IRS Foreclose on Inheritance that is Jointly Owned?

Published Categorized as IRS Collections, IRS Collections, Tax Relief
IRS levy on inheritance, Austin Tax Attorney

What happens when someone inherits money from their parents, but they also owe the IRS? Can the IRS collect on the inherited assets? What if the taxpayer only inherited a fractional interest in the property? Can the IRS foreclose on the property to pay the back taxes? The court considered this in United States v. Dase, No. 4:18-cv-00501 (N.D. Ala. 2019).

Facts & Procedural History

This case involved real estate located in Alabama.

The owners of the real estate entered into a lease-purchase arrangement with their son. Their son occupied the property and was making payments for the lease-purchase arrangement. The parents died before the son made all of the lease payments. The son finished making all of the required payments after his parents died.

The parents did not execute a will before they died (and a probate attorney was not hired to probate the estate). The parents interest in the property transferred to their son and daughter upon their death. The son and daughter held the property as tenants in common under Alabama law.

Prior to the time the son had made all of the mortgage payments, the IRS had obtained a judgement against the son for unpaid taxes. The IRS had also filed a lawsuit to enforce its judgement against the parent’s property.

The IRS had also filed a lawsuit to enforce its judgement against the parent’s property.

This dispute focused on whether the IRS can foreclose on all of the property or only on one half of the property.

The IRS Lien & State Intestacy Laws

An IRS tax lien attaches to all property the taxpayer owns. Federal law determines the amount of the tax owed, and state law determines what property the taxpayer owns.

In this case, Alabama state intestacy laws say that children inherit their parents property and that the property is held by the siblings as tenants in common.

This means that the son owned a one half interest in the property and that the IRS lien attached to that one half interest.

But the IRS wasn’t satisfied with half of the property in this case. The IRS wanted all of the property.

Foreclosing on Jointly Held Property

Our tax laws allow the courts to foreclose on property to satisfy unpaid taxes even if the property is partially owned by a third party.

We see this in Texas with spouses who own real estate as community property and only one of the spouses owes the IRS back taxes. Our tax laws allow the courts to foreclose on the entire property, but the proceeds for the non-liable spouse is paid over to the non-liable spouse. These same rules apply in the present case with the son and his sister owning the property jointly.

But the court noted that the statute gives the courts discretion to foreclose on jointly held property. The court is not obligated to do so. The court summarized the rules as follows:

[W]hen the interests of third parties are involved, . . . a certain fairly limited set of considerations will almost always be paramount.” The court must consider, among other circumstances, (1) “the extent to which the Government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes”; (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 likely prejudice to the third party, both in personal dislocation costs and in the sort of practical under compensation described; and (4) “the relative character and value of the non-liable and liable interests held in the property.” 

The court concluded that there was not enough evidence to allow it to consider whether it should foreclose on the jointly held property in this case. The case will have to go to trial, assuming it isn’t settled before trial.

The IRS’s Ability to Get 100% of the Property

But the IRS’s argument was that it is entitled to all of the property. It reasoned that the son had a lease-purchase arrangement and this arrangement, when coupled with his current possession of the property and his inherited interest in the property, was equivalent to full ownership.

The court did not agree with the IRS. It compared the current facts to prior court cases. In doing so, it noted that prior case law would only support the IRS’s position if the son had made all of the payments prior to his parents death. In that case, the son would have owned the property outright. But the son did not make all of the payments before his parents died and, as such, he didn’t own all of the property.