Massachusetts Agencies

Trusts and Federal Tax Liens

Trusts and Trustees

In Zuroff v. First Wisconsin Trust Company, 41 Mass.App.Ct. 491, 671 N.E.2d 982 (1996) Pamela DiSarro held title in her name as trustee of 1408 Commonwealth Trust. The trust was a nominee trust in which Ms. DiSarro held a 51% beneficial interest. In response to requirements imposed by a lender, First Wisconsin Trust Company, Ms. DiSarro conveyed the title to herself, granted a mortgage on the property and then reconveyed the property back to herself as trustee of the aforementioned trust. Thereafter two federal tax liens were filed against Ms. DiSarro in her individual capacity. In the process of foreclosing its mortgage First Wisconsin Trust Company did not send any notice to the IRS, either under G.L.c. 244, §14 or 26 U.S.C. §7425(c)(1). After the foreclosure the lender entered into a purchase and sale agreement with Zuroff, who made a deposit on the property. The question before the Appeals Court in this action by Zuroff for a refund of the deposit was whether the foreclosure was good. Zuroff claimed that it was defective due to the lack of notice to the IRS.

The court states outright that property that one holds as trustee is not subject to payment of the trustee's personal debts. It "assumed" that the IRS could have reached Ms. DiSarro's fifty-one percent beneficial interest in the trust, but held that it did not follow that the lien attached to the trust res itself or that the IRS could reach the property in the hands of a purchaser for value. The court's decision, however, then revolves around whether or not the federal lien could have been discovered as having been filed against Ms. DiSarro individually. The court noted that nothing on the record disclosed who the beneficiaries of the 1408 Commonwealth Trust were and that under 26 U.S.C 6323(f)(4) "the Federal tax lien is not valid against a purchaser unless the fact of its filing is recorded in a public Federal lien index so that a reasonable inspection of the index will reveal the existence of the lien." The court concluded that the lien could not be reasonably discovered and, therefore, did not affect the title. This ruling and seems to in contradiction to the court's decision in Fairfield Associates v. General Builders Supply Company, 40 Mass.App.Ct. 1109, 662 1063 (Summary Disposition, 1996). In Fairfield Associates it was held that a mortgage from April A. Iannacone individually, when she held title as trustee, was good as against subsequent attaching creditors who had filed their liens against Ms. Iannacone as trustee, the court stating that "[n]o reasonable title examiner would have been misled by the state of the records." But for now Stewart Title Guaranty Company will permit the issuance of policies without exceptions for federal tax liens based on facts consistent with those in Zuroff. It is likely that the decision will be further appealed and that the IRS will intervene, which may clarify the matter.