Supreme Court Holds IRS Lien Encumbers Entireties Property

Departing starkly from a body of decisional law burnished by time in the lower courts, the Supreme Court, in United States v. Craft, No 001831(4/17/02) reversing the 6th Circuit, held that a spouse’s interest in entireties property constitutes property or rights to property to which a federal tax lien may attach. Five Justices concurred in an opinion written by Justice O’Connor.

[The IRS filed a federal tax lien against husband, who then quitclaimed his interest in the property held as tenants by the entirety to his wife. Subsequently, IRS agreed to release the lien upon the condition that half the net proceeds be held in escrow pending determination of the government’s claim. Wife then brought an action in District Court to quiet title, which was dismissed. The Sixth Circuit reversed, holding that no lien attached because the husband had no separate interest in the entireties property under Michigan law.]

The Court first observed that because the federal tax lien statute itself creates no property rights, state law must be consulted to determine whether state-created rights qualified as property or rights to property under IRC § 6321, which provides that the amount of any tax owed becomes a lien against “all property and rights to property, whether real or personal, belonging to such person.” Next, the Court found that Michigan law gave the husband a bundle of rights, including the right to use the property, to alienate it, or to block the spouse from unilaterally encumbering or selling it.

The Court found that the rights conferred upon the husband under Michigan law qualified as property or rights to property under IRC § 6321. Even though the husband could not unilaterally alienate the property, he still possessed a substantial degree of control over the property. Moreover, the Court found that excluding property from a federal tax lien simply because the taxpayer could not unilaterally alienate it would exempt an undue amount of property from the reach of the lien statute. Finally, the Court reasoned that if the husband had no lienable interest in the property, the wife’s interest, which was no greater than her husband’s, would also not be subject to the lien. This “absurd” result, in which entireties property would be beyond the reach of the lien statute, would “facilitat[e] abuse of the federal tax system.”

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The 3rd Circuit, in Tolve v. CIR, No. 00-2289 (3/22/02), held that the Tax Court erred in finding that a Form 872-A consent to extend the period to assess “tax” included penalties and interest. Applying contract principles, the court found that limiting language added to the consent form distinguished it from unrestricted consent.

Est. of Fontana v. CIR, 118 T.C. No. 16 (3/28/02), held that stock subject to a decedent’s general power of appointment must be aggregated with stock owned outright by the decedent for estate tax purposes.

Est. of Adams v. CIR, T.C. Memo 2002-80, held that an estate was not required to include proceeds of an insurance policy owned by a general partnership in which the decedent was a one-third owner, where the partnership was required to buy, and the estate to sell, the decedent’s interest in the partnership, since the the proceeds facilitated the partnership’s obligation to purchase the interest.

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