A recent federal tax lien case, Terrina Gallegos v. Rocky Mountain Chiropractic Corp. et al., No. 1:12-cv-03106, provides another example of why doctors sometimes do not care for lawyers. The application of lien priorities in this instance seems to favor the JD over the MD. The taxpayer, Terrina Gallegos, failed to pay taxes in 2007 of about $16,000 and the IRS filed a notice of federal tax lien on February 3, 2009. Ms. Gallegos was injured in a car accident caused by another driver on June 22, 2009. She incurred medical and legal expenses in connection with the car accident. This is the story of how those expenses faired against the federal tax lien.
Congress created the current legislative scheme for the federal tax lien in 1966. Since that time almost no structural changes to the federal tax lien provisions have come into existence. Perhaps the major innovation is the ability to withdraw the federal tax lien added to IRC 6323. For purposes of this discussion the case may have well arisen in 1967 as 2014. Because the notice of federal tax lien existed at the time of the accident, the focus on the lien provisions is on the superpriority provisions in IRC 6323(b) and not on the quickest to file provisions of IRC 6323(a). Ten superpriorities exist. The idea behind the superpriority provisions is that some interests need protection from the federal tax lien even when the federal tax lien comes into existence and is perfected by filing before the competing property interest comes into existence.
Many of the superpriorities are rooted in common sense designed to insure the flow of commerce without undo fear of interference from the federal tax lien. The superpriority provisions, inter alia, allow you to buy goods from a retail establishment, to trade stocks and bonds, to buy goods at a yard sale without worrying about whether the other party has had a federal tax lien filed against it. One of the superpriority provisions protects attorney’s fees where the attorney’s work creates the fund to which the federal tax lien attaches. The idea behind this superpriority provision centers on the fact that without the efforts of the attorney no fund would exist and if the attorney stood behind the federal tax lien the attorney would not do the work necessary to create the fund. So, IRC 6323(b)(8) creates a superpriority for attorney’s fees allowing the attorney to take first out of the created fund with the federal tax lien attaching thereafter. An exception to this rule, not applicable here, exists if the attorney creates the fund by suing the federal government. In that circumstance no superpriority exists – this exception may exist to reduce the number of suits against the federal government or perhaps in recognition of the fact that the federal government would be a net loser without such a provision.
While attorney’s fees receive the benefit of one of the 10 superpriority provisions, doctor’s fees do not. Therein lays the rub in Ms. Gallegos’ case. When she was injured, she acquired a cause of action against the individual driving the car that caused her injury. She needed medical attention to make her physically whole and legal attention to make her financially whole. The hospital where she was treated obtained an assignment of insurance benefits thinking that this assignment would make it whole. As it turns out, it did not.
The insurance recovery due to Ms. Gallegos constituted property or rights to property. The federal tax lien attaches to all of a taxpayer’s property or rights to property including an insurance recovery. When the hospital sought to enforce its assignment, it ran headlong into the federal tax lien and lost. Meanwhile, the IRS conceded that her attorney was entitled to take from the proceeds before the IRS took the balance.
The result here clearly follows from the statute and the absence of a provision benefiting medical professionals in this situation. The decision concerning the competing interests of the parties belongs to Congress. The court got this case right. I am not sure that Congress has. These proceeds were designed to make Ms. Gallegos physically whole. Having them go to satisfy her prior tax liability while cutting off the medical professionals who helped make her physically whole seems like the wrong result.