5.17.2  Federal Tax Liens

Manual Transmittal

December 12, 2014

Purpose

(1) This transmits revised IRM 5.17.2, Legal Reference Guide for Revenue Officers, Federal Tax Liens, including transmission of topic based procedural changes incorporated based on the Affordable Care Act.

Background

This section provides procedures for perfecting a federal tax lien and outlines the major issues regarding the types of property subject to the federal tax lien and the status of the federal tax lien versus other competing liens with respect to that property. It also outlines the law and taxpayer rights governing the release of the federal tax lien, discharge of property from the lien, or other types of relief from the lien. This revision also incorporates changes associated with the Affordable Care Act.

Material Changes

(1) Editorial and reference updates made throughout the IRM.

(2) IRM 5.17.2.2.3: Deleted paragraph two the reference pertains to estate tax liens.

(3) IRM 5.17.2.3.2: Added in paragraph three the territories of, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and the Virgin Islands (VI), as filing personal property lien notices with the district court.

(4) IRM 5.17.2.5.1(3): New paragraph added regarding looking to state law regarding property and civil unions and domestic partnerships.

(5) IRM 5.17.2.5.2.1: Revised to include clarification of community property ownership by same-sex marriages and domestic partnerships.

(6) IRM 5.17.2.5.2.4: Revised to include clarification of tenancy by the entirety ownership by same-sex spouses.

(7) IRM 5.17.2.5.2.5: Revised to include clarification on equitable conversion in light of a recent court decision.

(8) IRM 5.17.2.6.1(5): Adds new paragraph on how equitable conversion can affect the statutory federal tax lien and Notice of Federal Tax Lien (NFTL) status in relation to purchasers.

(9) IRM 5.17.2.6.4(7): Adds new paragraph on how equitable conversion can affect the lien and NFTL status in relation to holders of a security interest.

(10) IRM 5.17.2.6.5.4(1) Editorial Change - Rev. Proc. 2014-61, 2014-47 I.R.B. 860 adjusts yearly amount for calendar year 2015 of Persons Against Whom a Federal Tax Lien Is Not Valid regarding personal property purchased in a casual sale to less than $1,520.

(11) IRM 5.17.2.5.4(2): Deleted the Note as it is applicable to levies not liens.

(12) IRM 5.17.2.5.9: New subsection added titled, Same-sex Marriage and Legally-Recognized Relationships.

(13) IRM 5.17.2.6.5.7(2) Editorial Change - Rev. Proc. 2014-61, 2014-47 I.R.B. 860 adjusts yearly amount for calendar year 2015 of Persons Against Whom a Federal Tax Lien Is Not Valid regarding mechanic's lien for repair or improvement of certain real property to $7,590.

(14) IRM 5.17.2.6.6.1(4)(a): Revise subsection to clarify lien priorities related to the 45-Day Rule.

(15) IRM 5.17.2.7.1.5: Deleted paragraph two as duplicative of content in IRM 5.17.2.6.7 and renumbered the former paragraph three as paragraph two.

(16) IRM 5.17.2.7.1.19: New subsection titled, Unrecorded Conveyances, incorporating the content of the reissued Interim Guidance SBSE-05-0914-0057

(17) IRM 5.17.2.8.3: Deleted paragraph five for inaccuracies with content and case cite. Paragraph six renumbered as paragraph five.

(18) IRM 5.17.2.10: New subsection titled, Federal Tax Lien and the Affordable Care Act’s (ACA) Shared Responsibility, contains information related to the Affordable Care Act encompassing Internal Revenue Code (IRC) § 5000A and § 4980H,

(19) IRM 5.17.2-1: New Exhibit providing a table format visual depiction for the Commercial Transactions Financing Agreements example in IRM 5.17.2.6.6.1(4)(a).

Effect on Other Documents

This supersedes IRM 5.17.2 dated December 23, 2013 with an effective date of January 1, 2014 and reissued Interim Guidance Memorandum SBSE-05-0914-0057, titled, Unrecorded Conveyances and Federal Tax Lien Attachment, dated September 10, 2014.

Audience

SB/SE Revenue Officers.

Effective Date

(01-01-2015)

Dretha M Barham
Director, Collection Policy
Small Business/Self-Employed

5.17.2.1  (03-27-2012)
Federal Tax Liens Overview

  1. This section first explains how the federal tax lien arises, its duration, and the effect of filing a Notice of Federal Tax Lien (NFTL). The text then discusses the priority disputes between the federal tax and competing liens. The text next discusses the different methods for seeking relief from the federal tax lien, including subordination, releases, and certificates of discharge. The section ends with a discussion of the estate tax lien and the gift tax lien.

5.17.2.2  (03-27-2012)
The General Tax Lien

  1. The law generally defines a lien as a charge or encumbrance that one person has on the property of another as security for a debt or obligation. Essentially, this concept can be reduced to a simple metaphor — i.e., a special "sticker" similar to what a moving company puts on the furniture, boxes, and other contents of a house when it takes the owner’s property from one place to another. The lien (or "sticker" ) does not change the ownership or other qualities of the property to which it is affixed; it merely identifies the property as having some kind of claim against it.

  2. Liens may be divided into three general categories: common-law liens, consensual liens, and statutory liens. This section deals with the statutory liens provided for by the Internal Revenue Code. The principal lien considered in this section is the "general" tax lien, sometimes referred to as the assessment or "secret" lien. The general tax lien is provided for by IRC § 6321 and is a very broad lien; it generally encompasses all of the taxpayer’s property or rights to property as security for a tax liability.

  3. In addition to the general tax lien, there are two special liens for estate and gift taxes which arise at the date of death or the date of the gift, respectively. These liens are provided for by IRC § 6324. Special estate tax liens applicable to cases involving certain closely held business or farm or qualified family-owned business property are provided for by IRC § 6324A, IRC § 6324B, and IRC § 2057(i)(3)(P), respectively. Questions concerning these liens should be referred to Area Counsel. For more information on the Estate Tax Lien, see IRM 5.5.8.

5.17.2.2.1  (03-27-2012)
When and How the Tax Lien Arises

  1. 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. IRC § 7701(a)(1). The lien is effective from the date the Government assesses 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.

5.17.2.2.2  (03-27-2012)
Duration of the Federal Tax Lien

  1. 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., passing of the collection statute expiration date (CSED). 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.

  2. IRC § 6502 provides for an extension of the collection period in two situations:

    1. The statute of limitations was extended at the same time an installment agreement was entered into. In this case, collection action may be taken until the 89th day after expiration of the installment agreement. IRC § 6502(a)(2)(A).

      Note:

      The Service only secures extensions on partial payment installment agreements and only in limited situations. See IRM 5.14.2.1.3.

    2. Release of a levy under IRC § 6343 is accompanied by an agreement to extend the statute of limitations to a specific date and that date has not yet passed. IRC § 6502(a)(2)(B); Treas. Reg. § 301.6343-1(b)(2)(ii)(D).

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

    • Issuance of a statutory notice of deficiency, IRC § 6503(a).

    • Assets of the taxpayer in control or custody of a court, IRC § 6503(b).

    • Taxpayer is outside of the United States for a continuous period of at least 6 months, IRC § 6503(c).

    • An extension exists for the payment of an estate tax, IRC § 6503(d).

    • A wrongful seizure of property or a wrongful lien on property, IRC § 6503(f).

    • A taxpayer bankruptcy filing triggering the automatic stay, IRC § 6503(h). Insolvency or Area Counsel can identify whether the automatic stay is in effect for any particular period.

    Note:

    There are other IRC sections whose provisions result in extensions of the Collection Statute Expiration Date (CSED), including, but not limited to, IRC §§ 6015(e)(2), 6330(e)(1), 6331(i)(5), 6331(k)(3)(B) and 6672(c)(4). See also IRM 5.1.19, Collection Statute Expiration

    .

  4. 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).

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

5.17.2.2.3  (12-12-2014)
Transfer of Property Subject to Lien

  1. After the federal tax lien attaches to property, it remains on that property until the lien has expired, is released, or the property has been discharged from the lien. The transfer of property subsequent to attachment does not affect the lien. United States v. Bess, 357 U.S. 51, 57 (1958). If property is sold by the taxpayer, the lien attaches to whatever is substituted for it, as it reaches all of the taxpayer’s property and rights to property. Phelps v. United States, 421 U.S. 330, 334-35 (1975) (lien attached to the cash proceeds of a sale). However, as a practical matter, it may be difficult to enforce a tax lien against cash sale proceeds.

5.17.2.3  (12-12-2014)
Filing Notice of the Federal Tax Lien

  1. The federal tax lien arises when the Service meets the requirements of IRC § 6321, i.e., an assessment and a notice and demand for payment. However, the law provides that in order for the federal tax lien to have priority against certain competing lien interests, the Service must file a NFTL pursuant to IRC § 6323.

  2. Prior to filing a NFTL, the Service should verify the outstanding liability and determine that the filing of the notice of lien is appropriate under the circumstances. See IRM 5.12.2.3, Notice of Federal Tax Lien Filing Determination (Pre-filing Considerations).The criteria for filing an NFTL are set forth in IRM 5.12.2.6, NFTL Filing Criteria.

5.17.2.3.1  (12-12-2014)
Purpose and Effect of Filing Notice

  1. 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). See In re Tracey, 394 B.R. 635 (BAP 1st Cir. 2008) (act of filing NFTL sufficient for section 6323(a) purposes with respect to personal property, under applicable local law, even if clerk fails to record). 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.

  2. IRC § 6323(f)(4) requires that in some states a NFTL filed with respect to real property 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. See 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.

5.17.2.3.2  (12-12-2014)
Place of Filing

  1. 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 lien will not have priority over a later purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor.

  2. 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.

    • For real property, the NFTL is filed in the one office designated by the State where the property is physically located. States generally provide that the one office for filing the NFTL for real property is the county recorder or clerk of the county in which the real property is located.

    • As against personal property, the situs of both tangible and intangible property is the residence of the taxpayer at the time the notice of lien is filed. Again, most states generally provide that the one office for filing the NFTL for an individual’s personal property is the county clerk’s office in the county in which the individual resides.

    • The residence of a corporation or partnership is deemed to be the place at which the principal executive office is located, which is the office at which the major executive decisions are made. S. D’Antoni, Inc. v. Great Atlantic & Pacific Tea Co., Inc., 496 F. 2d 1378 (5th Cir. 1974). For employment tax and certain excise tax purposes, a single-owner unincorporated business entity is classified as a corporation under Treas. Reg. § 301.7701-2T(c)(2)(iv)(B) and (c)(2)(v)(B), subject to the effective date rules in Treas. Reg. § 301.7701-2T(e)(5)-(6).

    • For purposes of filing a notice of federal tax lien, a taxpayer who resides abroad is deemed to reside in Washington, D.C. Thus, a notice of federal tax lien filed against personal property is to be filed with the Recorder of Deeds for the District of Columbia.

  3. 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, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and the Virgin Islands (VI) are the only jurisdictions where the Service files a NFTL for personal property in federal district court.

  4. 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. 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 is not counted. IRC § 6323(f)(1)(A)(ii). See also Treas. Reg. § 301.6323(f)-1(a)(2).

    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.

  5. 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.

5.17.2.3.3  (12-12-2014)
Refiling of Notice

  1. 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.

  2. 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).

    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 the lien has priority as of July 1, 1993.

  3. If the collection period continues to be suspended or extended after the initial refiling, the Service may have to refile again. 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. IRC § 6323(g)(3)(B).

  4. 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. See IRC § 6323(g)(2)(A) and Treas. Reg. § 301.6323(g)-1(a)(1). 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 file a NFTL in the recording office covering the new residence.

  5. If a self-releasing NFTL is filed in multiple offices with respect to a particular tax assessment, and the Service fails to timely refile in each of those offices, the assessment lien releases and the refiling of any other NFTL is rendered ineffective. Treas. Reg. § 301.6323(g)-1(a)(1). In other words, even if the NFTL is properly refiled in every office except for one, failure to refile in one office causes the underlying assessment lien to be extinguished and the refiled NFTLs to be ineffective.

  6. However, neither the failure to refile before the expiration of the refiling period, nor the release of the lien, shall alter or impair any right of the United States to property or its proceeds that is the subject of a levy or judicial proceeding commenced prior to the end of the refiling period or the release of the lien, except to the extent that a person acquires an interest in the property for adequate consideration after the commencement of the proceeding and does not have notice of, and is not bound by, the outcome of the proceeding. Treas. Reg. § 301.6323(g)-1(a)(3). This provision is effective for NFTLs filed on or after April 4, 2011. Contact Area Counsel if you have a case involving a lien that is released that attached property or proceeds that are the subject of a levy or judicial proceeding.

5.17.2.3.4  (03-27-2012)
Contents of Notice of Federal Tax Lien

  1. 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).

  2. The NFTL can be either a paper form (the Service uses Form 668(Y)(c)), or a form transmitted electronically, including by fax or e-mail. Regardless of the method used to file the NFTL, it 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).

5.17.2.3.5  (12-12-2014)
Effect of Errors in Notice of Federal Tax Lien

  1. 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.

  2. 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).

  3. In applying the substantial compliance test, many courts have upheld NFTLs even when there was an error in the taxpayer's name. See Quist v. Wiesener, 327 F.Supp.2d 890 (E.D. Tenn. 2004) ("Joint Effort" rather than "Joint Effort Productions, Inc." ); Whiting-Turner v. P.D.H. Dev. Inc., 184 F.Supp.2d 1368 (M.D.Ga. 2000) ("PDH Development, Inc." rather than PD Hill Development, Inc.”); 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 "Davis's Restaurant," a partnership, and one partner, "Joe Davis," was sufficient as notice against the other partner, "Mary Davis" ); Richter's 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) ("Alan G. Casey" rather than "Alan 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.B. Clark, Sr." rather than "W.B. Clark, Sr.").

  4. In re Spearing Tool and Manufacturing Co., Inc., 412 F.3d 653 (6th Cir. 2005), cert. denied sub nom. Crestmark Bank v. United States, 549 U.S. 810 (2006), is the lead case for upholding a NFTL when lien filing records are electronically searched. In Spearing Tool , the Sixth Circuit held that the Service's 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."

    • The 6th Circuit found that the secured creditor challenging the validity of the NFTL had failed to conduct a reasonable and diligent electronic search because its search did not take into consideration the following three factors:
      1. The use of the abbreviation "Mfg." and the use of an ampersand are common.
      2. The secured creditor knew that Spearing Tool sometimes used these abbreviations.
      3. The Michigan Secretary of State's office recommended to the secured creditor that it undertake a search using the abbreviations.

    • The 6th Circuit limited its holding to the facts and specifically expressed no opinion about whether creditors have a general obligation to search name variations.

  5. 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 factual 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 5.12.7.6(8).

5.17.2.4  (12-12-2014)
Collection Due Process

  1. IRC § 6320 gives the taxpayer the right to challenge a NFTL filing, request a Collection Due Process (CDP) hearing with Appeals, and seek judicial review of Appeals’ determination with the Tax Court. The Service must generally notify the taxpayer within 5 business days after the date of filing the first NFTL for a tax period. The notice of lien must be given in person, left at the taxpayer’s home or place of business, or sent by certified or registered mail to the person’s last known address. The notice must also inform the taxpayer of the amount of the unpaid tax, the taxpayer’s right to request a hearing, the available administrative appeals procedures, and applicable procedures for releasing the lien. IRC § 6320(a). For more information, see IRM 5.12.6, Appeals Processes Involving Liens;IRM 5.1.9, Collection Appeal Rights; and IRM 8.22, Collection Due Process.

5.17.2.5  (03-27-2012)
Property to Which the Tax Lien Attaches

  1. The federal tax lien attaches to all property and rights to property of the taxpayer. This is a very broad concept and includes not only items which are typically thought of as property, e.g., tangible items and "things," but also intangible items and "rights" which a taxpayer may have, but are not necessarily marketable. The only exception is that the lien does not attach to any interest of an Indian in restricted land held by the United States. Treas. Reg. § 301.6321-1.

  2. The courts have interpreted this very broad language to include property of greatly varying natures, as well as future interests, contingent interests, and executory contracts.

    • Future interests. The fact that a taxpayer’s enjoyment of a "right to property" may be postponed does not prevent attachment. If a taxpayer has an unqualified fixed right, under trust or a contract, to receive periodic payments or distributions of property, a lien attaches to the taxpayer’s entire right regardless of when the payments or distributions will be made. Rev. Rul. 55-210, 1955-1 C.B. 544.

    • Contingent interests. These are interests which a party will receive only if certain circumstances or events occur. See Fouts v. United States, 107 F.Supp.2d 815, 817 (W.D. Mich. 2000) (under state law an expectant beneficiary of an inter vivos trust has a present interest in property that is attachable). But see Dominion Trust Co. of Tennessee v. United States, 7 F.3d 233 (unpublished table decision) (6th Cir. 1993) (under state law a contingent remainder person did not have an interest in property). An inter vivos trust is sometimes referred to as a "living trust" .

    • Executory contracts. A lien may attach before performance under a contract. See Seaboard Surety Co. v. United States, 306 F.2d 855, 859 (9th Cir.1962) (a lien attached to the taxpayer's rights under an executory contract which the taxpayer had assigned and, when the taxpayer performed under the contract, the government had a lien on the proceeds). See also Randall, Sr. v. H. Nakashima & Co., 542 F.2d 270, 274 (5th Cir. 1976) (contract rights under a partially executed contract constituted a right to property because they had a realizable value).

  3. Once the lien has come into existence, it attaches immediately to any property acquired by the taxpayer during the existence of the lien. In other words, unlike a typical mortgage, the federal tax lien attaches to a taxpayer’s after-acquired property.

  4. If the Service files a NFTL, the tax lien will generally have priority to a taxpayer’s after-acquired property. In United States v. McDermott, 507 U.S. 447 (1993), the Supreme Court held that the federal tax lien had priority over a judgment lien on the taxpayer’s after-acquired property, to which the judgment lien and the federal tax lien attached simultaneously, even though the judgment lien was filed ahead of the NFTL.

5.17.2.5.1  (12-12-2014)
State Law

  1. 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 taxpayer's 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).

  2. 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.

  3. The Government must look to state law to determine whether a taxpayer has rights in property by virtue of a civil union, domestic partnership, or similar relationship.

5.17.2.5.2  (03-27-2012)
Real Property

  1. 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:

    • Community property,

    • Joint tenancy,

    • Tenancy in common , or

    • Tenancy by the entirety.

5.17.2.5.2.1  (12-12-2014)
Community Property

  1. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico is also a community property jurisdiction. Spouses in Alaska may elect to have statutory community property rules apply to some or all of their property. Alaska St. § 34.77.010 et. seq. Community property includes both real and personal property.

  2. In most community property states, only married couples may own property as part of a community. Community property rules in these states apply to both opposite and same-sex married couples whose marriages are recognized by that state. The community property rules also apply in some states to state-created, formal relationships between opposite and same-sex couples. For example, California, Nevada and Washington permit domestic partnerships to which each states apply its community property laws.

  3. Community property law presents special problems concerning the force and effect of the federal tax lien. Questions in that regard should be referred to Area Counsel. Reference may also be made to the State Law Guides on the My SB/SE Counsel website. See http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx and IRM 25.18.1 and IRM 25.18.4.

5.17.2.5.2.2  (03-27-2012)
Joint Tenancy

  1. A joint tenancy may be created when the following conditions are met:

    • Two or more persons become the owners of property in equal and undivided shares.

    • The interest of each tenant is created in the same conveyance at the same time and the interests must be equal.

  2. Joint tenants generally have a right of survivorship. Under the right of survivorship, when a joint tenant dies, the surviving joint tenants automatically own a greater portion of the property.

    Example: Assume A, B, and C own Whiteacre in a joint tenancy. If A dies, B and C automatically own Whiteacre. If B then dies, C automatically is the sole owner.

    Note:

    By statute, some states have abolished the survivorship feature of joint tenancy.

  3. Generally, where only one of the joint tenants owes taxes, the lien attaches to the taxpayer’s property interest and the entire property may be sold pursuant to judicial sale under IRC § 7403, although the non-liable joint tenant must be compensated from the sale proceeds. If the Service enforces the tax lien against a taxpayer’s interest in a joint tenancy and sells it, the purchaser acquires the taxpayer’s partial interest in property, but most states then treat the joint tenancy as having been converted to a tenancy in common (discussed below). See generally, United States v. Rodgers, 461 U.S. 677 (1983).

  4. In most states, if the individual, against whose property a federal tax lien attaches, dies before any of the other joint tenants, then the lien ceases to attach to the property. However, if the same individual is the last survivor of the joint tenants, the tax lien then attaches to the entire property. In a few states, however, this is not the rule. Wisconsin is an exception to the general rule: if the federal tax lien has attached to the interest of one joint tenant who then dies, the surviving joint tenant takes the property encumbered with the federal tax lien. United States v. Librizzi , 108 F.3d 136 (7th Cir. 1997). Connecticut is also an exception to the general rule. Conn. Gen. Stat. 47-14f. See also Paternoster v. United States, 640 F.Supp.2d 983 (S.D. Ohio 2009). Accordingly, state law should always be consulted to determine whether there is an exception to the general rule.

5.17.2.5.2.3  (03-27-2012)
Tenancy in Common

  1. A tenancy in common is like a joint tenancy in that it creates an undivided interest in property. However, it is different from a joint tenancy in two important aspects:

    • First, the interest of a tenant in common may be transferred to a third party without destroying the tenancy in common.

    • Second, there is no right of survivorship in a tenancy in common.


    Example: Assume A and B own Blackacre in tenancy in common, and A dies. B and A’s estate would then own Blackacre as tenants in common.

  2. Applying the above rules to collection, the Service may levy and sell a taxpayer’s interest in a tenancy in common. Alternatively, the Service may ask a court to foreclose the federal tax lien and sell the entire property, although the non-liable tenant in common must be compensated from the sale proceeds. Also, if a tax lien attaches to one tenant’s interest, it will survive the taxpayer’s death and continue to encumber the property in the hands of heirs or legatees.

5.17.2.5.2.4  (12-12-2014)
Tenancy by the Entirety

  1. Only spouses can hold property in a tenancy by the entirety. A tenancy by the entirety is similar to a joint tenancy in having a right of survivorship. But the tenancy by the entirety has a restriction not found with a joint tenancy: one spouse cannot transfer his or her interest without the consent of the other spouse. Same-sex spouses may own property as tenants by the entirety in those states that recognize same-sex marriages and allow property to be held as tenancy by the entirety. Some states permit real and personal property to be held as a tenancy by the entirety while others only permit real property to be held in such manner.

  2. For many years there was uncertainty as to whether a federal tax lien could attach to the interest of only one tenant. (If both spouses were liable, the general rule was that a federal tax lien could attach to the tenancy by the entirety.) In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court provided a clear answer, holding that the federal tax lien may attach to the tenancy by the entirety when only one spouse had a federal tax liability. Notice 2003-60, 2003-2 C.B. 643 addressed the application of Craft to different situations. In summary, the Notice stated the following:

    1. The federal tax lien attaches to all the property and rights to property of the taxpayer. The Court's decision confirms that a taxpayer's property and rights to property have always included any rights that the taxpayer may have in entireties property under state law. The Court's decision, therefore, does not represent new law and does not affect other law applicable to federal tax liens and federal tax collection. For example, the Craft decision does not change any limitation on the ability of the Service to rescind an accepted offer in compromise or terminate an accepted installment agreement.

    2. As a matter of administrative policy, the Service will, under certain circumstances, not apply Craft, with respect to certain interests created before Craft, to the detriment of third parties who may have reasonably relied on the belief that state law prevents the attachment of the federal tax lien.

    3. The administrative sale of entireties property subject to the federal tax lien presents practical problems that limit the usefulness of the Service's seizure and sale procedures. Levying on cash and cash equivalents held as entireties property is considerably less problematic and will be used by the Service in appropriate cases.

    4. Because of the potential adverse consequences to the non-liable spouse of the taxpayer, the use of lien foreclosure for entireties property subject to the federal tax lien will be determined on a case-by-case basis. See United States v. Rodgers, 461 U.S. 677 (1983) (IRC § 7403 authorizes foreclosure sale of entire jointly-owned property for separate tax liability of one spouse, but non-liable spouse is entitled to compensation from sale proceeds for loss of her share of the property).

    5. As a general rule, the value of the taxpayer's interest in entireties property will be deemed to be one-half. Accord Popky v. United States, 419 F.3d 242, 245 (3d Cir. 2005); United States v. Barr, 617 F.3d 370, 373 (6th Cir. 2010), cert. denied, 131 S. Ct. 1678 (2011). But see Pletz v. United States, 221 F.3d 1114, 1117-18 (9th Cir. 2000) (using actuarial tables). Craft declined to address the valuation of each spouse’s individual interest in the property. 535 U.S. at 289.

    6. Where there has been a sale or other transfer of entireties property subject to the federal tax lien that does not provide for the discharge of the lien, whether the transfer is to the non-liable spouse or a third party, the lien thereafter encumbers a one-half interest in the property held by the transferee.

5.17.2.5.2.5  (12-12-2014)
Equitable Conversion

  1. Some states recognize the doctrine of equitable conversion, which provides that a purchaser acquires equitable title to property when the unrecorded contract for sale is executed. Although the seller retains bare legal title to the property, the seller's equity interest is in the right to the balance of the purchase money. The seller holds legal title in trust for the purchaser.

  2. Some states extend the doctrine of equitable conversion to a lender who secures the interest with a mortgage or deed of trust.

  3. For a discussion of equitable conversion on the priority of the statutory federal tax lien with respect to purchasers and lenders, see IRM 5.17.2.5.6.1(5), Purchasers and IRM 5.17.2.5.6.4(7), Holder of a Security Interest, respectively.

5.17.2.5.3  (03-27-2012)
Personal Property

  1. 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.

  2. 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.

5.17.2.5.3.1  (03-27-2012)
Cash and Rights to Cash

  1. The federal tax lien attaches to a taxpayer’s interest in a bank account, even when the bank account is in the joint names of the taxpayer and others. United States v. National Bank of Commerce, 472 U.S. 713 (1985). This means that the lien reaches a taxpayer’s unqualified right to withdraw all of the money in the account without the consent of the other account holder. However, the right of a taxpayer joint depositor to withdraw funds from a joint bank account is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.

  2. The federal tax lien attaches to a taxpayer’s wages as the wages become his property and rights to property. State laws shielding some portion of a debtor’s wages from collection do not apply to the Service, as the collection of federal taxes is a matter of federal supremacy. Compare IRC § 6334(a)(9) and IRM 5.17.3.4.7, Property Exempt from Levy, regarding exemption of wages and other property from levy.

  3. In many situations, the Service loses its federal tax lien on money when a third party acquires the money in exchange for fair value. This occurs under IRC § 6323(b)(1)(A), which provides a superpriority for a purchaser of a security if the purchaser has no actual knowledge of the federal tax lien. Treas. Reg. § 301.6323(h)-1 defines a security to include negotiable instruments and money.

    Example: Taxpayer stops his car at a gasoline station and purchases $25 of gasoline. The federal tax lien has been stripped from the $25 paid to the gasoline station because the station has no actual knowledge of the federal tax lien. The superpriority for purchasers of money allows money to flow in commerce without delays for searching for federal tax liens.

5.17.2.5.3.2  (12-12-2014)
Partnership and Other Joint Interests

  1. It is often difficult to determine a partner-taxpayer’s interest in a partnership or other joint interest to which a federal tax lien has attached. Generally speaking, a partner-taxpayer’s interest in either a partnership or a joint venture is only a share in the equity in the assets; that is, the excess of assets over liabilities. United States v. Kaufman, 267 U.S. 408 (1925). Note that a partnership may own both real and personal property in the name of the partnership. If a federal tax lien exists on the partner-taxpayer’s property, the federal tax lien would not attach to the partnership’s property. See Rev. Rul. 73-24, 1973-1 C.B. 602 (addressing whether partnership account is subject to levy to satisfy tax liability of individual partner).

  2. Frequent and regular partnership "draws" which are advances or loans on annual profits are subject to a lien (and may be levied as salary or wages). United States v. Mokowitz, Passman & Edelman, 603 F.3d 162 (2d Cir 2010).

  3. Another issue that arises with respect to partnerships is whether the federal tax lien attaches to a general partner’s individual property in connection with an assessment made against the partnership for a partnership tax liability. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held that a timely assessment of a partnership’s employment tax liability permits the Service to collect the liability from the individual partners. Because the partners are derivatively liable for the taxes under state law, the assessment and notice and demand upon the partnership gave rise to the federal lien both on partnership and partner property.

5.17.2.5.3.3  (03-27-2012)
Trusts and Beneficial Interests

  1. A trust is a state-law created entity where one party holds property for the benefit of another. The following are terms generally used in connection with trusts:

    • The creator of the trust is referred to as the "grantor" or "settlor."

    • The property held by the trust is called the "res," "corpus," "principal" or "remainder." Income generated by the corpus is called income.

    • The person holding the property for the benefit of the other person is called the "trustee" or "fiduciary."

    • The person benefitting from the trust is called the "beneficiary." A beneficiary may only be entitled to income, principal or both, depending on the provisions of the trust.

    • A "revocable" trust is one where under the terms of the trust, the grantor/settlor reserves the right to dissolve the trust and take the property back.

    • An "irrevocable" trust is one that the grantor/settlor cannot dissolve and cannot take the property back.

  2. If the taxpayer is the grantor or settlor of a trust, the validity of the trust must be determined under applicable state law. If the grantor reserves a substantial interest or unrestricted control over the management of the operations that is not for the benefit of the purported beneficiary, the grantor remains the owner of the property and the trust will be ignored. For example, property in a family trust that is a sham - the grantors attempt to reduce their taxes by putting the property in trust, while retaining the use and benefits of the property - is subject to collection action to satisfy the grantors‘ liability. Whitesel Family Estate v. United States, 84-2 U.S. Tax Cas. (CCH) ¶ 9890 (S.D. Ohio 1984); Edwards Family Trust v. United States, 572 F. Supp. 22 (D. N.M. 1983).

  3. If the taxpayer is the beneficiary of a trust, a federal tax lien will attach to the taxpayer’s beneficial interest in the trust. This determination is made by reference to the trust instrument itself, with the appropriate state law governing construction of the terms of the instrument or the resolution of any ambiguities in the instrument. In some cases the lien will attach to the corpus of the trust and the income payable to the beneficiary. In other cases the lien will attach only to the income as it becomes payable to the beneficiary, and in a few cases it may not attach to either the income or the corpus. The latter situation may arise where the trustee has the unrestricted power of disposition of the trust income; i.e., where he/she may legally refuse to make any further distribution to the taxpayer-beneficiary and instead make the distribution to other beneficiaries or simply accumulate the income.

  4. The trust instrument can only determine the property right of the beneficiary (e.g., the taxpayer) in the trust corpus and income; the trust instrument itself cannot determine the effect of the federal tax lien upon that right. Thus, a so-called "spendthrift" trust may by its terms confer certain specific benefits upon a beneficiary and then purport to restrict the rights of creditors to reach those benefits. Such restrictions are not effective to remove those benefits from the reach of the federal tax lien, regardless of whether under the appropriate state law a "spendthrift" trust is regarded as valid in all respects. Bank One Ohio Trust Co. v. United States, 80 F.3d 173 (6th Cir. 1996). In any case where doubt exists as to the rights of a beneficiary of any of the many forms of trusts, the opinion of Area Counsel should be sought.

  5. Because the validity of a trust and the taxpayer's rights to trust property are highly dependent upon the particular facts of the case, the terms of the trust agreement, and applicable state law, Area Counsel should be consulted whenever these issues arise. General information regarding the rules relating to trusts and how they impact tax collection may be found in the Tool Box provided on the My SB/SE Counsel website at http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/MySBSECounsel.aspx under "Trusts & Collection Outline." See also IRM 5.17.3.9.24, Levy and Sale, Trusts, for information on levying on the corpus or income of a trust.

5.17.2.5.3.4  (12-12-2014)
Intangible Property

  1. Intangible property is personal property which lacks a physical existence but is represented by physical evidence. Items in this category include certificates of stock, bonds, promissory notes, licenses, goodwill, debts owed to the taxpayer, patents, copyrights, trademarks, franchises and "choses in action."

  2. A chose in action is a personal right not reduced to possession and recoverable by a suit at law. A plaintiff’s cause of action in tort or contract against a defendant is an example of a chose in action. United States v. Stonehill, 83 F.3d 1156 (9th Cir. 1996), cert. denied, 519 U.S. 992 (1996).\

5.17.2.5.4  (12-12-2014)
Exempt Property

  1. With one exception, no property or rights to property belonging to the taxpayer is exempt from attachment of the federal tax lien. 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."

  2. 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 beneficiary's interest remains property subject to the federal tax lien.

5.17.2.5.5  (03-27-2012)
Terminable Interests

  1. 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.

  2. 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.

    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 no longer attaches to the option.

  3. 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.

5.17.2.5.6  (03-27-2012)
Property in the Custody of a Court

  1. 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).

  2. 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.

  3. Each state decides whether the taxpayer is divested of his interest upon the transfer.

  4. 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.

    Note:

    Generally, a levy should not be used to enforce collection of taxes if assets of the taxpayer are in custodia legis. See IRM 5.17.3.4.4, Custodia Legis, for more information.

  5. 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.

5.17.2.5.7  (12-12-2014)
Property Held By Third Parties

  1. Attempting to avoid the imminent attachment of 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.

  2. 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.

  3. 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.

5.17.2.5.7.1  (12-12-2014)
Alter Ego

  1. Alter ego essentially means a "second self." It is a doctrine that allows the law to disregard an entity’s separate legal identity in order to extend liability and prevent abuse. Using an alter ego theory, if an individual is the alter ego of a corporate taxpayer or other legally distinct entity, then that individual’s assets may be used to satisfy the debts of the corporate taxpayer. This is sometimes called "piercing the corporate veil."

  2. Similarly, if a corporation or other legally distinct entity is the alter ego of a taxpayer, then the assets of that entity may be used to satisfy the debts of the individual taxpayer. This is sometimes called "reverse piercing of the corporate veil."

  3. An alter ego generally involves a sham corporation used to avoid legal obligations. To establish an alter ego, such that an alter ego Notice of Federal Tax Lien may be filed, it must be shown that the shareholders disregarded the corporate entity and made it an instrumentality for the transactions of their own affairs.

    Note:

    Counsel's position is that federal common law, rather than state law, governs alter ego status. See Chief Counsel Notice CC-2012-002 (Dec. 2, 2011). Contact Area Counsel with questions regarding the applicable law.

  4. No one factor determines whether an alter ego situation is present, but a number of factors taken together may. The following list is neither exhaustive nor exclusive, but alter ego situations typically involve one or more of the following:

    1. Commingling of corporate and personal finances and use of corporate funds to pay personal expenses.

    2. Unsecured interest-free loans between the corporation and the shareholder.

    3. The taxpayer is a shareholder, director, or officer of the corporation, or otherwise exerts substantial control over the corporation.

    4. The corporation is undercapitalized relative to its reasonable anticipated risks of business.

    5. A failure to observe corporate formalities, e.g. issuance of stock, payment of dividends, director and shareholder meetings, or the maintenance of corporate records.

    6. A failure to disregard the corporate fiction presents an element of injustice or "fundamental unfairness."

  5. In an alter ego case, a special condition NFTL is used, identifying, in the name line of the NFTL before the taxpayer's name, the third party as the alter ego.. For example, if the taxpayer is TP, and ABC Inc. is TP’s alter ego, then the NFTL name line would read "ABC, Inc., as Alter Ego of TP."

  6. Area Counsel approval is required prior to filing a Notice of Federal Tax Lien naming an alter ego. See both 5.12.7.6.2Alter-Ego Lien Notices and IRM 5.12.7.6.4(6) through (8), Special Condition NFTL Approval Process: Request, Advisory Review, and Post-Approval.

    Note:

    Generally, an alter ego should not be asserted in transactions involving only individuals.

5.17.2.5.7.2  (12-12-2014)
Nominee

  1. A "nominee" is someone designated to act for another. As used in the federal tax lien context, a nominee is generally a third-party individual who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property. In other words, the federal tax lien extends to property "actually" owned by the taxpayer even though a third party holds "legal" title to the property as nominee. Generally speaking, the third party in a nominee situation will be either another individual or a trust.

  2. A nominee situation generally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations. To establish a nominee lien situation, it must be shown that while a third party may have legal title to the property, it is really the taxpayer that owns the property and who enjoys its full use and benefit. If state law is undeveloped or underdeveloped as to the issue of nominee ownership, contact Area Counsel for assistance.

  3. No one factor determines whether a nominee situation is present, but a number of factors taken together may. The following list is neither exhaustive nor exclusive, but nominee situations typically involve one or more of the following:

    1. The taxpayer previously owned the property.

    2. The nominee paid little or no consideration for the property.

    3. The taxpayer retains possession or control of the property.

    4. The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.

    5. The taxpayer pays all or most of the expenses of the property.

    6. The conveyance was for tax avoidance purposes.

  4. The Service’s NFTL in a nominee situation is identical to the standard NFTL, except that the nominee is identified as the name of the taxpayer. For example, if the taxpayer is TP, and My Brother-In-Law or My Trust is TP’s nominee, then the name of the taxpayer on the nominee NFTL would be "My Brother-In-Law or My Trust, Nominee of TP."

  5. Unlike the alter ego situation, nominee situations usually involve specific pieces of a taxpayer’s property that were conveyed to the nominee. Since the federal tax lien only attaches to property actually "owned" by the taxpayer, it may not reach all property that is, in fact, actually owned by the nominee. Therefore, the NFTL in a nominee situation will usually contain a notation on its face that the lien is filed to attach specifically to certain identified property. This property must be specifically identified and described in the NFTL.

  6. Area Counsel approval is required prior to filing a nominee lien. See both IRM 5.12.7.6.1, Nominee Lien Notices, and IRM 5.12.7.6.4(6) through (8), Special Condition NFTL Approval Process: Request, Advisory Review, and Post-Approval for more information.

5.17.2.5.8  (12-12-2014)
Disclaimers and Renunciations

  1. 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.

  2. 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).

  3. "Retroactive" or "relation-back" state laws also do not prevent a federal tax lien from attaching to property. Treas. Reg. § 301.6323(h)-1(a)(2)(B); Brent v. Commissioner, 630 F.2d 356 (5th Cir. 1980); Daine v. Commissioner, 168 F.2d 449 (2nd Cir. 1948); Eisenberg v. Commissioner, 161 F.2d 506 (3d Cir. 1947), cert. denied, 332 U.S. 767 (1947)..

5.17.2.5.9  (12-12-2014)
Same-sex Marriage and Legally-Recognized Relationships

  1. The recognition of same-sex marriage and the creation of formal relationships other than marriage may give taxpayers property rights they previously did not have. Federal tax liens will attach to these property rights and the Service will be able to levy on these rights. Many states recognize same-sex marriage. Some states allow opposite and same-sex couples to enter into other formal, legal relationships that confer rights and benefits similar to those provided by marriage. These relationships include civil unions, registered domestic partnerships, reciprocal beneficiaries, and designated beneficiaries. Among the rights conferred on same-sex spouses as well as the opposite and same-sex members of the state-created legal relationships are:

    1. Inheritance rights. Upon the death of one spouse or member of a legally-recognized relationship, the survivor may be entitled to inherit certain property under the state’s intestacy law. Alternatively, the surviving member may have a right to property as a beneficiary under the decedent’s will. Instead of taking under a will, or in the event of unjustifiable disinheritance or omission from the will, the survivor may be entitled to claim an elective share.
    2. Community property rights. See IRM 5.17.2.5.2.1.
    3. Tenancy by the entirety. See IRM 5.17.2.5.2.4.
    4. Tort claims. An opposite or same-sex spouse or member of a legally-recognized relationship may have the right to bring a cause of action in connection with the death or injury of the other member of the legally-recognized relationship. A federal tax lien attaches to tort claims. United States v. Hubbell, 323 F.2d 197 (5th Cir. 1963).
    5. Insurable interest. An opposite or same-sex spouse or member of a legally-recognized relationship may have an insurable interest in the life of the other member of the legally-recognized relationship. A delinquent taxpayer in one of these legally-recognized relationships may be the beneficiary under an insurance policy upon the death or disability of the other member.
    6. Retirement plans. A liable taxpayer may be entitled to receive survivor benefits or the balance of a retirement account from a retirement plan in which his or her deceased spouse or member of a legally-recognized relationship was a participant. If a liable taxpayer has been divorced, he or she may be entitled to benefits or the account balance from a retirement plan in which his or her divorced spouse or member of a legally-recognized relationship is or was a participant.
      a. ERISA-qualified plans. The Employment Retirement Income Security Act (ERISA) governs most retirement plans and if ERISA-qualified, state law rules do not apply. Under ERISA, the term “spouse” includes individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not. U.S. Dept. of Labor Technical Release No. 2013-04. For a defined benefit plan (plan funded by an employer that pays participants a specific monthly benefit at retirement), the surviving spouse of participant is eligible for a monthly benefit unless the participant and spouse elect against it. For a defined contribution plan (e.g., 401(k), IRA, profit-sharing plan), a spouse is entitled to the balance of the account unless the participant and spouse elect against it. In the absence of a spouse, the named beneficiary may be a registered domestic partner or member of another legally-recognized relationship.
      b. Non-ERISA plans. Governmental plans, many church plans and section 403(b) plans are not covered by ERISA. These plans may provide for survivor benefits for a same-sex spouse or member of a legally-recognized relationship upon the death of the participant.

5.17.2.6  (03-27-2012)
Priority of Tax Liens: Specially Protected Competing Interests

  1. After notice and demand for payment, the federal tax lien arises and relates back to the assessment date. Congress recognized that it was difficult to conduct business when creditors were unaware of the Service’s assessment lien. Consequently, Congress enacted the forerunner of IRC § 6323(a) to provide that a NFTL must be filed in order to have priority over certain creditors. Today, IRC § 6323(a) provides, in part, that "[the] 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 thereof ... has been filed ..."

  2. IRC § 6323(a) applies to the Service in a variety of situations including interpleaders and lien foreclosures. In lien priority disputes, the Service must determine which claims against the taxpayer’s property will be satisfied first, which second, and so on down the order of priority until the value of the property is exhausted. If a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor with a claim to the taxpayer's property perfects its claim prior to the filing of a NFTL, then that claim is entitled to priority over the tax lien.

  3. The parties listed in IRC § 6323(a) are protected against unfiled NFTLs, notwithstanding actual knowledge of the statutory assessment lien. Rev. Rul. 2003-108, 2003-2 C.B. 963.

5.17.2.6.1  (12-12-2014)
Purchasers

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

  2. 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).

  3. 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.

  4. 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.

  5. Some states recognize the doctrine of equitable conversion, which provides that a purchaser acquires equitable title to property when the unrecorded contract for sale is executed. Equitable conversion is only relevant where the contract for sale is executed before the NFTL is filed but recordation occurs after the NFTL is filed or not at all. Even in states that recognize equitable conversion, the purchaser will not take the property free of the federal tax lien unless they qualify as a "purchaser" under IRC 6323(h)(6). IRC 6323(h)(6) defines a purchaser as a person who acquires an interest in property for adequate consideration that is valid under local law against a subsequent purchaser without notice. In many states, a purchaser’s interest is not valid against a subsequent purchaser until it is recorded. Ruggerio v. United States, 2005-2 USTC ¶ 50,645 (4th Cir. 2005), cert. denied, 549 U.S. 811 (2006). In Ruggerio, which is a Maryland case, an assessment lien attached to the taxpayer-seller’s real property. Subsequently, the taxpayer-seller contracted to convey the real property to buyer. The Service filed a NFTL before the closing date on the real property. The Fourth Circuit held that buyer took the real property with the federal tax lien attached to it, because the Service filed a NFTL before the buyer qualified as a purchaser under IRC § 6323(a).

    Reminder:

    State Law Guides contain information on equitable conversion and its impact on the priority of the federal tax lien in relation to purchasers.

5.17.2.6.2  (03-27-2012)
Judgment Lien Creditor

  1. 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 for the recovery of specifically designated property or for a certain sum of money. Treas. Reg. § 301.6323(h)-1(g).

  2. 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:

    • the identity of the lienor,

    • the property subject to the lien, and

    • the amount of the lien be established.

  3. 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 recordation 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 in order for a judgment lien creditor to have priority.

5.17.2.6.3  (03-27-2012)
Mechanic's Lienor

  1. 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.

  2. 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).

  3. 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.

5.17.2.6.4  (12-12-2014)
Holder of a Security Interest

  1. 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.

  2. 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.

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

    1. if, at such time the property is in existence and the security interest has become protected under local law against a subsequent judgment lien and

    2. to the extent that, at such time, the holder has parted with money or money’s worth. See Treas. Reg. § 301.6323(h)-1(a)(3).

  4. 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 will 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).

  5. 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.

  6. State law permitting relation back to perfect a state lien cannot affect the priority of the lien. Treas. Reg. § 301.6323(h)-1(a)(2)(B).

  7. In some states, equitable conversion provides a lender priority over a NFTL filed before the lender records. Equitable conversion is only relevant where the mortgage instrument or deed of trust is executed before the NFTL is filed, but recordation occurs after the NFTL is filed or not at all. Equitable conversion provides that a lender acquires equitable title when an unrecorded mortgage or deed of trust is executed. In some states, priority is established when the mortgage or deed of trust is executed because the lender’s equitable interest is protected under local law against a subsequent judgment lien arising out of an unsecured obligation. IRC 6323(h)(1)(A). Susquehanna Bank v. United States, 2014-2 USTC ¶ 50492 (4th Cir. 2014). In Susquehanna Bank, the NFTL was filed after the deed of trust securing the loan was executed, but before the deed of trust was recorded. The Fourth Circuit found that the lender’s unrecorded security interest had priority over the federal tax lien, even though the NFTL had been filed, because an equitable security interest is protected under Maryland law against subsequent judgment-lien creditors.

    Reminder:

    State Law Guides contain information on equitable conversion and its impact on the priority of the federal tax lien in relation to holders of a security interest.

5.17.2.6.5  (03-27-2012)
Superpriorities

  1. 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."

  2. 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.

5.17.2.6.5.1  (03-27-2012)
Securities

  1. This "superpriority" protects the purchaser or the holder of a security interest in a "security" who at the time of purchase or at the time the security interest came into existence did not have actual notice or knowledge of the existence of the federal tax lien. IRC § 6323(b)(1). The Code defines securities to include money, stock, bonds, debentures, notes, negotiable instruments, and various other types of interests. IRC § 6323(h)(4) .

  2. A subsequent holder of a security interest is also protected if the prior holder did not have actual notice or knowledge at the time the security interest came into existence. An illustration of the intent of this paragraph is the case where "P" , without actual notice or knowledge of the existence of a tax lien, purchases a security from "T" , the taxpayer, after a notice of lien has been filed. "P" is protected under the provisions of this paragraph. If "P" thereafter sells the security to "C" , who at the time of such sale has actual knowledge of the existence of the lien, "C" is also protected against the tax lien. See Treas. Reg. § 301.6323(b)-1(a)(2), Examples (1) and (2).

5.17.2.6.5.2  (03-27-2012)
Motor Vehicles

  1. This "superpriority" protects the purchaser of a motor vehicle if, at the time of purchase, —

    1. the purchaser did not have actual notice or knowledge of the existence of the federal tax lien; and

    2. before the purchaser has actual notice or knowledge, the purchaser has actual possession of the motor vehicle and has not thereafter relinquished actual possession to the seller or his/her agent. IRC § 6323(b)(2).

5.17.2.6.5.3  (03-27-2012)
Personal Property Purchased at Retail

  1. This "superpriority" protects the purchaser of tangible personal property purchased at a retail sale unless at the time of purchase the purchaser intends the purchase to (or knows the purchase will) hinder, evade or defeat the collection of the federal tax. IRC § 6323(b)(3).

  2. "Retail sale" means a sale made in the ordinary course of the seller’s trade or business of tangible personal property of which the seller is the owner. It includes a sale in the customary retail quantities by a seller who is going out of business but not a bulk sale or an auction sale in which goods are offered in quantities substantially greater than are customary in the ordinary course of the seller’s trade or business or an auction sale where the owner is not in the business of selling such goods. Treas. Reg. § 301.6323(b)-1(c)(2).

5.17.2.6.5.4  (01-01-2015)
Personal Property Purchased in Casual Sale

  1. This "superpriority" protects a purchaser of household goods, personal effects or other tangible personal property exempt from levy under IRC § 6334(a). It encompasses items purchased (other than for resale) in a casual sale for less than $1,520. IRC § 6323(b)(4). This amount is adjusted annually for inflation. See Rev. Proc. 2014–61, 2014–47 I.R.B. 860. These sales include "garage sales" or "tag sales."

  2. A casual sale is a sale not made in the ordinary course of the seller’s trade or business. Protection is afforded only if the purchaser does not have actual notice or knowledge of the existence of the federal tax lien or that the sale is one of a series of sales which means that the seller plans to dispose of, in separate transactions, substantially all of his/her household goods, personal effects and other tangible personal property. This exception applies only to tangible personal property (e.g. household goods, personal effects, wearing apparel, firearms, furniture, etc.) as defined in Treas. Reg. § 301.6323(b)-1(d)(1).

5.17.2.6.5.5  (03-27-2012)
Personal Property Subject to Possessory Lien

  1. This "superpriority" protects someone in possession of tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of that property. IRC § 6323(b)(5).

  2. Thus, for example, if state law gives an automobile mechanic a lien for the repair bill and the right to retain possession of the repaired automobile as security for payment of the repair bill, and the mechanic retains continuous possession of the automobile, a federal tax lien which has attached to the automobile will not be valid to the extent of the repair bill.

5.17.2.6.5.6  (03-27-2012)
Real Property Tax and Special Assessment Liens

  1. This "superpriority" protects certain specified state and local tax liens against real property. IRC § 6323(b)(6) applies if state or local law entitles such liens to priority over security interests in such property which are prior in time, and such lien secures payment of one of the following three types of taxes or charges:

    1. A tax of general application levied by any taxing authority based upon the value of such property. For example, real estate tax.

    2. A special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement. For example, sewers, streets, or sidewalks.

    3. A charge for utilities or public services furnished to such property by the United States, a state or political subdivision thereof, or an instrumentality of any one or more of the foregoing.

  2. If real estate taxes (whenever they accrue) are ahead of mortgages under local law, they will also be ahead of federal tax liens. The result will be the same if a special assessment lien arises after the federal tax lien is in existence. The same priorities apply in the case of charges for utilities or public services.

  3. This superpriority category does not include other state and local tax liens arising for personal property taxes, state or local income taxes, franchise taxes, etc.

5.17.2.6.5.7  (01-01-2015)
Residential Property Subject to a Mechanic’s Lien for Certain Repairs and Improvements

  1. This "superpriority" protects lienors whose liens arise from the repair or improvement of certain real property. IRC § 6323(b)(7).

  2. The property must be a personal residence containing not more than four dwelling units with the owner occupying one of the units and the total contract price being $7,590 or less. This amount is adjusted annually for inflation See Rev. Proc. 2014-61, 2041-47 I.R.B. 860.

5.17.2.6.5.8  (12-12-2014)
Attorney’s Liens

  1. This "superpriority" protects an attorney who, under local law, holds a lien upon, or a contract enforceable with respect to, a judgment or other amount in settlement of a claim or cause of action, to the extent of reasonable compensation for obtaining the judgment or procuring the settlement, even if the attorney has actual notice or knowledge of the filing of the notice of lien. IRC § 6323(b)(8). There is a limitation upon this absolute priority that arises with respect to a judgment or amount in settlement of a claim or a cause of action against the United States, to the extent that the United States sets off such judgment or amount against any liability of the taxpayer to the United States.

  2. Even in those cases where the attorney’s lien enjoys the priority over the federal tax lien, it is limited to reasonable compensation. Generally, reasonable compensation means the amount customarily allowed under local law for an attorney’s services for litigating or settling a similar case or administrative claim. See North Carolina Joint Underwriting Assn. v. Long, et al., 2008-1 USTC ¶ 50,183 (E.D.N.C. 2008). Nevertheless reasonable compensation shall be determined on the basis of the facts and circumstances of each individual case. The priority does not apply to an attorney’s lien which may arise from the defense of a claim or cause of action against a taxpayer, except to the extent such a lien is held upon a judgment or other amount arising from the adjudication or settlement of a counterclaim in favor of the taxpayer.


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