In 1992, Rosalina and Coriolano Verduchi owed $82,000 to theInternal Revenue Service for unpaid income taxes as determined by the U.S. TaxCourt. While this tax debt was unpaid, they transferred title to their home totheir son, Dennis.
A year later, the unpaid taxes had grown to almost $400,000because of interest. In 1994, the IRS filed its notice of tax lien.
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In 1996, Rosalina and Coriolano filed Chapter 7 bankruptcyand discharged their debts. However, because the fraudulent transfer of thehouse, which would have been available to pay the $400,000 tax lien, wasinvalid under state law, the IRS argued the transfer of the house to Dennis wasfraudulent so the tax lien should apply to the house.
Meanwhile, Dennis obtained a $196,000 mortgage on the housefrom Option One Mortgage Corp. The IRS then sought (1) to foreclose its taxlien against Dennis’ house, plus (2) $196,000 from Dennis for the cash heobtained from the house when he obtained the Option One Mortgage.
If you were the judge would you allow the IRS to forecloseits tax lien on the fraudulently transferred house and receive $196,000 fromDennis for the equity he borrowed against the house?
The judge said yes!
A fraudulent transfer occurs, the judge began, when a debtorconveys assets, such as the house in this case, without receiving adequateconsideration in return. If the house had not been fraudulently transferred toDennis, when Rosaline and Coriolano filed Chapter 7 bankruptcy, the house couldhave been sold to pay the IRS debt, and the unpaid balance would have beendischarged.
However, in a fraudulent transfer case like this, the judgecontinued, the IRS can elect to foreclose its tax lien against the fraudulentlytransferred property and/or bring an action against the transferee of thetaxpayer.
Dennis does not argue that the house was not fraudulentlytransferred to him, the judge noted. Nor has the amount of the IRS tax lien,now approximately $875,000 with interest, been contested, he added.
Dennis paid nothing for the house, so he will not suffer anyout-of-pocket loss, the judge emphasized. Therefore, the IRS is entitled toforeclose its lien against the fraudulently transferred house, and Dennis isordered to pay to the $196,000 he received from the mortgage he added, thejudge ruled.
Based on the 2006 U.S. Court of Appeals decision in U.S.v. Verduchi, 434 Fed.3d 17.
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Copyright 2006 Inman News