Community Property and the IRS

            Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.  Community property refers to a form of property ownership between spouses. Generally property that is acquired during marriage other than by gift or inheritance is community property (Tex. Fam. Code Ann. Tit. 1, Section 5.10 (1985). 

 

            In community property states, both spouses are liable for delinquent taxes.  Each spouse is considered to own one-half of the community property.  This interest may be used to satisfy the individual tax liability. 

 

            In the case of United States v. Mitchell, 403 U. S. 190 (1971), a husband and wife did not file tax returns for the tax years 1955 through 1959.  They separated in 1960 and filed for divorce.  Before the divorce, the wife renounced all ownership in the community property.  Under Louisiana law, she was absolved from all debts contracted during marriage.  The IRS took the position that she should be liable for one-half the tax liability.  The Supreme Court found that both the husband and wife were liable and bound the community property of both individuals to satisfy the federal tax liability.

 

            When the tax liability arises from the act of one spouse or from a premarital tax obligation, state law may determine that the debt is a community property debt. In Broday v. United States, 455 F.2d. 1097 (5th Cir. 1972), the Court ruled that to satisfy a wife's pre-marital tax debts, her community one-half interest in income earned by husband and solely managed by him was subject to a tax lien because premarital liabilities do not fall under the state statute.

 

            In United States v. Rodgers, 461 U.S. 677 (1983), a husband was declared liable for gambling taxes during his marriage.  After he died, the government claimed that the entire homestead interest of both spouses was responsible for the husband's wagering tax liability and it went after the community homestead.  The Court found that the wife's homestead interest was her separate property because it arose when the homestead was acquired. Since the purchase was made before the lien attached to the remainder of the property, the wife's separate property right could not be attached to satisfy the deceased husband's tax liability.  In other words, since the debt was not a community liability, the wife's separate property interest could not be attached.  In Rogers, the Court reached the significant conclusion that Section 7403(c) empowers the District Court to compel a sale of the entire fee interest in the homestead.  The surviving spouse may be forced to sell her separate homestead interest. 

 

            The government may attack the community property of both spouses to satisfy a federal tax lien. State exemptions from creditors are to be ignored for federal tax purposes. When the homestead of a delinquent taxpayer is an exemption from creditors and not a property right, it is ignored for federal tax liens.  Federal tax liens can attach to both community and separate property interests of the liable spouse.  Although the separate property of the non-liable spouse is not to be used to satisfy the tax liability of the delinquent spouse, the unbridled power of the IRS can create considerable problems and cause liquidation of assets.  

 

            In community property states, community income is defined as income from community property, salaries, wages and other pay for services of either or both the husband and wife during the marriage.  In the states of Arizona, California, Nevada, New Mexico and Washington, income from separate property is the income of the spouse who owns the property.  However, in Idaho, Louisiana, Texas and Wisconsin, income from separate property is community income.

 

            Property that is acquired after marriage is presumed by the IRS to be community property whether or not the title was taken in the name of the husband or wife.  If property is not definitely the property of one of the spouses, the income from such property is also community property. The method of acquisition is also used to determine if property should be classified as community or separate.  The substance and not the form of a transaction determines whether property acquisition is separate or community property.  In community property states, contracts between spouses, which change the characterization of ownership, have been held to be valid and effective under local property rules.  These agreements may be made before marriage or during the marriage. 

 

            Community property laws control the property owned by spouses that live within the state.  The interest that one spouse acquires in property other than that acquired during the marriage is governed by the law of the state the spouses lived in on the date that the property was acquired.

 

            Property which is owned in a non-community property state and which is purchased with community funds by spouses domiciled in a community property state, does not constitute community property.

 

            Individuals who are married filing separately in a community property state must each report one-half of their combined community income and deductions in addition to their separate income and deductions.

CHARACTERISTICS OF THE COLLECTION DIVISION

 

            The Internal Revenue Code has given the IRS Draconian Powers in relation to the collection of alleged taxes.  One of the main problems with this grant of ubiquitous power is that the statutes and the regulations do not state which powers should be exercised and when they should be exercised. The Internal Revenue Manual attempts to provide guidance but it still depends on the revenue officer's evaluation of the "facts and circumstances of the case." (IRM 56(12)1.1, MT 5600-26.

 

            Because of this situation, the IRS is not consistent in how it handles its various collection methods.  The fact that there is a lack of clear-cut guidelines gives the local revenue officer incredible power and discretion.  Many times, this discretion is not used wisely by the revenue officer and herein lies an incredible weakness in the IRS collection procedure.  Individuals who know the code and the procedures can catch the IRS in all kinds of mistakes in their overzealous attempt to extract the wealth of the American Public to put into the bottomless pit of bureaucratic waste.

 

            Revenue officers are not sympathetic to tax delinquents as a class; and generally when a case is assigned to a Revenue Officer, the case is already delinquent for a period of time.  The Revenue Officer takes the position that the individual has failed to take his "obligation" seriously.

 

            The Revenue Officer will sit down and deal, but he will demand that all back returns are filed and he will demand a 433-A Collection Information Statement.  If an individual who is not judgment proof takes a hard-core stance against the Revenue Officer, the IRS will not hesitate to attempt by any hard-core method to get the assets.  After all, it appears to be IRS policy, that it is better to have one more street person and to have a few more dollars for the feds to use in paying off the ever expanding National Debt.  (Sounds real rational, doesn't it?).  Actually, the Revenue Officer is really more interested in voluntary compliance with the "voluntary" tax system than he is in collecting taxes.

 

            The best way to pop the IRS during collections is to thoroughly examine their procedures.  You may have to comply with the 433-A stuff if you are not judgment proof.  If you are judgment proof, the IRS may issue a summons.  However, there is extensive litigation pointing out the fact that individuals can legitimately raise the Fifth Amendment and decline to specifically answer questions.  The law gets stronger and stronger each day and in each circuit in this regard.

 

            If you wish to examine the procedural defects in collections, you must take a look at the following issues:

 

     1.  Was the assessment made at the time prescribed by law.

 

     2.  Did the IRS fail to send the individual a notice of the assessment and a demand for payment.

 

     3.  The notice and demand was received, but the IRS did not give the individual the opportunity to make a payment within the ten-day period.

 

     4.  The notice and demand was sent but was not sent to the individual's last known address.

 

     5.  Collection of the assessed tax by foreclosure of the tax lien is prohibited by the statute of limitations on collection.

 

     6.  The interest of the individual that the IRS asserts is subject to the tax lien is not "property or rights to property" of the individual.

 

 

            As you can see, the procedures the IRS must follow are very specific.  Although to fight back effectively, you must be better educated than they are.  Remember this:  IRS employees are just workers who have a job.  They don't go home at night and think up new issues.  There is a lot of turn over among them because it is hard to be an IRS Agent. (Imagine how their children must feel when their father goes to school during career day and the whole class finds out that their father is an IRS Agent!).  Becoming a dangerous adversary to the IRS is not that difficult. Just make up your mind you are going to do it.  If you are forced to back down because you have painted yourself into a corner, then do it. But realize that the war is not over.  As more and more individuals become educated and come out of the woodwork to raise important issues; the IRS Beast will falter and eventually die.  It will not be able to enforce such a complicated procedural law in the face of thousands of pro se litigants who know their rights and know IRS procedures.

 

 

 

 

A  Case Involving the Exempt W-4

 

      This article is to serve as a warning to those of you who insist in eliminating withholding as employees.  Hopefully you will take note.  The Case of United States of America vs. Ronald King, 96-4086 was decided by the Seventh Circuit Court of Appeals on October 2, 1997.  King had filed an exempt W-4 Form and he did not subsequently file tax returns.  Here are excerpts from the Court's opinion:

 

      "An affirmative act is some conduct undertaken at least in part because of a tax evasion motive, "the likely effect of which would be to mislead or conceal."  Spies v. United States, 3317 U.S. 492 (1943).  Filing a false Form W-4 satisfies the affirmative act requirement.  Sansone, 380 U.S. at 351; United States v. Sloan, 939 F.2d 499 (7th Cir. 1991)."

 

      The Court decided that the filing of a fraudulent W-4 Form also supplies the affirmative act for subsequent years even if no other W-4 was filed. The Court goes on to say:

      "We begin our analysis with United States v. Williams 928 F.2d 145 (5th Cir), cert denied, 502 U.S. 811 (1991) in which the Fifth Circuit held that the filing of a fraudulent Form W-4 (that had not legally expired) could supply the affirmative act required for tax evasion charges in subsequent years.  Williams was convicted of attempting to evade federal income tax for the tax years 1983, 1984, an 1985.  In October 1982 and March 1983, respectively, Williams submitted more withholding allowances than he was entitled to claim.  The instructions to the W-4 that Williams completed in March 1983 included the notice:  "Your Form W-4 remains in effect until you change it or, if you entered 'EXEMPT' on line 6b above, until February 15 of next year."  William maintained the March 1982 W-4 on file during the period charged in the indictment.

 

      On appeal to the Fifth Circuit, Williams conceded that his 1983 filing constituted an affirmative act for that tax year, but argued that the government neither alleged or proved subsequent affirmative acts for acts of the tax years 1984 and 1985 ...The court was not persuaded by Williams' argument...If the form is false, the form has the capacity to deceive for as long as it is kept on file...To find otherwise would be to allow the negligence of an employer to accrue to the benefit of an employee who has contravened the law in the first  place by filing a false and fraudulent Form W-4...We also note that it is irrelevant for our purposes here that King wrote "under duress" where he was instructed to sign his name.  See United States v. Robinson, 974 F.2d 575 (5th Cir. 1992) (noting that an unsigned tax form is sufficient evidence to support a conviction for tax evasion)."

 

      As you can see, the exempt W-4 approach that is currently used by various tax protest leaders and groups  around the country is bound to cause their gullible followers mountains of trouble in the future.  There is no doubt about it, the courts are going to hit the exempt W-4 very hard.