Was a transfer of homestead property fraudulent and does a federal tax lien follow the property, making the person who received the property liable for unpaid taxes?
Taxpayer Says: The property qualified for homestead exemption under Florida law and is exempt from the Uniform Fraudulent Transfer Act. Therefore, the transfer was not fraudulent, and the value of the property cannot be used to collect unpaid income tax.
Internal Revenue Service Says: The transfer was fraudulent, and the federal tax lien follows the property. The facts surrounding the transfer allow collection of the unpaid tax liability from the taxpayer.
From Internal Revenue Code Section 6901(a): Provides that the liability of a transferee of a taxpayer’s property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred”.
From Sawyer Trust v. Commissioner, 133 T.C. __, __ (2009) (slip op. at 20): For purposes of this case, the existence and extent of the transferee’s liability are determined by the law of the State in which the transfer occurred (Florida).
From Fla. Stat. Ann. sec. 726.106: When certain conditions are met, these provisions treat a “transfer” by an insolvent debtor as constructively fraudulent; i.e., without regard to the actual intent of the parties.
From Fla. Stat. Ann. sec. 726.106(1): Provides in pertinent part that a transfer by a debtor is fraudulent as to a creditor if: (1) The creditor’s claim arose before the transfer was made; (2) the debtor did not receive a “reasonably equivalent value” in exchange for the transfer; and (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.
From Fla. Stat. Ann. sec. 726.102(12); UFTA sec. 1(12), 7A (Part II) U.L.A. 15 (2006): Defines a “transfer” as a mode of disposing of or parting with an “asset”.
From Ries v. Wintz Props., Inc. (In re Wintz Cos.), 230 Bankr. 848, 860 (Bankr. 8th Cir. 1999): If the term “asset” does not apply to property that has been conveyed, then there is no “transfer”.
THE CAUSE OF THE DISPUTE
In some circumstances, the IRS can collect taxes from someone other than the taxpayer who owes them, using a procedure called “transferee liability”. For instance, if property is transferred to you for less than a reasonable amount, you may be liable for paying federal income tax liens related to that property.
In this case, the taxpayer received a condominium from his father. The property was transferred to the taxpayer in 2003 for $10 and “other good and valuable consideration” via a warranty deed. At the time of the transfer, the fair market value of the condominium was $41,000. The taxpayer knew his father was insolvent, and also knew his father owed $112,420 for unpaid federal income taxes, penalties, and interest for taxable years 1994 through 2002.
Eighteen months after the transfer, the IRS filed a lien for the unpaid amounts.
The IRS says the taxpayer, as a transferee of the property, is responsible for paying the tax lien (up to the value of the condominium plus interest). The IRS argues the transfer of the condominium was constructively fraudulent because: 1) the tax liability arose before the transfer was made, 2) the taxpayer’s father did not receive a “reasonably equivalent value” in exchange for the transfer, and 3) the taxpayer’s father was insolvent at the time of the transfer.
The taxpayer says transferee liability cannot be assessed because the condominium is homestead property under Florida law, and is therefore not considered an asset under the Florida Uniform Fraudulent Transfer Act. Alternatively, the taxpayer says the services he rendered while acting as his father’s caregiver during the ten years they lived together in the condominium is “fair consideration” for the condominium.
WHAT WOULD YOU DECIDE?
Make your selection, then see “The Court’s Decision” below for a full explanation
THE COURT’S DECISION
HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.
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