which the prior NFTLs were
filed. IRC § 6323(g)(2)(A). If a taxpayer
properly notifies the Service of a change of residence, the Service must not
only refile in the original offices, but must also refile in the recording
office covering the new residence.

The Secretary of Treasury prescribes the form and content of the NFTL
and the NFTL is valid notwithstanding any other provisions of law regarding
the form or content. IRC § 6323(f)(3).
State law may not require that the NFTL be in any particular form or contain
any particular items to be recordable. United States v. Union
Central Life Ins., 368 U.S. 291 (1961). The Service files a paper NFTL
on a Form 668(Y), which must identify the taxpayer, the tax liability giving
rise to the lien, and the date the assessment arose. Treas. Reg. § 301.6323(f)-1(d)(2).

Errors appearing on the face of the Service’s filed NFTL often
create problems not only in evaluating the validity of the NFTL, but also
in determining relative priorities between the Service’s claim and other
competing lien claimants.

A number of controversies concern errors in the name of the taxpayer
as it appears on the NFTL. The general rule is that if the name on the notice
is not identical to the correct name of the taxpayer, then the NFTL is still
valid if the NFTL is sufficient to put a third party on notice of a lien outstanding
against the taxpayer. This is known as the substantial compliance test. United States v. Sirico, 247 F. Supp. 421 (S.D.N.Y. 1965).

In applying the substantial compliance test, many courts have upheld
NFTLs even when there was an error in the taxpayers name.
See
Kivel v. United States, 878 F.2d 301 (9th
Cir. 1989) (“Bobbie Morgan”
rather than ”
Bobbie Morgan Lane”
); United States v. Polk, 822
F.2d 871 (9th Cir. 1987) (“Roy Bruce Polk”
rather than “Bruce Polk”
); Tony Thornton Auction Service,
Inc. v. United States, 791 F.2d 635 (8th Cir. 1986) (notice filed against “Daviss Restaurant,”
a partnership, and one partner, “Joe Davis,”
was sufficient as notice against the other partner, “Mary Davis”
); Richters Loan Co. v. United States
, 235 F.2d 753 (5th Cir. 1956) (“Freidlander” rather than “Friedlander”); Brightwell v. United States, 805 F. Supp. 1464 (S.D. Ind.
1992) (“William S. Van Horn” rather than “William B. Van Horn”); and United States v. Sirico, 247 F. Supp. 421 (S.D.N.Y. 1965)
(“Sirico, George” and “Sirico, A.” rather than “Assunta Sirico”).
But
see
Fritschler, Pellino, Schrank
& Rosen, S.C. v. United States, 716 F. Supp. 1157 (E.D.Wis. 1988)
(“Allen G. Casey” rather than “Allen J. Casey”); Haye v. United
States, 461 F. Supp. 1168 (C.D.Cal. 1978) (“Castello” rather than “Castillo”); United States v. Ruby Luggage Corp., 142 F. Supp. 701 (S.D.N.Y.
1954) (“Ruby Luggage Corp.” rather than “S. Ruby Luggage Corp.”); and Continental Invs. v. United States, 142 F. Supp. 542 (W.D.
Tenn. 1953) (“W.R. Clark, Sr.” rather than “W.B. Clark, Sr.”).

In re Spearing Tool and Manufacturing Co., Inc.,
412 F.3d 653 (6th Cir. 2005), is the lead case for upholding a NFTL when lien
filing records are electronically searched. In Spearing Tool
, the Sixth Circuit held that the Services identification of a taxpayer
in a NFTL was sufficient where the name of the corporation appeared in an
abbreviated form of the corporate name registered with the Michigan Secretary
of State. A lien search by a secured creditor did not disclose the NFTLs that
had been filed against “Spearing Tool & Mfg. Company, Inc.
”
The proper name under UCC filing rules was “Spearing
Tool and Manufacturing Co.”

In summary, when searching for a NFTL in public records, either in a
book format or electronic format, the searcher must act reasonably and diligently.
The NFTL identifies the taxpayer when it is sufficient to put a third party
on notice of a lien outstanding against the taxpayer. Since this is essentially
a fact question, however, it is especially important to pay attention to the “details.”
Thus, for example, if a person is known or suspected
to use any aliases or owns property held for him/her by a nominee, agent or
trustee, it is desirable to prepare an individual NFTL for filing in all the
necessary names. Area Counsel approval should be obtained before filing a
NFTL in the name of a nominee, alter ego, transferee, or successor in interest.
IRM 5.12.2.6.4.

State law is very significant when considering the property and rights
to property to which the federal tax lien attaches. The Government looks to
state law to determine a taxpayers rights in a particular piece of property,
but federal law determines whether such interests qualify as property or rights
to property. “[One] look[s] to state law to determine what rights
the taxpayer has in the property the Government seeks to reach, then to federal
law to determine whether the taxpayer’s state-delineated rights qualify
as ‘property’ or ‘rights to property’ within the compass
of federal tax lien legislation.”
United States v. Craft
, 535 U.S. 274 (2002); Drye v. United States,
528 U.S. 49, 58 (1999).

State law does not determine whether something is property under the
Internal Revenue Code. For example, in many states a liquor license is not
property. Under the Internal Revenue Code, however, the question is whether
the taxpayer has rights under state law. Because the taxpayer does have rights
under state law, the liquor license is property under the Internal Revenue
Code. See
Drye, 528 U.S. at 58-59.

Federal tax lien questions relating to the joint ownership of property
generally arise when other parties claim an interest in real property otherwise
subject to the federal tax lien. This issue typically arises when the Service
asserts a tax lien against only one of the parties having an interest in real
property which, depending on state law, is held in one of the following forms:

Personal property is defined generally as everything that can be owned
that is not real property. Tangible property is defined generally as personal
property that has physical form and is moveable.

The Service takes collection action against a variety of types of personal
property, including automobiles, trucks, boats, goods, bank accounts, wages
and benefits, interests in trusts, and partnership interests.

With one exception, no property or rights to property belonging to the
taxpayer is exempt from attachment of the federal tax lien except as follows.
Treas. Reg. § 301.6321-1 provides, “Any interest in restricted
land held in trust by the United States for an individual noncompetent Indian
(and not for a tribe) shall not be deemed to be property, or a right to property,
belonging to such Indian.”
State laws exempting a debtor’s property
from creditors do not affect the reach of the federal tax lien.
United States v. Bess, 357 U.S. 51 (1958); Commissioner
v. Stern, 357 U.S. 39 (1958). Similarly, while state law may prevent
a beneficiary of a spendthrift trust from transferring his or her interest
to third parties, the beneficiarys interest remains property subject to the
federal tax lien.

Terminable interests are interests a taxpayer may have that, by definition,
terminate upon the death of the party holding the interest, such as a life
estate in property, or a contract right that will terminate at some time,
e.g., an option.

The federal tax lien may attach to such an interest before it terminates.
However, once the interest terminates, the federal tax lien on that interest
also terminates. United States v. Swan, 467 F.3d 655
(7th Cir. 2006); Rev. Rul. 54-154, 1954-1
C.B. 277.

For example, assume taxpayer has an option to purchase Whiteacre. The
federal tax lien attaches to that option. If the taxpayer, however, never
exercises the option, the option will lapse. After the lapse, the federal
tax lien attaching to the option is also extinguished. Similarly, in the case
of a life estate, the federal tax lien clearly attaches to the life tenant’s
interest and may be enforced against that interest so long as the life tenant
lives. However, upon the death of the life tenant, the lien ceases to attach
to the property since the Government’s tax lien rights do not exceed
the taxpayer’s right to the property.

When a taxpayer’s property is within the jurisdiction of and under
the control of a state or federal court, such property is referred to as being
in “custodia legis.”
This is a judicial doctrine. In most
situations, courts recognize that a lien may attach to property held in the
court’s custody. See
Dragstrem
v. Obermeyer 549 F.2d 20 (7th Cir. 1977). There may be situations,
however, when the federal tax lien will not attach to property held in the
court’s custody. For example, if an assessment has not been made prior
to the transfer of the taxpayer’s property to a state court receiver
and the taxpayer has no property interest or rights to property after the
transfer, then the federal tax lien will not attach to the property held by
the receiver. Each state decides whether the taxpayer is divested of his interest
upon the transfer.

The fact that the Government may not have a lien on property in custodia
legis does not prevent the Government from collecting the tax liability in
the judicial proceeding that administers the property. The tax lien will attach
to any property of the taxpayer not in the custody of the court and will attach
to any property returned to the taxpayer upon termination of the court proceedings,
such property being in the nature of after-acquired property. In bankruptcy
cases the discharge of the debtor-taxpayer from a tax liability may prevent
the tax lien from attaching to after-acquired property. Area Counsel should
be contacted with questions concerning the effect of a bankruptcy discharge.

Attempting to avoid the federal tax lien, taxpayers have transferred
their assets to legal entities that they or their friends or relatives control.
This maneuver will generally be unsuccessful, because the federal tax lien
extends to property held by a third party if that third party is either the
alter ego or the nominee of the taxpayer. The factors which are relevant in
determining whether such a situation exists are similar to the factors which
are used in deciding whether a taxpayer has fraudulently conveyed property
to keep it from the reach of creditors.

This section outlines some of the most significant elements in determining
whether the federal tax lien attaches to property held by a taxpayer’s
alter ego or nominee. Note that these two doctrines are legally distinct. Oxford Capital Corp. v. United States, 211 F.3d 280 (5th Cir.
2000). “Alter egos”
connote legally distinct entities
which are so intermixed that their affairs (and assets) are not readily separable. “Nominees”
connote readily separable persons or entities, with
one holding certain specific property for the exclusive use and enjoyment
of the other. The terms often interchange or overlap, but ”
alter egos”
are usually corporate and business entities controlled by
the taxpayer, whereas “nominees”
are usually individuals
who clearly have a separate physical identity.

State laws generally provide that a recipient does not have to accept
a gift or transfer. Such transfers are generally inheritances, devises, bequests,
gifts, and marital interests upon divorce or death of a spouse. To avoid the
transfer, state law allows the recipient to “disclaim”
or “disavow”
or “renounce”
such transfers.
Typically, the operation of state law can create a legal fiction that the
recipient of such transfers never received the property in question by retroactively
treating the disclaimer as having occurred prior to the receipt of the property.

The issue is whether a taxpayer-recipient’s disclaimer will prevent
the federal tax lien from attaching to the property. In Drye
v. United States, 528 U.S. 49 (1999), the Supreme Court held that such
a disclaimer will not prevent a federal tax lien from attaching to the property.
Similarly, even though a spouse’s renunciation of a marital interest
may be treated as retroactive under state law, that state-law disclaimer does
not determine the spouse’s liability for federal tax on her share of
community income realized before the renunciation. United States
v. Mitchell, 403 U.S. 190 (1971).

If a NFTL has not been filed prior to the sale of a taxpayer’s
property, the purchaser takes the property free of the federal tax lien. IRC § 6323(a).

A purchaser is a person, who for adequate and full consideration in
money or money’s worth, acquires an interest (other than a lien or security
interest) in property which is valid under local law as against subsequent
purchasers without actual notice. IRC § 6323(h)(6)
.

A purchaser must acquire the property pursuant to a sale. The amount
paid must bear some reasonable relationship to the value of the property acquired.
However, this requirement of full and adequate consideration does not preclude
a bona fide bargain purchase or a purchaser who has not completed performance
of his/her obligation, such as the completion of installment payments.

A purchaser is also one who has acquired a lease of property, an executory
contract to purchase or lease property, one who has an option to purchase
or lease property or an interest in it, or one who has an option to renew
or extend a lease on property, if the interest acquired is not a lien or security
interest.

If a NFTL has not been filed prior to a creditor perfecting a judgment
lien, the judgment lien has priority over the federal tax lien. In order to
be a judgment lien creditor, the creditor must obtain a valid judgment in
a court of record and of competent jurisdiction.

In the case of a judgment for the recovery of a certain sum of money,
a claimant must have a perfected lien on the property involved. This requires:

If state law requires a recording of the judgment before there is a
lien on the real property good against third parties, the creditor does not
qualify as a judgment lien creditor until that date. If state law requires
a levy or seizure of personal property before there is a lien on the personal
property that is good against third parties, then there must be a levy or
seizure of the personal property before the notice of federal tax lien is
filed.

If a NFTL has not been filed prior to a creditor perfecting a mechanic’s
lien, the mechanic’s lien has priority over the federal tax lien.

IRC § 6323(h) defines a mechanic’s
lienor as a person who, under local law, has a lien on real property (or on
the proceeds of a contract relating to real property) for services, labor
or materials furnished in connection with the construction or improvement
of the property. IRC § 6323(h)(2).

For priority purposes, the lien arises on the earliest date such lien
becomes valid under local law against subsequent purchasers of the property
without actual notice of the tax lien but not before the mechanic begins to
furnish the services, labor or materials. Thus a mechanic’s lienor,
who takes all of the requisite action under local law to perfect and enforce
such lien, has a mechanic’s lien from a date no earlier than the day
on which the mechanic began to furnish the services, labor or materials on
the job to which the lien relates.

If a NFTL has not been filed prior to a creditor perfecting a security
interest, the security interest has a priority over the federal tax lien.
IRC § 6323(h)(1) defines a security
interest as any interest acquired by written contract for the purpose of security
(payment, performance, indemnity) in existing property for which the holder
paid money or money’s worth and which has priority under local law over
subsequent judgment liens arising out of unsecured obligations.

If a federal tax lien is invalid against an initial holder of a security
interest, it is also invalid against another party that acquires the security
interest, whether by purchase or otherwise.

A security interest must be in existence to prime a federal tax lien.
A security interest exists at any time

This priority over a NFTL will occur only if such an interest under
local law would prime a judgment lien creditor as of the time of the filing
of the NFTL. Thus, where a creditor fails to perfect its security interest
as required by the Uniform Commercial Code, the federal tax lien will attach
to the property and may be entitled to priority over the creditor.
United States v. Trigg, 465 F. 2d 1264 (8th Cir. 1972),
cert. denied, 410 U.S. 909 (1973).

Local law distinguishes real property from personal property. This is
important because the actions required under local law to establish the priority
of the security interest against a subsequent judgment lien may differ depending
on whether the property involved is real or personal property.

The Internal Revenue Code provides special protection for limited interests
by giving them priority over the federal tax lien even though the interests
come into existence after the filing of a NFTL. IRC
§ 6323(b). These special interests are called ”
superpriorities.”

There may be some overlapping among categories of “superpriorities
”
in which event federal law provides protection if any category applies
even though another may also be relevant. Should two categories of ”
superpriorities”
apply to an interest, then the Service should use that
category which gives the greatest protection to the private interest.