There are a number of difficult questions that come up when one spouse has a debt with the IRS and also owns property jointly with their spouse. The question is often whether the spouses can transfer the property to the non-liable spouse.
The answer is, maybe. The court addressed this in U.S. v. Gerard, No. 1:14-CV-67-TLS (N.D. Ind. 2018).
Contents
1 Facts & Procedural History On Gerard Case
2 Real Estate Title & the IRS’s Lien
3 Purchaser for Value
4 The Amount Invested Does Not Impact the Lien
5 If the Facts Were Different
Facts & Procedural History On Gerard Case
The taxpayers were married and they lived in a common law state. They purchased real estate together in 1990. The taxpayer-wife owned a sole proprietor business that accrued a balance for unpaid employment taxes. Several years later, the taxpayers filed a gift deed to transfer the real estate to the taxpayer-husband’s individual name. The court considered whether the IRS’s tax lien survived the transfer of the real estate to taxpayer-husband.
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Real Estate Title & the IRS’s Lien
Generally, when a married couple acquires real estate during marriage, state law will provide that the real estate is held in tenants by entirety (this is true for most non-community property states; the rules are substantially different for community property states…).
The term “tenants by entirety” is a real estate concept. It refers to a spouse owning an undivided one-half interest in the real estate.
Our Federal tax laws generally say that the IRS’s lien or right to property looks to the state definition of property. For property held by tenants by entirety under state law, the IRS’s lien attaches to the spouse’s fifty percent interest.
There are several nuances and exceptions to these general rules. One of these is the purchaser for value rule.
Purchaser for Value
The taxpayer-husband in this case argued that he was a purchaser for value and, as such, the IRS’s lien did not continue to attach to the real estate after the real estate was transferred to him.
A purchaser for value is:
a person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in real estate which is valid under local law against a subsequent purchaser without actual notice.
The taxpayer-husband argued that he paid value for the real estate given that the taxpayer-wife had used marital assets to pay for her individually-owned business and that the transfer of the real estate was in satisfaction of that debt to him.
The court noted that, at best, this is past consideration. Past consideration represents an amount owed prior to the transfer that is being considered. Past consideration generally does not count for this purpose.
The Amount Invested Does Not Impact the Lien
Since the court concluded that the taxpayer-husband was not a purchaser for value, the IRS’s lien would attach to his wife’s interest despite the transfer. This leads to the question as to what interest the taxpayer-wife had in the real estate.
The taxpayers argued that the taxpayer-wife owned less than a 50 percent interest in the real estate. The taxpayers’ argument was that the taxpayer-wife had contributed 10 percent of the monies to purchase the real estate. Therefore, the argument was that the taxpayer-wife only owned 10 percent of the real estate.
The court did not agree. It concluded that the taxpayer-wife acquired a 50 percent interest despite only putting in 10 percent of the monies to purchase the real estate. The court reached this conclusion by examining the applicable state law.
If the Facts Were Different
While the taxpayers did not prevail in the court case, they may have other options.
What if the taxpayer-husband argued that the transfer was made to relieve the taxpayer-wife of her future obligations, such as an obligation to pay alimony to the taxpayer? This was not part of the case, but it may be that this future consideration may suffice to qualify a non-liable spouse as a purchaser.
It may also have been possible for the taxpayer-husband to refinance the real estate with a third party lender and pay the proceeds to the taxpayer-wife. If the taxpayer-husband were to do this, perhaps he could then qualify as a purchaser for value.
Similarly, if the taxpayer-husband could not qualify for a loan or find a lender who would lend given the potential IRS lien, maybe he could pay the taxpayer-wife a lesser amount to reduce the value of her 50 percent interest to 20 percent or less. The IRS usually does not pursue real estate assets that have less than 20 percent interest. Perhaps this would also have allowed the taxpayers to keep their real estate.
Hiring a Tax Relief Company
It’s not uncommon for tax debt advisors and tax relief companies to help taxpayers in distress. This can be quite helpful, especially if you aren’t sure how to fill out the forms you need. Taxes are complicated and there’s clearly a wide margin for error. Many people get into trouble with the IRS just for accidentally filling out a form wrong. Tax debt advisors can help you avoid this.
Our experts can help rectify erroneous tax bills and guide you in picking a suitable repayment program. Contact us today (713)300-3965 for back tax filing and tax relief services.
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