Types of Tax Liens
Some taxpayers try to game the system by transferring property to another person in order to avoid having a lien placed. As you will read, this rarely is successful and can backfire badly.
If a person’s name is on a property title, but they are not the actual owner, then they are a nominee. A nominee lien is recorded against property when it is determined that the nominee is holding the lien for the benefit of the taxpayer.
There are three situations when either real or personal property not in the name of the taxpayer are subject to levy, lien, or some other enforcement procedure. These situations are:
- Liability of the community property for debts of either spouse
- Property that was subjected to a lien when owned by the taxpayer
- Property that the taxpayer has fraudulently conveyed
The lien compels the taxpayer to take action to remove the resulting cloud on the title of its property rather than the CDTFA having to initiate action to set aside a fraudulent conveyance. A cause of action with respect to a fraudulent transfer is subject to the provisions of Civil Code section 3439.09.
Buying or Selling a Business Subject to a Tax Lien
Even though a business may be facing a tax lien, the opportunity to buy or sell your business may still appear as an attractive opportunity. However, a lien adds some considerations for buyers and sellers.
Both Federal and California tax liens remain on the business and are assumed by the buyer in a sale (CDFTA Collections Manual 732.100). It is important to understand that even if you did not create the lien, the lien is attached to the business assets, and the authorities can ultimately collect from those assets if the lien is not satisfied.
Even if the seller does not tell the buyer about a tax lien, the seller is still liable. There are some exceptions for fraud or negligence of the previous owner. Under RTC §6814, successors (buyers) may seek relief from prior tax liens if they were “beyond the successors control” and were not readily discoverable. However, obtaining a tax clearance involves a lot of time and can delay a transaction
An important first step as a purchaser is looking for any potential tax lien through an online record search. This will help you structure your deal to cover for the liability. Sellers and buyers may be able to negotiate the sale price to accommodate paying off a lien as part of the transaction.
The State will send the buyer a Successor’s Liability notice to inform of any liens. The statute of limitations of the liens run three years after the CDTFA has been aware of the purchase of the business (CDTFA 732.120).
Escrow and Audits
If the purchaser allows funds in escrow to be distributed without first securing a tax clearance from the CDTFA, the successor cannot be relieved of liability. CDTFA still needs to receive payment to cover the lien.
California tax authorities are authorized to conduct audits to determine tax liabilities.
When businesses are being sold with outstanding tax liens, California may elect to do an audit of the business and request that the entire amount being withheld in escrow be turned over to the state pending the outcome of that audit.
The CDTFA will issue warrants to confiscate property in accordance with a legal judgment to enforce liens and to collect amounts due.
Warrants are often issued upon property in which a third party has an interest, and the third party will often file claims objecting to the seizure.
The levying officer must release the property to the third-party claimant within five days after the claim is filed unless the amount of the claim is posted with the levying officer or the levying officer has been notified of the CDTFA’s opposition to it (CPPM 753.210).
The CDTFA may also decide to pay off the third-party claim and still seize the original property if it is in its best interest and the claim is relatively nominal.
A third-party claimant may file a claim with the CDTFA office that issued the levy. That CDTFA is responsible for advising the third-party claimant of all requirements of a valid claim. Third-party claim must be signed under penalty of perjury and contain all of the following:
- Name and mailing address of the third-party
- Description of the property in which an interest is claimed
- Description of the ownership interest claimed, including a statement of the facts upon which the claim is based
- An estimate of the market value of the interest claimed
If the third-party claim cannot be resolved by the specific bureau of the CFTFA, it will be sent to the Litigation Bureau of the CDTFA for further consideration.
Notices to Third Parties Holding Taxpayer Property
RTC § 6703 and equivalent special taxes and fees statutes authorize the CDTFA to serve a Notice of Levy on a third-party holding property belonging to a taxpayer.
Funds held in a joint bank account are presumed to be community property, and funds in some bank accounts in the name of the taxpayer’s spouse may be subject to levy as community property.
To reach community property interests, collectors must attach a spousal affidavit, and the state must investigate if the funds there are truly community property.
Community property as opposed to separate property owned by just one spouse, is liable for debts of either spouse. You should consult an attorney if you have any questions as to the status of your marital assets.
Federal Third-Party Liens
Federal authorities can also place a lien upon a property. Any CDTFA lien is treated with equal priority. The state can seek payment of their lien only if the holder of the money is unaware of a federal lien that is to be paid out.
Generally, a fraudulent conveyance is a transfer of a property interest that is made for the purpose of preventing creditors from obtaining assets in satisfaction of a claim. The elements the state looks for in a fraudulent transaction are intent, insolvency, lack of fair consideration (i.e., unreasonable exchange in value), and larger bulk transfers. If the state suspects a fraudulent transaction, they must document their reasons why, and the taxpayer will receive notice of such.
So Much More To Tax
The 20th-century economy model of taxing goods being sold is still practiced in California. In some counties, the sales and use tax rates are as high as 10.25 percent. Still, the state does not tax basic needs such as groceries, rent, utilities and prescription drugs or for that matter, most services.
How long will it be before the CDTFA catches up to the 21st century? That’s hard to say.
The sale of data products such as software, digital books, music and mobile applications remain tax free, as do services such as haircuts and doctor’s appointments.
For the time being, the CDTFA will continue to aggressively collect billions of dollars in sales and use taxes from businesses selling their products within its borders every year.
If you are a business owner either within California or out of state and have run afoul of the CDTFA, give Brotman Law a call. We’ll set the record straight and help you to keep your doors open and the lights on.