Supreme Court Holds That Tax Lien Against Husband Attaches to Tenancy by the Entireties Property

Don Craft failed to file federal income tax returns for several years, and the IRS assessed a $482,446 lien against him under the federal tax lien statute, 26 U.S.C. § 6321.

Craft and his wife, Sandra, owned real estate in Michigan as tenants by the entirety. After the lien was filed, Craft and his wife jointly conveyed the Michigan property to Sandra. Several years later when Sandra decided to sell the property, the tax lien showed up on the title examination. The Crafts and the IRS reached an agreement that the sale could go forward but that one half of the proceeds would be placed in escrow until a determination was made of the IRS interest in the property.  The Crafts took the position that a tax lien against one spouse did not attach to property owned by both spouses as tenants by the entireties.  The IRS contended that the tax lien attached to Mr. Craft’s interest in the property. 

The United States District Court held that the tax lien attached upon the transfer of the property to Sandra. The Sixth Circuit Court of Appeals reversed, holding that the lien did not attach to entireties property, but remanded the case to the District Court for consideration of a separate issue. After remand and further consideration by the Sixth Circuit Court of Appeals, both parties appealed.

The federal tax lien statute provides that a federal tax lien attaches to “all [of a taxpayer’s] property and rights to property.”  The issue before the Court was whether Mr. Craft’s interest in tenants by the entireties property constituted “property” or “rights to property” for the purposes of the federal tax lien statute.

The Supreme Court reversed, holding that the tax lien attached to Mr. Craft’s interest in the tenancy by the entireties property. The Court stated that regardless of "the state law fiction that a tenant by the entireties [one spouse] has no separate interest in entireties property," each tenant [spouse] possessed "individual rights in the estate sufficient to constitute 'property' or 'rights to property'" for purposes of the federal tax lien statute. The Court remanded the case for a determination of the value of Mr. Craft’s interest in the property.

Justice Thomas, in a dissenting opinion, pointed out that “For more than 50 years, every federal court reviewing tenancies by the entirety in States with a similar understanding as Michigan has concluded that a federal tax lien cannot attach to such property to satisfy an individual spouse’s tax liability.”

In Maryland as in many other jurisdictions, tenants by the entirety must act together to sell their property or to subject it to any interest, lien or encumbrance, or to lease the property. Neither the husband nor the wife may, without the assent of the other, sell, give or encumber property that is held by the entireties.  A judgment against one tenant by the entirety is not a lien upon the land held by the entireties.  Property held by the entireties is not subject to the debts of one of the tenants.  Property held by entireties cannot be levied upon or sold to satisfy the debts of one of the tenants. 

Until the Craft decision, it was generally held that a federal tax lien against one spouse would not attach to tenancy by the entireties property.  The Craft decision is a major departure from prior law and its implications are unclear.

United States v. Craft, Supreme Court of the United States, No. 00-1831.  Argued January 14, 2002-Decided April 17, 2002. 

Click here to read the full opinion
 

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