August 1998 Issue


By Roy Whitehead, JD, LLM, University of Central Arkansas 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. 3713] 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.S. Supreme Court granted certiorari, because the Pennsylvania Supreme Court decision conflicted with two U.S. Court of Appeals decisions and the government contended that the decision was inconsistent with the U.S. Supreme Court decision in Thelusson v. Smith, 2 Wheat. 396 (1817). The Thelusson decision contained the admonition that "only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of [The Federal Priority Statute]."

The Supreme Court said that the proper inquiry was how to best harmonize the impact of the two statutes on the government's power to collect delinquent taxes. Justice Stevens said that a Federal priority statute is not an assertion that it shall always prevail over all other Federal policies, writing that "its generalities should not lightly be construed to frustrate a specific policy embodied in a later Federal statute" [Massachusetts v. United States, 333 U.S, 611 (1948)]. He said that on several occasions that the Court has followed this approach and concluded that a specific policy embodied in a later statute should control construction of the priority statute, even though it has not been expressly amended.

The Court said there are sound reasons for treating the Tax Lien Act of 1966 as the governing statute. It is the later statute, a more specific statute, and its provisions are comprehensive, reflecting an obvious attempt by Congress to accommodate the strong policy objections to the enforcement of secret liens. Justice Stevens noted that the amendments to the 1966 act bespeak a strong condemnation of secret liens, which unfairly defeat the expectations of innocent creditors and frustrate the needs of citizens for certainty and convenience in their commercial dealings.

In affirming the decision of the Pennsylvania Supreme Court, the U.S. Supreme Court said that nothing in the text or history of the old 1797 priority statute justifies the conclusion it authorizes the equivalent of a secret lien as the substitute for an expressly authorized tax lien with proper notice. To hold otherwise would allow secret liens in violation of commercial expectations and good public policy. *

Source: United States v. Estate of Francis Romani, No. 96-1613, (April 29, 1998)

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