The IRS has broad collection powers. But its collection powers are not unlimited. The recent U.S. v. Heptner, Case No. 8:15-cv-1125-T-33MAP (Dist. Fla. 2016) case provides an example.
Facts & Procedural History
Heptner practiced law from 1984-2001. After being disbarred, he was employed as a legal advisor and in-house counsel by Damien Freeman, an entrepreneur, around 2002, and continued to provide legal services until 2009.
In February of 2004, Heptner filed his federal income tax returns for tax years 1993-1996 and 1999-2001. Heptner failed to pay the taxes reported on these late-filed tax returns.
On September 28, 2004, the IRS filed a notice of federal tax lien against Heptner for tax years 1993-1996 and 1999-2001. Heptner made installment payments to the IRS from 2005 to 2009, but he fell behind and “was unable to pay.”
In June of 2005, Heptner’s employer loaned him $15,000 for a downpayment on a house, paid $430,825.99 to the title company, and advanced $100,000 to remodel the house.
Heptner filed late tax returns for tax years 2010 and 2012. On December 18, 2014, the IRS filed a notice of federal tax lien against Heptner for tax years 2010 and 2012. Heptner’s former employer brought suit to compel Heptner to sign a promissory note for the amounts advanced, which the court granted.
On May 8, 2015, the IRS filed suit to enforce its lien and attach Heptner’s real estate. On August 31, 2016, Hempter signed a promissory note on with an “effective date” of June 6, 2005. As of March 16, 2016, Heptner’s tax liability was $250,829.14.
The IRS attempted to collect the unpaid debt from Heptner. The court case involved a dispute between the Heptner’s former employer and the IRS.
The Purchase Money Mortgage
The former employer argued that its purchase money mortgage was superior to the IRS lien. The court summarized the support for the former employer’s position as follows:
The Supreme Court has decreed: “A federal tax lien is subordinate to a purchase-money mortagee’s interest notwithstanding that the agreement is made and the security interest arises after notice of the tax lien.” Slodov v. United States, 436 U.S. 238, 259 (1978) (citing United States v. New Orleans R.R. Co., 20 L. Ed. 434 (1871)).
The court also cites a revenue ruling and other court cases that reach this same conclusion.
The IRS’s Lien Priority
The IRS argued that its lien is superior to the former employer’s lien because the former employer failed to perfect the mortgage lien in accordance with Florida law. More specifically, the IRS contended that the former employer’s mortgage must be perfected to take priority over a federal tax lien.
The IRS cited a court case that relied on Pennsylvania law, which requires recording within ten days in order for a mortgage to be valid. Florida does not have such a law. In fact, Florida law says that a mortgage does not have to be filed in order for the mortgage to be valid.
Which Lien Has Priority?
The court concluded that the former employer had a valid purchase money note and mortgage that was was superior to the interest held by the IRS, even though the loan was not perfected until after the IRS’s lien notices were filed.
In 40 minutes, we'll teach you how to survive an IRS audit.
We'll explain how the IRS conducts audits and how to manage and close the audit.