Federal District Court Holds that IRS Lien on Jointly-Owned Property Only Encumbers the Tax Debtor’s Interest in the Property

A federal district court has held in Dase v. IRS, 124 AFTR 2019-5281 that jointly-owned property subject to an IRS lien against one of the joint owners only encumbered the tax debtor’s interest in the property.

Legal Background:  A person’s failure to pay any tax after the IRS makes demand for payment automatically creates a lien in favor of the IRS upon all property and rights to property, whether real or personal, belonging to such person.  The IRS may enforce the lien by asking a federal district court to order a judicial sale of the property subject to the lien.

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Under Alabama law (like the law in Ohio and other states), if a decedent dies without a will (intestate) and leaves no surviving spouse, the estate passes to the issue of the decedent.  Under state law, real estate passes immediately to the decedent’s heirs upon the death of an intestate person.

In Wadsworth v. Hannah, (AL 1983) 431 So. 2d 1186, the Alabama Supreme Court had held that two couples had equitable title to a properly because: (a) they had already performed all the promised services to the landowner, and (b) the landowner had prepared the deeds transferring the property before he died, but his untimely death prevented conveyance of the property.

Facts in Dase Case: In 2004, the taxpayer, Scott Dase, entered into a lease-to-own agreement with his parents Walter and Anita to purchase real property X, which Walter and Anita owned jointly with a right of survivorship. Under the agreement, Scott was to make monthly payments to his parents until he paid them $63,703, and once Scott paid that amount in full, his parents would convey property X to him.

Before Scott made all the payments under the agreement, first Anita and then Walter died intestate. After their deaths, Scott continued to make the monthly payments required by the agreement but made them directly to the mortgagee. Scott paid off the $63,703 in 2012, and the balance of the mortgage in 2018.

In 2017, the IRS obtained a default judgment against Scott for unpaid taxes and filed a lien against property X. Then, the IRS filed suit seeking to foreclose the lien and sell the property.

Arguments:  The parties agreed that Walter and Anita died intestate leaving two surviving children, Scott and his Sister. The parties also agreed that Scott had an interest in property X, but disagreed on the extent of Scott’s interest.

The IRS contended that only Scott had an interest in property X because he entered into a lease-to-own agreement with his parents before their deaths and fully performed all the obligations under that contract after their deaths.  Therefore, the IRS argued, under the case law set forth in Wadsworth, Scott was the sole equitable owner of property X, and no interest in the property passed to his Sister under the intestacy statute.

Scott and Sister argued that because their parents died intestate before Scott had made all the payments under his lease-to-own agreement with their parents, Scott’s only interest in property X derived from the intestacy statute. Therefore, they argued, Scott and Sister each owned a one-half interest in property X as tenants in common pursuant to that statute.

Court’s Holding:  The federal district court held that Scott and Sister each acquired a one-half interest in property X under the intestacy statute because Walter still owned the property when he died as Scott had not fully paid the purchase price under the lease to own agreement. Therefore, the IRS’s lien only attached to Scott’s one-half interest in property X.

The district court rejected the IRS’s argument that, under Wadsworth, Scott was the sole equitable owner of property X because he completed the obligations under the lease-to-own agreement after his parents died. Wadsworth was distinguishable because, in that case, the couples had performed all the promised services and the landowner had prepared the deeds to the property before he died.  Only the landowner’s untimely death prevented the conveyance of the property to the couples.

In contrast, Scott did not perform all his obligations under the lease-to-own agreement with his parents before his parents died.  The IRS failed to present any evidence that Walter intended to convey the property to Scott before Scott had made all the payments required by the lease-to-own agreement, while in Wadsworth the landowner clearly intended to convey the property to the couples before he died.

If you have any questions about the Ohio intestacy statute, Ohio property rights or federal or state income tax matters, please contact you tax or estate planning attorney at 937-223-1130 or Jsenney@pselaw.com.d

AUTHOR: Jeff Senney
jsenney@pselaw.com