In March 1987, Wilhelmina and Arthur Johnson Jr. were granted a divorce. The divorce judgment said their jointly owned house on Strathmoor Avenue shall be placed on the market for sale. The decree said the net sales proceeds shall be equally divided between Wilhelmina and Arthur with the first $10,700 being awarded to Arthur.
About six months after the divorce was final, Wilhelmina divested her interest in the house by a quit claim deed to Arthur. However, Arthur continued living in the house until he died 15 years later.
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While he lived in the house, Arthur incurred $505,784 in I.R.S. tax liens, which were recorded with the local recorder of deeds.
After Arthur’s death, the house was sold on July 22, 2003, to an unrelated third party for $130,721. Wilhelmina claimed 50 percent of the net sales proceeds.
But the I.R.S. claimed the entire sales proceeds, arguing Arthur Johnson Jr. “owned the entire Strathmoor property when the federal tax lien attached, and thus the United States should receive all the proceeds from the sale of the property.”
If you were the judge would you award Wilhelmina half of the home-sale proceeds as ordered by the 1987 divorce judgment?
The judge said no!
There is no question the I.R.S. had authority to impose its $505,784 tax lien against Arthur Johnson Jr. for unpaid taxes, the judge began. The tax lien was properly recorded with the county recorder of deeds, he noted.
Although there are statutory exemptions for assets to which an income-tax lien cannot attach, such as tools of a trade, partial wage exemption and principal residences, none of these exemptions apply because the homeowner, Arthur, is deceased, the judge explained.
Mrs. Johnson’s divorce decree provided she would receive half of the Strathmoor property sale proceeds, after the decedent received $10,700, and gave her an equitable interest in the house, the judge continued.
Although Mrs. Johnson claimed she gave up her interest in the home via the quit claim deed to enable the sale of the house, she did not enforce her rights for more than 15 years while title to the house was held in Arthur Johnson’s name alone, the judge emphasized.
Because the $505,784 IRS tax lien was recorded while Mr. Johnson owned the house in his name alone, “There is no evidence of any interest in the property with a higher priority than the government’s tax lien on the property,” the judge ruled. Therefore, Wilhelmina Johnson is not entitled to any of the home-sale proceeds and the IRS shall receive all those proceeds, the judge concluded.
Based on the U.S. District Court decision in Estate of Arthur Johnson Jr., Deceased, 2005-1 USTC 50339.
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