What if a Tax Lien is attached to a Property Transferred in Divorce?

In recent years, there are a number of cases involving some transferred real property in divorce settlement where tax lien is attached. Usually, in a divorce settlement a wife is awarded some property and the husband is ordered to execute a divorce decree and a quitclaim deed on the transferred property. The next best thing to do is to register the conveyance and the quitclaim deed to avoid any unexpected problem in the future.

A case in point is a divorced couple where the husband incurred some post-divorce tax liabilities. Shortly thereafter, the Internal Revenue Service (IRS) filed A Notice of Federal Tax Lien. The problem was that the conveyance and the quitclaim deed were filed with the appropriate register’s office only after the filing of the Notice of Federal Tax Lien. At that instance, there are no specific laws about the tax lien attached to the transferred property.  Subsequently, The Tax Advocate Service seeks the advice of the Office of the Chief Counsel (OCC) to determine whether the husband has still some interest or ownership on the transferred property, and as a result, is the one liable to pay the tax lien attached to the property.  In this case, under the state of Tennessee law, certain unregistered instruments are considered void or invalid, like Quitclaim deeds and divorce decrees, without prejudice to creditors and legal buyers.

Since the sixth Circuit Court in Tennessee has no ruling in this kind of case the OCC searched for similar case/s of other Circuits to give the Sixth Circuit better interpretation and judgment of the case.(TN Code Ann sec 24-101) While there was a previous ruling by the Fifth Circuit that a federal tax lien would attach to a property even  if a quitclaim deed transferring the property was not registered before the lien was filed, there were conflicting opinions from the first, eight and Tenth Circuits. Because of that, the OCC determined that the opinion of the Fifth Circuit case, “Creamer Indus. Inc., 349 F. 2d 625(5^th Cir.1965), must be followed.

Finally, it was upheld that the Tax Lien attached in the transferred property to his wife was legal and binding. Remember that the IRS Code Sec. 6321 is strictly observed and imposed by IRS. The possibility of losing the property to the IRS, if the tax lien and other penalties are not paid could have been avoided if the property had been fully registered right after the divorce decree and quitclaim deed were issued.

Another good example is the (U.S. vs. Baker 13-cv-213-PB2014DNH 176, August 22,2014) New Hampshire U.S. District Court decision. It gives some facts about the priorities of a divorce decree against a federal tax lien on one of the spouses. .

Today, so many cases of the same nature are docketed in several courts over the years, however, the IRS issued SBSE 05-0913-0077 announcing a change in its policy regarding the attachment of the federal tax lien to unrecorded conveyances.  See some at Procedurally Taxing

Tax Lien Seminars, therefore, can only advise married couples who are about to enter into these kind of arrangements or those facing some difficult real estate issues, to seek some legal advise from knowledgeable lawyers and tap the services of experts who can provide the best answers to your real estate related problems.