The IRS wants to foreclose mom's house

Yes, if you want to resolve the tax lien administratively and head off the court action.

Does the IRS even have a leg to stand on when it threatens to foreclose on the

In general, absolutely! Happens frequently. Specific to your situation, something that should be asked of competent legal counsel fully aware of all aspects of the case. Failure to answer timely may result in default judgment and loss of the property.

Any creditor can go after a joint tenant's share of a property. I suspect that you may not understand that if the property was sold, only your brother's share of the proceeds would go to the government. The rest would go to the co-owners.

In any event, if you want to keep the house in the family, buy him out, paying the government in exchange for a "discharge" of the property from the Federal tax lien. Since a suit has been filed you can no longer do this administratively through the IRS, but you'll have to work with the Justice Dept. That means lawyers, and that means ka-ching!

By the way, the villain in this piece is your brother. The reason you didn't know what a mess you were getting into is that he withheld that information from you. This could have been so much easier, not to mention cheaper, to resolve.

Phil Marti Clarksburg, MD

I think you hit the nail on the head when you just advised to "seek COMPETENT legal counsel. I would add "for a change." Sounds to me like the lawyer who advised the LLC was thinking an LLC was just like a corporation.

ChEAr$, Harlan Lunsford, EA n LA

I would say this sort of clean split, with none of the co-owners' funds going elsewhere (court costs, IRS lawyers, etc.), is by no means assured.

Steve

Why not? If I am 50% owner of property with you, how is any of my half responsible for any of your debts if they're not my debts as well?

Let's say the IRS has to seize the property. There are costs associated with this. I would expect those costs to be apportioned among the non-deliquent owners and the IRS. I do not see why the IRS would absorb them all.

Steve

IRS can seize and sell only the right, title and interest of the delinquent taxpayer. Costs of seizure and sale would be paid from sale proceeds, the remainder of which would be applied to the delinquent taxpayer's tax liability. Any surplus proceeds would become available to the taxpayer and/or his/her creditors. The interests of co-owners of the property would be unaffected by the sale.

Let's see if I can understand this. Assume there are

5 equal owners, and the tax liability exceeds the delinquent owner's share. IRS seizes the 1/5 interest owned by the delinquent owner, then as 1/5 owner forces the other owners to sell. Costs associated with this forced sale are apportioned, 1/5 to the IRS and 4/5 to the other owners, and the remaining net proceeds are split in the same ratio.

Is this correct?

Steve

Partially. Yes, the IRS, by virtue of the Government's tax lien interest in all assets of the delinquent TP, perfects an administrative seizure of his 1/5 interest. This is in essence a paper transaction - the IRS does not become owner of the 1/5 interest - the seizure simply establishes the right of the Government to offer the property for sale. Ownership still rests with the delinquent TP until the sale, and its redemption period, if any, are final. No, the owners of the other 4/5 interests are not forced to sell, and their interests are not sold. As you can guess, this makes for a difficult sale. Usually, IRS won't seize a partial interest in property unless there is a reasonable expectation that someone, often one or more of the other owners, is willing to bid at the sale. Sale proceeds, which arise from the sale of the TP's interest, will be used first to pay all seizure and sale costs. The co-owners have no obligation to pay costs and have no interest in sale proceeds, as nothing they owned was seized and sold. After the sale and redemption period, the buyer assumes the delinquent TP's 1/5 interest in the property. If the buyer is a previously disinterested third party, the other owners now have a new business partner! If there is no sale, the delinquent TP retains ownership and possession of his 1/5 interest, still subject to the tax lien.

Because of the difficulties with administrative seizure and sale of a partial interest of jointly owned property, and the resulting depressed forced sale value, these issues are usually resolved with judicial foreclosure, as in the OP's case. If the Government's suit is successful, the court can order the sale of the entire property (the 1/5 and the 4/5 interests), and divide the proceeds among the various interests. In that case, any costs determined to be the responsibility of the delinquent TP will be taken from the delinquent TP's proceeds and not from the tax compliant co-owners' funds.

What fraudulent conveyance? Before the LLC, he had NO ownership interest - as it was your mother's house. Depending on what happened, your mother (or her estate) may have placed the house directly into the LLC (by will).

Yes, he has a 25% interest in the house currently, and that's all the IRS can take. However, as there are parties NOT liable for these taxes, the IRS should approach them before forcing a sale (they might not have to, but we have the "kinder, gentler IRS as of 1998").

As it is 25% his, then yes. As you have discussed the situation with the IRS/U.S.Atty, I suggest buying your brother out and getting the lien on the property released.

I leave the issue of disowning your brother up to you.

If Mom's will and/or state law left an interest in property to her tax delinquent son, the Government may argue that he received a valid, transferable, devisee interest in the property at the time of her death (see Drye V. United States,

If he transferred that interest to the LLC or to anyone else without addressing his tax liabilities, the IRS may claim a conveyance to the detriment of creditors.

Generally, the Government won't initiate suit until all administrative remedies have been exhausted. I don't know a Revenue Officer who would expend the time and effort necessary to initiate a suit without first contacting other LLC members and asking for the money. It is unlikely that the suit was the first notice to the LLC.

I remember seeing a case fairly recently where a devisee did a qualified disclaimer of his interest in an estate. For tax purposes a qualified disclaimer is considered as never having been owned by the person.

In that case, which I believe was a bankruptcy case, the court held that the qualified disclaimer was a fraudulent transfer under the statute, and his creditors could get at it in preference to the next person in line.

My guess is that an income tax liability would end in the same result.

(balance snipped for brevity)

The siblings inherited the house the moment mom died. Although the OP did not say, I gather the LLC was formed afterwards, hence brother did indeed have an interest in the house.

ChEAr$, Harlan Lunsford, EA n LA

I interpreted it as they formed the (partnership) LLC before death of the mother. The LLC directly caught the property upon distribution, not the individuals.

I read this as that they had set up the LLC (partnership) to receive the property BEFORE the actual death of the mother, not as individual beneficiaries. Inheritance is not a fraudulent conveyance.

Having seen plenty of IRS screw-ups, you're being overly generous.

Actually I believe it can be. It certainly fits the definition of fraudulent conveyance - a transfer for less than full consideration such that, afterwards, the donor unable to pay all his debts.

The issue, as I recall, was whether the IRS can get at one brother's interest to pay his old tax debt.

He's a quarter owner of the LLC which is owner of the real property. There was no fraudulent conveyance since what he received - the interest in the LLC - was worth what he transferred to it - his interest in the house.

If for some reason that brother is not stated as an owner of the LLC, then there certainly could be a fraudulent conveyance if he transferred his interest in the house to it without getting full value in return.

Can the IRS get at his interest in the house? Yes, whether it ownership is in the individuals or the LLC. One way or another.

Suppose instead, he sold it for FMV. That wouldn't be a fraudulent conveyance, right? So how is trading a 25% interest in the property for a 25% interest in an LLC that owns the property? He didn't remove any value.

Seth

Not knowing all of the facts makes it difficult to analyze. Knowing the review process required to initiate a collection suit, I'm guessing that, in the OP's case, the legal minds at IRS and DOJ were satisfied that the elements of a fraudulent conveyance exist, else the suit would not have been filed.