May 15, 2018

Can the IRS Take Property Purchased in a Business Name?

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If you owe the IRS back taxes but want to buy real estate or some other type of property, can you form a legal entity and use it to acquire property and thereby put the property is beyond the IRS’s reach? The court recently addressed this in United States v. Jones, No. 8:17-cv-2389-T-24 AEP (M.D. Fla. 2018), which provides an opportunity to consider this question.

The Facts & Procedural History

The facts in the Jones case are not complex. The taxpayer had unpaid federal income tax liabilities for the tax years 2005, 2006, 2007, and 2014. The balance was $432,233.89. The IRS filed tax lien notices in the taxpayer’s name. In 2008, the taxpayer formed a business entity in Florida. In 2012, the taxpayer used his personal funds to purchase real estate in the name of the business entity. The IRS brought suit to foreclose on the liens and sell the property.

Using Cash Subject to the IRS’s Lien

The law gives the IRS a lien on all of a taxpayer’s property. The lien arises as of the date the taxes are due. This is true regardless of whether the IRS has filed a lien notice in the public records.

In this case, the taxpayer used his personal funds to purchase the real estate. The IRS’s lien attached to the personal funds prior to the purchase and, as a result, it also attached to the real estate purchased with the funds. Based on this, the court ordered the property to be foreclosed on and sold to satisfy the IRS’s lien.

The IRS’s Alter Ego Theory

The court didn’t have to go further in its analysis, but it. The court went on to consider whether the company was the taxpayer’s alter ego. This is a judicial doctrine that basically allows the courts to disregard the corporate entity if it finds that the company is the taxpayer’s alter ego.

The court described the facts that show that the company was the taxpayer’s alter ego as follows:

Jones is the 100% shareholder of OPG and exercises sole dominion and control over OPG. Jones granted a mortgage on the Subject Properties as OPG’s CEO. Jones and OPG’s finances are co-mingled. Jones is the sole authorized signer on OPG’s bank account, and she has used the “corporate” funds to pay for clothing, beauty supplies, groceries, airfare, pool maintenance, childcare, housekeeping, entertainment, car insurance, and other personal expenses. Jones withdrew over $180,000 in cash from the “corporate” account in 2014 and another $234,000 during the first half of 2015. When the IRS questioned these large withdrawals, Jones did not provide any explanation.

These are the factors that the courts often consider in evaluating whether a company is the taxpayer’s alter ego. Given these facts, the court also concluded that the company was the taxpayer’s alter ego.

The IRS’s Other Remedies

The IRS and/or court could have also used transferee liability for the company or the state or Federal fraudulent transfer rules, but did not need to do so given the facts in this case. These laws also allow the IRS to recoup funds transferred to a legal entity.

The court did not need to address these other theories in this case, ,as the taxpayer did not put the real estate beyond the government’s reach. Even if he had, these transferee and fraudulent transfer theories may have allowed the government to recoup the property from the company.

The Bottom Line

The government has broad collection powers when it comes to unpaid taxes. The law is intended to prevent taxpayers who owe back taxes from diverting money to buy property in a way that is beyond the IRS’s reach. Merely buying property in the name of a legal entity will generally not put the property beyond the IRS’s reach. This is particularly true if funds subject to the IRS’s lien are used to purchase the property.

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