Unpaid income taxes create real estate havoc

In 1988, Hugh and Betty Taylor bought their home together. But Betty failed to file an income tax return for 1989. In 1993, the Taylors sold the home to their daughter, Connie. Seven months later, Connie sold the home to her brother, George.

In 1998, George reconveyed the home to his father, Hugh Taylor.

Purchase Bob Bruss reports online.

However, in 1996 a general Notice of Federal Tax Lien was filed by the Internal Revenue Service in the county records for Betty Taylor’s unpaid 1989 federal income taxes. In 1999, the IRS began this lawsuit to foreclose its tax lien, which was recorded in 1996 against Betty. The IRS then recorded a specific “lis pendens” notice of pending litigation affecting title to the property.

In 2000, the U.S. District Court granted summary judgment for the IRS, finding Betty Taylor’s 1989 federal income taxes remained unpaid and the IRS can foreclose against the house.

But in 2001, Hugh Taylor sold the house to Leon Hix, Scott Streetman and William Merrill. In 2002, the IRS recorded its lawsuit judgment with the county registrar of deeds to foreclose on the house for its judgment against Betty Taylor.

At that time, according to the IRS, Betty Taylor owed $5,018 unpaid 1989 income taxes plus accrued interest of $6,082, and penalties of $542, for a total of $11,642.

The three buyers of the house argue they are bona fide purchasers without notice so the IRS should not be allowed to foreclose against their house for Betty Taylor’s unpaid 1989 income taxes. But the IRS replied that its recorded 1996 general tax lien then attached to the house and its 1999 recorded “lis pendens” against the house gave constructive notice of the pending tax litigation.

If you were the judge would you rule the three buyers of the house were bona fide purchasers without notice who took title free of the IRS tax lien?

The judge said no!

Although the three buyers of the house argue they are bona fide purchasers for value of the house without either actual or constructive notice of Betty Taylor’s unpaid tax lien, the facts show otherwise, the judge began.

In 1996, the IRS recorded its general Notice of Federal Tax Lien against Betty Taylor in the county records, the judge explained. This lien attached to any assets she owned in the county, he continued.

But in 1999, when the IRS began enforcement of its lien, it recorded a specific “lis pendens” against the house, the judge emphasized. A lis pendens gives notice of pending litigation involving title to the property so any buyer or lender deals with the property subject to the outcome of the lawsuit, he noted.

Although the three buyers of the house might not have actual notice of the tax lien and the recorded lis pendens, state law clearly states a lis pendens gives constructive notice to a buyer or lender so they are bound by all court proceedings affecting the property title, the judge ruled.

The IRS recorded its lis pendens over two years before the three buyers took title to the house, the judge reported. The recorded IRS lis pendens gave constructive notice to the buyers and the IRS is therefore entitled to foreclose on the house for the unpaid $11,642 income taxes and penalties, the judge concluded.

Based on the 2003 U.S. District Court decision in U.S. v. Taylor, 292 Fed.Supp.2d 791.