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IRS guidance on federal tax liens on entireties property after Craft.

The Supreme Court's decision in Sandra L. Craft, 535 US 274 (2002), held that a Federal tax lien arising under Sec. 6321 on "all property and rights to property" of a delinquent taxpayer attaches to the taxpayer's rights in property held as a tenancy by the entirety (TE), even though Michigan law insulates such property from the claims of creditors of only one spouse. The Court stated that while state law determines what rights a taxpayer has in property, Federal law determines whether the state-defined rights are property or rights to property for Sec. 6321 purposes. The decision has consequences in approximately 26 jurisdictions that recognize TE as a form of property ownership. Notice 2003-60 explains how the IRS will apply Craft.


TE is a form of property ownership available only to a husband and wife as a marital unit; a key feature is the right of survivorship (i.e., the surviving spouse becomes the property's fee-simple owner on the other spouse's death). ATE also terminates on the property's transfer or the spouses' divorce. While TE property is subject to the claims of the spouses' joint creditors, jurisdictions that recognize TE follow different rules for claims against only one of the spouses.

In the majority of these jurisdictions, TE property is completely free of the reach of one spouse's creditors. Other jurisdictions permit one spouse's creditors to attach the other spouse's interest in TE property, subject to the nonliable spouse's rights.


Notice 2003-60 addresses collection issues raised by the Court's ruling, including enforcing collection administratively and judicially, valuing the IRS's secured claim in bankruptcy, applications for discharge and subordination and evaluating offers in compromise (OICs) and proposed installment agreements.

The notice states that the IRS will rely on a number of general principles in addressing issues raised by Craft. First, the Court's decision confirms that, for Sec. 6321 purposes, a taxpayer's property and rights to property have always included any rights that he or she may have in TE property under state law. Craft does not change any limit on the IRS's ability to rescind an accepted OIC or terminate an accepted installment agreement. Further, the Court's decision does not represent new law and does not affect other law applicable to Federal tax liens and tax collection.

Second, under certain circumstances, as a matter of administrative policy, the IRS will not apply Craft to certain interests created before Craft, to the detriment of third parties who may have reasonably relied on the belief that state law prevents attachment of a Federal lien. Third, the administrative sale of TE property subject to a Federal tax lien presents practical problems that limit the usefulness of the IRS's seizure and sale procedures. However, levying on cash and cash equivalents held by TE property is considerably less problematic and will be used in appropriate cases.

Fourth, because of the potential adverse consequences to a nonliable spouse, the use of lien foreclosure for TE property subject to a Federal tax lien will be determined on a case-by-case basis. Fifth, generally, the value of the taxpayer's interest in TE property will be deemed to be one-half. Finally, when TE property subject to a Federal tax lien is transferred without any provision for the lien's discharge, the lien thereafter encumbers a one-half interest in the property held by the transferee.

The remainder of the notice contains questions and answers as to how the IRS will apply Craft to TE property acquired before and after the decision date.


Mark H. Ely, J. D., CPA Partner

Washington National Tax KPMG LLP Washington, DC
COPYRIGHT 2004 American Institute of CPA's
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Author:Ely, Mark H.
Publication:The Tax Adviser
Date:Jan 1, 2004
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