Those of us who practice in the asset protection planning and tax arenas are already familiar with the Craft case where the Supreme Court determined that a delinquent taxpayer's entireties interest constitutes an interest in property to which the Federal tax lien applied irrespective of Michigan law to the contrary. This decision led to the forced sale of the property even though one of the tenants by the entireties had no tax liability. Notwithstanding Craft, there remained some limited comfort that a District Court may exercise reasoned discretion to deny an IRS motion to sell entireties property in order to protect the interests of innocent third parties.
In United States v. Winsper, the United States brought action against owners of real property seeking to reduce to judgment separate federal tax assessments and to foreclose tax liens against real property by forcing sale of the entire property. The District Court for the Western District of Kentucky entered summary judgment denying foreclosure of the entire property. On appeal to the Sixth Circuit, the case was reversed and remanded. In a nutshell, the District Court was found to have misconstrued and misapplied various factors in reaching its determination. The decision of the Circuit Court analyzes how the various factors are applied so that taxpayers now have a better understanding of the circumstances under which they may be able to thwart an IRS foreclosure effort.
Malcolm Winsper owed $901,000 to the IRS, and his wife, Barbara Winsper, owed $50,575. Before the District Court decided the summary judgment motion, Barbara fully satisfied her tax liability. Thus, only Malcolm owed any taxes at the time of the District Court's decision. The IRS was seeking to foreclose the parties' home. Barbara testified that the home had "enormous sentimental value" because she had worked hours restoring it with her own hands, and it was the place where she had experienced "Births, deaths and all the events that make up our lives." Finally, Barbara stated that she would incur substantial moving expenses in the event of foreclosure and that, although her "emotions and labor add nothing to the market value," they are what makes it her "Home" and if she was "forced out, it would be impossible for her to ever find another place to live, like her Home, at any cost."
The Circuit Court considered how the District Court interpreted and then applied the factors enunciated in United States v. Rogers, a 1983 Supreme Court case. Indeed they found that the District Court made a fundamental error in perspective in that it applied the Rogers factors as limiting or circumscribing the government's discretion to foreclose when, instead, the District Court's should have applied the Rogers factors to its discretion not to foreclose. Here is what the Circuit Court had to say about the Rogers factor focusing on the likely prejudice to an innocent third party. The District Court found this factor favored Barbara because she would have received a relatively small amount of the proceeds which would not be enough to allow her to relocate to other reasonable housing. Also, Barbara testified that she would lose her home of 30 years. The Circuit Court stated that there was no support in the record for a finding that Barbara would be unable to find suitable housing with her share of the proceeds. Moreover, the Circuit Court, quoting from language in United States v. Barr, stated if "the inherent indignity and inequity of being removed from one's home should automatically tip the scales in the third party's favor, the government could never foreclose against a jointly owned residence - a result clearly untenable under Section 7403." The Circuit Court went on to conclude that the hardship of having to leave a home with enormous sentimental value itself would not present special circumstances of prejudice that weigh against foreclosure of the entire property.