Tenancy by entirety property subject to federal tax lien for taxes owed by one spouse only 4/24/02 12/2/06
Previous to U.S. v. Craft, 122 S.Ct. 1414, 2002-1 USTC ¶50,361, 2002 WL 561332 (U.S. April 17, 2002), it had been generally held that a federal tax lien did not attach to tenancy by the entirety property because unilateral alienation of one spouse's interest in entireties property is typically not possible without severance; typically, requiring the consent of both spouses or the ending of the marriage in divorce or death. In Craft, the Supreme Court held that the federal tax lien for taxes owed by only one spouse could attach to their partial interest in tenancy by the entirety property.
Subsequent to Craft, in Hatchett v. U.S., 2003-1 USTC ¶50,504, rev'g 2000-1 USTC ¶50,455 (DC Mich., June 4, 2003), the 6th Circuit found that: Craft could be applied retroactively; the government could seize and sell the properties because they could not be divided, and could collect a portion of the sale proceeds; and on remand could present its nominee and lien-tracing theories in order to determine the exact (and arguably greater) value of the government's interest in the properties.
Taxpayer-husband-debtor's argument that he because he was older than his wife and men died younger, he had less than a 50% interest in the tenancy by the entirety property based on his shorter life expectancy was rejected (wife was not liable for the taxes in issue). In re Jerry Gallivan and Jeannette Gallivan, Debtors, 2004-2 USTC ¶50,386, U.S. Bankruptcy Court, West. Dist. Mo.; 03-60525, July 23, 2004.
Notice 2003-60, IRB 2003-39, 9/29/03. Collection Issues Related to Entireties Property. Partial overview:
- As a general rule, the value of the taxpayer’s interest in entireties property will be deemed to be one-half.
- Because of the potential adverse consequences to taxpayer's non-liable spouse the use of lien foreclosure for entireties property subject to the federal tax lien will be determined on a case-by-case basis.
- As administrative policy, under certain circumstances and with respect to certain interests created before Craft, the Service will not apply Craft to the detriment of 3rd parties who may have reasonably relied on the belief that state law prevented the attachment of the federal tax lien.
- The administrative sale of entireties property subject to the federal tax lien presents practical problems that limit the usefulness of the Service’s seizure and sale procedures. Levying on cash and cash equivalents held as entireties property is considerably less problematic and will be used by the Service in appropriate cases.
- Where there has been a sale or other transfer of entireties property subject to the federal tax lien to the non-liable spouse or a 3rd party without discharge of the lien, the lien thereafter encumbers a one-half interest in the property held by the transferee.