Court Says Taxpayer Could Not Redeem Real Estate Sold Under Tax Lien

Court Says Taxpayer Could…

Taxpayers who sink their assets into real estate rather than pay their taxes can find themselves facing sheriff sales when the IRS comes to collect what is owed. One taxpayer tried to use a Utah law to redeem real estate sold under a tax lien, but the federal courts said that was not an option.

Taxpayer Tries to Redeem Real Estate Sold Under Tax Lien

John Worthen owed over $18 million in unpaid tax liabilities. He also owned 15 properties including those owned jointly with his wife, by his company, or through a trust for the benefit of his heirs. In 2000 and again in 2008, the IRS issued tax liens on those properties to try to collect what it said was owed. Worthen’s wife and company filed a real property lawsuit to quiet title on these properties. However, the IRS countersued asking that the tax assessments be reduced to judgment and enforced by foreclosing on the properties.

After some procedural complications, the court granted a final judgment for the IRS and ordered that the properties be sold. The buyer was Salt Lake County, Utah, and the amount was $145,000. But then, Worthen and his real property attorneys got smart. They tried to use a Utah state redemption right to allow Worthen to buy back the properties for just the $145,000 paid for the properties, rather than the $18 million owed. When the county refused to honor his redemption rights, Worthen went back to court, arguing the state law allowed him to redeem real estate sold under a tax lien.

IRS Has a Right to Seek Civil Foreclosure and Sale of Real Property

The IRS was pursuing collections against Worthen under 26 USC 6321, which allows the United States government to place a lien on “all property and rights to property, whether real or personal” of a person “liable to pay any tax neglects.” Section 7403 and 2001 says that this can be done by filing a civil action in federal district court and asking the court to order the property be sold, and the proceeds distributed to satisfy the outstanding tax debt.

Federal Court Weighs Tax Law Against Utah Real Property Law

The Tenth Circuit Court of Appeals in Arlin Geophysical Co v United States, published early this year, acknowledged that Utah state law allowed a property owner to redeem property sold to satisfy a debt by paying the purchase price. However, it went on to say:

“But state-created rights do not automatically apply in federal tax proceedings.”

Instead, the court laid out a 2 step process for applying the law:

  1. State law determines what rights the taxpayer has in the property
  2. Federal law determines whether those state-delineated rights qualify as property or rights to property under the federal tax lien legislation specifically.

Assuming that the Utah redemption law applied to Worthen’s case, the court said federal law did not allow those rights to apply in a tax lien situation. Unlike other sections of the Internal Revenue Code, Sections 7403 and 2001 did not include a right to redeem real estate. Because other sections included redemption periods, the court reasoned Congress had not intended the same right to apply here.

The court noted that the Internal Revenue Code already gave taxpayers and third parties options to protect their property rights through written notice and administrative appeals. Sales under these sections only happen after the trial court has adjudicated all the issues related to tax liability and the property.

Taxpayers Can’t Use State Redemption Laws to Avoid Tax Liabilities

The court concluded its opinion by noting that Worthen’s attempt to redeem his property for $145,000 when he owed $18 million showed why it couldn’t be allowed. The court said “doing so would permit them to shirk the consequences of their liabilities.”

Property owners and the real estate attorneys who assist them may feel that their state’s redemption laws will protect them from creditors. And under normal circumstances, they may be right. However, when the federal Internal Revenue Code comes into play, it is better to consult with an experienced tax attorney than face the IRS’s efforts to collect on a debt alone. By working with a tax attorney as well as a real estate attorney, you or your clients may be able to negotiate installment agreements and save their property from a sheriff’s sale.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding IRS tax liens or need to refer your real estate client’s tax collections case, contact Joe Viola to schedule a consultation.