The IRS is empowered by federal law to claim a lien against the property of a taxpayer who fails to timely pay its tax. The IRS tax lien arises upon assessment and notice to the taxpayer when the tax goes unpaid. However, in order for the federal tax lien to have priority over many other non-federal tax liens, the IRS must file a Notice of Federal Tax Lien with the relevant state government entity, which is often the county clerk and recorder in the case of a taxpayer’s real property.
In Shirehampton Drive Trust v. United States Department of Treasury, the 9th Circuit Court of Appeals addressed the question of whether a filed Notice of Federal Tax Lien had lien priority over an unfiled home owners associatiation lien, notice of which was filed in land records after the Notice of Federal Tax Lien was filed. The home owners association lien is a lien arising under state law due to nonpayment of homeowners association fees. Spoiler alert: the IRS tax lien won, having priority over the homeowners association lient.
The 9th Circuit set forth guiding principles for determining which lien had priority:
- “Federal law governs the relative priority of federal tax liens.”
- “The common law rule of ‘first in time is the first in right’ governs the relative priority of a federal tax lien vis-à-vis a lien created under state law.”
- “Under the first-in-time rule, choate state-created liens take priority over later-created federal taxliens; inchoate state-created liens do not.”
- “A state-created lien is inchoate for priority purposes until the lienholder takes some administrative step to establish the lien.”
A choate lien is one in which nothing further must be done in order to make the lien enforceable. The 9th Circuit ruled that the HOA did not take the administrative step to establish its lien by filing first with the county clerk and recorder. Therefore, the IRS Notice of Federal Tax Lien, which was filed first with the county clerk and recorder, had lien priority.
A lien creditor must carefully analyze the priority of liens to determine if the federal Notice of Federal Tax Lien has priority over liens arising under state law, such as a homeowners association lien, agisters lien or construction lien.
Taxpayers are encouraged to contact Jared Le Fevre to discuss the priority of tax and other liens.
Jared M. Le Fevre is a tax attorney and partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
 IRC § 6321.
 IRS § 6323.
 Shirehampton Drive Trust v. United States Department of the Treasury; No. 19-17254, 2020 WL 6306021 (9th Cir. Oct. 28, 2020)
 Id. at *1.
 Id. at *2.
 https://legal-dictionary.thefreedictionary.com/Choate (accessed October 30, 2020).