The Good, the Bad, and the Ugly in Post-Drye Tax Lien Analysis

Abstract

The general federal tax lien attaches to "all property and rights to property, whether real or personal" which belong to the delinquent taxpayer. In most cases in which the IRS takes enforced collection action based on its lien, there is little doubt that the property the IRS is pursuing constitutes "property [or] rights to property." The easiest cases, of course, are those in which the tax delinquent is the fee simple owner of realty or personalty. The IRS typically goes after such assets first because the tax lien obviously attaches to them and they are relatively easy to convert into cash to pay the liability.
If such assets are unavailable or have been exhausted, the IRS may pursue items involving less than fee simple ownership. As it does so, the question may arise whether the items constitute property or property rights. The Supreme Court has repeatedly stressed that the language of section 6321 "is broad and reveals on its face that Congress meant to reach every interest in property a taxpayer might have.  Despite this expansive construction, controversies as to the reach of the general lien are perennial. Whether a given interest constitutes "property [or] rights to property" for section 6321 purposes has been litigated in hundreds of cases.
The most challenging of these controversies involve one or more of three situations. First, the taxpayer's interest may not yet have ripened (and may never ripen) into full possession or control of the underlying property. A continuum exists from mere hope, to expectancy, to contingent interest, to present possessory interest. Second, the taxpayer's interest may be shared with others. It may be undivided not individual, joint not single, or fractional. Third, restrictions may exist, under the instrument governing the property or under state law, on the taxpayer's ability to use or dispose of the property or on the ability of the taxpayer's creditors to reach the property or the taxpayer's interest in it. The more the taxpayer's interest diverges from fee simple ownership, because of one or more of these situations, the more likely is an argument that the tax lien does not attach to the interest because it is not "property [or] rights to property."