Chapter 16 : Governmental Liens

• Library: Standards for Examination of Real Estate Titles in Arkansas (2021 Ed.)

CHAPTER 16: GOVERNMENTAL LIENS

CAVEAT

This Chapter does not reflect an exhaustive analysis of federal tax laws. Rather, it is only intended to provide the examiner with an understanding of what constitutes a "safe harbor" in regard to federal tax liens.

The examiner should also bear in mind the fact that federal tax laws are subject to comparatively rapid change. The examiner should therefore take note of the effective date of this standard, and confirm that there have been no changes to the pertinent federal tax laws subsequent to the effective date of this standard.

Standard 16.1 General Tax Lien

26 U.S.C. § 6321 provides, in pertinent part: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the [tax] . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

26 U.S.C. § 6323(a) provides, in pertinent part: "The lien imposed by § 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed . . . ."

The term "purchaser" is defined in 26 U.S.C. § 6323(h)(6) as "a person who, for adequate and full consideration . . . acquires an interest . . . in property which is valid under local law against subsequent purchasers without actual notice."

The term "security interest" is defined in 26 U.S.C. § 6323(h)(1) as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.

A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth."

The term "mechanic's lienor" is defined in 26 U.S.C. § 6323(h)(2) as "any person who under local law has a lien on real property . . . for services, labor, or materials furnished in connection with the construction or improvement of such property. [A] person has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials."

The term "judgment lien creditor" is not defined in the statute.

The notice required by 26 U.S.C. § 6323(a) is more particularly described in 26 U.S.C. § 6323(f) and (g). Under these subsections, the form of the notice is left to the discretion of the secretary, but in order to be valid, the notice must be filed in the real property records of the county in which the real property is located. The notice is good for 10 years and may be extended for additional periods of 10 years by re-filing the notice within the original 10 years or within one year and 30 days after the expiration of the original 10 years.

26 U.S.C. § 6323(b) and (c) subordinate the general federal tax lien to the following interests, regardless of filing:

1. Real property taxes, special assessments, and the like;
2. Mechanic's and materialmen's liens on residential property occupied by the owner, provided the contract price is not more than $5,000.00;
3. "Certain commercial transactions." In essence, this exception protects lenders who have an established lending relationship with the taxpayer that obligates the lender to extend credit, and entitles the lender to acquire liens on the taxpayer's property, on a continuing basis. An example of "certain commercial transactions" is a construction loan mortgage.

Any party satisfying the definitions of purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor may rely upon the lack of a recorded notice of a federal tax lien, provided the interest of any such party is filed of record prior to the date on which any notice of federal tax lien is filed of record and provided such party has no actual knowledge of the federal tax lien.

Any party who falls...