Monday, October 3, 2011

Hubby's Federal Tax Lien Leads To Foreclosure Sale Of Family Home Owned Jointly With Spouse; Innocent Wife Gets Boot, But Splits Loot

From a publication from The Bureau of National Affairs:

  • In U.S. v. Barczyk, No. 10-1498 (6th Cir. 8/17/11), the Sixth Circuit found that the federal government could force the sale of real property held as tenants by the entirety where only one spouse was delinquent and that the sale proceeds should be distributed equally between the federal government and the non-delinquent spouse.

  • Accordingly, not only can joint creditors reach property held as tenants by the entirety, the federal government can also force a sale of property held as tenants by the entirety that is subject to a federal tax lien even if only one spouse is delinquent.

  • Since 1979, Husband and Wife owned a residence in Troy, Michigan ("the Troy Property"), as tenants by the entireties. The Troy Property was free and clear of debt, and worth approximately $200,000.

  • From 1996 to 2006, inclusive, Husband and Wife filed individual federal tax returns under the status of "married filing separately." During this period, Husband failed to pay large amounts of federal income taxes. As a result, several tax liens were created in favor of the federal government, which attached to Husband's property and property rights, including the Troy Property.

  • In March 2009, the federal government brought an action to have the Troy Property foreclosed and sold, with proceeds distributed according to the parties' respective interests.(1)

For more, see U.S. v. Barczyk: Sixth Circuit Finds Property Held as Tenants By the Entirety Subject to Forced Sale and Equal Distribution.

(1) Typically, an unsecured creditor's judgment lien that attaches to the interest of a co-owner of real estate can lead only to a foreclosure sale of that co-owner's interest, leaving the ownership interests of the other co-owners unaffected. Further, such a lien against a property owner on real estate co-owned with a spouse as tenants by the entirety cannot lead to a sale of even the judgment debtor's interest.

The rules are different when it comes to the enforcement of Federal tax liens. From the story (statute references are to Title 26 of the U.S. Code):

  • Under §6321, if an individual fails to pay outstanding taxes after a demand, the federal government may place a lien "upon all property and rights to property, whether real or personal, belonging to such person." The federal government may then enforce the lien in court under §7403(a) and (b).

  • If the court finds in favor of the federal government, then, under §7403(c), the court may enforce the lien by directing sale of the property, with the proceeds of the sale being distributed in respect to the interests of the parties and of the federal government.

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