Where spouses are jointly and severally liable for federal taxes on account of having filed a joint federal income tax return, the taxes may be collected from the separate property of either spouse or any of their community property. Community property collection issues rarely arise in this context. Community property collection issues typically arise where only one spouse owes a tax liability. This can come up in many contexts, but the most frequent examples are where spouses do not file returns, where they file separate returns, where one spouse is given innocent spouse relief, or where one spouse incurs employment taxes or is assessed a trust fund recovery penalty. The issue in these contexts is what assets are available to satisfy the obligations.

If a taxpayer neglects or refuses to pay assessed taxes after notice and demand, a federal tax lien arises against the taxpayer. IRC § 6321. The lien attaches to all of the taxpayer’s property and rights to property. Id. Under federal law, the Service steps into the shoes of the taxpayer. United States v. Rodgers, 461 U.S. 677 (1983). State law determines a taxpayer’s property and rights to property. Id. Because a federal tax lien against one spouse (but not the other spouse) attaches to "all of the taxpayer's property and rights to property," in a community property state the lien would attach to the liable spouse's one-half ownership interest in all items of community property. This gives the Service a collection right against this property. Thus, for example, if a husband incurs a separate tax liability, a lien would attach to half of the wife’s wages, which are community property. This could not happen in a state that does not have community property.

Under the laws of all community property states, under certain circumstances a private creditor has the right to collect a debt from all or part of both spouses’ interests in community property. The Service can also rely on these state law remedies in collecting taxes. The Service's rights as a creditor under federal law may be supplemented by state law remedies, and the Service may satisfy delinquent tax obligations from more than one-half of community property. See Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). Thus, in some states a levy for the husband’s separate tax liability would attach to all of the wife’s wages, or a levy on the husband’s wages for the same liability would attach to all of the husband’s wages, even though the wife has a half interest in them.

In the community property states, a federal tax lien will always attach to all of a liable spouse’s separate property. Also, the tax lien will always attach to at least the liable spouse’s half interest in community property, and possibly more, depending on state law. To determine how to collect the tax, a revenue officer must go through a two-step process. The first step is to characterize all of the property available for collection as either community property or separate property. The second step is to determine the available remedies under state and federal law against the community property.

Some states attempt to protect a spouse's interest in community property from attachment by creditors. For example, many states prohibit creditors from collecting premarital debts from the nonliable spouse's contribution to community property. In Wisconsin, the laws prohibit a creditor from garnishing the nonliable spouse's wages for the liable spouse's premarital obligations. These are generally referred to as "exemption statutes." The federal courts have held that state law exemption statutes do not apply to the federal government. Therefore, if state law creates a community property interest, state law cannot prevent a federal tax lien from attaching to the liable spouse's half interest in it. In Re Ackerman, 424 F.2d 1148 (9th Cir. 1970); In Re Overman, 424 F.2d 1142 (9th Cir. 1970); and Broday v. United States, 455 F.2d 1097 (5th Cir. 1972). Therefore, the minimum claim the Service has against any item of community property is half.

The issue of which spouse has management and control over community property has limited impact on tax collection, except in the State of Texas. In Texas, management and control determines the collection remedy if only one spouse owes taxes. Tax debts of a spouse may be satisfied with 100% of the liable spouse's sole management community property, 100% of joint management community property and 50% of the nonliable spouse's sole management community property. See Medaris v. United States , 884 F.2d 832 (5th Cir. 1989). There are special limitations on homestead property in Texas. If homestead property is involved, contact Counsel. For a discussion of Management and Control See IRM 25.18.1.2.11.

As discussed above, in some circumstances states allow private creditors to reach more than half of community property to satisfy the debt of one spouse. In most states this depends on whether the obligation arose or was incurred before or after marriage. Therefore, to determine the available remedy it is important to know when the spouses were married and when the liability was incurred.

Where different creditor's remedies are available depending on when the liability arose, it is important to determine whether it arose before or after the marriage. Determining the date of marriage is relatively simple, but issues may arise as to when the liability was incurred. A tax liability accrues when all events have occurred that fix the liability. United States v. Anderson, 269 U.S. 422 (1926). An individual's income tax liability accrues as of the end of the year. See, e.g., In re Luongo, 259 F.3rd 323 (5th Cir. 2001). With regard to an employment tax liability, it arises when the wage is paid. Otte v. United States, 419 U.S. 43 (1974). If there is a doubt as to when a liability arose, Counsel should be contacted.

In all states, the Service can collect unpaid premarital liabilities from all of the separate property of the liable spouse. There is a difference among the states as to what part of community property can be reached. Here are the variations

100% States. Some states do not distinguish between pre- and post-marital obligations and allow creditors to collect an obligation from 100% of community property. Therefore, in these states the Service may also collect taxes from 100% of community property for all premarital debts of a spouse. These states include California, Idaho and Louisiana.

50% States. Some states allow collection of premarital debts from the liable spouse's 50% interest in community property. This is the same remedy the Service would have under its lien rights. These states include Nevada, New Mexico and Washington.

Wisconsin and Arizona. Because each spouse has a half interest in community property, a federal tax lien attaches to 50% of all community property. However, Wisconsin law also provides that premarital debts (Wisconsin includes these in a classification of debts called predetermination date obligations) can be collected from the liable spouse's contribution to community property. This would, for example, include 100% of the liable spouse's wages. As already discussed, the Service may supplement its federal remedies with state law remedies. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). Therefore, in this circumstance the Service can take 100% of the liable spouse's contribution to community property, plus 50% of any other community property. Thus, for example, the Service could reach 100% of the liable spouse's wages and 50% of the nonliable spouse's wages. Arizona is similar to Wisconsin. In Arizona, all separate property of the liable spouse is available. In addition, 100% of community property traceable to or contributed by the liable spouse and 50% of all other community property would also be available.

Texas. Because each spouse has a half interest in community property, a federal tax lien attaches to 50% of all community property in Texas. However, Texas law also allows a creditor to reach 100% of the liable spouse's sole management community property and 100% of joint management community property to satisfy a premarital debt. As already discussed, the Service may supplement its federal remedies with state law remedies. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). Therefore, in this circumstance the Service can take 100% of the liable spouse's sole management community property and 100% of any joint management community property, plus 50% of all other community property. Thus, for example, the Service could reach 100% of the liable spouse's wages and 50% of the nonliable spouse's wages. If property subject to a lien is a homestead, collection is subject to other limitations, and Counsel should be contacted.

Generally. In all states, the Service can collect unpaid post-marital liabilities from all of the separate property of the liable spouse. There are differences in the treatment of community property, however.

100% States. All states, except Texas, allow collection of some post-marital obligations from 100% of community property. Some states (California, Idaho and Louisiana) allow creditors to collect all debts of either spouse from 100% of community property. Other states (Nevada and New Mexico) only provide for this remedy for post-marital obligations. Although the Service's lien rights would allow it to levy on only 50% of community property, the Service may avail itself of a state remedy as well as a federal remedy. See Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). Accordingly, in these states (California, Idaho, Louisiana, Nevada and New Mexico) the Service can collect a post-marital tax liability of either spouse from 100% of community property.

Community Debt States. Some states characterize post-marital debts as either community or separate debts. Arizona, Washington, and Wisconsin are examples of this. Community debts may be satisfied from all community property, while other debts may only be satisfied from the liable spouse's half of community property or from the liable spouse's contribution to community property (i.e., 100% of that spouse's wages). These states have a presumption that debts are community debts. A community debt is one that benefits the marriage or family. For the debt to be a community debt, all that is required is a relationship between the obligation and a business which benefits the community. See, e.g., Garrett v. Shannon, 13 Ariz. App. 332, 476 P.2d 538 (1970). In these states, the Service takes the position that tax liabilities are community debts. Income taxes and excise taxes generally arise from gain-seeking activities that benefit the community and are community debts. See Wine v. Wine, 14 Ariz. App. 103; 480 P.2d 1020 (1971). Similarly, trust fund recovery penalties usually arise out of employment and are community debts. See Hyde v. United States, 72 A.F.T.R.2d 93-5298 (D. Ariz. 1993).

Texas. Texas follows the same rules for pre- and post-marital obligations. Texas law allows a creditor to collect from 100% of the liable spouse's sole management community property (again, including 100% of the liable spouse’s wages). Texas law also allows a creditor to reach 100% of joint management community property. Texas law prohibits a creditor from reaching the nonliable spouse's sole management community property, but since the liable spouse still has a half interest in this property, the tax lien still reaches half. If the property is a homestead, collection is subject to other limitations, and Counsel should be contacted.

In all states, the death of a spouse terminates the community. This means that no new community property may be created. For example, wages of the surviving spouse are no longer community property. In most states, items of community property do not automatically pass to the surviving spouse. The surviving spouse continues to have a half interest in the property with the decedent's estate. Most states provide, however, that items of former community property remain available to satisfy community debts as they would have before the death of the spouse and to the extent of their value at the decedent's death. If this issue arises in a case, local law should be consulted.

As discussed above, depending on the state involved, a decree of divorce, legal separation or physical separation will terminate ( "dissolve " ) the community property regime. Dissolution impacts on tax collection. For example, wages of the nonliable spouse earned after the dissolution are no longer community property. Most states provide, however, that items of former community property remain available to satisfy community debts as they would have before the dissolution to the extent of their value at the date of dissolution. If this issue arises in a case, local law should be consulted.

All community property states allow spouses to vary the effects of the community property regime by written agreements. The legal requirements for such marital agreements vary by state. The Service will honor such agreements in accordance with state law. Rev. Rul. 73-390, 1973-2 C.B. 12. These agreements impact the rights of creditors, including the Service. A spouse, for example, could divest his or her interest in community property earned by or titled to the other spouse. See, e.g., Calmes v. United States, 926 F. Supp. 582 (N.D. Texas 1996). Most states have developed rules for regulating how and when creditors receive notice of these agreements. If notice is not given, the laws usually provide that the agreement will not apply to the creditor. Wisconsin, for example, requires actual notice. See Wis. Stat. § 766.55(4m). Louisiana requires the agreements to be recorded. La. Civ. Code Art. 2332. Other states, such as Arizona, do not require notice, but apply fraudulent conveyance statutes to the agreements. See, e.g., State ex rel. Indus. Comm'n v. Wright, 202 Ariz. 255, 43 P.3d 203 (Ct. App. 2002). Where an issue involving collection and a marital agreement arises, reference should be made to state law. For a summary of state law requirements for these agreements see IRM Exhibit 25.15.1–1. For a discussion concerning the validity of such agreements see IRM 25.18.1.2.24.

Context of Issues. Community property is not an issue when a joint offer in compromise is submitted by spouses domiciled in a community property state, and both spouses are liable for the tax. In this circumstance, the assets and income of both are considered.

Joint Liability, Offer by One Spouse. Where spouses are subject to community property laws and owe a joint liability, but only one spouse submits an offer, community property rules are an issue. Separate property and separate property income of the spouse making the offer ("the offering spouse") should be considered. In addition, the offering spouse's share of community property and community property income should be considered. If, under applicable state law, all or part of the non-offering spouse's share (i.e. the spouse who is not making the offer) of community property and community property income would be available to satisfy the tax liability, these items should also be considered in the offer in compromise. Divorced and legally separated spouses (and physically separated spouses who do not intend to resume their marriage in California or Washington) are no longer subject to community property laws. In addition, in any case where only one spouse is compromising a joint liability, a co-obligor agreement should be secured. See IRM 5.8.6.2 and 8.13.2.3.5.

One Spouse Liable. Where only one spouse is liable for a tax and that spouse makes an offer in compromise, community property rules apply as follows. Anything that could be classified as the liable spouse's separate property or income should be considered in the offer. In addition, the liable spouse's share of community property and community property income should be considered. If, under the community property laws of the state involved, part or all of the nonliable spouse's share of community property or income would be available to satisfy the tax liability, the portion available should also be considered in the offer in compromise. Treas. Reg. § 301.7122-1(c)(2)(ii)(B). However, where spouses demonstrate that collection from assets or income of the nonliable spouse would have a "material and adverse impact" on the standard of living of the taxpayer, the nonliable spouse, and their dependents, these assets will not be considered in determining the acceptability of the offer. Treas. Reg. § 301.7122-1(c)(2)(ii)(B). Community property assets or income will not be disregarded under this regulation to allow the taxpayers to maintain a luxurious or affluent lifestyle. In most cases, it is anticipated that any "material and adverse impact" of considering community property income in an offer will be eliminated by the allowance of necessary living expenses in accordance with Service guidelines. See (4) below. In addition, community property assets will not be disregarded under this regulation unless inclusion in an offer would have an adverse impact on the taxpayer's ability to meet reasonable living expenses.

Calculating Allowable Expenses. As indicated above, the non-offering spouse's share of community property income will be considered to the extent that the liability could be collected from it under state law. If income of the non-offering spouse is considered, this raises the issue of how much and whose expenses should be allowed. Expenses will be allowed in proportion to the total income of the spouses considered in the offer. It is necessary to first determine how much of the total income earned by both spouses should be considered in the offer. The amount of expenses should be allowed in proportion to the total income. The total expenses of both spouses should be determined based on national standards and other expenses that would be applicable if both spouses were making the offer and were liable for the tax. This amount should then be reduced by the appropriate percentage. For example, if 50% of the total income of both spouses would be available to satisfy the tax liability, then 50% of the total expenses of both spouses should be allowed against this income. If 100% of the income is available, then 100% of the expenses should be allowed against the income.

Spouses filing for bankruptcy may either file a joint petition under Bankruptcy Code section 302(a), or file bankruptcy petitions separately. When spouses file a joint petition and the two bankruptcy estates are substantively consolidated under section 302(b), community property does not pose much of a problem, because creditors may file claims against all of the community property and any separate property of either spouse. Issues arise, however, where spouses file separate petitions or only one spouse files a petition. These issues include, for example, what property is included in the estate, whether to file a claim, how the automatic stay applies, and what effect the discharge has.See, also, IRM 25.17.3.4.1.1. For purposes of this section, the spouse who files the bankruptcy petition is referred to as the "debtor spouse," and the spouse who has not filed the petition is referred to as the "nondebtor spouse."