TOWN OF WALPOLE vs. LEROY D. SMITH.

Michael P. Georges was the owner of the premises now known as and numbered 5 Glendale Road in Walpole, in the county of Norfolk. Mr. Georges ran into financial difficulties which led to the recording by the Internal Revenue Service ("IRS") of liens at the Registry of Deeds in Dedham to which Registry recording information herein refers. Mr. Georges also neglected to pay the real estate taxes due the Town of Walpole, and this dereliction led to the classic confrontation now before the Court. The defendant Leroy D. Smith is a purchaser at a sale held by the IRS; Mr. Smith claims that the sale was free and clear of any liens of the Town of Walpole whereas the Town presses in this forum its claim for unpaid real estate taxes with interest and other charges. The sole issue in the case, other than as to the proper amount of the Town's claim if the Court should recognize its priority, is whether the federal government's sale wiped out the position of the Town.

A trial was held at the Land Court on February 14, 1990 at which the proceedings were electronically recorded. The exhibits introduced into evidence are incorporated herein for the purpose of any appeal. On all the evidence I find and rule as follows:

1. The IRS filed a "Notice of Federal Tax Lien Under Internal Revenue Laws" on August 10, 1984 in Book 6470, Page 434 and filed a second such notice on May 23, 1985 in Book 6681, Page 48.

2. The Town of Walpole's real estate taxes assessed as of January 1, 1983 for fiscal 1984 were not paid when due, and the Town filed a tax taking on April 29, 1986 for the unpaid real estate taxes. There has since been added to the tax title account the real estate taxes for the years from 1985 to 1987 inclusive. The Town then brought this proceeding pursuant to the provisions of G.L. c.60, §65 to foreclose the taxpayer's right of redemption. The complaint was filed on October 18, 1988.

3. The IRS proceeded to solicit sealed bids to sell the locus for the nonpayment of the federal taxes and provided that the bids were to be opened on March 17, 1987. The title that was to be delivered was "the right, title, and interest of the taxpayer . . . in and to the property subject to any prior valid outstanding mortgages, encumbrances or other liens in favor of third parties against the taxpayer that are superior to the lien of the United States". The phrase beginning with the word "subject" were italicized (Exhibit No. 7). The exhibit recites that the property was sold to Leroy D. Smith for the highest bid received, $87,200.

4. Subsequently the District Director of Internal Revenue conveyed the locus to Mr. Smith by deed dated September 18, 1987 and recorded on September 21, 1987.

5. The Walpole Assessors twice voted abatements of the outstanding real estate taxes; initially the Board granted an entire abatement of all overdue taxes in 1988 without any formal application for an abatement having been filed. In August of 1989 the Assessors voted a fifty percent abatement of the tax, again without a formal application. The Assessors then applied to the Commonwealth of Massachusetts for approval of its action pursuant to G.L. c. 58, §8, but the Commonwealth disallowed the abatements in a letter from Harry M. Grossman, Chief, Property Tax Bureau (Exhibit No. 5) which recited that the Assessors were without jurisdiction to abate the outstanding tax obligation. The letter refers to the sale by the IRS, but Mr. Grossman also points out that the sale was subject to prior valid outstanding liens.

6. The Water Department of the Town of Walpole did abate the water lien due on the premises so these charges are not properly a part of the tax title account.

The question which the Court must resolve is whether the lien by the Town which is affective as of January 1 of the year in which the taxes are assessed gives the municipality priority over the federal tax lien which also has an earlier assessment date than the date of its recording. However, the federal lien, as distinguished from the lien for real estate taxes, speaks as of its recording date so far as third parties are concerned. While the authority on the priority of federal tax liens as against municipal tax liens is surprisingly sparse, I think it is well settled as a matter of practice that the lien of the city or town prevails since under Massachusetts law it is entitled to priority over real estate mortgages and other encumbrances even if they are prior in time to the assessment date of the real estate taxes. The federal law governs as to priority, but it in turn looks to the local law and provides that these questions are to be determined by the law of the particular jurisdiction. Milton Savings Bank v. United States, 345 Mass. 302 (1963). The case was based on United States v. Brosnan, 363 U.S. 237 where the Supreme Court of the United States held that in the interest of uniformity local law would govern the question of priorities.

Section 6323(a) of the Internal Revenue Code provides that "(t)he lien imposed by Section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection F has been filed by the secretary." Subsection (b) subordinates the lien to certain taxes imposed by other taxing authorities. Its language is controlling here, for it reads:

Even though notice of a lien imposed by section 6321 has been filed such lien shall not be valid ......(6) with respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time and such lien secures payment of (A) a tax of general application levied by any taxing authority based upon the value of such property; (B) A special assessment imposed directly upon such property by any taxing authority if such assessment is imposed for the purpose of defraying the cost of any public improvement.

Under Massachusetts law real estate taxes are prior to mortgages and other liens whether assessed before or after recording of the security interest. It therefore follows that the foreclosure by sale of the IRS lien could not affect the prior lien of the town's taxes. The lien for the local real estate taxes pursuant to Massachusetts law was earlier in time than the recording of the first of the federal notices of federal tax lien. The subsequent taxes fed the earlier lien although since under Massachusetts law they would in any event be prior to the lien of a mortgage or other encumbrance, they also are prior to the federal liens. The second notice of federal tax lien was filed in the spring of 1985 whereas the first notice of taking by the Town was not put on record until 1986, but it is the assessment date of the taxes that prevails; however, under the language of the Internal Revenue Code even taxes assessed by a city or town after the federal lien attaches are prior to the latter. A case precisely on point is not easy to find. Our Supreme Judicial Court has held that a federal tax lien is subject to a prior mortgage. In the present case the United States tax lien was recorded prior to the tax taking by the Town of Walpole, but the local real estate taxes had become a lien under Massachusetts law prior to the recording by the IRS. Since under Massachusetts law the real estate taxes would be prior to any mortgage encumbrance or other lien even if prior in time, then under the applicable section of the U.S. Code, i.e., Section 6323(b) (6), the municipality prevails. The Massachusetts real estate tax meets the requirements of this provision of the code, and accordingly the priority of the real estate taxes prevails. The sale by the IRS recognized that the purchaser might take title subject to certain existing liens, and in deed that is exactly what has happened. If the real estate taxes had been paid at the time of the acquisition by the defendant, then their amount would have been much less. It is the running of the interest on the unpaid tax title account which has increased the amount due.

The assessors, impressed by the defendant's hardship and uncertain of the law, twice attempted to grant an abatement to the defendant. They, of course, have no authority to grant an abatement if the statutory scheme is not followed. Guzman v. Board of Assessors of Oxford, 24 Mass. App. Ct. 118 (1987). Board of Assessors of Boston v. Suffolk Law School, 295 Mass. 489 (1936), Choate v. Assessors of Boston, 304 Mass. 298 (1939). The statutes do provide a remedy which the Assessors may seek from the Commissioner of Revenue Belt Realty Corporation v. State Tax Commission, 363 Mass. 52 , 57 (1973). Here the application was unsuccessful.

The Supreme Judicial Court has recognized that where a tax is void, the invalidity may be raised as a defense in this Court, Norwood v. Norwood Civic Association, 340 Mass. 518 (1960), even without the filing of an application. Moreover, if the lien of the federal government cut off the Walpole lien, this Court has jurisdiction to so determine.

On all the evidence therefore I find and rule that the foreclosure by the Internal Revenue Service of the federal tax lien did not eliminate the existing liens for real estate taxes due the Town of Walpole. I further find and rule that the defendant is entitled to redeem upon payment to the Collector of Taxes for the Town of Walpole of all unpaid real estate taxes, accrued interest and other charges such as demand, including court costs, but that other municipal expenses, unpaid water bills having been abated, are not properly a part of the tax title account. If the parties do not agree as to the amount to be paid by the defendant to the Town, then this matter will stand for further hearing on the issue of the actual amount to be paid. Once a finding has been made, then I will set a due date three months thereafter, thus in effect granting the defendant three months to make the necessary payment.

Judgment accordingly.