United States v. Gerard, a recent case from the Northern District of Indiana, demonstrates how a tax lien, once attached, can stay with property even after the property is conveyed to someone other than the taxpayer. In 1990, a husband and wife named Robert and Cynthia Gerard bought a residence as tenants by the entirety. Although the Gerards bought the residence together, Robert paid at least 90% of the purchase price. Between 2003 and 2008, Cynthia owned a business with outstanding employment and unemployment taxes. The Gerards and the government generally agreed that the assessments for these tax liabilities attached to Cynthia’s interest in the property. As time went on, Robert and Cynthia decided to convey the property solely to Robert. The deed stated that the conveyance was “by way of gift and without any consideration other than for love and affection.”
The government, however, still wished to enforce the liens. Litigation ensued, and the government moved for summary judgment. The key issue was whether the liens that were attached to Cynthia’s interest in the property survived the severance of the tenancy by the entirety. Section 6323 provides that a lien is not valid against a purchaser until the IRS files proper notice. Thus, according to the court, Robert would not be liable for Cynthia’s outstanding tax balance if Robert was a “purchaser.” A “purchaser” is “[a] person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against a subsequent purchaser without actual notice.” IRC § 6323(h)(6). “Adequate and full consideration in money or money’s worth” is “a consideration in money or money’s worth having a reasonable relationship to the true value of the interest in property acquired.” Treas. Reg. § 301.6323(h)-1(f)(3).
The Gerards argued that Robert was a purchaser because Cynthia used marital assets to pay her business’s expenses and then transferred her interest in the property in repayment of those debts. The government, however, pointed out that the deed specifically stated that the transfer was made “by way of gift and without any consideration other than for love and affection,” and that any consideration would have been past consideration, which was insufficient.
The court was not concerned that the deed stated that the property was a gift. It noted that “[i]t is a well-known fact that often a conveyance recites a nominal consideration whereas the true consideration is not nominal. It is therefore never certain that the recited consideration is the true consideration.” Clark v. CSX Transp., Inc., 737 N.E.2d 752, 759 (Ind. Ct. App. 2000). The court was, however, concerned with the fact that the parties agreed that the use of marital assets to pay Cynthia’s business expenses was “past consideration.” Under the regulations, “adequate and full consideration” includes past consideration only if, “under local law, past consideration is sufficient to support an agreement giving rise to a security interest. . .” Treas. Reg. § 301.6323(h)-1(a)(3); (f)(3). Accordingly, the court turned to Indiana law to determine whether past consideration could create a security interest.
The Gerards could not cite any Indiana authority indicating that past consideration gives rise to a security interest. Also, other federal courts hold that past consideration does not make a party a “purchaser” under section 6323(a). See, e.g., United States v. Register, 727 F. Supp. 2d 517, 526 (E.D. Va. 2010). Thus, the court concluded that Robert was not a purchaser under section 6323(a) and that the liens attached to Cynthia’s interest in the property survived the conveyance.
The parties still disputed the extent to which the liens attached to the property. The government argued that the liens remained attached to a one-half interest in the property. The Gerards, however, argued that Cynthia’s actual interest was worth less than one-half of the property when it was conveyed, so the liens only attached to something less than a one-half interest. Here again, the court found that Indiana law did not support the Gerards’ argument. For example, in Radabaugh v. Radabaugh, the court held that the trial court erred by “conclud[ing] that appellee was the owner of less than an undivided one-half interest in the mortgage loan” for real estate owned by a husband and wife as tenant by the entirety. 35 N.E.2d 114, 115-16 (Ind. Ct. App. 1941). Thus, the court concluded that the liens were still attached to one-half of Robert’s interest in the property, even after the conveyance.