Expert answer:Accounting Article brief 1
Answer & Explanation:These briefs should be exactly that, no more than 3 pages in length. The student must also post a link or a copy of the article when posting the brief. The briefs are to be posted in the appropriate Discussion by the due dates shown in the Course Schedule below. A portion of the grading on each brief will be based on writing (eg, grammar, spelling) and readability.Here is what you’ll write on. Federal Tax Implications.pdf
federal_tax_leins.pdf
federal_tax_implications.pdf
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Unrecorded Conveyances
and Federal Tax Liens*
By William D. Elliott
William D. Elliott examines recent guidance
effecting unrecorded real property deeds
arising in divorce cases on a later-arising
federal tax lien.
T
he IRS has changed its policy concerning the effect of unrecorded
real property deeds arising in divorce cases on a later-arising federal
tax lien. The IRS chose to make the policy change in an announcement, instead of a formal revenue ruling or regulation. The announcement
in pertinent part provides:
The new
position
federal tax li
lien do
doess not aattach
property
new pos
ition is that a fed
ttach to pro
operty once
nce
a conveyance
divests a taxpayer
property,
regardless
conv an divest
paye of their iinterest
te st in tthat
at propert
y, regar
le
of what
what state law provides
p ov es regarding
reg ng the rights
ights of creditors
c ditors in unrecorded
nreco de
conveyance situations.1
WILLIAM D. ELLIOTT practices tax law
in Dallas, Texas, with particular experience in tax procedure and controversy
and the IRS conflict resolution and is
author of the leading treatise, FEDERAL
TAX COLLECTION, LIENS & LEVIES.
OCTOBER–NOVEMBER 2014
The IRS announcement raises more questions than it answers. Further, the
general area of law covered by the announcement is somewhat complicated.
Code Sec. 6323(a) is misleading in that the provision is usually thought to
refer to priorities among competing liens, including the federal tax lien, but,
in fact, also governs the relative priority of purchasers of property vis-à-vis
federal tax liens. A number of decided cases among the federal circuits apparently conflict. State law plays an important role in defining property rights
and in particular, Code Sec. 6323(h)(6) defines a purchaser by reference to a
hypothetical bona fide purchaser without notice. The relevance of state recording statutes is directly important to the priority test of Code Sec. 6323(h)(6),
which federal courts generally respect, but the IRS announcement expressly
disregards this important state law.
©2014 CCH INCORPORATED. ALL RIGHTS RESERVED.
37
UNRECORDED CONVEYANCES AND FEDERAL TAX LIENS
Underlying Facts
The new policy is accompanied by an illustrative example:
Example. A husband and wife divorced in 2005. In the
divorce case the court awarded the residence to the wife,
with the condition that if the wife sells the residence
within three years of their divorce, the husband has the
right to 50 percent of the sale proceeds. The husband’s
contingent property right expired December 2008.
The husband failed to pay his 2005 federal tax liability
The list of issues could continue
ad infinitum, but the conclusion of
this writer is that although the IRS
announcement might be attractive
from a certain fairness point
of view, it is ill-considered and
creates many problems.
arising
his Form 1040 and the IRS filed a Notice
singg from
m hi
Federal
Lien against the husband in September
off Fed
F
d l Tax
deral
T L
Li
p
2008.
property
contained in thee d
divorce
20
008. Th
008
Thee prope
p
erty conveyance
veyance contain
vo
decree
recorded in the count
countyy deed rrecords.
de
ecreee was not rec
cords.
example
announcement,
IRS
In
n this exam
mple ccited
ed
d iin the policy an
uncem nt the
he IR
RS
concluded
d d that
h the husband did not own any property rights
in the residence after December
the
ber 22008
008 when
w
t contingent
contractual interest expired. Thus,
Thus, tthe
federal
he fe
deral ttax lien did not
attach to the residence. The IRS concluded that there was no
property to which the federal tax lien against the husband
could (have) attached after December 2008.2
Influencing the IRS policy announcement was the case
of Carol A. Felicetti.3 The facts in Felicetti resembled the
facts in the above example.4 The wife did not record the
conveyance of the house to herself until October 2010.
The case arose as a result of the wife bringing a quiet title
action in U.S. District Court to defeat the tax lien on
her residence; she asked the court to rule that the tax lien
against the husband did not attach to her residence.
The District Court held for the wife and held that the
husband had no interest in the residence when the IRS
filed the notice of federal tax lien. The court found that
under Idaho law, the divorce decree transferred title to the
residence to the wife, despite the failure to record the conveyance. Under the Idaho Recording Act,5 the unrecorded
38
JOURNAL OF TAX PRACTICE & PROCEDURE
transfer is conclusive as to the husband, but if the conveyance is not recorded, a creditor can defeat the transfer if
the creditor acquires a lien, in good faith, and for valuable
consideration, by an instrument that is duly recorded. Thus,
a later-filed lien (filed after the divorce transfer) can defeat
the unrecorded divorce conveyance to the wife. Because the
unrecorded transfer is conclusive to transferor-husband,
however, this means that the IRS has a lien on whatever
rights owned by the husband, and since the husband had
no rights, the IRS’s lien does not attach to the residence
despite the fact that the conveyance is unrecorded.6
Ironically, the case turned on state law, the state recording act, and yet the IRS announcement disregards the
effect of state law. As discussed below, this IRS statement
presents numerous issues.
Reaction to New Policy
The new IRS policy has a superficial appeal and appears
to favor the innocent spouse, so to speak, who receives
real property in a divorce, but could suffer otherwise on
account of the unrecorded real estate deed. The IRS position would now seem to be that the transferee-spouse of
property in a divorce no longer need worry about whether
the divorce lawyers take the extra, but formerly essential,
step of filing the divorce decree in the real estate deed
records. The IRS is saying
with a stroke of a pen that as
y
far the IRS is concern
concerned,
ed state laws are no longer relevant.
a
Byy unilateral
uni
al action,
ac n, the
h IRS
R has decided
decided to what
w
federal
fe
al tax
ta lien
en attaches,
atta he despite
d pi judicial and statutory
sta u
precedent
sincee 11913.
administrap
cedent existing
ting sinc
13 The IRS,
RS by thiss adm
ni
tive announcement, and not through a more substantively
considered regulation or revenue ruling, has opened a
veritable Pandora ’s Box of issues.
Recent decided cases are divided, or perhaps not. The
Fifth Circuit has respected the state (Texas) recording
statute. Under Texas law, an unrecorded deed is void.
Some cases outside the Fifth Circuit consider the state
recording statutes as not voiding the transfer, but merely
affecting third party rights, who are placed somewhat
in the position of a bona fide purchaser without notice.
Non-Fifth Circuit cases hold that by entering into a
divorce decree, or signing the divorce agreement, the
transferor-spouse no longer has a property right in the
transferred property. Under this reasoning, there is no
property to which the tax lien against the transferorspouse could attach.
To gain a proper understanding, the statutory rules first
need to be reviewed. Then, the principal cases are reviewed.
Finally, consideration will be given to uncertainties introduced by the IRS policy shift.
OCTOBER–NOVEMBER 2014
Statutory Scheme
Since 1913, purchasers of property have been senior to unfiled
federal tax liens. A “purchaser” entitled to protection against an
unfiled federal tax lien has been defined by the Supreme Court
as “one who acquires title for a valuable consideration in the
manner of a vendor and vendee.”7 The term “purchaser” thus
has been held to exclude holders of landlords’ liens,8 mechanic
liens,9 attaching creditors,10 or other interests that might be held
to be purchasers under state law. The term does seem to include
assignees of some personal property for a consideration.11
Prior to 1966, the cases were uncertain whether one
could be a purchaser without title conveyed and the entire
purchase price having been paid.12 There was judicial support for the rule that if a person contracted to purchase
a home and had even taken possession of the home, but
did not make sufficient payments to entitle the person
to a deed, then a tax lien against seller would lead to the
purchaser losing his home. The supposed purchaser’s equitable lien for payments was held not sufficiently choate
to prevail over the IRS’s lien.13
Modern authorities address purchaser status in various
ways.14 Regulations speak of the consideration that must have
“reasonable relationship to the true value of the interest in
property acquired” and define “money or money’s worth.”15
In 196
1966,
Congress provided some clarity defining who
66, C
Con
is a purchaser.
purcchase
h er. Code
Cod Sec. 6323(h)(6) states that one who
Co
has entered
written
contract orr ooption
enteered into
i
aw
n executory co
tio to
purchase
purchasee property
proopertty shall
sh have
ave the protection
protection of a purchaser
purchaser
with
what
Congress
with
hand,
h title.
titlle. But
Bu
ut wh
hat Co
ess gave w
h one h
nd it took
ok
away
with
the
other,
purchaser
waay wit
th th
he oth
he , for
fo it prescribed
rescribed that
at even a pu
rcha er
with title
i l could enjoy protection from a federal tax lien
against a seller only if the purchaser’s
interest was “valid
urchaser’s inter
under local law against subsequent
purchasers without
bsequent purch
actual notice.”16 By virtue of the 1966 statutory reforms,
therefore, a “purchaser” gains protection against a later
filed federal tax lien if the purchaser is protected under
state law as would be a judgment creditor arising out of
an unsecured judgment.17
This statutory language of Code Sec. 6323(h)(6)
provides an important reference to state law and creates
something of an equivalent test to a purchaser without
notice. The role of state law, therefore, is essential to the
statutory scheme enacted by Congress.
The Fifth Circuit Cases
The heart of the Fifth Circuit cases is the Texas recording
statute which provides that a conveyance is void to a creditor
or subsequent purchaser for valuable consideration without
notice. Property Code §13.001(a) specifically states:
OCTOBER–NOVEMBER 2014
A conveyance of real property or an interest in real
property or a mortgage or deed of trust is void as to
a creditor or to a subsequent purchaser for a valuable
consideration without notice unless the instrument
has been acknowledged, sworn to, or proved and filed
for record as required by law.
This statute makes the transaction with an unrecorded
deed void, as a matter of state law. The clear effect of an unrecorded deed under Texas law, therefore, is unambiguous
and makes the outcome under the exact rule of Code Sec.
6323(a) certain, at least insofar as Texas law is concerned.
The controlling cases in the Fifth Circuit are Creamer
Industries, Inc.18 and Robert Prewitt.19 The Creamer Industries case involved competition between the IRS and a bona
fide purchaser of property. The deed conveying title to the
purchaser erroneously failed to include certain tracts. The
Creamer Industries court held that because the conveyance
of the omitted property was not timely recorded, the IRS
was a creditor without notice and was thus entitled to
protection of the relevant Texas recording statute.
The dissent in Creamer Industries, Inc. in 1965, on the eve
of passage of The Tax Lien Act of 1966, declared the injustice:
the morality of the Government’s taking property which
… was sold to, paid for by, and in equitable conscience
and law belonged to a stranger, is so disturbing to me
that before the heavy
hand of the tax gatherer falls, it is
heavy h
Congresss to speak
that
for Con
ak clearly
le y ttoo declare tha
at this iis the
20
conscience
nscie of the ccountry.
un ry
Prewitt involved whether under Texas law a former
spouse must record in the county deed records her separate
interest in real property created by a divorce decree in order
to protect her interest against the other spouse’s creditors
(i.e., the IRS) without notice of the decree. The husband
and wife owned real estate as Texas community property.
Incident to their divorce in October 1982, the wife was
awarded 100 percent of the community real property. The
divorce decree awarding her the real property was only
contained in the divorce trial record, but not recorded in
the pertinent deed records.
A few months after the divorce decree was entered, on
December 15, 1982, the IRS filed a notice of tax lien
against the husband and his assets, naming only the husband as the delinquent taxpayer. A little later, in May 1983,
Robert Prewitt purchased the real property from the wife,
without knowledge of the tax lien against the husband.
The wife did not disclose the existence of the lien against
her husband to Mr. Prewitt, the purchaser, because of the
prior divorce and the notice of tax lien did not list the wife.
39
UNRECORDED CONVEYANCES AND FEDERAL TAX LIENS
After the IRS seized the real property to collect penalties
owed by the husband, Prewitt brought action to quiet title.
On cross-motions for summary judgment the District Court
ruled for the IRS because under the Texas recording statute
the IRS was offered the same protection as other creditors
and thus the failure to record the divorce decree in the deed
records meant that the transfer of the real property to the
wife in the divorce decree was void as to the IRS. Further, the
IRS was a creditor without notice of the property transfer.
The Fifth Circuit panel in Prewitt held for the IRS by
relying on Creamer Industries. The court of appeals held
that the conveyance to the wife in the divorce decree, to
be valid, must be recorded in the deed records. It was not.
Therefore, the IRS could and did claim protection of the
recording statute. As another irony, the IRS in Prewitt
used state law for its benefit and prevailed.
The Fifth Circuit has revisited this issue more recently in
Qui P. Wagner21 with similar facts and to the same effect.
Mr. and Mrs. Wagner were divorced in June 2003. In June
2004, the IRS assessed the penalty arising under Code
Sec. 6672 for failure of a responsible officer to withhold
and pay employment taxes against Mr. Wagner and filed
a notice of tax lien against him. Mrs. Wagner apparently
was uninformed of these proceedings.
In the divorce, Mrs. Wagner was awarded the community resid
residence,
dencce, bbut the real estate transfer evidenced by the
divorce
decree
voorce decre
d
ee was
w not recorded in the deed records. In
2006,
200
0006, Mrs.
M
Mrs Wagner
W
Wagn
ner attempted
mpted to sell her
h home,
me but
u the
tax
ax llien filed against
agaiinst Mr. Wagner clouded
clouded Mrs.
Mr . Wagner’s
W
Wagne
r’s
title
prevented
conveying
title to the
itlee and
d prev
venteed her from
m convey
ng clear tit
he
residence.
Wagner
amount,
after
id
dence.
denc
e Mrs
Mrs. W
M
gner
ne paid
d the IRS an amou
t bbut
ut aft
er
a few months,
h she sought a refund of the monies paid.
Following the denial of the refund,
Mrs.
Wagner brought
efund, M
s. W
suit for wrongful levy.
The District Court held for the IRS on summary judgment on the ground that the federal tax lien had priority
over the unrecorded divorce decree, following Prewitt and
Creamer Industries. On appeal, the Fifth Circuit followed
Prewitt and Creamer Industries without comment.
First Circuit
The First Circuit decision in V&E Engineering & Construction Co., Inc.,22 reached a different result from Prewitt
and Creamer Industries mostly on account of a different
recording statute. On April 22, 1980, V&E mortgaged
the property to the bank to guarantee the repayment of
a promissory note. On May 2, 1980, V&E executed a
purchase and sale agreement whereby it sold the property
to Berrios. Neither the mortgage nor the deed of sale was
recorded at the Registry of Deeds until April 25, 1982.
40
JOURNAL OF TAX PRACTICE & PROCEDURE
Meanwhile, on May 21, 1980, the IRS filed a Notice
of Federal Tax Lien against the property with respect to
unpaid tax assessments. On January 22, 1985, the government brought suit in District Court to foreclose the lien.
The First Circuit distinguished Prewitt and Creamer Industries largely on the basis of the different state recording
statutes. To quote the First Circuit:
The Texas statute, cited in Creamer Industries,
explicitly states that an unrecorded sale “shall be
void as to all creditors and subsequent purchasers
for a valuable consideration without notice.” The
Puerto Rico statute, by contrast, is not phrased
in terms of the validity of the transaction or the
rights of creditors but in terms of the protection
afforded a good faith purchaser. Moreover, Puerto
Rico law provides that a “sale shall be perfected
between vendor and vendee and shall be binding
on both of them, if they have agreed upon the
thing which is the object of the contract and upon
the price, even when neither has been delivered.”
Under this provision, a vendor is bound by the sale
of his property, regardless of the recording of that
sale by the purchaser. He, therefore, has no “right
to property” under 26 U.S.C. § 6321.23
Thus, the First Circuit held that the conveyed property
was not subject
thee tax lien, despite the fact that the
ct to th
conveyance
tax
convveyan was
as not
no recorded
ec rd until
u til after the notice of ta
lien
li was filed.. The “race-notice”
ac -n ic recording
recording statute
statute protected
te ed good
go faith
aith purchasers
purcha ers who
wh relied upon
u n the public
pu
record. While the First Circuit did not track the statutory
scheme of Code Sec. 6323(a) and (h)(6), it arrived at the
same result.
Eighth Circuit
In Mary Joyce Thomson24 the same basic facts were seen
again. The husband and wife divorced in 1971. In the divorce proceeding, the wife was awarded their home, which
the couple was purchasing under a contract for deed. The
husband continued to make payments under the contract
for deed. The divorce decree was unrecorded when the IRS
filed a tax lien on all of the husband’s property and rights
to property. The IRS then levied on the home, prompting
the wife to institute a wrongful levy proceeding.
The Minnesota recording statute only made an unrecorded transfer void or voidable as against subsequent
judgment creditors or bona fide purchasers, thus the transferor retains no post-transfer interest. The state recording
act provides that an unrecorded conveyance:
OCTOBER–NOVEMBER 2014
shall be void as against any subsequent purchaser …
whose conveyance is first duly recorded, and as against
… any judgment lawfully obtained … against the person in whose name the title to such land appears of
record prior to the recording of such conveyance. 25
The court viewed this recording statute as protecting only
subsequent bona fide purchasers and judgment creditors,
essentially those “who buy real estate in reliance upon the
record.”26 The court held that the recording act did not vest
any property interest in the husband, the transferor, and thus
the court concluded that the recording act did not give the
husband any property right to which the Code Sec. 6321 lien
may attach. As seen with the other cases, the court did not
expressly cite the statutory scheme of Code Sec. 6323(a) and
(h)(6), but the ultimate decision arrived at the same result.
Tenth Circuit
The Tenth Circuit in Betty J. Gibbons27 confronted a similar circumstance as the other cases discussed; there was
an unrecorded conveyance arising in a divorce case. The
husband and wife, Colorado residents, were divorced in
1982, and the wife was awarded the right to live in their
residence in language suggesting a life estate:
occupied
too be
b occu
upied
i d bby Betty J. Gibbons and three minor
children,
ch
hildreen, and
a mortgage
mor
m
e paid monthly by Bettyy J. GibG
bons.
Betty
Gibbonss remarries aand/or
moves
bo
ons. If Be
etty JJ.. G
nd/or m
ve from
sa …
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