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RECOMMENDED READING: Tell the Tax Man How It Will Be – A Primer on Federal Tax Liens

In his article,“Secured Lender Primes Earlier Federal Tax Lien in Fourth Circuit Split Decision,” Michael L. Cook of Schulte Roth & Zabel presents a learned and immediately useful nutshell account of how federal tax liens work — in itself a major service to non-specialist legal and financial professionals.  Having provided that understanding, Cook shows how a federal appeals court got it right in holding that a lender with an unrecorded lien prevailed over the IRS’s prior unrecorded lien.  The lender’s later unrecorded lien defeated the Tax Man’s earlier unrecorded lien because: (1) the Internal Revenue Code provides that a tax lien (before the IRS files notice of it) is not valid against holders of a “security interest,” which is defined by the Internal Revenue Code with reference to certain “local law” interests; and (2) Maryland law’s principle of “equitable conversion” supplies the lender with a superior sort of local law interest in this case.

Dry?  Not to a secured creditor in a lien fight with the Tax Man or with the PBGC Man or even the Federal Coal Act Man which, as Cook explains (less facetiously), obtain liens to be treated in bankruptcy cases like tax liens.  An interesting tidbit: Cook explains that the IRS often holds off on filing notice of its lien until it determines that a debtor will not be able to provide a meaningful recovery to the IRS.  The IRS calculates that filing notice of its lien in many cases will hasten the destruction of the debtor’s business.  The prudential forbearance by the IRS can bite the Tax Man under Maryland law, anyway.

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The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.

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