Tax Lien Concerns

I am buying a boat and am concerned about the possibility of a tax lien being recorded with the Coast Guard after title transfers to me. My broker has asked for a copy of last year’s property tax bill and proof of payment, but the seller has not provided the paperwork and I suspect that he never paid the tax. I have also learned that the seller did not pay sales or use tax when he bought the boat, and he may not have complied with all of the rules that would allow for a tax-exempt purchase. I am very excited about this purchase so I don’t want to hold things up unnecessarily. What can I do to protect myself?

Most vessel purchase and sale contracts require the seller to pay all taxes and satisfy all liens prior to closing, and to indemnify the buyer against any claims against the boat that were overlooked. Therefore, if a claim surfaces after closing, you should immediately contact your yacht broker (or the seller) and discuss the problem. If the seller does not cooperate you may need to work directly with the government agency that asserted the claim, and pursue legal action against the seller for reimbursement of your costs.

The California Board of Equalization and your local County Tax Collector may seize and sell any property owned by a delinquent taxpayer. To facilitate this process, and to get the attention of the taxpayer prior to seizing a documented vessel, the tax agencies will frequently record a Notice of Claim of Lien with the Coast Guard. This is an unfortunate practice, because a tax lien relating to personal property is a personal obligation of the individual taxpayer, and a subsequent owner of a boat cannot be held responsible for payment.

Maritime lien law provides that the vessel and the owner are both responsible for payment of goods and services used to equip, maintain and operate the vessel. The vessel herself may therefore be held responsible for payment regardless of who owns the boat, and a valid lien will remain with that boat until the lien is satisfied.

A tax lien, however, is not related to the operation of a vessel. It is therefore not a maritime lien and the vessel herself is not responsible for payment of the obligation. The taxpayer will remain personally liable for the obligation after he or she sells the boat, and the tax agency must look to the taxpayer’s other property for payment.

The limitations of a tax claim against a boat or other personal property are reflected in California law. California Government Code section 7170(c)(4)(B) provides that a state tax lien is not valid as to personal property against a subsequent owner, even if a prior notice of the lien was filed.

A claim for unpaid taxes therefore should not be recorded against the boat’s Coast Guard title. However, as we discussed in a previous edition of this column (’A Lesson on Liens,’ August 24, 2006 issue), the Coast Guard will allow practically anything to be recorded against the title of a vessel, without investigation or proof that the instrument supports a valid claim.

As discussed above, the recording of a Notice of Claim of Lien with the Coast Guard has no bearing on whether a creditor has a valid claim against the vessel, and a tax claim is not a valid maritime lien. Tax agencies, however, routinely use the Coast Guard lien recording system to record tax claims. This is of course a problem for a subsequent owner, since any claim that is recorded with the Coast Guard will complicate any vessel financing or a future sale. The tax agencies are unlikely to change their procedures anytime soon, so when a tax claim against a former owner is recorded, the new owner has little choice but to work with his or her attorney and the tax agency to remove the claim.