Procedure & Administration
The IRS Office of Chief Counsel advised a member of the National Taxpayer Advocate Office that a tax lien attached to property that a husband transferred to his wife in a divorce settlement where the quitclaim deed conveying the property was not registered prior to the filing of a Notice of Federal Tax Lien.
Husband and Wife, who owned real property, divorced in Tennessee. The divorce decree awarded Wife the real property and ordered Husband to execute a quitclaim deed for it. Husband incurred post-divorce tax liabilities, based on which the IRS made an assessment and subsequently filed a Notice of Federal Tax Lien. After that notice was filed, the divorce decree and the quitclaim deed were filed with the appropriate register’s office. The Taxpayer Advocate Service requested advice from the Office of Chief Counsel (OCC) on whether the federal tax lien attached to the real property that Husband transferred to Wife by the quitclaim deed.
The OCC stated that the question at issue was whether Husband owned the real property transferred or had any other rights to the property to which the tax lien could attach. It further advised that the nature and the extent of Husband’s interest in the property must be determined under state law—in this case, Tennessee law. Under Tennessee law, certain unregistered instruments “shall be null and void as to existing or subsequent creditors of, or bona fide purchasers from, the makers without notice” (TN Code Ann. §66-26-103). Quitclaim deeds and divorce decrees are both types of instruments that may require registration in Tennessee (TN Code Ann. §66-24-101). Because the Sixth Circuit, in which Tennessee lies, had not ruled on this issue, the OCC looked to the case law of other circuits to determine how the Sixth Circuit would interpret Tennessee law for this purpose.
The OCC noted that while there was precedent in the Fifth Circuit that a federal tax lien would attach to property if a quitclaim deed conveying the property was not registered before the lien was filed, there was conflicting precedent from the First, Eighth, and Tenth Circuits stating that a lien would not attach in such a situation. Despite the more numerous contrary opinions, the OCC advised that the opinion in the Fifth Circuit case, Creamer Indus., Inc. , 349 F.2d 625 (5th Cir. 1965), should be followed.
In Creamer , Texas was the state involved. The Fifth Circuit observed generally that the determination of the seller’s interest as between the seller and the purchaser may differ from the determination of the seller’s interest with respect to a creditor without notice. In the Texas statute at issue, unrecorded conveyances are void as to creditors and bona fide purchasers without notice, but between the parties and as to purchasers with notice or who have not given valuable consideration, such conveyances are valid and binding. The court concluded that “[a]s to the taxes owed to it, the United States was a ‘creditor’ within the Texas recording statute” and that therefore the federal tax lien attached.
The OCC explained that the opinions from the other circuits should not be followed because they relied on flawed reasoning. It stated:
Those courts failed to give full meaning to state statutes that provide that a transfer is void or ineffective as to certain parties absent recording: The characterization that the relevant state provisions merely protect creditors and other third parties or merely address the rights of third parties ignores that they do so by voiding the conveyance as to those parties. In other words, for those parties, that conveyance did not occur, and, as to those parties, the transferor does have an interest in the property.
Thus, the OCC advised that in order to give Tennessee law its proper effect, the tax lien against Husband in this case should be held to have attached to the real property that was transferred to Wife.
The possibility of Wife losing the property to the IRS could have been avoided if she had simply registered the quitclaim deed given to her by husband promptly. However, most people, even if they are aware that they need to register a deed, are probably unaware of what could happen if they do not. Property is frequently transferred by quitclaim deed in divorce, potentially exposing many people to the lien problem faced by Wife in this case. Tax practitioners representing clients who are going through a divorce will often be privy to what the clients receive in their divorce settlements. When practitioners see that transfers by quitclaim deeds have occurred, they can provide clients a valuable service by making them aware of the potential disastrous results stemming from unregistered deeds.