United States v. Craft Case Analysis

In United States v. Craft, 535 U.S. 274 (2002), the U.S. Supreme Court held that the federal tax lien attaches to a taxpayer’s interest in entireties property even though Michigan law, like Florida’s, keeps that property away from the creditors of either spouse alone. The decision reversed the Sixth Circuit and departed from decades of lower-court rulings the other way.

The holding reaches only the federal tax lien. The Court’s reasoning rests on the broad federal lien statute and the federal government’s power to sweep aside state exemptions. Courts applying Florida law have refused to extend it to a creditor of one spouse. The vote was 6 to 3, with Justice Thomas writing for the dissenters.

The Michigan Tax Lien That Reached the Supreme Court

Don Craft did not file federal income tax returns for 1979 through 1986. In 1988 the IRS assessed $482,446 against him. When he did not pay, a federal tax lien arose by statute on all his property and rights to property. He and his wife, Sandra Craft, owned real estate in Grand Rapids, Michigan, as tenants by the entirety.

After the IRS filed notice of the lien, the couple signed a quitclaim deed transferring the husband’s interest to his wife for one dollar. When she tried to sell the property a few years later, the title search turned up the lien. The IRS agreed to release the lien so the sale could close, and half the net proceeds went into escrow until a court decided whether the government had any interest in them. Sandra Craft then sued to quiet title to the escrowed money.

The district court ruled for the government: the lien attached to the husband’s interest the moment the transfer ended the tenancy, entitling the IRS to half the property’s value. The Sixth Circuit reversed, holding that under Michigan law a tenant by the entirety has no separate interest for a lien to reach. A second appeal left that ruling in place as law of the case, and the Supreme Court agreed in 2001 to decide whether the husband had a separate interest the lien could reach.

The Holding: State Law Supplies the Rights, Federal Law Decides Whether They Are Property

The Supreme Court held that a taxpayer’s interest as a tenant by the entirety is “property” or “rights to property” to which the federal tax lien attaches. Justice O’Connor’s majority opinion answered the question in two steps taken from the Court’s 1999 decision in Drye v. United States.

The Court described property as a bundle of sticks, a collection of individual rights that in certain combinations constitute property. State law determines only which sticks are in a person’s bundle; whether those sticks add up to property for federal tax purposes is a federal question. Labels a state attaches to those rights do not control. The Court called Michigan’s rule that a tenant by the entirety has “no interest separable from that of the other” a state-law fiction (535 U.S. at 282).

Under Michigan law, Don Craft could use the property, exclude others from it, and take an equal share of any income it produced. He held a right of survivorship, and on divorce he would become a tenant in common holding an equal share. With his wife’s consent he could sell or encumber the property and take half the proceeds, and he could block her from doing either alone.

The Court said the rights to use the property, take its income, and exclude others might be enough on their own, because they gave him substantial control. It did not have to decide that, because his bundle went further.

The Court rejected the argument that property must be something the owner can sell alone. A federal tax lien already attaches to a Texas homestead that one spouse cannot sell without the other’s consent, and to a beneficiary’s interest in a spendthrift trust. Excluding everything a taxpayer cannot transfer alone would also exempt much community property. The Court did not decide whether the survivorship right by itself would qualify as property, because enough other rights were present.

If neither spouse held a property interest in entireties property, the Court reasoned, the property would belong to no one for federal tax purposes. Married couples could then shield assets from federal taxation by retitling them as entireties property. Congress considered writing entireties interests into the lien statute by name in 1954 and left the words out. The Court said that proved nothing: the Senate dropped them as superfluous.

The Court acknowledged that Michigan shields entireties property from state-law judgment creditors, but exempt status under state law does not bind the federal collector, and the Supremacy Clause lets the federal government sweep aside state-created exemptions. On how to value the husband’s interest, the Court expressed no view and sent that question back to the Sixth Circuit.

What the Three Dissenting Justices Argued

Justice Thomas, joined by Justices Stevens and Scalia, would have affirmed the Sixth Circuit because Michigan law gave Don Craft neither property nor rights to property that the lien could reach.

The dissent’s central objection was that the States define property interests and that the majority had created a new federal common law of property by disregarding Michigan’s definition of the estate. The dissent read Drye narrowly: it concerned state laws that disclaim or exempt an interest after it exists, and it never addressed whether an interest exists at all. The tax lien, the dissent said, steps into the taxpayer’s shoes and gets no more than the taxpayer had.

Justice Thomas also cited more than fifty years of federal decisions that had kept the lien off entireties property. Until this decision, the IRS’s own manual listed entireties property among the assets the lien could not reach.

Justice Scalia wrote a short separate dissent, joined by Justice Thomas, and both dissents drew a partnership comparison. A state that treats the marriage as a unit whose property cannot be encumbered for one member’s debts is doing nothing more artificial, in their view, than a state that treats a commercial partnership the same way. Justice Scalia added that the ruling removed a protection that served the stay-at-home spouse, who is usually the survivor and rarely the debtor.

Does Craft Let Ordinary Creditors Reach Entireties Property?

No: Craft rests on the federal tax lien statute and the government’s power to override state exemptions, and courts applying Florida law have confined it to the IRS.

The Eleventh Circuit faced the question two years later in In re Sinnreich, 391 F.3d 1295 (11th Cir. 2004). A creditor argued that a Chapter 13 debtor’s individual rights in Florida entireties property belonged in the bankruptcy estate under Craft‘s reasoning. The court refused: Craft rested on the unique powers Congress gave the IRS, and nothing in the opinion suggested the holding reached beyond tax collection. Extending it to bankruptcy creditors would make the Bankruptcy Code’s exemption for entireties property superfluous.

Florida’s Second District reached the same conclusion in Gibson v. Wells Fargo Bank, N.A., 255 So. 3d 944 (Fla. 2d DCA 2018). A bank holding a judgment against the husband alone tried to garnish a joint federal tax refund deposited in the couple’s entireties account. The bank argued that because the IRS can apportion a joint refund between spouses, the refund was never entireties property.

The court disagreed. Under the Beal Bank presumption, the refund was entireties property. The bank, in the court’s words, “is not the IRS and lacks the IRS’s special authority under the Internal Revenue Code.” A creditor of one spouse cannot borrow Craft to divide what Florida law treats as indivisible.

Other federal agencies do not automatically inherit the IRS’s position. Which federal creditors can reach Florida entireties property depends on the collecting agency’s own statute. The IRS can, and federal criminal forfeiture can. The Eleventh Circuit vacated the FTC’s attempt to reach an innocent spouse’s entireties home, and no court has held that the SEC can reach it. Craft leaves untouched the Florida decisions on how entireties protection is created and lost, collected in Florida’s tenancy by the entireties case law.

What Craft Means When One Spouse Owes the IRS

A federal tax lien against one spouse attaches to that spouse’s interest in entireties property whatever the asset, because the lien statute covers property “whether real or personal” and the Court’s reasoning turned on the rights a spouse holds. The Court did not say how to value the taxpayer’s interest, and it left open whether the survivorship right alone would count as property.

The Eleventh Circuit has since used Craft to shrink what a taxpayer spouse can shelter from a levy. In United States v. Ryals, 480 F.3d 1101 (11th Cir. 2007), the taxpayer argued that dividends he and his wife received as tenants by the entirety should not count as his income. The court disagreed. Because the dividends counted, his other income already exceeded the statutory exemption amount, so no part of his wages was exempt from the levy on them.

The district court’s first ruling treated the 1989 deed as the moment the lien fastened onto his half. The Sixth Circuit rejected that theory, and the Supreme Court had no need to adopt it, because it held the lien reached his interest in the entireties estate itself.

The lower courts had rejected the government’s fraudulent-conveyance claim only because they believed the lien could not attach. The Supreme Court observed that in future cases that question “will no doubt be answered differently” (535 U.S. at 289). A transfer of entireties property to the non-liable spouse after an assessment now invites a fraudulent-transfer challenge.

In Florida, tenancy by the entirety still protects a couple’s jointly owned property from a judgment creditor of one spouse, and Craft is the reason the IRS stands outside that rule. When both spouses owe the tax, the entireties question never arises: a creditor of both spouses can reach entireties property, a long-settled Florida rule that Beal Bank restated and the later decisions in Florida asset protection case law apply.

For planning, Craft leaves Florida couples where Beal Bank put them for every creditor but one. Jointly titled property stays beyond a single spouse’s creditors, and the IRS is the only civil creditor with a Supreme Court holding that lets it reach a taxpayer spouse’s interest. For a couple where one spouse carries federal tax exposure, entireties titling alone leaves that spouse’s interest open to the lien.

Because the holding construes the federal lien statute, it applies wherever a state recognizes the estate, and planning around a federal tax lien begins from the premise that the lien follows the taxpayer’s rights into jointly held property.