Liability Tannenbaum, (DC NY 8/11/2016) 117 AFTR 2d District Court Approves Sale of Marital Home to Satisfy One Spouse's Tax

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1 Liability Tannenbaum, (DC NY 8/11/2016) 117 AFTR 2d District Court Approves Sale of Marital Home to Satisfy One Spouse's Tax A district court has concluded that IRS could enforce its tax lien and sell the primary residence owned by a tax-delinquent husband and a non-delinquent wife. It also held that Code Sec. 6323(b)(8)'s superpriority for attorney's liens didn't apply to a third party creditor of the husband. Under Code Sec. 6331(a), IRS can levy on all property and rights to property of a taxpayer on which there is a federal tax lien, in order to collect delinquent taxes. As an alternative to a levy, IRS may bring a lien foreclosure suit under Code Sec. 7403, i.e., an action in federal district court, to reach the funds. The Supreme Court, in U.S. v. Rodgers, (S Ct 1983) 52 AFTR 2d , held that Code Sec empowers a district court to enforce a tax lien by decreeing a forced sale of an entire property in which a delinquent taxpayer had an interest, even though a nondelinquent person also has an interest in the same property. The nondelinquent person is entitled to receive an appropriate portion of the sales proceeds. Under certain circumstances, the district court may use its discretion to disallow a request for the forced sale. This discretion should be exercised in the light of the following considerations:... the extent to which government financial interests would be prejudiced by relegating it to a forced sale of the partial interest;... whether an innocent/nondelinquent third-party has a legitimate or legal expectation that his separate interest would not be subject to a forced sale by the delinquent taxpayer or his 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 term practical undercompensation refers to the Rodgers Court's statement that in practical terms financial compensation may not always be a completely adequate substitute for a roof over one's head. The Court suggested that this kind of undercompensation was likely to arise in the case of a homestead interest (the type of interest at issue in Rodgers). With exceptions not relevant here, a federal tax lien is not valid with respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforceable against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement. (Code Sec. 6323(b)(8)) 1

2 Gershon and Sarah Tannenbaum owned their residence in Brooklyn, New York (the Home) as tenants by the entirety. Sarah's mother, who was wheelchairbound, lived with Gershon and Sarah. Gershon was liable for many years of unpaid federal taxes. Sarah was not liable with respect to these taxes. IRS filed Notices of Federal Tax Liens with the State of New York for the unpaid taxes. Several years later, IRS obtained a default judgment against Gershon in the amount of $1.9 million for his tax deficiency. David Sheldon was a private citizen who secured a money judgment against Gershon and other non-parties in a civil suit in the District of Kansas. Sheldon retained an attorney to represent him in the Kansas litigation on a contingency basis; Sheldon agreed to pay the attorney 50% of any judgment. All of IRS's liens were filed before Sheldon's attorney's lien arose. Several years before this case was brought, Sarah received $350,000 from the sale of a condominium that she inherited. In the current case, IRS sought an order of foreclosure and sale of the Home, with the net proceeds from sale to be distributed 50% each to Sarah and to creditors of Gershon, including IRS, in accordance with their relative lien priority status. Sarah opposed the motion to sell the Home. Sheldon cross-moved; he argued that, under Code Sec. 6323(b)(8), his attorney's lien enjoyed superpriority status over IRS's lien. IRS could sell the marital residence. The court, looking to the Rodgers criteria, granted IRS's motion to foreclose on and sell the Home, with half of the sales proceeds to be distributed to Sarah and the other half to be distributed to Gershon's lienholders. The court said that the four Rodgers factors are not intended to be an exhaustive list or a mechanical checklist to the exclusion of common sense and consideration of special circumstances. And, it said that Rodgers said that the limited discretion accorded by Code Sec should be exercised with a presumption in favor of sale. The court then analyzed the four Rodgers criteria as follows:...financial prejudice to IRS. The court said that this factor favored IRS's position. It said that selling half the house was not a feasible option. But even if it was, it would prejudice IRS because the full value of the house was $1.2 million, and IRS proposed to split the sales proceeds equally with Sarah. Thus, even selling the whole house would have left IRS with approximately $600,000 which would not even satisfy Gershon's outstanding deficiency. 2

3 And IRS argued, and the court agreed, that under New York law, if a non-debtor tenant by the entirety survives the debtor, the non-debtor tenant acquires the entire fee and the creditor takes nothing....a legally recognized expectation that the home would not be subject to a forced sale. The court also said that this factor favored IRS's position. It cited both New York cases and federal cases that held that, under New York law, a non-liable spouse does not have a legally recognized expectation that property owned as tenants by the entirety would not be subject to a forced sale to satisfy the liable spouse's tax liabilities. Sarah had argued that there was ample precedent that a New York court cannot, over the objection of either spouse, order the forced sale, or forced partition, of a property owned in a tenancy by the entirety. But the court said that the cases that she cited were inapposite because they concerned the splitting of assets in divorce proceedings, not satisfying outstanding tax liens....prejudice to Sarah. This factor, too, favored IRS's position. Sarah made several arguments, but the court rejected them. The court said that there is no dispute that a non-liable party usually suffers some prejudice in having to relocate. Consequently, factors such as typical relocation expenses and the inconvenience of relocating, if no different from the inconvenience associated with any foreclosure sale, are alone insufficient for a finding of prejudice. Moreover, the inherent indignity and inequity of being removed from one's home is not enough to weigh this element in favor of the non-liable spouse, especially if there is no evidence that the non-liable spouse would be undercompensated after the property's sale. Sarah argued that the Home was unique and irreplaceable because it had been outfitted to accommodate her elderly wheelchair-bound mother, who also lived in the Home. Over $50,000 was used to make the Home wheelchair-accessible. Sarah argued that she could never again afford to make such a large investment for wheelchair-accessibility. Sarah also argued prejudice because her mother, who was Orthodox Jewish, relied on their Orthodox Jewish neighborhood service providers since they spoke the same language (Yiddish) as her mother, shared similar cultural practices, and knew her mother's medical history. And, she noted, since the Home was walking distance from Sarah's job, it permitted her to tend to her mother as needed. But, while acknowledging that the impact on Sarah's mother was relevant, the court said that Sarah's proceeds from the condominium sale ($350,000) plus those from the sale of the Home ($600,000) should suffice for Sarah to find replacement housing, that she did not need a house of equal size as the Home, and that she could rent rather than buy a home. Although neither side presented 3

4 any evidence of the cost of leasing or buying an apartment or house in the Tanennbaums' neighborhood, the court found that $950,000 should suffice. The court said it was not aware of any controlling law, nor did Sarah bring any to the court's attention, holding that a non-liable party is prejudiced if that party has to lease rather than buy a home. The court also said that the Tannenbaums did not have to stay in their neighborhood. There were other Orthodox Jewish neighborhoods in Brooklyn, New York. And, Sarah had other resources to minimize the disruption of relocating on her mother. There was a large nursing home in the neighborhood, and Sarah's three grown children also lived in the same neighborhood....prejudice to the community. This factor also favored IRS. Sarah argued that the Home was irreplaceable to the community because the Tannenbaums provided four empty bedrooms and kosher meals in the Home, at no cost, to families of patients at a nearby hospital and nursing home. These services helped those families when kosher restaurants were closed or the families could not travel due to religious restrictions. But, a witness testified that a number of religious organizations and other members of the community also provided free lodging to accommodate these families. And, the court said it was not persuaded that charitable services should be offered at the expense of tax liabilities that have been outstanding for almost thirty years. Sarah cited no supporting law for this proposition....relative value of liable and non-liable interests. This factor was neutral because the relative value of the liable and non-liable interests here were 50/50. Attorney's lien did not have superpriority. The court also held that Sheldon's attorney's lien did not have priority over the federal tax lien and judgment. The court said that federal law determines the relative priority of a federal tax lien. And, federal law follows the common law rule that a lien first in time is the first in right unless the later lienholder can identify an applicable exception or overriding principle. One applicable exception is Code Sec. 6323(b)(8). The court said that the Second Circuit, i.e., the Circuit to which an appeal in this case would be heard, has held that the primary purpose of the statute was to collect taxes, not bestow benefits on attorneys... Congress intended Code Sec. 6323(b)(8) to encourage attorneys to bring suits and obtain judgments that would put their clients in a position to be better able to pay their tax liabilities. Therefore, the attorney receives no protective consideration for his efforts on behalf of a client with a tax liability, if the funds to satisfy that liability are going to 4

5 come from a judgment against the Government. (Ripa, (CA2 2003) 91 AFTR 2d ) Consequently, Code Sec. 6323(b)(8) is applicable only where the attorney obtains a judgment for the delinquent taxpayer, not against the taxpayer. Therefore, the court held that Sheldon's attorney's lien did not take priority over any first-filed lien by IRS because Sheldon secured a judgment against Gershon, thereby reducing the amount of funds available to the government to satisfy its tax claim against Gershon. It would run contrary to the very purpose of Code Sec. 6323(b)(8) to have granted Sheldon's attorney's lien superpriority status. 5

Statute of Limitations on Collection Extended by Taxpayer Bankruptcy, Offer in Compromise. Fields, (DC NM 3/17/2016) 117 AFTR 2d

Statute of Limitations on Collection Extended by Taxpayer Bankruptcy, Offer in Compromise Fields, (DC NM 3/17/2016) 117 AFTR 2d 2016-528 A district court has approved IRS's calculation of an extension