LOCATION: Los Angeles City Hall
DOCKET NO.: 00-1831
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Sixth Circuit
CITATION: 535 US 274 (2002)
ARGUED: Jan 14, 2002
DECIDED: Apr 17, 2002
Jeffrey S. Sutton - Argued the cause for the respondent
Kent L. Jones - Argued the cause for the petitioner
Facts of the case
When Don Craft failed to pay federal income tax liabilities for the failure to file federal income tax returns for the years 1979 through 1986, a federal tax lien attached to "all [of his] property and rights to property," pursuant to 26 USC section 6321. After the notice of the lien was filed, Dan and his wife Sandra L. Craft jointly executed a quitclaim deed purporting to transfer to her his interest in a piece of real property in Michigan that they owned as tenants by the entirety. Subsequently, the Internal Revenue Service (IRS) agreed to release the lien and allow the Crafts to sell the property with half the net proceeds to be held in escrow pending determination of the Government's interest in the property. After Sandra brought an action to quiet title to the escrowed proceeds, the Government claimed that its lien had attached to the husband's interest in the tenancy by the entirety. The District Court granted the Government summary judgment. The Court of Appeals, however, held that no lien attached because the husband had no separate interest in the entireties property under Michigan law.
Does a tenant by the entirety possess property or rights to property to which a federal lien may attach?
Media for United States v. CraftAudio Transcription for Oral Argument - January 14, 2002 in United States v. Craft
Audio Transcription for Opinion Announcement - April 17, 2002 in United States v. Craft
William H. Rehnquist:
The opinion of the court in No. 00-1831, United States against Craft will be announced by Justice O’Connor.
Sandra Day O'Connor:
This case comes here on writ of certiorari to the Court of Appeals for the Sixth Circuit.
When the respondent’s husband failed to pay his federal income tax, a federal tax lien attached to all his property and rights to property.
At the time that respondent and her husband owned a piece of property classified by Michigan Law as tenancy by the entirety, a unique form of co-ownership reserved for married people.
The question before the Court is whether her husband had property or rights to property in the tenancy by the entirety to which the tax lien could have attached.
The Sixth Circuit held that under Michigan Law, respondent’s husband had no property right in the entirety’s estate.
We now reverse.
Because the federal tax lien statute itself creates no property rights, this court looks initially to State Law to determine what rights the taxpayer has in the relevant property.
Ultimately however, whether these rights constitute property for purposes of the federal tax lien as a question of federal law.
If property is as they say a bundle of sticks, a collection of individual rights which in certain combination may constitute property, State Law determines which sticks are in the taxpayers bundle, while federal law determines whether the label property may attach to those sticks.
Whether a State Law would also label those sticks as property is irrelevant.
Michigan Law gave respondent’s husband rights in the tenancy by the entirety’s property consisting of the right to use the property, the right to exclude others from it, the right to receive income from it, and the right to alienate (or otherwise encumber) the property with the permission of his spouse.
We hold that these rights are sufficient to constitute property for the purposes of the federal tax lien statute.
If they were not considered properly, the entirety’s estate would have no longer, a result that not only seems strange but with also facilitate tax evasion.
It is true that Michigan Law exempts entirety’s property from the reach of State Law creditors but we have elsewhere held that State Law exemptions do not bind the federal government and they should not do so here.
Justice Thomas has filed a dissenting opinion in which Justice Stevens and Justice Scalia have joined; Justice Scalia has also file a dissenting opinion which Justice Thomas has joined.