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Federal Tax Lien Results in Sale of Marital Property

Under New York law, property that two spouses own as tenants by the entirety ordinarily may not be reached by creditors seeking to enforce the individual debt of one spouse. However, an exception to this rule exists for federal income tax liens, as shown in United States v. Bonadido, 3:14-CV-1391 (N.D.N.Y. May 19, 2020). In this case, a husband and wife were required to sell New York real property owned jointly by them due to the husband’s failure to pay several years of federal taxes. After notifying the husband of the outstanding amounts due, the Internal Revenue Service placed a lien against the real property owned by the husband and wife. The IRS then moved for a default judgment and the sale of the property, with the IRS’s claim to be paid from the husband’s interest in the property. The court explained that “there are three prerequisites to the existence of a tax lien: (1) the assessment of a tax; (2) the notice of assessment and demand for payment; and (3) the taxpayer’s neglect or refusal to pay.”

The Internal Revenue Code provides that the federal government may force the sale of a debtor’s property to satisfy a valid tax lien, and the U.S. Supreme Court has held that contrary state laws that would prevent the IRS from reaching certain property may be preempted. While some equitable factors may be taken into account in deciding whether to order the sale of the property, in this case, the defendants defaulted and did not raise any such arguments. The court directed that the property be sold and that, after the sale, the net proceeds (after costs and expenses) would be divided in half. The wife, who was not liable for her husband’s tax debts, would receive her fifty percent share of the proceeds. The IRS then would recover the money it was owed from the husband’s fifty percent share. If any of the husband’s share remained after the IRS was paid in full, he would receive the balance.

It is important to remember that even though a property is held by a husband and wife as tenants by the entirety, there are certain scenarios under which a lien may arise and force the apportioning of the property.