Rev. Rul. 54-257

Advice is requested whether an automobile or other personal property disposed of by a delinquent taxpayer after notice of a Federal tax lien has been properly filed may be seized from a third party and sold under a warrant for distraint in satisfaction of the delinquent's tax liability.

Section 3670 of the Internal Revenue Code provides that if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Section 3672 of the Code, as amended, contemplates that the filing of a notice of internal revenue tax lien with the proper authorities makes the lien valid against any subsequent mortgagee, pledgee, purchaser, or judgment creditor. Thus the notice of tax lien, when properly filed, becomes a matter of public record, and the lien is a charge on the property of the taxpayer.

Section 3690 of the Internal Revenue Code grants the Collector (now District Director) or his deputy authority to collect delinquent taxes by distraint and sale of the delinquent taxpayer's property with the exception of certain property specifically enumerated in section 3691 of the Code. Section 3692 of the Code provides as follows:

In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists , for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy. Italics supplied.

In Osterberg v. Union Trust Co. , 93 U.S. 424, at 428, in connection with the foreclosure of mortgages on railroad property to secure the payment of bonds (where the purchaser was denied the right to have a portion of his bid applied in payment of State taxes which were a subsisting lien on the property at the date of the decree of foreclosure, for the reason that he took the property subject to the lien for taxes on the caveat emptor principle), the Court said that a lien for taxes attaches to the res without regard to individual ownership, and when it is enforced by sale pursuant to the statute prescribing the mode of assessing and collecting taxes, the purchaser takes a valid and unimpeachable title. (Real property, franchises, etc., were involved; in making its statement, the Court did not draw or indicate a distinction between real and personal property.)

The following facts were involved in Ralston v. Heiner , 21 Fed.(2d) 494. A notice of lien for taxes had been filed against the owner of certain distillery property. Thereafter, plaintiff bought the property at a sheriff's sale on execution of a judgment. The collector then attempted to seize the property under a warrant for distraint, and the plaintiff sought to restrain him on the theory that the sheriff's sale divested the property of the tax lien. In dismissing the bill of complaint, the court said:

True, no tax was assessed against the plaintiff but he acquired property subject to a tax lien. The distillery, the operation of which gave rise to the tax in question, came into his hands. So far as that property is concerned he takes the place of the taxpayer * * *

On plaintiff's appeal, the United States Circuit Court of Appeals for the Third Circuit affirmed, 24 Fed.(2d) 416, the judgment of the district court dismissing the bill of complaint, saying: `The fact that the present plaintiff is the successor in title to the taxpayer does not put him on any higher plane than the taxpayer, or confer any rights the latter did not have.' Plaintiff's application for a writ of certiorari was denied, 277 U.S. 608, by the United States Supreme Court.

The same reasoning would appear to apply to a sale of personal property, such as an automobile, after a lien for taxes has attached, irrespective of whether the sale was by the owner or a sheriff. The buyer could and should have searched the local records for possible liens against personal property, and not having done so, he cannot complain. If this were not so and if the tax lien were divested by a sale, an easy method would be provided by which taxpayers could dispose of their personal property and avoid payment of taxes. In other words, if the lien did not follow the property, no advantage would be gained by filing notice of it.

The Federal lien statute makes no distinction between real and personal property in providing that a tax lien shall not be valid as against a mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed for record-with the single exception of providing that even though notice has been filed, the lien shall not be valid against securities, as defined in the statute, if they are acquired by such persons for value and without notice or knowledge of the existence of the tax lien. See section 3672 of the Internal Revenue Code, as amended. After notice is properly filed, the lien is valid as to other personal property as against subsequent mortgagees, pledgees, purchasers, or judgment creditors, and it follows the property into their hands. In other words, they take the property subject to the lien. The courts have not held that the summary process of distraint and sale of personal property to effect the collection of taxes is unavailable where the property comes into the hands of a person other than the taxpayer. In fact, as set forth herein, section 3692 of the Internal Revenue Code specifically authorizes a levy on property on which the tax lien exists . Furthermore, section 3693 of the Code provides that an account of the property seized shall be left with the owner or possessor of the property, together with a notice of the time and place of sale, which time is tied up with the date of notification to the owner or possessor of the property.

In view of the foregoing, it is held that an automobile or other personal property disposed of by a delinquent taxpayer after notice of a Federal tax lien has been properly filed may be seized from a third party and sold under a warrant for distraint, provided such property can be identified as property covered by the lien.