Property Tax Strict Foreclosure – A Follow Up

Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on a prior post and discusses how other states in addition to Michigan have engaged in the practice of using strict foreclosure to combat delinquent property taxes. As Anna discusses, the practice raises significant constitutional issues, with a case stemming from Minnesota heading to the Supreme Court. Les

In November 2022, I wrote a post about a case, Hall v. Meisner, in which the Sixth Circuit Court of Appeals held that the state of Michigan cannot pursue “strict foreclosure” when a property owner becomes delinquent in property tax payments. Strict foreclosure occurs when a creditor takes both the legal and the equitable title to the debtor’s secured property in the event of default. This means that the creditor can acquire full ownership of property for a sum significantly less than the fair market value of the property. A public sale does not accompany the foreclosure. Strict foreclosure, I thought, is rare throughout the United States, and as the Hall court put it, the practice is “unconscionable” and violative of both the federal and state constitutions. However, since my last post, I have been made aware of several cases with nearly the same facts as those in Hall, including one case recently granted cert by the Supreme Court.

Here is a general overview of the substantially similar facts in Hall v. Meisner, Fair v. Continental Resources, Nieveen v. TAX 106, andTyler v. Hennepin County (throughout this post, I will refer to these four district court cases as the “Hall cases”). Through a series of statute-determined processes, a locality — usually the city or county in which the property is located — determines that a property owner is delinquent in making property tax payments. The property owner is notified of the delinquency and given an opportunity to make the outstanding payment. The timing and nature of the notices varies across states. After a specified amount of time, the locality receives the title through deed transfer or tax certificate sale of the property. After the period for redemption has passed and the former owner has made no attempt to exercise this right, the locality is free to sell or otherwise transfer ownership of the property. At no point during this process does the former property owner receive the fair market value of the property in excess of the tax, penalties, and interest owed. Instead, the government retains the sale proceeds after the outstanding property tax has been paid. In many cases, this is more than 10 times the amount of the tax due.

In my last post, I discussed the reasons that the Sixth Circuit cited in striking down Michigan’s strict foreclosure law. In this post, I review the reasons that lower and other circuit courts are citing in upholding laws substantially the same as Michigan’s. A caveat: I am by no means a SALT expert, nor am I an authority on the state laws mentioned here (those of Nebraska, Minnesota, and Michigan). These cases, however, are significant from a taxpayer rights perspective and deserve attention.


Generally, there are three main arguments presented by plaintiffs in the Hall cases. The courts’ and the governments’ responses to these arguments in the Hall cases are largely the same.

Takings Clause

The most compelling argument in favor of the petitioners in the Hall cases is that the state’s strict foreclosure law violates the Takings Clause. As a reminder, the Fifth Amendment’s Takings Clause prevents the government from seizing private property for public use without just compensation. To be protected by the Takings Clause, a person must have an “interest” in the property at issue. Common law principles recognize that a property owner has an interest in the equity proceeds of their property.

The courts in the Hall cases find that the Takings Clause does not apply in these strict foreclosure situations for two reasons. First, they say that state law has overridden common law recognition of this property interest and that courts have consistently upheld the application of the state statute. Rejecting the district court’s application of this argument in Hall v. Meisner on appeal, the Sixth Circuit wrote, “The government may not decline to recognize long-established interests in property as a device to take them.” Automatically accepting the terms of a statute without considering how this deference interacts with centuries of common law and with constitutional requirements is a threat to taxpayer rights.

Second, in a rather perplexing argument, the Fair court states that because the Supreme Court has held that taxes are not takings, the steps taken by the state to collect taxes cannot be considered takings either. The Fair court writes, “If taxes, as the U.S. Supreme Court has held, are not takings, we do not see how efforts to collect that tax, whether through the sale of a lien on the property or sale of the property itself, could be characterized as a taking.” This misstates the nature of the plaintiffs’ Takings Clause arguments, namely that the act of foreclosure is not the taking. The taking, in plaintiffs’ view, is the state’s refusal to return the excess equity to the owner. The Fair framing also leads to strange parallels. I think it’s safe to assume that if the IRS levied several thousands of dollars from my bank account to satisfy a $50 debt, we would not argue that the IRS was justified in doing so because it recovered income tax. Indeed, the Tax Code does not permit this result; the IRS must return levy proceeds in excess of the tax liability it was entitled to collect. The Taxpayer Bill of Rights ensures that the taxpayer pays no more than the correct amount of tax, and IRC §§ 6331, 6342, and 6343 support this.

Procedural Due Process

A second argument made in the Hall cases is that the state violates the 14th Amendment’s Due Process clause in not providing adequate notice to the property owner in advance of the strict foreclosure proceedings. In each of the state statutes at issue here, there are several points during the process at which the locality must notify the property owner of the delinquency, of the consequences of a foreclosure, and of the right to redeem. Generally, the courts conclude that as long as adequate notice is provided to the property owner, there is no taking. Across these cases, the courts find that enough time was provided between the initial notices and the closing of the sale or redemption period, so no violation of due process rights occurred.

Excessive Fines

Though this argument has not been successful for the plaintiffs in any of the strict foreclosure cases I’ve read, all the plaintiffs have made an Eighth Amendment claim, arguing that in retaining the equity in excess of the property tax (plus costs, fees and interest), the government violates the Eighth Amendment’s Excessive Fines clause.

Finding that the state’s retention of the property owner’s equity is valid, the district court relies on a 1993 Supreme Court case, Austin v. United States, which established that the “fines” encompassed by the Eighth Amendment are limited to those intended to punish. The Supreme Court wrote, “The Cruel and Unusual Punishments Clause is self-evidently concerned with punishment. The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” The Supreme Court’s analysis distinguishes between punitive fines and remedial fines. A remedial fine is not subject to the limitations of the Eighth Amendment.

In the Hall cases, the courts explain that the equity retained by the government is not a punitive fine for two main reasons. First, just because the government recovers a lot of money doesn’t mean the fine is punitive. Second, the fines targeted in the Eighth Amendment have historically been tied to criminal offenses. Here, the courts find that the state did not intend to punish the property owners for non-payment of property tax; rather, the payment in question is merely to remedy the non-payment. Therefore, according to the courts, the Eighth Amendment does not apply. 

Once again, I don’t agree with the courts’ analysis here. I think that a penalty added to a tax is intended to punish the taxpayer. A payment of the outstanding tax, interest, and penalties would remedy the government’s unsatisfied interest; retaining the equity beyond this amount goes beyond remedy.


Of these cases, Hall has received a decision in favor of the taxpayer (and of all Michigan property owners) from the Sixth Circuit Court of Appeals. Meanwhile, the Tyler case out of Minnesota is heading to the Supreme Court. I will keep you all updated on these and other cases as they unfold.

Principal Residences as Collection Target: TIGTA Criticizes IRS Practice

In  The IRS Primarily Uses Lien Foreclosures When Pursuing Principal Residences, Which Do Not Provide the Same Legal Protections as the Seizure Process TIGTA released a report detailing how IRS uses judicial lien foreclosure suits rather than administrative collection tools when it targets a taxpayer’s principal residence to satisfy an assessed liability. The report is noteworthy for its highlighting the relatively rare times IRS chooses to pursue a taxpayer’s residence, and how in the times that it does do so, IRS tends to avoid the statutory requirement to obtain court approval for seizures of principal residence by bringing a suit seeking to foreclose on a lien. The report also suggests that when the IRS is pursuing a residence, the IRS decision to bring a foreclosure suit rather than a seizure may be related to statute of limitations issues arising from its having too many collection cases and not enough revenue officers to work cases.


Background on Differing Collection Paths

The report reviewed the relatively infrequent scenario when IRS sought to collect on an assessment by targeting a taxpayer’s principal residence. When seeking to collect on an assessed liability, IRS has a variety of tools at its disposal to attempt to collect, including administrative seizure or judicial actions, such as suits to foreclose on a lien.

Overall IRS chooses to pursue principal residences infrequently. As the below figure notes, in the one-year period ending June 30, 2020 there were only a total of 24 lien referrals to DOJ and seizures conducted.

There are differing procedures and statutory rules with respect to the administrative versus judicial collection path. For example, a noteworthy difference is that for administrative collection actions with respect to a principal residence, in addition to the general provisions relating notice and collection due process, under Section 6334(e)(1), the IRS must obtain written approval from a federal district court judge before conducting the seizure of a principal residence.

As TIGTA notes, when the government is required to get court approval and seeks to seize a principal residence, taxpayers have “the opportunity to bring additional arguments against the seizure of the principal residence, such as showing cause as to why the residence should not be seized and demonstrating that the underlying tax liability has been satisfied, that the taxpayer has other assets from which the liability can be satisfied, or that the IRS did not follow applicable laws or procedures.”

The process for IRS to get court approval for administrative seizure is not quick, and with backlogs TIGTA notes it may take a year to get the necessary judicial blessing. 

One other difference between administrative seizure and judicial foreclosure is, after seizure and sale, but not after a foreclosure sale, a taxpayer has the opportunity to redeem the property.

To be sure, IRS does have a number of procedural requirements associated with foreclosure suits. The report details the differing approach that IRS takes with taxpayers when it chooses to bring a foreclosure suit, and notes the following steps revenue officers are instructed to take when they are considering pursuing a residence via the judicial collection path:

  • Attempt to contact the taxpayer by either a telephone call or a field call and advise the taxpayer that seizure or lien foreclosure is the next planned action.
  • Give the taxpayer an opportunity to resolve the tax liability voluntarily and provide and explain Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process.
  • Advise the taxpayer about the Taxpayer Advocate and provide Form 911, Request for Taxpayer Advocate Service Assistance.
  • Provide the taxpayer with the name and location of the immediate supervisor if the taxpayer requests a managerial review.
  • Attempt to identify the occupants of the principal residence.

Why Would The Government Choose to Bring a Suit?

There may be important reasons to use a foreclosure suit rather than a levy, including situations where there is a question about the property’s legal title that necessitates a judge sorting out the property’s ownership and if there is not much time left on the SOL on collection.  As to SOL issues, that can be crucial, as the collection statute continues to run until a court approves the seizure and IRS serves Notice of Seizure to the taxpayer. When the government seeks to foreclose a lien it will simultaneously file suit to reduce tax liability claims to judgment, thus making the lawsuit path as in effect the main way to proceed if there is not much time left on the SOL.

The data reflect that the SOL issue is the principal driver behind the IRS decision to use the foreclosure path rather than its administrative collection powers. For example, almost 80% of the principal residence cases assigned to DOJ for a foreclosure suit had an imminent collection statute issue, and many of the cases had been reassigned to differing revenue officers or sat in the collection queue for years.

To address the differing protections associated with administrative versus judicial collection action, TIGTA recommended that the IRS should work with Treasury to propose a legislative amendment that would “amend the law (I.R.C. § 7403) so that taxpayers are afforded the same rights and protections whether the IRS is conducting a Federal tax lien foreclosure or a seizure on their property”. The current TIGTA recommendation echoes a 2012 the National Taxpayer Advocate legislative recommendation to Section 7403 that would require an IRS employee to determine that that the taxpayer has no other property sufficient to pay the amount due and ensure that the foreclosure sale would not create a hardship.

IRS opposed the TIGTA (and TAS) recommendation principally because it feels that current protections associated with judicial foreclosure suits were sufficient, and also because the number of taxpayers is relatively small:

Every collection device has its own advantages and disadvantages to tax administration, but each ensures that taxpayers’ rights are protected. While the mechanisms for ensuring that taxpayer rights are protected may be different, they are not less. In lien foreclosure cases, the IRS provides certain administrative protections, but Congress ensured that taxpayer rights are fully protected by empowering a neutral third party, a district court, and broad equitable powers to review the merits of all claims before it may order a sale. United States v. Rodgers, 461 US 677 (1983). Based on our data, such a legislative change potentially benefits only a small population of taxpayers.


As with my discussion last week in Partial Pay Installment Agreements In the Dark, today’s post signifies TIGTA attempting to take a taxpayer rights perspective to IRS collection action. In acknowledging IRS’s opposition to its recommendation, TIGTA refreshingly states that “even if this change may only benefit a small population of taxpayers, it is important that those taxpayer’s rights are protected.”  

Kudos to TIGTA for embracing taxpayer rights and considering IRS actions in light of the potential risk to rights Congress has identified as worthy of agency consideration.

Local Taxes and the Federal Tax Lien

Cases involving lien priority fights between the IRS and local taxing authorities became quite rare after the Tax Lien Act of 1966.  That act has stood the test of time and brought federal lien law into the “modern” age.  With almost no changes to the statute since its enactment, it still operates with great efficiency.

The case of United States v. Tilley, No. 1:19-cv-00626 (M.D.N.C. 2022) purports to resolve a case or controversy between the IRS and a group of counties with local real estate taxes but is really just the court memorializing an assertion of lien priority by the counties and an acknowledgement by the IRS of their priority.  It wasn’t always this way.  Prior to 1966 and the enactment of 26 U.S.C. § 6323(b)(6), lien priority questions between the IRS and local taxing authorities too often ended up with a circular priority problem.  That provided one of the big reasons for passage of the Tax Lien Act.  The love fest exhibited in this case shows how the Tax Lien Act fixed the problem.


Mr. Tilley got in a heap of trouble.  For readers old enough to have watched the TV series the Andy Griffith Show, I picture Mr. Tilley providing material for one of the episodes of that show, based in rural North Carolina in the central part of the state, as one of the occasional scallywags that Sheriff Taylor had to navigate.  While Sheriff Taylor did not deal with too many “elaborate scheme[s] of sham trusts, fake corporations, and other nominee entities,” perhaps the character on the episode Bailey’s Bad Boy grew up to bigger problems.

Mr. Tilley defrauded the IRS through his schemes and ultimately pled guilty to a crime under IRC 7212(a) which is not one of the tax crimes you see prosecuted very often.  To be convicted of this crime you need to forcibly interfere with tax administration.  He interfered enough to draw a restitution order as part of his sentence of $7,676,757.00.  Not bad for a country boy.  At the time the IRS brought suit to foreclose on 35 properties he was holding through nominees, he still owed over $6 million.

Most of the people and entities involved in the holding of these properties did not respond to the suit that the IRS brought to foreclose, but a passel of counties and townships in central North Carolina raised their hands and said, “We want ours.”  Not surprisingly in a scheme of this type, lots of real estate taxes remained unpaid and that’s where the lien priority issue between the IRS and the counties comes into play.

The general rule of lien priority is first in time, first in right and that rule is reflected in IRC 6323(a) as well as in the Supreme Court’s decision in United States v. City of New Britain, 347 U.S. 81 (1954).  This is where the circular priority problem comes into play.  In real property the first lien is usually the mortgage.  If the IRS then files a lien it comes behind the mortgage.  If the owner doesn’t pay his real estate taxes after the IRS has filed its lien, the real estate taxes come after the federal tax lien in a first in time situation but come ahead of the mortgage under local law.  That’s why mortgage companies often require borrowers to escrow their local real estate taxes so that no local tax lien comes ahead of them.  The mortgage beats the IRS because it was first in time, the IRS beats the local taxes because it was filed first, and the local taxes beat the mortgage because of local law, but the local law cannot trump the federal law, thus creating the circle and the problem.

To fix the problem, Congress passed 6323(b)(6).  While 6323(a) sets up the first in time rule of law, 6323(b) provides 10 exceptions which allow a party to defeat the filed federal tax lien even if they come later in time.  Number 6 in that list is local property taxes.  Here, the liens of the counties and the townships clearly fit within the statutory language and the IRS acknowledged that fact in its concession.  The court states:

Although only one taxing authority, the City of Durham, has moved for summary judgment, this court finds judgment may be entered in favor of all taxing authorities similar to the relief requested by the City of Durham. The Government concedes that its interests are not superior to local property tax authorities. … Pursuant to 26 U.S.C. § 6323(b)(6) and 18 U.S.C. § 3613(c), property tax liens held by local property tax authorities have priority over the liens the Government seeks to enforce here. (See Doc. 175.) The City of Lenoir, (Doc. 176), County of Chatham, (Doc. 178), City of Durham, (Doc. 179), County of Harnett, (Doc. 180), County of Wake, (Doc. 181), County of Ashe, (Doc. 182), County of Orange, (Doc. 183), County of Granville, (Doc. 184), County of Durham, (Doc. 185), and County of Alamance, (Doc. 186), all agree with the Government’s position and consent to entry of an order resolving this case as to all property tax authorities which have filed answers.

This doesn’t stop the IRS from foreclosing on the property.  It just means that the proceeds from the sale will go first to satisfy the local taxes, then to satisfy any mortgage or other creditor, if they exist, listed in IRC 6323(a) who filed before the IRS perfected its lien interest and then, after those parties are satisfied, the IRS will take the rest up to the amount of the outstanding liability. It was not clear from the opinion whether the sale of all of the properties Mr. Tilley held through his nominees would satisfy his large liability to the IRS.  If not, there could be more cases involving Mr. Tilley in the future.  What would Andy Griffith say?

The Intersection of Foreclosure and Innocent Spouse

In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.


Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.

They bought the house in 1980 as joint tenants; however, they deeded the house to Victoria for no consideration in 1987. In 1988 Victoria transferred the property back to both of them for no consideration. Five days later they executed a deed of trust in favor of Security Allied Services to secure a loan of just over $300,000. In August of 1989, the couple transferred the property solely to Victoria again for no consideration. Charles created an entity known as Casa de Erin, LLC which the court describes as the alter ego/nominee of Charles and/or Victoria and in 2003 Victoria transferred the property to Casa de Erin for no consideration. In 2006 Casa de Erin rescinded the deed and transferred the property back to Victoria for no consideration and she remains the property’s nominal owner. The court notes that “upon information and belief, Charles LeBeau has continued to reside at the Property and has retained all the benefits and burdens of ownership.”

The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.

Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.

In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.

The court next notes that it has broad discretion to stay proceedings noting that it must consider:

  • the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.

The defendants made the following arguments in support of a stay:

On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.

The court cites the Supreme Court’s decision in United States v. Rodgers, 461 U.S. 677 (1983) regarding its discretion to foreclose a federal tax lien on taxpayer’s property. We have discussed Rodgers before here in a case blogged by Les with some similarities to the LeBeau’s situation. After discussing the general Rodgers factors a court should weigh in deciding whether to permit foreclosure, the district court here cites to two prior cases in which someone claiming innocent spouse status sought to use that status as a basis for postponing foreclosure based on the Rodgers’ factors. In the first case, United States v. Battersby, 390 F. Supp. 2d 865 (N.D. Ohio 2005) the court did stay the action while in the second case, United States v. McGrew, 2014 WL 7877053 (C.D. Cal. 2014), aff’d, 669 Fed. App’x 831 (9th Cir. 2016) the court concluded Rodgers was inapplicable stating that “innocent spouse protection does not entitle [non-liable spouse] to prevent foreclosure on the Government’s tax liens.”

A third case exists out of South Carolina, which the LeBeau court does not mention, in which Carl Smith and Joe DiRizzo sought to assist the wife in her effort to stop foreclosure and seek innocent spouse relief, United States v. Dew. The IRS brought a foreclosure proceeding to sell some jointly owned property for liabilities of both Mr. and Mrs. Dew.  Late during the proceeding, Mrs. Dew filed a Form 8857, which had not yet been ruled on by the IRS.  The DOJ first asked the district court to ignore this belated filing.  And the court essentially did so in 2015 U.S. Dist. LEXIS 112979 (D. S.C. 2015), where it wrote in footnote 1:

The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).

The Dews filed an appeal to the 4th Circuit arguing that the collection suit could not go forward.  Section 6015(e)(1)(B)(i) provides:

Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

Mrs. Dew filed a response with the District Court arguing that 6015(e)(1)(B) was mandatory and asked, therefore, that foreclosure be stayed.  In response to this filing, the government finally agreed that it could not pursue collection against her for the taxes subject to the Form 8857, but still asked the court to foreclose and sell the property to satisfy Mr. Dew’s tax debts and Mrs. Dew’s tax debts that were not covered by the Form 8857.  See attached response. The court went ahead with the sale and instructed the distribution of proceeds in accordance with the government’s revised listing (excluding the Form 8857 liabilities). See the final revised order confirming the sale here.  The 4th Cir. then decided the appeal and held against the Dews.  670 Fed. Appx. 170 (4th Cir. 2016).  The entire text of the 4th Cir. opinion is as follows:

James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2]  and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.

In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.

It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.


Making an Offer in Compromise Does not Stop Seizure and Sale of Home

In United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018) the Eighth Circuit affirmed the decision of the district court allowing the sale of taxpayer’s home and affirmatively determining that an offer in compromise request filed by the taxpayer has no impact on the ability of the court to grant the request by the IRS to sell the home or on the IRS’ ability to sell the home once the court granted its approval. In reaching this conclusion the Eighth Circuit analyzes the exemptions to levy in IRC 6334 and the relief those provisions do and do not provide.


Taxpayer owes the IRS over $500,000. The opinion does not discuss the actions by the taxpayer to pay or resolve her liability prior to the action by the IRS to sell her house. I imagine that the IRS considered her a “won’t pay” taxpayer. Before seeking to sell her home, the IRS had seized and sold her boat and levied on her bank accounts.

The 1998 Restructuring and Reform Act added IRC 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer. Prior to 1998 collection due process did not exist. Prior to 1998 the 10 deadly sins did not exist one of which calls for the dismissal of an IRS employee who makes an inappropriate seizure. So, the landscape regarding seizures, and especially personal residence seizures, changed dramatically after 1998; however, the amount of litigation regarding seizure of personal residences is low and the Brabant-Scribner case offers a window on one aspect of this process.

As the IRS initiated the process of seizing her personal residence by obtaining the appropriate court approval, the taxpayer filed an offer in compromise. She filed an effective tax administration offer of $1.00, but the amount and sincerity of her offer do not really matter to the legal outcome of this case. The timing and the amount of the offer may have influenced the thinking of the judges and made them more inclined to dismiss her argument but her possibly bad faith effort to stop the approval and execution of the sale should not have affected the outcome here.

To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. Taxpayer argued that her offer was a reasonable alternative; however, the court spends three paragraphs explaining that an offer does not matter in this situation. The relevant language in the applicable regulation is “reasonable alternative for collection of the taxpayer’s debt.” The court explains that the word “for” holds the key to the outcome.

“For” refers to an alternative to the sale of the personal residence such as an installment agreement or the offer of funds from another source to satisfy the debt. An offer in compromise is not an alternative for collection but an alternative “to” collection.

Having determined that the words of the regulation point toward a resolution other than an offer as providing the necessary alternative, the court looks at the remainder of the regulation for further support of its conclusion. It points to the provision in Treasury Regulation 301.6334-1(d)(2) which provides that the taxpayer has a right to object after the IRS makes its initial showing and “will be granted a hearing to rebut the Government’s prima facie case if the taxpayer … rais[es] a genuine issue of material fact demonstrating … other assets from which the liability can be satisfied.” This regulation, like the one providing an alternative “for” collection, looks not to relief from payment of the liability but a source for making payment. It does not provide the offer in compromise as a basis for relief. Based on this the court concludes that “nothing requires the district court to ensure that the IRS has fully considered a taxpayer’s compromise offer before approving a levy on a taxpayer’s home.”

Since the IRS properly made its case for seizing and selling the home and the taxpayer did not rebut that case, the Eighth Circuit affirms the decision of the district court to approve the sale. The decision provides clear guidance for district courts faced with the request by the IRS to seize and sell a personal residence. Personal residence seizures by the IRS remain rare at this point. Taxpayers faced with such a seizure, almost always taxpayers the IRS characterizes as “won’t pay” taxpayers, will find it difficult to stop the seizure and sale based on this decision. I do not think this decision will motivate the IRS to increase the number of personal residence seizures but it will make it a little easier to accomplish when it decides to go this route.


District Court Blesses Sale of Marital House to Satisfy Other Spouse’s Tax Liability

What happens when a spouse or other third party co-owns a house with someone who has a sizable federal tax liability? IRS seizures to satisfy an assessment are relatively rare. IRS attempts to enforce a lien and foreclose on a home are even rarer. And forced sales of homes when one of the co-owners of the house owes none of the taxes probably occurs only a handful of times a year.

We are in the process of reviewing cases and other developments that we have read over the past few months as we gear up to complete the last of the three updates we do annually for the Thomson Reuters treatise IRS Practice and Procedure. Earlier this year I read US v Tannenbaum, a case out of the Eastern District in New York where the IRS sought to enforce its lien and foreclose and sell upon a marital home in Brooklyn that was shared by the Tannenbaums, Sarah and Gershon. I flagged Tannenbaum for inclusion in our discussion of the government’s authority to force the sale of co-owned property under Section 7403.


Including interest and penalties Gershon unfortunately had run up a couple of million dollars in income tax liabilities. I am not sure if he filed MFS or if Sarah were relieved of the liabilities via Section 6015; the opinion is silent but Sarah was not on the hook for those assessments. Since 1977, the Tannenbaums jointly owned a house in Brooklyn that had an appraised value of over $1.2 million (a far cry from the Brooklyn home values when I was born and lived there in the days of Mayor Lindsay).

While the tax assessment only related to Gershon, both had some history with the government. In the mid 90’s both Sarah and Gershon had been indicted for conspiracy to defraud or commit an offense against the US and for false statements made to the IRS. Gershon pleaded guilty to the conspiracy charges and Sarah entered into a deferred prosecution agreement and all charges were dropped against her. Gershon had been sentenced to a year and a day and supervised release.

That background takes us to the case at hand and likely matters in terms of how the government approached this case. IRS sought to enforce the assessment against Gershon by foreclosing on and forcing the sale of their Brooklyn house. Both lived in the house, where they raised their children and also now lived with Sarah’s disabled mom. The house was specially set up to accommodate Sarah’s mom, who was in her 80’s and bound to a wheelchair.

This takes us to an issue that we discuss heavily in the Saltz/Book treatise, courtesy of Keith who has taken the lead oar as primary author on the revised collection chapters. Under Section 7403, a federal district court can “determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property,…, and a distribution of the proceeds of such sale according to the findings of the court.

Yet that power to force a sale and distribution of the proceeds is limited. In the 1983 case US v Rodgers the Supreme Court said that while the government has broad discretion to force a sale, “Section 7403 does not require a district court to authorize a forced sale under absolutely all circumstances, and that some limited room is left in the statute for the exercise of reasoned discretion.” Keith has discussed the application of Rodgers in prior posts here and here

To assist courts in exercising that discretion, Rodgers identifies factors:

1) “the extent to which the Government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes[;]”

(2) “whether the third party with a nonliable separate interest in the property would, in the normal course of events (leaving aside § 7403 and eminent domain proceedings, of course), have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors[;]”

(3) “the likely prejudice to the third party, both in personal dislocation costs and … practical undercompensation [;]” and

(4) “the relative character and value of the nonliable and liable interests held in the property ….”

The Tannebaum opinion applies these factors to the case at hand. While I will not discuss all the factors here, usually the most interesting part of these cases considers the prejudice to the non liable party if there is a forced sale. Of course, when the government comes in and kicks you out of your marital residence (and one that here was the marital home for close to 40 years) there is going to be prejudice.

What is too much in terms of prejudice? Sarah starts off at an atmospheric disadvantage because of her (and Gershon’s) prior history with the government. It did not help that Gershon’s mother had bequeathed a condo to Sarah and Gershon’s sister in what looks like an attempt to transfer assets outside the reach of creditors, including Uncle Sam. In addition, the opinion suggests that Sarah had other assets at her disposal and upon sale of the Brooklyn house, she would be entitled to about $600,000, as the government offered to split the sale proceeds of the Brooklyn house equally.

Those facts led the court to conclude that there was little prejudice to Sarah if the government would go ahead with the sale, as Sarah could find somewhere else to live.

Despite those facts that were stacked up against Sarah I did find one aspect of her prejudice argument to be interesting. She emphasized that in thinking about prejudice the court should “consider intangible factors” and “other common sense special circumstances.” In particular, Sarah noted that the forced sale would also impact her elderly and disabled mom, who lived with Gershon and Sarah in Brooklyn. She also pointed to the unique character of the neighborhood, which was predominantly Orthodox Jewish, as were the Tannenbaums. To top it off, she included in her papers an affidavit from a local real estate broker who noted that there was little market turnover in the neighborhood and that the house had additional value to elderly residents due to its proximity to a hospital.

The court agreed with Sarah on the principle that intangible factors matter but in the end concluded that the mom’s presence and the neighborhood’s character did not tip the scales on prejudice. First, on the mom:

The Court sympathizes with Sarah Tannenbaum concerning the care of her mother. But the evidence does not support Sarah Tannenbaum’s argument that she is short on resources. First, her financial resources are not limited to her salary, an amount that she has not disclosed.

The opinion then discussed that she and her sister in law sold the condo they inherited from Gershon’s mom and that all things considered Sarah (and her mom) would be ok if the IRS sold the marital home given the assets she had at her disposal:

Nonetheless, her share of the Condo sales proceeds, $350,000, plus the approximately $600,000 that she is anticipated to receive from the sale of the Home, mean that Sarah Tannenbaum will have $950,000 to lease or buy another home that can accommodate the Tannenbaums and Sarah Tannenbaum’s mother. Although neither side presented any evidence of the cost of leasing or buying an apartment or house in this neighborhood, the Court finds that $950,000 should suffice where the Tannenbaums can look for a smaller home, and the amount is not far off from the $1.2 million estimated market value of the Home. The Court is not aware of any controlling law, nor does Sarah Tannenbaum bring any to the Court’s attention, holding that a non-liable party is prejudiced if that party has to lease rather than buy a home.

The opinion noted that there were other Orthodox communities even if there were few alternates in the specific neighborhood. At the end of the day, however, while the court acknowledged the relevance of Sarah’s special circumstances, her resources were enough to tip that factor in favor of the government.


After applying all the Rodgers factors, the district court held that IRS had the right to force the sale of the Brooklyn house. Interestingly, the government argued that one of the factors in its favor was the prejudice to the government if it did not permit the forced sale. It is hard to force a sale of half a house, so there is always some prejudice if a court does not permit the sale of the entire property.

But there is more. Here the government pointed out that under NY law if Gershon were to die the US would not have the right to collect because its lien would be extinguished. Earlier this year and in fact prior to the court order setting the sale Gershon in fact did pass away (See Brooklyn, NY – Jewish Community Mourns The Sudden Loss Of Rabbi Gershon Tannenbaum ). The court was not aware of his passing when it wrote the opinion as the opinion noted Gershon failed to file any responsive papers. I suspect that the rabbi’s passing may then have extinguished the government’s interest in the residence, which would allow Sarah to remain in the house and give her the relief she sought. After the court issued its opinion, Sarah in fact filed a motion effectively asking the court seeking relief from a final judgment; the government has yet to respond and last week filed a motion seeking additional time to respond.





Revoking the Release of the Federal Tax Lien and Appointing a Receiver

In United States v. Evseroff the Eastern District of New York rendered an opinion which seems to have brought a case with procedural history spanning almost 15 years and six prior decisions to conclusion. After appointing a receiver to sell Mr. Evseroff’s residence, the property at the heart of this case, the court gave him 35 days to vacate and declined his invitation to exercise equitable powers to stay the appointment of the receiver and the sale of the property.

Since both the revocation of the release of federal tax lien and the appointment of a receiver are unusual procedural actions, with the appointment of a receiver the much more unusual of the two, a discussion of the Evseroff case provides an opportunity to examine two little used procedures and to look at another situation in which the Court declines to exercise its equitable powers to stop a sale.


Mr. Evseroff, a retired attorney, owns a valuable house in Brooklyn. After, or in conjunction with, incurring substantial tax liabilities, he transferred the house to a trust. In an earlier proceeding the Second Circuit, overturning the district court, determined that the transfer of the house to the trust was fraudulent.

Because the property at issue in this case serves as the taxpayer’s personal residence, the IRS has two primary choices as it seeks to get the unpaid taxes out of the taxpayer’s equity in the property. Ignoring for a moment the appointment of a receiver in this case which represents a very rarely used third choice, the normal choices available to the IRS involve seeking to administratively sell the house after an ex parte hearing before a District Court judge or Federal Magistrate as provided in IRC 6334(e)(1) or bringing a suit in federal district court to foreclose the federal tax lien pursuant to IRC 7403. On April 18, 2014, the IRS issued guidance on how to proceed in these cases. The guidance makes clear that the IRS prefers the administrative course and seeks to use foreclosure proceedings (or the appointment of a receiver) only in the more difficult cases.

While this case journeyed through the courts for many years, the IRS improvidently released the notice of federal tax lien filed against Mr. Evseroff. Section 6325(a) provides for lien release where the tax is satisfied or no longer enforceable. Occasionally, the IRS will issue a release when it should not. The opinion contains a suggestion that Mr. Evseroff’s representative may have played an inappropriate role in the release; however, that issue went unresolved and did not impact the outcome of the case.

When the IRS releases a lien improvidently, it has the ability to reverse the release. It must follow the procedures of IRC 6325(f)(2) which involves filing a release revocation form in the same place(s) where it recorded the release. Revoking the release requires little effort; however, the process of releasing the federal tax lien and then revoking the release can have very negative consequences on the priority of the federal tax lien vis a vis other competing creditors.

During the period between the release and its revocation, other creditors, or a purchaser, can intervene to defeat the federal tax lien. Here, that did not appear to happen. The IRS discovered its mistake relatively quickly. No one purchased the property during the period after the release or recorded a mortgage or judgment. So, the improvident release did not harm the IRS. A taxpayer who thinks the federal tax lien has been improvidently released may want to act quickly if they want to get the value of the property without the burden of the lien. Considering the earlier transfer to a trust in this case in an apparent attempt to defeat the federal tax lien, Mr. Evseroff’s failure to sell or encumber the property during the period when the federal tax lien did not attach to the property suggests his earlier action did not evince an effort to defeat the federal tax lien or, if it did, he no longer sought to do so or did not appreciate the window of opportunity.

The federal tax lien release can occur either with the filing of a release with the court(s) where the notice was recorded or it can occur with the passage of time. The more frequent cause of inadvertent releases, which themselves are rare, results from a combination of the failure of the IRS to refile the notice within the appropriate period coupled with the self releasing feature of the notice of federal tax lien. The IRS incorporated the self releasing feature into the notice in the early 1980s because it could not keep up with all of the releases it needed to file in order to meet its statutory obligation to release a lien once the liability was satisfied or became unenforceable. The IRS monitors its liens to determine when they will self release and refiles them when appropriate – usually when something has extended the statute of limitations on collection. It occasionally fails to properly monitor a lien resulting in an unintended release. As mentioned above, fixing the improvident release requires little effort but the release itself can have dire consequences for the priority of the federal tax lien in its competition with other creditors or purchasers of any encumbered property.

Aside from the lien release issue, Mr. Evseroff’s case contains another interesting issue because of the appointment of a receiver. The appointment of a receiver got scant attention in the opinion yet this action by the IRS rarely occurs. Usually, the IRS simply forecloses its lien on the property subject to a lien and sells the property itself. It does not see the appointment of a receiver because of the expense of paying the receiver and, quite often, the difficulty in finding a receiver willing to accept the task and acceptable to the IRS. Getting a receiver appointed also requires a demonstration to the court of the necessity of a receiver. The opinion contained little or no information guiding a reader to an understanding of why it chose to appoint a receiver here. The motion seeking the appointment of a receiver makes it clear that the receiver here is a real estate agent experienced in the Brooklyn. The motion also includes information that the IRS expects to recover more for the property by selling it through a local real estate agent than a typical IRS sale. This approach makes a great deal of sense but is not one I routinely encountered when I worked at Chief Counsel’s office.

I can offer some speculation based on other situations in which I have seen a receiver appointed. Usually, the property needs to have characteristics that will make sale of the property by the IRS difficult or one in which the IRS will obtain a depressed price. About 15 years ago the IRS split the function for sale of property off from an occasional duty of a revenue officer handling the account into a special unit, the Property Appraisal and Liquidation Specialists (PALS) unit. The individuals assigned to the PALS unit do nothing but sell property. As a consequence, they know the complicated rules under the Internal Revenue Code for selling property and the market for such sales better than revenue officers did. Because of the low number of seizures and sales of property following the Revenue Reform Act of 1998, a typical revenue officer might sell property only a handful of times through a career. This specialization brings many benefits while losing very little except for the local market contacts some of the senior revenue officers had developed.

Some types of property exceeds even the capacity of the PALS unit to property market and sometimes even the clear title following a judgment and foreclosure of the lien will still not make it beneficial for the government to conduct a sale. In those circumstances, the IRS should consider the appointment of a receiver by the court because a knowledgeable receiver will better market the property. If done correctly the increased price will benefit the IRS (and the taxpayer) because it will more than pay for the extra expense of the receiver. Typical IRS sales bring in a depressed sales price because of the nature of the sale. A receiver has the opportunity to market the property in a manner much more likely to achieve a fair market value for the property.

Aside from the legal issues presented here involving lien release and the appointment of a receiver, the case also presents another view at the factors a court considers when asked to exercise its equitable powers to postpone foreclosure, or in this case the appointment of a receiver. Mr. Evseroff made the request and the Court relatively easily said no. He argued that his “age, physical condition, history as an attorney, veteran and law-abiding taxpayer, as well as the age of this case” should factor into the Court’s decision to grant a stay. The Court found that unlike the Rodgers case Mr. Evseroff’s wife did not have an interest in the property. It also found that appointing a receiver rather than simply allowing the IRS to foreclose was itself an equitable result. His tax liabilities were over 10 years old (not an unusual age in these types of cases) and they were so old because of his actions to hinder and delay the IRS from collecting. When someone has been found to have made a fraudulent transfer of property, they need to have significant equity on their side in order to persuade a court to exercise its discretion using the Rodgers factors. Mr. Evseroff did not have enough equity to overcome his earlier actions.


“Crafting” an Appropriate Value for Your Tenancy by the Entireties Interest When Your Spouse Owes the IRS

Tenancy by the entireties serves as a common means for married couples to hold property in the Eastern half of the United States, as well as some states further West. This form of property ownership derives from a fiction developed in English common law that the marital unit holds property separate and apart from the individuals in the marriage. Many states permitting this form of property ownership combine it with the fiction that the marital unit holding the property causes the property to remain free from attachment by creditors of only one spouse. So, for example, if the husband has a small business that runs into financial difficulty and he becomes personally liable to a number of creditors for the debts of the business, those creditors cannot look to the marital home or to any other asset held as tenants by the entirety in states that protect that property interest from the debts of one spouse.

After many years of trying, the IRS broke the protection provided by tenancy by the entireties status with a victory in the Supreme Court in 2002 in Craft v. United States. After Craft, Chief Counsel Notice 2003-60 set out the government’s view of the decision and the intentions of the IRS regarding property held as a tenancy by the entireties where only one spouse owed federal taxes. The Supreme Court’s decision turned on the power and special status of the federal tax lien. Now that the issue of whether the federal tax lien can attach to tenancy by the entireties property has been answered, the past twelve years have provided incomplete instruction on what happens when the IRS takes action against the property.



Imagine tenancy by the entireties property owned by the late Anna Nicole Smith and her late husband during the period of their marraige. What is the value of her interest in any jointly held property versus his? Given their significant age difference, her interest in such property seems more valuable than his since her life expectancy extends many decades beyond his. Suppose he owed a significant trust fund recovery liability for which she did not share the liability. If the IRS had brought a foreclosure action and sold the property, how much of the proceeds of the sale should go to her and how much to the IRS in recognition of her husband’s interest?

Six circuit courts have now faced this question in some fashion and their answers have differed but so far the Supreme Court has declined to take a case on this issue. The basic split stands at four to two with four circuits (Second, Fifth, Ninth, and Tenth) deciding that the property interest of each spouse includes the actuarial interests of the spouses and two (Sixth and Third) deciding that a 50/50 split appropriately values the interests of the spouses. The IRS position favors the 50/50 split. I imagine that taxpayers whose actuarial interest would give the indebted spouse the bigger share have not engaged in this litigation.

The Ninth Circuit supported their position on using actuarial tables for the interests of both spouses by asserting that a different method would result in the property being valued at something different than 100% of the property value. The Fifth Circuit echoed this outlook by stating the actuarial tables, “properly reflect the fact that the aggregate value of all the interests in a piece of property equals 100 percent the value of the property.”

On the other hand, the Sixth Circuit has held that actuarial valuation should only be used out of necessity. The Third Circuit has also rejected the actuarial approach and determined the interests held by tenants by entirety is equal. The Third Circuit cited to precedent indicating Pennsylvania has a long history of tenants by entirety equally possessing the estate.

An article written for The Florida Bar Association in 2005 noted that none of the courts addressing the issue of the value of the separate interest of one owner of jointly held property utilized marketability discounts.  The reason that marketability discounts may not apply is that the property is usually being sold in its entirety and the issue is how to divide up the proceeds which have not been diminished by a marketability discount because a court has generally allowed the sale of the whole property.

One reason the IRS favors the 50/50 split is the administrative convenience of such a split. The IRS does not need to engage in age verification, in calculations, in fending off arguments that the younger spouse is the sicker spouse. Having a simple 50/50 test to apply will sometimes favor the IRS (and perhaps more than a random amount but I know of no studies on this) and sometimes not. Keeping it simple almost always serves the administrator. I wrote about a similar phenomenon when one spouse goes into bankruptcy and the other spouse (sometimes called the injured spouse) competes with the bankruptcy trustee over the proper split of a tax refund.

At some point, I anticipate that this issue will make it to the Supreme Court. In the meantime, if you live in one of the circuits that has not opined on this issue do your research and first decide if it best serves your interest to accept the IRS payment of a straight 50% of the proceeds. If that result provides the best actuarial result, stop there and take the money. If you represent the non-liable spouse who has more projected years to live and therefore an argument for a higher percentage of the proceeds, get the briefs from the cases in the winning circuits and make your arguments. The government’s brief at this point is pretty well fixed. You should have no trouble knowing what the government plans to argue and how it plans to do so.

One problem that you may face is that the cases holding for the split of the proceeds based on actuarial value pre-date the Craft decision. Since that decision on the 3rd and 6th Circuits have spoken on the issue and they have gone with the 50/50 split. You may have to overcome the age factor on the actuarial cases in trying to convince the next circuit that such a result best serves the intent of a statute that never intended a creditor reach this property.