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FEDERAL TAX LEVY/LIENS - GARNISHMENTS

A general federal tax lien arises by operation of law when three conditions are satisfied: (1) assessment; (2) demand for payment by the IRS; and (3) neglect or refusal to pay by the taxpayer. Code Section 6321. After the IRS makes its demand, the taxpayer has ten days in which to pay. If he fails to do so, the lien becomes effective (relates back) to the date of assessment and attaches to any and all property and rights
to property rights that the taxpayer owns on the assessment date or thereafter. Whether a taxpayer owns property or property rights is a matter of state law. See Section 613.6(b). Thereafter, on 30 days' notice, the IRS may levy on, or seize, the taxpayer's property. Code Section 6331(a). See Section 613.7

The lien does not come into existence unless the taxpayer fails to pay after a demand for payment. The demand for payment is usually issued within 60 days of assessment, Reg. Section 301.6303-1, although the IRS's failure to make the demand within 60 days does not invalidate the demand.
Reg. Section 301.6303-1. The demand requirement is not strictly enforced, however, if the taxpayer waived or is deemed to have waived formal demand. In re Baltimore Pearl Hominy Co., 5 F.2d 553 (4th Cir. 1925), the court held that the demand requirement was satisfied even though the IRS had made no formal demand for payment. The company and the IRS had reached an agreement that the Baltimore Pearl Hominy Company would pay additional assessed tax of $35,000. The court reasoned that "the
expression of this expectation and requirement that the Hominy Company should pay the amount agreed upon was in effect a demand and all that was requisite to make the tax a lien."

Failure to comply with a demand for payment occurs when the taxpayer refuses to pay when demand is made or, after receiving a written demand for payment, simply neglects to pay. Code Section 6321. At that point, the IRS will generally file a Notice of Federal Tax Lien with the appropriate state office for the lien to be valid against certain third parties. Code Section 6323(a). See Section 613.6(c).

For collection actions initiated more than 180 days after July 22, 1998, the IRS must provide written notice to the taxpayer of filing of notice of lien. Code Section 6320(a)(1). The notice must include the amount of unpaid tax; the right to request a hearing during the 30-day period beginning on the day after the 5-day period; the administrative appeals
available and the procedures relating to these appeals; and, the provisions of the Internal Revenue Code and procedures relating to the release of liens on property. Code Section 6320(a)(3). . For discussion of the notice required to be provided by the IRS and the hearings a taxpayer may request regarding liens, see Section 613.10(a).

(a) DURATION OF LIEN

A federal tax lien remains in effect until the liability is satisfied or becomes unenforceable by lapse of time. Code Section 6322. Thus, the duration of a federal tax lien is tied to the 10-year statute of limitations on collections. Section 613.2

CAUTION: Even though the underlying tax liability may be discharged, many federal tax liens even survive a bankruptcy proceeding. See Section 157.7

(b) PROPERTY SUBJECT TO LIEN

A general federal tax lien attaches to all property and rights to
property, both real and personal, tangible and intangible, belonging to the person liable for any tax remaining unpaid after demand. Code Section 6321. Property includes anything that is subject to ownership, capable of transfer, and subject to jurisdiction and process by a court. Citizen's
State Bank v. Vidal, 114 F.2d 380 (10th Cir. 1940). State law determines whether a property interest exists; however, once a property interest has been identified, federal law determines whether the tax lien has validly attached. As the liens are created by federal law, the validity, durability, and qualified exceptions thereto are also determined by federal law. In re James Berg, No. 95-36205 (9th Cir. 1997).

OBSERVATION: The renunciation of a property right established under state law does not necessarily prevent the attachment of a federal tax lien if the renouncing party maintains some control over the property. For instance, if a taxpayer owing federal taxes disclaims or renounces her right to an inheritance, the federal tax lien still attaches to the inheritance as the taxpayer inevitably exercises dominion over the property (i.e., she determines who will receive the
property -- herself if she does not disclaim, or a known other if she does).

Once the lien comes into existence, it extends automatically to all property subsequently acquired by the taxpayer during the life of the lien. For example, the lien attaches to income to be earned in the future for services to be rendered under an existing contract, even though the right to income is contingent on the satisfactory performance of those
services. Atlantic National Bank v. United States, 536 F.2d 1354 (Ct. Cl.1976). A tax lien remains attached to property that is subsequently sold by the taxpayer if the taxpayer owned the property on the assessment date.

A federal tax lien may attach to community property of the delinquent taxpayer and his spouse, depending on state community property law and the origin of the debt. United States v. Stolle, No. CV 99- 00823-GAF (C.D.
Cal. Feb. 14, 2000). In California, for example, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt. McIntyre v. United States, No. 99-17192 (9th Cir. July 13, 2000), citing Calif. Family Code Section 910. Similarly, a taxpayer's interest in
property that he held as tenants by the entireties with his wife is property or rights to property to which a federal tax lien may attach. United States v. Craft, No. 00-1831 (S. Ct. Apr. 17, 2002).

OBSERVATION: Prior to the Supreme Court's decision, this issue had been undecided, with some courts holding that a lien could attach to property held by the entirety, and other courts holding that it could not. See Section 612.9 for a discussion of the application of federal tax liens to tenancies by the entirety.

The existence of a properly filed federal tax lien gives the government the power to levy on and seize the property, which then can be sold to pay the tax. Even though the lien attaches to all the taxpayer's property and to all property in which the taxpayer has an interest, some property is exempt from levy. Code Section 6334 describes such property exempt from levy. See Section 613.7(b).

A federal district court has also determined that a federal tax lien could attach to property held by a trust created by the individuals against whom the taxes were assessed, stating that the trust was a nominee of the taxpayers. The taxpayers had transferred title to their principal residence to the trust, and the IRS filed the tax lien on the home for taxes owed by the individuals. Similarly, a federal district court has also determined that a federal tax lien could attach to property held by a corporation controlled by the individuals against whom the taxes were assessed, stating that the corporation was a nominee of the taxpayers. Nantucket Village Dev. Co. v. United States, No. 5:99 CV 230 (N.D. Ohio
Jan. 9, 2001).

Spendthrift provisions created under state law cannot defeat a federal tax lien. The Fifth Circuit has held that a federal tax lien on an individual beneficiary’s income distributions from a spendthrift trust attach to future distributions at the time of the creation of the lien instead of at the time each distribution is made. Commissioner v. Orr, 180 F.3d 656 (5th Cir. 1999), cert. denied, Dkt. No. 99-1295 (S.Ct. May 1, 2000).

Where a trust gives the trustee absolute discretion to make (or not to make) distributions to a beneficiary, the beneficiary has no basis to compel the trustee to make a distribution. Therefore, the beneficiary does not have any interest in the trust that is subject to a federal tax lien. In contrast, where the beneficiary can force the trustee to act, as with a support trust, the beneficiary does have a right to property that is
subject to a federal tax lien. Magavern v. United States, 550 F.2d 797 (2d Cir. 1977), cert. denied, 434 U.S. 826 (1977). In CCM 200036045, the IRS concluded that even though a beneficiary of a support trust could name himself trustee and could also designate the beneficiary of the trust's remainder interest as he wished, a federal tax lien could not reach the entire trust; rather, the lien would attach to the right to
receive payments necessary for the beneficiary's health, maintenance, support, and education, as determined by the trustee.

(c) PRIORITIES OF LIENS

A federal tax lien securing payment of tax due is a statutory lien created by Code Section 6321. Because the lien arises by operation of law, it exists even if it is not recorded. In re Suarez, No. 94-0338-BKC-AJC (Bankr. S.D. Fla. 1995); United States v. Sands, 174 F.2d 384 (2d Cir. 1949). However, the lien imposed by Code Section 6321 is not valid against certain competing claims until notice of the lien is correctly filed as required by the statute. The protected claimants are purchasers, holders of security interests,
mechanic's lienors, and judgment lien creditors. addition, the
lien does not have priority against certain other claims even if it is recorded.

A purchaser is a person who acquires property for value and has, under state law, an interest that is valid against subsequent purchasers without notice. Code Section 6323(h)(6). It refers to those who obtain an interest (other than a security interest) under a lease, a written executory contract to purchase or lease property, an option to purchase
or lease property, or an option to renew or extend a lease.