In Davis, (DC LA 1/5/2017) 119 AFTR 2d 2017-309, a district court has sided with the IRS and allowed the foreclosure/sale of a property owned by three people. Of the three people, two owned the law firm which owed the back taxes forcing the sale. The case at hand was decided under the reasoning put forth by the Supreme Court in U.S. v. Rodgers, (S Ct 1983) 52 AFTR 2d 83-5042.
Under Rodgers, a district court is given the power to enforce a tax lien by the forced sale of an entire property held in part by a delinquent taxpayer, even though the same property is also partially owned by a nondelinquent taxpayer. The nondelinquent or innocent taxpayer will be entitled to receive a portion of the sales price. The Court’s discretion is influenced by the following factors:
- the extent to which government financial interests would be prejudiced by relegating the property to a forced sale of the partial interest;
- whether an innocent/nondelinquent third party has a legitimate or legal expectation that his or her separate interest would not be subject to a forced sale by the delinquent taxpayer or 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 nonliable and liable interests held in the property.
The law firm in question failed to pay federal payroll taxes, and the Court fulfilled its mandate to weigh the above factors – ultimately ruling in favor of the sale. As any seasoned property investor would tell you, partial interests in property will almost always sell for less than the equivalent pro rata share of the entire property. Therefore, the government’s interest will inevitably be better served with the sale of the entire property.
So make sure to let your clients know that if they intend to title property with other business partners or even perhaps purchase a vacation home as part of a group, they should be aware that the tax obligations of the other co-owners could eventually force the sale of the entire property. Particularly after fees and costs, the money eventually paid out to any nondelinquent owner will be necessarily beat down. Therefore, despite the fact it would probably be a very awkward conversation, these tax delinquency issues should be explored among co-owners prior to purchase and titling.
Nick Spoltore is Director of Tax & Advisory Content for Surgent Professional Education. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent Professional Education, Nick practiced tax and estate planning law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.
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