A federal tax lien attaches to all real and personal property of a taxpayer at the time an assessment is made by the Internal Revenue Service and continues until the liability is paid or becomes unenforceable by reason of a lapse of time (10 years). The lien is a statutory lien that is perfected as to the taxpayer at the time the tax is assessed. As to third parties, the lien is only perfected if properly filed in the appropriate filing office under state law. In South Carolina, a federal tax lien is perfected when filed with the Register of Deeds in the county where the taxpayer owns real (or personal) property.
Because a limited liability company is a legal entity separate and apart from its member(s), real property held by a limited liability company at the time an assessment is made is exempt from a federal tax lien. In the case of a single member limited liability company which is treated as a disregarded entity for federal and state tax purposes, questions arose as to whether property held by a single member limited liability company was subject to a federal tax lien placed on its sole member. In CCA 201116019, the Internal Revenue Service concluded that, because state law determines whether a taxpayer has property or rights to property to which a federal tax lien can be attached, a federal tax lien did not attach to, and the IRS could not levy on, property held by a single member LLC to satisfy the tax liability of its member. While the IRS cannot levy on the property held by the single member LLC, it would have a lien on the taxpayer’s membership and would be entitled to any distribution made by the LLC to the member. The IRS may also attempt to place a lien on the single member LLC’s property under a reverse veil piercing theory arguing that the LLC is the mere alter ego of the taxpayer. The IRS may be successful in this argument if the single member LLC was not operated as a separate legal entity with a separate bank account, separate letterhead, and separate balance sheet.
If the single member LLC is respected as a separate legal entity apart from its member, real property held by the LLC should be free of any tax lien placed on the member’s assets. While each property is different, a self-sustaining property held by a single member LLC for the life of a tax lien (10 years) could provide the member taxpayer with full protection from an IRS lien and could, after 10 years, be liquidated with the proceeds being distributed to the member free of the lien. Further, real estate held by the LLC can be sold free of the lien. It should be noted that once the property is sold, an IRS collection agent will want the proceeds of that sale paid to the member and then paid in satisfaction of all or a portion of the deficiency owed to the Internal Revenue Service. Even with that result, the ability of a single member LLC to negotiate and sell its property without interference from the IRS, and free of liens which must be released by the IRS upon sale, is a significant benefit to the member.
It should be noted that real property held by an LLC only escapes a tax lien if the property was placed in the LLC prior to the assessment of the tax.