A New Hampshire U.S. District Court decision U.S. v. Baker 13-cv-213-PB2014 DNH 176, August 22, 2014) highlights some important lessons about the priorities of a divorce decree against a federal tax lien on one of the spouses.
The facts of the case
- Mr. and Mrs. Baker filed for divorce on 2/28/08, after ten years of marriage.
- The Bakers owned two parcels of land in New Hampshire as tenants with rights of survivorship.
- The two properties had been purchased by them in 2000 and a quitclaim deed recorded with the Register of Deeds reflecting their ownership rights.
- The Massachusetts state issued a divorce judgment on 2/28/08.
- The divorce judgment became final on 5/29/08.
- The judgment of divorce approved and incorporated the Baker’s separation agreement.
- The Massachusetts court found the separation agreement to be “fair and reasonable and not the product of any fraud, duress or coercion.”
- The agreement states in part:
- The Wife shall own solely the piece of land located at Micion Rd., Campton, New Hampshire (“Land”). Within thirty (30) days following the date of the Agreement the Husband shall execute a deed transferring and conveying to the Wife all of his right, title and interest in and to the Land, free and clear of all existing liens. The Husband hereby waives and releases any and spousal rights in the Vacation Home, which he may have or acquire under the present and future laws of any jurisdiction.
- Neither the divorce judgment nor a deed conveying the Land to Mrs. Baker was recorded with the Register of Deeds subsequent to the divorce.
- On May 14, 2009 the U.S. assessed unpaid income taxes against Mr. Baker.
- On October 21, 2009 the U.S. sent a levy notice to Mr. Baker.
- The IRS then recorded its federal tax lien in the amount of $2,458,609 on November 9, 2009.
- The IRS later assessed additional taxes against Mr. Baker and send to him a second levy notice on 7/29/10 and on 8/9/10 recorded a second notice of federal tax lien for $1,133,687.
- On May 1, 2013 the U.S. sued both Mr. and Mrs. Baker seeking a judicial sale of the Land transferred to the Wife under the divorce decree as partial satisfaction of Mr. Baker’s tax liability now totaling over $4 million.
Government’s Argument and Court’s decision
The government argued that the failure to execute and record the deed as required in the Separation Agreement invalidates the conveyance to the Wife. The government argued that since the deed was not recorded, a subsequent bona fide purchaser for value would have priority over the wife’s interest in the property. The Court rejected the government’s argument. That Mr. Baker could defeat the Wife’s interest by making a fraudulent transfer to a purchaser without knowledge of the earlier transfer who pays full value is irrelevant. Mrs. Baker could still enforce her full title rights against Mr. Baker.
Under New Hampshire law (applied as the property is located in NH) the Separation Agreement effectuated an immediate severance of the Joint tenancy and transfer of Mr. Baker’s interest to Mrs. Baker. The deed requirement was not intended in the Separation Agreement to be a condition precedent. The Separation Agreement did not require that the deed be recorded before Mr. Baker ceased to have an interest in the Land.
“Mr. Baker lost his right to own, transfer or encumber the properties when the divorce judgment became final.” NH law did not give him any enforceable right to the properties after that date.
Whether one has an interest in property is determined under state law. Whether the federal tax lien attaches to such property interests is a matter of federal Law. In U.S. v. Baker, the U.S. District Court found that Mr. Baker ceased to have any property interest in the Land conveyed to Mrs. Baker under the divorce decree upon entry of the divorce judgment. Thus, there was no property interest of Mr. Baker against which the federal tax lien could be enforced.
- The result could in this case be different for property located in a state with a race to record statute.
- Mrs. Baker prevailed in this case, but the dispute would have been averted if she had simply made sure that the deed was recorded.
- The Lesson: Record all divorce conveyances that can be recorded. Record both the judgment and deed or other document of transfer.
- In this case the tax lien arose and was recorded after the divorce judgment had been entered. But, don’t assume there are no income taxes unpaid or no tax liens recorded. Spouses should obtain federal and state tax transcripts and conduct a search for tax liens before signing a Separation Agreement.
- A tax attorney knowledgeable on federal tax liens and state property law should resolve issues of tax lien priority. A CPA is not trained to make these legal determinations.
© 2014 by Robert S. Steinberg, Esquire
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