Leonard and Joyce owned 50% of a commercial property. Their son, Derek, owned the other 50%. The IRS liened the property due to amounts owed by Leonard and Joyce to the IRS for unpaid taxes. The IRS sought to foreclose its tax liens and force a sale of the property. 50% of the proceeds would go to the IRS, and 50% would go to Derek.
The taxpayers argued that the district court should not order the sale.
Code Section 7403 provides authority to the government to file suit to enforce its lien and force a sale of the liened property. There is no exception in Section 7403 that prevents its operation even though there are “innocent third-party” interest holders in the subject property that do not owe taxes to the IRS. The U.S. Supreme Court, in US v. Rodgers, 461 US 677 (1983), confirmed that the Code Section authorizes the sale of the whole property in these circumstances, and that the Supremacy Clause of the U.S. Constitution overrides any state law to the contrary that seeks to protect innocent third-party interest holders.
However, Code Section 7403 says the district court “may” order a forced sale, not “shall.” The Supreme Court in Rodgers acknowledged the district court has discretion to not order a sale, but that discretion is not unbridled and should be exercised only sparingly. It provided four factors for consideration in making this determination: (1) the prejudice to the government's interest as the result of a partial, rather than a total, sale, (2) whether the third party with a non-liable separate interest in the property would, in the normal course of events ... have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors, (3) the prejudice to the third party as the result of a total sale, and (4) the relative character and value of the non-liable and liable interests held in the property.
The district court considered the four Rodgers factors, and determined to allow the sale to proceed. In so ruling, the court noted:
a. the government would be unduly prejudiced without a forced sale, since a partial sale is not viable;
b. the prejudice to Derek is minimal since he does not live on the premises and will receive 50% of the sale proceeds - further Derek could bid on the sale to either buy the full property himself or attempt to bid up the ultimate purchase price; and
c. as a 50/50 ownership split, the relative ownership considerations weighed in favor of neither party.
U.S. v. Adent, 117 AFTR 2d 2016-1505 (CA7 5/10/16)