If You Are An Innocent Party, Can The IRS Foreclose On An Interest That You Own?
Under tax law, the Internal Revenue Service (the “IRS) has a lien on a taxpayer’s property for unpaid taxes. The U.S. Attorney can direct a civil action to enforce the lien and the court can adjudicate all matters and can direct a sale of the property and the distribution of such proceeds.
In U. S. V. Adent, the appellate court determined that a district court could enforce a tax lien by forcing a sale of an entire property in which a delinquent taxpayer had EVEN though an innocent party also had an interest in the same property . The innocent person is entitled to their portion of the proceeds but does not have a right to keep the property.
Leonard and Joy filed joint income tax returns for the year’s 1998 and 2001 owing taxes they did not pay. They owned property A which was their residence and Leonard and his son owned commercial property B. The IRS filed tax liens against both parcels. The IRS filed suit to enter a judgement, foreclose the liens and sell both parcels A and B to satisfy the liens. Leonard and Joyce stipulated to the entry of judgement
The Wisconsin district court determined, as there were no innocent parties as to parcel A, the sale had to occur. As to parcel B, the court determined the son was an innocent party and weighed the factors enunciated in the United Supreme Court case, U.S. v. Rodgers; prejudice to the government’s financial interests, whether the innocent party had a legitimate expectation that his interest would be subject to sale and the likely prejudice to the innocent party. The court found in favor of the government.
The Seventh Court of Appeals affirmed the district court and noted that Leonard’s son had an innocent 1/2 ownership in the property; however, there were no circumstance of undue hardship to the son that overcame “the Government’s paramount interest in prompt and certain collection” of the unpaid taxes. The law does NOT provide for a partial sale and the government’s interest would be severely prejudiced by denying the sale.
ADVICE: The moral of this story is know your partners. It is unclear whether the fact that the delinquent taxpayer’s partner was his son made the difference to the court. What if the partner was unrelated and the partner had particularly held this property for investment such as farmland and wanted to develop the property? Would the only recourse be to pay the delinquent taxpayer’s debt?
WORD OF THE WEEK: STIPULATION is a voluntary agreement between opposing parties concerning some relevant points. Many times in tax cases the facts are stipulated and the argument is how the law applies to those stipulated facts.
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