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What You Should Know About Federal Tax Liens
BY: John Burrus, Esq.

A federal tax lien arises upon notification by the Internal Revenue Service to the taxpayer of the assessment of the delinquent taxes. However, it is not valid against the interest of a secured lender until a notice of lien has been filed in the proper office. In Colorado the general scheme is that notice of liens against real estate and those pertaining to individuals must be filed with the Clerk and Recorder of the county where the real estate is located or the individual resides. All others are filed with the Secretary of State. Normal UCC lien searches or real estate title searches should disclose these filings.

Any deed of trust or financing statement recorded prior to recording of a notice of lien would be senior to the federal tax lien if the loan has been fully disbursed and the collateral is in existence and identifiable on the date the tax lien is recorded. However, the federal tax lien takes priority over so-called "inchoate" liens except where the Federal Tax Lien Act provides otherwise. There are three common situations involving inchoate liens held by secured lenders.

A lien on after acquired property is considered inchoate with respect to any property to which the lien attaches after the date of recording of the federal tax lien. Common examples are inventory acquired or accounts receivable arising in the future. The principle would also apply, however, to such items as equipment under a security agreement granting a security interest in "all equipment now owned or hereafter acquired."

Prior to passage of the Federal Tax Lien Act in 1966 the Internal Revenue Service took the position that its lien had priority over an interest under an after acquired property clause with respect to all assets acquired by the taxpayer after recording of its notice of lien. The Federal Tax Lien Act created a limited exception to that rule. A secured lender under an after acquired property clause will have priority over the federal tax lien with respect to any property acquired within 45 days after recording of the notice. Therefore, to assure continued priority in inventory, accounts receivable or other after acquired collateral lenders would be well advised to check for filings every 45 days and to take immediate collection action if a tax lien notice is recorded.

Another common example of an inchoate lien is a lien which secures future advances. Before passage of the Federal Tax Lien Act, the tax lien took priority over all advances made under a future advances clause after recording of the lien notice. The Federal Tax Lien Act created an exception to that rule. A lender's advances after recording of the notice will have priority over the tax lien until the earlier of the date the lender actually learns of the recording or 45 days after the recording. Again, for loans which are periodically disbursed it is important to have a tax lien search done every 45 days to assure the priority of liens securing future advances.

The last situation to consider is an assignment of rents. Under Colorado law it has been held that an assignment of rents remains inchoate until the lender "takes affirmative steps" such as taking possession of the property, causing rents to be sequestered or seeking appointment of a receiver. If a tax lien notice is recorded before these steps are taken, that lien will have priority over a prior recorded assignment of rents, but if the tax lien notice is recorded afterwards, the lender will win the priority battle.

Other Matters. On July 31, 2001, amendments to the regulations of the Colorado Department of Public Health and Environment became effective which classify as "universal wastes" certain electronic devices and components, including computer monitors, color televisions and circuit boards. The effect of these amendments is to make unlawful a business's disposal of these items in public landfills and to require that they be turned over to and handled by licensed recyclers and waste managers. These items are not regulated as hazardous wastes if generated by residential sources.

A financial institution which performs various services on behalf of the Treasury Department, including acting as tax depository. accepting federal deposits and perhaps even redeeming federal bonds, is considered a federal contractor under regulations of that department and is subject to various requirements imposed on federal contractors in general, including executive orders and regulations pertaining to equal employment and affirmative action requirements.

Contact John E. Burrus at jeb@bsblaywers.com

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