In Email Chief Counsel Advice 202226010[1] IRS counsel gave its conclusion on whether a federal tax lien (FTL) could be attached to payments made by the purchaser of a business to the seller’s former spouse to cover an alimony obligation of the seller who now faced a collection action related to a federal tax liability. This payment structure was entered as part of the taxpayer’s divorce action and was in effect prior to when the federal tax lien arose.

IRC §6231 provides the following regarding a lien for federal taxes:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The email describes the question posed and the history of the arrangement as follows:

You have asked us about the priority of the federal tax lien (FTL), in a situation where the taxpayer was ordered to pay monthly alimony payments to his ex-wife as a part of the taxpayer’s divorce and such order was issued prior to the FTL arising. In short, following the taxpayer’s divorce, the taxpayer sold his interest in three businesses to a purchaser in exchange for multiple forms of compensation provided by the contract terms. One of the contract terms provides that the purchaser will cause one of the business entities to pay the taxpayer’s monthly alimony obligations to the taxpayer’s ex-wife.[2]

The email notes that the author was not made aware of whether any such payments are still being made and the assumption made for the answer given in this emailed advice:

Currently, we are not aware of the history of alimony payments since the execution of the contract. For purposes of this advice, we are assuming that the monthly payments have occurred and continue to occur as provided for by the contract.[3]

The email concludes that an FTL can attach to these payments:

The contract term that the purchaser will cause the business entity to pay the taxpayer’s monthly alimony obligation provides a contractual right to payment that is subject to attachment of an FTL. Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc., 512 F.2d 605 (2d Cir. 1975) (FTL attached to fund comprised of periodic payments owed to taxpayer under severance agreement); Mantovani v. Fast Fuel Corp., 494 F.Supp. 72, 77 (S.D.N.Y. 1980) (FTL attached to taxpayer’s contractual right to proceeds); Rev. Rul. 55-210 (“Where a taxpayer has an unqualified fixed right, under a trust or a contract, or through a chose in action, to receive periodic payments or distributions of property, a Federal lien for unpaid tax attaches to the taxpayer’s entire right . . .”).

Assuming the payments are occurring, they are part of the compensation given to the taxpayer in exchange for his business interests.[4]

The fact that the payments are being directed to the seller’s former spouse under the agreement does not serve to insulate this payment stream from being subject to a federal tax lien in the view of the author of the email:

That the payments are directed to the taxpayer's ex-wife and not the taxpayer himself should not prevent attachment of the FTL because the payments are compensation to the taxpayer and for the benefit of the taxpayer. However, if the alimony obligation has been paid in full, or if the purchaser and taxpayer have otherwise not abided by the arrangement provided for by the contract, there may be no payments accruing.[5]

[1] Email Chief Counsel Advice 202226010, July 1, 2022, https://www.taxnotes.com/research/federal/irs-private-rulings/e-mail-chief-counsel-advice/tax-lien-attaches-to-alimony-paid-by-business-purchaser/7dm5l (retrieved July 10, 2022)

[2] Email Chief Counsel Advice 202226010, July 1, 2022

[3] Email Chief Counsel Advice 202226010, July 1, 2022

[4] Email Chief Counsel Advice 202226010, July 1, 2022

[5] Email Chief Counsel Advice 202226010, July 1, 2022