A choate lien means a lien where “the identity of the lienor, the property subject to the lien, and the amount of the lien” are firmly established. [fn2] In addition, for a lien to be choate requires the right to summarily enforce the lien,[fn3] with nothing further needed be done to make it enforceable [fn4].
In tax lien cases, the federal lien’s statutory existence generally means it doesn’t have to jump through as many hoops as other types of liens. The term “choate” typically arises when there is a dispute as to when one lien is competing with another for the right to be paid first. When the lien-holder claiming to compete with the IRS’s lien involves a money judgment, the claimant must have “perfected a lien under the judgment on the property involved.” [fn1]
The general rule is that “Federal law governs the relative priority of federal tax liens and state-created liens.”[fn5] A federal tax lien arises by operation of law at the time of assessment and, if the taxpayer fails to pay the liability after demand is made, the statutory federal lien becomes choate and attaches to “all property and rights to property” belonging to the taxpayer.[fn6] The basic rule of priority (i.e., “first in time, first in right”) applies when federal tax liens compete with a private claimant whose claim is based on a right created by state law.[fn7] In order to compete with the statutory federal tax liens, other lien claimants must show that their liens became choate and were perfected under state law before the federal tax liens arose.[fn8]
fn1. Tasemkin, Inc., v. United States, 196 F.3d 862, 865 (7th Cir. 1999), quoting 26 C.F.R. § 301.6323(h)1-(g).
fn2. United States v. City of New Britain, 347 U.S. 81, 74 S. Ct. 367 (1954).
fn3. See Minnesota Department of Revenue v. United States, 184 F.3d 725, 728 (8th Cir. 1999); United States v. Vermont, 377 U.S. 351, 359, 84 S. Ct. 1267, 12 L. Ed. 2d 370, 1964-2 C.B. 493 (1964).
fn4. United States v. Bond, 279 F.2d 837 (4th Cir. 1960).
fn5. See Quality Loan Serv. Corp. v. 24702 Pallas Way, 635 F.3d 1128, 1134 (9th Cir. 2011).
fn6. 26 U.S.C. §§ 6321-22; United States v. Vermont, 377 U.S. 351, 371-76 , 84 S. Ct. 1267, 1268-72 (1964).
fn7. 26 U.S.C. §§ 6321-6323; United States v. City of New Brittain, 347 U.S. 81, 85, 74 S.Ct. 367, 370 (1954).
fn8. United States v. McDermott, 507 U.S. 447, 453-55, 113 S. Ct. 1526, 1529-31 (1992).
The author of this blog post, Daniel W. Layton, is a former federal prosecutor and former IRS trial attorney.
Updated on 07/18/2021 by Daniel Layton.