What Happens to Jointly Owned Property When One of the Owners Owes the IRS

Leonard and Joyce owned 50% of a commercial property. Their son, Derek, owned the other 50%. The IRS liened the property due to amounts owed by Leonard and Joyce to the IRS for unpaid taxes. The IRS sought to foreclose its tax liens and force a sale of the property. 50% of the proceeds would go to the IRS, and 50% would go to Derek.

The taxpayers argued that the district court should not order the sale.

Code Section 7403 provides authority to the government to file suit to enforce its lien and force a sale of the liened property. There is no exception in Section 7403 that prevents its operation even though there are “innocent third-party” interest holders in the subject property that do not owe taxes to the IRS. The U.S. Supreme Court, in US v. Rodgers, 461 US 677 (1983), confirmed that the Code Section authorizes the sale of the whole property in these circumstances, and that the Supremacy Clause of the U.S. Constitution overrides any state law to the contrary that seeks to protect innocent third-party interest holders.

However, Code Section 7403…

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Of Spousal Gifts and the Substance Over Form Doctrine

U.S. spouses each have a unified credit that allows for substantial gifting to third parties without requiring the payment of gift tax. What happens if one spouse has assets to be gifted away, but that spouse does not have sufficient remaining unified credit exemption to cover the gift and wants to use the exemption of the other spouse?

At times, the spouses can agree to split the gift for gift tax purposes, which treats 1/2 the gift as coming from each spouse. This allows the unified credit of the spouse not making the gift to be used to avoid gift tax on the 1/2 that such spouse is treated as making. However, it can be an imperfect solution if the spouse with the assets does not have enough unified credit to offset his or her 1/2 of the gift.

Oftentimes, the parties may contemplate having the party with the assets transfer them by gift to the other spouse (a tax-free gift under the gift tax marital deduction), and then the receiving spouse makes a gift to the third party applying his or her own unified credit. The question in these circumstances is whether the IRS will respect the transaction and allow the receiving spouse’s unified credit to be applied to the gift to the third party, or whether it would seek to apply the “substance over form” doctrine to treat the gift as coming from the spouse who transferred the assets to the other spouse and does not have enough unified credit to fully cover the gift.

This is not a black and white issue. On one end of the spectrum. . .

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