Searching for Federal Tax Liens The Typical Search for UCC Financing Statements May Not Be Good Enough

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Oct 2004

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Part of virtually every
secured transaction is a search or series of searches for existing security
interests or other liens encumbering the intended collateral. Such searches
either confirm that there are no prior perfected liens or reveal those that
do exist so that they can be removed or subordinated prior to closing. It
goes without saying that the searches undertaken in each transaction must
be sufficiently complete to find any lien of any type that could deprive a
secured party of the collateral securing its related obligations.

The most familiar type of such a search is the search
for effective financing statements perfecting security interests under
Article 9 of the Uniform Commercial Code (UCC). As a result of the
enactment of Revised Article 9 in all states, the rules for filing
financing statements changed substantially in 2001. We are presently in a
transition period during which secured parties must search for financing
statements in the filing offices under both Revised Article 9 and former
Article 9.<a href="#1" name="1a">1</a> This double searching requirement will end on July 1, 2006,
when the financing statements filed under former Article 9 will no longer
be effective.<a href="#2" name="2a">2</a>

The intricacies of searching for Article 9 security
interests have been widely addressed in the literature and appear to be
well understood by practitioners.<a href="#3" name="3a">3</a> However, there exists a substantial
variety of security interests and liens that are not governed by Article 9
and may not be disclosed by the standard searches for Article 9 financing
statements. In an earlier installment of this column, Michael P. Schuster provided a
comprehensive listing of liens that can affect a secured party's
rights but lie outside the filing provisions of Revised Article 9 and
former Article 9.<a href="#4" name="4a">4</a> This article focuses on the proper search procedure for
one type of these nonstandard liens—the lien for nonpayment of
federal taxes (Internal Revenue Service (IRS) lien), which arises under 26
U.S.C. §6321.<a href="#5" name="5a">5</a>

The recording of an IRS lien lies outside the scope
of the UCC and is governed by a combination of federal statutes and non-UCC
state statutes. In order to conduct effective searches for IRS liens,
practitioners must become familiar with the complicated procedures for
determining the proper filing office for their recording. The IRS lien
arises automatically upon the neglect, failure or refusal of a taxpayer to
pay taxes due after demand and is a lien upon all real and personal
property of the taxpayer.<a href="#6" name="6a">6</a> However, the IRS lien is not valid against any
purchaser, secured party, mechanic's lien or judgment lien creditor
until notice of the lien is properly filed in the correct filing office.<a href="#7" name="7a">7</a>
The IRS files this required notice of lien in the form of IRS Form 668.<a href="#8" name="8a">8</a>

<blockquote><blockquote>
<hr>
<big><center>
All states, including Indiana, have enacted some form of statute designating the proper filing offices for IRS liens and other federal liens.
</center></big>
<hr>

</blockquote></blockquote>

For both real property and personal property, the
notice of lien will be filed in the one office designated by the laws of
the state in which the property is located.<a href="#9" name="9a">9</a> This rule requires the
searcher to make two determinations: (1) the state in which the property is
located, and (2) the filing office within that state that is designated for
the filing of IRS notices of lien. The first of these determinations is
governed by federal law, the second by each state's law.

In many cases, determination of the location of the
property leads to a divergence from familiar procedures under Article 9.
Under federal law, for purposes of recording the IRS notice of lien, real
property is, not surprisingly, located at its physical location.<a href="#10" name="10a">10</a> However,
all personal property of the taxpayer (tangible or intangible, wherever it
may be physically located) is deemed to be located at the residence of the taxpayer at the
time the notice of lien is filed.<a href="#11" name="11a">11</a> The residence of a taxpayer that is a
corporation, limited liability company or partnership is deemed to be the
location of its principal executive office.<a href="#12" name="12a">12</a>

These rules for determining the state in which the
notice of lien will be filed differ significantly from the rules for filing
Revised Article 9 financing statements. Under Article 9, the proper state
for filing a financing statement if the debtor is a corporation, limited
liability company or other registered entity is the state of registration,
regardless of where the principal executive office is located and
regardless of where the collateral is located.<a href="#13" name="13a">13</a> It is certainly quite
common for a business entity debtor to be registered in one state while
maintaining its principal executive office in another. As a result,
searchers may find themselves searching in one state for a debtor's
Article 9 financing statements (the state of incorporation, organization or
registration) and in an entirely different state for the same
debtor's IRS liens (the state of the principal executive office).

For example, assume debtor ABC Inc. is a Delaware
corporation with its principal executive office in Adams County, Ind. After
July 1, 2006, the only filing office in which an Article 9 financing
statement naming ABC as debtor may be effectively on file is in the office
of the secretary of state of Delaware. However, a search of that office
will not find effective IRS notices of liens filed against ABC. Those IRS
notices will be filed in some office in Indiana as determined by Indiana
state law.

All states, including Indiana, have enacted some form
of statute designating the proper filing offices for IRS liens and other
federal liens.<a href="#14" name="14a">14</a> Although many states have adopted the Uniform Federal Lien
Registration Act, there are still substantial variances among states,
particularly in the filing of liens upon personal property collateral.<a href="#15" name="15a">15</a> Where
the collateral is real property, the state statutes appear to be quite
uniform in designating the same office for filing IRS liens as for
conveyances of real property and real property mortgages. However, states
may provide for the filing of IRS notices of liens on personal property in
the state's central filing offices, county recorder's offices,
county courts or other offices of county government. The statutes of each
state must be consulted to determine its particular rule.

In our example, the Indiana federal lien statute
provides that the IRS notice of lien on personal property shall be filed in
the office of the recorder of the county in which the personal property
subject to the lien is located.<a href="#16" name="16a">16</a> Because all personal property of the
taxpayer, regardless of its physical location, is deemed to be located in
Adams County, Ind.,<a href="#17" name="17a">17</a> the IRS notice of lien on ABC's personal
property must be filed in the office of the recorder of Adams County. Thus,
a potential lender to ABC must conduct at least two searches, one in the
office of the secretary of state of Delaware for Article 9 financing
statements and another in the office of the recorder of Adams County, Ind.,
for IRS notices of lien. Even if ABC were an Indiana corporation, two
searches would be required: one in the office of the secretary of state of
Indiana for Article 9 financing statements and the other in the office of
the recorder of Adams County.

The federal statute governing the state of location
of the taxpayer contains at least one other trap for the unwary. As noted
above, the location of all of a taxpayer's personal property is
deemed to be at the taxpayer's residence as
of the date of the filing of the notice of
lien.<a href="#18" name="18a">18</a> In contrast to Revised Article 9 and former Article 9,<a href="#19" name="19a">19</a> the proper
location for filing an IRS notice of lien is not immediately affected by a
change in the taxpayer's location after the notice of lien is filed.
Even if the taxpayer's principal executive office moves to another
jurisdiction, the notice of lien remains effective in the taxpayer's
old location. Moreover, the IRS has no obligation to file a notice of lien
in the new location of the taxpayer until the current notice of lien
expires 10 years after the initial assessment of tax liability.<a href="#20" name="20a">20</a> In fact,
the IRS may continue to refile notices of lien in the taxpayer's old
location every 10 years unless the taxpayer reports its new location to the
IRS under some very specific and detailed procedures.<a href="#21" name="21a">21</a> This aspect of
the federal statute creates a substantial burden of inquiry for a secured
party. In our example, assume ABC Inc. now has its principal executive
office in Adams County, Ind., but moved there from Whitley County, Ind.,
five years ago. A secured party must search in the recorder's offices
of both counties to determine whether currently effective IRS notices of
lien are on file. Indeed, a prudent secured party might inquire into prior
locations of the taxpayer beyond the 10-year horizon. Unless a notice to
the IRS of change of location can be produced, earlier notices of lien may
have been renewed any number of times in former taxpayer locations.

<blockquote><blockquote>
<hr>
<big><center>
The search for existing perfected liens on the collateral is an essential step in every secured transaction.
</center></big>
<hr>
</blockquote></blockquote>

In searching for IRS notices of lien, practitioners
must also take special care in specifying the search name—the name of
the taxpayer that the filing office is asked to find among its records.
There is some unresolved doubt regarding the standards that the IRS must
meet in correctly stating that name in a notice of lien. For a registered
entity, Article 9 requires that the name on a financing statement be
exactly the same as the name on the public record establishing the entity.
Some minor mistakes are permitted, but they must be so minor that a search
under the correct name will still find the financing statement with the
error under the filing office's search logic. This usually means that
an error in punctuation will pass, but a misspelling or the use of an
abbreviation will be fatal. At least one bankruptcy court has ruled that
the IRS is not subject to these rules in the filing of a notice of lien and
may abbreviate words that cause the notice of lien not to be found by a
search using the correct name.<a href="#22" name="22a">22</a> Although that decision was reversed by the
district court, the issue remains unresolved in most jurisdictions.<a href="#23" name="23a">23</a> Prudence
would dictate a more extensive search using variations of the correct name.

A similar problem in finding IRS notices of lien
arises from the IRS's procedures for listing a corporate
taxpayer's name on Form 668. According to some sources, the
procedure is to list the name of the taxpayer followed by the term "a
corporation."<a href="#24" name="24a">24</a> This addition will cause the notice of lien not
to be found by most computer searches using the exact taxpayer name.
Prudence would dictate that a search using the added phrase be conducted.

The search for existing perfected liens on the
collateral is an essential step in every secured transaction. Prudent
practitioners will ensure that they conduct a search to identify all
security interests and other liens wherever they may be recorded or filed.
Part of that complete comprehensive process is a search for IRS notices of
lien in every filing office in which such notices may be properly filed,
recognizing that some modifications in Article 9 search techniques may be
required.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> U.C.C. §9-705(c) (1999). <a href="#1a">Return to article</a>

<a name="2">2</a> U.C.C.
§9-705(c)(2) (1999). <a href="#2a">Return to article</a>

<a name="3">3</a> Hakes,
Russell A., "The ABCs of the UCC: (Revised) Article 9 Secured
Transactions," 72-78 (2000). <a href="#3a">Return to article</a>

<a name="4">4</a> Schuster,
Michael P., "Unknown Secured Claims: Hidden Liens," 22 Am.
Bankr. Inst. J., No. 6, July/August 2003. <a href="#4a">Return to article</a>

<a name="5">5</a> While this
article has focused on IRS liens, there are two other less common types of
federal liens that will be discovered by the same or similar search
techniques: (1) liens imposed under the Employee Retirement Income Security
Act (ERISA) pursuant to 29 U.S.C. §1368, and (2) liens imposed under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) pursuant to 42 U.S.C. §9607. <a href="#5a">Return to article</a>

<a name="6">6</a> 26 U.S.C.
§6321. <a href="#6a">Return to article</a>

<a name="7">7</a> 26 U.S.C.
§6323(a). <a href="#7a">Return to article</a>

<a name="8">8</a> 26 C.F.R.
§301.6323(f)-1(d). <a href="#8a">Return to article</a>

<a name="9">9</a> 26 U.S.C.
§6323(f)(1)(A). <a href="#9a">Return to article</a>

<a name="10">10</a> 26 U.S.C.
§6323(f)(2)(A). <a href="#10a">Return to article</a>

<a name="11">11</a> 26 U.S.C.
§6323(f)(2)(B). <a href="#11a">Return to article</a>

<a name="12">12</a> Id. <a href="#12a">Return to article</a>

<a name="13">13</a> U.C.C.
§9-307(e) and cmt. 2 (1999). <a href="#13a">Return to article</a>

<a name="14">14</a> See Indiana Code 36-2-11-25. <a href="#14a">Return to article</a>

<a name="15">15</a> Unif. Fed.
Lien Registration Act, 7A-I U.L.A. 328-362 (2002 and Supp. 2004). <a href="#15a">Return to article</a>

<a name="16">16</a> Indiana
Code §36-2-11-25(a). <a href="#16a">Return to article</a>

<a name="17">17</a> 26 U.S.C.
§6323(f)(2)(B). <a href="#17a">Return to article</a>

<a name="18">18</a> Id. <a href="#18a">Return to article</a>

<a name="19">19</a> U.C.C.
§9-316(a) (1999). <a href="#19a">Return to article</a>

<a name="20">20</a> The date
of assessment is not necessarily the date of the first notice of lien
filing. <a href="#20a">Return to article</a>

<a name="21">21</a> 26 C.F.R.
§301.6323(g)-1(b). <a href="#21a">Return to article</a>

<a name="22">22</a> In re Spearing Tool and Manufacturing Co. Inc., 292 B.R. 579 (Bankr. E.D. Mich. 2003). <a href="#22a">Return to article</a>

<a name="23">23</a> In re Spearing Tool and Manufacturing Co. Inc., 302 B.R. 351 (E.D. Mich. 2003). <a href="#23a">Return to article</a>

<a name="24">24</a> Mather & Weisman, 638-2nd T.M., Federal Tax Collection Procedure, A-38 (2003). <a href="#24a">Return to article</a>

Journal Authors

Dennis H. Long

Journal Date

Friday, October 1, 2004 - 12:00

Bankruptcy Rule

2004