Tax Lien Filed in County Where Taxpayer Didn't Live Was Not Effective

(Parker Tax Publishing July 2022)

In a case of first impression, a bankruptcy court held that a Notice of Federal Tax Lien (NFTL) which the IRS recorded for a taxpayer's federal tax debts against her personal property in a county in which the taxpayer did not live at the time the lien was filed did not attach to her personal property and therefore, the IRS's claim against the bankruptcy estate was not a secured claim. The court found that under Code Sec. 63323(f), an NFTL must be filed in the county of the taxpayer's "residence," i.e., the address where the taxpayer physically lives. In re Stephenson, 2022 PTC 181 (Bankr. W.D. Tenn. 2022).

Background

Vanessa Stephenson filed a petition for relief under chapter 13 of the Bankruptcy Code in August 2021. The IRS filed a proof of claim for unpaid taxes, penalties, and interest owed for tax debts for 2014, 2015, and 2020. The IRS asserted that Stephenson's 2015 tax debt was a secured claim because it was secured by a Notice of Federal Tax Lien (NFTL) which the IRS filed in Benton County, Tennessee, on August 21, 2018.

Stephenson asserted that the IRS's claim was unsecured because the NFTL failed to attach to any real or personal property identified in her bankruptcy petition. According to Stephenson, she frequently moved around from 2016-2018 and used 102 Kathy Avenue, Camden, Benton County, Tennessee - her mother's home address - for employment purposes and on her 2017 tax return. In 2016, Stephenson lived and worked in Longmont, Colorado and used her mother's address on her W-2. She continued to use her mother's address on her W-2s during 2017 and 2018 as she moved from one state to another. Those frequent moves included living in Huntington, Tennessee in 2017 and borrowing an RV with her husband in December of 2017 and traveling and living in Fort Mills, South Carolina, then Keeling, Virginia, and finally Semora, North Carolina until June 2018, when she accepted a teaching position in Germantown, Tennessee. Upon accepting the teaching position, she moved to Tennessee and began renting a home located in Shelby County, Tennessee.

Stephenson jointly filed her tax return with her husband using the 102 Kathy Avenue, Camden, Benton County, Tennessee address. In April 2017, without Stephenson's knowledge, her mother executed a quitclaim deed conveying her interest in the home located at 102 Kathy Avenue to Stephenson and her brother, which was subject to a life estate that Stephenson's mother expressly retained in the property. Purportedly wanting nothing to do with the real property, Stephenson testified that she later quitclaimed her remaining interest in the real property to her brother in 2019.

Stephenson maintained that she never lived at 102 Kathy Avenue, never spent money on the home, nor did she pay real estate taxes or insurance. She also testified that while she has visited her mother and stayed there, the longest she ever stayed at 102 Kathy Avenue was a week. Stephenson said that she began living in Shelby County, Tennessee in June 2018 and still lives in Shelby County today. The IRS never file a tax lien in Shelby County, Tennessee.

Under Code Sec. 6321, if a person liable to pay any tax neglects or refuses to pay after the government demands payment, a federal tax lien arises in favor of the United States on all property and rights to property belonging to such person. Code Sec. 6323(f) provides that the notice of a lien must be filed in the county where the individual's property is situated. For this purpose, Code Sec. 6323(f)(2)(B) specifies that personal property is deemed situated at the "residence" of the taxpayer at the time the notice of lien is filed.

In Corwin Consultants, Inc. v. Interpublic Group of Cos., Inc., 512 F.2d 605 (2d Cir. 1975), the Second Circuit held that the residence of a delinquent taxpayer is a question of fact to be determined by various criteria, including the taxpayer's physical presence as an inhabitant and not a mere transient, the permanence of that presence, the reason for his or her presence, and the existence of other residences. According to the Second Circuit, a taxpayer generally is considered to live where he or she dwells for a significant amount of time and where creditors would be most likely to look for him or her. In Corwin Consultants, the court observed that when a taxpayer has no ascertainable residence it may be impossible for the government to properly file an NFTL, and the court expressed its hope that Congress would amend the statute to eliminate that possibility in the future.

Analysis

In a case of first impression, the bankruptcy court held that for purposes of Code Sec. 6323(f), Stephenson's residence was located in Shelby County, Tennessee, on August 21, 2018. Because Stephenson did not live in Benton County, where the NFTL was filed, on August 21, 2018, the court concluded that the NFTL was not effective.

The court recognized that Stephenson held out the 102 Kathy Avenue, Camden, Tennessee, address as her address on her W-2s and tax returns for purposes of receiving mail. However, the court found that she never physically lived there. Further, there was no evidence, in the court's view, that Stephenson even stayed in Benton County, Tennessee, for any extended period of time. Even without recording an NFTL, the court explained, a federal tax lien is created in favor of the government upon the assessment against the taxpayer. However, the court concluded that under federal and Tennessee law, a lien does not attach to personal property and gain secured status until it is properly filed in the office of the register of deeds of the county where the taxpayer lives. Benton County was not the proper place for filing, so the IRS's claim for tax year 2015 was not secured and was instead a general unsecured claim.

Observation: The court noted that the Second Circuit in Corwin Consultants warned of the situation in this case - a situation where there was no ascertainable address for the government to properly file the NFTL against a taxpayer's personal property. However, the court said this was an issue for Congress to address.

For a discussion of the discharge of tax debts in a bankruptcy, see Parker Tax ¶16,160. For a discussion of tax liens, see Parker Tax ¶260,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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