TENANCY BY THE ENTIRETY-FEDERAL TAX LIENS

The United States Supreme Court has recently ruled on the issue of whether or not a federal tax lien against one spouse can effect the other spouse's interest in a tenancy by the entirety. The case is United States V. Craft, 122 S.CT.1414 (April 17, 2002). After failing to file federal income taxes for seven years, the IRS assessed a $482,000 federal tax lien against the husband's interest under the Federal Tax Lien. The husband and wife then jointly deeded the property to the wife for $1 after which she attempted to sell the property to a third party. A title search disclosed the federal tax lien and an arrangement was made with the IRS to release the lien in order to facilitate the sale.

However, under the agreement, the IRS released the lien only with the understanding that one half of the sale proceeds would be held in escrow pending a determination of the government's interest, if any, in the property. The lower court ruled that the tax lien survived the transfer to Mrs. Craft; the Court of Appeals reversed, holding that the lien did not attach to a tenancy by the entirety. Finally, the US Supreme Court reversed the Appeals Court and held that the tenancy by the entirety is a property interest under the Federal Tax Lien Statute holding that each tenant possesses individual rights in the estate sufficient to constitute “property” or “rights to property” for purposes of the Federal Tax Lien Statute.

Although this case was tried based on Michigan law, that law is very similar to most other tenancy by the entirety statutory schemes around the country. It is close enough to the Massachusetts tenancy by the entirety to suggest that this decision adopted by the Supreme Court would apply in Massachusetts.

The Court determined that the husband had certain rights under the tenancy by the entirety law, namely a right to use the property, a right to exclude others, a right to share any income from the property, a right of survivorship, a right to become a tenant in common if he divorced, a right to sell the property with his wife's consent, and a right to block his wife from selling the property unilaterally. Because the husband had so many significant property interests, Justice O'Connor writing for the majority of the Supreme Court concluded that the federal tax lien attached, the husband's rights were effectively liened, and the escrowed sales proceeds were to be turned over to the IRS.

This case presents one major unanswered question namely, had the Crafts remained married and not sold the property, would the Court have given the IRS a cause of action to foreclose on the tax lien, force a sale and split the proceeds? In many jurisdictions, although the lien would attach, it would not be actionable against the innocent owner until death of the debtor, divorce or voluntary division of the property. If the wife survived the death of the husband against whom the federal tax lien was applicable, would the IRS have lost its lien position? Does Craft suggest that the IRS is now authorized to foreclose on the tenancy of the entirety estates, running roughshod over the innocent spouse's right to control the disposition of the tenancy by the entirety property.

In a dissenting opinion, Justice Thomas raised the specter that the same logic by which the Court arrived to this decision could lead to a conclusion that partnership property may be attached for tax liability of an individual partner and foreclosed in the same manner as a tenancy by the entirety. As in tenancy by the entirety, the partner has significant rights to use, enjoy and control partnership property in conjunction with his or her partners. Justice Thomas saw no way to distinguish between the propriety of attaching the federal tax lien to partnership property to satisfy tax liability as opposed to attaching the lien to tenancy by the entirety property. Will this mean that more couples will purchase homes through a tenancy in partnership? Craft may pose more questions than it answers.