[ OConnor ]
[ Scalia ]
[ Thomas ]
UNITED STATES, PETITIONER v. SANDRA L. CRAFT
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
[April 17, 2002]
Justice Thomas, with whom Justice Stevens and Justice Scalia join, dissenting.
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, respondents husband, Don Craft,1 because, in the Courts view, he possesse[d] individual rights in the [tenancy by the entirety] estate sufficient to constitute property and rights to property for the purposes of the lien created by 26 U.S.C. § 6321. Ante, at 1. The Court does not contest that the tax liability the IRS seeks to satisfy is Mr. Crafts alone, and does not claim that, under Michigan law, real property held as a tenancy by the entirety belongs to either spouse individually. Nor does the Court suggest that the federal tax lien attaches to particular rights to property held individually by Mr. Craft. Rather, borrowing the metaphor of property as a bundle of sticksa collection of individual rights which, in certain combinations constitute property, ante, at 4, the Court proposes that so long as sufficient sticks in the bundle of rights to property belong to a delinquent taxpayer, the lien can attach as if the property itself belonged to the taxpayer. Ante, at 11.
This amorphous construct ignores the primacy of state law in defining property interests, eviscerates the statutory distinction between property and rights to property drawn by §6321, and conflicts with an unbroken line of authority from this Court, the lower courts, and the IRS. Its application is all the more unsupportable in this case because, in my view, it is highly unlikely that the limited individual rights to property recognized in a tenancy by the entirety under Michigan law are themselves subject to lien. I would affirm the Court of Appeals and hold that Mr. Craft did not have property or rights to property to which the federal tax lien could attach.
Title 26 U.S.C. § 6321 provides that a federal tax lien attaches to all property and rights to property, whether real or personal, belonging to a delinquent taxpayer. It is uncontested that a federal tax lien 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) (construing the 1939 version of the federal tax lien statute). Consequently, the Governments lien under §6321 cannot extend beyond the property interests held by the delinquent taxpayer, United States v. Rodgers, 461 U.S. 677, 690691 (1983), under state law. Before today, no one disputed that the IRS, by operation of §6321, steps into the taxpayers shoes, and has the same rights as the taxpayer in property or rights to property subject to the lien. B. Bittker & M. McMahon, Federal Income Taxation of Individuals ¶44.5[a] (2d ed. 1995 and 2000 Cum. Supp.) (hereinafter Bittker). I would not expand
If the Grand Rapids property belong[ed] to Mr. Craft under state law prior to the termination of the tenancy by the entirety, the federal tax lien would have attached to the Grand Rapids property. But that is not this case. As the Court recognizes, pursuant to Michigan law, as under English common law, property held as a tenancy by the entirety does not belong to either spouse, but to a single entity composed of the married persons. See ante, at 67. Neither spouse has any separate interest in such an estate. Sanford v. Bertrau, 204 Mich. 244, 249, 169 N. W. 880, 882 (1918); see also Long v. Earle, 277 Mich. 505, 517, 269 N. W. 577, 581 (1936) (Each [spouse] is vested with an entire title and, as against the one who attempts alone to convey or incumber such real estate, the other has an absolute title). An entireties estate constitutes an indivisible sole tenancy. See Budwit v. Herr, 339 Mich. 265, 272, 63 N. W. 2d 841, 844 (1954); see also Tyler v. United States, 281 U.S. 497, 501 (1930) ([T]he tenants constitute a unit; neither can dispose of any part of the estate without the consent of the other; and the whole continues in the survivor). Because Michigan does not recognize a separate spousal interest in the Grand Rapids property, it did not belong to either respondent or her husband individually when the IRS asserted its lien for Mr. Crafts individual tax liability. Thus, the property was not property to which the federal tax lien could attach for Mr. Crafts tax liability.
The Court does not dispute this characterization of Michigans law with respect to the essential attributes of the tenancy by the entirety estate. However, relying on Drye v. United States, 528 U.S. 49, 59 (1999), which in turn relied upon United States v. Irvine, 511 U.S. 224 (1994), and United States v. Mitchell, 403 U.S. 190 (1971), the Court suggests that Michigans definition of the tenancy by the entirety estate should be overlooked because federal tax law is not controlled by state legal fictions concerning property ownership. Ante, at 4. But the Court misapprehends the application of Drye to this case.
Drye, like Irvine and Mitchell before it, was concerned not with whether state law recognized property as belonging to the taxpayer in the first place, but rather with whether state laws could disclaim or exempt such property from federal tax liability after the property interest was created. Drye held only that a state-law disclaimer could not retroactively undo a vested right in an estate that the taxpayer already held, and that a federal lien therefore attached to the taxpayers interest in the estate. 528 U.S., at 61 (recognizing that a disclaimer does not restore the status quo ante because the heir determines who will receive the propertyhimself if he does not disclaim, a known other if he does). Similarly, in Irvine, the Court held that a state law allowing an individual to disclaim a gift could not force the Court to be struck blind to the fact that the transfer of property or property rights for which the gift tax was due had already occurred; state property transfer rules do not transfer into federal taxation rules. 511 U.S., at 239240 (emphasis added). See also Mitchell, supra, at 204 (holding that right to renounce a marital interest under state law does not indicate that the taxpayer had no right to property before the renunciation).
Extending this Courts state law fiction jurisprudence to determine whether property or rights to property exist under state law in the first place works a sea change in the role States have traditionally played in creating and defining property interests. By erasing the careful line between state laws that purport to disclaim or exempt property interests after the fact, which the federal tax lien does not respect, and state laws definition of property and property rights, which the federal tax lien does respect, the Court does not follow Drye, but rather creates a new federal common law of property. This contravenes the previously settled rule that the definition and scope of property is left to the States. See Aquilino, supra, at 513, n. 3 (recognizing unsoundness of leaving the definition of property interests to a nebulous body of federal law, because it ignores the long-established role that the States have played in creating property interests and places upon the courts the task of attempting to ascertain a taxpayers property rights under an undefined rule of federal law).
That the Grand Rapids property does not belong to Mr. Craft under Michigan law does not end the inquiry, however, since the federal tax lien attaches not only to property but also to any rights to property belonging to the taxpayer. While the Court concludes that a laundry list of rights to property belonged to Mr. Craft as a tenant by the entirety,2 it does not suggest that the tax lien attached to any of these particular rights.3 Instead, the Court gathers these rights together and opines that there were sufficient sticks to form a bundle, so that respondents husbands interest in the entireties property constituted property or rights to property for the purposes of the federal tax lien statute. Ante, at 11, 13.
But the Courts sticks in a bundle metaphor collapses precisely because of the distinction expressly drawn by the statute, which distinguishes between property and rights to property. The Court refrains from ever stating whether this case involves property or rights to property even though §6321 specifically provides that the federal tax lien attaches to property and rights to property belonging to the delinquent taxpayer, and not to an imprecise construct of individual rights in the estate sufficient to constitute property and rights to property for the purposes of the lien. Ante, at 1.4
In contrast, a tenant in a tenancy by the entirety not only lacks a present divisible vested interest in the property and control with respect to the sale, encumbrance, and transfer of the property, but also does not possess the ability to devise any portion of the property because it is subject to the others indestructible right of survivorship. Rogers v. Rogers, 136 Mich. App. 125, 135137, 356 N. W. 2d 288, 293294 (1984). This latter fact makes the property significantly different from community property, where each spouse has a present one-half vested interest in the whole, which may be devised by will or otherwise to a person other than the spouse. See 4 G. Thompson, Real Property §37.14(a) (D. Thomas ed. 1994) (noting that a married persons power to devise one-half of the community property is consistent with the fundamental characteristic of community property: community ownership means that each spouse owns 50% of each community asset).7 See also Drye, 528 U.S., at 61 ([I]n determining whether a federal taxpayers state-law rights constitute property or rights to property, the important consideration is the breadth of the control the taxpayer could exercise over the property (emphasis added, citation and brackets omitted).
It is clear that some of the individual rights of a tenant in entireties property are primarily personal, dependent upon the taxpayers status as a spouse, and similarly not susceptible to a tax lien. For example, the right to use the property in conjunction with ones spouse and to exclude all others appears particularly ill suited to being transferred to another, see ibid., and to lack exchangeable value, id., at 56.
Nor do other identified rights rise to the level of rights to property to which a §6321 lien can attach, because they represent, at most, a contingent future interest, or an expectancy that has not ripen[ed] into a present estate. Id., at 60, n. 7 (Nor do we mean to suggest that an expectancy that has pecuniary value and is transferable under state law would fall within §6321 prior to the time it ripens into a present estate). Cf. Bess, 357 U.S., at 5556 (holding that no federal tax lien could attach to proceeds of the taxpayers life insurance policy because [i]t would be anomalous to view as property subject to lien proceeds never within the insureds reach to enjoy). By way of example, the survivorship right wholly depends upon one spouse outliving the other, at which time the survivor gains substantial rights, in respect of the property, theretofore never enjoyed by [the] survivor. Tyler, 281 U.S., at 503. While the Court explains that it is not necessary to decide whether the right to survivorship alone would qualify as property or rights to property
Similarly, while one spouse might escape the absolute limitations on individual action with respect to tenancy by the entirety property by obtaining the right to one-half of the property upon divorce, or by agreeing with the other spouse to sever the tenancy by the entirety, neither instance is an event of sufficient certainty to constitute a right to property for purposes of §6321. Finally, while the federal tax lien could arguably have attached to a tenants right to any rents, products, income, or profits of real property held as tenants by the entirety, Mich. Comp. Laws Ann. §557.71 (West 1988), the Grand Rapids property created no rents, products, income, or profits for the tax lien to attach to.
In any event, all such rights to property, dependent as they are upon the existence of the tenancy by the entirety estate, were likely destroyed by the quitclaim deed that severed the tenancy. See n. 1, supra. Unlike a lien attached to the property itself, which would survive a conveyance, a lien attached to a right to property falls squarely within the maxim that the tax collector not only steps into the taxpayers shoes but must go barefoot if the shoes wear out. Bittker ¶44.5[a] (noting that a state judgment terminating the taxpayers rights to an asset also extinguishes the federal tax lien attached thereto). See also Elliott ¶9.09[d][i] (explaining that while a tax lien may attach to a taxpayers option on property, if the option terminates, the Governments lien rights would terminate as well).
Accordingly, I conclude that Mr. Craft had neither property nor rights to property to which the federal tax lien could attach.
That the federal tax lien did not attach to the Grand Rapids property is further supported by the consensus among the lower courts. For more than 50 years, every federal court reviewing tenancies by the entirety in States with a similar understanding of tenancy by the entirety as Michigan has concluded that a federal tax lien cannot attach to such property to satisfy an individual spouses tax liability.8 This consensus is supported by the IRS consistent recognition, arguably against its own interest, that a federal tax lien against one spouse cannot attach to property or rights to property held as a tenancy by the entirety.9
That the Court fails to so much as mention this consensus, let alone address it or give any reason for overruling it, is puzzling. While the positions of the lower courts and the IRS do not bind this Court, one would be hard pressed to explain why the combined weight of these judicial and administrative sourcesincluding the IRS instructions to its own employeesdo not constitute relevant authority.
Finally, while the majority characterizes Michigans view that the tenancy by the entirety property does not belong to the individual spouses as a state law fiction, ante, at 1, our precedents, including Drye, 528 U.S., at 5860, hold that state, not federal, law defines property interests. Ownership by the marriage is admittedly a fiction of sorts, but so is a partnership or corporation. There is no basis for ignoring this fiction so long as federal law does not define property, particularly since the tenancy by the entirety property remains subject to lien for the tax liability of both tenants.
Nor do I accept the Courts unsupported assumption that its holding today is necessary because a contrary result would facilitat[e] abuse of the federal tax system. Ante, at 11. The Government created this straw man, Brief for United States 3032, suggesting that the property transfer from the tenancy by the entirety to respondent was somehow improper, see id., at 3031, n. 20 (characterizing scope of [t]he tax avoidance scheme sanctioned by the court of appeals in this case), even though it chose not to appeal the lower courts contrary assessment. But the longstanding consensus in the lower courts that tenancy by the entirety property is not subject to lien for the tax liability of one spouse, combined with the Governments failure to adduce any evidence that this has led to wholesale tax fraud by married individuals, suggests that the Courts policy rationale for its holding is simply
Just as I am unwilling to overturn this Courts 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.
1. The Grand Rapids property was tenancy by the entirety property owned by Mr. and Mrs. Craft when the tax lien attached, but was conveyed by the Crafts to Mrs. Craft by quitclaim deed in 1989. That conveyance terminated the entirety estate. Mich. Comp. Laws Ann. §557.101 (West 1988); see also United States v. Certain Real Property Located at 2525 Leroy Lane, 910 F.2d 343, 351 (CA6 1990). The District Court and Court of Appeals both held that the transfer did not constitute a fraudulent conveyance, a ruling the Government has not appealed. The IRS is undoubtedly entitled to any proceeds that Mr. Craft received or to which he was entitled from the 1989 conveyance of the tenancy by the entirety property for $1.00; at that point the tenancy by the entirety estate was destroyed and at least half of the proceeds, or 50 cents, was property or rights to property belonging to Mr. Craft. By contrast, the proceeds that the IRS claims here are from Mrs. Crafts 1992 sale of the property to a third party. At the time of the sale, she owned the property in fee simple, and accordingly Mr. Craft neither received nor was entitled to these funds.
2. The parties disagree as to whether Michigan law recognizes the rights to property identified by the Court as individual rights belonging to each tenant in entireties property. Without deciding a question better resolved by the Michigan courts, for the purposes of this case I will assume, arguendo, that Michigan law recognizes separate interests in these rights to property.
3. Nor does the Court explain how such rights to property survived the destruction of the tenancy by the entirety, although, for all intents and purposes, it acknowledges that such rights as it identifies exist by virtue of the tenancy by the entirety estate. Even Judge Ryans concurrence in the Sixth Circuits first ruling in this matter is best read as making the Federal Governments right to execute its lien dependent upon the factual finding that the conveyance was a fraudulent transaction. See 140 F.3d 638, 648649 (1998).
4. The Courts reasoning that because a taxpayer has rights to property a federal tax lien can attach not only to those rights but also to the property itself could have far-reaching consequences. As illustration, in the partnership setting as elsewhere, the Governments lien under §6321 places the Government in no better position than the taxpayer to whom the property belonged: [F]or example, the lien for a partners unpaid income taxes attaches to his interest in the firm, not to the firms assets. Bittker ¶44.5[a]. Though partnership property currently is not subject to attachment or execution, except on a claim against the partnership, Rev. Rul. 7324, 19731 Cum. Bull. 602; cf. United States v. Kaufman, 267 U.S. 408 (1925), under the logic of the Courts opinion partnership property could be attached for the tax liability of an individual partner. Like a tenant in a tenancy by the entirety, the partner has significant rights to use, enjoy, and control the partnership property in conjunction with his partners. I see no principled way to distinguish between the propriety of attaching the federal tax lien to partnership property to satisfy the tax liability of a partner, in contravention of current practice, and the propriety of attaching the federal tax lien to tenancy by the entirety property in order to satisfy the tax liability of one spouse, also in contravention of current practice. I do not doubt that a tax lien may attach to a partners partnership interest to satisfy his individual tax liability, but it is well settled that the lien does not, thereby, attach to property belonging to the partnership. The problem for the IRS in this case is that, unlike a partnership interest, such limited rights that Mr. Craft had in the Grand Rapids property are not the kind of rights to property to which a lien can attach, and the Grand Rapids property itself never belong[ed] to him under Michigan law.
5. Even such rights as Mr. Craft arguably had in the Grand Rapids property bear no resemblance to those to which a federal tax lien has ever attached. See W. Elliott, Federal Tax Collections, Liens, and Levies ¶¶9.09[a][f] (1995 and 2000 Cum. Supp.) (hereinafter Elliott) (listing examples of rights to property to which a federal tax lien attaches, such as the right to compel payment; the right to withdraw money from a bank account, or to receive money from accounts receivable; wages earned but not paid; installment payments under a contract of sale of real estate; annuity payments; a beneficiarys rights to payment under a spendthrift trust; a liquor license; an easement; the taxpayers interest in a timeshare; options; the taxpayers interest in an employee benefit plan or individual retirement account).
7. And it is similarly different from the situation in United States v. Rodgers, 461 U.S. 677 (1983), where the question was not whether a vested property interest in the family home to which the federal tax lien could attach belong[ed] to the taxpayer. Rather, in Rodgers, the only question was whether the federal tax lien for the husbands tax liability could be foreclosed against the property under 26 U.S.C. § 7403 despite his wifes homestead right under state law. See 461 U.S., at 701703, and n. 31.
8. See IRS v. Gaster, 42 F.3d 787, 791 (CA3 1994) (concluding that the IRS is not entitled to a lien on property owned as a tenancy by the entirety to satisfy the tax obligations of one spouse); Pitts v. United States, 946 F.2d 1569, 15711572 (CA4 1991) (same); United States v. American Nat. Bank of Jacksonville, 255 F.2d 504, 507 (CA5), cert. denied, 358 U.S. 835 (1958) (same); Raffaele v. Granger, 196 F.2d 620, 622623 (CA3 1952) (same); United States v. Hutcherson, 188 F.2d 326, 331 (CA8 1951) (explaining that the interest of one spouse in tenancy by the entirety property is not a right to property or property in any sense); United States v. Nathanson, 60 F. Supp. 193, 194 (ED Mich. 1945) (finding no designation in the Federal Revenue Act for imposing tax upon property held by the entirety for taxes due from one person alone); Shaw v. United States, 94 F. Supp. 245, 246 (WD Mich. 1939) (recognizing that the nature of the estate under Michigan law precludes the tax lien from attaching to tenancy by the entirety property for the tax liability of one spouse). See also Benson v. United States, 442 F.2d 1221, 1223 (CADC 1971) (recognizing the Governments concession that property owned by the parties as tenants by the entirety cannot be subjected to a tax lien for the debt of one tenant); Cole v. Cardoza, 441 F.2d 1337, 1343 (CA6 1971) (noting Government concession that, under Michigan law, it had no valid claim against real property held by tenancy by the entirety).
9. See, e.g., Internal Revenue Manual §220.127.116.11.3 (RIA 2002), available at WESTLAW, RIAIRM database (Mar. 29, 2002) (listing property owned as tenants by the entirety as among the assets beyond the reach of the Governments tax lien); id., §18.104.22.168.3 (recognizing that a consensual lien may be appropriate when the federal tax lien does not attach to the property in question. For example, an assessment exists against only one spouse and the federal tax lien does not attach to real property held as tenants by the entirety.); IRS Chief Counsel Advisory (Aug. 17, 2001) (noting that consensual liens, or mortgages, are to be used as a means of securing the Governments right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety (emphasis added)); IRS Litigation Bulletin No. 407 (Aug. 1994) (Traditionally, the government has taken the view that a federal tax lien against a single debtor-spouse does not attach to property or rights to property held by both spouses as tenants by the entirety.); IRS Litigation Bulletin No. 388 (Jan. 1993) (explaining that neither the Department of Justice nor IRS chief counsel interpreted United States v. Rodgers, 461 U.S. 677 (1983), to mean that a federal tax lien against one spouse encumbers his or her interest in entireties property, and noting that it do[es] not believe the Department will again argue the broader interpretation of Rodgers, which would extend the reach of the federal tax lien to property held by the entireties); Benson, supra, at 1223; Cardoza, supra, at 1343.