Tax Brake with Robert G. Nath, Esq.

The Supreme Court's case dealt with a Michigan couple; the husband (only) owed back taxes. The IRS filed a notice of federal tax lien, which by law attaches to “all” “property and rights to property” of the husband. Their home was owned tenants by the entirety. This is a legal fiction in which neither husband nor wife owns the home; instead “the entirety” of the two of them (as “one”) owns it. This age-old form of property ownership was invented specifically to protect widows' homes from the unpaid debts of husbands after the husband passes away. (Of course it works the other way around too.) If a home is owned TBE, creditors can't sell it for the debts of ONE spouse without her consent. Everyone understood that this meant the creditor's lien did not “attach” to the home. Even the IRS followed this logic - until now.

In Craft, the Supreme Court said that TBE is a “bundle” of property rights, such as the right to keep people out, the right to sell with consent, and others. Since state law recognizes those attributes as “property,” the federal tax lien in fact attaches to them.

In practice, this means that if a divorcing couple agrees to sell a home (where only the husband, or wife, owes back taxes), the IRS will be standing there with its hand out. That was NOT the case before. This scenario will arise often, such as the case where husband and wife divorce, and wife is awarded the home, with an agreement to sell.

The Craft case raises many new questions concerning its implications for other fact patterns. One thing seems reasonably clear (at least until the IRS pushes the NEXT case): Under Craft, the IRS cannot FORCE a sale of the residence. But once the residence is sold (even if there is a bank foreclosure), the IRS will not be in a position to be paid the tax delinquent's share.