2025-04-18
In US v. Driscol, 2025 WL 30092 (not for publication) (USDC NJ, Civil Action No. 18-11762, signed January 6, 2025), the District Court allowed the IRS to force the sale of dental practice real property and a dental practice LLC to recover taxes owed by taxes owed by one 50% owner / member (Driscoll) and a another 50% owner / non-liable dentist (Vockroth).
The real property was owned as tenants in common, and the delinquent taxpayer became a disassociated member of the LLC on filing bankruptcy so had no right to participate in the LLC’s management.
The District Count cited Rodgers, 461 U.S. at 697 (quoting U.S. Const. art. I, § 8, cl. 1) in which the Supreme Court recognized that the Government’s power to enforce the obligations of the delinquent taxpayer is grounded in the constitutional mandate to lay and collect taxes, extends beyond the privileges of an ordinary creditor, and it is instead borne out of the express terms of 26 U.S.C § 7403.”’
The court also found that “Although New Jersey law allows a charging order as the ‘sole remedy of a judgment creditor,’ the Government is not bound by the state laws of an ordinary creditor when it forecloses pursuant to § 7403. Rodgers, 461 U.S. at 697 ….” The court reviewed the four factors (and “additional considerations”) in Rogers:
- the extent to which the Government’s financial interests would be prejudiced if relegated to a forced sale of the partial interest actually liable for the delinquent taxes.
- the market for Driscoll’s 50% stake in the real property is, at best, quite limited (favoring the IRS), and
- any buyer of a 50% interest in the LLC would have to either practice alongside Vockroth, or solely receive payments from the LLC, leaving Dr. Vockroth to be the sole practitioner, or hire other employees, and no buyer materialized in the many months that Vockroth and Driscoll attempted to sell the LLC share (favoring the IRS)
- whether the third party with a non-liable separate interest in the property would have a legally recognized expectation that the separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors.
- under New Jersey Law,either tenant in common may ask the court to grant a partition, and a court may direct a sale when it is not possible to partition the property to give each party the requisite amount of ownership stake without great prejudice to the owners (favoring the IRS).
- New Jersey law adopted the Revised Uniform Limited Liability Company Act (“RULLCA”), and requires the consent of all members in an LLC to “sell, lease, exchange, or otherwise dispose of all, or substantial all, of the company’s property (favoring Vockroth).
- prejudice to the non-liable interest holder in terms of personal dislocation costs and under compensation of interest.
- possibly forcing Vockroth to close his dentistry practice, fire his five employees, lose relationships with his 5,000 dental patients, and look for a new business location may be disruptive, it is not unduly prejudicial (favoring the IRS).
- even if Vockroth is negatively affected by the LLC sale in some way, this is not undue prejudice of a magnitude to prevent a forced sale. LLCs and partnerships change, fail, dissolve, are bought and sold, partners die, retire, or sell their shares, and is simply part of being in business (favoring the IRS)
- the relative character and value of the non-liable and liable interests held in the property (weighs neutrally as to both the Real Property and LLC). Driscoll and Vockroth each own 50% of the Real Property and LLC; neither one owns more than the other, so this factor is also neutral.
- The Rodgers Court warns against using the four factors as a “mechanical checklist” and directs courts to employ “common sense and consideration of special circumstances.” The Rodgers Court has explicitly highlighted the “limited discretion accorded by § 7403” and how such discretion “should be exercised rigorously and sparingly, keeping in mind the Government’s paramount interest in prompt and certain collection of delinquent taxes.”
- The most salient additional considerations are the impact of a forced sale of the real property on Dr. Driscoll and Dr. Vockroth’s employees and patients., and each of the non-liable people, including Vockroth, might be inconvenienced, having to work or go to the dentist in a new place that might not be as close by or easily accessible, or a new location might be more advantageous, and the Court does not find that the common sense considerations sufficiently weigh in favor of halting the forced sale.
- the forced sale of the LLC on non-liable third parties, such as the patients and employees of the dental practice do not weigh against forced sale. Those individuals are free to continue to associate with the LLC after sale or find another dentist or place of employment. The fact that the circumstances presented here do not outweigh the Government’s “paramount interest in prompt and certain collection of delinquent taxes[,]” any equitable balancing weighs in favor of the forced sale of the LLC.
The Court found that Vockroth also stands to benefit from the sale of the LLC because he will be paid 50% of the proceeds from the sale, allowing Vockroth to find a new location for a dental practice, and pay the substantial tax that a forced sale would compel Vockroth to realize.