In a bench opinion dated September 27, 2024, the Tax Court sustained a Notice of Federal Tax Lien but not the proposed levy against Daugerdas, a convicted tax shelter promoter in home confinement in Illinois.
The petitioner's underlying tax liability came about from court-ordered criminal restitution as part of the conviction result, after the Department of Justice seized about $170 million in assets from Petitioner. Petitioner, in his attempt to pay substantial legal fees incurred in his defense, transferred his interest in his home to his wife in 2012. The court previously held that the restitution order allowing delayed payment until his time of release did not preclude the IRS from assessing the ordered restitution nor filing the Notice of Federal Tax Lien. However, Petitioner sought summary judgment against the proposed levy on the residence, asking to the court to determine that he did not have any interest in the residence, and that his wife did not hold the property as his nominee.
The court reviewed the petitioner's Appeals records, noting that the second remand to Appeals resulted in an inappropriate outcome and odd statements by the second settlement officer including statements that the Petitioner was using the home, paying utilities, and therefore must have some interest, all while he was actually incarcerated.
The court stated that this case was not an appropriate forum to decide the nominee issue, because Petitioner's wife was not a party to the case and it would not be appropriate to adjudicate her rights in the Wilmette property without her participation. The Notice of Federal Tax Lien at issue was held not to attach to the Wilmette property, because Petitioner had no legal title to the property. If the IRS filed a nominee lien, Petitioner's wife would then have an opportunity to assert her ownership and to litigate that question in an appropriate forum.
This decision sheds light on how murky the waters can be when the IRS seeks to collect from one party in a marriage. It's been a longstanding premise in federal law, and many states' laws, that a married couple is taxed as a unit. Therefore, the IRS presumed that one half of the unit, Mr. Daugerdas in this case, undoubtedly had a pecuniary interest in the residence where he and his wife live. They were, however, wrong.
This case may be an extreme example of the importance that post-marital or spousal agreements and property planning can hold. Had the petitioner never documented the transactions with his wife as they did (the opinion described that Appeals received copies of a quitclaim deed, promissory note, mortgage, real estate transfer, tax receipt, and release of mortgage dated in 2012, and statements that the wife alone paid the remaining mortgage balance in full) the IRS may have had a stronger argument to stand behind.
Having practiced family law throughout Texas for years prior to my tax practice, I know firsthand that regardless of whether spouses are married, divorced, residing in a community property state, or elsewhere, there can always be federal tax complications that can arise. Consulting with tax experts, knowledgeable family attorneys in your jurisdiction, and keeping an updated inventory and accounting of joint and separate assets is crucial for high-income/high-net-worth families in these times. Since fall of 2023, the IRS has stepped up its enforcement activities with regards to wealthy families and has obtained over $1.3 billion in unpaid taxes due to past declines in audits. With increasing IRS funding and activity, there's no better time to increase one's own tax or family wealth planning for the future.
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