Transferring Property Subject to a Federal Tax Lien

What happens if I sell property and have an IRS tax lien?  Can I transfer property if the IRS has filed a tax lien against me?  These are common questions that individuals or businesses who have had a tax lien filed against them may ask a tax attorney.  John McGuire is a tax attorney in Denver, Colorado at The McGuire Law Firm and has drafted the article below to provide some information regarding the above topics.  Please remember that all information on The McGuire Law Firm website is for informational purposes and should not be relied upon, and does not create an attorney client relationship.  Furthermore, when cases are referenced in an article, it is important to know that case law may change, and again, should not be relied upon as current law.

When the IRS files a tax lien against a taxpayer this tax lien will attach to the property of the taxpayer and remain attached to the taxpayer’s property until the lien is either released, expires or the property is discharged from the tax lien.  It is possible to have property discharged from a tax lien whereby the lien remains, but the IRS no longer considers the lien to attach to the property.  This occurs through the acceptance by the Internal Revenue Service of a request for certificate of discharge of a federal tax lien, and will be discussed in other articles.  Once, the lien has attached to property, the transfer of such property that is subject to the federal tax lien does not impact the IRS’ tax lien.  See U.S. v. Bess, 357 U.S. 51, 57 (1958).  If the taxpayer sells property with a tax lien attached, the lien will attach to whatever the taxpayer receives through the transfer.  For example, if a taxpayer owns a corvette and a tax lien has been filed, and thereafter the taxpayer exchanges the corvette for an RV, the lien would attach to the RV.  Thus, the lien will attach to whatever the initial property is substituted or exchanged for because the tax lien can attach to all of the taxpayer’s property and rights to property.  See Phelps v. U.S. 421 U.S. 330, 334-35 (1971)  whereby a tax lien can even attach to cash received through a sale of property.  Of course, it would likely be pretty hard for the Internal Revenue Service to enforce a federal tax lien on cash.

If property that is encumbered by a federal tax lien is transferred to a third party and thereafter the third party exchanges or transfers such property for other property (substitute property) in a manner that the lien would not attach to the initial property (or property transferred) the lien will now attach to the substituted property.  See, Municipal Trust and Savings Bank v. U.S., F.3d 99 (7th Cir. 1997).

The transfer of property subject to a federal tax lien can create many issues including substituted property that the IRS then has a lien on as well.  Speak with a Denver tax attorney at The McGuire Law Firm if you have questions relating to a tax lien.