Tenancy by the Entirety; Federal Tax Liens

EDITOR'S NOTE: The following case from the United States Supreme Court is of significant importance for tenancy by the entirety property and federal tax liens. We suggest you read this casenote as well as the actual case decision.

*United States v Craft, (00-1831), 122 SCt 1414 (US 2002).

Facts: Don and Sandra Craft (respectively, "Husband" and "Wife") owned property in Michigan as tenants by the entirety. Husband failed to pay federal income tax liabilities levied against him causing a notice of federal tax lien to be filed. Husband and Wife then executed and recorded a quitclaim deed transferring his interest in the property to Wife alone. The IRS released the lien so that Wife could sell the property, agreeing to put half the proceeds in escrow pending determination of Husband's interest. Wife brought this action to quiet title to the escrowed property. Primarily arguing that the lien attached to Husband's interest in the tenancy by the entirety, the Government prevailed on its motion for summary judgment in the district court. The sixth circuit reversed based on the state law interpretation that Husband had no separate interest in entireties property. The Supreme Court "granted certiorari to consider the Government's claim that [Husband] had a separate interest in the entireties property to which the federal tax lien attached."

Holding: Reversed by a 6-3 decision. Delivered by J. O'Connor, the Supreme Court held that Husband, as a tenant by the entirety "possesses individual rights in the estate sufficient to constitute 'property' or 'rights to property'" for the purposes of the federal tax lien statute and a federal tax lien may attach to his interest. As state law defines the rights an individual has in property, federal law determines the extent to which the federal tax lien statute attaches. Michigan law delineates the rights of a tenant by the entirety as, among others, "the right to use the property, the right to exclude third parties from it, the right to share income produced from it, the right to survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with [Wife's] consent, and the right to block [Wife] from selling or encumbering the property unilaterally. In applying the federal tax lien statute, which "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have," the Court cited certain rights that give a tenant by the entirety individual property or rights to property. Specifically, the rights of use, income, and exclusion derived from the property were likely to bring Husband's rights within the ambit of the federal statute. As a tenant by the entirety, Husband was unable to alienate the property without wife's consent. Although the right to alienate is a property right, the Court found that the right was not an "essential" characteristic and repeated a previous holding that "federal tax liens may attach to property that cannot be unilaterally alienated."

J. Scalia, J. Thomas, and J. Stevens dissented. According to J. Scalia, because the federal government cannot encumber partnership property by an individual partner's debts, the holding creates a discrepancy in partnership law with respect to the tax lien statute. In resolution, the majority cites its decision in United States v Rodgers, 461 U.S. 677 (1983), which found that "the government may foreclose on property even where co-owners lack the right of unilateral alienation." J. Thomas maintained that the majority ignored the primacy of state law and failed to show that a tenant by the entirety has "property" or "rights to property" to which the federal tax lien statute could attach.

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