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Federal Tax Liens Now Threaten

 Marital Property
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 government agencies.
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 lien powers.
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 the property.
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 entireties property. 
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 the property?
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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.
Don't leave equity in your home unprotected! The Nevada LLC or family limited partnership we set up for you can place a "equity stripping lien with consideration" on your home to shield any equity.  You must be pro-active and protect yourself BEFORE trouble starts.

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