The Invisible Lien

During the Super Bowl I saw a trailer for the upcoming horror movie, The Invisible Man. I’m not sure how that will be, but it made me want tell you a scary real estate story. In a horror movie, the thought of what we cannot see, what may be lurking out there is what is so terrifying. The real estate equivalent of this scariness is what I would call the “invisible lien.” It is the dreaded South Carolina tax lien imposed under Section 12-54-124 lien of the South Carolina Code of Laws. Now, it is rare, and it may never affect your client. Regardless, we do not want to take chances and fall prey to the invisible lien.

The statute reads as follows: “in the case of the transfer of a majority of the assets of a business, other than cash, whether through a sale, gift, devise, inheritance, liquidation, distribution, merger, consolidation, corporate reorganization, lease or otherwise, any tax generated by the business which was due on or before the date of any part of the transfer constitutes a lien against the assets in the hands of a purchaser, or any other transferee, until the taxes are paid. Whether a majority of the assets have been transferred is determined by the fair market value of the assets transferred, and not by the number of assets transferred. The department may not issue a license to continue the business to the transferee until all taxes due the State have been settled and paid and may revoke a license issued to the business in violation of this section.” Just as clear as the beginning of an M. Night Shyamalan movie, right?

In a nutshell, if an entity (corporation, LLC, etc.) has not paid its taxes and then sells real estate, those unpaid taxes are a lien against the real estate. The buyer could end up paying the seller’s taxes. The lien is therefore “invisible” because there is no lien book for the South Carolina Department of Revenue that we can access to find the lien. It just arises when a business entity that has not filed/paid taxes sells more than a majority of its’ assets.

So… now we know the little monster is out there, what do we do about it? Rest assured, if there is a business entity involved in the transaction (local builders, investors), we will be checking to make sure that the lien will not affect us. First, we will ask the seller if the property being sold consists of “business assets” (usually the answer is “yes”). Second, we will ask the seller if the property being sold comprises less than a majority of the assets of the business. If the answer is “yes” then we can move toward closing. If the answer is “no,” then we have a little more work to do. That work means obtaining a Certificate of Tax Compliance from the South Carolina Department of Revenue. This certificate shows if the taxpayer has paid its’ taxes. Be aware, however, that the Department of Revenue estimates the turn- around time for a tax compliance certificate of up to two weeks.

Okay, we know that the lien is there and what can happen. What can you do to help avoid a delay or, worse yet, a buyer that has to foot the seller’s tax bill? Talk to your clients who use LLC’s and corporations to hold real estate about complying with the tax laws. Let them know that we will have to check to see if they are selling a majority of the LLC or corporate assets. Hopefully this friendly advice will serve your clients and keep the tax ghoul at bay.

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