United States District Court, E.D. Kentucky, Southern Division, Frankfort
MEMORANDUM OPINION & ORDER
Gregory F. Van Tatenhove United States District Judge
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
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)).
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
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.]
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.
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.]
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.]
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
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).
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