Taxation & Estate Planning

HOMESTEAD CAN STILL BE SUBJECT TO FRAUDULENT CONVEYANCE WHEN IRS INVOLVED [Florida]

By Charles Rubin

A transferee of an insolvent debtor that receives property from the debtor may be required to disgorge the received property or its equivalent value to the debtor?s creditors, if the transfer to the transferee was a ?fraudulent conveyance.? However, a fraudulent conveyance only applies to a transfer of property of a debtor. Property of a debtor for this purpose does not include property that is ?generally exempt under nonbankruptcy law.?

In a recent case, an insolvent debtor transferred his homestead property to his transferee. The creditor sought to recover the homestead property from the transferee as a fraudulent conveyance. Per the above rules, the transferee defended the creditor?s claim per the homestead property being exempt from creditor claims under Florida law ? thus, it was not ?property? of the debtor for this purpose so that the fraudulent conveyance laws did not apply.

A strong argument, but the twist in this case was that the creditor was the Internal Revenue Service. The IRS is a supercreditor in that, as a matter of federal supremacy, it is not bound by state law homestead protections. Since the IRS could have levied on the transferred homestead prior to its transfer and regardless of its homestead status, the Tax Court held that the transferred homestead was not ?generally exempt under nonbankruptcy law? (at least as to the IRS) and thus was an asset of the transferor that could be reached by the IRS under Florida?s fraudulent transfer laws.

Scott E. Rubenstein, et al. v.  Commissioner, 134 T.C. No. 13 (2010)

Full post as published by Rubin on Tax on June 10, 2010 (boomark / email).