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Tax Liens Now Threaten
by Raymond J. Bowie
Will Rogers reputedly said of legislatures that no
one's life or property is safe when they are in session. The
same, unfortunately, may sometimes also be said about the
nation's judiciary. Case in point: Even while the nation's
public policy focuses on bolstering the institution of marriage,
the U.S. Supreme Court has just take a judicial swipe at the
very legal foundations of marital property.
In a recent decision of major import nationwide, the nation's
highest court struck down traditional common law protections
afforded real estate owned jointly by husband and wife.
In its decision April 17, 2002 in the case of United States
v. Craft, the Supreme Court ruled that even when spouses hold
title to their own home as 'tenants by the entireties' an
IRS tax lien against just the husband would attach to the
property they own jointly, giving the IRS power to seize half
the marital residence over the wife's objection.
This decision overturned a venerable common law doctrine,
cherished in many states, that when a married couple hold
title to real property, they may enjoy a unique status called
an 'estate by the entireties' in which the property is absolutely
beyond the reach of any of their individual creditors including
Prior to the April 17 decision of the Supreme Court, both
federal and state courts had consistently ruled that real
property owned jointly by spouses was protected against government
liens to the same extent as private liens or judgments. Various
court decisions have held such 'entireties' property to be
beyond the reach of either private judgments, federal or state
tax liens, criminal fines or penalties, or other government
actions levied against only on e of the spouses individually.
Then came the case of U.S. vs. Craft before the Supreme Court.
In this case, Don and Sandra Craft owned property in Michigan
as tenants by the entireties. Mr. Craft failed to file income
tax returns for seven years, and the IRS assessed a lien against
him for $482,446 in back taxes. Mr. and Mrs. Craft then jointly
deeded the entireties property to Mrs. Craft, who was not
liable for any of the taxes. But when Mrs. Craft attempted
to sell her property after her husband's death, the IRS asserted
that its lien had attached to the entireties property at the
time when both spouses owned it, and demanded half of her
sales proceeds to pay Mr. craft's tax liability. Mrs. Craft
had no income or inheritance from her husband other than the
home, and needed all the proceeds to secure her retirement.
In upholding the IRS claim, the Supreme Court said that as
a matter of federal law, each individual spouse is deemed
to own a separate 50% interest in entireties property that
can be separately reached by federal government agencies with
The tremors of this precedent-shattering decisions are just
now being felt throughout the country.
To appreciate better the consequences of the court's ruling,
it helps to understand the traditional legal doctrine of tenants
by the entireties, at least as it had been understood in this
country prior to the Craft decision.
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In many states, the law automatically creates
an estate by the entirety any time property is conveyed to
spouses jointly. The deed does not even have to recite that
they are husband and wife, or use the words 'tenants by the
entireties', although most deeds in fact do. The mere fact
that they are married to one another is sufficient.
Over the centuries, as part of the social compact to protect
the interests of wives and children in the marital home ,
the common law developed a legal doctrine called the 'estate
by the entirety' to protect real property conveyed jointly
to a husband and wife. Entirety is the concept that legally,
the two spouses own the property as only one entity holding
one single indivisible interest in the property. In a way,
entireties ownership makes the two spouses into a single entity,
almost like a corporation, for purposes of holding title to
This means that neither of the spouses acting alone, nor any
of their individual creditors, nor any court or government
could divide entireties property into two separate individual
ownership interests. Only both of the spouses acting together
can do anything with or to the entireties property. Neither
one of the spouses alone can sell, mortgage, lease, encumber
or do anything with entireties property without the joiner
of the other spouse.
By the same token, creditors to whom only one of the spouses
might owe an obligation have not traditionally been able to
reach entireties property to satisfy their judgments, claims
or liens. Only if the married couple were jointly obligated
to the same creditor on the same obligation might their common
creditor reach their property.
It was this centuries-old legal doctrine that was struck down
by the Supreme Court in holding that a federal lien against
one individual spouse can indeed attach to half of any property
owned jointly by both spouses as tenants by the entireties.
In effect, what our highest court did was, for the first time,
split an entireties property into two separate ownership interests
for purposes of enforcing federal government liens.
In its ruling, the court brushed aside "the state law
fiction that a tenant by the entireties has no separate interest
in entireties property" and held that under federal law,
each spouse possessed "individual rights in the estate
sufficient to constitute property or rights to property for
purposes of the federal tax lien statute."
In the aftermath of the Craft decision, entireties property
will no longer be entitled to absolute protection from any
and all liens incurred by one spouse but not the other. For
liens arising under federal law in favor of federal agencies,
such liens will now attach to a spouse's interest even in
One needs to realize the constantly increasing scope of federal
government power in citizens' lives and the lien rights afforded
various federal agencies under federal laws. The Supreme Court's
ruling will subject entireties property not only to IRS tax
liens but also to myriad other liens that can be imposed by
other federal agencies for environmental hazards, statutory
restitution, improper business practices and federal criminal
fines and forfeitures.
And considering that federal tax rules now comprise 45,662
incomprehensible pages, increasing in size 74% over the last
16 years with some 7,000 tax code changes over those years,
few taxpayers can disregard entirely the prospect of encountering
an IRS tax lien sometime over the course of their lives.
One of the interesting questions the Supreme Court did NOT
answer in the Craft decision was, however, what does the IRS
get for its lien on half of an entireties property?
This issue was remanded for determination in lower federal
courts. Can the IRS force the sale of the property and keep
half the proceeds? Or does the tax lien lie dormant until
the spouses sell the property themselves? Or until the innocent
wife dies the husband owing the taxes becomes sole owner of
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Raymond Bowie is a Naples, FL attorney admitted in Florida,
Virginia and New York, who has practiced law for 21 years,
specializing in real estate transactions.
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