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Thursday, October 23, 2014

Federal Tax Lien Did Not Survive Death of Joint Tenant

Two individuals (Cunning and Wren) acquired real property in the U.S. Virgin Islands as joint tenants with rights of survivorship (JTWROS) in 2005. In 2010 the IRS filed a federal tax lien against Cunning in the U.S. Virgin Islands. Cunning died in 2011, so that Wren succeeded to 100% ownership of the real property.

The IRS sought to continue its tax lien against the real property.The District Court in the Virgin Islands ruled that the lien died with Cunning such that Wren owns the interest free of the tax lien.

In most states, when property is held in joint tenancy with a right of survivorship, liens issued against a deceased joint tenant's interest in the property are extinguished when the deceased joint tenant dies and any other living joint tenants succeed to his share. Federal tax liens do not create any property rights in favor of the IRS beyond those that otherwise exist under state law.  United States v. Craft, 535 U.S. 274, 278. Thus, the IRS has the same rights, and only the rights, of other lienholders in the subject jurisdiction, and is subject to the above general rule in those states where the rule applies.

The legal theory of this general rule is that the surviving joint tenant does not obtain ownership by succession to the the rights of the first joint tenant to die. Instead, the survivor’s interests in the property were established at the time the property was initially conveyed into the joint tenancy. Thus, the survivor did not receive property subject to a lien against the first joint tenant, and that lien is extinguished.

The District Court determined that while there was no case law in the U.S. Virgin Islands on this issue, it believed the Supreme Court of the U.S. Virgin Islands would apply the above general rule. Thus, it found that the IRS lien died with Cunning.

NPA ASSOCIATES, LLC, v. CUNNING, EST, 114 AFTR 2d 2014-XXXX, (DC VI), 10/17/2014

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