Fifth Circuit Gives IRS Priority in Lien and Levy Case (5/29/12)

In United States v. Boardwalk Motor Sports, Limited, ___ F.3d ___, 2012 U.S. App. LEXIS 17978 (5th Cir. 2012), here, the Court dealt with some nuances of the IRS collection process dealing with liens and levies. The majority and minority opinions are a bit obtuse in their holdings, but the opinions do offer an opportunity to step through the lien and levy process in a way that students should learn in a basic tax procedure course.  Hence, I provide a summary -- dealing with the big points and not getting into the details of some of the convoluted reasoning of the majority and the minority as to what the right result should be.

The facts:

1. The taxpayer had tax lien filings for over $3 million.  The IRS had filed the tax lien of public record.

JAT Comment:  Section 6321, here, creates a federal tax lien upon the assessment if the taxpayer fails to pay upon notice and demand.  Section 6322, here, makes the effective date of the lien the date of assessment.  The lien springs into operation by law, without any notice to the taxpayer or third party creditors.  Section 6326(a), here, says that the lien is not valid as to certain third party purchasers of the taxpayer's property before the lien is filed of public record (thus giving at least constructive notice, under familiar creditor's rights concept).  Certain third party purchasers during the period the lien is filed are not primed (e.g., purchasers of stock on a stock exchange, purchasers of merchandise from a regular retail vendor), but none of these exceptions apply here.  There is one exception, not applicable here, that should be mentioned.  Section 6323(b)(2) provides:

(2) Motor vehicles
With respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if—
(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and
(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.

Note that this exception for automobile purchases has two conjunctive components.  The bottom line is that any person who acquires an interest in the taxpayer's property while the lien is filed is loses to the IRS unless an exception applies.