Priority of A Federal Tax Lien: A Defective Legal Description Unseats A Purchase Money Mortgage.

Congress has granted the IRS some very strong collection tools, including the federal tax lien under Section 6321 of the Internal Revenue Code. This lien attaches to any interest in property that they taxpayer may have. The breadth of this lien is altered, however, by Section 6323 of the Code, which recognizes that certain other property interests may take priority over a federal tax lien, including a perfected security interest. I.R.C. § 6323(a). “Security interest” is a defined term embracing an interest in property that was obtained by contract to secure performance, provided that the relevant property is in existence, the interest has become perfected under local law, and the holder of the security interest “has parted with money or money’s worth.” See I.R.C.… Read More

Priority of Federal Tax Liens: Don’t Wait To Perfect.

Mortgages and security interests are a routine part of the business of banking. Sometimes, however, the routine element of recording the relevant interest doesn’t get the requisite attention, a situation that can create problems once the IRS files a federal tax lien.

A recent case from the Fourth Circuit highlights the potential pitfalls for lenders who delay in perfecting their rights in collateral. In re Restivo Auto Body, Inc., 2014 U.S. App. LEXIS 20927 (4th Cir. Oct. 31, 2014). The debtor, Restivo Auto Body, had borrowed a million dollars from Susquehanna Bank, a loan which was to be secured by a deed of trust on two parcels of real estate.… Read More

Federal Tax Liens-What the Contingent Fee Lawyer Needs to Know.

The federal tax lien is a very potent collection device: if someone owes money to the IRS, the lien attaches to everything they have any interest in, even property held by the entireties (with some limited exceptions).
But there are times when the federal tax lien is subordinate to another obligation, and a conversation I had this morning with another lawyer indicated that they may now be as well-known as they should be. This lawyer was concerned about a contingent fee matter where his client had a federal tax lien.
This is an issue that might lead an attorney to reject a viable case.… Read More

Federal Tax Liens: Dilatory Government Conduct Bars Foreclosure.

Section 7403 of the Internal Revenue Code authorizes the government to bring a foreclosure action to enforce a federal tax lien, a remedy that the IRS frequently employs in situations in which it has only a partial interest in property. Its power to force a sale is not absolute, however, as courts weigh a variety of factors before authorizing a sale. A recent opinion illustrates this principle in the context of property transferred incident to a divorce.

Smith v. United States, 2014 U.S. Dist. LEXIS 29467 (D. Conn. Mar. 7, 2014) involved a dispute over the validity of a federal tax lien on the former marital home of David and Dyane Smith.Read More

Federal Tax Liens-A Certificate of Discharge is Construed Narrowly.

Section 6325(b) of the Internal Revenue Code has provisions authorizing the IRS to discharge its tax lien as to specific property under certain circumstances. For example, it can issue a certificate of discharge if it is paid the value of its interest in particular property. I.R.C. § 6325(b)(2)(A). The IRS can also issue a certificate of discharge if there is an agreement that all proceeds from sale of a property will be held and that all liens and encumbrances will attach to the proceeds with the same priority they previously had. I.R.C. § 6325(b)(3).

A recent opinion from the First Circuit looks at the impact of the certificate of discharge on the rights of competing creditors.Read More

Tax Cases Can Be Tricky.

Suing the federal government isn’t easy; after all it generally enjoys sovereign immunity. And pursuing a tax case is harder due to the length and complexity of the Internal Revenue Code, which has a variety of traps that can snare even capable lawyers.

A recent case illustrates the point: the plaintiff, Ms. McGinley held a property that was subject to a federal tax lien due to liabilities of her former husband. To resolve that situation, the plaintiff negotiated an arrangement in which she paid the IRS an agreed amount out of the proceeds in exchange for a certificate of discharge of the tax lien.Read More

Wrong Way: How Not to Attack an Alter-ego Tax Lien.

A recent Sixth Circuit case illustrates the importance of selecting the right route in attacking an alter-ego tax lien, which arises when the IRS contends that someone holding property is actually the alter-ego or nominee of someone who has unpaid tax liabilities. Morris v. United States, 2013 U.S. App. LEXIS 17707 (6th Cir. Aug. 23, 2013).

The case started when Mrs. Morris received a Notice of Federal Tax Lien indicating that the IRS was asserting a lien against property that she held on the theory that she was acting as the alter-ego or nominee of her husband. She then filed a complaint, alleging that the filing of the lien without a prior hearing violated her due process rights and requested declaratory relief.Read More

Alter Ego Tax Liens: Refund Claims Are Barred By The Substitution of Value Remedy.

The IRS has a number of third-party collection theories which it employs to collect taxes from someone other than the taxpayer, including an alter ego theory. Alter ego cases are tricky for the collection target, as certain of the normal remedies a taxpayer has don’t apply. For example, an entity that the IRS has classified as an alter ego does not enjoy the right to obtain a collection due process hearing in the IRS appeals unit. I.R.M. 5.12.1.2.11 (01-09-2009). A recent case from the Southern District of Ohio highlights another complication; the person who has been tagged as an alter ego cannot bring a normal refund suit.Read More

Abstention in a Tax Case? The IRS Meets Colorado River.

Federal courts are supposed to hear any case that is properly before them. But there are exceptions: a series of abstention doctrines govern situations in which it is proper to refuse to hear a case. Describing the various doctrines is better suited to a book than a blog, but in broad brush strokes most of them involve competing federal and state interests where a state interest is important enough that a federal court should stay its hand instead of acting. Recently, the United States District Court for the Eastern District of New York issued a very interesting opinion in a tax collection case brought by the government; the district court concluded that it should abstain from hearing the government’s case under Colorado River abstention.Read More

Consistency, Hobgoblins and Esoterica: A Look at Interpleader in Tax Levy Cases.

A recent case from the Western District of New York highlights a fairly esoteric issue: interpleader of funds subject to an IRS tax levy. The case is also interesting because of a governmental flip-flop on the power of a federal court to entertain an interpleader case involving a fund that has been the subject of a federal tax levy: first the IRS told a state court that only a federal court could address the priority of its lien, but when the entity holding the fund obliged by filing an interpleader action in federal court, the government balked and move to dismiss, arguing that no federal jurisdiction existed.Read More