Rubin on Tax: What Happens to Jointly Owned Property When One of the Owners Owes the IRS

In his article, Charles Rubin discusses a case in which a couple owned 50% of a commercial property, with their son owning the other 50%. The couple owed the IRS for unpaid taxes so the IRS placed a lien on the property and hoped to foreclose the liens and force sale of the property where 50% of the proceeds would go to the IRS while the remaining would go to the couple’s son. Rubin explains,

Code Section 7403 provides authority to the government to file suit to enforce its lien and force a sale of the liened property. There is no exception in Section 7403 that prevents its operation even though there are “innocent third-party” interest holders in the subject  property that do not owe taxes to the IRS. The U.S. Supreme Court, in US v. Rodgers, 461 US 677 (1983), confirmed that the Code Section authorizes the sale of the whole property in these circumstances, and that the Supremacy Clause of the U.S. Constitution overrides any state law to the contrary that seeks to protect innocent third-party interest holders.

However, Code Section 7403 says the district court “may” order a forced sale, not “shall.” The Supreme Court in Rodgers acknowledged the district court has discretion to not order a sale, but that discretion is not unbridled and should be exercised only sparingly. It provided four factors for consideration in making this determination: (1) the prejudice to the government’s interest as the result of a partial, rather than a total, sale, (2) whether the third party with a non-liable separate interest in the property would, in the normal course of events … have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors, (3) the prejudice to the third party as the result of a total sale, and (4) the relative character and value of the non-liable and liable interests held in the property.

Find the entire post here: What Happens to Jointly Owned Property When One of the Owners Owes the IRS

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal