The appeals court affirmed the lower court’s decision, siding with the IRS. The court held that the federal priority statute does apply to foreclosure surplus funds and that the court clerk, by holding and controlling the surplus, functions as an “administrator” under the statute. The court also confirmed, based on probate records, that Nelson’s estate was insolvent.
The outcome: the IRS, not the state tax agency, was entitled to the surplus funds. The court also denied the Wisconsin Department of Revenue’s request for reconsideration, maintaining its interpretation of the federal statute and the clerk’s role.
For mortgage professionals, this case is a clear reminder that federal tax liens take precedence over state claims when distributing surplus funds from a foreclosure. The decision underscores the importance of checking for federal tax liens before distributing any leftover funds, especially when an estate is insolvent and multiple government creditors are involved.
In practical terms, if you’re handling foreclosures or advising clients on properties with outstanding tax debts, this ruling shows that the IRS will generally have the first claim on surplus funds. It’s a straightforward but important takeaway for anyone in the mortgage business: when surplus money is on the table, federal tax liens come first.