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Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

UNITED STATES OF AMERICA, ) 

) 

Appellant, . ) 

) 

v. ) 

) 

STATE OF COLORADO, } 

) 

Appellee. ) 

FILED 

United States Court of Appea!s 

'l'<>nth r.;'"C'Jit 

APR 0 71989 

ROBERT L. HOOCKli:R 

Clerk 

No. 87-1957 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 85-F- 974) 

William s. Eastabrook (Michael c. Durney, Acting Assistant United 

States Attorney General; and Michael L. Paup, Wynette J. Hewett, 

and Richard J. Driscoll, Attorneys, Tax Division, United States 

Department of Justice, Washington, D.C., with him on the briefs), 

Department of Justice, for the Appellant. Robert N. Miller, 

United States Attorney, of Counsel. 

Steven · M. Bush (Duane Woodard, Attorney General of Colorado; 

Charles B. Howe, Deputy Attorney General of Colorado; and Richard 

H. Forman, Colorado Solicitor General, with him on the brief), 

Assistant Attorney General of Colorado, General Legal Services 

Section, for the Appellee. 

Before ANDERSON, McWILLIAMS, and TACBA, Circuit Judges. 

TACHA, Circuit Judge. 

Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 1 
This appeal arises from a dispute between the United States 

Government and the State of Colorado (State) over property that 

the State seized and sold to satisfy state tax liens. The 

district court granted summary judgment in favor of the State, 

holding that the State's purchase of seized property at a tax sale 

did not extinguish the State 1 s tax liens, and tha~ state tax liens 

retained their priority over federal tax liens despite the fact 

that the State failed to give notice to the government prior to 

sale as required by I.R.C. § 7425. We affirm. 

I. 

We will affirm a grant of summary judgment if it is clear 

from the record that there are no genuine issues of material fact 

and the defendant is entitled to judgment as a matter of law. 

Willner~ Budig, 848 F.2d 1032, 1033-34 (lOth Cir. 1988), cert. 

denied , 109 S. ct. 240 (1989). Such affirmance need not be based 

on the grounds relied upon by the district court, but may be based 

on any proper grounds for which there is a record sufficient to 

permit conclusions of law. Griess v. Colorado, 841 F.2d 1042, 

1047 (lOth Cir. 1988) . The district court decided this case based 

upon stipulated facts; therefore no material facts are in dispute. 

On September 16, 1981 , and March 29, 1982, the State filed 

liens against the taxpayer, Gourmet Junk Foods, Inc ., for 

$3,087.66 of unpaid Colorado labor and employment taxes. On March 

29, 1982, the IRS also made assessments against the taxpayer for 

unpaid federal withholding taxes and FICA taxes totaling 

$7,067.59. The IRS filed notices of federal tax liens with Pitkin 

County, Colorado on June 23, 1982, and with the Secretary of State 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 2 
on June 24, 1982. The parties concede that the state liens 

initially had priority over the federal liens. 

On January 24, 1983, the State seized and stored personal 

property of the taxpayer for the purpose of protecting its liens. 

On February 7, 1983, the State held a public auction of the seized 

property pursuant to Colorado law. See Colo. Rev. Stat. § 39-21-

114 (1982). The State did not give prior notice of this sale to 

the IRS as required by I.R.C. § 7425(c}(l). Because the highest 

bid tendered at the auction was insufficient, the State purchased 

the property. See Colo. Rev. Stat. § 39-21-114(2}(a) (1982). 

On March 31, 1983, the IRS served a notice of levy on the 

State, demanding that the State turn over all property in its 

possession that belonged to the taxpayer. The State did not 

comply with this demand and, furthermore, sold the property to a 

third party for $7,ooo on April 14, 1983. The IRS served a final 

demand for the property on April 15, 1983, and the State persisted 

in refusing to turn over the property or the proceeds. 

The Government initiated litigation in the district court on 

April 9, 1985. The Government argued that because the State did 

not comply with the notice requirements of I.R.C. § 7425(c)(l), 

its junior lien survived the sale of the property. Further, 

because the State purchased the property at the sale, the 

Government contended that the doctrine of merger operated to 

extinguish the State's lien. The State conceded that the federal 

tax liens survived the sale, but disputed the extinguishment of 

the state tax liens. 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 3 
The district court granted summary judgment in favor of the 

State, ordering that the State retain that portion of the property 

necessary to satisfy state tax liens and costs, with the remainder 

to be paid to the Government. The Government appeals from this 

order. 

II. 

We must decide whether the State's purchase of the property, 

without giving notice to the government as required by I.R.C. 

§ 7425, extinguished the State's senior lien by merging that lien 

with fee title to the property, thereby elevating the federal tax 

lien to first priority. Federal law governs the priority of a tax 

lien against other claims to property. Aquilino ~ United States, 

363 U.S. 509, 513-14 (1960); United States v. Wingfield, 822 F.2d 

1466, 1473 (lOth Cir. 1987), cert. dismissed, 108 S. Ct. 1762 

(1988); see I.R.C. §S 6321-6323. Unless Congress has stated 

otherwise, however, we look to state law in determining what 

constitutes a property interest or right to property to which a 

federal tax lien may attach. United States ~ Brosnan, 363 u.s. 

237, 240-42 (1960); ~ Bigheart Pipeline Corp. ~United States, 

835 F.2d 766, 767 (lOth Cir. 1987). Accordingly, whether merger 

applies in this case must be answered by reference to state law. 

See First American Title Ins. Co. ~ United States, 848 F.2d 969, 

971 (9th Cir. 1988) (applying California law of merger); United 

States ~ Polk, 822 F.2d 871, 874 (9th Cir. 1987) (applying 

Arizona law of merger); Southern Bank~ IRS, 770 F.2d 1001, 1007 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 4 
(11th Cir. 1985) (applying Alabama law of merger), cert. denied, 

476 u.s. 1169 (1986). 1 

A. 

Under Colorado law, the doctrine .of merger does not 

automatically apply when the same person acquires a greater estate 

and a lesser estate in property. "The doctrine of merger ••• is 

not a rule of property; the question of merger depends upon intent 

. . II Hart v. Monte Vista Bldg. Ass•n, 257 P. 1079, 1079 

(Colo. 1927). 

In law a merger always takes place when a greater 

estate and less[er] [estate] coincide and meet in one 

and the same person, in one and the same right, without 

any intermediate estate, unless ~ contrary intent 

appears. The question is upon the intention, actual or 

presumed, of the person in whom the interests are thus 

united. 

Goldblatt v. Cannon, 37 P.2d 524, 526 (Colo. 1934) (emphasis 

added); ~Colorado Nat•l Bank-Exchange v. Hammar, 764 P.2d 359, 

361 {Colo. Ct. App. 1988). 

If no actual intention to preserve the lien has been 

expressed, such an intent 

will be presumed 

interests of the 

circumstances. If 

to be ~ept alive, 

inferred. 

from what appear to be the best 

party, as shown by all the 

his interests require the incumbrance 

his intention to do so will be 

1 One district court has interpreted Southern Bank as requ~r1ng 

application of the doctrine of merger as a matter-or-federal law. 

See Title Guar. Co. v. IRS, 667 F. Supp. 767, 771-72 (D. Wyo. 

1987). We re)ec~his interpretation. We read Southern Bank as 

hol ding that the foreclosure sale there resulted in a complete 

merger of title as a matter of Alabama state law. To the extent 

Southern Bank•s analysis may rely on preemption by I .R.C. 

§ 7425(b), we disagree. 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 5 
Vaughn~ Comet Consol. Mining Co., 39 P. 422, 424 (Colo. 1894) 

(quoting Pomeroy, Equity Jurisprudence§ 791); see Sellers v. 

Floyd, 52 P. 674, 675-76 (Colo. 1898) (intent to preserve junior 

liens inferred when property owner purchased such liens to protect 

himself in the event that his title to property was defeated).2 

Here, the State's interests plainly support an inference that 

the State intended to preserve its lien in the property. By 

purchasing the property at the auction, the State intended to 

protect its lien, and perhaps junior lienholders, by preventing 

the property from being purchased at below its market value. It 

would be an absurd result to conclude that the State intended to 

destroy its own lien, which in this case would preclude collecting 

any part of its debt, by taking action that arguably benefited 

junior lienholders. Absent evidence of intent to the contrary, we 

therefore presume that the State intended to preserve its lien. 

B. 

The Government contends that, regardless of the state law 

doctrine of merger, section 7425 requires that a senior lienholder 

who fails to give notice to the government prior to sale of 

property held as collateral, and who purchases such property at 

the sale, loses the priority of that senior lien. The Government 

draws this interpretation from the statutory language which states 

2 Colorado has codified a rule of merger with regard to 

mortgages. Colo. Rev. Stat. § 38-38-109 (1982} provides: 

If the holder of such mortgage acquires the title 

conveyed by virtue of such foreclosure, the title 

evidenced by the mortgage shall nevertheless continue to 

secure the lien for the remaining obligation and shall 

not merge with the title acquired by such foreclosure. 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 6 
that the party who acquires the property in such a sale takes the 

property 11Subject to" the federal tax liens. See I.R.C. 

§ 7425(b). 

Section 7425 provides in relevant part: 

[A] sale of property on which the United States has or 

claims a lien • • • 

(1} shall, except as otherwise provided, be ~ subject to and without disturbing such lien ££ t~tle, if notice of such lien was filed or such t~tle recorded in the place provided by law for 

such filing or recording more than. 30 days before 

such sale and the United States is not given notice 

of such sale in the manner prescribed in subsection 

(c) ( 1) ~ or 

(2) shall have the same effect with respect to 

the discharge or divestment of such lien or such 

title of the United States, as may be provided with 

respect to such matters by the local law of the 

place where such property is situated, if 

(A) notice of such lien or such 

title was not filed or recorded in the 

place provided by law for such filing 

more than 30 days before such sale, 

(B) the law makes no provision for 

such filing, or 

(C) notice of such sale is given in 

the manner prescribed in subsection 

(c) (1). 

Id. (emphasis added). Subsection (c)(l) requires the senior 

lienholder to provide written notice of a sale of collateral to 

the government 11 not less than 25 days prior to such sale. 11 Id. 

§ 7425(c}{l). 

The practical effect of this statute may be summarized as 

follows. The statute creates two duties to give notice -- one on 

behalf of the government, and one on behalf of the senior 

l ienholder who desires to sell collateral. The government must 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 7 
give a senior lienholder notice of its junior federal tax lien at 

least thirty days prior to the time that the senior lienholder 

sells collateral. If the government fails to file such notice, 

the sale of the collateral extinguishes the government's lien on 

that property, and the purchaser takes free of the junior federal 

lien. By timely filing notice of its tax lien, however, the 

government triggers the requirement that the senior lienholder 

give notice to the government at least twenty-five days prior to 

selling the collateral. 

If the senior lienholder gives timely notice of the sale to 

the government, the government's junior liens on collateral are 

extinguished by the sale to the extent provided by local law. 

Thus, the purchaser generally will take the property free of all 

such liens. If, however, the senior lienholder fails to give 

notice of the sale to the government, the government's junior lien 

is preserved and the purchaser of collateral takes property 

"subject to" the government's lien. 

The legislative history of section 7425 shows that Congress 

was responding to the problems caused by the practice of 

foreclosing a senior security interest without notifying the 

government. S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 

1966 u.s. Code Cong. & Admin. News 3722 , 3748. Foreclosure 

without notice had the effect of extinguishing the junior lien of 

the United States "under circumstances where it is not possible 

for the Internal Revenue Service to take steps to protect the 

United States in the collection of its tax revenues... Id. By 

adding the notice requirement, the government was given "an 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 8 
opportunity to review its position and determine the appropriate 

action without placing an undue bu~den on a foreclosing creditor." 

!d. 

Neither the language nor the purpose of section 7425 supports 

the Goverment's claim that failure to comply with the notice 

provisions automatically elevates junior tax liens to priority 

status. By m?king property sold without notice "subject to" the 

lien of the United States, section 7425 merely preserves federal 

tax liens from being extinguished through sale of the underlying 

collateral; it does not otherwise alter the federal priority rules 

of I.R.C. §§ 6321-6323. 

Under the federal law of priority, the State's tax liens are 

senior to the federal tax liens. The district court therefore 

correctly granted summary judgment in favor of the State and 

ordered that the State had priority to satisfy its lien from the 

proceeds that resulted from the State•s sale of the property to a 

third party. 

We recognize that federal tax liens are important tools used 

to protect the "vital national interest•• in collecting federal 

taxes. Southern Bank, 770 F.2d at 1009. We further agree with the 

Eleventh Circuit that 

[b]ecause of this important interest, we cannot permit 

states to nullify the effectiveness of the federal tax 

lien by enacting nonjudici al foreclosure laws or by 

applying various equitable principles recognized by the 

state. The legislative history of 26 u.s.c. § 7425 

makes clear that Congress did not intend such a result. 

Id. By applying the state law of merger, which here permitted an 

exception when the purchaser did not intend merger, we have 

neither nullified the effectiveness of federal tax liens nor 

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Appellate Case: 87-1957 Document: 01019596432 Date Filed: 04/07/1989 Page: 9 
allowed the states to alter the federal law of priority among 

competing liens~ Rather than creating an exception to section 

7425, as the Government argues, the result in this case is 

entirely consistent with the statute. The federal tax lien is 

preserved, and the priority among competing lienholders is decided 

on the basis of the federal law of priority. 

The judgment of the district court is therefore AFFIRMED. 

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