Bose McKinney & Evans appelate law blog

When does a federal tax lien attach to real property? The Court of Appeals stated that it is considered attached to the property at the time of assessment, not at the time the tax lien was recorded.

In Charles David Kelly v. National Attorneys Title Assurance Fund, No. 69A04-1104-CT-215, the Kelly Oil Company issued title to real property by way of warranty deed to Kelly on February 19, 2004, and later recorded that deed on February 24, 2004. The IRS made assessments of the Kelly Oil Company for unpaid taxes on November 11, 2002. The federal tax liens were recorded on September 17, 2004. Kelly subsequently conveyed that same real property to the Grays by way of warranty deed. The deed did not disclose the federal tax lien. Attached to the deed was an affidavit stating among other things that there were no liens, orders, and encumbrances on the property. Gray’s insurance company, National Title Assurance Fund, did not find the recorded federal tax lien during the title search. Thereafter, the United States initiated an action to foreclose on the property. The Grays paid the United States $11,667 in exchange for a release of the lien on their property. National Insurance, as a subrogree of the Grays, filed suit against Kelly for breach of warranty of title. The trial court granted National Insurance's motion for summary judgment.

Kelly’s only argument on appeal was that the notices of the federal tax lien were not timely recorded with respect to the conveyance of the property by Kelly Oil Company to himself. The basis of this argument was that the federal tax lien did not attach to the property until it was recorded on September of 2004. The United States Codes sections 6321 and 6322 state that if a person neglects or refuses to pay any tax, the amount shall be a lien against the property, and the lien imposed attaches at the time of assessment. The Court of Appeals explained that the moment the tax assessment was made on November 11, 2002, the federal tax lien attached and the property became encumbered. Thus, Kelly breached his warranty by conveying title that is not free and clear from all encumbrances. The Court of Appeals affirmed.