An Introduction to Tax Liens
| Publication year | 1984 |
| Pages | 399 |
| Citation | Vol. 13 No. 3 Pg. 399 |
1984, March, Pg. 399. An Introduction to Tax Liens
Virtually every lawyer with a commercial law practice must wrestle with the tax collector from time to time. It comes as no surprise to any of us that a host of liens are available to various tax claimants to fortify them in these contests. Even when the tax collector is not directly involved, the effect of tax liens can have an important fiscal impact in innumerable transactions. A basic understanding of tax liens, therefore, enables attorneys to prognosticate, formulate, negotiate and litigate more effectively. The purpose of this article is to review the fundamentals of some of the more frequently encountered liens for taxes.
The general federal tax lien,(fn1) which secures payment of all federal taxes, attaches to all of the taxpayer's property upon the occurrence of two events: "demand" by the Internal Revenue Service ("Service") and neglect or refusal to pay by the taxpayer. Demand must occur as soon as practicable, but in any event within sixty days after "assessment" of the tax liability.(fn2) Assessment is simply shorthand notation for the recordation of tax liability in the Service's regional office.(fn3) The first demand sent by the Service to the taxpayer typically allots ten days to discharge the liability.(fn4)
The federal tax lien attaches to all real and personal property, and rights to property, belonging to the taxpayer.(fn5) The issue of whether property or property rights belong to the taxpayer is resolved by state law.(fn6) However, the tax lien attaches to property exempt from execution under state law(fn7) and to after-acquired property held at any point after the lien attaches.(fn8)
Assuming that the conditions for attachment have been satisfied, the federal lien is deemed to have attached at the time of assessment and continues until the liability is paid or becomes unenforceable by reason of lapse of time.(fn9) With respect to this latter possibility, the Service generally must levy or initiate judicial collection proceedings within six years of the assessment date, or prior to the expiration of any period for collection agreed to in writing between the Service and the taxpayer (providing that the agreement is reached within the six-year period).(fn10) The Internal Revenue Code also lists several events that suspend the running of the six-year limitation.(fn11)
The federal tax lien is fully enforceable against the taxpayer without recordation of any notice of tax lien.(fn12) However, it is subordinate to the rights of purchasers,(fn13) holders of security interests,(fn14) mechanic's lien claimants(fn15) and judgment lien creditors who acquire rights prior to the filing of a notice of tax lien.(fn16)
In working with this rule, it is important to observe that the tax lien will be deemed to maintain its original filing date only if it is refiled within the one-year period ending six years and thirty days after assessment and if it is refiled thereafter within the one-year period ending six years after the preceding required refiling period. If the tax lien is not timely refiled, it loses the priority of the original filing date and is deemed to be filed when it is most recently refiled.(fn17)
The notice of tax lien must be filed in the office designated by the laws of the state within which the property subject to the lien is situated or, in the absence of such state law designation, in the office of the clerk of the federal district court in the judicial district where the property subject to the lien is situated.(fn18) Real property is deemed situated at its physical location; personal property is deemed situated at the taxpayer's residence at the time the notice of tax lien is filed.(fn19)
For its part, Colorado has enacted the Uniform Federal Tax Lien Registration Act.(fn20) Notices of tax liens on real property, and certificates and notices affecting such liens, must be filed with the clerk and recorder for the county in which the realty is located.(fn21) With respect to personal property, the notices and certificates must be filed in the office of the Secretary of State if the taxpayer is a corporation or a partnership which has its principal executive office in Colorado. Otherwise, filings must be made in the office of the clerk and recorder for the county in which the taxpayer resides.(fn22)
The notice of lien is filed on a Form 668, denominated "Notice of Federal Tax Lien Under Internal Revenue Laws." The lien is valid regardless of any other legal requirement concerning a notice of lien. For example, omission of a description of the property from the notice of lien does not affect the
validity of the federal tax lien, regardless of the fact that state law may require such a description of property subject to a lien.(fn23)
Even if a notice of tax lien is properly recorded, certain protected parties acquire rights in the taxpayer's property free of the burden of the federal tax lien. These protected parties include the following:(fn24)
1) Purchasers of securities or motor vehicles who purchase without actual notice or knowledge of the federal tax lien, and those who acquire security interests in securities without actual notice or knowledge of the tax lien;
2) Retail purchasers of tangible personal property in the ordinary course of the taxpayer's business;
3) Purchasers who acquire household or personal effects (or other property exempt from levy) without actual notice or knowledge of the lien in a casual sale for less than $250;
4) Holders of possessory liens for repair or improvement to tangible personal property who have been continuously in possession of such property;
5) Holders of liens on real estate (entitled to priority over prior-filed encumbrances) that secure payment of an ad valorem tax, a special assessment for defraying the cost of a public improvement or charges for utilities or public service provided by a governmental body;
6) Holders of mechanic's liens for repair or improvement on the personal residence of the taxpayer if the contract price does not exceed $1,000;
7) Attorneys with liens under local law on judgments and settlement amounts to secure payment for services;
8) Insurers who make certain loans to the insured under a life insurance, endowment or annuity contract; and
9) Financial institutions that make certain passbook loans without actual notice or knowledge of the tax lien.
Obviously, many financing arrangements contemplate disbursements over an extended period of time. In order to provide some protection for these arrangements against an intervening federal tax lien, the general tax lien statute contains several limited exceptions to the priority afforded a properly filed federal lien over security interests that attach after the tax lien filing. For example, one exception is that the tax lien is subordinate to a security interest in the taxpayer's property resulting from disbursements made before the earlier of forty-six days after the filing of the tax lien and the time that the secured party acquires actual notice or knowledge of the tax lien.(fn25) However, the security interest must arise from a written agreement entered into prior to the filing of the notice of tax lien.(fn26)
An exception of importance to those making future advances(fn27) concerns loans secured by "commercial financing security" (i.e., paper of a kind ordinarily arising in commercial transactions;(fn28) accounts receivable, mortgages or inventory; and purchases of commercial financing security, excepting inventory). These secured loans and purchases may have limited priority over a properly filed federal tax lien if the following requirements are met.
The taxpayer must have acquired the commercial financing security in the ordinary course of his...
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