United States v. Craft
535 U.S. 274 (2002)
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Rule of Law:
An individual spouse's interest in property held as a tenancy by the entirety constitutes "property" or "rights to property" to which a federal tax lien may attach under 26 U.S.C. § 6321, regardless of state law characterizations that treat the marital unit as the sole owner.
Facts:
- The Internal Revenue Service (IRS) assessed Don Craft for $482,446 in unpaid income tax liabilities for the years 1979 through 1986.
- At the time the tax liability was assessed, Don Craft and his wife, Sandra L. Craft, owned a piece of real property in Michigan as tenants by the entirety.
- After the IRS filed a notice of a federal tax lien against all of Don Craft's property, he and Sandra Craft jointly executed a quitclaim deed transferring his interest in the property to her for one dollar.
- Several years later, when Sandra Craft attempted to sell the property, a title search revealed the tax lien.
- The IRS agreed to release the lien to allow the sale, provided that half of the net proceeds were held in escrow pending a judicial determination of the government's interest in the funds.
Procedural Posture:
- Sandra Craft filed an action in the U.S. District Court for the Western District of Michigan to quiet title to the escrowed proceeds.
- The District Court granted summary judgment for the Government, holding the tax lien attached to the husband's interest.
- Both parties appealed to the U.S. Court of Appeals for the Sixth Circuit.
- The Sixth Circuit (the intermediate federal appellate court) held that the lien did not attach because under Michigan law, the husband had no separate interest in the property, and it remanded the case on other grounds.
- On remand, the District Court found for Sandra Craft on the lien issue but awarded the IRS a portion of the proceeds on a fraudulent payment theory.
- Both parties appealed again to the Sixth Circuit, which affirmed its prior ruling on the lien issue as law of the case.
- The U.S. Supreme Court granted certiorari to review the Sixth Circuit's decision that the federal tax lien did not attach to the husband's interest.
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Issue:
Does an individual spouse's interest in property held as a tenancy by the entirety constitute 'property' or 'rights to property' to which a federal tax lien may attach under 26 U.S.C. § 6321?
Opinions:
Majority - Justice O’Connor
Yes. An individual's interest in property held as a tenant by the entirety constitutes 'property' or 'rights to property' for the purposes of the federal tax lien statute. The determination of whether a taxpayer's state-delineated rights qualify as property is a question of federal law. The Court looked beyond Michigan's legal fiction that entireties property is owned by a single marital unit, examining the 'bundle of sticks' of rights that Don Craft actually possessed. These rights—including the right to use the property, to exclude others, to receive a share of any income, the right of survivorship, and the right to alienate the property with his wife's consent—were substantial enough to qualify as 'property' under the broad language of 26 U.S.C. § 6321. The fact that he could not unilaterally alienate the property was not dispositive, as federal tax liens can attach to other interests with similar restrictions. To hold otherwise would allow spouses to shield property from federal taxation and create an absurd result where the property belongs to no one for tax purposes.
Dissent - Justice Scalia
No. The Court's decision nullifies a form of property ownership that traditionally provided significant protection for stay-at-home spouses. This form of ownership protects the surviving spouse, who is often a wife who was not involved in the business dealings that led to the individual debt, from having her interest in the home encumbered. It is regrettable that the Court has eliminated this traditional protection.
Dissent - Justice Thomas
No. The Court improperly disregards the primacy of state law in defining property interests. Under Michigan law, entireties property does not belong to either spouse individually but to the marital unit, meaning Don Craft had no separate 'property' to which the lien could attach. The majority misapplies precedent like Drye, which dealt with disclaiming existing property rights, not defining them in the first instance, thereby creating a new federal common law of property. The individual rights Mr. Craft possessed were too contingent or personal to be considered lienable 'rights to property.' This decision also conflicts with the established treatment of partnership property, where a lien attaches only to a partner's interest in the firm, not to the firm's specific assets.
Analysis:
This decision significantly strengthens the collection power of the IRS by clarifying that federal tax law, not state law, defines what constitutes 'property' for lien purposes. It establishes that the substance of a taxpayer's rights in an asset (the 'bundle of sticks') prevails over state-law labels or 'legal fictions,' such as the concept of a single marital unit in a tenancy by the entirety. This ruling curtails the ability of married couples in certain states to use this form of ownership to shield real property from one spouse's federal tax liabilities, impacting estate and financial planning.
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