FEDERAL TAX LIENS
31.1 In General
Marketability of title is adversely affected by the General Federal Tax Lien, which is discussed in Sections 31.2 through 31.11, the Federal Estate Tax Lien, discussed at Section 31.12(a) and the Federal Gift Tax Lien, discussed at Section 31.12(b).
31.2 Applicability of Federal Tax Lien
The federal tax lien arises under Section 6321 of the Internal Revenue Code (hereinafter, the “Code”). The federal tax lien may be imposed against any “person”: (whether an individual, trust, estate, partnership, association, company or corporation) with respect to unpaid federal taxes.
Comment: When used in this Chapter, “federal tax lien” refers to the “general” federal tax lien imposed with respect to income taxes, employment taxes and various excise taxes. The Code is codified at 26 U.S.C. Section 1 et seq. “Person” is defined in Section 7701(a)(1) of the Code, and includes the categories listed in the above parenthetical. Although a general or limited partnership, as well as a Subchapter S corporation can have no liability for unpaid income taxes, such entitles may be liable for failure to pay employee withholding taxes or excise taxes and, consequently, can be subject to federal tax liens.
31.3 Creation and Attachment
The federal tax lien is created by Section 6321, which provides that: “If any person liable to pay any tax neglects or refused to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be alien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” The above Section 6321 language can be broken down into three separate components, as follows: (a) assessment of an unpaid tax liability (I.R.C. Section 6203), (b) notice and demand for payment (I.R.C. Section 6303) and (c) non-payment by the Taxpayer (I.R.C. Section 6321).
The first requirement, “assessment,” is the simple administrative act by the Service of entering in its records that a particular liability is due and payable from a Taxpayer. (I.R.C. Section 6203). The second element, notice and demand, is governed by Section 6303, which requires that the Service must, as soon as practicable within 60 days after an assessment is made, notify each person liable for the unpaid tax of the amount due and make formal demand for payment. Despite the 60-day grace period, notice of an assessment is generally given at the same time as the effectiveness of the assessment. A Form 4340 (Certificate of Assessments and Payments) is typically used by the Service. The third element, non-payment, is addressed by Section 6321 itself, as set forth above. No time period for payment is set forth in the statute.
The lack of a time period for payment is irrelevant in light of section 6322, which provides that the tax lien attaches “at the time the assessment is made.” This date is reflected on both the Certificate of Assessments and Payments (Form 4340) and the Notice of Federal Tax Lien (Form 668(Y)). Because of its capacity to “relate back” to a date prior to notice and demand for payment, the federal tax lien is sometimes referred to as the “secret lien.”
Comment: The term “Service” is used generically in this Chapter to refer to the Internal Revenue Service or the Secretary of Treasury (or his designate). The Code often empowers the Secretary of Treasury or his designee to perform various acts which, as a practical matter, are performed by the Internal Revenue Service. There are a number of cases which address the sufficiency of notice and demand under Section 6303. In general, courts have been extremely pro-Service with respect to what constitutes sufficient notice and demand for payment.
(a) Notice of Federal Tax Lien.
The federal tax lien is choate and valid against the interest of the Taxpayer as soon as the elements discussed above (i.e., assessment, notice/demand and non-payment) have been completed. Pursuant to Section 6323(a), however, the federal tax lien is not valid against a “purchaser, holder of a security interest, mechanic’s lienor or judgment lien creditor” until a Notice of Federal Tax Lien (an “NFTL”) has been filed of record in the appropriate office. The NFTL filing requirement is consistent with the general rule of “first in time, first in right” with respect to competing interests in property. The form which is currently used by the Service is Form 668(Y) (Notice of Federal Tax Lien under Internal Revenue Laws).
Comment: The required elements of the above categories are set forth in Section 6323(h) of the Code and are discussed in Section 31.8, infra.
(b) Place of Filing.
With respect to real property, the location for filing the NFTL is governed by state law. Section 6323(f)(1)(A)(1) provides that the state in which real property is located must designate the appropriate location for filing of the NFTL. Federal tax lien filing procedures in Georgia are governed by O.C.G.A. Sections 44-14-570 through 574. Georgia NFTLs are filed with the Clerk of the Superior Court for the county in which the property is located, in either a special lien book or in the general execution docket (O.C.G.A. Section 44-14-571).
(c) Contents of NFTL.
Section 6323(f)(3) provides that the Service may prescribe the proper form and content of an NFTL. Such form is deemed to be valid, notwithstanding any other provision of law regarding the required form or content of a notice of lien. Accordingly, a properly completed and recorded From 668(Y) is effective to perfect the federal tax lien.
The NFTL need not (and does not) identify particular property interests to be attached. With respect to Georgia real property, the filing covers all real property and interests in real property of the Taxpayer located in the county in which the NFTL is filed.
Comment: Litigation has arisen over inaccuracies in the name of the taxpayer as the same appears on the NFTL. Minor discrepancies, such as the failure to include a full name or errors, omissions or substitutions in a name are not fatal. See e.g., U.S. v. Sirico et al., 247 F. Supp. 421 (D.C. N.Y. 1965). The test is whether there is substantial compliance sufficient to give constructive notice. Id. at 422.
31.5 Property To Which Lien Attaches
The lien attaches to “all property and rights to property, whether real or personal, belonging to (the Taxpayer).” (I.R.C. Section 6321). With respect to real property interests, state law determines whether the Taxpayer has property or property rights to which the lien may attach. Moreover, any property acquired by the Taxpayer after the date of the assessment is immediately attached by the lien, without the need for further action by the Service.
Comment: See Acquilino v. U.S., 363 U.S. 509 (1960); Texas Oil & Gas Corp. v. U.S., 466 F.2d 1040 (5th Cir. 1972).
With respect to joint tenancies, the federal tax lien attaches only to the taxpayer’s interest in the property, not to the property itself. With respect to joint tenancies with right of survivorship, the death of the taxpayer/joint tenant extinguished the general federal tax lien.
Comment: See Schmidt v. U.S., 896 F.2d 352 (9th Cir. 1989); U.S. v. Ridley, 120 F. Supp. 530 (N.D. Ga. 1954); Fecarotta v. U.S., 154 F. Supp. 592 (D.C. Ariz. 1956). In Georgia, general partners are jointly and severally liable for all debts and obligations of a general partnership (O.C.G.A. Section 14-8-15(, as well as a limited partnership [O.C.G.A. Section 14-9-403(b)]. Accordingly, federal tax liens for the tax liability of a Georgia general or limited partnership attach not only to partnership property, but also to property owned individually by the general partner. To take advantage of the foregoing provisions, partnership NFTL’s generally also list the names of all known general partners.
Comment: The general partner’s liability, however, only extends to liabilities which arose when the general partner was a general partner of the partnership. See Lidberg v. U.S., 375 F. Sup. 631 (D.C. Minn. 1974); In re: Robby’s Pancake House of Florida, Inc., 24 B.R. 989 (Tenn. 1982).
31.6 Duration of NFTL Filing
The NFTL must be refiled during the one-year period ending on the date ten years and 30 days after assessment of the tax on any assessment made on November 5, 1990. Any lien which had not expired on November 5, 1990 will be for ten years and 30 days after the date of assessment [I.R.C. Section 6323(g)(3)]. day of the refiling period is specified on the NFTL form.
Form 668(Y) provides on its face that, unless the NFTL is refiled by the required date, the form serves as a Certificate of Release pursuant to Section 6325(a) and the lien is automatically released (but see the preceding paragraph concerning extension of certain liens). The NFTL must be refiled in the place where it was originally filed. (I.R.C. Section 6323(g)(2)(A)]. If the Taxpayer has notified the Service of a change of address at least 90 days prior to the actual refiling of the NFTL, the Service must also refile the NFTL in the appropriate place for the taxpayer’s new address [I.R.C. Section 6323(g)(2)(B)].
31.7 Limitation, Release and Satisfaction of Lien
The federal tax lien may be limited, released, satisfied or subordinated by the following certificates, all of which should be filed in the same county office where the NFTL was initially filed. All such certificates are conclusive as to the matters set forth therein [I.R.C. Section 6325(f)(i)].
(a) Certificate of Release.
When the tax liability has been satisfied or an appropriate bond has been issued, the Service is required pursuant to Section 6325(a) to issue a Certificate of Release of Lien. The form currently used by the Service is Form 668(Z). In addition, if a NFTL has been erroneously filed, a Certificate of Release of Lien may be obtained by the Taxpayer pursuant to Section 6326(b).
(b) Certificate of Nonattachment. When an NFTL identifies the wrong person as the Taxpayer, the incorrectly identified person may seek issuance of a Certificate of Nonattachment pursuant to Section 6325(e). The certificate provides that the lien does not attach to the property of such person.
Comment: The most typical instances are when two people have the same name or when a general partner is being charged for liabilities of a partnership incurred after his withdrawal as general partner.
(c) Certificate of Discharge.
In certain situations, the Service may elect to release particular property from a federal tax lien, without extinguishing the lien itself. In such situations a Certificate of Discharge is filed pursuant to Section 6325(b). The Service currently uses Form 669-A, Certificate of Discharge of Property from Federal Tax Lien.
(d) Certificate of Subordination.
In certain situations, the Service may agree to subordinate its federal tax lien on specific property, Section 6325(d) sets forth the limited situations in which the Service may take such action. The forms currently used by the Service for subordination are Forms 669-D, 669-E, and 669-F.
As discussed above, Section 6323(a) provides that the federal tax lien is not valid against purchasers, holders of security interests, mechanic’s lienholders or judgment lien creditors until the NFTL is properly filed. These four categories of interest must be “perfected” pursuant to applicable Code definitions in order to have priority over the federal tax lien. Applicable Code requirements are as follows:
A purchaser is defined as 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 against subsequent purchasers without actual notice.” [I.R.C. Section 6323(h)(6)]. Adequate and full consideration is consideration which bears a reasonable relationship to the true value of the acquired interest. [Treas. Reg. Section 301.6323(h)-1(f)(3)]. An “interest” in property expressly includes (i) a lease, (ii) a written executory contract to purchase or lease, (iii) an option to purchase or lease and (iv) an option to renew or extend a lease [I.R.C. Section 6323(h)(6)].
(b) Mechanic’s Lienor.
Section 6323(h)(2) defines a mechanic’s lien as a lien which arises under local law on real property for services, labor or materials furnished for the construction, improvement or demolition of the property. The mechanic’s lien attaches on the earliest date on which the lien was valid under local law against subsequent purchasers of the property who lack actual notice of the lien, but not before the date on which the services, labor or materials were supplied [I.R.C. Section 6323(h)(2)]. Under Georgia law, a properly and timely filed mechanic’s lien “relates back” to the date on which services were commenced, even if the lien is subsequently filed (See O.C.G.A. Section 44-14-361]. Accordingly, an NFTL which is filed before a mechanic’s lien, but after the effective date of the mechanic’s lien (i.e., the date on which services were commenced or materials were provided) does not prevail over the mechanic’s lien.
(c) Holders of a Security Interest.
Section 6323(h)(1) defines a security interest as any interest in property which is acquired by contract for the purpose of securing payment or performance of an obligation or for indemnifying against loss or liability. The definition is broad enough to include a Georgia security deed. In order to be entitled to priority against a subsequently filed federal tax lien, all of the following events must have occurred prior to the filing of the NFTL: (i) a written contract regarding the security interest must have been executed; (ii) the holder of the security interest must have parted with money or money’s worth, (iii) the property must be in existence and the interest must be protected under local law against a subsequently perfected judgment lien arising out of an unsecured obligation [I.R.C. Section 6323(h)(1); Treas. Reg. Section 301.6323(h)-1(a)(1)].
Accordingly, so long as the secured party has “parted with money or money’s worth,” a properly filed and recorded Georgia security deed will have priority over a federal tax lien evidenced by a subsequently filed NFTL.
(d) Judgment Lien.
The regulations define a “judgment lien creditor” as a person who has “obtained 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.” The Regulations also require that the judgment lien must meet the following three part test: (1) the identify of the lienholder must be certain; (ii) the identity of the property subject to the lien must be known; and (iii) the demand of the lien must be established. In addition, the lienholder must record the judgment if such action is required for perfection under local law [Treas. Reg. Section 301.6323(h)-1(g)].
31.9 “Semi-Super” Priority
Four types of security interests have priority over previously filed federal tax liens in certain limited circumstances. Two of the four types of security interests can relate to real estate, as follows:
(a) Real Property Construction or Improvement Financing Agreements.
A “real property construction or improvement financing agreement” is an agreement to make cash disbursements to finance the construction or improvement on real property, or to finance a contract for such work [I.R.C. Section 6323(c)(3)]. In order to qualify, (i) the financing agreement must be a written agreement which was entered into prior to the filing of the NFTL, [I.R.C. Section 6323(c)(1)(B)], and (ii) the security interests claiming semi-super priority must be protected under local law against a judgment lien arising out of an unsecured obligation as of the time of the NFTL filing. [I.R.C. Section 6323(c)(1)(B)]. The property covered by the priority is limited to the property being constructed or improved [I.R.C. Section 6323(c)(3)(B)].
(b) 45-Day Disbursements.
Section 6323 also gives protection to a security interest created by disbursements made within 45 days after the filing of the NFTL in property existing at the time of the NFTL filing. As with the real property improvement exception, (i) the financing agreement must be a written agreement which was entered into prior to the filing of the NFTL [I.R.C. Section 6323(c)(1)(B)] and (ii) the security interest must be protected under local law against a judgment lien arising out of an unsecured obligation as of the NFTL filing [I.R.C. Section 6323(c)(1)(B)].
31.10 Super Priorities
Certain interests are entitled to priority over the federal tax lien regardless of when such interest arises. Of these various “super priority” exceptions, only two are relevant to Georgia real property, as follows:
(a) Unpaid State Taxes and Assessments.
Section 6323(b)(5) grants priority over perfected federal tax liens to certain real property law liens which, under local law, have priority over senior perfected security interests in the same property. The liens eligible for this super priority status are limited to those which secure (i) tax of a general application based on the value of real estate, (ii) a special assessment on the property to cover the cost of public improvements or (iii) charges for utilities or public services furnished to the property by a governmental instrumentality [I.R.C. Section 6323(b)(6)].
(b) Residential Property Improvements.
There is a limited super priority exception for mechanic’s liens up to $1,000 relating to work on residential property. To qualify for the exception, (i) the property must be occupied by the owner and must not contain more than four dwelling units, (ii) the lien must arise from the repair or improvement of the property and (iii) the contract price must be less than $1,000 [I.R.C. Section 6323(b)(7)].
31.11 Special Rules Relating to Foreclosure of Real Property Encumbered by Federal Tax Lien
SEE SECTION 17.4 SUPRA FOR PROCEDURE FOR DIVESTING PROPERTY IN FORECLOSURE OF FEDERAL TAX LIEN.
31.12 Special Rules for Estate Tax Lien and Gift Tax Lien
(a) Estate Tax Lien.
The estate tax lien is a special lien which secures the payment of federal estate tax obligations and is administered pursuant to Section 6324(a). The estate tax lien attaches at the date of the decedent’s death to all of the gross estate and remains in effect for a period of ten years from the date of death. The estate tax does not require an assessment prior to attachment. The Service need not file a notice of estate tax lien to make the estate tax lien effective against most interests. In a limited number of cases, Section 6324(a) may afford protection to “purchasers” and “holder(s) of a security interest” in the liened property by providing that the lien is divested upon transfer to either such entity, and the lien thereafter attaches to the property of the transferor. In most cases, however, the estate tax lien should be accounted for by a determination of the tax and evidence of final payment, or by a special release of the particular property issued by the Service. The estate tax lien is not valid against mechanic’s liens or the “super priority” liens discussed in Section 31.10, supra.
Comment: The “ambiguous phraseology” utilized in I.R.C. Section 6324(a) purporting to divest the lien as against transferees has never been construed by the courts, and estate property subject to the estate tax lien is still regarded as unmarketable. See Pindar & Hinkel, Georgia Real Estate Law and Procedure, Section 26-90 (5th ed. 1998). (This section was revised effective August 18, 2005 to add the underlined language in the fifth and sixth sentences and to add the Comment.)
(b) Gift Tax Lien.
The gift tax lien attaches (to the property transferred) at the time of the gift and exists for a period of ten years, unless the tax is satisfied or becomes unenforceable by the lapse of time. As with the estate tax lien, notice of the lien need not be filed in order to perfect the lien against most interests. The gift tax lien is not valid against mechanic’s liens or the “super priority” liens discussed in Section 31.10, supra. The gift tax lien is subject to divestment upon transfer of the gifted property to a purchaser or the holder of a security interest. The lien, however, then becomes a lien on all of the donee’s property.