Tax titles are precarious in SC

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New Court of Appeals case demonstrates this fact again

A South Carolina Court of Appeals case* decided on June 20 demonstrates once again how precarious real estate titles coming through tax sales can be in South Carolina.

The unfortunate facts are not unusual. Bessie and Willis Thompson owned a residence in Bamberg County. They died in 2004 and 2005, respectively. The residence was devised to three grandchildren, one of whom, Corretta McMillan, was involved in this case through the appeal. The estates of Mr. and Mrs. Thompson were not probated, leaving the Thompsons as the title holders of record.

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Corretta McMillan paid the 2005 property taxes, but she did not notify Bamberg County of the deaths of her grandparents, nor did she provide a substitute address for tax notices. The 2006 property taxes were not paid, resulting in a letter to the residence from Bamberg County in the spring of 2007. In May of 2007, Bamberg County sent a second notice to the residence via certified mail. The letter was returned undelivered with the receipt marked “Deceased” above the names of Mr. and Mrs. Thompson. McMillan never received the notices, and she rented to house to Bernard Hallman in the summer of 2007.

Bamberg County referred the property to the Delinquent Tax Office which held a tax sale in November of 2007. The tax office submitted a minimum bid on behalf of the Forfeited Land Commission (FLC), a commission within each county which exists to bid on real properties not otherwise sold at tax sales. Following this tax sale, however, Ralph Johnson contacted the tax office with an offer to purchase several dozen tax sale properties. The tax office assigned to Johnson the bids it had submitted on behalf of the FLC, allowing Johnson to purchase 39 tax sale properties, including the residence involved in this appeal.

In January of 2009, McMillan paid a portion of the outstanding property taxes. Bamberg County sent her a notice acknowledging receipt of her payment and informing her that there were still delinquent taxes due. No mention was made of the tax sale.

Johnson acquired a deed to the property in February of 2009, at which time he learned the property was still occupied by Hallman. Johnson asked Hallman to move out and later filed an eviction action. Hallman notified his landlord, McMillan, of the eviction action.

The magistrate held Johnson’s eviction proceeding in abeyance when the FLC filed suit against Johnson alleging the tax office had inappropriately assigned its bids to Johnson without FLC’s authority. This suit also alleged the tax sales had not been conducted in compliance with the “rigid statutory structure.” Johnson answered, cross claimed and counterclaimed. One of his theories was the two-year statute of limitations on challenging tax sales set out in South Carolina Code §12-51-160.

During a November 2013 hearing, McMillan appeared and informed the court that she was an heir of the Thompsons. The FLC abandoned its suit and the circuit court dismissed the FLC’s complaint and Johnson’s counterclaims with prejudice. The circuit court then entered a default judgment in favor of Johnson on his cross claims to quiet title.

On April 8, 2014, McMillan filed an answer and counterclaim to Johnson’s quiet tile action. Johnson maintained McMillan could not contest the validity of the tax sale because the claim was barred by the two-year statute of limitations. At trial, there was no evidence that the property was properly posted with a notice of the tax sale once the second notice was returned marked “Deceased”.  The circuit court granted the quiet title demand.

On appeal, the Court of Appeals reversed and remanded, discussing the two-year statute of limitations and the technicalities required for a successful tax sale. The Court sited earlier cases which held that defects in quiet title actions are jurisdictional and may prevent the statute from running. Other cases have suggested that even in the absence of strict compliance, the statute of limitations will begin to run when the purchaser at the tax sale takes possession of the property.

In this case, the purchaser never took possession because he was unable to evict the tenant. That fact, and the fact that the property was not properly posted with a notice of the sale, led to the Court’s conclusion that the two-year statute did not run.

The moral to this story is simple: always discuss tax sale titles with your friendly and smart title insurance company underwriter. They generally keep up with these cases, no matter how tedious. **

*The Forfeited Land Commission of Bamberg County v. Beard, South Carolina Court of Appeals Opinion 5570 (June 20, 2018).

**Please see footnote 5 in this case. It’s rare that a footnote in an appellate case can make a lawyer cry (unless the lawyer lost the case), but this footnote summarized the exemplary career of the late Tanya Gee, who died in 2016. This case would have been her first case as a temporary justice on the Court of Appeals. After her death, the appellate process had to begin again. Rest in peace, Justice Gee!

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IRS issues for tax season…for your reading pleasure

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Just in time for tax season, the IRS announced on April 4 that it will begin using private debt collectors pursuant to federal law enacted late in 2015.

The IRS said that it will begin this month sending around 100 letters per week to taxpayers who have accumulated years-overdue tax debt. If the process goes smoothly, the number of letters will be increased to 1,000 per week.

Outsourcing debt collection will likely provide scammers with new opportunities, so the IRS has provided some advice for the safety of taxpayers.

The taxpayer will hear from the IRS first by letter. The letter will provide the name and contact information for the debt collection firm. After that initial contact, the debt collection firm will send its first letter confirming that it will handle the case. Neither initial contacts will be by telephone.

At this point, only four firms have been identified:  CBE Group of Cedar Falls, Iowa; Conserve of Fairport, New York; Performant of Livermore, California; and Pioneer of Horseheads, New York. Each taxpayer’s account will be assigned to only one of these firms.

None of the firms will ever ask for payments to be made to anyone other than the United States Treasury. If a taxpayer is asked to make payment to anyone else, this is a scam.

In the case of mistreatment under this new program, taxpayers are urged to file complaints with the Treasury Inspector General for Tax Administration and the Consumer Financial Protection Bureau.  The IRS and Congress have indicated they will be monitoring this situation carefully.

On a related topic, real estate lawyers should be reminded that the IRS may issue a levy, which is a legal seizure, of a taxpayer’s property to satisfy a tax debt. When a levy is issued, it applies to real property, money, credits and bank deposits. A levy can also reach property held by third parties, such as retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivable, the cash loan value of life insurance policies and commissions.

The IRS issues a levy only after it has exhausted other means to collect a tax debt.

From time to time, a settlement agent will receive a levy for a party involved in a closing. The taxpayer should be sent a notice in writing of the receipt of the levy and should be directed to consult with his or her tax advisor. Remember that a real estate lawyer who is not also competent as a tax lawyer should never offer tax advice. Typically, after the taxpayer has time to seek tax advice, the settlement agent should comply with the levy.

(If I received a levy, however, I would also seek my own tax advice prior to disbursing any funds!)