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By David I. Kempler, Esq., and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
In U.S. v. Barczyk, No. 10-1498 (6th Cir. 8/17/11), the Sixth Circuit found that the federal government could force the sale of real property held as tenants by the entirety where only one spouse was delinquent and that the sale proceeds should be distributed equally between the federal government and the non-delinquent spouse. Accordingly, not only can joint creditors reach property held as tenants by the entirety, the federal government can also force a sale of property held as tenants by the entirety that is subject to a federal tax lien even if only one spouse is delinquent.
Since 1979, Husband and Wife owned a residence in Troy, Michigan ("the Troy Property"), as tenants by the entireties. The Troy Property was free and clear of debt, and worth approximately $200,000. From 1996 to 2006, inclusive, Husband and Wife filed individual federal tax returns under the status of "married filing separately." During this period, Husband failed to pay large amounts of federal income taxes. As a result, several tax liens were created in favor of the federal government, which attached to Husband's property and property rights, including the Troy Property. In March 2009, the federal government brought an action to have the Troy Property foreclosed and sold, with proceeds distributed according to the parties' respective interests.
Wife filed a motion for summary judgment seeking a determination that the federal government could not "legally order the sale of the Property, because such a sale would, in violation of law, depriv[e] her of her survivorship expectancy in the Property." In the alternative, if the court determined that the Troy Property could be foreclosed and sold, Wife sought a determination that instead of splitting the proceeds of the sale equally between herself and the federal government, she should receive a larger percentage based on her actuarial expectancy. The district court found that the federal government was authorized to foreclose on its tax liens against Husband and that Wife was entitled only to half of the proceeds from any such judicial sale.
Under §6321, if an individual fails to pay outstanding taxes after a demand, the federal government may place a lien "upon all property and rights to property, whether real or personal, belonging to such person." The federal government may then enforce the lien in court under §7403(a) and (b). If the court finds in favor of the federal government, then, under §7403(c), the court may enforce the lien by directing sale of the property, with the proceeds of the sale being distributed in respect to the interests of the parties and of the federal government. Tenancy by the entireties is a form of ownership, available only to married couples, which provides each spouse an indivisible right to use the whole property. Accordingly, a creditor of one spouse cannot force the sale of either spouses interest because to do so would affect the other spouse's enjoyment of the whole property.
While the definition of underlying property interests is governed by state law, in connection with a federal tax lien, the consequences that attach to those interests are governed by federal law.1 Under Michigan law, spouses with a tenancy by the entirety have equal rights to the marital residence.2 Each spouse has certain individual rights with respect to the marital residence, including "the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the [other spouse's] consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the [other spouse's] consent, and the right to block [the other spouse] from selling or encumbering the property unilaterally."3 In U.S. v. Craft, the Supreme Court, looking to Michigan law, determined that tenants by the entirety each hold a number of property rights in entireties property and that those rights qualify as "property" or "rights to property" for the purposes of the federal tax-lien statute under §6321, and therefore, tax liens may attach.4 Moreover, in U.S. v. Rodgers, the Supreme Court held that once a tax lien properly attaches to jointly-held marital property a district court may order a forced sale of that property.5 However, neither Craft nor Rodgersaddressed whether, once a federal tax lien attaches to a tenancy-by-the-entirety property, a court may order foreclosure and forced the sale of the property pursuant to §7403 over the objections of the non-delinquent spouse.
After the parties filed their principal briefs in this case, a panel of the Sixth Circuit decided U.S. v. Barr, which affirmed a district court's order of foreclosure and forced the sale of property owned by spouses as tenants by the entirety under Michigan law. Although the court in Barr did not directly address the argument that foreclosure and forced sale is not available under §7403 in any case involving a tenancy by the entirety where only one spouse owes unpaid taxes, the Sixth Circuit stated that implicit in reaching the issue of the proper valuation of the non-delinquent spouse's interest in the share of the foreclosure-sale proceeds was the understanding that there was no bar to ordering a forced sale of entireties property over the objection of a non-delinquent spouse. Accordingly, the Sixth Circuit affirmed the order of the district court permitting the government to foreclose and sell the Property.
The Sixth Circuit then turned to Wife's argument that, if a forced sale was permitted, she was entitled to more than 50% of the proceeds because, actuarially, she was likely to outlive her husband and thus has a greater probability of receiving the survivorship interest. The Sixth Circuit held that this argument was foreclosed by the ruling in Barr,which provided for a presumption of equal division of the foreclosure-sale proceeds absent a showing of a compelling reason to divide otherwise.6 However, the Sixth Circuit found that Wife had presented no compelling reason for departing from the presumption of equal division, noting particularly that Husband and Wife had only a five-year age difference.
Advisors often recommend that married couples own their residence as tenants by the entirety because of the creditor protections afforded. However, in advising clients, it is important to note that joint creditors can always reach property held tenants by the entirety. Additionally, in light of the decisions in Barrand Barczyk, clients should also be advised that in the event that a tax lien is imposed on either spouse, the federal government can force a sale and that regardless of relative contributions to the purchase of the home or life expectancy, a non-delinquent spouse will receive only 50% of the proceeds of sale.
For more information, in the Tax Management Portfolios, see Mather and Weisman, 637 T.M., Federal Tax Collection Procedure — Liens, Levies, Suits and Third Party Liability, and in Tax Practice Series, see ¶3870, Collection of Tax.
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