IRS Tax Lien on Jointly-Owned Property Extinguished at Death of Delinquent Joint Tenant

A federal district court has held that an IRS lien on a taxpayer’s interest in property was extinguished at his death because the property was owned jointly with a right of survivorship and the other joint tenant survived the taxpayer.

The taxpayer and a friend were the owners as joint tenants with right of survivorship of real property.  The taxpayer and his friend borrowed money from a bank and gave the bank a mortgage on the property.  The taxpayer failed to pay certain federal taxes and the IRS subsequently filed a lien on the property. 

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The taxpayer and his friend also failed to make payments on the loan and the loan went into default.   Shortly thereafter, the taxpayer died.  

The bank declared the entire amount of principal and accrued interest under the loan due and payable and filed a lawsuit to collect.   No representative of taxpayer, his friend or his estate appeared in the law suit.  The court entered default judgment against taxpayer’s estate and his friend.    The bank then moved for default judgment against the IRS.  The IRS opposed such motion and attempted to enforce its tax lien against the property. 

The court noted that the Warranty Deed stated that taxpayer and his friend owned the property as joint tenants with rights of survivorship.   Accordingly, when taxpayer died, his friend succeeded to taxpayer’s interest by process of law.

The court said that it needed to determine whether the IRS tax lien, which only attached to taxpayer’s interest in the property, survived taxpayer’s death.  In making this determination, the court noted that US Supreme Court precedent made it clear that tax liens do not extend beyond the property interests held by the taxpayer, and that the federal tax lien statute created no property rights but merely apply rules to the property rights created under state law.

The court observed that, in most states, when property is held in joint tenancy with a right of survivorship, liens issued against a deceased joint tenant’s interest in the property are extinguished when the deceased joint tenant dies and the other living joint tenants succeed to his interest.  A surviving joint tenant succeeds to the interest of the deceased joint tenant by virtue of the original conveyance which created the joint tenancy, not as the successor of the deceased joint tenant.

Applying the foregoing rationale, the court found that when taxpayer died, his friend became the sole owner of the property because she was a joint tenant with the right of survivorship as set forth in the Warranty Deed and as provided under state law.  At the time of taxpayer’s death, the IRS tax lien, which attached only to taxpayer’s interest in the property, was extinguished.   Accordingly, the court held that the IRS tax lien was no longer a valid lien on the property.

Please call or email me at Jsenney@pselaw.com or 937-223-1130 if you would like to discuss IRS tax liens or any other federal or state tax matter. 

AUTHOR: Jeff Senney
jsenney@pselaw.com