United States v. Craft

Supreme Court of the United States · 2002 · Property

PropertyFederal tax liensTenancy by the entirety26 U.S.C. § 6321tenancy by the entiretypropertyrights to propertyfederal tax lien

Facts

The IRS assessed unpaid federal income tax liabilities against Don Craft alone and, when he failed to pay, a federal tax lien attached to all property and rights to property belonging to him. At that time, Don Craft and his wife Sandra owned Michigan real property as tenants by the entirety. After notice of the lien was filed, they executed a quitclaim deed purporting to transfer the husband's interest to Sandra for one dollar, and when she later attempted to sell the property, half of the net proceeds were escrowed pending resolution of the Government's claim. The dispute centered on whether Don Craft's interest in the entireties property was property or rights to property to which the federal lien had attached.

Issue

Whether a tenant by the entirety under Michigan law possesses "property" or "rights to property" within the meaning of 26 U.S.C. § 6321, so that a federal tax lien for that spouse's individual tax debt may attach. More specifically, the question was whether the husband's individual rights in Michigan entireties property were sufficient for federal lien purposes despite Michigan's characterization of the estate as having no separate spousal interest.

Rule

Under 26 U.S.C. § 6321, courts first look to state law to determine what rights the taxpayer has in the property, and then look to federal law to determine whether those state-delineated rights qualify as "property" or "rights to property" to which a federal tax lien may attach. State labels and legal fictions do not control the federal classification question; if state law gives the taxpayer substantial individual rights in the asset, those rights may constitute property or rights to property even if the taxpayer lacks unilateral power to alienate the whole asset.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Evan Mills lives in Lansing, Michigan, and owes substantial federal income taxes. He and his spouse, Nora Mills, own a duplex as tenants by the entirety under Michigan law; Evan may use the property, exclude strangers, share rental income equally, and join in any sale or mortgage only with Nora's consent.

If the IRS files a lien for Evan's individual tax debt, which is the strongest argument that the lien attaches to Evan's interest in the duplex?

Explanation. The governing rule is a two-step inquiry: state law defines what rights the taxpayer has, and federal law determines whether those rights amount to "property" or "rights to property" under § 6321. Rights such as use, exclusion, income, survivorship, and participation in consensual sale or encumbrance are substantial enough to support lien attachment even without unilateral alienation. The majority rejected the idea that inability to act alone defeats attachment.