Opinion ID: 782142
Heading Depth: 3
Heading Rank: 2

Heading: Applicability of United States v. Craft

Text: 11 On March 16, 2001, this Court issued an opinion on the appeal from its remand of Craft I and again held that the Government was unable to levy property held as a tenancy by the entirety. Craft v. United States, 233 F.3d 358 (2001) ( Craft II ). However, in 2002 the Supreme Court granted certiorari on Craft II and reversed the decision of this Court. The Supreme Court held that property titled as a tenancy by the entirety could be levied by the Government. United States v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 1420, 152 L.Ed.2d 437 (2002) ( Craft ). 12 Sandra Craft was the wife of a delinquent taxpayer, Don, and she and her husband owned property as tenants by the entirety under Michigan law. Craft I, 140 F.3d at 639. In 1988, the IRS filed a notice of federal tax lien under 26 U.S.C. § 6321 (2002) on all of Don's property, including the entireties property, due to a liability of $482,446.73 in unpaid taxes. Id. After the lien was filed, the Crafts transferred the entireties property to Sandra by way of a quitclaim deed, in exchange for $1.00. Id. When Sandra attempted to sell the property in 1992, the federal lien was discovered. Id. at 640. The IRS agreed to release the lien on the property and allow the sale to go forward conditioned on Sandra's placing half the proceeds of the sale into an escrow account until a court decided the nature and extent of the Government's interest in the property. Id. In 1993, Sandra brought an action in the district court to quiet title to the proceeds being held in the escrow account. Id. 13 In the district court, the Government maintained that the lien attached to the property despite the fact that the Crafts held it as tenants by the entirety. Id. The district court rejected that argument and instead held that the tenancy by the entirety was terminated when the Crafts executed the quitclaim deed. Id. The court concluded that each spouse momentarily held a one-half interest in the property and that the tax lien attached to Don's interest for that brief moment. Id. 14 On appeal, we rejected the notion that Don held a transitory one-half interest in the property when the property was conveyed to Sandra. Relying principally on our decisions in Cole v. Cardoza, 441 F.2d 1337 (6th Cir.1971) and United States v. Certain Real Property Located at 2525 Leroy Lane, 972 F.2d 136 (6th Cir.1992), we held that under Michigan law, a spouse does not possess a separate interest in the entireties property and therefore, the tax lien could not attach to the entireties property. Id. at 643-44. On remand, the district court conducted a bench trial and held that Don had committed fraud by making several mortgage payments on the property while claiming to be insolvent. Craft II, 233 F.3d at 363. Both parties appealed the decision, with the Government again claiming that its lien attached to the taxpayer's interest in the entireties property, and the case was heard by this Court for a second time. Applying the doctrines of the law of the case and the law of the circuit, we held that the panel's decision in Craft I must stand and that the federal tax lien did not attach to the entireties property. Id. at 369. 15 The Supreme Court granted certiorari to consider the Government's claim that respondent's husband had a separate interest in the entireties property to which the federal tax lien attached. Craft, 122 S.Ct. at 1420. In a six to three decision, the Supreme Court reversed and remanded the decision of this Court. The Supreme Court began its analysis by using the common idiom of a bundle of sticks to describe property interests. Id. It described the relationship between state and federal law in the following terms: State law determines only which sticks are in a person's bundle. Whether those sticks qualify as `property' for purposes of the federal tax lien statute is a question of federal law. Id. The Court held that despite the [state law fiction that a tenant by the entirety has no separate interest in entireties property] each tenant possesses individual rights in the estate sufficient to constitute `property' or `rights to property' for the purposes of the lien.... Id. at 1419. The Court examined the individual rights created under Michigan law with respect to entireties property and concluded that those rights included: 16 [T]he right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally. 17 Id. at 1422. The Court also noted that the most essential property rights granted by Michigan — the rights to use the property, to receive income produced by it, and to exclude others from it — alone constituted rights sufficient to subject a delinquent taxpayer's interest in an entireties property to a federal tax lien. Id. at 1423. 18 Emphasizing that the interpretation of 26 U.S.C. § 6321 is a federal question, the Supreme Court reasoned that if neither [the husband nor the wife] had a property interest in the entireties property, who did? This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system. Id. at 1424, 1425. 19 With this decision, the Supreme Court unequivocally stated that the language in § 6321 allowing the Government to place a lien upon all property and rights to property, whether real or personal, included the right to place federal tax liens on properties held as tenancies by the entirety. Furthermore, the inclusion of entireties property in the definition of all property and rights to property in § 6321 is directly applicable to § 6331(a), which allows for the Government to collect unpaid taxes by administrative levy of all property and rights to property ... belonging to such person or on which there is a lien.... The scope of the federal tax lien and the scope of the levy are identical and interests subject to a federal lien are also subject to an administrative levy. Accordingly, the Government in this case is able to levy against and seize the West Hickory, Franklin Road, and South Saginaw properties, as well as the Cyclone mortgage payments, all held by the Hatchetts as tenants by the entirety.