In 2001, the federal government (Internal Revenue Service) filed this lawsuit to foreclose on a 60-acre property owned by J. Leonard Padilla and Rose Moreno-Padilla. The $239,284 IRS tax liabilities of the property owners arose out of unpaid income taxes for 1996 and 1997.

When the Padillas bought the property, they borrowed $25,000 secured by a deed of trust on the property. In 2000, the owner of that deed of trust, Nelly Patino, advanced $45,655 to pay the unpaid property taxes and prevent the local tax collector from selling the land at a tax sale.

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In this lawsuit, the IRS argued its unpaid income tax lien arose when the taxes became due, although the IRS didn’t record its tax lien until after Patino advanced her money to save the property from the tax collector’s sale.

Patino claimed she had an equitable lien because the IRS couldn’t prove it recorded its tax lien against the property owner before she paid the $45,655 property taxes.

If you were the judge, would you allow the IRS to foreclose its $239,284 tax lien and wipe out Patino’s $45,655 equitable lien for her property tax payment?

The judge said no!

Although the general rule is the Statute of Frauds requires everything involving real estate to be in writing, the judge said, that does not preclude lender Patino from having an equitable lien for the $45,655 she paid to save the property, and her loan security, from a tax sale.

However, federal law says IRS tax liens arise when income taxes due are not paid, he said. In this case, the IRS tax lien occurred well before 2000 when Patino paid the unpaid property taxes, he noted.

But the IRS failed to promptly record its income tax lien to give public notice, the judge said. According to federal law, the automatic income tax lien, “shall not be valid as against any…holder of a security interest…until notice,” he said.

Therefore, because the IRS failed to promptly record its income tax lien, that lien was not superior to Patino’s equitable lien for the $45,655 she advanced to save the property from the tax collector’s sale, the judge ruled.

Although the IRS is entitled to a presumption of correctness of the income tax assessed, lender Patino’s lien is superior because under the race-notice priority recording system, the IRS unrecorded tax lien did not give public notice before Patino paid the property taxes and her equitable lien arose, the judge concluded.

Based on the 2005 U.S. District Court decision in U.S. v. Padilla, 2005-2 USTC 50535.

(For more information on Bob Bruss publications, visit his
Real Estate Center


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