25.18.4  Collection of Taxes in Community Property States

25.18.4.1  (03-04-2011)
Context of Collection Issues

  1. 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.

  2. 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.

  3. 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.

25.18.4.2  (03-04-2011)
Process for Determining Collection Options

  1. In the community property states, a federal tax lien will always attach to all of the liable spouse’s separate property. Also, the tax lien will always attach to at least the liable spouse’s half interest in community property. 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.

  2. 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. However, depending on state law, the Service may be able to reach more than half. See IRM 25.18.4.6, Collecting Premarital Liabilities, and IRM 25.18.4.7, Collecting Post-Marital Liabilities.

  3. The Service has ceased the practice of recording notices of federal tax lien that specifically reference a liable spouse’s interest in community property held in the name of a nonliable spouse. The Service takes the position that the notice of federal tax lien filed against the liable spouse provides proper notice of the attachment of the tax lien to community property held in the name of the nonliable spouse.

25.18.4.3  (03-04-2011)
Levies Against a Nonliable Spouse to Reach a Liable Spouse's Share of Community Property

  1. In all of the community property states, in some circumstances, it is possible to serve a levy on the nonliable spouse’s salary or wages to reach the liable spouse’s community property interest. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989); Tull v. United States, 848 F. Supp. 1466 (E.D. Cal. 1994), rev’d on other grounds, 69 F.3d 394 (9th Cir. 1995); Vorhies v. Z Management, 87-1 U.S.T.C. ¶ 9200, 59 A.F.T.R.2d ¶ 87-658 (W.D. Wis. 1987). Special issues arise with respect to such levies.

    1. A levy against a nonliable spouse’s wages to reach the liable spouse’s share of community property is not subject to a continuous levy under IRC 6331(e). The Code provides that a levy on “salary or wages payable to or received by a taxpayer shall be continuous....” IRC 6331(e) (emphasis added). This phrase should be read literally. A levy to reach a liable spouse’s community property interest in a nonliable spouse's wages is not continuous, because those wages are not earned by the “taxpayer,” the person against whom the tax liability is assessed. Thus, the Service must issue separate levies to reach each wage payment. However, if the continuous levy is improperly used, it would not preclude the Service from enforcing it as a one-time levy. See, e.g., United States v. Raymond James and Associates, 98-2 U.S.T.C. ¶ 50,534 (M.D. Fla. 1998); cf. Moore v. General Motors Pension Plans, 91 F.3d 848 (7th Cir. 1996) (pension plan served with wrong levy form immune from suit by taxpayer for complying).

    2. A nonliable spouse may claim an exemption for levied wages. The Code provides for a minimum exemption from levy for amounts “payable to or received by an individual as wages or salary for personal services....” IRC 6334(a)(9). The nature of the property levied upon, i.e., the fact that it is wages or salaries, is determinative. The fact that state community property law may create a property interest in income on behalf of a party other than the party who actually earned the income does not alter the nature of that property. As the purpose of the wage exemption is to ensure that persons whose salary has been levied have some funds to meet their living expenses, a nonliable spouse whose wages are levied upon may also claim an exemption.

    3. The nonliable spouse would not be entitled to collection due process rights under IRC 6330 before the issuance of the levy. These rights are given only to the taxpayer (i.e., the liable spouse).

25.18.4.4  (02-15-2005)
Management and Control and Collection

  1. 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 SeeIRM 25.18.1.2.11, Definition of Separate Property.

25.18.4.5  (02-15-2005)
Premarital v. Post-Marital Obligations

  1. 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.

  2. 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.

25.18.4.6  (02-15-2005)
Collecting Premarital Liabilities

  1. 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

  2. 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.

  3. 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.

  4. 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.

  5. 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.

25.18.4.7  (02-15-2005)
Collecting Post-Marital Liabilities

  1. 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.

  2. 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.

  3. 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).

  4. 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.

25.18.4.8  (02-15-2005)
Effect of Spouse’s Death on Collection

  1. 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.

25.18.4.9  (02-15-2005)
Effect of Dissolution of the Community Property Regime on Collection

  1. 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.

25.18.4.10  (03-04-2011)
Effect of Change of Domicile on Existing Community Property

  1. If spouses move from a community property jurisdiction to a common law jurisdiction, existing community property does not lose its character by virtue of the move. In re Marriage of Moore & Ferrie, 14 Cal. App. 4th 1472, 18 Cal. Rptr. 2d 543 (Cal. App.1993).

25.18.4.11  (03-04-2011)
Effect of Marital Agreements on Collection

  1. 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).

  2. Most states have developed rules for regulating how creditors receive notice of these agreements and/or what effect the agreement has on the creditor. For example, in some states, if notice is not given the laws provide that the agreement will not apply to the creditor. Wisconsin, for example, requires actual notice before the liability is incurred. See Wis. Stat. § 766.55(4m). Louisiana requires the agreements to be recorded. La. Civ. Code Art. 2332. Washington provides that these agreements are neither valid nor enforceable against creditors in existence at the time the agreement was executed. Wash. Rev. Code § 26.16.050. Other states, such as Arizona and California, do not require notice, but may 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. Div. 1, Dept. A 2002).

  3. If the agreement is entered into after marriage and after the liability was incurred, these fraudulent conveyance statutes have been held not only to prevent recharacterization of existing assets, but also recharacterization of property to be received in the future (e.g., wages or other future income). See, e.g., State Board of Equalization v. Woo, 98 Cal. Rptr. 2d 206, 82 Cal. App. 4th 481 (Ct. App. 2000); State ex rel. Indus. Comm'n v. Wright, 202 Ariz. 255, 43 P.3d 203 (Ct. App. 2002); but see O'Kane v. United States, 1989 U.S. Dist. LEXIS 15,631, 1989 WL 252397 (D. Idaho 1989). It should be noted, however, that a premarital agreement opting out of community property is unlikely to be considered a fraudulent conveyance, particularly if the liability was incurred after the spouses entered into the agreement. See, e.g., Calmes v. United States, 926 F. Supp. 582 (N.D. Texas 1996); Schlaefer v. Financial Management Service, Inc., 196 Ariz. 336, 996 P.2d 745 (Ct. App. 2000); Leasefirst v. Borrelli, 13 Cal. App. 4th Supp. 28, 17 Cal. Rptr.2d 114 (App. Dept. Sup. Ct. 1993). For a summary of state laws in this area, see IRM Exhibit 25.18.1-1, Comparison of State Law Differences in Community Property States.

25.18.4.12  (02-15-2005)
Effect of Community Property on Offers In Compromise

  1. 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.

  2. 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. SeeIRM 5.8.6.2, Collateral Agreements.

  3. 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.

  4. 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.

25.18.4.13  (02-15-2005)
Community Property and Bankruptcy

  1. 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. 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."

25.18.4.13.1  (02-15-2005)
Property of the Estate and Debts

  1. Generally. The filing of a bankruptcy petition creates an estate that includes all of the debtor’s interest in property (except qualified pension plans). If the debtor is married, domiciled in a community property state, and files a joint petition with his or her spouse and the two estates are substantively consolidated, all of both spouses' property (including community property) is included in the estate. In this situation, there is nothing different about a bankruptcy filing in a community property state from any other state. If, however, only one spouse files the petition for bankruptcy, the effect of community property must be considered.

  2. Filing By One Spouse, Assets Considered. Under the Bankruptcy Code, the bankruptcy estate includes the debtor spouse’s separate property and all community property that is under the sole, equal or joint management and control of the debtor spouse (as determined under state law). In addition, the bankruptcy estate includes community property to the extent that the property is liable for either an allowable claim against the debtor spouse, or a claim against both spouses. 11 U.S.C. 541(a)(2). In most states, community property laws make all or part of community property held by either spouse liable for claims against only one of the spouses, so the property will probably be included in the estate up to the value of the claims. In addition, at least half of all community property is liable for federal tax obligations. 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); See also IRM 25.18.4.2(2), Process for Determining Collection Options. The estate does not include the nondebtor spouse's separate property.

  3. Chapter 13 Post-Petition Income. In a Chapter 13 case, the estate includes "property that the debtor acquires after the commencement of the case …" and "earnings from services performed by the debtor after the commencement of the case." 11 U.S.C. 1306(a). Courts are split on whether this includes the nondebtor spouse's income earned after the commencement of the case. Compare In re Nahat, 278 B.R. 108 (N.D. Tex. 2002) and In re Harmon, 118 B.R. 68 (E.D. Mich. 1990) with In re White, 243 B.R. 498 (Bankr. N.D. Ala. 1999), In re Whitus, 240 B.R. 705 (Bankr. W.D. Tex. 1999) and In re Cardillo, 170 B.R. 490 (Bankr. D. N.H. 1994). Whether these earnings are included in the estate may affect whether a plan should be confirmed. If this issue arises, check with Counsel to determine the rule in your jurisdiction.

25.18.4.13.2  (03-04-2011)
Automatic Stay

  1. When a bankruptcy petition is filed, the automatic stay applies to prevent collection of prepetition debts against either the debtor or property of the estate. If the spouses file a joint petition, property of the estate includes each spouse's separate property and all of their community property. Thus, when a joint petition is filed, the automatic stay prevents collection action against either spouse or any of their community or separate property.

  2. If only one spouse files the bankruptcy petition, the automatic stay still prevents any collection action against all or nearly all of the community property. This is because the stay prevents collection action against property of the estate. As previously discussed, the estate includes all community property that is under the sole, equal or joint management and control of the debtor spouse. It can also include community property under the management and control of nondebtor spouse. SeeIRM 25.18.4.13.1(2), Property of the Estate and Debts. Action against such property would be a violation of the automatic stay. The automatic stay could also apply to acts to collect income of the nondebtor spouse. In re Passmore, 156 B.R. 595 (Bankr. E.D. Wis. 1993) (Holding that a garnishment of the nondebtor spouse's community property wages is a violation of the automatic stay). Further, even a voluntary wage assignment by the nondebtor spouse is likely to be a violation of the automatic stay. However, the automatic stay does not apply to collection actions against the separate property of the nondebtor spouse, because the nondebtor spouse's separate property is not part of the estate. See IRM 25.18.4.11(2), Effect of Marital Agreements on Collection. If there is a question regarding whether a proposed collection action is a violation of the automatic stay, Counsel should be contacted.

25.18.4.13.3  (02-15-2005)
Proofs of Claim

  1. When a person liable for a prepetition tax files a bankruptcy petition, the Service generally files a proof of claim. See 11 U.S.C. §§ 501 and 502. When spouses domiciled in a community property state file a joint petition and the bankruptcy estates are substantively consolidated under B.C. § 302(b), the Service simply files a proof of claim for all taxes owed by either spouse. When only one spouse in a community property state files for bankruptcy, the Service files a proof of claim for the separate and joint liabilities owed by the taxpayer. The Service may also be able to include separate tax liabilities of the nondebtor spouse on its proof of claim. The Bankruptcy Code allows creditors of the nondebtor spouse holding "community claims" to file a claim in the debtor’s bankruptcy case. 11 U.S.C. §§ 101(7), 101(10), 501(a). A community claim is a prepetition claim for which community property of the kind that would be included in the bankruptcy estate (seeIRM 25.18.4.13.1, Property of the Estate and Debts) is liable, whether or not there is any such property at the commencement of the case. 11 U.S.C. 101(7). Generally, prepetition taxes incurred during the marriage by either spouse are community claims. Thus, the Service will typically be able to include the nondebtor spouse's separate tax liability on its proof of claim. Filing a community claim for the separate taxes owed by the nondebtor spouse may be the only way for the Service to collect the taxes from community assets, since the property in the estate may be liquidated and distributed to creditors in the bankruptcy case, and the bankruptcy discharge may prevent the Service from collecting community claims from postpetition community property. SeeIRM 25.18.4.11, Effect of Marital Agreements on Collection. If an issue arises concerning whether a community claim for liabilities of the nondebtor spouse should be filed, Counsel should be contacted.

  2. When a community claim is being filed in the debtor spouse's bankruptcy for a tax owed by the nondebtor spouse, the claim should be classified in the same manner it would have been if the nondebtor spouse had filed the bankruptcy petition. For example, if the Service has filed a prepetition notice of federal tax lien against the nondebtor spouse for a tax obligation that could be collected from community property, this would be a secured claim in the debtor spouse's bankruptcy proceeding. If no notice of federal tax lien was filed, the claim will be classified as priority or unsecured based on the age and/or type of tax involved. See 11 U.S.C. §§ 507 and 541(a)(2).

  3. Note that the Bankruptcy Code establishes a separate distribution scheme for community property in Chapter 7 cases. 11 U.S.C. 726(c).

25.18.4.13.4  (02-15-2005)
Discharge Provisions

  1. Discharge of Community Claims – Hypothetical Discharge of Nondebtor Spouse. 11 U.S.C. §§ 524(a)(3) and (b) set forth special discharge provisions relating to claims against the community property of the estate. If both spouses file for bankruptcy, both spouses receive a discharge, and there are generally no issues resulting from community property. If only one spouse files for bankruptcy, the effect of community property must be considered. Under the discharge provisions, if only one spouse filed bankruptcy, only that spouse receives a discharge. However, under section 524(a)(3), the debtor spouse's discharge will generally prevent the collection from postpetition community property of prepetition community claims incurred by either spouse. The nondebtor spouse is said to receive a "hypothetical discharge." The "hypothetical discharge" is an exception to the general rule of section 524(e) that a debtor’s discharge does not affect the liability of any other entity on, or the property of any other entity for, a debt. The hypothetical discharge is inapplicable if the debtor does not receive a discharge.

  2. Exceptions to Hypothetical Discharge. Claims for community debts incurred by the nondebtor spouse may be filed in the debtor spouse's bankruptcy. SeeIRM 25.18.4.13.3, Proofs of Claim. As indicated above, the discharge of the debtor spouse generally prevents a creditor of either spouse from collecting prepetition community claims from postpetition community property. However, a creditor may collect a prepetition community claim from postpetition community property if the community claim is excepted, or would be excepted, from discharge under section 523, 1228(a)(1), or 1328(a)(1). Further, under section 524(b)(2), if the nondebtor spouse would have been denied a discharge under section 727 had the nondebtor spouse filed a Chapter 7 case on the same date that the debtor’s case was filed, then a prepetition community claim incurred by either spouse may be collected from community property.

  3. Termination of the Hypothetical Discharge. The nondebtor spouse's hypothetical discharge is only good while the nondebtor spouse remains married to the debtor, the spouses live together in a community property state and the debtor is alive. If the spouses are divorced or if the debtor spouse dies, property acquired by the nondebtor spouse is no longer community property. Therefore, community claims incurred by the nondebtor spouse can again be collected from the nondebtor spouse's property. Also, if the spouses change their domicile to a non-community property jurisdiction, any property subsequently acquired by the nondebtor spouse is not community property and would be available to the creditor. The creditors of the nondebtor spouse generally can collect claims incurred by the nondebtor spouse from the separate property of the nondebtor spouse regardless of the discharge.

  4. Notice to Nondebtor Spouse's Creditors. Creditors of the nondebtor spouse must receive appropriate notice of the debtor spouse’s bankruptcy. In re Sweitzer, 111 B.R. 792 (Bankr. W.D. Wis. 1990). It may be necessary to file an objection to the dischargeability of the community claims against the nondebtor spouse.


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