CCA 1024039: IRS advice addresses federal tax liens on property awarded in an unregistered divorce conveyance

Plain-English summary

This Chief Counsel Advice considers whether a federal tax lien attaches to real property awarded to a taxpayer's former wife in a divorce decree when the decree and quitclaim deed were not registered before the tax lien arose. The memorandum concludes that, under the Tennessee recording statutes discussed, an unregistered conveyance is void as to existing or subsequent creditors without notice. It therefore concludes that the husband retained an interest in the property that was subject to collection by the Service. The memorandum notes that other federal circuits have reached different conclusions under their state recording laws and that the Sixth Circuit had not decided the issue.

Ruling snapshot

• Question: Does a federal tax lien attach to property awarded to a former spouse when the divorce decree and conveyance were not registered before the lien arose?
• Outcome: Advice given
• Key authorities: IRC § 6321; T.C.A. §§ 36-4-121(a)(3), 66-24-101, 66-26-101, and 66-26-103

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201024039
       Release Date: 6/18/2010
       CC:PA:03:
       POSTN-151721-09

UILC: 6321.01-00

date: January 19, 2010

 to:Janice R. Feldman
    (National Taxpayer Advocate) CC:NTA

from: Pamela W. Fuller
(Procedure & Administration) CC:PA:B03

subject: Lien Attachment and Unregistered Conveyance

       This responds to your request for our views on the issues raised in the case referenced
       above. The facts as we understand can be summarized as follows: Husband and Wife
       purchased real property in ------. They divorced in -------------------. The divorce decree
       awarded Wife the property and ordered Husband to execute a quitclaim deed. Husband
       incurred post-divorce tax liabilities for --------------------------which were assessed, with a
       Notice of Federal Tax Lien filed in -------------. In --------------, the ------------------ divorce
       decree and a quitclaim deed, dated ----------------,1 were filed with the Register’s Office in
       ---------------------------------------.

       The local Taxpayer Advocate Service requested field counsel’s views on whether the
       federal tax lien attaches to the real property which the divorce decree awarded to the
       taxpayer's wife but for which no registration had been filed prior to the NFTL. The field
       concluded that the property is subject to collection. As discussed below, we agree.

       If the taxpayer has any property interest in the real estate, then the federal tax lien
       attaches; if he does not, it does not. As a preliminary matter, we note that the under
       Tennessee law courts are “empowered to effectuate its decree by divesting and
       reinvesting title to [the] property.” T. C. A. § 36-4-121(a)(3). Here, the divorce decree
       awarded Wife “all right title and interest to and in [the property], and any interest
       [Husband] has in [the] property shall be divested out of [Husband} and vested solely in
       [Wife.]” It ordered Husband to execute a quitclaim deed transferring all his right, title,

       1
          The fact that the ----------------- date on the quitclaim was apparently changed to --------
       -----------------while the deed appears to have been filed in -------------- has no bearing on
       the disposition of this matter.

POSTN-151721-09 -2-

and interest in the property to Wife. We note that faced with similar, though not
identical, language in In re Kelley, 304 B.R. 331 (Bankr. E.D. Tenn. 2003), the
Bankruptcy Court observed that it is not clear that the divorce decree “awarding”
property to one spouse and ordering the execution of a quitclaim deed, in fact, divested
the debtor of the property at issue. 304 B.R. at 336. If the decree here in no way itself
divested Husband of this interest, no further discussion would be necessary—clearly at
the time the government’s lien arose, he would have had an interest in the property. 2
Assuming that a decree such as the one in this case does itself divest a spouse of his
interest in property, the extent of that divestiture might turn on some other factor.

The requirements of state recording/filing statutes might be such a factor. Under
Tennessee law, certain instruments are effective between the parties without
registration; but as to other persons, not having actual notice of them, only from
registration. T.C.A. § 66-26-101. More specifically, unregistered instruments are "null
and void as to existing or subsequent creditors of, or bona fide purchasers from, the
makers without notice." T.C.A. § 66-26-103. In Tennessee, a quitclaim deed is a type
of instrument that may require registration, see T.C.A. § 66-24-101, as is a divorce
decree divesting one spouse of property. See T.C.A. § 66-24-101; In re Frasier, 47
B.R. 864 (Bankr. M.D. Tenn. 1985)(a divorce decree must be registered to be effective
as a conveyance of real property against creditors and bona fide purchasers).

As noted in your email, there is case law in the Fifth Circuit that holds that in the Fifth
Circuit, the United States is a creditor protected under the Texas Recording Act and the
federal tax lien attached to real property, and there is conflicting case law in the First,
Eighth and Tenth Circuits holding that, recording statutes at issue notwithstanding, after
the transfer of property the taxpayer has no remaining interest in the property which can
support the attachment of the federal tax lien. The Husband and Wife in this case
reside within the Sixth Circuit. The Court of Appeals for the Sixth Circuit has not opined
on this issue.

In United States v. Creamer Industries, Inc., 349 F.2d 625 (5th Cir. 1965), cert. denied,
382 U.S. 957 (1965), the first Court of Appeals opinion on the issue, the Fifth Circuit
correctly stated the issue as:

   The question to be decided is whether at the time of the assessment on March
   24, 1959, the taxpayer, Maxwell, owned any property or rights to property in the
   six lots upon which the tax lien could fasten. The nature and extent of Maxwell's
   interest in the lots on that date must be determined by state law.

349 F.2d at 628. It observed generally that the determination of the seller’s interest as
between the seller and the purchaser may differ from the determination of the seller’s
interest with respect to a creditor without notice. The court went on to note that under

2
At the time the federal tax lien arose, the quit claim deed had not been registered or
even executed.
POSTN-151721-09 -3-

the Texas statute at issue unrecorded conveyances are void as to creditors and bona
fide purchasers without notice, but between the parties and as to purchasers with notice
or who have not given valuable consideration such conveyances are valid and binding.
The court concluded that “[a]s to the taxes owed to it, the United States was a ‘creditor’
within the Texas recording statute” and that, therefore, the federal tax lien attaches.
The dissenting opinion in Creamer Industries stated that after the transfer, there was no
longer any property “belonging to” the taxpayer under section 6321 and the Service is
not the type of party that the Texas recording statute was intended to protect. After
Creamer Industries, in Prewitt v. United States, 792 F.2d 1353 (5th Cir. 1986), a case
involving a divorce decree, the court followed Creamer Industries, rejecting the dissent’s
argument and concluding that “the right of certain of [the husband’s] creditors to reach
property he formerly owned until the disposition is properly recorded is sufficient to
support a tax lien on the property.” 792 F.2d at 1355-1356.

Each of the cases in the other Courts of Appeals similarly presented the issue of what
property right remained with a transferor after a transfer where the transfer was not
recorded as provided by a state recording statute. The first rejecting the conclusion in
Creamer Industries, and instead concluding that the property was not subject to federal
tax lien after its sale, was United States v. V. & E. Engineering & Construction Co., 819
F.2d 331 (1st Cir. 1987). While V. & E. Engineering rejected the conclusion of Creamer,
it did so by attempting to distinguish the state statute at issue in the case from the
statute in the Texas case. This initially may seem to provide some support for the
reasoning of Creamer Industries: The court in V. & E. Engineering noted that the Texas
statute in Creamer Industries, “explicitly states that an unrecorded sale ‘shall be void as
to all creditors and subsequent purchasers for a valuable consideration without notice.’
[citation omitted.] The Puerto Rico statute, by contrast, is not phrased in terms of the
validity of the transaction or the rights of creditors but in terms of the protection afforded
a good faith purchaser.” 819 F.2d at 334. However, we note that while the First Circuit
rejected the conclusion in Creamer Industries by trying to distinguish the statutes in the
cases, the statutory schemes are not meaningfully distinguishable. 3 In any event, after
observing that Puerto Rico law provides that a sale is binding on the parties and
therefore the transferor is bound by the sale of the property, regardless of the recording
the purchaser, the court found that the seller would have no right to property under 26
U.S.C. § 6321.

In Thomson v. United States, 66 F.3d 160 (8th Cir. 1995), the Eighth Circuit reasoned
that “the plain meaning of the words ‘belonging to’ [in section 6321] suggests that the

3
Although the court did not so note in the opinion, the Texas law in Creamer
Industries, like the Puerto Rico law, provided that the transfer is binding between the
parties. Moreover, while the court notes that the Puerto Rico statute does not have the
“void” language contained in the Texas statute, under the statutes of both states a
transfer is, in fact, going to be ineffective as to a certain party or parties absent
recording.
POSTN-151721-09 -4-

lien attaches to property interests owned by the taxpayer, not property interests
vulnerable to the taxpayer's judgment creditors.” 66 F.3d at 162. The court found the
reasoning of the First Circuit case law more persuasive than that of the Fifth Circuit.
The court then considered the Minnesota statute in light of the foregoing. That statute
provides that unrecorded conveyances are “void as against any subsequent purchaser
... whose conveyance is first duly recorded, and as against ... any judgment lawfully
obtained ... against the person in whose name the title to such land appears of record
prior to the recording of such conveyance.” 4 The court found that if a statute provides
that title does not pass until a conveyance is recorded, the transferor retains a post-
transfer interest. On the other hand, the court found, if a statute makes an unrecorded
transfer void or voidable as against parties such as subsequent judgment creditors or
bona fide purchasers, the transferor retains no post-transfer interest. The court
concluded that the Minnesota statute falls into the latter category, and therefore does
not give the taxpayer any property right to which the § 6321 lien may attach.

The Tenth Circuit reached the same result in United States v. Gibbons, 71 F.3d 1496
(10th Cir. 1995), based on a Colorado statute providing that “[n]o such unrecorded
instrument or document shall be valid as against any class of persons with any kind of
rights who first records, except between the parties thereto and such as have notice
thereof.” There, the court reasoned that “[t]he IRS must stand in the shoes of [the
taxpayer], who has no ‘rights to property,’ I.R.C. § 6321, to which the tax lien could
attach in the property interest conveyed to Betty Gibbons. Therefore, the IRS lien
against property ‘belonging to’ [the taxpayer] does not reach [the ex-wife’s] interest.”
71 F.3d at 1501.

While the government has not prevailed in the three Courts of Appeals that have
considered this issue since Creamer Industries was decided, we continue to believe that
case was correctly decided. Applied to the present case, we note that under the
Tennessee statute, an unregistered conveyance is void as to, inter alia, existing or
subsequent creditors. We have not found anything that indicates that the Service would
not be a creditor under state law. Nor have we uncovered anything under state law that
would require as restrictive a meaning of “void as to existing and subsequent creditors”
as would be required by the other Courts of Appeals. There is language in an 1836
Tennessee case that, at first impression, lends support to the position of the other
Courts of Appeal that the taxpayer has no interest in property after its transfer. In
Shields v. Mitchell, 18 Tenn. 1, 1836 WL 1188 (Tenn.), the Tennessee Supreme Court
stated:

   The vendor, by the execution of the deed, has divested himself of his
   legal estate; no title, legal or equitable, remains in him; he is seized of
   nothing for the use of the vendee; he is not a trustee for the vendee. The

4
We note that the Minnesota statute at issue in Thomson is similar to, but not identical
to, the Texas statute in Creamer Industries.
POSTN-151721-09 -5-

   title passes from him, and no acts to give it effect remain to be done by
   him. If the legal title be not perfected in the vendee until registration, it
   does not remain in the vendor. Upon registration, the perfect and entire
   legal title, by relation and operation of law, vests in the vendee from the
   execution of the deed. If it be never registered, it does not revest in the
   vendor.

However, the Shields case was addressing the nature of the purchaser’s interest—
whether the purchaser holding property under an unregistered deed had sufficient
interest in the property to subject the property to seizure. The case did not involve
determining the effect of nonregistration on the creditors of the seller. In that situation, it
was the rule then in Tennessee as it is now: As to certain parties, conveyances have
no effect until registration. See, e.g., Hays v. McGuire, 16 Tenn. 92, 1835 WL 907
(Tenn.)

Further, the reasoning of the First, Eighth, and Tenth Circuits is flawed. Those courts
failed to give full meaning to state statutes that provide that a transfer is void or
ineffective as to certain parties absent recording: The characterization that the relevant
state provisions merely protect creditors and other third parties or merely address the
rights of third parties ignores that they do so by voiding the conveyance as to those
parties. In other words, for those parties, that conveyance did not occur, and, as to
those parties, the transferor does have an interest in the property.

The First, Eighth, and Tenth Circuits would ignore that this is the result called for by the
Tennessee statute. As the Bankruptcy Court noted in In re Hurst, 27 B.R. 740 (Bankr.
E.D. Tenn 2003) in which the bankruptcy trustee challenged an unregistered divorce
decree:

   A determination by this court that the defendant's right to occupy the
   contested premises is paramount to the trustee's rights under § 544(a)
   would ignore the provisions of Tenn.Code Ann. § 66-26-103 (1982) and
   numerous decisions interpreting the precursors of that statute. … ‘The
   purposes of the statute are obvious, and the penalty imposed for its
   nonobservance is harsh. Such unrecorded conveyances, at least insofar
   as they affect the rights of creditors, are void.’ In re Sweat, Bankruptcy
   No. 4660 (E.D.Tenn.1930).

See also In re Frasier, 47 B.R. 864 (Bankr. M.D. Tenn. 1985) (had bankruptcy trustee
established status as hypothetical lien creditor as required by B.C. § 546, he could have
claimed, pursuant to T.C.A. § 66-26-101 et seq., an undivided half interest as a tenant
in common in property awarded to Wife in unregistered divorce decree.)

For the reasons stated above, the Husband had an interest in the property that was
subject to collection by the Service. If you would like to discuss this further, please
contact Deborah Grogan at (202) 622-3600.