Nothing Is Certain but . . . : Tax Liens and the Judgment Creditor
| Publication year | 2015 |
| Author | By James C. Eschen |
By James C. Eschen
James Eschen hung out his shingle in Santa Cruz in 1997. His real property and business litigation practice has ranged from unlawful detainers to intellectual-property disputes. His article, "Your Rental Unit is in Foreclosure: Now What?" appeared in the August 2011 Big News. He can be reached at (831) 466-0753 and eschenlaw@cruzio.com.www.eschenlaw.net.
Aclient had an award from the Department of Labor Standards Enforcement for unpaid wages to enforce. He wanted fast action—the employer was liquidating and had posted the company's equipment on eBay. Fortunately, a sheriff's levy or two would go a long way to paying him what he was due.
But the Secretary of State's website1 showed bad news. Like many employers not paying their employees, this one was not paying other bills, either. Specifically, it had outstanding tax liens to the Internal Revenue Service and the Franchise Tax Board. Any money that my client got from a sheriff's levy, and any fee I received, could well end up in Uncle Sam's pocket. We closed the file—at least for the time being.
When a taxpayer fails to pay "any tax" after demand, the Internal Revenue Code (title 26, United States Code ["I.R.C."]) creates a lien for any unpaid amounts, including not just the taxes but penalties, interests, and costs of collection.2 The term "any tax" is broad, including more than just income taxes owed by the taxpayer. For example, the lien commonly arises from unpaid payroll taxes.3
The lien's purpose is to "insure prompt and certain collection of taxes due the United States from tax delinquents."4 Generally, the lien does not arise automatically when a taxpayer fails to pay but only upon the "assessment" of unpaid taxes.5 "Assessment of tax as defined consists of no more than the ascertainment of the amount due and the formal entry of that amount on the books of the secretary."6 The lien exists until the tax is paid or liability for it "becomes unenforceable by reason of lapse of time"—generally ten years from the date of assessment.7
Once the IRS assesses a taxpayer's delinquency, the lien extends to "all property and rights to property, whether real or personal, belonging to such person."8 This language "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have."9 Although federal law determines priority, state law defines the rights the taxpayer has in the property.10 For example, the lien attaches to an escrow for a sale of a California liquor license because the license is property under state law.11 The IRS enforces the lien by bringing a foreclosure action or by levying on the property.12
Once a tax lien arises, federal law governs the priority of competing liens.13 Even without recording, the tax lien is effective upon assessment against all persons.14 In the absence of a statutory exception, it takes priority over any other claim to property.15 Even workers who have not received their wages must defer to an IRS lien.16
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Internal Revenue Code section 6323 sets forth the exceptions to that priority.17 Section 6323(a) provides exceptions based on priority of recording, but the exceptions in subdivisions (b) and (c) apply regardless of recording. For example, subdivision (b) (4) creates an exception for personal property sold at a casual sale; yard-sale enthusiasts need not fear trouble with the IRS should their counterparties' property be subject to a tax lien.
Under section 6323(a), the lien is not valid "against a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor" until the IRS files notice of it. The notice is filed in the office within a state or county as directed by state law.18 Under California law, Federal tax liens are recorded in the same way as state tax liens.19 Tax liens on real property, like any instrument affecting real property, are recorded with the county recorder.20 Tax liens on personal property, like UCC financing statements, are filed with the Secretary of State.21 California's Government Code sets forth strict requirements for the filings' contents,22 but those requirements do not apply to federal liens.23 Instead, federal law determines whether a filing gives adequate notice of an IRS lien.24
Anyone enforcing a civil obligation therefore should take the time early to make sure there are no tax liens. No one wants to end up with a worthless judgment or, worse, to take the trouble to levy on the defendant's property only to have the IRS come after the client.25 Unfortunately, searching for a pre-existing tax lien may require more than just typing the defendant's name into the Secretary of State's or county recorder's websites.26
A tax-lien filing need not state the taxpayer's exact or true name.27 The Internal Revenue Code requires only that a lien on real property be filed so that a "reasonable inspection" of the index of deeds will disclose it.28 The courts seem to apply the same "reasonable inspection" test to liens on personal property.29 Thus a filing identifying the taxpayer as "Hudgins Masonry, Inc." perfected the lien against an individual, Michael Steven Hudgins, and filings under "Davis's Restaurant" and "Daviss [sic] Restaurant" were effective against the Davis Family Restaurant.30
In measuring a search's reasonableness, the Ninth Circuit Bankruptcy Appellate Panel has applied the standard of an ordinary prudent person, not of a professional title searcher.31 It held that what is reasonable can vary from place to place, depending on the search facilities maintained in the office where the tax lien is filed.32 In particular, it held that a reasonable inspection in Clark County, Nevada, required only a search by the taxpayer's exact name.33
Counsel looking for tax liens, however, should not rely on the BAP's ruling by searching only by the debtor's exact name. What one court held is reasonable in Clark County may not be reasonable elsewhere using other search mechanisms.34 In addition, BAP decisions have limited precedential effect; they may not bind even the bankruptcy courts themselves.35 Finally, reasonableness may require counsel to search under any name by which the judgment debtor has done business with the client, even if not the debtor's true name.36
Although both subdivisions (a) and (b) appear to have exceptions of interest to counsel for judgment creditors trying to collect in the face of a tax lien, only subdivision (a) actually does. Section 6323(a) provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice...
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