I was reading a case recently that bothered me. It involves something that – fortunately – I rarely see in practice.
Here is the Code section:
§
7403 - Action to enforce lien or to subject property to payment of tax
(a) Filing. In any case where there has
been a refusal or neglect to pay any tax, or to discharge any liability in
respect thereof, whether or not levy has been made, the Attorney General or his
delegate, at the request of the Secretary, may direct a civil action to be
filed in a district court of the United States to enforce the lien of the
United States under this title with respect to such tax or liability or to
subject any property, of whatever nature, of the delinquent, or in which he has
any right, title, or interest, to the payment of such tax or liability. For
purposes of the preceding sentence, any acceleration of payment under section
6166(g) shall be treated as a neglect to pay tax.
(b) Parties. All persons
having liens upon or claiming any interest in the property involved in such
action shall be made parties thereto.
(c) Adjudication and decree.
The court shall, after the parties have been duly notified of the action,
proceed to adjudicate all matters involved therein and finally determine the
merits of all claims to and liens upon the property, and, in all cases where a
claim or interest of the United States therein is established, may decree a
sale of such property, by the proper officer of the court, and a distribution
of the proceeds of such sale according to the findings of the court in respect
to the interests of the parties and of the United States. If the property is
sold to satisfy a first lien held by the United States, the United States may
bid at the sale such sum, not exceeding the amount of such lien with expenses
of sale, as the Secretary directs.
(d) Receivership. In any
such proceeding, at the instance of the United States, the court may appoint a
receiver to enforce the lien, or, upon certification by the Secretary during
the pendency of such proceedings that it is in the public interest, may appoint
a receiver with all the powers of a receiver in equity.
And here is where you leave your tax CPA and hire a tax attorney.
Section 7403 permits a court to authorize the sale of property when a delinquent person owns property with a nondelinquent person. The IRS cannot do this on its own power, however; it must first go to district court and obtain approval.
To be fair, one is deep into the IRS Collection machinery before Section 7403 is even an issue. I would be screaming at you – and likely fired you as a client – long before we got here, unless bad fortune was involved. If there was bad fortune, we likely would be submitting an offer in compromise.
The heavyweight case in this area is United States v Rodgers. Rodgers was a Texas gambler who died, leaving a $900,000 tax debt. He (well, now his estate) and his wife owned their home. Under Texas law the surviving spouse had a lifetime right to live in the home. The government of course wanted its money.
The case went all the way to the Supreme Court, which identified four issues before the government could force any sale to collect taxes.
(1) Statutory authority
Does the taxpayer have any “right, title or interest”
to the property in question?
In Rodgers, yes. The deceased had the same
rights to the entire home as did the widow.
The type of ownership can have a drastic effect on the government’s ability to reach the asset. A tenancy by the entirety, for example, might result in a different answer from a tenancy in common (which we will see below).
(2) Constitutional authority
This goes back to eminent domain. The government is not an ordinary creditor in this situation; rather it is exercising the prerogatives of a sovereign. Think of the government as a super creditor.
(3) Practical undercompensation
Think actuarial
calculations. For example, one could think that a 50/50 split of marital assets
is fair. However, the value of a life estate to a surviving spouse aged fifty
can be up to 95% of the home’s sales price. The spread between 95% and 50% is
referred to as “practical undercompensation.”
(4) Four-factor balancing test
(a) Will a non-sale prejudice the government?
(b) Does
the spouse have a legally recognized expectation of the house not being sold?
(c) Will the spouse suffer prejudice from
practical undercompensation and dislocation costs?
(d) What are the relative characters and values of
the two ownership interests?
Subsequent application of Rodgers focuses on
these four factors.
Let’s move on to Driscoll.
Thomas Driscoll was a dentist. He owned a dental
practice with Dr Vockroth. Together they also owned the building in which the
dental practice was located.
Common enough.
Dr Driscoll became substantially delinquent with his
tax obligations.
In April 2023, the government filed a motion for
forced sale of both the practice and the building.
Meanwhile. Dr V had no tax issues. He may have made
the mistake of partnering with someone who did, but that was the extent of his
culpability.
The government – to its credit – allowed additional
time to sell both assets.
But there were issues: trying to sell a dental
practice in a small town and a building housing said practice in said small
town. Let’s just say there was limited interest in buying either.
The government now wanted a forced sale.
Let’s go through the Rodgers four factors:
One
The Court decided Dr V could not show that the government would not be prejudiced by going after 50% rather than 100% of the practice and building.
Yes, the double negative is a bit difficult to follow.
This was a practice in a small town. It was going to be tough enough to sell without trying to sell half rather than the whole.
The court decided that factor one weighed in favor of a sale.
Two
Was Dr V as a tenant in common subject to a forced sale?
Here is the Court
discussing the real estate:
This conclusion is also supported by the fact that, unlike tenants by the entirety or joint tenants, tenants in common enjoy no protections from forced sales or partition actions.”
Tough to be a tenant in
common in New Jersey.
The court decided factor
two weighed in favor of a sale.
Three
Was there prejudice to Dr V in terms of personal dislocation of costs and undercompensation of interest?
Here is the Court:
Dr Vockroth asserts that he will be ‘forced to lay off all of [his] employees,’ and that he will ‘no longer be able to see [his] patients.'”
OK, Dr V may be laying it
on thick, but that does not mean there is no truth here. Relocating a practice
costs money. There are – for example - additional electrical and plumbing needs
before a building can house a dental practice. Patients may not follow.
Employees may not follow. The court is playing cavalierly with other people’s lives.
Here is the court in its best
Frasier Crane voice:
Furthermore, even if Dr Vockroth is negatively affected by the LLC in some way, this is not an undue prejudice of a magnitude to prevent a forced sale. It is axiomatic that LLCs and partnerships change, fail, dissolve and are bought and sold with regularity. Partners die or sell their shares The reality is simply part of being in business, and Dr. Vockroth is not exempt from this fact, especially when he fails to offer any reliable evidence to support his contentions.”
What is Dr V to do: poll
his patients and employees to see whether they would follow? Oh, that will go
swimmingly.
BTW the sale of a dental
practice will certainly include a noncompete, meaning that Dr V could not open
a dental practice within so many miles of the existing practice. Well, he
could, but he would be sued.
One would think a judge
would know that.
Four
The relative character and value of the property owned by the two owners.
There was not much play here
as both doctors owned 50%.
The court decided that the government could foreclose on
both the practice and the real estate.
Technically right, but lousy law. Consider this menacement
from Rodgers:
We do emphasize, however, that the limited discretion accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes.
Section 7403 is not taxpayer friendly.
Our case this time was United States v Driscoll,
2025 BL 2655, D.N.J. No. 3:18-cv-11762, 1/6/25.
