Former spouse's interest in retirement plans trumps tax lien

Law Reporter, Dec 2003

FAMILY LAW

United States v. Taylor, ____ F.3d ____, No. 01-2874/3872, 2003 WL 21755928 (8th Cir. July 31, 2003).

The Eighth Circuit Court of Appeals held that a woman's interest in her former husband's retirement plans trumps an Internal Revenue Service (IRS) lien.

Here, Taylor participated in three employee retirement plans. After retiring, he filed for divorce from his wife. One month later, a tax court found that Taylor had not paid taxes from 1981 through 1985. In July 1995, the divorce court approved a marital settlement agreement giving Taylor's ex-wife a 90 percent interest in the retirement plans and also entered a qualified domestic relations order (QDRO) directing the plan administrators to distribute the ex-wife's interest directly to her.

Taylor's former employer later informed Taylor and his exwife that the July 1995 agreement did not qualify as a QDRO because of several deficiencies, and in December 1995, the IRS filed a lien against the plans. After Taylor and his ex-wife corrected the deficiencies in the agreement, Taylor's former employer declared the agreement a QDRO in January 1997. A U.S. district court subsequeiitiy ruled in favor of the IRS, finding that Taylor's ex-wife was not a judgment lien creditor because there was no evidence she had perfected her lien by executing the judgment, as required under state law.

Reversing, the Eighth Circuit noted that an IRS lien attaches automatically on the date a penalty is assessed and is enforceable on that date against most creditors, with one exception being a judgment lien creditor. If a judgment lien creditor exists, the IRS must provide adequate notice to establish the priority of its lien. The priority of a lien established under state law depends on when the lien attaches and is perfected, which is established by federal law. Liens are perfected under federal law, the court explained, when the identity of the lienholder, the property subject to the lien, and the amount of the lien are established.

Applying this reasoning here, the court said that Taylor's ex-wife obtained a valid judgment from a divorce court for a 90 percent interest in the plan proceeds. This created an exclusive property interest in the plan for her. Therefore, on the date the court granted the agreement, the exwife's identity was known, the subject property was identified, and the amount of the interest in the plan was fixed.

The court further noted that the ex-wife was not required to comply with any state law requirements to establish lien priority. The Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461, provides a procedure for enforcing QDROs, and this procedure supersedes any conflicting state law. ERISA provides for alienation of pension plan benefits under a QDRO and gives plan administrators or courts 18 months to determine whether a DRO qualifies as a QDRO. Here, the former employer determined within 18 months that the DRO was a QDRO. Because the ex-wife satisfied ERISA's requirements, requiring her to satisfy state law perfection requirements would conflict with ERISA's policy of ensuring plan sponsors are subject to a consistent body of law.

Accordingly, the court remanded.

Ex-wife's Counsel

Peter D. Gray, Minneapolis, Minn.