United States v. Craft

No. 00-1831. Argued January 14, 2002. Decided April 17, 2002. Certiorari to the United States Court of Appeals for the Sixth Circuit. Judgment reversed and case remanded (233 Federal 3d 358, reversed and remanded). Opinion of the Court by Justice O'Connor, in which Chief Justice Rehnquist and Justices Kennedy, Souter, Ginsburg, and Breyer joined. Justice Scalia filed a dissenting opinion, in which Justice Thomas joined. Justice Thomas filed a dissenting opinion, in which Justices Stevens and Scalia joined.

Editorial note. Don Craft failed to pay federal income taxes, and the Internal Revenue Service assessed a deficiency and recorded a notice of lien against his property. He and his wife held their Michigan residence as tenants by the entirety. After the lien attached, the spouses conveyed the property to the wife alone for nominal consideration, and she later sold it, with a portion of the proceeds held pending resolution of the Government's claim.

Editorial note. The District Court held that the lien had attached to the husband's interest, and the Court of Appeals for the Sixth Circuit reversed, holding that under Michigan law the husband had no separate interest to which a lien could attach. The Supreme Court reversed and remanded for consideration of the remaining questions, including the value of the interest and the effect of the conveyance.

Editorial note. Whether a taxpayer holds rights in property is determined by state law, but whether those rights constitute property or rights to property within the meaning of the federal lien statute is a question of federal law. Michigan law gave the husband, among other things, the right to use the property, to receive income from it, to exclude others, to survive to sole ownership, to convey his interest with his wife's consent, and to prevent her from conveying unilaterally. That collection of rights is property for federal purposes, and the lien attached to it. The rule derived is that the state-law label of indivisibility does not defeat the federal lien where the taxpayer in fact holds substantial identifiable rights in the property.

Editorial note. Justice O'Connor employed the familiar method of the tax lien cases: catalogue the sticks in the taxpayer's bundle under state law, then ask whether what remains is property in the federal sense. She reasoned that Michigan's characterisation of the entireties estate as a unity, with no separate share, was a conclusion about the rights of the spouses inter se and against ordinary creditors, and did not deny the husband the enumerated incidents of ownership. Justice Scalia, dissenting, objected that the majority had disassembled an estate that state law treats as a single indivisible whole and had thereby created a federal interest that no one held. Justice Thomas, dissenting, argued that the entireties estate belongs to the marital unity rather than to either spouse, so that the husband had no property to which the lien could attach.

Editorial note. Craft is the treatise's principal modern illustration of the relation between state property definitions and federal law. It confirms that the content of an estate is a matter of state law while its federal consequences are not, and it materially qualifies the creditor protection that tenancy by the entirety has historically supplied in the States that retain it, at least as against the United States. Practitioners advising on entireties ownership must therefore treat federal tax claims as an exception to the general immunity of the estate from the debts of one spouse.

Editorial note. Followed. Applied by the lower federal courts in determining the attachment and valuation of federal tax liens against entireties property, and cited generally for the two-step method of identifying state-law rights and then classifying them under federal statutory language.

Editorial note. Read with 26 U.S.C. § 6321, and the treatise chapters on concurrent ownership and on creditors' claims against co-owned property.