The IRS wants to foreclose mom's house

If he owned it and transferred it to the LLC directly, it's only a fraudulent transfer if he did not get an ownership interest in the LLC approximately worth the value he transferred to it. If you receive full and adequate consideration, it's never a fraudulent transfer.

But full and adequate is a subjective view. The value of a fictitious entity doesn't necessarily equal the value of its assets. If the principals of the LLC sought a sizable bank loan and offered the intangible value of the LLC as security, they would likely come away with cash only after pledging the real property as collateral.

Note that there are 3 points, and the third one is "to foreclose upon [brother's] interest in the LLC". The suit looks sort of like the standard defense pleading "My client never borrowed it, it was already broken when he borrowed it, and it was in perfect shape when he returned it."

Seth

I didn't see that stated anywhere. The IRS will estimate a value. If they're good at it, and fair, it will be fairly low in today's market. (If it seems way too high and OP is willing to risk it, they could bid at the auction. That might have interesting effects on the cost basis and/or capital gains tax.)

Seth

Way back in his original post, the OP quoted or paraphrased the "DC US Atty" who said, "The one-forth share would be determined by the IRS, probably based on the property tax assessment."

OP here again. I should have said "possibly" rather than "probably" based on the property tax assessment. And if they elect to use MV, things will get very strange, because another sibling has been living in the place since mom died, and she's been gutting and remodeling the place - I mean to the point of tearing out the old plaster walls and replacing them with sheetrock (I preferred the irregular old walls, but she likes right angles). Anyway, she's run out of time and money at the moment, and the place, while habitable, is certainly in a transitional state: unpainted sheetrock walls, unfinished stairways, unifinished windows, etc. Here's hoping the IRS decides to go with tax value - which (go figure!) still increased in the most recent assessment.

I don't think that's because of an inherent difference in the values. It's because foreclosing on the real property alone would be simpler (and cheaper) than foreclosing on corporate stock, and then having to dissolve the corporation and sell the property.

You've gotten a LOT of responses to this post and I have not read them all, though I have red the first 10 or so. Make no mistake about this you NEED professional help and you need it NOW. You may have other options available to you, and perhaps to your brother, but it all fact dependent and we don't have enough of your facts to give you clear guidance. But consider this -

1 - any word with fraud, be definition, contains intent. And fraudulent intent can be a criminal matter so don't take this lightly. If the IRS intends to argue fraudulent conveyance and they can prove intent, it would not surprise me if they tried to name the rest of you as co-conspirators so they could attach YOUR share of the property as well. 2 - If they can't prove criminal fraud, they may still try for civil fraud. NO jail time, but you could still have to deal with costs of litigation, especially for the LLC to defend the suit; 3 - LLCs are unique entities and the law on them is state specific. Most creditors will not sue an LLC the way they'd sue a person or corporation because of what called "A Charging Order" - I'll not go into that here, but it may be worth having your attorney look into this especially if the IRS intends to go after the LLC. 4 - the seizure of what your brother owns is applied to all his property, including the value of his investments. In this case, the IRS coming after the house to make your brother's investment liquid is not substantially different from them insisting that he sell his stock portfolio. 5 - Keep in mind that real estate values are way down right now. This can work to your favor in two ways, but you WILL NEED PROFESSIONAL HELP TO MAKE IT WORK -

A - if the house is insufficient to satisfy your brother's debt, trust me the IRS doesn't want it. You may be able to redeem your brother's debt with the IRS and get the IRS to release their lien. Your brother may want to consider filing an Offer-In-Compromise to satisfy the debt - this should put a hold on collection activity. You'll need to determine how much the IRS will consider and your offer will have to be at least that much. This is essentially a mathematical computation, but you do get to use fire sale values for his assets because there will be costs associated with the sale that will have to come from proceeds, thus reducing the amount the IRS will get. If your brother's situation is grievous enough you may be able to settle for less than the IRS wants, especially if you can make a cash offer and get penalties and interest waived.

B - if the house is insufficient to satisfy your brother's debt, and considering how low the real estate market is at this point, you MAY be able to let the IRS auction the house off (that is what will happen when they seize it) and you and the sisters could buy it back at auction. This may be better for you financially than borrowing money to pay off your brother's debt. Consider this -

Brother owes the IRS $200,000. IRS thinks the house is worth $800,000 - they want to sell and get the $200 they are due. But houses at this level are NOT moving right now, so you go to the auction and buy the house for $600,000 - $450K of this belongs to you and the sisters anyway so you'd really only need to come up with $150K to pay the IRS. But if you settle directly with the IRS they may want to see the full $200K - buying back at auction could save you $50K this way. You could also lose the hose completely if someone outbids you, but in that case at least you 'd get your share of the proceeds which is all you'll get if they seize it anyway.

6 - depending on what taxes your brother owes and what years they are for, bankruptcy may be an option for him. Some taxes ARE dischargeable in bankruptcy. And even if they aren't, filing for bankruptcy protection will almost always get your case transferred to IRS Special Procedures for review, where you could get a fresh set of eyes to look at the case and possibly remove any political roadblocks that may be hampering a settlement.

Again, these are NOT maneuvers you should attempt on your own, you WILL need professional help to attempt any of these - or for that matter to SEE if any of these may be viable for you.

Good luck, Gene E. Utterback, EA, RFC, ABA

Normally yes. However a fraudulent transfer does not require fraudulent intent. It just means giving away or selling something for inadequate consideration that leaves you unable to pay all your outstanding bills. The law will treat it as if it still belongs to you and your creditors can get at it.

I defer to my esteemed and knowledgeable colleague, Mr. Bronstein.

Gene E. Utterback, EA, RFC, ABA