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District Court Incorrectly Applied Factors in Considering If IRS Could Foreclose on Married Couple's Home

(Parker Tax Publishing May 2017)

The Third Circuit vacated a district court's decision not to force the sale of a married couple's home to recover the husband's unpaid taxes and ordered the lower court to recalculate the couple's respective interests in the property and to reconsider the equitable factors set forth in U.S. v. Rodgers, 461 U.S. 677 (S. Ct. 1983). The court rejected the taxpayer's argument that the district court did not have the authority to order a sale of the property. U.S. v. Cardaci, 2017 PTC 217 (3d Cir. 2017).


Gary Cardaci was the owner of Holly Beach Construction Company. In 2000 and 2001, the business began to fail and, in an effort to shore it up, Mr. Cardaci used approximately $49,000 in taxes withheld from his employees' wages to pay suppliers and make payroll instead of paying the payroll taxes. Cardaci's salary during that time was approximately $20,000. He used that income to support his family, including making mortgage payments and paying one of his sons' private school tuition. The company eventually folded and Cardaci tried unsuccessfully to start other businesses. Cardaci had medical problems that limited his employment options. Beginning in 2005, Cardaci's wife, Beverly, was the primary wage earner in the family, earning about $62,000 a year as a public school teacher.

The Cardacis owned a home in New Jersey that they purchased in 1978. Two of their adult children lived in the house with them at least part of each year. Their son, Garrett, lived there full time with his wife and three children. Garrett earned approximately $37,000 a year. He emerged from bankruptcy a year and a half before the trial in this case. He and his wife did not pay rent. Another son, Robert, lived in the house during the summer. He earned just under $4,000 a year doing seasonal work.

The Cardacis' house had been their marital domicile continuously since they bought it. The mortgage was paid in full in 2009. Mr. Cardaci made the majority of the monthly mortgage payments from 1978 through 2005. After that, Mrs. Cardaci made the mortgage payments.

In 2012, the IRS sued the Cardacis for a judgment on tax assessments against Mr. Cardaci and to force a sale of their home. The IRS asked for half the proceeds to go to Mr. Cardaci's tax liability and to distribute the rest to Mrs. Cardaci. Mr. Cardaci owed the IRS approximately $80,000 plus interest. The district court granted partial summary judgment on the assessments against Mr. Cardaci. With respect to the foreclosure on the house, the district court determined that it had limited discretion to order an alternative remedy and decided against a forced sale.

In considering whether to order a sale of the Cardaci home, the district court applied the equitable factors set out in U.S. v. Rodgers, 461 U.S. 677 (S. Ct. 1983). The district court examined (1) whether the IRS's interests would be prejudiced if the court ordered a sale of Mr. Carduci's interest in the house, since he was the one liable for the taxes; (2) whether Mrs. Cardaci had a legally recognized expectation that her interest in the property would not be subject to a forced sale; (3) the likely prejudice to Mrs. Cardaci in personal dislocation costs and practical undercompensation; and (4) the relative character and value of the Cardacis' interests in the property. The district court also considered other factors, including the impact of a forced sale on other nonliable parties.

The district court determined that it would be inequitable to force the sale of the property. Its conclusion was based in part on the court's method of valuing Mr. and Mrs. Cardacis' respective interests in the home. It determined that Mrs. Cardaci's interest in the event of a forced sale would be 86 percent of the property, because she owned an undivided one-half interest in the whole property plus a right of survivorship. That meant that the IRS could recover only 14 percent of the value of the proceeds from a forced sale. The court considered that calculation plus the Rodgers equitable factors and found that the equities warranted the exercise of the court's limited discretion not to order a sale. Instead, it fixed a monthly rental value of $1,500 and ordered Mr. Cardaci to pay half of that value to the IRS every month. Mr. Cardaci defaulted on his monthly payment, failed to set up an automatic debit payment, and failed to provide proof of homeowner's insurance up to the balance of the tax liability. He made no payments and did not seek a stay while his appeal was pending.

The IRS appealed the district court's decision to the Third Circuit. The Cardacis also appealed, challenging the order to pay rent, the monthly rental amount, and the district court's authority to order a sale (even though no sale was ordered). The Cardacis also argued that the district court could not even consider ordering a sale of their home because it was protected by a New Jersey statute.

Third Circuit's Decision

The Third Circuit confirmed the district court's authority to order a sale of the property. However, it vacated the district court's calculation of the Cardacis' respective interests in the property and remanded the case for a recalculation of those interests and for reconsideration of the equitable factors weighing for and against a sale.

The court found two flaws with the argument that the sale of the Cardacis' home was protected by New Jersey law. First, the court said, the statute did not apply to their home because it was enacted after they purchased the property. Second, even the state statute applied, the court determined that it would have been preempted by the federal tax lien provision in Code Sec. 6321.

The court also concluded that the IRS was authorized under Code Sec. 7403(c) to dispose of the Cardacis' home by forced sale. The court noted that under the statute, a court "may" decree a sale of property, implying that the court has discretion. That reading of the statute was adopted by the Supreme Court in Rodgers, which held that courts must order a sale of property to satisfy a tax lien unless, in light of common sense or special circumstances, it determines that a sale would be inequitable. That determination is to be guided by four non-exhaustive factors.

The Third Circuit found that the district court abused its discretion in analyzing the Rodgers factors and erred in concluding that the Cardacis' home should not be sold. In remanding the case, the court gave an explanation of the Rodgers factors to assist the district court.

The first factor is whether the government's financial interests would be adversely affected by a partial sale of the property. The district court determined that a sale of Mr. Cardaci's interest in the home would be of little value, while rental payments would be likely to produce much greater collection of the taxes owed. On this factor, the Third Circuit agreed that there would be no real market for one spouse's interest in a marital home. However, the court said that rental payments were not relevant. In the court's view, the only consideration was whether the government would be adequately compensated by a partial sale. According to the court, the lack of a market for a partial interest in the property weighed heavily in favor of a forced sale of the entire property.

The second factor directs a court to consider whether a nonliable third party would have a legally recognized expectation that the separate property interest would not be subject to a forced sale. The court directed the district court to consider applicable New Jersey law in deciding the strength of Mrs. Cardaci's legally recognized expectations.

The third factor under Rodgers is the likely prejudice to Mrs. Cardaci, both in personal dislocation costs and in practical undercompensation. The Third Circuit agreed with the district court that Mrs. Cardaci's dislocation costs would be no greater than in any other foreclosure sale. However, it found that the district court should have also addressed the practical undercompensation Mrs. Cardaci might suffer in a forced sale. The court said that under Rodgers, if a forced sale would undercompensate a nonliable spouse, this factor should weigh against a forced sale. The court determined that a fair approach to valuing Mrs. Cardaci's interest would be to rely on joint-life actuarial tables to reflect the interests of both spouses. Once the spouses' respective interests were determined, the district court could then take into account whether Mrs. Cardaci would be undercompensated as a separate consideration.

Under the fourth factor, the district court had to consider the relative character and value of the nonliable and liable interests in the property. The Third Circuit said that this factor was more likely to come into play where the liable party owns a relatively small fraction of the property and found that it was neutral when applied to the Cardacis' approximately equal interests. This factor, the court said, could be applied more precisely by the district court once it calculated the relative interests in the property using a joint-life actuarial table.

The Third Circuit concluded by noting that the four Rodgers factors were not to be applied mechanically, and that the district court should also consider special circumstances. The IRS argued that the district court should not have taken into account the Cardacis' son, Garrett, who was living in the house with his wife and three children. The Third Circuit left it to the district court to decide how, if at all, the interests of Garrett's family should weigh in the mix.

For a discussion of foreclosures and forced sales in the enforcement of tax liens, see Parker Tax ¶260,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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