Source: http://unclefed.com/AuthorsRow/BJHaynes/liens1.html
Timestamp: 2019-04-18 16:29:31+00:00

Document:
© by Burton J. Haynes, Esq.
The federal tax lien is at the heart of all enforced collection action taken by the IRS Collection Division. Accordingly, representing clients requires an understanding of how the lien arises, the kinds of property to which it attaches, the consequences of such attachment, the duration of the lien, the priority of the tax lien over the interests of other claimants to the taxpayer's property, and the circumstances under which the IRS will removed or subordinate the lien. This is the first of a two-part article which will introduce these essential topics.
IRC 6323(f) provides rules for the place of filing for a notice of federal tax lien against both real and personal property. For real property, the notice is filed in the office designated by the state where the property is located. In Maryland, as in most states, this means that the notice is filed with the land records in the county in which the property is located.7 The residence of a corporation or partnership is the place where the principal office is located. A notice of federal tax lien for a taxpayer who resides abroad is filed with the Recorder of Deeds for the District of Columbia.
Under some circumstances, a lien must be "refiled." To remove any uncertainty about whether a lien is still enforceable when the notice shows the assessment is more than ten years old, the IRS is required to refile its notice of tax lien within a one year period ending ten years and 30 days after the date of the assessment.8 Failure to refile at the appropriate time does not affect the validity of the lien, but it does nullify the legal effect of the prior filing. In the case of a late refiling, any security interest arising after the prior filing but before the refiling obtains a priority to the same extent as if no notice of tax lien had been filed prior to the time of the late refiling.
Most encumbrances on or interests in a taxpayer's property, if properly perfected prior to the date on which the federal tax lien arises, have priority over the lien. Notice of the lien must be filed before it has priority over most subsequently perfected interests in the taxpayer's property. But once the notice is filed, the federal tax lien takes priority over all but a few subsequently arising interests in the taxpayer's property. Remember, the lien itself does not transfer or convey the taxpayer's property to the IRS. Such transfer of ownership is accomplished either through a judicial foreclosure of the lien, or through an administrative action such as a levy.
H owes income taxes arising prior to his marriage to W. Marriage does not make W liable for such taxes.
H and W file their returns "married filing separately," with only one spouse owing tax.
H has been hit with the trust fund recovery penalty, but W had nothing to do with H's business and is not liable.
In all forms of joint tenancy, two or more persons become the owners of property in equal and undivided shares. Often, the deed establishing a joint tenancy will recite the interests as "joint tenancy with right of survivorship." State laws differ as to whether joint tenancy alone implies a right of survivorship if not so stated.16 Where only one joint tenant owes taxes, the lien attaches to his or her interest, and this interest can be sold. The majority of courts have held that the entire property may be sold and the proceeds divided with the other joint owner, rather than selling only the taxpayer's undivided interest.17 If the person against whom a federal tax lien is outstanding predeceases the other joint tenants, the tax lien will cease to attach to the property.18 However, if that individual happens to be the survivor, the lien will attach to the entire property in his hands.
A tenancy in common, in contrast to a joint tenancy with right of survivorship, results in undivided interests in property without the right to succeed to the ownership of the undivided interest held by a deceased co-tenant. Thus, once a federal tax lien has attached to one tenant's interest, the lien will survive his or her death and will continue to encumber the decedent's interest in the property as it passes into the hands of his or her heirs.
In addition to real estate, tangible personal property can be subject to the federal tax lien. The notice of lien is recorded in the county where the taxpayer resides at the time it is filed. If the notice is properly filed, the lien follows the personalty wherever it is thereafter located.
The most common kind of personalty subjected to the federal tax lien is a bank account. Difficult issues arise when accounts are held jointly by the taxpayer and one or more other persons. With a typical joint account, all co-holders have an unrestricted right to make withdrawals in amounts up to and including the entire balance, regardless of who deposited the funds into the account. The Supreme Court has held that this unrestricted right of withdrawal is a property right to which the federal tax lien attaches.21 Thus, in response to an IRS levy, the bank must pay over the full balance. The "true owner,"however, can file a wrongful levy action to recover his or her part of the funds.
Other important and interesting problems are presented by the application of the federal tax lien to the taxpayer's interest in a trust. In general, the lien attaches to whatever interest the taxpayer has in the trust. It is necessary to refer to the trust instrument itself, with the appropriate state law governing construction of the terms of the instrument and the resolution of any ambiguities. In some cases the lien will attach to the corpus of the trust and to 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.
Sometimes a taxpayer holds a "terminable interest," such as a life estate in property which ends on the death of the person holding the right. In the case of a life estate, the lien attaches to the life tenant's interest, and may be enforced against that interest as long as the life tenant is alive. But upon the death of the life tenant the lien ceases to attach to the property, and it passes free of the lien to the remaindermen.
Intangible personal property is also subject to the federal tax lien. Such property includes licenses, franchises, debts owed to the taxpayer, and any other such "chose in action." A chose in action is a personal right not reduced to possession and recoverable by a suit at law. The cause of action in tort which one possesses against another who has wrongfully injured him is an example of a chose in action.
The taxpayer's right to receive alimony payments is a property right to which the lien may attach.27 In contrast, child support payments are not subject to the lien; they are deemed the property of the child, and not the taxpayer parent.
In the second part of this article, to be published in the next issue of The Freestate Accountant, we will examine the priority of the federal tax lien against other claimants to interests in a taxpayer's property. This will include the various "superpriority" provisions, and the complex lien priority rules governing commercial financing arrangements. In addition, we will discuss the mechanics of seeking the release or subordination of the federal tax lien.
Mr. Haynes is a tax lawyer with offices in Burke, VA, and Burtonsville, MD. From 1973 to 1981 he served as a Special Agent with the IRS Criminal Investigation Division, and in 1980 was named "Criminal Investigator of the Year" by the Association of Federal Investigators. He specializes in civil and criminal tax disputes and litigation, and the tax aspects of bankruptcy and divorce. This article is part of an ongoing series Mr. Haynes has written for The Freestate Accountant on dealing with the IRS Collection Division. In December, Mr. Haynes is presenting a seminar on this topic for the Maryland Society of Accountants.
In addition to the general tax lien, there are special liens for estate and gift taxes, arising at the date of death or the date of the gift. See IRC �6324.
IRC �6502. The statutory period was increased from six years to ten years by the Revenue Reconciliation Act of 1990, effective November 5, 1990, and can be extended in various ways, such as by the execution of an extension agreement, or by the filing of an offer in compromise or a petition in bankruptcy.
The IRS uses Form 668.
D'Antoni, Inc. v. Great Atlantic & Pacific Tea Co., Inc., 496 F.2d 1378 (5th Cir. 1974); see also Rev. Rul. 74-571.
Hannus v. U.S., (W.D. Wash. 1958) 60-2 USTC 77,485.
In U.S. v. Friedlander, 235 F. 2d 753 (5th Cir. 1956), the lien was upheld though the name was spelled "Freidlander" instead of "Friedlander." But liens were held invalid where filed against "Ruby Luggage" rather than "S. Ruby Luggage," U.S. v. Ruby Luggage, 142 F. Supp. 701 (S.D.N.Y. 1954), and where the taxpayer's name was spelled "Manual Castillo" instead of "Manuel Castillo," Haye v. U.S., 416 F. Supp. 1168 (C.D., Cal. 1979). Also, a notice filed against "W.B. Clark, Sr.," was defective when the taxpayer's name was "W.R. Clarke, Sr." Continental Investments v. U.S., 142 F. Supp. 542 (W.D. Tenn. 1953).
Regs. �301.6321-1. See also Glass City Bank v. U.S,, 326 U.S. 265 (1945).
Aquilino v. U.S., 363 U.S. 509 (1960).
Federal law also defines the priority of competing claims to property after it is determined under state law that a property right exists. Aquilino, supra.; see also U.S. v. Acri, 348 U.S. 211 (1955).
IRC �6015. See also the author's previous articles in The Freestate Accountant describing the innocent spouse rules.
In Maryland, there is a statutory presumption against joint tenancy "unless the deed . . . expressly provides that the property granted is to be held in joint tenancy." See �2-117 of the Real Property Article. Failure to state that the tenancy is with the right of survivorship requires an inquiry into the intent of the parties, with the presumption in favor of finding a mere tenancy in common without such survivorship rights. Similarly, in Virginia the conveyance of property in joint tenancy without additional language of survivorship results in a mere tenancy in common.
U.S. v. Kocher, 468 F. 2d 503 (2d Cir. 1972), cert. denied 411 U.S. 931 (1973); Washington v. U.S., 402 F. 2d 3 (4th Cir. 1968), cert. denied, 402 U.S. 978 (1971); Contra, see Folsom v. U.S., 306 F. 2d 361 (5th Cir. 1962).
The reason is that the interest of a joint tenant with right of survivorship as a type of "terminable interest." The survivor-ship feature extinguishes the taxpayer's property right upon his death. In that event the property interest disappears, and there is nothing left to which the lien can attach. See Parsons v. Anglim, 143 F.2d 534 (9th Cir. 1944).
State v. Friedman, 283 Md. 701, 705-06, 393 A.2d 1356 (1978); Annapolis Banking & Trust Co. v. Neilson, 164 Md. 8, 9-10, 164 A. 157 (1933); Ades v. Caplin, 132 Md. 66, 69, 103 A. 94 (1918); Jordan v. Reynolds, 105 Md. 288, 294, 66 A. 37 (1907).
This ability to protect real estate from separate creditors, including the IRS, is one of the crucial rights given up by the filing of joint income tax returns. This is why the author often cautions against the filing of joint tax returns except where the tax has or will be paid in full, and where there is little risk of subsequent audit adjustments. Especially when a group of tax returns is being filed for a delinquent taxpayer who is trying to get himself back into compliance, and the amount due exceeds his ability to pay, careful consideration must be given to filing "married filing separately" to protect joint property.
U.S. v. National Bank of Commerce, 472 U.S. 713 (1985); IRS v. Gaster, 94-2 USTC �50,622 (3d Cir. 1994) (holding that IRS cannot levy against a joint bank account where the delinquent taxpayer lacks the right to make a unilateral withdrawal of the funds).
Maryland accepts the use of spendthrift clauses subject to certain exceptions. See Watterson v. Edgerly, 388 A.2d 934, 935-36 (Md. Ct. Spec. App. 1978). If income is withheld under such a clause, the beneficiary may sue to get it; therefore there is a property right to which the federal tax lien can attach.
Nichols v. Eaton, 91 U.S. 716, 722-25 (1875) (protective trust, after forfeiture, confers no right which a court would enforce). But see McGavern v. U.S., 550 F.2d 797 (2d Cir.), cert. denied, 434 U.S. 826 (1977) (lien effective against trust in which income payments were not completely discretionary with the trustee). Many courts have held that a simple spendthrift trust cannot defeat a tax lien. First Northwestern Trust Co. v. IRS, 622 F.2d 387 (8th Cir. 1980). One court has held that a spendthrift trust with a forfeiture clause is not effective to defeat a federal tax lien. U.S. v. Taylor, 254 F. Supp. 752 (N.D. Cal. 1966). It reached this result after balancing the state property law policies against the needs of federal tax collection, as called for in Aquilino v. U.S., 363 U.S. at 513-14 (1960). Some courts have found that it would be offensive and disruptive to federal tax law for a beneficiary to receive an income stream for years without paying taxes on it, only to have that income stream disappear once the IRS moves against it. U.S. v. Riggs National Bank, 636 F.Supp. 172 (D.D.C. 1986).
See First of America Trust Co. v. U.S., 93-2 USTC �50,507 (1993). If the instrument creates a discretionary trust, under Maryland law there is no interest in the trust corpus to which the lien can attach because even the beneficiary could not invade the corpus. The beneficiary of a discretionary trust cannot compel payments of the principal by the trustee absent a showing of dishonesty on the part of the trustee. First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 399 A.2d 891, 894 (Md. 1979). It follows that a creditor cannot compel payment of the principal of a discretionary trust because the beneficiary could not compel such payment. The IRS, through its lien, has no greater right to the property than the taxpayer has at the time the tax lien arises. U.S. v. Durham Lumber Co., 363 U.S. 522, 525-26 (1958).
U.S. v. Bess, 357 U.S. 51 (1958).
Kovacs v. U.S. 355 F.2d 349 (9th Cir. 1966), cert. denied, 384 U.S. 941 (1966).
U.S. v. Rye, 550 F.2d 682 (1st Cir. 1977); U.S. v. Russell, 74-2 USTC �9540 (D. Conn. 1974); Rev. Rul. 53-89.
U.S. v. Bess, 357 U.S. 51 (1958); U.S. v. Stern, 357 U.S. 39 (1958); U.S. v. Heffron, 158 F.2d 657 (9th Cir.) cert. denied, 331 U.S. 831 (1947).
IRAs will not be levied unless the taxpayer flagrantly disregards requests for payment. See IRM 536(14).1.
© 2004, Burton J. Haynes.

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