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United States v. Steele

United States District Court, E.D. Kentucky, Southern Division, Frankfort

March 28, 2018



          Gregory F. Van Tatenhove United States District Judge

         Defendant John K. Steele considers himself a “sovereign citizen, ” and this matter arises from Mr. Steele's failure to pay federal income tax to the Government of the United States of America. In their complaint, Plaintiff United States seeks two forms of relief: (1) a judgment of Mr. Steele's indebtedness to the United States of America, and (2) a tax lien and foreclosure on Mr. Steele's property located in Bagdad, Kentucky. [R. 1 at 4-5.] In regards to the tax lien, the United States included as defendants in their complaint any entity they believed might have an interest in the real property located in Bagdad, Kentucky, including Defendant Kimberly A. Flake, formerly Kimberly A. Steele. Id. at 2. Today, the United States has moved for Partial Summary Judgment against Ms. Flake, seeking judgment in its favor as to the priority of the federal tax liens encumbering the real property located at 1058 Jacksonville Road, Bagdad, Kentucky. [R. 57.] For the following reasons, the United States' motion is DENIED.


         When evaluating a motion for summary judgment pursuant to Federal Rule of Civil Procedure, the Court must review the facts and draw all reasonable inferences in favor of the non-moving party. Logan v. Denny's, Inc., 259 F.3d 558, 566 (6th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)).

         Ms. Flake married Defendant John K. Steele on August 2, 1975. [R. 62 at ¶2.] In what appears to be February of 1997, Ms. Flake (as Mrs. Steele) and Mr. Steele signed a “Contract for Deed” with James and Nora Rogers to convey the Jacksonville Road Property in exchange for $80, 000, to be paid in eight yearly installments of $10, 000 beginning February 12, 1997. [R. 65-1.] This contract allowed Mr. and Mrs. Rodgers to continue use of certain portions of the property, “[u]ntil such time as the completion of deed.” Id.

         On October 16, 2003, Ms. Flake filed for divorce in Shelby County. [R. 62 at 1.] The Contract for Deed agreement was recorded several months later on February 6, 2004, in Shelby County, Kentucky. [R. 65-1 at 2.] And then, the Family Court Judge entered a Limited Decree of Dissolution, dissolving Ms. Flake's marriage to Mr. Steele as of April 12, 2004. During the divorce proceedings, on December 11, 2006, the United States assessed taxes against Mr. Steele for the 2000, 2001, 2003, and 2004 tax years. [R. 57-1 at ¶ 3.] Ms. Flake acknowledges these assessments. [R. 62 at ¶ 11.]

         The United States recorded notices of a Federal Tax Lien on “all property and rights belonging to” Mr. Steele with the Shelby County Clerk's Office in Shelbyville, Kentucky on July 20, 2007. [R. 57-1 at ¶ 5.] Ms. Flake also acknowledges this recording. [R. 62 at ¶ 12.] The United States did not file tax liens against Ms. Flake.

         The divorce became final on November 19, 2007, at which time the Shelby County Family Court awarded Ms. Flake the Jacksonville Road Property, but gave Mr. Steele the option to “retain ownership” if he paid Ms. Flake $225, 000 within sixty (60) days of the order. [R. 57-5.] Mr. Steele never paid Ms. Flake, and on April 3, 2017, Ms. Flake and the Estate of Nora Rogers (both Mr. and Mrs. Rogers are now deceased) executed a general warranty deed of conveyance “in consideration of the satisfaction of the terms and conditions” of the 1997 Contract for Deed for the Real Property. [R. 62-4.]

         Now, the United States seeks to foreclose tax liens on the Jacksonville Road Property. [R. 57-1 at 1.] Ms. Flake acknowledges the tax assessments filed against Mr. Steele [R. 62 at ¶ 11] and acknowledges the United States recorded its tax liens in the Shelby County Clerk's Office [R. 62 at ¶12.] Ms. Flake, however, denies that Mr. Steele ever held legal rights to the property. [R. 62-7 at 2.] The United States maintains Ms. Flake and Mr. Steele acquired legal rights to the Real Property in 1997, at the signing of the Contract for Deed. [R. 57-1 at 1.] Ms. Flake disagrees, stating that the Contract for Deed was not a deed under Kentucky law, and that the property remained titled to Mr. and Mrs. Rodgers, and subsequently, their estates, until April 3, 2017, when the Deed of Conveyance was executed, titling the Real Property to Ms. Flake. [R. 62-7 at 4-6.]



         Plaintiff United States seeks a tax lien pursuant to 26 U.S.C. § 6321, which allows in certain circumstances the United States to acquire a lien “upon all property and rights to property, whether real or personal, belonging to such person.” The United States seeks partial summary judgment to show that this tax lien has priority over Ms. Flake's interest in the property. The question of “whether and to what extent the taxpayer had ‘property' or ‘rights to property' to which the tax lien could attach” is governed by state law. Aquilino v. United States, 363 U.S. 509, 512-13 (1960); United States v. Brosnan, 363 U.S. 237, 240 (1960). However, once a tax lien attaches to the taxpayer's state-created interest, federal law determines the priority of any competing liens asserted against the taxpayer's “property” or “rights to property.” Aquilino, 363 U.S. at 513-14 (citations omitted).

         Since the United States requested a determination of priority of their lien, this Court first turns to the federal law. Priority for a tax lien is governed by the common-law principle “first in time, first in right.” United States by and through IRS v. McDermott, 507 U.S. 447, 449 (1993) (citations omitted). Tax liens are not automatically awarded priority over all other liens. Id. To have priority over other liens, the tax lien must be perfected prior to the other liens. Id. at 450. A tax lien under § 6321 is not valid against a subsequent purchaser or holder of security interest unless perfected in accordance with 26 U.S.C. § 6323(a). Perfection of tax liens against real property is completed in accordance with state law. 26 U.S.C. § 6323(f). For property in Kentucky, “a notice of the federal tax lien must be recorded in the office of the clerk of the county within which the property subject to the lien is located.” In re Dave Thomas Co., 51 B.R. 66, 70 (Bankr.W.D.Ky. 1985); 26 U.S.C. § 6323(f)(1)(A)(ii); KRS 382.480(1). Additionally, federal tax liens to property owned at the time of assessment, as well as after-acquired property. Glass City Bank of Jeanette, Pa. v. United States, 326 U.S. 265, 267-68 (1945).

         Ms. Flake filed the Contract for Deed for the Real Property with the Shelby County Clerk on February 6, 2004. [R. 57-6.] The recorded contract serves as notice of the contract, for the purpose of priority, to all persons. KRS 382.100. The United States filed a Notice of Federal Tax Lien on July 20, 2007, with the Shelby County Clerk. [R. 57-7.] Not until April 20, 2017, did Ms. Flake record a deed in which the Nora Rogers ...

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