Additional complications arise if a taxpayer with outstanding tax liabilities is married and the spouse is not liable for those taxes, e.g., tax liabilities incurred for a tax year previous to the marriage, or tax liabilities incurred on a “married filing separate” return.
Spouses are not liable for their spouses taxes if they do not file a joint return, e.g., the tax is for a year a separate (married or single) return was filed, or incurred prior to marriage.
Normally, a non-liable spouse and the non-liable spouse’s separate property are not subject to IRS collection activity for the delinquent spouse’s tax liability. This does NOT mean the non-liable spouse is not affected, because if the IRS garnishes the liable spouse’s wages or requires installment payments, there is less money available to support the household. The non-liable spouse’s share of a tax refund may be withheld and require filing of a request for injured spouse relief.
Some joint assets such as joint bank accounts can be reached by the IRS, and in the case of bank accounts they can seize the entire account (because either spouse can access the entire balance).
Until 2002, the IRS could not reach property owned as “tenancy by the entirety” (held as “husband and wife”) in Missouri (e.g., a residence) where only 1 spouse was liable for the tax debt. This was because each spouse has only a current right to occupy tenancy by the entirety property and an expectation of inheritance on the other spouse’s death, but neither spouse can mortgage or sell their separate interest in the property without the other spouse’s agreement (and signing the deed, mortgage or deed of trust). Because neither spouse alone had the ability to deal with the property the IRS could not reach tenancy by the entirety property with enforced collection.
This changed April 17, 2002 with the Supreme Court’s decision in U.S. v. Craft, 122 S.Ct. 1414, 2002-1 USTC ¶50,361, 2002 WL 561332, holding that the liable spouse possesses sufficient property rights under state law for the federal tax lien to attach, and once the lien attached federal law controls enforcement of the lien.
In 2003, the 6th Circuit Court of Appeals in Hatchett v. U.S., 2003-1 USTC ¶50,504 (6th Cir, June 4, 2003), rev’g 2000-1 USTC ¶50,455 (DC Mich.), found that:
- Craft could be applied retroactively (applied to circumstances or transactions existing before the date the decision was written);
- the government could seize and sell the properties because they could not be divided, and could collect a portion of the sale proceeds; and
- on remand could present its nominee and lien-tracing theories in order to determine the exact (and arguably greater) value of the government’s interest in the properties. 6/22/03
The IRS provided guidance on collection from property held as tenancy by the entirety, where only 1 spouse is liable for the outstanding taxes, in light of Craft, in Notice 2003-60 (link to pdf file below). Questions addressed include:
- does transfer to a non-liable spouse in divorce avoid the lien on the liable spouse (no); and
- does death of the liable spouse eliminate the lien (yes). 9/16/03
US v. Charles J. Barr
In US v. Charles J. Barr, 07-11717 (DC, East. Dist. Mich., So. Div. September 2, 2008), the wife failed to show that based on the four factors set forth in Rodgers, foreclosure and forced sale of the property would be an extremely inequitable and offensive result. 9/18/08
In Rodgers, No. 81-1476, 103 SCt 2132, 461 US 677, 5/31/83, reversing and remanding and vacating and remanding, 82-2 USTC ¶9536, 81-2 USTC ¶9533 (S.Ct 1983), on writ of certiorari to the United States Court of Appeals for the Fifth Circuit, the Supreme Court held that foreclosure of federal tax liens that had attached to jointly owned property was appropriate under 26 U.S.C. § 7403, by sale of the entire property and distribution of the proceeds in proportion to the value of the interests of each owner. But, § 7403 does not require a district court to authorize a forced sale under absolutely all circumstances, and can take into account both the Government’s interest in prompt and certain collection of delinquent taxes and the possibility that innocent third parties will be unduly harmed by that effort. The Court emphasized that “the limited discretion accorded [a district court] under § 7403 should be exercised rigorously and sparingly, keeping in mind the Government’s paramount interest in prompt and certain collection of delinquent taxes.
Under Rodgers, the factors that a district court must consider before electing to order a sale include the following:
- “the extent to which the Government’s financial interest would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes;”
- “whether the third party with a non-liable separate interest in the property would, in the normal course of events (leaving aside § 7403 and eminent domain proceedings, of course), have a legally recognized expectation that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors;”
- “the likely prejudice to the third party, both in personal dislocation costs and in … practical undercompensation;” and
- “the relative character and value of the non-liable and liable interests held in the property.” Id. at 710-11. This is not an exhaustive list of the factors the court may consider, and it should not be used as a mechanical checklist.
In application of those 4 factors the noted:
First, the financial interest of the United States would be substantially prejudiced if sale of the entire property were denied and it were allowed to sell only Charles’ interest in the property. Because the United States cannot look to any other assets of Charles to collect, the Cumberland Property is not amenable to partition; and it is unlikely that any purchaser could be found for only Charles’ interest.
The government contends that if this court orders foreclosure, the United States would petition the court to appoint a local real estate broker as a receiver, who would list the Cumberland Property for sale on the open market, not through an auction. The government expects that the sales proceeds should approximate the fair market value of the property. After deduction of a five percent sales commission and closing costs, the net proceeds could be as much as $500,000. Charles’ interest would entitle him to half of the sale proceeds. Since his assessed tax liabilities exceed the value of his share of the property, the United States would be entitled to his entire share. Thus, the first factor weighs in favor of foreclosure and sale.
“The second factor also does not provide support for Carolyn’s position. In the normal course of events, she could argue that her interest in the Cumberland Property would not be subject to a forced sale. However, such a legally recognized expectation of a non-liable joint owner can be disturbed when that spouse “has acted with her husband in such a way as to frustrate the government’s tax collection efforts.” United States v. Bierbrauer [ 91-2 USTC ¶50,331], 936 F.2d 373, 376 (8th Cir. 1991). In this case Carolyn participated in the conveyance of four properties that were specifically contemplated to frustrate the United States’ tax collection efforts. These were four properties in Saginaw, Michigan, that Charles’ mother conveyed to Carolyn and not to Charles following the death of Charles’ sister. Thus, Carolyn should not be permitted to engage in a shell game with the Saginaw properties to elude the very laws whose protection she now claims.
The third Rodgers factor does not weigh in favor of Carolyn. Although she argues that she would be prejudiced by having to move out of the Cumberland Property, there is no evidence that she would be unduly harmed by having to relocate or that her personal dislocation costs would be greater than in any other foreclosure against a residence to satisfy a tax lien. In Bierbrauer the court explained that if “the inherent indignity and inequity of being removed from one’s home” automatically precluded foreclosure, “the government could never foreclose against a jointly owned residence-a result clearly untenable under § 7403.” Bierbrauer, supra, at 375-76.
Carolyn Barr is 68 years old, is in good health, and sustains full-time employment. She claims no infirmity that would support a finding that relocation would unduly harm her. The inconvenience of her relocating is no different from the inconvenience associated with any foreclosure sale and is insufficient to support a denial of such a sale in this case. In light of her substantial personal indebtedness and the expenses of maintaining the Cumberland Property, where monthly heating bills in the winter exceed $1000, perhaps cash in hand would be of greater benefit than judicial license to remain in the home.
Furthermore, Carolyn is guaranteed to receive her share of the proceeds of the sale of the Cumberland Property. Properties sold on behalf of the court routinely sell at or near fair market value. If it were to be sold at auction instead, she may be undercompensated for her interest in the property.
Finally, the fourth Rodgers factor, the relative character and value of the non-liable and liable interests held in the property, does not weigh in favor of this court exercising its limited discretion not to order sale of the entire property in this case. The Rodgers court was concerned with a situation in which the owner with the tax liability held only a small interest in the property and suggested that if the interest of the non-liable owner was worth 99% of the value of the property, there might be no reason to allow the sale of the entire property to proceed. This case, however, involves only two owners, husband and wife, each of whom holds an interest as tenants by the entireties that may be fairly divided between them.
In U.S. v. Mark R. Vogt, Lori A. Vogt, first Franlin Financial Corp., and Judy A. Davis, 2008-2 USTC ¶50,569 (N. D. IN 2008) the court denied the government’s summary judgment motion to foreclose tax liens and sell a delinquent taxpayer’s interest in a property he held in joint tenancy with his non-liable wife. 10/9/08
… the record suggests Lori may suffer other dislocation costs. In particular, Lori has indicated that she is not in good health, ( see DE 50-2 ¶ ¶8-11), and that she is not employed outside of the home (cite omitted). … the government does not show that there isn’t a genuine issue of material fact about them. Other courts evaluating § 7403 foreclosures have found these issues to be relevant. See, e.g., U.S. v. Jones [ 95-1 USTC ¶50,190], 877 F.Supp. 907, 918 (D.N.J. 1995) (“To dispossess an unemployed individual who has no source of income and who still has a minor son residing with her at her home in order to satisfy a debt owed by her husband presents a grossly unfair solution and one that violates New Jersey’s policy of protecting the marital home.”); U.S. v. Jensen [ 92-1 USTC ¶50,078], 785 F.Supp. 922, 924-25 (D. Utah 1992) (concluding that “depriving [the third party] of the roof over her head would be a significant hardship” given her medical condition) …
The record before me shows that Lori is a non-liable party and is a mother of two children living in a home built by her husband and father with their own hands. (cite omitted) Those facts alone do not mean that I will ultimately use my limited equitable discretion to block the sale of the roof over her head, but they give me pause. Perhaps there is in fact no market for Mark’s independent interest in the home such that there is a great prejudice to the government. Perhaps Lori is sufficiently well-supported financially to overcome the dislocation costs. Perhaps her children are at or near the age of majority or independence such that they are a non-factor. Any number of undeveloped facts may block or trigger my limited equitable discretion in this case.
None of this means the government cannot make its case for forced sale. Rather, it simply means that, in this “individualized” matter, see Rodgers [83-1 USTC ¶9374], 461 U.S. at 711, the government has failed to prove that there are no genuine issues of material fact. For a proceeding that is rooted in equity, and therefore inherently fact-intensive, I simply do not have a complete enough picture to forego my equitable discretion and order foreclosure at this stage.