- Ag Docket
The debtor failed to pay employment taxes which ultimately resulted in the IRS filing a notice of federal tax lien against the debtor's property. However, six days before the IRS filed its lien, the debtor had borrowed money from a bank giving the bank a note and deed of trust on two parcels of land adjacent to the tract on which the IRS filed its lien. The bank recorded the deed of trust to secure repayment of the note five weeks after the IRS filed its lien. Over six years later, the debtor filed Chapter 11 bankruptcy. The IRS filed a proof of claim for over $60,000 in unpaid taxes, interest and penalties, and the bank brought an adversary proceeding to determine priority of the competing liens. The bank relied on a state (MD) statue that relates back a deed of trust's effective date upon recordation to the date when the deed of trust was executed, and also claimed that they had a prior equitable lien. Both the bankruptcy court and the district court agreed with the bank's reliance on the relations back theory under MD statutory law, with the bankruptcy court also stating that the bank had priority even if the deed of trust had never been recorded. On appeal, the IRS argued that the lower courts erred in construing I.R.C. Sec. 6323(h)(1) because, according to the IRS, the key was whether a security interest existed at the time when the IRS filed its lien and that a security interest only exists when it has become protected under local law - which occurred when the deed of trust was recorded. The appellate court noted that, under I.R.C. Sec. 6323(h)(1), a security interest must exist and be protected under state law to obtain priority over an IRS lien. The court reasoned that the language of I.R.C. Sec. 6323(h)(1)(A) precluded the application of the relation back doctrine under MD law, but that the bank still had priority by reason of having an equitable security interest under the MD doctrine of equitable conversion which I.R.C. Sec. 6323(h)(1) incorporated. In re Restivo Auto Body, Inc. v. United States, No. 13-2249, 2014 U.S. App. LEXIS 20927 (4th Cir. Oct. 31, 2014).
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