United States v. Craft

UNITED STATES v. CRAFT.

Certiorari to the United States Court of Appeals for the Sixth Circuit.

No. 00–1831. Argued January 14, 2002 — Decided April 17, 2002.

233 F. 3d 358, reversed and remanded.

O'Connor, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Kennedy, Souter, Ginsburg, and Breyer, JJ., joined. Scalia, J., filed a dissenting opinion, in which Thomas, J., joined, post, p. 289. Thomas, J., filed a dissenting opinion, in which Stevens and Scalia, JJ., joined, post, p. 290.

Kent L. Jones argued the cause for the United States. With him on the briefs were Solicitor General Olson, Assistant Attorney General O'Connor, Deputy Solicitor General Wallace, David English Carmack, and Joan I. Oppenheimer. Jeffrey S. Sutton argued the cause for respondent. With him on the briefs were Chad A. Readler, Jeffrey A. Moyer, and Michael Dubetz, Jr.

The report occupies pages 274 through 302 of volume 535 of the United States Reports. The opinion of the Court begins at page 276 and ends at page 289; the dissenting opinion of Justice Scalia occupies pages 289 and 290; the dissenting opinion of Justice Thomas begins at page 290 and ends at page 301.

[535 U.S. 274] “When respondent's husband failed to pay federal income tax liabilities assessed against him, a federal tax lien attached to ‘all [of his] property and rights to property.’ 26 U. S. C. § 6321. After the notice of the lien was filed, respondent and her husband 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 respondent to sell the property with half the net proceeds to be held in escrow pending determination of the Government's interest in the property. She brought this action to quiet title to the escrowed proceeds. The Government claimed, among other things, that its lien had attached to the husband's interest in the tenancy by the entirety. The District Court granted the Government summary judgment, but the Sixth Circuit held that no lien attached because the husband had no separate interest in the entireties property under Michigan law, and remanded the case for consideration of an alternative claim not at issue here. In affirming the District Court's decision on remand, the Sixth Circuit held that its prior opinion on the issue whether the lien attached to the husband's entireties property was the law of the case.”

[535 U.S. 274] “Held: The husband's interests in the entireties property constitute ‘property’ or ‘rights to property’ to which a federal tax lien may attach. Pp. 278-289.”

[535 U.S. 274] “(a) Because the federal tax lien statute itself creates no property rights, United States v. Bess, 357 U. S. 51, 55, this Court looks initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach and then to federal law to determine whether such state-delineated rights qualify as property or rights to property under § 6321, Drye v. United States, 528 U. S. 49, 58. A common idiom describes property as a ‘bundle of sticks’ — a collection of individual rights which, in certain combinations, constitute property. State law determines which sticks are in a person's bundle, but federal law determines whether those sticks constitute property for federal tax lien purposes. In looking to state law, this Court must consider the substance of the state law rights, not the labels the State gives them or the conclusions it draws from them. Pp. 278-279.”

[535 U.S. 275] “(b) Michigan law gave respondent's husband, among other rights, the right to use the entireties property, the right to exclude others from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with respondent's consent and to receive half the proceeds from such a sale, the right to encumber the property with respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally. Pp. 279-282.”

[535 U.S. 275] “(c) The rights Michigan law granted respondent's husband qualify as ‘property’ or ‘rights to property’ under § 6321. The broad statutory language authorizing the tax lien reveals that Congress meant to reach every property interest that a taxpayer might have. United States v. National Bank of Commerce, 472 U. S. 713, 719-720. The husband's rights of use, exclusion, and income alone may be sufficient to subject his entireties interest to the lien, for they gave him a substantial degree of control over the property. See Drye, supra, at 61. He also had the right to alienate the property with respondent's consent. The unilateral alienation stick is not essential to ‘property.’ Federal tax liens may attach to property that cannot be unilaterally alienated, United States v. Rodgers, 461 U. S. 677, and excluding such property would exempt a rather large amount of what is commonly thought of as property. . . . Were this Court to reach a contrary conclusion, the entireties property would belong to no one for § 6321 purposes because respondent had no more interest in the property than her husband. Such a result seems absurd and would allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system. . . . Pp. 283-288.”

[535 U.S. 275] “(d) That Michigan makes a different choice with respect to state law creditors does not dictate the choice here. Because § 6321's interpretation is a federal question, this Court is in no way bound by state courts' answers to similar questions involving state law. Pp. 288-289.”

[535 U.S. 276] “This case raises the question whether a tenant by the entirety possesses ‘property’ or ‘rights to property’ to which a federal tax lien may attach. 26 U. S. C. § 6321. Relying on the state law fiction that a tenant by the entirety has no separate interest in entireties property, the United States Court of Appeals for the Sixth Circuit held that such property is exempt from the tax lien. We conclude that, despite the fiction, each tenant possesses individual rights in the estate sufficient to constitute ‘property’ or ‘rights to property’ for the purposes of the lien, and reverse the judgment of the Court of Appeals.”

[535 U.S. 278] “Whether the interests of respondent's husband in the property he held as a tenant by the entirety constitutes ‘property and rights to property’ for the purposes of the federal tax lien statute, 26 U. S. C. § 6321, is ultimately a question of federal law. The answer to this federal question, however, largely depends upon state law. The federal tax lien statute itself ‘creates no property rights but merely attaches consequences, federally defined, to rights created under state law.’ United States v. Bess, 357 U. S. 51, 55 (1958) . . . . Accordingly, ‘[w]e look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as “property” or “rights to property” within the compass of the federal tax lien legislation.’ Drye v. United States, 528 U. S. 49, 58 (1999).”

[535 U.S. 278] “A common idiom describes property as a ‘bundle of sticks’ — a collection of individual rights which, in certain combinations, constitute property. . . . State law determines only which sticks are in a person's bundle. [535 U.S. 279] Whether those sticks qualify as ‘property’ for purposes of the federal tax lien statute is a question of federal law.”

[535 U.S. 279] “In looking to state law, we must be careful to consider the substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them. Such state law labels are irrelevant to the federal question of which bundles of rights constitute property that may be attached by a federal tax lien.”

[535 U.S. 279] “English common law provided three legal structures for the concurrent ownership of property that have survived into modern times: tenancy in common, joint tenancy, and tenancy by the entirety. . . . The tenancy in common is now the most common form of concurrent ownership. . . . The common law characterized tenants in common as each owning [535 U.S. 280] a separate fractional share in undivided property. . . . Tenants in common may each unilaterally alienate their shares through sale or gift or place encumbrances upon these shares. They also have the power to pass these shares to their heirs upon death. Tenants in common have many other rights in the property, including the right to use the property, to exclude third parties from it, and to receive a portion of any income produced from it.”

[535 U.S. 280] “The main difference between a joint tenancy and a tenancy in common is that a joint tenant also has a right of automatic inheritance known as ‘survivorship.’ Upon the death of one joint tenant, that tenant's share in the property does not pass through will or the rules of intestate succession; rather, the remaining tenant or tenants automatically inherit it. . . . In order for one tenant to alienate his or her individual interest in the tenancy, the estate must first be severed — that is, converted to a tenancy in common with each tenant possessing an equal fractional share.”

[535 U.S. 280] “A tenancy by the entirety is a unique sort of concurrent ownership that can only exist between married persons. [535 U.S. 281] . . . Because of the common-law fiction that the husband and wife were one person at law . . . Blackstone did not characterize the tenancy by the entirety as a form of concurrent ownership at all. Instead, he thought that entireties property was a form of single ownership by the marital unity. . . . Neither spouse was considered to own any individual interest in the estate; rather, it belonged to the couple.”

[535 U.S. 281] “Like joint tenants, tenants by the entirety enjoy the right of survivorship. Also like a joint tenancy, unilateral alienation of a spouse's interest in entireties property is typically not possible without severance. Unlike joint tenancies, however, tenancies by the entirety cannot easily be severed unilaterally. . . . Typically, severance requires the consent of both spouses . . . or the ending of the marriage in divorce . . . .”

[535 U.S. 281] “With the passage of the Married Women's Property Acts in the late 19th century granting women distinct rights with respect to marital property, most States either abolished the tenancy by the entirety or altered it significantly. . . . Michigan's version of the estate is typical of the modern tenancy by the entirety. Following Blackstone, Michigan characterizes its tenancy by the entirety as creating [535 U.S. 282] no individual rights whatsoever: ‘It is well settled under the law of this State that one tenant by the entirety has no interest separable from that of the other . . . . Each is vested with an entire title.’ Long v. Earle, 277 Mich. 505, 517, 269 N. W. 577, 581 (1936).”

[535 U.S. 282] “[Michigan law gave] respondent's husband . . . among other rights, the following rights with respect to the entireties property: the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally.”

[535 U.S. 283] “The statutory language authorizing the tax lien ‘is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.’ United States v. National Bank of Commerce, 472 U. S., at 719-720. ‘Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.’ Glass City Bank v. United States, 326 U. S. 265, 267 (1945). We conclude that the husband's rights in the entireties property fall within this broad statutory language.”

[535 U.S. 283] “Michigan law grants a tenant by the entirety some of the most essential property rights: the right to use the property, to receive income produced by it, and to exclude others from it. . . . These rights alone may be sufficient to subject the husband's interest in the entireties property to the federal tax lien. They gave him a substantial degree of control over the entireties property, and, as we noted in Drye, ‘in determining whether a federal taxpayer's state-law rights constitute “property” or “rights to property,” [t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property.’ 528 U. S., at 61 . . . .”

[535 U.S. 283] “The husband's rights in the estate, however, went beyond use, exclusion, and income. He also possessed the right to alienate (or otherwise encumber) the property with the consent of respondent, his wife. . . . It is true, as respondent notes, that he lacked the right to unilaterally alienate the [535 U.S. 284] property, a right that is often in the bundle of property rights. . . . There is no reason to believe, however, that this one stick — the right of unilateral alienation — is essential to the category of ‘property.’”

[535 U.S. 284] “This Court has already stated that federal tax liens may attach to property that cannot be unilaterally alienated. In United States v. Rodgers, 461 U. S. 677 (1983), we considered the Federal Government's power to foreclose homestead property attached by a federal tax lien. . . . We nonetheless stated that ‘[i]n the homestead context . . . , there is no doubt . . . that not only do both spouses (rather than neither) have an independent interest in the homestead property, but that a federal tax lien can at least attach to each of those interests.’ 461 U. S., at 703, n. 31 . . . .”

[535 U.S. 284] “Excluding property from a federal tax lien simply because the taxpayer does not have the power to unilaterally alienate it would, moreover, exempt a rather large amount of what is commonly thought of as property. It would exempt not only the type of property discussed in Rodgers, but also some community property. . . . [535 U.S. 285] Accordingly, the fact that respondent's husband could not unilaterally alienate the property does not preclude him from possessing ‘property and rights to property’ for the purposes of § 6321.”

[535 U.S. 285] “Respondent's husband also possessed the right of survivorship — the right to automatically inherit the whole of the estate should his wife predecease him. Respondent argues that this interest was merely an expectancy, which we suggested in Drye would not constitute ‘property’ for the purposes of a federal tax lien. . . . Drye did not decide this question, however, nor do we need to do so here. As we have discussed above, a number of the sticks in respondent's husband's bundle were presently existing. It is therefore not necessary to decide whether the right to survivorship alone would qualify as ‘property’ or ‘rights to property’ under § 6321.”

[535 U.S. 285] “That the rights of respondent's husband in the entireties property constitute ‘property’ or ‘rights to property’ ‘belonging to’ him is further underscored by the fact that, if the conclusion were otherwise, the entireties property would belong to no one for the purposes of § 6321. Respondent had no more interest in the property than her husband; if neither of them had a property interest in the entireties property, who did? This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system.”

[535 U.S. 287] “Respondent argues that, whether or not we would conclude that respondent's husband had an interest in the entireties property, legislative history indicates that Congress did not intend that a federal tax lien should attach to such an interest. . . . We have elsewhere held, however, that failed legislative proposals are ‘a particularly dangerous ground on which to rest an interpretation of a prior statute,’ Pension Benefit Guaranty Corporation v. LTV Corp., 496 U. S. 633, 650 (1990) . . . .”

[535 U.S. 288] “This background is not sufficient to overcome the broad statutory language Congress did enact, authorizing the lien to attach to ‘all property and rights to property’ a taxpayer might have.”

[535 U.S. 288] “We therefore conclude that respondent's husband's interest in the entireties property constituted ‘property’ or ‘rights to property’ for the purposes of the federal tax lien statute. We recognize that Michigan makes a different choice with respect to state law creditors . . . . But that by no means dictates our choice. The interpretation of 26 U. S. C. § 6321 is a federal question, and in answering that question we are in no way bound by state courts' answers to similar questions involving state law. As we elsewhere have held, ‘“exempt status under state law does not bind the federal collector.”’ Drye v. United States, 528 U. S., at 59.”

[535 U.S. 289] “We express no view as to the proper valuation of respondent's husband's interest in the entireties property, leaving this for the Sixth Circuit to determine on remand.”

[535 U.S. 289] “The judgment of the United States Court of Appeals for the Sixth Circuit is accordingly reversed, and the case is remanded for proceedings consistent with this opinion.”

[535 U.S. 289] “It is so ordered.”

[535 U.S. 289] “I join Justice Thomas's dissent, which points out (to no relevant response from the Court) that a State's decision to treat the marital partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members, is no more novel and no more ‘artificial’ than a State's decision to treat the commercial partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members.”

[535 U.S. 289] “I write separately to observe that the Court nullifies (insofar as federal taxes are concerned, at least) a form of prop[535 U.S. 290]erty ownership that was of particular benefit to the stay-at-home spouse or mother. She is overwhelmingly likely to be the survivor that obtains title to the unencumbered property; and she (as opposed to her business-world husband) is overwhelmingly unlikely to be the source of the individual indebtedness against which a tenancy by the entirety protects. It is regrettable that the Court has eliminated a large part of this traditional protection retained by many States.”

[535 U.S. 290] “The Court today allows the Internal Revenue Service (IRS) to reach proceeds from the sale of real property that did not belong to the taxpayer, respondent's husband, Don Craft, because, in the Court's view, he ‘possesse[d] individual rights in the [tenancy by the entirety] estate sufficient to constitute “property” or “rights to property” for the purposes of the lien’ created by 26 U. S. C. § 6321. Ante, at 276. The Court does not contest that the tax liability the IRS seeks to satisfy is Mr. Craft's alone, and does not claim that, under Michigan law, real property held as a tenancy by the entirety belongs to either spouse individually.”

[535 U.S. 301] “Just as I am unwilling to overturn this Court's longstanding precedent that States define and create property rights and forms of ownership, Aquilino, 363 U. S., at 513, n. 3, I am equally unwilling to redefine or dismiss as fictional forms of property ownership that the State has recognized in favor of an amorphous federal common-law definition of property. I respectfully dissent.”

Editorial note. This record is a research edition, not a substitute for the official reporter. It reproduces the Reporter of Decisions apparatus and reproduces the Court's own text in verbatim passages arranged under the Court's own numbered divisions, each bracketed with the official United States Reports page on which the passage appears. Passages set without quotation marks are Society prose; every quotation mark in this record encloses the Court's or the Reporter's words.

Editorial note. The Court-authored sections of this record are SELECTED EXCERPTS, not complete opinions. Four limitations are declared. First, the numbered footnotes of every opinion, including the substantial footnote 1 of Justice Thomas's dissent, are not reproduced. Second, Part I of the opinion of the Court, at pages 276 through 278, which states the facts and procedural history, is summarised in the Society's Facts and Procedural History sections rather than quoted. Third, the Court's answer to the dissents on the treatment of partnership property, at pages 286 and 287, and its discussion of the common-law background at page 288, appear here only in part. Fourth, the dissenting opinion of Justice Thomas, occupying pages 290 through 301, appears as its opening statement and closing paragraph with a Society summary of its argument; it is not reproduced in full.

Editorial note. Obvious typographic and scanning defects in the digitised bound volume — including the optical corruption of “overwhelmingly,” “tenants,” and several reporter section symbols in the transcription — have been silently corrected against the surrounding text; no substantive word has been altered, modernised, or paraphrased inside a quotation. For any purpose requiring the complete official text, consult the bound volume through the canonical source recorded with this authority.

Editorial note. Justice Scalia, joined by Justice Thomas, dissented on the ground that a State's treatment of the marital partnership as a distinct entity is no more artificial than its treatment of a commercial partnership, and objected that the decision destroys, for federal tax purposes, a protection historically valuable to the spouse who is not the source of the individual indebtedness.

Editorial note. Justice Thomas, joined by Justices Stevens and Scalia, dissented at greater length. He argued that Michigan law gives neither spouse an individual interest in entireties property; that under Aquilino v. United States, 363 U.S. 509 (1960), and its line, the definition of property interests is for the States, the federal question being only the consequences attached to interests state law has created; that the Court's 'bundle of sticks' method inverts that order by assembling a federal common-law definition of property out of incidents of the estate; and that the longstanding consensus in the lower courts, unaccompanied by evidence of widespread tax avoidance, refuted the majority's policy rationale.

Editorial note. A husband failed to pay assessed federal income tax liabilities, and a federal tax lien attached to all his property and rights to property under 26 U.S.C. § 6321. He and his wife held real property in Michigan as tenants by the entirety. After the notice of lien was filed, the spouses executed a quitclaim deed purporting to transfer his interest to the wife, and the property was later sold, half the net proceeds being placed in escrow pending determination of the Government's interest.

Editorial note. The wife sued to quiet title to the escrowed proceeds. The District Court granted the Government summary judgment; the Court of Appeals for the Sixth Circuit held that no lien had attached because, under Michigan law, the husband had no separate interest in entireties property, and remanded on an unrelated claim. On the second appeal the Sixth Circuit treated its earlier ruling as the law of the case. The Supreme Court granted certiorari, reversed, and remanded for determination of the value of the husband's interest.

Editorial note. The issue was whether a spouse's interest in property held in tenancy by the entirety is 'property' or a 'right to property' within 26 U.S.C. § 6321 when state law declares that neither spouse holds a separate interest. The Court held that it is: each tenant possesses individual rights in the estate sufficient to satisfy the statute. The rule that follows is that state law determines which rights a taxpayer holds, but federal law determines whether those rights amount to property for lien purposes, and a state-law label denying separate ownership does not control that federal question.

Editorial note. Justice O'Connor proceeded by the two-step method of Drye v. United States, 528 U.S. 49 (1999): look first to state law for the taxpayer's rights, then to federal law for their character. Treating property as a bundle of sticks, she enumerated the rights Michigan in fact confers on each tenant by the entirety — use, exclusion, income, survivorship, conversion to tenancy in common on divorce, sale or encumbrance with the other's consent, and the power to block unilateral disposition by the other — and held that these rights, particularly use, exclusion, and income, gave the husband a substantial degree of control. The absence of a power of unilateral alienation was not decisive, since United States v. Rodgers, 461 U.S. 677 (1983), had already permitted attachment to homestead property that could not be alienated alone, and community property would otherwise be exempt on the same reasoning. The Court declined to decide whether the survivorship right alone would suffice, and observed that the contrary conclusion would leave the property belonging to no one for § 6321 purposes.

Editorial note. Craft is the treatise's principal illustration of the analytical method by which the incidents of a concurrent estate, rather than the label a State attaches to it, determine its consequences under federal law. For the chapters on concurrent ownership it supplies the Court's own account of the three surviving common-law forms and of the modern statutory transformation of the tenancy by the entirety; for the chapters on creditors' claims it establishes that entireties property affords no shelter from the federal tax lien, whatever protection it retains against ordinary state-law creditors.

Editorial note. Followed. Applied routinely in federal tax-lien litigation concerning entireties property, and cited generally for the proposition that state-law characterisations and exemptions do not bind the federal collector. Its 'bundle of sticks' method remains standard in determining what state-created interests qualify as property for federal purposes.

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