Appeal from Circuit Court of Pike County. No. 94CH12. Honorable Arthur R. Strong, Judge Presiding.
As Corrected August 27, 1996.
Honorable Rita B. Garman, J., Honorable Robert J. Steigmann, J., Honorable John T. McCULLOUGH, J., Concurring. Justice Garman delivered the opinion of the court: Steigmann and McCULLOUGH, JJ., concur.
The opinion of the court was delivered by: Garman
The Honorable Justice GARMAN delivered the opinion of the court:
This appeal involves the relative priority of the rights of the Internal Revenue Service of the United States (IRS) and Farmers State Bank (bank) to the proceeds from a foreclosure sale of property which a debtor was purchasing under a real estate installment contract. The trial court gave the IRS lien for unpaid tax priority over the bank's interest as assignee of the buyer's rights as security for a loan. We affirm.
In July 1989, Thomas and Susan Neese contracted to buy real estate in Pike County, Illinois, from Walter and Wilma Wade on installments, for a total purchase price of $55,000. After an initial payment of $5,000, 13 monthly payments of $375 were to be made, after which the amount increased to $650 per month. The payments thus were planned to extend for over five years.
In November 1989, the Neeses obtained a $210,000 loan from the bank. They assigned the bank their interest in the contract as part of the security for the loan. However, neither the assignment nor the contract was recorded until June 1992, when the bank recorded both with the Pike County recorder of deeds. Murray Martin, first vice president of the bank, testified the reason the bank finally recorded the assignment was to "perfect that document." In July 1991, before the assignment was recorded, the IRS filed a notice of tax lien with respect to the Neeses in Pike County. The lien was for a deficiency assessed in March 1991.
The Neeses defaulted on their loan payments to the bank after the IRS filed notice, and in July 1994 the bank initiated proceedings under the Illinois Mortgage Foreclosure Law (Foreclosure Law) (735 ILCS 5/15-1101 et seq. (West 1992)). When the suit was filed, 58.6% of the purchase price was still owed.
The Neeses also defaulted on their contract payments to the Wades, and the Wades sent a notice of default to the Neeses and the bank. In November 1994, the bank paid the Wades the remaining amount owed on the contract and took an assignment of all the Wades' rights under the contract. In March 1995, the court entered its judgment of foreclosure. After paying the reasonable expenses involved with the foreclosure, the proceeds of the sale went first to repay the bank the amount it paid the Wades to buy out the contract, second to the IRS to satisfy the tax lien, and third to pay the remaining amount owed to the bank on its loan. The property was foreclosed and sold for $60,000, which was exhausted by payment of $47,881.26 to the bank and $10,448.81 to the IRS (the remaining $1,669.93 went to the buyers at the foreclosure sale as a credit for real estate taxes).
The bank complains on appeal first, the Neeses had no interest to which the IRS lien could attach, and second, even if the IRS lien did attach, that as assignee the bank should have had priority over the IRS and, thus, should have received the money which went to the IRS. Our review on both issues is de novo, as the dispute concerns solely the application of law to undisputed facts. Fitzpatrick v. Human Rights Comm'n, 267 Ill. App. 3d 386, 392, 642 N.E.2d 486, 491, 204 Ill. Dec. 785 (1994).
A. The Neeses Had an Interest to Which the IRS Lien Could Attach
Under the Federal Tax Lien Act (Lien Act) (26 U.S.C. § 6322 (1988)), IRS liens attach at the time an assessment for unpaid tax is made. Jersey State Bank v. United States, 926 F.2d 621, 622-23 (7th Cir. 1991). At that time a lien in the amount of the assessment arises on all "property and rights to property, whether real or personal, belonging to such person." (Emphasis added.) 26 U.S.C. § 6321 (1988). Even if Illinois law differs on the timing of the evaluation of the taxpayer's interest (see Baker v. Salzenstein, 314 Ill. 226, 233-34, 145 N.E. 355, 358 (1924)), state law cannot prevent attachment of liens ...