Supreme Court Overrules Ben Franklin: Collection of Federal Tax Liens Are Not Certain

Article excerpt

In 1789, Ben Franklin wrote "in this world nothing can be said to be certain, except death and taxes." He may have been referring to the common law prerogative that was exercised by the English Crown, and later enacted into U.S. Law in 1797 as the Federal Priority Statute, that a claim of the government "shall be first paid" when the decedent's estate cannot pay all of its debts [31 U.S.C., section 3713(a)].

In United States v. Estate of Francis Romani, No. 96-1613 (April 29, 1998), the U.S. Supreme Court was faced with harmonizing conflicting opinions on the question of whether the cited Federal Priority Statute requires a Federal tax claim be given preference (first paid) over a judgment creditor's perfected lien on real property even though such preference is not specifically authorized by the Federal Tax Lien Act of 1966 [26 U.S.C. section 6321]. In effect, the question is whether an after-recorded Federal tax lien operates as a "secret lien" to defeat a perfected judgment lien.

The issue arose because in 1985 a $400,000 judgment against Romani was properly recorded in Cambria County, Pennsylvania. Thereafter, the IRS filed notice of a series of tax liens on his property totaling $490,000. When Romani died in 1992, his entire estate consisted of real estate encumbered by both the judgment lien and the Federal tax liens.

The administrator of the estate sought permission of the state court to transfer the property to the judgment debtor in lieu of execution. The Federal government acknowledged that its tax liens were not valid against the judgment lien for lack of notice under the Federal Tax Liens Act of 1966. The Federal government, however, opposed the transfer on the grounds that the priority statute [31 U.S.C. 37131 gave it the right to "be paid first." The Pennsylvania Supreme Court decided that there was an inconsistency between section 3713, which appears to give the United States "absolute priority," and the Tax Lien Act, which provides that a Federal tax lien "shall not be valid" against judgment lien creditors until a prescribed notice has been given. The Pennsylvania court concluded that the 1966 act had the effect of limiting the operation of Section 3713 as to tax liens and found for the judgment creditor and against the United States.

The U. …