Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, March 19, 2006.
In 1988, Jennifer and Terral Croft divorced. The court awarded Jennifer use of the jointly owned family home and ordered Terral to pay child support for their children.
But Terral was not faithful in making child support payments. In 1992, the state court entered judgments against him for the accruing unpaid child support payments.
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In 1996, the Internal Revenue Service filed and recorded a federal tax lien for $73,857 in unpaid federal taxes against Terral.
In 2004, Jennifer obtained a judgment against Terral for $131,495 for unpaid child support payments. The court granted her an equitable lien against Terral’s half-interest in the house.
She then filed this lawsuit against the IRS, alleging her interest in Terral’s half of the house was superior to the IRS tax lien that was recorded in 1996.
The IRS argued that because its tax lien was recorded in 1996 against Terral, under the “first in time, first in right” rule, the $73,857 tax lien has priority over Jennifer’s $131,495 judgment in 2004 for unpaid child support payment.
If you were the judge, would you rule the 1996 IRS tax lien has priority over Jennifer’s 2004 judgment as to Terral’s 50 percent interest in the house?
The judge said yes!
“The Federal Tax Lien Act creates a lien in favor of the United States upon ‘all property or rights to property, whether real or personal’ belonging to any person who neglects or refuses to pay any tax after demand,” the judge began.
“Once a taxpayer’s interest in property is established and a federal tax lien arises, however, federal law governs the priority of competing liens,” he explained.
“In other words, as to these interest holders, the ‘first in time, first in right’ priority applies,” the judge emphasized.
“By her petition, plaintiff claims an equitable entitlement to monies owed to her by Mr. Croft dating to July 6, 1988, the date that the final judgment of dissolution of marriage was entered, and Mr. Croft’s support obligation was created,” he continued.
However, she was not a judgment lien creditor in the marital residence by reason of the divorce decree and, at the earliest, she did not obtain a recorded final judgment until April 6, 2004, the judge emphasized.
Since the IRS tax lien attached to Mr. Croft’s one-half interest in the residence in 1996, the tax lien was first in time so it is superior to the plaintiff’s equitable lien for unpaid child support in the property, the judge ruled.
Based on the 2005 U.S. District Court decision in Croft v. U.S., 2006-1 USTC 50105.
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