It has been almost four years since I wrote a post on United States v. Craft, 535 U.S. 274 (2002). At the time I wrote the last post, a circuit split existed on how to value the interest of the spouses in a tenancy by the entirety. The IRS argues for a 50/50 valuation whereas some taxpayers argue for a valuation based on the actuarial interest of each of the spouses. The issue has been quiet recently, perhaps because of the lack of IRS activity in the area based on its diminished capacity or perhaps because the cases that have moved forward have all involved situations in which the 50/50 split favors the spouse who does not owe the tax. In United States v. Gerard, 121 AFTR 2d 2018-640 (N.D. Ind. April 9, 2018), another court voiced an opinion on how to split the proceeds.
Robert and Cynthia Gerard bought a home in Indiana in 1990 as tenants by the entirety. Over 90% of the purchase of the property has been paid by Robert. From 2003 to 2008, Cynthia owned a business treated as a sole proprietorship and incurred employment taxes which remain unpaid. In 2012, following in the footsteps of the Crafts, Robert and Cynthia conveyed, by gift, the property to Robert individually. I am guessing they had not read the Supreme Court’s opinion at the time they decided to make this transfer and they may have thought that it would magically remove the federal tax lien from the property.
They argue that at the time of the transfer her interest was worth much less than his because he had contributed the lion’s share toward the purchase of the property and her business had been a net drain on the family finances. They further claim that the property was transferred due to her health and the need for Robert to manage her affairs.
The case involves a fight about the amount owed as well as the extent of the federal tax lien on the property. With respect to the amount owed, the Court found that Cynthia owed $60,969.04 plus statutory accruals, resolving that aspect of the case and then turned to the lien.
The Gerards argued that Robert was a purchaser when the property was transferred to him from joint ownership. That argument flies in the face of the statute. IRC 6323(h)(6) defines a purchaser as:
“a person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in property which is a valid under local law against a subsequent purchaser without actual notice.”
Despite the deed of gift, the Gerards argue that Cynthia’s use of joint marital assets in connection with her business formed the basis for meeting the full and adequate consideration test. The IRS argued that the deed itself stated it was transferred “without any consideration other than love and affection.” It further argued that even if the language of the deed prepared by the Gerards does not control the transfer, the consideration they offer is past consideration which is insufficient to meet the test of adequate consideration. The Court agreed with the IRS on the issue of past consideration and determined that Robert was not a purchaser.
Having determined Robert did not purchase the property from the joint tenancy, the remaining dispute centered on the extent to which the liens attached to the property. The Gerards contend that Cynthia’s interest in the property was something less than half of the property and the federal tax lien only attached to her smaller interest. The arguments regarding who has what interest in the property usually stem from an application of the actuarial tables and usually occur when the husband owes the money and the actuarial tables show that the wife has the greater life expectancy. Here, the argument builds around the husband’s contribution toward the purchase of the property. The IRS argues that they each have a 50% interest and that’s what the court found that Indiana law supports. The court cites Indiana case law in support of the position that husband and wife each become owner of half of the property.
In addition to the several cases involving Indiana law, the court cited the earlier Craft decisions from the Third and Sixth Circuits, supporting a 50/50 split of the value of the property. So, the court concludes that the lien against Cynthia attaches to her 50% interest in the property. I was curious that I had not seen the Craft issue in some time and felt there must be cases decided since my last post. My research assistant found the following cases which may benefit someone concerned with this issue: United States v. Tannenbaum, 2016 WL 4261755 (E.D.N.Y. 2016); United States v. Bogart, 715 Fed. Appx. 161 (3d Cir. 2017); United States v. Cardaci, 856 F.3d 267 (3d Cir. 2017); In re Conrad, 544 B.R. 568 (Bankr. D. Md. 2016); and United States v. Born, 2016 WL 1239219 (D. Alaska 2016).
The third issue in the case involves whether the court should allow the IRS to foreclose its lien and sell the property giving Robert a monetary amount equal to his interest in the property based on the sale. Although it initially sought summary judgment on this issue, the IRS backed away from that request and argued that the decision to foreclose required the gathering of facts. Such facts would be necessary in order to make a United States v. Rogers, 461 U.S. 677 (1983) determination that foreclosure properly serves the interests of all parties in this situation. So, the amount of the liability is now known, the extent of the lien in the property is known, and all that remains to learn is whether the court should order foreclosure or defer it based on the Rogers factors.