Court Upholds Foreclosure on Taxpayer’s Primary Residence in Satisfaction of Federal Tax Lien


In United States v. Smith, 117 AFTR 2d 2016-XXXX (February 8, 2016), the U.S. District Court for the Western District of Washington allowed the Federal government to foreclose on the taxpayers’ primary residence in satisfaction of a Federal tax lien.

Mr. and Mrs. Smith, the taxpayers, were a married couple living in Washington State.  Mr. Smith worked as an airline pilot, supplying the Smiths’ primary source of income, and managed the couple’s finances.  Mrs. Smith managed the couple’s household.  In 1983, Mr. and Mrs. Smith purchased a residence in Washington State (the “Residence”).  The couple failed to pay Federal income taxes for the period 1999-2004, resulting in a judgment against Mr. Smith of $626,814.32.  Subsequently, the government foreclosed on a vessel and two parcels of land owned by the Smiths in execution of the judgment.  The foreclosure proceeds were insufficient to satisfy the amount owed.  Consequently, the government filed an action to foreclose on its liens against the Residence.  In defense of the enforcement action, the Smiths argued as follows:  (1) the government could not foreclose on Mrs. Smith’s share of the Residence in satisfaction of Mr. Smith’s debt; (2) Mrs. Smith is entitled to innocent spouse relief with respect to the judgment; and (3) Mr. Smith did not receive sufficient notice of the Federal tax lien.  

Under Washington law, debt incurred by a spouse during the course of marriage is presumed to be community debt.  The taxpayer must introduce clear and convincing evidence to overcome this presumption.  

Special “innocent spouse relief” provisions apply to taxpayers living in community property states (including Washington).  Specifically, a taxpayer in such a state can claim innocent spouse relief if:  (1) the spouses live apart; (2) one of the taxpayers acted as if he or she was solely entitled to the income subject to the tax at issue and failed to notify the spouse claiming relief of the income before the due date for the applicable tax return; or (3) the spouse claiming relief (i) did not file a joint return for the year, (ii) did not report the disputed income item on his or her individual return, (iii) did not know, or had no reason to know, of the disputed income item, and (iv) demonstrates that it would be inequitable to include the disputed income item in his or her gross income.  I.R.C. § 66.

Under section 6320 of the Internal Revenue Code, the Federal government must notify a taxpayer in writing of the filing of a notice of Federal tax lien.  The notice must advise the taxpayer of his or her right to an administrative hearing.  However, a notice of Federal tax lien is valid and retains its priority regardless of whether the taxpayer receives such notice.

The court held that Mrs. Smith failed to introduce clear and convincing evidence to overcome the presumption that the tax debt was a community debt.  The court also denied Mrs. Smith’s claim for innocent spouse relief – she continued to live with Mr. Smith, she failed to introduce evidence that Mr. Smith alone was entitled to the income at issue, and she failed to introduce evidence that she was unaware that Mr. Smith had earned the income at issue.  Lastly, the court rejected Mr. Smith’s argument that he had failed to receive sufficient notice.  The court noted that even if he failed to receive the 5-day notice, the Federal tax lien was still valid.  

Taxpayers living in community property states should be advised of the special provisions applicable to debts incurred during a marriage.  Due to Washington’s community property laws, the Smiths’ residence was subject to foreclosure to satisfy a tax debt incurred during the Smiths’ marriage.  In order to preserve the non-debtor spouse’s right in community property, at least under Washington law, such spouse must have sufficient evidence to show that a tax debt is not a community debt.  Where the non-debtor spouse has benefited from the failure to pay Federal taxes, it may be difficult to satisfy this standard.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.