Federal and State Tax Liens in Colorado
| Publication year | 1979 |
| Pages | 1938 |
1979, October, Pg. 1938. Federal and State Tax Liens in Colorado
In arranging credit transactions, either on behalf of a lender or borrower, counsel frequently finds itself in a position where an evaluation must be made of competing security interests. Counsel is usually familiar with the various interests and priorities which our recording acts create in real property and which the Uniform Commercial Code ("Code") creates with respect to personal property. However, knowledge of the liens available to the private sector is not sufficient in and of itself. Frequently, counsel must give consideration to liens made available to federal and state governments for the purposes of collecting taxes due and owing from a borrower. The purpose of this article is to give some insight into federal and state tax liens which counsel may encounter in a credit transaction.
The federal tax lien is a general lien which acts as a charge or an encumbrance on all the property or rights to property of the taxpayer.(fn1) With respect to such liens, it is incumbent upon counsel to be aware of the steps in the tax process which give rise to the general tax lien, what property the lien attaches to, what priorities the lien may have, and how the lien may be affected by insolvency or bankruptcy proceedings.
The general tax lien is created at the time the Internal Revenue Service ("IRS") makes its assessment, serves its notice of assessment and demand for payment, and the taxpayer fails to pay the tax as demanded. After the lien comes into existence, it continues until such time as it has been satisfied or becomes unenforceable under the time parameters established by the Code.(fn2)
It is apparent that there are three prerequisites to the creation of the tax lien. The first prerequisite, the assessment, is the administrative act of entering the liability on the assessment rolls.
After the assessment has been made, the second prerequisite, the mailing of the notice and demand, must be met. This, in some instances, may be the taxpayer's first formal notice that the IRS is claiming of the taxpayer a sum to be due and owing. The filing with the taxpayer of the notice and demand provides the attorney with an opportunity to determine the type of tax for which an assessment has occurred, the period involved, and the assessment date. An evaluation may then be made as to whether the tax has been assessed more than three years after the date the return was filed and thus has been barred by the statute of limitations. Additional inquiries of the IRS at
this juncture should be whether the notice and demand has been made within sixty days of the assessment,(fn3) and whether the taxpayer has received a ninety-day letter.(fn4) Certain case law supports the proposition that a failure by the IRS to accomplish this three-step procedure may cause the tax lien to be invalid.(fn5)
The third prerequisite to the creation of the general tax lien is the failure of the taxpayer to respond, by payment, to the notice and demand. Under the terms of the notice and demand, payment must be made within ten days after its mailing. Usually a series of notices are sent, permitting the taxpayer to make payment after receipt of any of the notices, although in fact, the general tax lien comes into existence once the original ten-day period has run.
It is important to note that this article deals with general assessment proceedings and does not discuss the jeopardy assessments which are available to the IRS. A jeopardy assessment generally arises when the collection of the tax due or believed to be due is in jeopardy. The special provisions relating to jeopardy assessments should be reviewed for an understanding of those procedures.(fn6)
When the three above-described prerequisites take place, the general tax lien has been created. The taxpayer is now faced with the question as to what property the lien has attached.
After the tax lien has come into being, the Code provides that it shall attach to all property and rights to property, both real and personal, belonging to the person liable for the tax.(fn7)
Very few property rights are not encompassed within the Code's description of "all property." Some property and property rights to which the lien has been found to attach are choses in action,(fn8) deposits in bank accounts occurring before or after the lien arose,(fn9) reversionary interests in a trust,(fn10) unliquidated tort claims,(fn11) moneys seized by law enforcement authorities in criminal proceedings which was returnable to the taxpayer upon acquittal,(fn12) and a partnership interest (but not the assets of the partnership).(fn13)
One limitation on the extent of the lien is that the property must "belong" to the taxpayer. In order to determine whether this question is to be resolved in favor of the taxpayer or the IRS, it must be determined whether the property belongs to the taxpayer under state statute or common law.(fn14)
Another critical question which must be asked is whether the "asset" to which the lien may have attached is actually property. In some instances, courts have found that liquor licenses,(fn15) or contingent future interests in testamentary trusts,(fn16) do not constitute property.
One final note of caution with regard to determining the "property" to which the lien is attached: after the tax lien comes into existence, it extends automatically to all property acquired by the taxpayer between the time of the creation of the lien and its expiration,(fn17) except in those instances noted later in this article with respect to certain types of secured transactions.
The statutes giving rise to the federal tax lien were designed to give to the United States a position as a secured creditor with respect to the taxpayer. In consulting with a client with respect to tax liens, the relative position of the government as a secured creditor vis-Ã -vis other secured creditors is of great importance in determining how the problem posed by a tax lien might be resolved. To analyze the government's position, an analysis of the priority of the tax lien must be made.
Generally, the principle used in determining
the priority among secured creditors, i.e., "first in time, first in right," applies to federal tax liens.(fn18) However, with respect to unfiled tax liens, the law recognizes four categories of third-party interests which are to be protected from this general rule. These categories are holders of security interests, purchasers, judgment lienors, and mechanic's lienors.
1. The...
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