Federal tax liens.

The Supreme Court held in Sandra L. Craft, 4/17/02, that a husband's interest in a tenancy by the entirety was "property" or "rights to property" to which a Federal tax lien could attach, despite the fact that state (Michigan) law exempted such property from creditors. According to the Court, Sec. 6321's interpretation is a Federal question; exempt status under state law is not binding.

When a husband failed to pay a tax assessment, the IRS issued a tax lien that attached to all his real and personal property and rights. After the notice of lien was filed, the husband and his wife jointly executed a quitclaim deed allegedly transferring his interest in the property to her for $1. A title search revealed the lien when the wife attempted to sell the property. The IRS released the lien, allowing the sale to proceed; half of the proceeds would be held in escrow pending a determination of the government's interest in the realty. The wife subsequently brought a quiet-title action seeking to recover the escrowed funds.

The Court examined the individual rights created by Michigan law to determine whether the husband possessed property or rights to property. He had the right:

* To use the property.

* To exclude third parties from the property.

* To a share of the income the property produced.

* Of survivorship.

* To become a tenant in common with equal shares on divorce.

* To sell the property with his wife's consent and receive half of the sales proceeds.

* To encumber the property (with his wife's consent).

* To block his wife from unilaterally selling or encumbering the property.

The Court concluded that the rights granted to the husband under Michigan law qualified as property or rights to property under Sec. 6321. The broad statutory language authorizing the tax lien demonstrated that Congress intended to reach every property interest a taxpayer might have. The husband's rights of use, exclusion and income alone may be sufficient to subject his entireties interest to the lien, because they furnished him substantial control over the property. The fact that he could not unilaterally alienate the property did not bar him from holding a property interest.

The Court noted that if it reached a contrary conclusion, the entireties property would belong to no one for Sec. 6321 purposes, because the wife had no greater interest in the property than did her husband. It deemed such a result absurd, because it would allow spouses to shield their property from Federal taxation by classifying it as entireties property, facilitating abuse.

However, the Court declined to rule on the proper valuation of the husband's interest in the entireties property, reversing and remanding the case to the Sixth Circuit.