A released federal tax lien can still maintain its priority over junior creditors, an Appeals Court says in the case of a debtor who owed back taxes to IRS. The agency put a tax lien against his property, including a tract of undeveloped land.
The Service released its lien on the parcel to enable the city to condemn the property, and the city gave IRS the value of its interest in the tract. The debtor sued the city for paying too little and won an extra $420,000. A creditor in line after the IRS sought to jump ahead and tap the money, claiming that by discharging its lien, the Service had no interest in the extra proceeds.
But the Appeals Court ruled that the release of the lien applied only to the parcel of land, and not to the interest the debtor had in the extra condemnation proceeds (Hannon v. City of Newton, 1st Cir.).