Opinion
CIVIL NO. H-01-2395
November 14, 2002
This case for tax indebtedness and foreclosure of federal tax liens was tried to the Court on November 7, 2002. Based on the evidence presented and the applicable law, the Court enters the following Findings of Fact and Conclusions of Law.
Any finding of fact that is more appropriately characterized as a conclusion of law shall be so construed and any conclusion of law more appropriately characterized as a finding of fact shall be so construed.
FINDINGS OF FACT
1. Melvyn and Evelyn Taylor (the Taylors) owned the property ("Property") described as:
Lot Thirty-Two (32), in Block Five (5), of Oaks of Devonshire, Section One (1), according to the map or plat thereof recorded in Volume 311, Page 58, of the Map Records of Harris County, Texas and being commonly known as 20215 Woodsboro Court, Spring, Texas 77388.
2. The Taylors owed federal income taxes, including penalties and interest, for the tax years 1990, 1991, and 1992, of $47,399.80 (as of Dec. 4, 2000).
3. A federal tax lien was filed on July 28, 1994, in Harris County, Texas for the Taylors' 1990, 1991 and 1992 liabilities.
4. It is undisputed that the federal tax lien filed on July 28, 1994, is superior to any interest in the Property of any party other than that of Aurora Loan Services, Inc.
5. The Taylors owed federal income taxes, including penalties and interest, for the tax years 1994, 1995, and 1996, of $24,069.93 (as of Dec. 4, 2000).
6. On November 16, 1998, a suit was filed in Cause No. 98-55154 in the 281st Judicial District Court of Harris County, Texas, (the "state court suit") seeking judicial foreclosure of a lien which secured then outstanding delinquent maintenance fees on the property owed by the Taylors to Oaks of Devonshire Homeowners Association for unpaid homeowner's association fees.
7. A federal tax lien was filed on November 20, 1998, in Harris County, Texas for the Taylors' 1994 — 1996 liability.
8. On March 12, 1999, a Default Judgment (the "judgment") was signed in the state court suit ordering foreclosure of the lien that secured the maintenance fees that were delinquent at the time of the filing of the judicial foreclosure suit on November 16, 1998.
9. On July 6, 1999, Elbar acquired title to the Property by purchase at a Constable's Sale held pursuant to the authority of the judgment in the Texas judicial foreclosure suit. The total amount of homeowner fees, attorneys fees and costs related to the foreclosure was $2,704.33.
10. No notice of this sale was provided to the Internal Revenue Service.
11. The Taylors owed federal income taxes, including penalties and interest, for the tax year 1997, of $13,117.00 (as of Dec. 4, 2000).
12. A federal tax lien was filed on September 13, 1999, in Harris County, Texas for the Taylors' 1997 liability.
13. The Taylors owed income taxes, including penalties and interest, for the tax year of 1998, of $11,216.24 (as of Dec. 4, 2000).
14. A federal tax lien was filed on June 5, 2000, in Harris County, Texas for the Taylors' 1998 liability.
15. The Notice of Federal Tax Lien recorded on July 28, 1994, under County Clerk's File No. P980011 of the Real Property Records of Harris County, Texas, is superior to any interest held in the Property by Elbar.
16. It is undisputed that both the Notice of Federal Tax Lien recorded on September 13, 1999, under Clerk's File Number T96 1162 of the Real Property Records of Harris County, Texas, and the Notice of Federal Tax Lien recorded on June 5, 2000, under Clerk's File Number U425880 of the Real Property Records of Harris County, Texas, are inferior to any interest held in the Property by Elbar.
CONCLUSIONS OF LAW
17. The United States acquired a lien on all property and rights to property, whether real or personal, of the Taylors after their failure or neglect to pay federal income taxes. See 26 U.S.C. § 6321. The federal tax liens also include all additions to tax, including interest, penalties and costs. See id.; Zink v. United States, No. H-79-535, 1981 WL 1951, at *3 (S.D. Tex. June 5, 1981).
18. The United States' federal tax liens were filed in the Harris County, Texas real property records. See 26 U.S.C. § 6323 (D(1)(A)(i).
19. The March 12, 1999, state court judgment and the July 6, 1999, sale of the Property followed a plenary judicial proceeding in which pleadings were filed, parties notified by service of process and evidentiary proof was made of the indebtedness that was the subject of the state court suit. See 25 C.F.R. § 301.7425-1(a) (Judicial proceedings subject to section 7425(a) are "plenary in nature and proceed on formal pleadings"); compare with 26 C.F.R. § 301.7425-2 (describing non-judicial proceedings).
20. Accordingly, the judgment of foreclosure obtained on March 12, 1998, was a "judicial proceeding" within the meaning of 26 U.S.C. § 7425(a). See United States v. Capobianco, 836 F.2d 808, 817 (3d Cir. 1988) (judgment obtained in a plenary proceeding for mortgage foreclosure is a "judicial sale" within the meaning of section 7425); A.H. R.S. Coal Corp. v. United States, 461 F. Supp. 752, 754-5 5 (W.D. Pa. 1978) (explaining that, under section 7425, a judicial sale is typically based on an order or judgment made pursuant to a judicial decree); cf Myers v. United States, 647 F.2d 591, 597 (5th Cir. 1981) (non-plenary executory proceedings are not "judicial proceedings" within the meaning of section 7425(a)).
The argument of the United States that the state court proceeding at issue here did not result in a "judicial sale" within the meaning of 26 U.S.C. § 7425(a) because this sale followed a "default" judgment is rejected. The primary purpose of the notice provisions of section 7425 is to protect the interests of the United States in instances where, for example, a summary state law procedure does not require notice to potentially affected parties before disposition of the property. See Federal Tax Lien Act of 1966, Pub.L. 8-9719, 1966 U.S.C.C.A.N. 3722, 3748 (Discharge of Liens Held by United States (Sec. 109 of the Bill and Sec. 7425 of the Code)). The purpose underlying section 7425 is not to protect the United States against extinction of its rights where, as here, the United States has not filed a notice of tax lien before judicial proceedings were commenced.
21. The judgment rendered on March 12, 1999, is subject to the lien of the United States filed on July 28, 1994, because that lien was filed before the state court suit was instituted. See 26 U.S.C. § 7425(a)(1).
22. The judgment rendered on March 12, 1999, is not subject to any lien filed by the Internal Revenue Service after November 16, 1998, the date on which the state court action was filed. See 26 U.S.C. § 7425(a)(2); see also 26 C.F.R. § 301.7425-1(c)(3)(i) ("Where the United States is not joined as a party in the court proceeding and . . . a notice of lien has not been filed . . . at the time the action or suit is commenced . . . a judgment or judicial sale pursuant to such a judgment shall have the same effect with respect to the discharge or divestment of the lien of the United States as may be provided with respect to these matters by the local law of the place where the property is situated."); id. at (3)(ii) (examples of judicial sales discharging federal tax liens filed after commencement of suit); Capobianco, 836 F.2d at 817.
23. The Taylors are indebted to the United States for the amounts set forth above plus interest and any statutory additions accruing since December 4, 2000. See, e.g., 26 U.S.C. § 6321 (providing for interest, additional amount, addition to tax, assessable penalties and costs); 26 U.S.C. § 6621 (rate of interest); and 28 U.S.C. § 6621 (assessments of surcharges).
24. The United States is entitled to a judgment for the total amount owed by the Taylors plus interest and all statutory additions. See, e.g., 26 U.S.C. § 6321, 6621; and 28 U.S.C. § 6621.
25. The United States is entitled to foreclose on the subject Property, either administratively or judicially. See 26 U.S.C. § 7403. The proceeds of any sale should first be applied to the security interest of Aurora, then to the United States for the Taylors' tax liabilities on the years 1990 — 1992, then to Elbar.