FOR THE NORTHERN DISTRICT OF CALIFORNIA
RONALD SIDEBOTTOM, No. 1-87-00146
Memorandum of Decision
This dispute between the debtor and the Internal Revenue Service comes before the court on
an agreed statement of facts. The issue to be decided is whether the debtor is entitled to a credit
for the full value of a seized asset where the IRS, after seizure, negligently administers the asset.
Prior to bankruptcy, the debtor held two promissory notes secured by deeds of trust. The
deeds of trust were "wrap-around" deeds of trust, junior to a deed of trust held by a third party.
The debtor was entitled to payment on the notes he held, but was obligated to make the payments
to the senior deed of trust holder from those payments. Thus, what the debtor was entitled to
keep was the difference between the note payments he received and the payments he was obligated
to make to the senior deed of trust holder.
When one holds a note secured by a "wrap-around" deed of trust, there are two unquestionably
prudent ways one can realize value from it. First, one can sell the note to a third party for cash,
thereby realizing the discounted value of the note in a lump sum. Second, one can continue to
collect the payments on the note and, from those payments, continue to service the senior debt,
eventually recovering the difference between the note one holds and the smaller balance owed to
the senior lienholder.
In this case, the IRS did not take either prudent course. Instead, it elected to keep all of the
payments and not service the senior debt. This resulted in the obligors exercising their right to pay
the senior debt directly, and rendered the notes seized by the IRS worthless.
The debtor argues that the IRS was obligated to sell the notes, and its failure to sell them
automatically entitles him to a credit for their sale value. The court believes that this argument
misses the mark, as the statute cited by the debtor does not seem to require
a sale, and the IRS had
another prudent means of realizing cash from the notes. The court sees the issue not as whether
the IRS is responsible for failing to sell, but whether the IRS is responsible for failing to administer
seized asset prudently.
It appears clear that the IRS is responsible for the proper care of seized assets. Heck v.
, 523 F.2d 23 (9th Cir.1975). Where the IRS has diminished the value of an asset through
mismanagement, the taxpayer is entitled to a credit based on the value of the asset, not the amount
actually realized by the IRS. United States v. Pittman
, 449 F.2d 623, 628 (7th Cir.1971). Since
the negligent management of the notes by the IRS after seizure rendered them worthless, the
debtor is entitled to a credit for their value on the date of seizure, and not just what was actually
Counsel for the debtor shall submit an appropriate form of order fixing the amount of the IRS
claim, which counsel for the IRS has approved as conforming to this decision.
Dated: October 15, 1990 _______________________