Craft: Federal Tax Liens Can Reach State-Law Rights in Entireties Property

Review the primary official source.

Decision: United States v. Craft, 535 U.S. 274 (2002).

Can property escape a federal tax lien because one spouse cannot sell it without the other’s consent? United States v. Craft answered no on the Michigan rights presented. The Court rejected the claimed exemption without deciding that the taxpayer’s share was worth half the property or that survivorship alone would support a lien. Those limits matter as much as the attachment holding.

The escrow dispute was about attachment, not a fixed half share

Don and Sandra Craft held Michigan real estate as tenants by the entirety. After notice of Don’s federal tax lien was filed, they signed a deed transferring his interest to Sandra for one dollar. When she later sought to sell, the IRS agreed to release the lien while half the net proceeds remained in escrow. Sandra’s quiet-title action contested the government’s claim to those proceeds. The escrow arrangement preserved the dispute; it did not establish the Supreme Court’s eventual valuation. 535 U.S. at 276–78, 289.

Why the inability to sell alone was not decisive

Michigan gave each spouse present rights to occupy the property, exclude outsiders, and receive income. Each could participate in a sale or mortgage with the other’s consent, and each could block the other from acting alone. Divorce generally produced equal interests as tenants in common. Those incidents of ownership supplied substantial control even though neither spouse could sell alone. Federal law then classified the rights for section 6321; Michigan’s label did not make the substantive rights disappear. 535 U.S. at 278–83.

The majority treated the missing power of unilateral sale as one absent ownership right, not a universal exemption. It pointed to homestead and community-property arrangements that also restrict a married owner’s ability to sell alone. Indeed, the opinion cited California’s community-property consent rule as an illustration. For a California home, examine the applicable ownership rules, debt exposure and collection procedures separately. 535 U.S. at 283–85.

Why survivorship alone remained undecided

Sandra argued that Don’s survivorship right—the right to take the whole estate if Sandra died first—was merely an expectancy. The Court did not decide whether survivorship alone would count as property for a federal tax lien. Don already held present rights of use, exclusion, income, and participation in disposition. The holding rested on that collection of existing rights. A case involving only a future expectancy would therefore require an analysis this opinion expressly left open. 535 U.S. at 285.

The rejected legislative-history argument

A second defense relied on Congress’s failure to adopt language expressly mentioning entireties interests in 1954. The majority found that inference unreliable: The proposal could have been viewed as clarifying existing coverage, and its deletion as unnecessary rather than as an exemption. The uncertain history did not overcome the broad property language Congress enacted. 535 U.S. at 287–88.

The Court reversed and remanded without valuing Don’s interest. It also noted an unusual procedural limit: The government had not sought Supreme Court review of the ruling that the conveyance was not fraudulent. Neither the escrow’s half-share arrangement nor the discussion of future conveyances should be mistaken for a valuation holding or an adjudication reopening that unreviewed ruling. 535 U.S. at 289.

For a practical evidence checklist, see Federal Tax Lien on Joint Property: Inventory Each Spouse’s Rights.

Justice Thomas, joined by Justices Stevens and Scalia, dissented. He treated Michigan’s entireties estate as property of the marital unit, rather than property belonging to either spouse separately. He argued that federal law could attach consequences to state-created interests but could not create individual ownership by collecting several limited rights into a bundle. He also questioned whether the husband’s personal and contingent rights could themselves be transferred or sold. Justice Scalia separately compared the marital unit with a commercial partnership and stressed the protection the arrangement gave the nondebtor spouse. The majority instead found the husband’s existing rights sufficient for lien attachment. Craft, 535 U.S. at 289–301 (dissenting opinions).

Separate the questions the Court actually resolved

• Identify present ownership rights separately from an asserted future expectancy.
• Do not treat the need for a spouse’s consent as proof that the taxpayer has no property interest.
• Keep attachment, valuation, sale, and allocation of proceeds separate; Craft did not decide all four.
• Use the actual state’s ownership rules and current federal collection procedures for a new dispute.

Related reading: Tax services; Tax procedure FAQ; FTB appeal guide.

Discussed in: California FTB Tax Liens: Payoff, Release, and Property-Sale Records.