/n The U.S. Court of Appeals for the 6th Circuit recently allowed the Internal Revenue Service (IRS) to enforce its tax lien and force a sale of property owned by a husband and wife, as tenants by the entireties, where the wife did not owe any unpaid taxes. This harsh ruling would apply equally to a government forced sale of both residential and commercial property.
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/nFacts
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/n The husband admitted owing the Federal government over $1 million dollars for federal employment taxes, interest and penalties. The IRS filed a civil suit to reduce its tax assessments to judgment. The IRS also sought to enforce its tax lien through a forced auction sale of the principal residence owned by the husband and wife, as tenants by the entireties. It is undisputed that the wife did not owe any unpaid taxes.
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/nWife’s Arguments
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/n The wife argued that the Federal District Court should have limited the IRS to the sale of her husband’s interest in the property instead of allowing the sale of the entire property. She argued that a forced sale of the residence would leave her not just homeless, but undercompensated, because she has a greater interest in the property due to her longer life expectancy. Women have longer life expectancies than men, and she is in good health, but her husband has heart disease, a stint, and is a diabetic. She also argued that a forced sale through the IRS Property Appraisal and Liquidation Specialist auction process typically yields only 80% of fair market value. Such a below market sale would deprive her of her constitutional right to just compensation under the Fifth Amendment to the U.S. Constitution.
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/nMichigan Law and Appellate Court Analysis
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/n Michigan law has historically held that a husband and wife who own property as tenants by the entireties are considered one person. Neither spouse has an interest in the property separable from the other. Neither has an interest that can be sold, conveyed or encumbered without the consent of the other. Neither spouse acting alone may subject the property to the payment of his or her individual debts. This rule applies in most circumstances and to most creditors, but not the IRS.
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/nThe Court of Appeals’ analysis begins by stating that failure to pay federal taxes after demand from the government converts the amount owed (including interest and penalties) into a lien in favor of the United States upon all of the debtor’s property and rights to property. The government may then enforce that lien in Federal District Court, naming all persons with an interest in the property as defendants. The District Court has authority to determine all claims and liens against the property. The District Court may further decree a sale of the property, even entireties property, and distribution of the proceeds.
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/n The Court next dismissed the wife’s argument that she will suffer under-compensation from the sale of the entireties property because she has a longer life expectancy, and thus a greater interest in the property than her husband. The Court found that Michigan law provides spouses are entitled to an equal interest in entireties property. There is, for example, an equal distribution of entireties property upon divorce or consensual sale, and differences in life expectancy do not result in different survivorship interests. Therefore, the Appellate Court upheld the District Court’s decision to order the sale of the entire property. The Court of Appeals presumably relied on recent precedent, without citing it, that lets the IRS and Federal Governmental alone, unlike all other creditors, force a sale of entireties property where only one of the two spouses, owes a debt.
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/n Finally the Court considered the wife’s argument that the forced sale of entireties property violates the just compensation clause of the Fifth Amendment to U.S. Constitution. The wife argued that she had a greater interest in the property due to her greater life expectancy, and that a forced auction sale would yield less than the fair market value of the residence. The Court concluded that the Federal statute permitting the sale provides adequate protection for non-delinquent taxpayers. The authorizing statute permits a sale to facilitate the extraction of value from concurrent property interests that are properly liable for the taxpayer’s debt. To the extent that the third-party property interest (such as that of the wife) are “taken” in the process, the statutory framework provides compensation for that “taking” by requiring that the Court distribute the proceeds of the sale in respect to the interest of the parties. Therefore, so long as third-party interest holders (such as the wife) are compensated, there is no taking-clause problem.
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/n In sum, if a tax delinquent spouse and an innocent spouse own real property as tenancy by the entireties, the IRS can force a sale of the property and apply one-half of the net proceeds to the delinquent spouse’s tax debt.
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/nTakeaway
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/n One way to avoid this, defeat the legitimate claims of other creditors against a delinquent spouse and, at the same time, create limited liability protection, might be to have a limited liability company own the property, and have the spouse without tax or other creditor liabilities, own 100% of the limited liability company membership interests. If you want to couple this with estate planning, the membership interests could be owned by the non delinquent spouse as trustee of his or her living trust. Bottom line: be careful who you marry.
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/n The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson’s express prior written authorization. Gregg Nathanson may be contacted by email: gregg.nathanson@couzens.com, telephone 248-489-8600, or regular mail: Couzens Lansky, 39395 W. 12 Mile, Suite 200, Farmington Hills, Michigan 48331.
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/n©2016 Gregg A. Nathanson, Esq. All Rights Reserved
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