5.17.2. Federal Tax Liens

(1) The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico is also a community property jurisdiction. Spouses in Alaska may elect to have statutory community property rules apply to some or all of their property. Alaska St. 34.77.010 et seq. Community property includes both real and personal property.

(2) In most community property states, only married couples may own property as part of a community. See Obergefell v. Hodges, 135 S. Ct. 2584 (2015). The community property rules also apply in some states to state-created, formal relationships between non-married couples. For example, California, Nevada and Washington permit domestic partnerships to which each state applies its community property laws.

(3) Community property law presents special problems concerning the force and effect of the federal tax lien. Questions in that regard should be referred to Area Counsel. Reference may also be made to the State Law Guides on the My SB/SE Counsel website. See http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx and IRM 25.18.1 and IRM 25.18.4.

(1) A joint tenancy may be created when the following conditions are met:

• Two or more persons become the owners of property in equal and undivided shares.

• The interest of each tenant is created in the same conveyance at the same time and the interests must be equal.

(2) Joint tenants generally have a right of survivorship. Under the right of survivorship, when a joint tenant dies, the surviving joint tenants automatically own a greater portion of the property.

(3) Generally, where only one of the joint tenants owes taxes, the lien attaches to the taxpayer’s property interest and the entire property may be sold pursuant to judicial sale under IRC 7403, although the non-liable joint tenant must be compensated from the sale proceeds. If the Service enforces the tax lien against a taxpayer’s interest in a joint tenancy and sells it, the purchaser acquires the taxpayer’s partial interest in property, but most states then treat the joint tenancy as having been converted to a tenancy in common (discussed below). See generally, United States v. Rodgers, 461 U.S. 677 (1983).

(4) In most states, if the individual, against whose property a federal tax lien attaches, dies before any of the other joint tenants, then the lien ceases to attach to the property. However, if the same individual is the last survivor of the joint tenants, the tax lien then attaches to the entire property. In a few states, however, this is not the rule. Wisconsin is an exception to the general rule: if the federal tax lien has attached to the interest of one joint tenant who then dies, the surviving joint tenant takes the property encumbered with the federal tax lien. United States v. Librizzi, 108 F.3d 136 (7th Cir. 1997). Connecticut is also an exception to the general rule. Conn. Gen. Stat. 47-14f. See also Paternoster v. United States, 640 F.Supp.2d 983 (S.D. Ohio 2009). Accordingly, state law should always be consulted to determine whether there is an exception to the general rule.

(1) A tenancy in common is like a joint tenancy in that it creates an undivided interest in property. However, it is different from a joint tenancy in two important aspects:

• First, the interest of a tenant in common may be transferred to a third party without destroying the tenancy in common.

• Second, there is no right of survivorship in a tenancy in common.

(2) Applying the above rules to collection, the Service may levy and sell a taxpayer’s interest in a tenancy in common. Alternatively, the Service may ask a court to foreclose the federal tax lien and sell the entire property, although the non-liable tenant in common must be compensated from the sale proceeds. Also, if a tax lien attaches to one tenant’s interest, it will survive the taxpayer’s death and continue to encumber the property in the hands of heirs or legatees.

(1) Only spouses can hold property in a tenancy by the entirety. A tenancy by the entirety is similar to a joint tenancy in having a right of survivorship. But the tenancy by the entirety has a restriction not found with a joint tenancy: one spouse cannot transfer his or her interest without the consent of the other spouse. See Obergefell v. Hodges, 135 S. Ct. 2584 (2015). Some states permit real and personal property to be held as a tenancy by the entirety while others only permit real property to be held in such manner.

(2) For many years there was uncertainty as to whether a federal tax lien could attach to the interest of only one tenant. (If both spouses were liable, the general rule was that a federal tax lien could attach to the tenancy by the entirety.) In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court provided a clear answer, holding that the federal tax lien may attach to the tenancy by the entirety when only one spouse had a federal tax liability. Notice 2003-60, 2003-39 I.R.B. 643 addressed the application of Craft to different situations. In summary, the Notice stated the following:

1. The federal tax lien attaches to all the property and rights to property of the taxpayer. The Court's decision confirms that a taxpayer's property and rights to property have always included any rights that the taxpayer may have in entireties property under state law. The Court's decision, therefore, does not represent new law and does not affect other law applicable to federal tax liens and federal tax collection. For example, the Craft decision does not change any limitation on the ability of the Service to rescind an accepted offer in compromise or terminate an accepted installment agreement.

2. As a matter of administrative policy, the Service will, under certain circumstances, not apply Craft, with respect to certain interests created before Craft, to the detriment of third parties who may have reasonably relied on the belief that state law prevents the attachment of the federal tax lien.

3. The administrative sale of entireties property subject to the federal tax lien presents practical problems that limit the usefulness of the Service's seizure and sale procedures. Levying on cash and cash equivalents held as entireties property is considerably less problematic and will be used by the Service in appropriate cases.

4. Because of the potential adverse consequences to the non-liable spouse of the taxpayer, the use of lien foreclosure for entireties property subject to the federal tax lien will be determined on a case-by-case basis. See United States v. Rodgers, 461 U.S. 677 (1983) (IRC 7403 authorizes foreclosure sale of entire jointly-owned property for separate tax liability of one spouse, but non-liable spouse is entitled to compensation from sale proceeds for loss of her share of the property).

5. As a general rule, the value of the taxpayer's interest in entireties property will be deemed to be one-half. Accord, Popky v. United States, 419 F.3d 242, 245 (3d Cir. 2005); United States v. Bar, 617 F.3d 370, 373 (6th Cir. 2010), cert. denied, 131 S. Ct. 1678 (2011). But see Pletz v. United States, 221 F.3d 1114, 1117-18 (9th Cir. 2000) (using actuarial tables). Craft, declined to address the valuation of each spouse’s individual interest in the property. 535 U.S. at 289.

6. Where there has been a sale or other transfer of entireties property subject to the federal tax lien that does not provide for the discharge of the lien, whether the transfer is to the non-liable spouse or a third party, the lien thereafter encumbers a one-half interest in the property held by the transferee.

(1) Some states recognize the doctrine of equitable conversion, which provides that a purchaser acquires equitable title to property when the unrecorded contract for sale is executed. Although the seller retains bare legal title to the property, the seller's equity interest is in the right to the balance of the purchase money. The seller holds legal title in trust for the purchaser.

(2) Some states extend the doctrine of equitable conversion to a lender who secures the interest with a mortgage or deed of trust.

(3) For a discussion of equitable conversion on the priority of the statutory federal tax lien with respect to purchasers and lenders, see IRM 5.17.2.6.1(5), Purchasers, and IRM 5.17.2.6.4(7), Holder of a Security Interest, respectively.

(1) The federal tax lien attaches to a taxpayer’s interest in a bank account, even when the bank account is in the joint names of the taxpayer and others. United States v. National Bank of Commerce, 472 U.S. 713 (1985). This means that the lien reaches a taxpayer’s unqualified right to withdraw all of the money in the account without the consent of the other account holder. However, the right of a taxpayer joint depositor to withdraw funds from a joint bank account is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.

(2) The federal tax lien attaches to a taxpayer’s wages as the wages become his property and rights to property. State laws shielding some portion of a debtor’s wages from collection do not apply to the Service, as the collection of federal taxes is a matter of federal supremacy. Compare IRC 6334(a)(9) and IRM 5.17.3.5.7, Property Exempt from Levy, regarding exemption of wages and other property from levy.

(3) In many situations, the Service loses its federal tax lien on money when a third party acquires the money in exchange for fair value. This occurs under IRC 6323(b)(1)(A), which provides a superpriority for a purchaser of a security if the purchaser has no actual knowledge of the federal tax lien. Treas. Reg. 301.6323(h)-1(d) defines a security to include negotiable instruments and money.

(1) It is often difficult to determine a partner-taxpayer’s interest in a partnership or other joint interest to which a federal tax lien has attached. Generally speaking, a partner-taxpayer’s interest in either a partnership or a joint venture is only a share in the equity in the assets; that is, the excess of assets over liabilities. United States v. Kaufman, 267 U.S. 408 (1925). Note that a partnership may own both real and personal property in the name of the partnership. If a federal tax lien exists on the partner-taxpayer’s property, the federal tax lien would not attach to the partnership’s property. See Rev. Rul. 73-24, 1973-1 C.B. 602 (addressing whether partnership account is subject to levy to satisfy tax liability of individual partner).

(2) Frequent and regular partnership "draws" which are advances or loans on annual profits are subject to a lien (and may be levied as salary or wages). United States v. Moskowitz, Passman & Edelman, 603 F.3d 162 (2d Cir 2010).

(3) Another issue that arises with respect to partnerships is whether the federal tax lien attaches to a general partner’s individual property in connection with an assessment made against the partnership for a partnership tax liability. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held that a timely assessment of a partnership’s employment tax liability permits the Service to collect the liability from the individual partners. Because the partners are derivatively liable for the taxes under state law, the assessment and notice and demand upon the partnership gave rise to the federal lien both on partnership and partner property.

(1) A trust is a state-law created entity where one party holds property for the benefit of another. The following are terms generally used in connection with trusts:

• The creator of the trust is referred to as the "grantor" or "settlor."

• The property held by the trust is called the "res," "corpus," "principal" or "remainder." Income generated by the corpus is called income.

• The person holding the property for the benefit of the other person is called the "trustee" or "fiduciary."

• The person benefitting from the trust is called the "beneficiary." A beneficiary may only be entitled to income, principal or both, depending on the provisions of the trust.

• A "revocable" trust is one where under the terms of the trust, the grantor/settlor reserves the right to dissolve the trust and take the property back.

• An "irrevocable" trust is one that the grantor/settlor cannot dissolve and cannot take the property back.

(2) If the taxpayer is the grantor or settlor of a trust, the validity of the trust must be determined under applicable state law. If the grantor reserves a substantial interest or unrestricted control over the management of the operations that is not for the benefit of the purported beneficiary, the grantor remains the owner of the property and the trust will be ignored. For example, property in a family trust that is a sham - the grantors attempt to reduce their taxes by putting the property in trust, while retaining the use and benefits of the property - is subject to collection action to satisfy the grantors‘ liability. Whitesel Family Estate v. United States, 84-2 U.S. Tax Cas. (CCH) ¶ 9890 (S.D. Ohio 1984); Edwards Family Trust v. United States, 572 F. Supp. 22 (D. N.M. 1983).

(3) If the taxpayer is the beneficiary of a trust, a federal tax lien will attach to the taxpayer’s beneficial interest in the trust. This determination is made by reference to the trust instrument itself, with the appropriate state law governing construction of the terms of the instrument or the resolution of any ambiguities in the instrument. In some cases the lien will attach to the corpus of the trust and 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. The latter situation may arise where the trustee has the unrestricted power of disposition of the trust income; i.e., where he/she may legally refuse to make any further distribution to the taxpayer-beneficiary and instead make the distribution to other beneficiaries or simply accumulate the income.

(4) The trust instrument can only determine the property right of the beneficiary (e.g., the taxpayer) in the trust corpus and income; the trust instrument itself cannot determine the effect of the federal tax lien upon that right. Thus, a so-called "spendthrift" trust may by its terms confer certain specific benefits upon a beneficiary and then purport to restrict the rights of creditors to reach those benefits. Such restrictions are not effective to remove those benefits from the reach of the federal tax lien, regardless of whether under the appropriate state law a "spendthrift" trust is regarded as valid in all respects. Bank One Ohio Trust Co. v. United States, 80 F.3d 173 (6th Cir. 1996). In any case where doubt exists as to the rights of a beneficiary of any of the many forms of trusts, the opinion of Area Counsel should be sought.

(5) Because the validity of a trust and the taxpayer's rights to trust property are highly dependent upon the particular facts of the case, the terms of the trust agreement, and applicable state law, Area Counsel should be consulted whenever these issues arise. General information regarding the rules relating to trusts and how they impact tax collection may be found in the Tool Box provided on the My SB/SE Counsel website at http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/MySBSECounsel.aspx under "Trusts & Collection Outline." See also IRM 5.17.3.10.24, Levy and Sale, Trusts, for information on levying on the corpus or income of a trust.

(1) Intangible property is personal property which lacks a physical existence but is represented by physical evidence. Items in this category include certificates of stock, bonds, promissory notes, licenses, goodwill, debts owed to the taxpayer, patents, copyrights, trademarks, franchises and "choses in action."

(2) A chose in action is a personal right not reduced to possession and recoverable by a suit at law. A plaintiff’s cause of action in tort or contract against a defendant is an example of a chose in action. United States v. Stonehill, 83 F.3d 1156 (9th Cir. 1996), cert. denied, 519 U.S. 992 (1996).

(1) Alter ego essentially means a "second self." It is a doctrine that allows the law to disregard an entity’s separate legal identity in order to extend liability and prevent abuse. Using an alter ego theory, if an individual is the alter ego of a corporate taxpayer or other legally distinct entity, then that individual’s assets may be used to satisfy the debts of the corporate taxpayer. This is sometimes called "piercing the corporate veil."

(2) Similarly, if a corporation or other legally distinct entity is the alter ego of a taxpayer, then the assets of that entity may be used to satisfy the debts of the individual taxpayer. This is sometimes called "reverse piercing of the corporate veil."

(3) An alter ego generally involves a sham corporation used to avoid legal obligations. To establish an alter ego, such that an alter ego Notice of Federal Tax Lien may be filed, it must be shown that the shareholders disregarded the corporate entity and made it an instrumentality for the transactions of their own affairs.

(4) No one factor determines whether an alter ego situation is present, but a number of factors taken together may. The following list is neither exhaustive nor exclusive, but alter ego situations typically involve one or more of the following:

1. Commingling of corporate and personal finances and use of corporate funds to pay personal expenses.

2. Unsecured interest-free loans between the corporation and the shareholder.

3. The taxpayer is a shareholder, director, or officer of the corporation, or otherwise exerts substantial control over the corporation.

4. The corporation is undercapitalized relative to its reasonable anticipated risks of business.

5. A failure to observe corporate formalities, e.g. issuance of stock, payment of dividends, director and shareholder meetings, or the maintenance of corporate records.

6. A failure to disregard the corporate fiction presents an element of injustice or "fundamental unfairness."

(5) In an alter ego case, a special condition NFTL is used, identifying, in the name line of the NFTL before the taxpayer's name, the third party as the alter ego. For example, if the taxpayer is TP, and ABC Inc. is TP’s alter ego, then the NFTL name line would read "ABC, Inc., as Alter Ego of TP."

(6) Area Counsel approval is required prior to filing a Notice of Federal Tax Lien naming an alter ego. See both IRM 5.12.7.6.2, Alter-Ego NFTL, and IRM 5.12.7.6.5, Special Condition NFTL Approval Process: Request, Advisory Review, and Post-Approval.

(1) A "nominee" is someone designated to act for another. As used in the federal tax lien context, a nominee is generally a third-party individual who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property. In other words, the federal tax lien extends to property "actually" owned by the taxpayer even though a third party holds "legal" title to the property as nominee. Generally speaking, the third party in a nominee situation will be either another individual or a trust.

(2) A nominee situation generally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations. To establish a nominee lien situation, it must be shown that while a third party may have legal title to the property, it is really the taxpayer that owns the property and who enjoys its full use and benefit. If state law is undeveloped or underdeveloped as to the issue of nominee ownership, contact Area Counsel for assistance.

(3) No one factor determines whether a nominee situation is present, but a number of factors taken together may. The following list is neither exhaustive nor exclusive, but nominee situations typically involve one or more of the following:

1. The taxpayer previously owned the property.

2. The nominee paid little or no consideration for the property.

3. The taxpayer retains possession or control of the property.

4. The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.

5. The taxpayer pays all or most of the expenses of the property.

6. The conveyance was for tax avoidance purposes.

(4) The Service’s NFTL in a nominee situation is identical to the standard NFTL, except that the nominee is identified as the name of the taxpayer. For example, if the taxpayer is TP, and My Brother-In-Law or My Trust is TP’s nominee, then the name of the taxpayer on the nominee NFTL would be "My Brother-In-Law or My Trust, Nominee of TP."

(5) Unlike the alter ego situation, nominee situations usually involve specific pieces of a taxpayer’s property that were conveyed to the nominee. Since the federal tax lien only attaches to property actually "owned" by the taxpayer, it may not reach all property that is, in fact, actually owned by the nominee. Therefore, the NFTL in a nominee situation will usually contain a notation on its face that the lien is filed to attach specifically to certain identified property. This property must be specifically identified and described in the NFTL.

(6) Area Counsel approval is required prior to filing a nominee lien. See both IRM 5.12.7.6.1, Nominee NFTL, and IRM 5.12.7.6.5, Special Condition NFTL Approval Process: Request, Advisory Review, and Post-Approval, for more information.

(1) This "superpriority" protects the purchaser or the holder of a security interest in a "security" who at the time of purchase or at the time the security interest came into existence did not have actual notice or knowledge of the existence of the federal tax lien. IRC 6323(b)(1). The Code defines securities to include money, stock, bonds, debentures, notes, negotiable instruments, and various other types of interests. IRC 6323(h)(4).

(2) A subsequent holder of a security interest is also protected if the prior holder did not have actual notice or knowledge at the time the security interest came into existence. An illustration of the intent of this paragraph is the case where "P", without actual notice or knowledge of the existence of a tax lien, purchases a security from "T", the taxpayer, after a notice of lien has been filed. "P" is protected under the provisions of this paragraph. If "P" thereafter sells the security to "C", who at the time of such sale has actual knowledge of the existence of the lien, "C" is also protected against the tax lien. See Treas. Reg. 301.6323(b)-1(a)(2), Examples (1) and (2).

(1) This "superpriority" protects the purchaser of a motor vehicle if, at the time of purchase, —

1. the purchaser did not have actual notice or knowledge of the existence of the federal tax lien; and

2. before the purchaser has actual notice or knowledge, the purchaser has actual possession of the motor vehicle and has not thereafter relinquished actual possession to the seller or his/her agent. IRC 6323(b)(2).

(1) This "superpriority" protects the purchaser of tangible personal property purchased at a retail sale unless at the time of purchase the purchaser intends the purchase to (or knows the purchase will) hinder, evade or defeat the collection of the federal tax. IRC 6323(b)(3).

(2) "Retail sale" means a sale made in the ordinary course of the seller’s trade or business of tangible personal property of which the seller is the owner. It includes a sale in the customary retail quantities by a seller who is going out of business but not a bulk sale or an auction sale in which goods are offered in quantities substantially greater than are customary in the ordinary course of the seller’s trade or business or an auction sale where the owner is not in the business of selling such goods. Treas. Reg. 301.6323(b)-1(c)(2).

(1) This "superpriority" protects a purchaser of household goods, personal effects or other tangible personal property exempt from levy under IRC 6334(a). It encompasses items purchased (other than for resale) in a casual sale for less than $1,810 (as of January 1, 2023). IRC 6323(b)(4). This amount is adjusted annually for inflation. See Rev. Proc. 2022-38, 2022-45 I.R.B. 445. Rev. Proc. 2022-38, 2022-45 I.R.B. 445. These sales include "garage sales" or "tag sales."

(2) A casual sale is a sale not made in the ordinary course of the seller’s trade or business. Protection is afforded only if the purchaser does not have actual notice or knowledge of the existence of the federal tax lien or that the sale is one of a series of sales which means that the seller plans to dispose of, in separate transactions, substantially all of his/her household goods, personal effects and other tangible personal property. See Treas. Reg. 301.6323(b)-1(d)(2).This exception applies only to tangible personal property (e.g. household goods, personal effects, wearing apparel, firearms, furniture, etc.) as defined in Treas. Reg. 301.6334-1.

(1) This "superpriority" protects someone in possession of tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of that property. IRC 6323(b)(5).

(2) Thus, for example, if state law gives an automobile mechanic a lien for the repair bill and the right to retain possession of the repaired automobile as security for payment of the repair bill, and the mechanic retains continuous possession of the automobile, a federal tax lien which has attached to the automobile will not be valid to the extent of the repair bill.

(1) This "superpriority" protects certain specified state and local tax liens against real property. IRC 6323(b)(6) applies if state or local law entitles such liens to priority over security interests in such property which are prior in time, and such lien secures payment of one of the following three types of taxes or charges:

1. A tax of general application levied by any taxing authority based upon the value of such property. For example, real estate tax.

2. A special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement. For example, sewers, streets, or sidewalks.

3. A charge for utilities or public services furnished to such property by the United States, a state or political subdivision thereof, or an instrumentality of any one or more of the foregoing.

(2) If real estate taxes (whenever they accrue) are ahead of mortgages under local law, they will also be ahead of federal tax liens. The result will be the same if a special assessment lien arises after the federal tax lien is in existence. The same priorities apply in the case of charges for utilities or public services.

(3) This superpriority category does not include other state and local tax liens arising for personal property taxes, state or local income taxes, franchise taxes, etc.

(1) This "superpriority" protects lienors whose liens arise from the repair or improvement of certain real property. IRC 6323(b)(7).

(2) The property must be a personal residence containing not more than four dwelling units with the owner occupying one of the units and the total contract price being $9,030 or less (as of January 1, 2023). This amount is adjusted annually for inflation See Rev. Proc. 2022-38, 2022-45 I.R.B. 445. Rev. Proc. 2022-38, 2022-45 I.R.B. 445.

(1) This "superpriority" protects an attorney who, under local law, holds a lien upon, or a contract enforceable with respect to, a judgment or other amount in settlement of a claim or cause of action, to the extent of reasonable compensation for obtaining the judgment or procuring the settlement, even if the attorney has actual notice or knowledge of the filing of the notice of lien. IRC 6323(b)(8). There is a limitation upon this absolute priority that arises with respect to a judgment or amount in settlement of a claim or a cause of action against the United States, to the extent that the United States sets off such judgment or amount against any liability of the taxpayer to the United States.

(2) Even in those cases where the attorney’s lien enjoys the priority over the federal tax lien, it is limited to reasonable compensation. Generally, reasonable compensation means the amount customarily allowed under local law for an attorney’s services for litigating or settling a similar case or administrative claim. See North Carolina Joint Underwriting Assn. v. Long, et al., 2008-1 USTC ¶ 50,183 (E.D.N.C. 2008). Nevertheless reasonable compensation shall be determined on the basis of the facts and circumstances of each individual case. The priority does not apply to an attorney’s lien which may arise from the defense of a claim or cause of action against a taxpayer, except to the extent such a lien is held upon a judgment or other amount arising from the adjudication or settlement of a counterclaim in favor of the taxpayer. See Treas. Reg. 301-6323(b)-1(h)(1).

(1) This "superpriority" protects an insurer in a life insurance, endowment or annuity contract with a taxpayer. IRC 6323(b)(9).

(2) This "superpriority" applies under the following situations:

1. If an insurer makes a policy loan on a life insurance policy after a notice of lien has been filed with respect to the property of the insured, the insurer is protected as against the tax lien if such insurer did not have actual notice or knowledge of the existence of the tax lien at the time the policy loan was made.

2. The insurer, after actual notice or knowledge of a federal tax lien, will still have priority but only with respect to advances (including contractual interest) required to be made under an agreement entered into prior to such actual notice or knowledge.

3. Thus, although an insurer will not have priority for policy loans made after the insurer has actual notice or knowledge that the policy is subject to a tax lien, the insurer may nevertheless continue to make automatic premium loans to maintain the contract in force and have priority over the federal tax lien with respect to such loans, if the agreement to make the automatic premium loans was entered into before the insurer had actual notice or knowledge.

(1) This "superpriority" protects certain institutions, including banks and building and loan associations with regard to a loan, if the loan is secured by an account with the bank. IRC 6323(b)(10). The following requirements apply:

Note: The provisions of IRC 6323(b)(10) apply to financial institutions described in IRC 581 and 591.

1. The bank must make the loan without any actual notice or knowledge of the existence of the tax lien.

   Example: Assume John Doe asks Bank C for a loan and offers his savings account at the bank as collateral. Bank C does a credit check, discovers a NFTL filed against John, but still makes the loan. Bank C will not qualify for the IRC 6323(b)(10) superpriority because it had actual notice or knowledge of the NFTL prior to the loan.

2. IRC 6323(b)(10) requires that the security interest be valid under state law. Under the Uniform Commercial Code (UCC) adopted in all 50 states, a bank cannot obtain a security interest in an account if the loan is made for a consumer transaction, i.e., it is not a business loan. UCC 9-109(d)(13) (excluding consumer loans from the scope of Article 9).

   Example: Assume Bank C made a loan to John Doe so that he could purchase a television. Because the loan was made for a consumer transaction, Bank C does not meet the state law requirements, and consequently fails to qualify under IRC 6323(b)(10).

(2) A superpriority is not a defense to a levy. Therefore, if a bank does qualify for an IRC 6323(b)(10) superpriority, it should either:

• honor the levy and seek a timely return of wrongfully levied property under IRC 6343(b), or

• the bank may promptly request the Service to release the levy.

(3) If the bank timely proves that it has a IRC 6323(b)(10) superpriority, the Service will generally release the levy. See Rev. Rul. 2006-42, 2006-2 C.B. 337.

(1) A purchase money mortgage or security interest is defined under state law as a mortgage or security device taken to secure the performance of an obligation incurred in the purchase of real or personal property.

(2) While the Internal Revenue Code does not give a PMSI priority status, pursuant to Rev. Rul. 68-57, 1968-1 C.B. 553, the Service recognizes that a PMSI will have priority over the Service’s NFTL if the PMSI is valid under local law.

(3) With respect to personal property, Revised Article 9 of the Uniform Commercial Code defines the creation and perfection of a PMSI. State law must be checked to determine whether a valid PMSI exists.

(4) Creating the PMSI--Pursuant to a security agreement under UCC 9-103, a PMSI arises when a creditor advances money or credit to enable the debtor-taxpayer to purchase goods (new tangible personal property), and the money loaned is actually used to acquire these specific goods. The newly purchased goods will serve as collateral for the loan. Generally, the PMSI arises in one of the following situations.

1. Seller advances credit—Buyer obtains possession of the goods, giving seller a security interest in the goods pursuant to a security agreement. Seller has not received full payment.

2. Bank/finance company advances money—Bank/finance company loans money to purchase goods after debtor-taxpayer signs security agreement with bank/finance company. Seller is fully paid. The burden is on the bank/finance company to prove that the money was actually used to purchase the goods. First Interstate Bank v. IRS, 930 F.2d 1521, 1526 (10th Cir. 1991). Typically, a bank/finance company meets this burden by drafting a check payable to the seller of the goods. If the bank/finance company cannot carry its burden, then it has a regular security interest, not a PMSI.

   Example: Bank loaned money to debtor-taxpayer to buy a tractor. Debtor-taxpayer misrepresented facts; debtor-taxpayer already owns a tractor. Instead, Debtor-taxpayer used the loan to purchase a trip to Europe. Here, Bank does not have a PMSI, so Rev. Rul. 68-57 does not apply.

(5) Perfecting the PMSI - In order to prime a NFTL, a creditor must perfect its PMSI. First National Bank v. Coxson, 76-1 USTC 9450 (D.N.J. 1976). This is generally not a burden for a PMSI in consumer goods: the PMSI is automatically perfected by the security agreement. There is no filing requirement. It’s an entirely different situation for a PMSI in business goods, which must be perfected within a short period from the date that the debtor-taxpayer obtains the collateral. See UCC 9-317(e), 9-324(a) and (b). Questions regarding whether a creditor has timely perfected should be referred to Area Counsel.

(6) Losing a PMSI in consumer goods - Some states have adopted a transformation rule for consumer goods, i.e., a creditor may lose its PMSI in consumer goods if it allows the debtor-taxpayer to refinance or consolidate its debts. The reasoning behind the rule is that the debt restructuring transforms the "old" loan to a "new" loan with a security interest encumbering the debtor-taxpayer’s old assets. The debtor-taxpayer does not acquire any new goods with the new loan. Thus, the new loan could not create a PMSI, because, by definition, a PMSI exists only if the debtor-taxpayer acquires new goods.

(7) The transformation rule does not apply to a PMSI in nonconsumer goods under UCC 9-103(b). Instead, a different rule, the dual status rule, applies. The dual status rule preserves the original PMSI in a restructuring or refinancing for the original PMSI goods. After the restructuring or refinancing, the creditor has both a PMSI in the original goods and a regular security interest in other existing goods.

(8) Identifying the PMSI property - Even if a creditor establishes that a PMSI was created, in a lien priority fight the creditor must be able to identify the original property encumbered with the PMSI or traceable to the original property. E.g., Citizens Savings Bank v. Miller, 515 N.W.2d 7 (Iowa 1994).

(1) IRC 6323(c)(2) provides protection for commercial transactions financing agreements. Generally, these are loans to a taxpayer to operate a business. The creditor and the taxpayer, in the course of trade or business, agree that loans to the taxpayer will be secured by taxpayer’s commercial financing security. Security can include, but is not limited to, accounts receivable, mortgages on real property, and inventory. The agreement must be entered into before the NFTL is filed; however, priority will extend to commercial financing security acquired before the 46th day after the NFTL is filed and to advances made within 45 days of filing (or sooner if the creditor gains knowledge of the NFTL).

(2) Alternatively, a commercial transactions financing agreement could be the purchase of commercial financing security, other than inventory, acquired by the taxpayer in the ordinary course of the taxpayer’s trade or business. Note that both the lender/purchaser and the debtor-taxpayer must have entered into the loan/sale within the ordinary course of business. This protection exists, however, for a limited time period. To be protected, the creditor must loan the funds or purchase the property from the taxpayer within 45 days of the filing of the NFTL, or (if earlier) before the lender or purchaser had actual notice or knowledge of the notice of lien filing.

(3) The term "commercial financing security" is defined as (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory. General intangibles, such as patents or copyrights, are not included. IRC 6323(c)(2)(C). In the case of loans to the taxpayer, commercial financing security also includes inventory. Inventory consists of raw material and goods in process, as well as property held by the taxpayer primarily for sale to customers in the ordinary course of business. Treas. Reg 301.6323(c)-1(c)(1).

(4) Examples of commercial financing security priority disputes (See also Exhibit 5.17.2-1):

1. 45-day rule: Assume T, a tool manufacturer, on June 14, 2013, gives Bank a security interest in its accounts receivable and inventory for a loan of $10,000, and Bank files its security interest on that date. Service files a NFTL on July 5, 2013. On that date, Bank’s security interest would have priority over a judgment lien arising on July 5, 2013. On August 1, 2013, without knowledge of the NFTL, Bank loans $7,000 to T. On August 2, 2013, Bank learns of the NFTL, but still loans T $2,000. On October 31, 2013, Bank loans T $1,000. Lien priority is as follows:

   Example: Below table contains the details.

   Item	Description
   i.	The loan made on August 1, 2013, for $7,000 has priority over the NFTL because it met all of section 6323(c)(2) prerequisites. T and the Bank entered into the loan in the ordinary course of business. The Bank’s security interest would have had priority over a judgment lien as of July 5, 2013. The Bank made the loan without actual knowledge of the NFTL. The loan was made within 45 days of filing of NFTL
   ii.	The NFTL has priority over the $2,000 loan made on August 2, 2013, because the bank had actual knowledge of the NFTL. The Bank fails to qualify under section 6323(c)(2) for a commercial financing security.
   iii.	The NFTL has priority over the $1,000 loan made on October 31, 2013, because the bank had knowledge of the NFTL and the loan was made after the 45th day. The Bank fails the 45-day rule.
   iv.	The 45-day rule also governs what inventory is included in the priority. For the loan made on August 1, 2013, the Bank has priority with respect to inventory acquired by the taxpayer before the 46th day after the NFTL was filed. This is because the inventory qualifies as commercial financial security to which the priority of the Bank extends for loans it made to T before having actual knowledge (August 2, 2013) of the NFTL filing. See IRC 6323(c)(2)(B) and 6323(c)(2)(C).

2. Purchaser under section 6323(c)(2): On June 14, 2013, T, a tool manufacturer, and P, a business entity that purchases accounts receivable and inventory, agree in writing that T will sell 1/4 of its accounts receivable and inventory to P each month. Pursuant to state law, P records the sales contract on June 14, 2013. On July 5, 2013, the Service files a NFTL against Taxpayer T. On August 1, 2013, P makes its monthly purchase of T’s accounts receivable and inventory without any actual knowledge of the NFTL. Lien priority is the following:

   Example: Below table contains the details.

   Item	Description
   I	P’s purchase of the existing accounts receivable primes the NFTL under section 6323(c)(2) requirements. T and P entered into the contract in the ordinary course of business before the filing of the NFTL. Also, section 6323(c)(2)(A)(ii) defines a commercial transactions financing agreement as including an agreement to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of business. Finally, P made the purchase within 45 days of the filing of the NFTL.
   ii	The NFTL primes P’s purchase of the inventory. Section 6323(c)(2)(A)(ii) explicitly excludes the purchase of inventory from the protection given to a purchaser of commercial transaction financing security. Accordingly, P purchased the inventory encumbered with the federal tax lien.

(1) IRC 6323(c)(3) provides protection for interests arising from written real property construction or improvement financing agreements entered into before a NFTL is filed and which interests are given priority under state law against a judgment lien creditor as of the time of the filing of the NFTL. This protection applies to 3 different situations:

1. the owner's construction or improvement (including demolition) of real property;

2. a contractor obtains financing, usually a bank loan, to construct or improve real property; or

3. the raising or harvesting of a farm crop or the raising of livestock or other animals.

(2) The first subsection addresses a taxpayer’s financing and lien for construction or improvement of the taxpayer’s home or business. IRC 6323(c)(3)(A)(i). Pursuant to such a financing agreement, the lender takes a mortgage/lien on the taxpayer’s property undergoing construction and agrees to make distributions in the future to finance the construction.

1. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

2. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL.

   Example: Assume Taxpayer and Lender, by contract, on January 3, 2013, agree to a mortgage for a total of $100,000 to finance construction on Taxpayer’s building. The mortgage lien is recorded on January 4, 2013. On February 1, 2013, the Service files a NFTL. On June 3, 2013, with actual knowledge of the existence of the NFTL, Lender makes a disbursement of $100,000 to taxpayer pursuant to contract. On August 1, 2013, there is a lien priority dispute. Lender’s mortgage for $100,000 primes the NFTL because Lender meets all of the requirements of section 6323(c)(3). There was a written agreement prior to the filing of the NFTL that created a mortgage which would have primed a judgment lien creditor on the filing date of the NFTL. Actual notice of the NFTL does not disqualify the lender.

(3) The second subsection addresses a contractor’s financing for a construction project. IRC 6323(c)(3)(A)(ii).

1. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

2. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL. In return for financing on the construction project, the lender acquires a security interest in the contract proceeds, not the real estate.

   Note: There is a difference between section 6323(c)(3)(A)(i), a financing agreement for construction on real property, and section 6323(c)(3)(A)(ii), an agreement to finance a construction contract. In the former situation, the lender’s lien is on the real property undergoing construction. In the latter situation, the lender’s lien is on the proceeds of the construction contract only.

(4) The third subsection addresses a farmer’s financing to raise or harvest a crop/livestock. There is no 45-day rule, i.e., disbursements can be made more than 45 days after the filing of the NFTL and the lender’s lien will still prime the NFTL.

1. Actual knowledge of the NFTL will not disqualify the lender, provided the written agreement predated the filing of the NFTL.

2. This subsection is relatively generous to the lender because it protects the lender's interest in not only the crop or livestock raised, but also in any of the taxpayer’s property existing as of the filing date of the NFTL, assuming that property was listed in the security agreement.

   Example: Assume that on January 2, 2013, Farmer and Lender sign a financing agreement in which Lender agrees to a loan of $10,000 to buy seed and fertilizer. Farmer gives Lender a lien on crops and all of Farmer’s current and future property. A financing statement is properly filed on January 2, 2013. On May 1, 2013, the Service files a NFTL. On May 15, 2013, with actual knowledge of the NFTL, Lender makes a $10,000 distribution to Farmer. On October 1, 2013, Farmer buys a tractor. Lien priority is the following:

   Item	Description
   i.	Lender has lien priority on Farmer’s crops and all of Farmer’s property held as of May 1,2013, the filing date for the NFTL.
   ii.	The NFTL primes Lender’s lien on the tractor. Farmer did not own the tractor as of May 1, 2013, the filing date of the NFTL.

(1) IRC 6323(c)(4) provides protections for interests arising from an obligatory disbursement agreement, which generally requires a lender to make a payment because someone other than a taxpayer has relied on that obligation. The lender must have entered into the obligatory disbursement agreement in the course of his trade or business. A general obligatory disbursement agreement requires that on the filing date of the NFTL, the lender's security interest must be protected against a hypothetical judgment lien creditor. Also, the taxpayer and the lender's written agreement must provide that the lender's duty to pay is triggered by the claim of a third party. In other words, the lender is typically paying a third party for property/services provided to the taxpayer. Under a general obligatory disbursement agreement, the protected security interest covers only two categories:

1. all of the taxpayer’s property as of the filing date of the NFTL and

2. after the filing date, any property traceable to the lender's payment.

(2) A letter of credit is a classic example of an obligatory disbursement agreement. A bank issues a letter of credit (a promise to pay the holder of the letter of credit) to Taxpayer. The Service then files a NFTL. Taxpayer later purchases property by giving the seller the letter of credit. The seller later presents letter of credit to the bank to obtain payment. The bank will have priority over the FTL with respect to all of Taxpayer’s property existing as of the date of the filing of the NFTL and the property purchased with the letter of credit after the filing of the NFTL.

(3) Section 6323(c)(4) provides extra protection to surety agreements. A surety agreement is a special type of obligatory disbursement agreement: The surety agrees to perform a contract if the taxpayer fails to perform. The taxpayer and the surety must meet all of the procedural requirements imposed on a general obligatory disbursement agreement. For example, there must be a written contract; the duty to perform must be triggered by the claim of a third party; and prior to the filing of a NFTL, the security interest must be perfected against the claim of a hypothetical judgment lien creditor.

(4) Sureties receive extra protection because section 6323(c)(4) expands the categories of collateral. Unlike a general obligatory disbursement that creates only two categories of collateral, a surety can look to four categories for collateral:

1. All of the taxpayer’s property as of the filing of the NFTL (similar category for general obligatory payment).

2. After the filing date, any of taxpayer’s property traceable to the surety’s payment (similar category for general obligatory payment).

3. The proceeds of the contract for which performance was insured (an additional category).

4. If the contract is to construct or improve real property, to produce goods, or to furnish services, any tangible personal property used by the taxpayer in performing the insured contract (an additional category).

(5) Example: Prior to the filing of the NFTL, Taxpayer and Surety agreed that, if Taxpayer defaulted, Surety will have a security interest in all of Taxpayer’s property in exchange for Surety’s agreement to complete construction of the building, if needed. The Service files a NFTL. Taxpayer bought a bulldozer, began work, and then defaulted on the building construction. Surety completed the construction contract. Surety primes the NFTL as to all of Taxpayer’s property existing prior to the NFTL, proceeds of the construction contract arising after the filing of the NFTL, and the bulldozer, which Taxpayer also acquired after the filing of the NFTL.

(1) IRC 6323(d) protects a creditor’s security interest for disbursements made within 45 days after the filing of the NFTL or before the lender acquires knowledge of the NFTL, if before the 45th day. As discussed below, section 6323(d) is similar to section 6323(c)(2) in some ways, but is different in other ways.

(2) The section 6323(d) and section 6323(c)(2) commercial transaction financing protections are similar in that they both require the following:

• Prior to the filing of the NFTL, the taxpayer and the lender must sign a written agreement that creates a security interest in the encumbered property.

• As of the filing date of the NFTL, the lender’s security interest must prime a hypothetical judgment lien creditor.

• After the filing of the NFTL, the lender must not have any actual knowledge of the NFTL when it makes the loan.

• Such loan must be made within 45 days of the filing of the NFTL. If, within the 45 day period, the lender acquires knowledge of the NFTL before making the loan, then the 45 days is shortened to the day on which the knowledge is acquired.

(3) Section 6323(d) and section 6323(c)(2) differ as to the types of property and the time when the taxpayer acquired the property. Specifically, section 6323(d) applies to all of the taxpayer’s property as of the date of the filing of the NFTL. In contrast, section 6323(c)(2) applies to specific property acquired by the taxpayer before the 46th day after the filing of the NFTL. Section 6323(d) applies to a larger pool of property; section 6323(c)(2) may apply to property acquired after the NFTL is filed.

(1) An assignment is a transfer of intangible property, frequently an account receivable. An assignee, the party receiving the assigned rights, may meet the requirements of the definition of a purchaser under IRC 6323(h)(6). Whether an assignee is a purchaser within the meaning of the above subsection is a federal question. See United States v. Gilbert Associates, 345 U.S. 361 (1953). An assignee who fails to qualify as a purchaser may try to argue that it has a security interest under IRC 6323(h)(1).

(1) An attachment lien, provided for under most state statutes, may arise upon the filing of a creditor’s suit and, under state law, will be taken as of the time the attaching creditor acquired a lien on the debtor’s property. This is done by the doctrine of "relation-back" which relates the subsequently acquired judgment lien back to the date of the attachment lien. This relation back doctrine does not apply to priority disputes with the federal tax lien. United States v. Security Trust and Savings Bank, 340 U.S. 47 (1950).

(2) In cases involving the determination of priority between a federal tax lien and such an attachment lien, the attachment lien is deemed inchoate until perfected by a final judgment.

(1) Circular priority describes a situation where A’s lien is senior to the federal tax lien; the federal tax lien is senior to B’s lien; but state law makes B’s lien senior to A’s lien.

(2) In United States v. City of New Britain, 347 U.S. 81(1954), the Supreme Court resolved the circular priority problem by providing:

1. first, that the portion of the fund for which federal law creates a lien superior to that of the Government’s tax lien is set aside;

2. second, the federal tax claim is paid; and

3. third, the reserved portion of the fund is distributed among competing claimants according to state law.

(1) The wife’s right of dower and the husband’s right of curtesy are limited estates in the real property of the respective spouses which some states still recognize at common law.

(2) Many states have abolished the common law dower and curtesy in favor of a statutory right of dower in either surviving spouse as to both real and personal property.

(3) Some states treat dower and curtesy as creating a property right as of the marriage: a spouse’s dower or curtesy interest or statutory rights cannot be defeated by the other spouse’s conveyances or alienations after the marriage or by a lien in favor of the other spouse’s creditors that becomes effective after the marriage. In these states, if the marriage occurred before the Service assesses the tax liability of one spouse, then the federal tax lien is junior to the non-liable spouse’s dower/curtesy interest. Rev. Rul. 79-399, 1979-2 C.B. 398.

(1) As discussed in IRM 5.17.2.6.7, if the holder of a security interest or lien has priority over a federal tax lien, then certain expenses also will have priority, provided such expenses are "reasonable" and also would have priority under local law. IRC 6323(e).

(2) In effect, both direct expenses of sale, such as advertising, auctioneer’s expenses and any other necessary expenses of the sale and items of cost which are included in IRC 6323(e), which are not normally direct expenses, will have priority over the federal tax lien if the original obligation is a lien or security interest and has priority over the tax lien.

(1) Most states have laws providing that property used in connection with the commission of a crime shall be seized; and if the accused is convicted of the criminal charge, the property is to be forfeited. IRC 6323(i)(3) provides that a forfeiture under local law of property seized by a law enforcement agency of a state, county, or other local governmental subdivision shall relate back to the time of the seizure, except that this paragraph shall not apply to the extent that under local law the holder of an intervening claim or interest would have priority over the interest of the state, county, or other local governmental subdivision in the property.

(2) For example, assume that a state seizes taxpayer’s car in January 2013; the Service makes an assessment against taxpayer in February 2013, and the state obtains an order of forfeiture in August 2013. Also assume that under local law the holder of an intervening claim or interest would not have priority over the state’s interest in the car. In this situation, the forfeiture relates back to the seizure, so essentially the state owned the car as of January 2013 and the car would no longer be property of the taxpayer to which the federal tax lien would attach as of February 2013.

(1) An "open-end" mortgage or home equity line of credit is different from a typical mortgage. Frequently, these mortgages provide for an initial loan at the time that the parties sign the mortgage, and the borrower has the discretion to request future advances after the mortgage is recorded.

(2) If the Service files a NFTL and the lender makes a future advance within 45 days of the filing of the NFTL, the lender may be entitled to protection under IRC 6323(d). Bank of America v. Fletcher, 342 F.Supp.2d 1009 (N.D. Okl. 2004).

(1) In the discussion of superpriorities, it was stated that a lien is not valid against life insurance, endowment or annuity contracts as against the insurer at any time before the insurer had actual notice or knowledge of the lien. Even if the company had such notice or knowledge, it could still make advances for automatic premium loans to maintain the contract if the agreement to make the advances was entered into before the insurer had actual notice or knowledge of the lien. In addition, if a levy had been served on the insurer and the levy was satisfied, the insurer would have priority for subsequent policy loans until a new notice of levy was served on the insurer.

(2) Policy loans are those loans made to an insured by an insurance company without causing the policy to be terminated. Automatic premium loans are loans for the payment of premiums made against the cash surrender value of the insured’s policy, but which the company is required to make by the terms of the contract of insurance itself by reason of the insured’s default in premium payments.

(3) Policy loans will prime the federal tax lien if they are made by the insurance company before the insurer has actual notice or knowledge of the existence of the federal tax lien. IRC 6323(b)(9)(A).

(4) Automatic premium loans will prime the federal tax lien if the agreement to make advances was entered into before the insurer had actual notice or knowledge of the lien. IRC 6323(b)(9)(B).

(5) If the Service serves a notice of levy on the insurer and that levy is satisfied by the insurer, then that notice of levy will not constitute a notice of a lien until the Service delivers a new notification of the lien to the insurance company. IRC 6323(b)(9)(C). The notification may take any form but delivery will only be effective from the time the insurer actually receives the notification.

(1) State law generally gives landlords and lessors a statutory lien for unpaid rents against their tenant’s or lessee’s property located on the leased premises. When a landlord’s lien competes with a federal tax lien for priority, IRC 6323(a) generally does not apply. Instead, the priority dispute is resolved under the "choateness test."

(2) In the case of United States v. Scovil, 348 U.S. 218 (1955), the Supreme Court held that the landlord did not have a choate lien until the landlord recovered a judgment. Prior to obtaining a judgment, the landlord’s lien was inchoate because the amount of the secured debt was not certain, i.e., the secured debt could increase as time progressed and the secured debt could be reduced by the landlord’s breach of contract. To have priority over a federal tax lien, a landlord would have to recover a judgment and then perfect the judgment lien on the personal property prior to the NFTL filing.

(1) An LLC is a form of business created under state law. LLCs may be either multi-member or single member. Treas. Reg. 301.7701-3 explains the federal taxation of LLCs. If an LLC is a multi-member, the members may elect to have the LLC taxed as a corporation. If the members do not make the election, then the LLC is treated as a partnership by default. Note, however, that if under state law the members of an LLC are not liable for the debts of the LLC, generally the IRS may not collect the LLC’s federal tax liabilities from the members. Rev. Rul. 2004-41, 2004-1 C.B. 845. A single-member LLC may also elect to be taxed as an association. If the election is not made, then by default the single member LLC will be disregarded, i.e., the single-member owner is the taxpayer.

(2) Treasury regulations affect the treatment of single-owner disregarded LLCs. See Treas. Reg. 301.7701-3. The single-owner disregarded LLC is liable for excise taxes as of January 1, 2008; the single-owner disregarded LLC is liable for employment taxes as of January 1, 2009. Treas. Reg. 7701-2(c)(2)(iv) and (v).

(1) The Federal Maritime Lien Act provides that any person furnishing repairs, supplies, towage or other necessaries for a vessel shall have a lien upon the vessel for payment. Maritime liens arise under 46 USC 31342. Although the Internal Revenue Code does not provide a priority for maritime liens, courts have generally given maritime liens priority over the federal tax lien.

(2) Maritime liens have, throughout history, enjoyed a peculiar sort of priority because of the very nature of a ship, its usage and needs, and the needs of its crew. For example, taking on provisions in a foreign port will give rise to a lien against the ship, generally entitled to seniority over any non-maritime lien against the ship, whether arising prior to or subsequent to the maritime lien.

(3) The source of problems in this area is that federal law has created both maritime liens and the federal tax liens. Currently, the courts have generally taken the view that the maritime lien should prevail over both prior and subsequent federal tax liens, regardless of whether the Service has filed a NFTL. National Bank of North America v. S.S. Oceanic Ondine, 335 F. Supp. 71 (S.D. Tex. 1971), aff’d, 452 F.2d 1014 (5th Cir.1972); United States v. Flood, 247 F.2d 209 (1st Cir. 1957).

(1) All state statutes provide liens for laborers (mechanics) and material suppliers (materialmen) for work performed or materials supplied with respect to real property. Local law governs the method by which such liens are perfected and their duration. Generally, a mechanic’s lien must be enforced within a certain specified time or it will be lost. Generally, a mechanic’s lien attaches to the real property under construction and the proceeds of the construction contract. In determining lien priority disputes under IRC 6323(a), one must look to the definition of mechanic’s liens in IRC 6323(h)(2), which limits the relief provided to persons who have a lien on real property under local law for services, labor, or material furnished in construction of the real property. IRC 6323(h)(2) also provides that a mechanic’s lien arises on the later of –

• The date on which the mechanic’s lien first becomes valid under local law against subsequent purchasers of the real property without actual notice, or

• The date on which the mechanic’s lienor begins to furnish the services, labor, or materials.

(2) The following example demonstrates how to apply the above rules for determining the date that a mechanic’s lien arises under IRC 6323(h)(2):

(3) In addition to the above, issues may arise as to whether a payment is the taxpayer’s property. In many cases a subcontractor asserts a mechanic’s lien on construction payments in the main contractor’s possession. A main contractor may fail to pay both his federal tax liability and the subcontractors on a construction project. If the Service and the subcontractors make claims on construction payments, the first step in resolving this priority dispute is determining whether the funds in the general contractor’s possession are the general contractor’s property or rights to property. In many situations the funds will not be the property or rights to property of the general contractor because state law does not give the general contractor any interest in the funds when subcontractors have not been paid.

(4) In two landmark cases, the United States Supreme Court annunciated the now famous "no property" rule. Aquilino v. United States, 363 U.S. 509 (1960), and United States v. Durham Lumber Company, 363 U.S. 522 (1960). The "no property" rule means that in approaching any priority determination, the first question must be: "Does the taxpayer have any property to which the lien will attach?" The fundamental thrust of this inquiry is that if there is no property interest to which the federal tax lien attaches, then there is no need to even consider the question of priorities.

1. In Aquilino, the Supreme Court remanded the case for a determination of whether the taxpayer-prime contractor, by virtue of a New York statute, held the funds against which the federal tax lien was asserted in trust for the payment of laborers and material suppliers.

2. In Durham Lumber Company, the prime contractor-taxpayer, by virtue of the law of North Carolina, was held to have no property interest in funds due from the owner except in any surplus that might remain after the payment of the subcontractors.

(1) Subcontractors and suppliers who agree to provide labor and materials to a prime contractor take the risk that they will not be paid by the contractor. To protect these subcontractors and suppliers, Congress enacted the Miller Act, codified at 40 USC 3131-3132 in 1935. Specifically, the Miller Act requires that the prime contractor on all federal construction projects purchase both a performance and a payment bond.

(2) The Miller Act, however, does not set forth the priorities as between any claim of the surety and any government claim. In United States v. Munsey Trust Co, 332 U.S. 234, 239 (1947), the Court first held that the government, like any creditor, has the right to setoff amounts owed to a debtor against amounts the debtor owes to the government.

(3) The Court also stated that if the surety completed the job, the surety would be entitled to the "retained moneys in addition to progress payments," as otherwise a surety would rarely agree to complete a job if it knew that, by doing so, it would lose more money than if it had allowed the government to proceed. Munsey Trust, 332 U.S. at 244.

(4) Subsequently, lower courts have cited Munsey Trust, to contrast a surety’s payments made pursuant to a payment bond with payments made pursuant to a performance bond. If the surety makes a payment pursuant to a payment bond, then the government has the right to setoff. Dependable Ins. Co., Inc. v. United States, 846 F.2d 65, 67 (Fed. Cir. 1988); United States Fid. & Guar. Co. v. United States, 475 F.2d 1377, 1383 (Ct. Cl. 1973); Barrett v. United States, 367 F.2d 834 (Ct. Cl. 1966). If a surety makes a payment pursuant to a performance bond, then the government does not have the right to setoff. See Aetna Cas. & Surety Co. v. United States, 845 F.2d 971, 976 (Fed. Cir. 1988); Aetna Cas. & Surety Co. v. United States, 435 F.2d 1082 (5th Cir. 1970); Trinity Universal Ins. Co., v. United States, 382 F.2d 317, 321 (5th Cir. 1967), cert. denied, 390 U.S. 906 (1968).

(1) A "receiver" is a disinterested third party (similar to a trustee) appointed by a court to receive and preserve property funds in litigation. In general, in determining the priority of the federal tax lien over court appointed receivers, the threshold consideration is determining the nature of the receiver’s interest in the insolvent’s property. Of course, if the taxpayer is divested of title prior to the time the federal tax lien arises, there is no property belonging to the taxpayer in the hands of the receiver to which a federal tax lien will attach. SEC v. Levine, 881 F.2d 1165 (2d Cir. 1989). If, however, the lien arises prior to the passing of title to the receiver, the property will pass burdened with the lien. See also IRM 5.17.13.10, Receiverships.

(1) Setoff may be defined as the discharge or reduction of one demand by an opposite one. Practically speaking, this question usually arises in the case where a bank has loaned money to a taxpayer who also is the bank’s customer. If the customer/borrower fails to meet the required loan repayments, the bank will often assert a right of setoff against any funds the customer has on deposit.

1. If the federal tax lien attaches to a taxpayer’s property prior to setoff, then the bank takes funds encumbered with a federal tax lien. The Government may levy on the bank to obtain the encumbered funds. United States v. Donahue Industries, Inc., 905 F.2d 1325 (9th Cir. 1990). Alternatively, the Government may file suit under IRC 7403 to foreclose the tax lien on the property. United States v. Cache Valley Bank, 866 F.2d 1242 (10th Cir. 1989).

2. If the bank setoff occurs prior to creation of the assessment lien, then the tax lien will not attach to the funds because the money no longer belongs to the taxpayer.

   Note: See also IRM 5.17.2.6.5 regarding the superpriority under IRC section 6323(b)(10) for deposit secured loans.

(1) Unlike the property tax, which has a superpriority status under IRC 6323(b)(6), a state, county, or municipal lien for taxes (e.g., sales taxes, income taxes, franchise taxes, etc.) can achieve priority over the federal tax lien only on the basis that such lien is a choate lien prior in time to the federal tax lien arising, which occurs when the federal tax liability is assessed. Then the doctrine of "first in time, first in right" is applicable. United States v. City of New Britain, 347 U.S. 81 (1954).

(2) State and local liens may not achieve priority over a federal tax lien by being characterized by the local law as some interest in addition to a lien. Thus, the U.S. Supreme Court rejected the characterization by the New Hampshire Supreme Court of a municipal tax lien as constituting a judgment lien, thus bringing the lienor within the protection of IRC 6323. United States v. Gilbert Associates, Inc., 345 U.S. 361 (1953).

(3) Similarly, a state’s characterization of its lien for taxes as an expense of sale in a mortgage foreclosure action was unavailing and the federal tax lien was held entitled to priority over the subsequent liens of the state on a first in time, first in right basis. United States v. Buffalo Savings Bank, 371 U.S. 228 (1963). Also, in determining the relative priorities of federal tax liens and state and local liens for taxes, the state’s characterization of its liens as choate is not conclusive for federal tax purposes. Illinois v. Campbell, 329 U.S. 362 (1946).

(4) The question of what constitutes "perfection" is particularly significant in this area. States vary in terms of how local tax liens are perfected. Generally speaking, state and local tax liens arise either at the time notice and demand is issued (similar to federal tax liens), or after administrative appeal procedures to contest the lien are exhausted. See Minnesota v. United States, 184 F.3d 725 (8th Cir. 1999) (holding that a state-created lien arises when the state takes administrative steps to fix the taxpayer's liability); Monica Fuel, Inc. v. IRS, 56 F.3d 508 (3d Cir. 1995), cert. denied, 528 U.S. 1075 (2000) (holding state tax liens to be choate when the time period to administratively appeal the lien expires).

(5) In any event, the principal inquiry in these cases is that of "perfection" of the competing state or local tax lien. If there is "nothing more to be done" in order for the state to enforce its tax lien prior to the attachment of the federal tax lien, which occurs when the federal tax liability is assessed, then the state or local tax lien will have priority. However, if the state must still take administrative action to establish a taxpayer’s liability after the federal tax lien arises, then the federal tax lien will have priority. This means that the state/local lien must be “choate” or “perfected” with respect to the property at issue prior to the time the federal tax liability is assessed.

(1) The doctrine of subrogation involves the substitution of one person in the place of another with respect to a lawful claim or right. IRC 6323(i)(2) allows creditors to argue subrogation in federal tax lien priority disputes. Specifically, IRC 6323(i)(2) provides that where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by IRC 6321 (relating to lien for taxes) or IRC 6324 (relating to special liens for estate and gift taxes). In lien priority disputes, subrogation issues arise when a lien that is junior to the federal tax lien pays off a lien that is senior to the federal tax lien.

(2) There is no universal definition of subrogation under state law. Whenever a lienor claims the right of subrogation, state law must be carefully examined to determine if such a claim meets the state definition of subrogation. Consult with Area Counsel on questions regarding applicable state law. State definitions of subrogation may differ. For example, under California law, courts (e.g., United States v. Han, 944 F.2d 526 (9th Cir. 1991)) apply a five-factor guideline for determining equitable subrogation:

1. Payment was made by the subrogee to protect his own interest.

2. The subrogee has not acted as a volunteer.

3. The debt paid was one for which the subrogee was not primarily liable.

4. The entire debt has been paid.

5. Subrogation would not work any injustice to the rights of others.

(1) Many lien priority disputes arise between the lien as secured by the NFTL filing and UCC security interest holders. In order to determine priority, you need to understand the creation and perfection of a security interest under Revised Article 9 of the UCC.

(2) Creation of a security interest — Under state law, attachment is the term used to describe the creation of a security interest in the debtor’s collateral. Under UCC 9-203, attachment generally requires the following three elements:

1. creditor has given value to the debtor,

2. the debtor has rights in the collateral, and

3. an agreement.

(3) Perfection of a financing statement — Under state law, in order to have priority against other lienors, the security interest not only must attach to the collateral but also must be perfected. UCC 9-301 and the following sections provide that, depending on the facts and type of collateral, steps for perfection may occur under four different methods:

1. filing a financing statement,

2. taking possession of the collateral,

3. for some types of collateral, particularly bank accounts, exercising control over the collateral,

4. in limited situations, usually a purchase money security interest in consumer goods, automatic perfection exists, i.e., attachment of the security interest automatically perfects it. An example is when a store sells a television for personal use, taking a security interest in the television.

(4) A UCC security interest must have attached and must have been perfected in order to have priority over the Service’s later filed NFTL. Do not assume, however, that a creditor’s security interest is perfected just because a financing statement has been filed. The UCC allows a creditor to file a financing statement before the security interest has attached (come into existence), and creditors frequently do so. UCC 9-308. The Official Comments to UCC 9-308, number 2, explain that "If the steps for perfection have been taken in advance, as when the secured party files a financing statement before giving value or before the debtor acquires rights in the collateral, then the security interest is perfected when it attaches."

(5) For corporations, limited liability companies, and other business entities created under state law (registered organizations) do not assume that a UCC security interest is filed at the same location where the NFTL is filed. IRC 6323(f)(2)(B) states that the location of personal property is the taxpayer’s residence, and the residence of a corporation is the principal executive office of the business. In contrast, a UCC security interest for a debtor-corporation is filed in the state of incorporation. For example, a UCC security interest on the inventory of a corporation with a principal executive office in California, which was incorporated in Delaware, would be filed in Delaware.

(1) Unrecorded conveyances can interact with the federal tax lien at differing points in time. The interaction could be:

1. After the accrual of the tax but before the tax is assessed;

2. After the tax is assessed and the statutory lien arises, but before a Notice of Federal Tax Lien has been filed; or

3. After a Notice of Federal Tax Lien has been filed.

(2) Prior to assessment, a tax lien does not attach to property the taxpayer has conveyed to a third party through a bona fide conveyance which divests the taxpayer's interest in the property at issue.

(3) Even where state law provides creditors with certain rights to property if there is an unrecorded conveyance, but all of the taxpayer's interest in the property was conveyed prior to assessment (i.e. the taxpayer retains no post-conveyance interest), the federal tax lien generally will not attach even if the conveyance is recorded after the lien arises. Filicetti v. United States, 2012-1 USTC ¶ 50,214 (D.Idaho 2012).

(4) In cases involving the determination of priority between a federal tax lien arising after an unrecorded conveyance that extinguishes all of the taxpayer’s interest in the property at issue, generally the federal tax lien does not attach and the lien has no priority position. This issue may come up when reviewing applications for, Certificate of Discharge of Property from Federal Tax Lien, resulting in a “no value” discharge. The issue might also come up reviewing applications for, Certificate of Nonattachment of Federal Tax Lien.

(5) The Service’s position on unrecorded conveyances is limited to any bona fide conveyance prior to the assessment and the statutory lien arising that extinguishes all of the taxpayer’s interest in the property at issue. A conveyance is not bona fide if the taxpayer retains control over the property or enjoys full use and benefit. Thus, the position on unrecorded conveyances does not apply to a transfer to a nominee or alter ego prior to assessment. If there are fraud indicators associated with a property transfer prior to the assessment and little evidence that the taxpayer controls or enjoys full use and benefit of the property, contact Area Counsel as soon as practicable to discuss making a suit referral to the Department of Justice.

(1) Most controversies involving the priority of the federal tax lien involve nonjudicial sales, which are sales made pursuant to one of the following:

1. An instrument creating a lien on the property sold;

2. A confession of judgment on the obligation secured by an instrument creating a lien on the property sold; or

3. A statutory lien on the property sold.

(2) Nonjudicial sales include the divestment of a taxpayer’s interest in property by operation of law, by public or private sale, by forfeiture, or by termination under provisions contained in a contract for deed, land sale contract, or conditional sales contract. Treas. Reg. 301.7425-2(a). The key point is that a court action is not needed to enforce the creditor's interest and to sell the property.

(3) The first step in analyzing a nonjudicial sale is determining whether the Service filed a NFTL more than 30 days before the sale. If the Service filed more than 30 days before the sale, then notice of the proposed sale must be given to the Service by the foreclosing party in order for the sale to discharge the federal tax lien. If proper notice is not given to the Service, then the federal tax lien will remain on the property. If the Service filed a NFTL less than 30 days before the sale, then the Service is not entitled to notice of the nonjudicial sale, which will generally discharge the property from the federal tax lien. IRC 7425(b).

(4) If a senior lienor finds a NFTL and wishes to give notice to the Service of a pending nonjudicial sale, the Internal Revenue Code and regulations provide that notice of a nonjudicial sale shall be given in writing by registered or certified mail or by personal service, not less than 25 days prior to the date of sale, to the IRS official, office and address specified in IRS Publication 786, "Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale," or its successor publication. Treas. Reg. 301.7425-3(a)(1)). The 25-day period is measured from the time of mailing of the notice and applies to the sale of all real and personal property except perishable goods.

(5) When a scheduled sale for which notice has been given is postponed to a later date, the seller of the property must give notice of the postponement to the appropriate Service official in the same manner as is necessary under local law with respect to other secured creditors. Treas. Reg. 301.7425-3(a)(2).

(6) The date of the sale is significant in order to compute the requisite notice period that the seller has to provide the Service of any anticipated nonjudicial sale of property encumbered by the federal tax lien. Under Treas. Reg. 301.7425-2(b), the "date of sale" for purposes of notice to the Service arises in one of the following three situations:

1. In the case of a public sale which divests junior liens on property, the date of the public sale is controlling.

2. In the case of a private sale which divests junior liens on property, the date that title to the property is transferred is controlling.

3. In all other cases (i.e., where there is a divestment of title or interest not resulting from a private or public sale), the date of sale is deemed to be the date on which junior liens in the property are divested under local law.

(7) The Service has authority to consent to a sale of property free and clear of the tax lien or title of the United States in a nonjudicial sale which does not meet the standard notice requirements for such sales. If the Service consents in the manner prescribed by the regulations, then the sale will discharge or divest the property from the federal tax lien notwithstanding a defect in the original notice of sale. Treas. Reg. 301.7425-3(b).

(8) Special rules apply for the notice of sale requirements for perishable goods. These are set forth in Treas. Reg. 301.7425-3(c).

(1) A judicial sale may discharge property from a federal tax lien. 28 USC 2410(c). Under IRC 7425(a), if the Service files a NFTL prior to commencement of the suit or civil action, the United States must be named as a party in the suit in order to discharge property from the federal tax lien. If the United States is not named as a party, the judicial sale will not discharge property from the federal tax lien. There may be situations in which the United States is not named as a party in the suit because a NFTL has not been filed prior to the filing of the suit, or the filing of a notice of lien is not provided by the IRC, such as in the case of estate or gift tax liens. In these situations, the judicial sale will discharge the federal tax lien as to the property sold.

(1) If either a nonjudicial sale or a judicial sale discharges real property from the federal tax lien, the Service has the right of redemption. This right enables the Service to redeem the real property from the party who purchased it at the foreclosure sale, and then sell it. For both judicial and nonjudicial sales, the Service may redeem the real property within 120 days of the date of sale or the redemption period under state law, whichever is longer. 28 USC 2410(c) (redemption after judicial sales) and IRC 7425(d)(1) (redemption after nonjudicial sales).

(2) For more information regarding redemptions, see IRM 5.12.5.

(1) IRC 6323(j) is primarily for situations in which the federal tax lien is still in effect; however, the Service is not legally prohibited from withdrawing the lien's notice (NFTL) after the lien has been released pursuant to IRC 6325(a). The IRS does not have general authority to withdraw a NFTL outside of the conditions of IRC 6323(j) but whether or not to grant a post-release withdrawal becomes a matter of policy.

(2) Written requests submitted under IRC 6323(j)(1)(A) (the Service’s filing of the NFTL was premature or otherwise not in accordance with administrative procedures) will generally be granted after lien release if the taxpayer demonstrates the original NFTL filing was improper or not otherwise in accordance with IRS procedures. A withdrawal under this provision may be issued whether a certificate of release was issued or the lien self-released.

(3) Post-release NFTL withdrawals under IRC 6323(j)(1)(D) (best interest test) will generally be granted if the following conditions apply:

1. The taxpayer requests the withdrawal in writing, and

2. The taxpayer fully satisfied the liabilities on the NFTL.

   Note: Fully satisfied is defined here as:

   Element	Definition
   1	Tax liability was fully resolved by payment or credit offset,
   2	Most circumstances where the tax assessment was abated because the taxpayer is no longer liable for the tax (e.g., amended return filed, reconsideration of additional assessment, innocent spouse determination, identity theft, or judicial ruling),
   3	Abatement of penalty and/or interest due to reasonable cause resulted in zero balance, or
   4	The taxpayer completed terms of an offer in compromise, including any related collateral agreements.

   Note: Fully satisfied does not include liabilities that are no longer collectable because of bankruptcy discharge or expiration of the collection statute.

3. A certificate of release was issued.

   Note: Generally, withdrawals will not be granted under IRC 6323(j)(1)(D) for self-releasing liens unless extenuating circumstances are present. See SBSE-05-1212-104 (December 31, 2012) for examples of extenuating circumstances.

4. The taxpayer is in compliance with filing requirements.

   Note: If the taxpayer has an unfiled return for any of the past three years, or appears to be delinquent with FTDs or Estimated Tax Payments, further investigation may be necessary as determined on a case-by-case basis.

   Note: The taxpayer will be considered to be in compliance if the return was, or can be, closed for one of the following reasons:

   Item	Description
   1	Not liable for the tax period;
   2	Income below the filing requirement;
   3	Little or no tax due or due a refund; and/or
   4	No longer liable for filing.

   Note: The taxpayer may be requested to supply additional information, as necessary, to complete this determination.

(4) Liens that self-released in error when the releases are subject to revocation do not qualify for withdrawal under these procedures.

(1) A request for lien withdrawal under IRC 6323(j)(1)(B), related to an active DDIA, will generally be approved for the following types of taxpayers:

• Individual Master File (IMF),

• Business Master File (BMF) income tax only, and

• Out of Business BMF for any type of tax,

(2) If the following conditions are met:

1. Aggregate unpaid balances of assessment and pre-assessed taxes are $25,000 or less.

2. Liability will be full paid in 60 months, or prior to collection statute expiration, whichever comes first.

3. The withdrawal request is in writing.

4. The taxpayer is in compliance with all other filing and payment requirements.

5. At least three consecutive payments have been made on the DDIA and there have been no defaults in payment under this, or any previous, DDIA.

6. The taxpayer has no previous lien withdrawals for any modules on the DDIA, excluding withdrawals relating to improper NFTL filing.

7. If a taxpayer defaults on making payment under a DDIA after the NFTL is withdrawn, a new NFTL may be filed if appropriate.