Marital Home Can Be Sold to Pay One Spouse’s IRS Debt
Married couples often believe that their marital property is free from seizure by the IRS for one spouse’s debt. This is not true. This article explains what can happen when the IRS comes calling for payment.
The general rule for marital homes is that a home owned by a married couple cannot be seized or sold to satisfy the debts of one spouse. As so often occurs in law, however, there are important exceptions.
IRS collection actions are one such exception. This is unsurprising, because at least one law professor has been heard to say, and I am paraphrasing, “the Constitution ends at the Internal Revenue Code.” A while back, Congress passed a statute enabling the IRS to seize the property of a married couple to satisfy the tax lien of just one spouse. That action spurred considerable litigation, with one case, United States v. Rodgers, 461 U.S. 677 (1983), interpreting that statute and stating certain requirements the IRS must meet before it can seize and sell marital property to satisfy one spouse’s tax liens.
Proper application of this statute was a contested matter in a case just decided by the Sixth Circuit Court of Appeals, which hears appeals of federal cases filed in Michigan. United States v Davis, No. 15-1696. In this case, the plaintiff wife’s husband amassed $1 million tax debt for unpaid business payroll taxes. The wife did not own the business and was not responsible for the taxes or the ensuing tax lien. The IRS nonetheless sued both spouses to enforce its tax liens through the forced sale of a residence and vacation home owned jointly by both spouses as tenants by the entireties.
Mr. Davis conceded his tax liability. Ms. Davis, on the other hand, came up with several rather imaginative arguments, including that she would be undercompensated by the forced tax sale because she had a greater interest in the real estate due to her longer life expectancy. She argued that women generally live longer than men, that she was in good health and that her husband had heart problems and diabetes.
Ms. Davis’ argument fit of the primary four factors limiting a court’s ability to order the sale of a marital home in these circumstances, namely, that the court can exercise its discretion to deny the IRS its sale if the sale would leave the non-liable spouse undercompensated. Unfortunately for Ms. Davis, neither Michigan nor federal law supported this argument, and both the District Court and Sixth Circuit Court of Appeals ordered forced sale of the marital home.
It is important to note that Ms. Davis, like any other spouse in this situation, was entitled to her half of the sale proceeds free of the IRS lien, which proceeds unfortunately are usually reduced in a forced tax sale. She just didn’t prevail on her argument that she should receive more than one-half of the sale proceeds.
The important lesson to be learned is that married couples are vulnerable to IRS enforcement actions in the situation described above. Ms. Davis expended considerable resources making plausible arguments, she did not owe the taxes and she was not found to be at fault. She nonetheless suffered the sale of her marital home and vacation home.
Married homeowners should not be misled by the fallacy that their marital home cannot be sold for one spouse’s debts. Counsel at this office should be engaged to negotiate and resolve any contested tax liability before the IRS files its tax liens and enforcement lawsuits.
Any accounting, business or tax advice contained in this Article is not intended as a thorough, in-depth analysis of specific issues, nor is it sufficient to avoid tax-related penalties. If requested, Lambert & Lambert PLC would be pleased to perform the requisite work on your matter. Such an engagement may be the subject of a separate letter that would define the scope and limits of the desired legal services.
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