Revenue Administrative Bulletin 1989-50

Approved: May 31, 1989

INCHOATE TAX LIENS

RAB-89-50. The purpose of this Bulletin is to explain the status of a tax lien between the time it attaches and the time it is properly recorded.

Taxes administered under [The Revenue Act, MCL 205.1- 205.31], together with the interest and penalties on those taxes, shall be a lien in favor of the state against all property and rights of property, both real and personal, tangible and intangible, owned at the time the lien attaches, or afterwards acquired by any person liable for the tax, to secure the payment of the tax. The lien shall attach to the property from and after the date that any report or return on which the tax is levied is required to be filed with the department . . . . [MCL 205.29(l)]

At the time the tax lien attaches, it is an inchoate lien. It is fully effective and enforceable against the person liable for the tax, and against all who have actual knowledge of the tax lien. However, until the tax lien is properly recorded, it is subordinate to many other claims. See generally United States v State of Michigan, 346 F Supp 1277 (ED Mich, 1972), (Michigan property tax application of the United State Supreme Court's rationale in United States v State of Alabama, 313 US 274 (1941)).

At the moment a tax lien is properly recorded, it becomes a perfected lien. Once perfected, the tax lien

take[s] precedence over all other liens and encumbrances, except bona fide liens recorded before the [tax lien] is recorded. However, bona fide liens recorded before the [tax lien] is recorded shall take precedence only to the extent of disbursements made under a financial arrangement before the forty-sixth day after the date of the tax lien recording, or before the person making the disbursements had actual notice of [the recordation of the tax lien] whichever is earlier. [MCL 205.29(2)(emphasis added)]

In other words, a lien recorded prior to recordation of the tax lien has precedence over the tax lien. However, if the prior lien secures future advances (such as disbursements made after the recordation of the tax lien), then the prior lien does not have precedence insofar as it secures disbursements made after the 45th day following recordation of the tax lien. In addition, the prior recorded lien does not take precedence over any advances (such as disbursements made by a secured party) made after that party has actual notice of the recordation of the tax lien.

A properly recorded tax lien affects the rights of those who, after the tax lien is recorded, acquire property from, or through, a delinquent taxpayer. Specifically, a purchaser or succeeding purchaser of property acquired from a delinquent taxpayer after the lien is recorded is personally liable for the unpaid taxes due on the lien. However, a purchaser's liability is limited to the value of the property less any proceeds which are due holders of security interests that were acquired in the property before the tax lien was recorded. [MCL 205.29(3)]

Example 1:

On December 1, 1987, an assessment is made against A with respect to his delinquent tax liability. On January 2, 1988, A enters into a written agreement with B, whereby B agrees to lend A $10,000 in return for a security interest in certain property owned by A. On January 5, 1988 B records the document(s) evidencing his security interest in the appropriate public office.

On January 11, 1988 the Department of Treasury files its notice of state tax lien affecting the subject lands. On February 1, 1988, B without actual notice or knowledge of tax lien filing, disburses the loan to A. Because the disbursement was made before the 46th day after the tax lien was filed, and because the disbursement was made pursuant to a written agreement and before the state's notice of tax lien was filed, B's $10,000 security interest has priority over the tax lien.

Example 2:

Assume the same facts as in example (1), except that when B disburses the $10,000 to A on February 1, 1988, B has actual knowledge of the tax lien filing. Because B's disbursement was made with actual knowledge of tax lien filing, B's security interest does not have priority over the tax lien, even though the disbursement was made before the 46th day after the tax lien filing.