Federal tax claims take priority in Wisconsin foreclosure

The United States should have priority in receiving surplus proceeds from a foreclosure over the Wisconsin Department of Revenue, according to the Wisconsin Court of Appeals District II.

The case involved the estate of Richard Nelson, who owed substantial tax debts to both the U.S. government and state Department of Revenue. At the time of his death, Nelson owed $175,431.51 to the United States and $115,975.33 to the state. The Bank of America issued foreclosure proceedings against his property to recover the debt he owed them. Once the sale was complete, there was a surplus amount of $54,421.96

Both the U.S. and state governments — who were named as defendants in the case due to the unpaid taxes — laid claim to the funds to help pay off the tax debt. The Waukesha County Clerk of Courts held on to the surplus while waiting for a circuit court to decide where the funds would go.

The U.S. government cited U.S.C. Statute 3713, which prioritizes federal claims when a deceased debtor’s estate is insufficient to cover all debts, in their argument. The DOR contested the application of the federal priority status stating the clerk of court did not qualify as an “administrator” under the federal statute.

The Waukesha County Circuit Court ruled in favor of the U.S. government saying it determined the clerk functioned as an “administrator” for the purpose of the statute. In making its decision, the circuit court referenced previous Supreme Court cases that advocated for a liberal construction of the statute to ensure the government’s claims are prioritized.

The DOR appealed the case asking the higher court to reconsider the decision.

The Court of Appeals noted the statute giving the federal government priority in collecting first on debts is “almost as old as the constitution.”

The DOR’s case focused on whether the clerk was the administrator, which it defined as “someone who is appointed to settle an estate.” The DOR explained the clerk could not be an administrator under 31 U.S.C. Statute 3713 because clerks hold constitutionally created offices and perform a variety of duties unconnected to settling estates.

“The statute applies here: the Waukesha clerk of court functions as an ‘administrator’ with respect to the foreclosure surplus because the clerk exercises control over the surplus and its disposition, and the estate of Richard Nelson is unable to pay all of Nelson’s debts.  Thus, the circuit court did not err in ordering the clerk to pay the surplus to the United States, or in denying the DOR’s motion to reconsider that order,” the court wrote.