Innocent Spouse Lien Cases – District Court Revives Refund Remedy for Third Party Who Pays the Taxpayer’s Liability to Clear Title to Property

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In 1995 the Supreme Court, in Williams v. United States, provided a remedy for a third party who paid the taxes of a delinquent taxpayer in order to clear title to her property.  In 1998 Congress amended section 6325(b)(4) to provide a path for relief through the discharge provisions for third parties stuck with an encumbrance on their property because of the failure of a non-owner taxpayer to pay their taxes.  The amendment intended to repeal and replace the decision in Williams.  In an earlier post I discussed the failure of a third party to use the discharge provisions before selling their property and the resulting loss of an opportunity to remove the lien.  That post contained a quote from a 6th Circuit case which held Congress changed the discharge provisions and 7426(a) specifically to “enable an individual like Williams… to challenge a lien placed upon a plaintiff’s property as a result of a tax liability incurred by another party.”  Portsmouth Ambulance, Inc. v. United States.

In Streeter v. United States the district court in Massachusetts allows a third party to use a Williams type procedure despite the statutory overruling of Williams. It may be a case to watch for those caught up in this situation.  The Court in Streeter found that reverting to the remedy provided in Williams became necessary because of IRS action (or inaction.)  Whether this decision can stand up on appeal remains to be seen but it does take this corner of lien law in an unexpected direction.  It does so because of the very sympathetic facts in the case.  Just as Congress has had to amend the innocent spouse statute twice since its enactment in 1971 to capture the many nuanced ways that a spouse signing a joint return needs statutory assistance to come out from under the joint liability, it may be that Congress will need to amend the procedures replacing Williams to address the innocent spouse lien cases and the permutations on different fact patterns that they can create.

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Ms. Streeter’s case results from a transfer in a divorce proceeding. Her ex-husband was to transfer the jointly owned marital home to her and she was to give him $1.1 million. Following the entry of the divorce decree, however, he abducted their two children and left the United States. The children were returned two years later but the husband did not come back. Ms. Streeter placed her payment in escrow waiting for him to execute the transfer deed which never happened. Sometime in 2001 she did record the divorce decree in the local court.

Of course, the husband owed federal taxes and on March 4, 2004, the IRS filed a notice of federal tax lien against him for about $250,000 for the year 2000. This liability belonged only to the husband as they did not file a joint return for that year. Five years later when she attempted to obtain a mortgage on the property, Ms. Streeter learned of the notice of federal tax lien and its impact in clouding the title to her property.

I call cases with this fact pattern innocent spouse lien cases. They do not implicate section 6015 because no joint liability exists, but they do arise when one spouse leaves the picture without cleanly transferring the property before the inevitable tax debt of the former spouse comes into the picture. At the time of discovery these cases seem to have already hit a crisis point in timing, and they often dreg up emotional issues the unsuspecting spouse hoped were past. I had a similar though more difficult case, because no decree ordering transfer existed, a few years ago at the tax clinic at Villanova. The just retired and wonderful local taxpayer advocate in Philadelphia, Lois Lombardo, worked with me and with collection to broker a discharge of the lien with respect to the property at issue because the facts were so sympathetic even though the case did not fit cleanly into the statute. Ms. Streeter did not find her guardian angel in TAS but did find one in the district court judge. Unlike the Little Italy case discussed in the prior post where the third party seeking relief did not appear to come before the court with clean hands, Ms. Streeter and those like her with innocent spouse lien cases come with buckets full of equity on their side. These are not cases the IRS wants to fight, and it should seek every opportunity to find a way to resolve them at the earliest stage. Yet, the district court here found that the IRS did just the opposite.

In January, 2010, Ms. Streeter requested a certificate of non-attachment from the IRS for the lien on the property pursuant to section 6325(d). The IRS responded by saying that this certificate was not the correct way to seek relief and she should instead request a discharge. So far so good. I pause to mention that the opinion last mentioned the $1.1 million dollar payment Ms. Streeter placed into escrow pursuant to the divorce decree as still being in the escrow account. If it still existed in the escrow account, I do not understand why the IRS was not simply pointed to that account with a request that it levy that account for full payment the easy way.

In February 2010 Ms. Streeter requested a discharge. In June, still waiting for the discharge and despite the existence of the lien on the property, she sold a small portion of the property to an adjoining landowner. In 2011 she found a buyer wishing to purchase the majority portion of the property. The buyer needed the lien removed and set a deadline of March 20,, 2012.

Ms. Streeter’s attorneys were contacting the IRS between December 2011 and March 2012 trying to obtain a discharge so the sale could go through. They filed another application for a discharge. The IRS employee in the advisory unit assigned to the case denied the discharge erroneously believing that the lien attached before the transfer in the divorce. As the deadline approached after several unsuccessful efforts to obtain the discharge, Ms. Streeter decided to pay the tax and later seek a refund. The same day the payment occurred the IRS issued the certificate of release because of the satisfaction of the liability. In October, 2012 Ms. Streeter filed a claim for refund which the IRS denied stating that the assessment was proper and “our lien had attached.”

Ms. Streeter timely brought a refund suit on February 7, 2014. The IRS moved to dismiss which the court denied. The parties filed cross motions for summary judgment. The parties agreed that Ms. Streeter did not owe the tax and that her ex-husband did not have an interest in the property at the time the notice of federal tax lien was filed in 2004. The Court found that she was unable to pursue the remedy of discharge because of the actions of the IRS and granted her motion for summary judgment. The IRS argued that the discharge provision “provided the sole waiver of immunity” for a refund suit after the 1998 amendments and that Ms. Streeter failed to follow the procedure for discharge.

The IRS argued in the case that her discharge was denied because she failed to make a deposit or post a bond as required by section 6325(b)(4); however, the court pointed out that she offered to make the deposit in her request but the application form in IRS Publication 783 tells applicants “do not send one with the application. The Advisory Group manager must first determine the amount of bond or deposit needed for the discharge….” No facts were presented to the Court that the Advisory Group manager communicated the amount needed to Ms. Streeter. The person at the IRS with whom Ms. Streeter did communicate simply stated that Ms. Streeter would not receive a discharge because she did not qualify.

The court found that under the applicable regulation her payment should have been treated as a deposit and a discharge should have been granted instead of a release. Had it been handled this way she would have a path to the return of her money. The check she sent did not include a statement that it was intended as a deposit or a payment seeking release. The court sites to the line of cases that have developed like Little Italy and Portsmouth Ambulance but finds that in these cases the third party did not properly pursue the discharge application unlike Ms. Streeter who pursued it only to be frustrated by the IRS which failed to follow its own procedures. The court further found that the Supreme Court has not overturned its holding in Williams that title 28 sections 1346 and 7422(a) confer subject matter jurisdiction and waive sovereign immunity for a third party otherwise left without a remedy. The IRS pointed out two other suits she might have brought instead of a refund action but the court rejected those possible causes of actions as a basis for denying refund relief again pointing to the actions of the IRS in failing to properly process the discharge application.

Ms. Streeter sought an alternative basis for relief under section 7432 for damages for failure to release the lien. The court denies this request for failure to exhaust administrative remedies and granted summary judgment on this issue to the IRS. Despite denying this request, the court gets Ms. Streeter to the place she needed to be. Based on the facts presented, this does not seem like a great case for the IRS to pursue on appeal. Perhaps this case will spur the IRS to move more quickly on discharge applications in situations such as this. The facts certainly suggest she received poor customer service as she tried to resolve a problem that she did not create.

 

 

 

 

 

Comments

  1. Lois Lombardo says

    Good article Professor Fogg

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