You learn something new every day!

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Question gives insight into IRS collection procedures against JTROS properties

In August of last year, an excellent South Carolina real estate lawyer raised this issue with Underwriting Counsel in our office:

The property owners are Sally Seller and Samuel Seller, as joint tenants with right of survivorship. Sally Seller died January 7, 2017. A federal tax lien was filed against Sally Single, Mrs. Seller’s maiden name, March 3, 2014. Mr. and Mrs. Seller were married in April 20, 2015. Please confirm that we should either pay off this lien at closing or obtain a release from the IRS.

Title insurance underwriting is all about pre-closing risk prevention and risk management, and I always joke that underwriting is more of an art than a science. This is true, in part, because few issues in the law are black and white. Most lawyers will confirm that a fair amount of gray area exists in most legal questions. But I digress.

The truth is that when a trusted, intelligent real estate lawyer calls her friendly South Carolina title insurance underwriter and says, in effect, “I should deal with this title problem at closing, shouldn’t I?”… that is an easy answer! Unless the Underwriter knows of a magic solution to eliminate the title issue, the friendly title insurance Underwriter will almost always respond, “Yes, please take care of that issue at closing.”  That’s exactly what our Underwriter did in this case last August.

Around Halloween, a follow-up question was raised:

The sellers’ attorney has been working on obtaining a satisfaction for the IRS lien, but the IRS has told him that the lien will not be released or satisfied because the taxpayer is deceased. IRS Agent Arnold Adams (IRS ID#10000797284)* referred me to Notice 2003-60. The IRS agent further said it will not file a release of lien for the convenience of title insurance companies and mortgage lenders**, but that the tax lien upon the death of a joint tenant is extinguished and not collectable on the basis of U.S. vs. Craft*** and its application.

The IRS notice linked above is entitled “Collection Issues Related to Entireties Property”. Every South Carolina dirt lawyer knows that we do not have a tenancy by the entirety form of ownership in South Carolina. If we don’t have that form of ownership, then does this IRS Notice have any application in South Carolina?

Married couples in South Carolina can own properties as tenants in common, joint tenants with right of survivorship or joint tenants with an indestructible right of survivorship under Smith v. Cutler.****

Several years ago, my friend and fellow South Carolina dirt lawyer, Paul Dillingham, called me to twist my arm to write an article with him for the Bar’s South Carolina Lawyer magazine, linked here, about a couple of deed drafting traps that were troubling him. In that article, we questioned whether Smith v. Cutler had created, in effect, a tenancy by the entirety form of ownership. That case dealt with property owned by couple pursuant to a deed with this language:

“for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple”

The case held that property owned pursuant to the quoted language cannot be partitioned. If the property cannot be partitioned by the creditor of one owner, then the IRS Notice would have application in South Carolina. Apparently the IRS agent who was questioned for this closing believes the notice does apply in the Palmetto State, but please note that the question before the IRS agent didn’t deal with the Smith v. Cutler form of ownership. It dealt with a standard joint tenancy with the right of survivorship.

Did the IRS Agent give our South Carolina good advice? Would all IRS agents give the same advice? Can we ignore this IRS lien for the purposes of closing? What do you think?

This is fictitious name and number. Don’t try to contact this IRS agent!

** That wasn’t very friendly!

*** 545 U.S. 274 (2002)

**** 366 S.C. 546, 623 S.E.2d 644 (2005)

BBC reports on South Carolina “heirs’ property” saga

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A December 5 article in BBC News Magazine entitled “Gullah Geechee: Descendants of slaves fight for their land”, outlines the struggles of property owners in Jackson Village to save their homes.

Jackson Village is one of three black communities in Plantersville, an unincorporated area of Georgetown County located about six miles north of the Town of Georgetown on Highway 701. The area is described as consisting of neat brick bungalows, set back form the road and protected from Highway 701 by a dense forest.

The BBC article, written by Brian Wheeler, describes 20 homes in Jackson Village being put up for auction because of the failure to pay taxes on a new sewer system. Local authorities apparently required residents to pay for hooking up to the new system because septic tanks were contaminating drinking water and becoming a health hazard. The residents complain that they were forced to pay even if their septic tanks were working well. The cost for each resident is $250 per year for the next 20 years.

Plantersville sign

Photo courtesy of BBC.com

The land is heirs’ property, land that has been passed down through the generations, usually without the benefit of deeds or probated estates. Many heirs’ property owners can trace their roots back to West African slaves who gained property rights during Reconstruction. These owners often allowed their properties to pass through the generations without formalities because they were denied access to the legal system, or because they didn’t understand it or trust it or could not afford it.

Where generations of landowners own property as tenants in common, maintaining ownership can become a risky proposition. All of the heirs own the property, whether or not they ever set foot on it.  Living on the land and paying taxes on it is certainly not a prerequisite.

Many of these properties are in or near valuable coastal areas where developers are eager to gain access.  A developer can buy the interest of one tenant in common to gain the same rights as the tax-paying residents. But distant family members looking for money can also create havoc. Partition actions are instituted, legal fees are incurred, and the result may be that the property is sold quickly and for less than fair market value.

Photo courtesy of Chicago Tribune

Thankfully, our legislature has recognized and addressed this problem. On September 22, Governor Haley signed legislation that honored the memory of Senator Clementa C. Pinkney, a victim of the Mother Emanuel A.M.E. Church mass shooting in Charleston on June 17, 2015. The new law is now known as the Clementa C. Pinckney Uniform Partition of Heirs’ Property Act, and it will become effective January 1, 2017.

The new law requires independent appraisals and open-market sales to ensure heirs receive fair prices. The new act would not prevent sales for the failure to pay taxes as described in the BBC article, but it should make sales begun by developers and distant heirs more impartial and advantageous for all property owners.