by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

The editor is indebted to Bob Wells of the Tax Analysts service for providing information about today's Daily Development.

FEDERAL INCOME TAX; TAX LIENS; COTENANCIES: Tax liens may attach to partners' interest in partnership property where record title is held as tenancy in common.

Greater Bethlehem Savings & Loan Ass'n v. Salvatore J. Crivellaro, et al., 96 TNT 169-14.

Title to the property in issue was held by five brothers as tenants in common under a deed recorded in 1981. The IRS admitted that the property was actually owned and managed by a partnership. The IRS, however, had filed notices of tax lien against two cotenant partners and their wives in 1990, and claimed that it had no notice that the property did not belong to the partners individually.

In this mortgage foreclosure proceeding, one of the partners not liable on the tax lien objected to a $96,000 distribution to the IRS out of proceeds of the sale of partnership property. Obviously, this partner's argument was that the IRS claim, if any, was against the partnership interest of the target defendants, not against the partnership itself. The tax liability was not a partnership debt.

The lower court overruled the objections and held that the tax liens attached to the proceeds because the IRS had no actual notice of actual title. On appeal,

The partnership cited United States v. Purcell, 798 F. Supp. 1102 (E.D. Pa. 1991) (91 TNT 232-33), aff'd, 972 F.2d 1334 (3d Cir. 1992), and argued that the lower court erred in failing to use the standard of constructive notice.

The appeals court distinguished Purcell, in which an IRS examiner had examined the returns reporting the transfer of the property the IRS later sought to attach. Here, the appeals court found no error in the lower court's conclusion that filed tax returns gave the IRS no notice that the partnership actually owned the property. The opinion is quite sketchy on the details of this ruling, and does not elucidate what the partnership saw in the tax documents that would have given the IRS constructive notice of the status of the property.

Comment 1: Note that this appears to be a reading of the bona fide purchaser status of the IRS under the tax lien statute. It would not apply where the IRS, for some reason, had actual knowledge of the true title to the property. Further, it is not a rejection of the concept that constructive notice would suffice to avoid the bona fide purchaser status of the IRS in a given case. The court simply concluded that there was no basis for finding constructive notice here.

Comment 2: It is quite common for co-owners to hold property as tenants in common. In fact, the co-owners may wish to preserve the argument that they have a common law cotenancy, rather than a partnership, for tax purposes. This might arise, for instance, when the owners desire to go separate ways upon disposition of the real estate but wish to argue for "tax deferred exchange" treatment under I.R.C. 1031. The co-owners would be able to have separate exchanges only if they were regarded as cotenants and not a partnership.

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