Brief Fact Summary.
Mr. and Mrs. Craft (Plaintiff) owned property as tenants by the entirety. The Internal Revenue Service (Defendant) attempted to place a tax lien on the property.
Synopsis of Rule of Law.
When property is owned as tenants by the entirety, each tenant’s individual rights in the property constitute “property” or “rights to property” for purposes of a tax lien.
In determining whether a federal taxpayer's state-law rights constitute property or rights to property, the important consideration is the breadth of the control the taxpayer could exercise over the property.View Full Point of Law
Defendant attached a tax lien to all of Mr. Craft’s property and rights to property, real or personal. The lien attached to a property that Mr. Craft owned with Plaintiff, his wife, as tenants by the entirety. The Crafts then jointly executed a quitclaim deed transferring Mr. Craft’s interest to Plaintiff for a dollar. Plaintiff then tried to sell the property and the IRS agreed to release the lien if half of the proceeds from the sale were held in escrow while the Government’s interest in the property was determined. Plaintiff sued to quiet title to the escrowed money. The trial court granted the Defendant’s motion for summary judgment, finding that the lien attached when the tenancy by the entirety was terminated and that Defendant was entitled to half of the proceeds. Both parties appealed. The appellate court held that the property was exempt from the lien because a tenant by the entirety does not have a separate interest in the property. On remand, the trial court found that since state law makes tenancies by the entirety exempt from creditors, the conveyance was not fraudulent. The United States Supreme Court granted certiorari.
When property is owned as tenants by the entirety, does a tenant possess “property” or “rights to property” for purposes of attaching a tax lien?
(O’Connor, J.) Yes. When property is owned as tenants by the entirety, each tenant’s individual rights in the property constitute “property” or “rights to property” for purposes of a tax lien. State law determines an individual’s rights in the property and federal law then determines whether those rights qualify as property or rights to property for purposes of attaching a lien. A tenancy by the entirety exists between married people and is a form of single ownership by the couple. Neither tenant owns any individual interest in the estate. Mr. Craft did have certain rights in the property—the right to use the property, exclude others, earn a share of income produced from the property, of survivorship, to become a tenant in common upon divorce, to sell the property with Plaintiff’s consent and receive half the proceeds, to place an encumbrance upon the property with Plaintiff’s consent, and to block Plaintiff from selling or encumbering the property unilaterally. State law grants these rights in the property to tenants in the entirety. These rights are sufficient to qualify as “property” or “rights to property” for purposes of a lien. Mr. Craft had essential rights in the property and this is enough to subject his interest to a tax lien, even if he could not unilaterally alienate the property. Reversed and remanded.
(Scalia, J.) This opinion eliminates a form of property ownership that protects non-working spouses who are not the source of the debt and who would have taken title to the property without encumbrances.
(Thomas, J.) This opinion ignores states’ rights to define property interests, removes the statutory distinction between property and rights to property, and contradicts precedent. This court should not expand the legal interest an individual has in property beyond that recognized under state law. In Michigan, property owned as a tenancy by the entirety does not belong to either tenant, but to the couple as one entity. The lien could not attach to the Craft’s property because it could not attach to a collection of individual rights in the property held by Mr. Craft. These rights cannot be sold and are a contingent future interest and, therefore, do not rise to the level of rights to property.
In most states, state law keeps a spouse’s creditor from attaching property owned as a tenancy by the entirety.