UNITED STATES v. CRAFT
When Don Craft failed to pay federal income tax liabilities for the failure to file federal income tax returns for the years 1979 through 1986, a federal tax lien attached to "all [of his] property and rights to property," pursuant to 26 USC section 6321. After the notice of the lien was filed, Dan and his wife Sandra L. Craft jointly executed a quitclaim deed purporting to transfer to her his interest in a piece of real property in Michigan that they owned as tenants by the entirety. Subsequently, the Internal Revenue Service (IRS) agreed to release the lien and allow the Crafts to sell the property with half the net proceeds to be held in escrow pending determination of the Government's interest in the property. After Sandra brought an action to quiet title to the escrowed proceeds, the Government claimed that its lien had attached to the husband's interest in the tenancy by the entirety. The District Court granted the Government summary judgment. The Court of Appeals, however, held that no lien attached because the husband had no separate interest in the entireties property under Michigan law.
Does a tenant by the entirety possess property or rights to property to which a federal lien may attach?
Legal provision: Internal Revenue Code
Yes. In a 6-3 opinion delivered by Justice Sandra Day O'Connor, the Court held that each tenant possesses individual rights in the estate sufficient to constitute "property" or "rights to property" for the purposes of the lien. By determining that Michigan law granted the husband the right to use the property, the right to receive income produced by it, the right to exclude others from it, the non-unilateral right to alienate the property, and the right of survivorship, Justice O'Connor reasoned that the rights Michigan law granted to the husband as a tenant by the entirety qualified as "property" or "rights to property" under section 6321 and, therefore, the federal tax lien could attach to the husband's property. Justice Antonin Scalia filed a dissenting opinion, in which Justice Clarence Thomas joined. Justice Thomas also filed a dissenting opinion, in which Justices Scalia and John Paul Stevens joined.
ORAL ARGUMENT OF KENT L. JONES ON BEHALF OF THE PETITIONER
Chief Justice Rehnquist: We'll hear argument now in Number 00-1831, United States v. Sandra Craft.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
The question in this case is whether the Federal tax lien that applies by operation of law to all property and rights to property of a delinquent taxpayer attaches to the interest of that taxpayer in a tenancy by the entirety.
The taxpayer in this case was an attorney who, for 10 years, failed to file a Federal income tax return and accumulated a Federal tax obligation of approximately half a million dollars.
At the time the taxes were assessed and the notice of tax lien was filed, the taxpayer owned a real property in a joint tenancy by the entirety with his wife.
He then conveyed his interest in that property to his wife for $1, and when his wife then sought to sell the property the tax lien appeared in the title record.
Mr. Sutton: Now, tell us about the fraudulent conveyance proceeding.
Does the fraudulent conveyance holding, or finding, make no difference one way or the other?
If it was a fraudulent conveyance the husband has the property... you can... well, if it was a fraudulent conveyance, you can pursue the property, and if it wasn't, the lien is still there anyway under your theory.
Is that the way it works?
Mr. Jones: I think that we would say that the lien, the question of the validity of the lien is the first question.
If the lien is valid you don't need to address the fraudulent conveyance question.
Indeed, we haven't presented the fraudulent--
Mr. Sutton: Right.
Mr. Jones: --conveyance question in this case.
If the lien were not valid, it would still be possible to go after property in certain circumstances if there had been a fraudulent conveyance, but on this record we're not challenging the determination that as a matter of State law there was not a fraudulent conveyance, except for this fraudulent enhancement portion that the court awarded.
Mr. Sutton: Mr. Jones, as part of the background, how did it come about that it's only the taxpayer who has the liability?
Did she file separate returns, or was she an innocent spouse?
Mr. Jones: In this case, the taxpayer is the husband.
The husband was an attorney, and he filed no return, and when... there's two ways for this issue to come up.
Either spouse may file either no return, or file only a separate return.
It's only when they file a joint return that they are jointly and severally liable for the tax obligation, so if, as in this case, the taxpayer simply files no return at all, then the obligation is exclusively that... the tax obligation is that of the nonfiler, in this case the husband.
Indeed, Judge Ryan pointed out in his separate opinion that the decision of this Court, of the court of appeals is very amenable to abuse, because on this theory both spouses can earn income, neither of them can file a return, or they can both file a separate return, and then they can put all of their real and personal property in a tenancy by the entirety, including stocks and bonds in States like Michigan and Maryland, and claim a complete exemption of all of their property from Federal tax obligations.
Mr. Sutton: --some penalties for failing to file a return?
Mr. Jones: --There are some penalties, but the penalties, like taxes, have to be enforced against the property of the taxpayer, and if the taxpayer is allowed to exempt all of its property in this fashion, then there's literally no way that the taxes can be enforced through civil procedures.
Mr. Sutton: What about criminal procedures?
Are there any criminal procedures for--
Mr. Jones: I--
Mr. Sutton: --failure, continued failure to file--
Mr. Jones: --Of course, if you file a return, then you're not exposing yourself to any criminal obligations, and if you don't file a return, it would be... I'm not familiar with a statute that makes that a crime by itself.
Now, it may be that it's a crime in connection with some intent to conceal, but just the fact that you didn't file... I'm not... frankly, I'm not... even though I come before the Court on tax cases, I'm not an expert on criminal tax matters, but it's my impression that that would not by itself be a crime.
Now, the Federal tax--
Mr. Sutton: --We'd better not let the word get out.
I thought that it was a crime, but I'll check.
Mr. Jones: --All right, well, I stand--
Mr. Sutton: We'll keep it just among ourselves.
Mr. Jones: --I will defer all questions on title 18 to Justice Kennedy.
I'm simply not--
Mr. Sutton: Do we know as a matter of fact what her situation was?
Did she not file also?
Did she file a separate return?
Mr. Jones: --I don't know whether she had any income of her own.
I don't know whether she was required to, whether she did file a return... this case does not involve this... the wife's taxes.
It involves the half-million dollars of taxes of the husband.
Mr. Sutton: Yes, I know.
I was just curious how that came about.
Mr. Jones: I don't believe the record reflects.
Now, the comprehensive text of the Federal tax lien reaches not only all property of the taxpayer but all rights to property of the taxpayer, and this Court has consistently held that this broad text shows a plain intent to reach every type of interest that a taxpayer might have in property, and two terms ago in the Drye case the Court summarized these holdings and said that the Federal tax lien reaches every species of valuable, legally protected right or interest of the taxpayer, and the simple question that we have before us today is whether a taxpayer who has an interest in a tenancy by the entirety has any valuable legally protected interest in the property.
Mr. Sutton: Well, of course, isn't the issue whether the taxpayer has a legal interest in the property?
Isn't that the issue?
Mr. Jones: That is the underlying issue in this case.
Mr. Sutton: And the other side says no, there's this mythical entity called the marriage, or something like that, is the owner.
Mr. Jones: Well, it's a real entity.
There is really a marriage.
It's just that the property interests are, in fact, owned by the individual spouses, as I can explain by going through what rights a tenant by the entirety has under the applicable law in this case, which is Michigan law.
Mr. Sutton: But are any of those rights legal rights owned by the taxpayer.
Mr. Jones: --Yes.
Mr. Sutton: That's the basic question.
Mr. Jones: Yes, and indeed, in fact, the supreme court in Michigan has so held.
Let me just describe these rights that the taxpayer has.
The individual owner of the... each spouse in a tenancy by the entirety has the right to occupy and use the premises, has the right, with the consent of the other spouse, to mortgage or sell it, and under section--
Mr. Sutton: Wait, wait.
Strike that one.
I mean, that's... the marriage can sell it.
I mean, with the consent of the other one is just to say--
Mr. Jones: --This is--
Mr. Sutton: --tenancy by the entirety.
It's the marriage that sells it.
Mr. Jones: --That is exactly the interest that the taxpayer had in the Rodgers case in a homestead estate.
He could not sell his properties separately from that of his spouse.
He could only mortgage or sell it with the right, with the concurrence of the spouse, and what the Court held in Rodgers--
Mr. Sutton: But he had a legal interest in the property.
Mr. Jones: --Yes, he did.
Mr. Sutton: He did.
Mr. Jones: Yes, and if I might go on, there are more interests involved.
I mean, even if you wanted to stop there, we can't stop there, because the taxpayer in fact has greater interests than the ones we've already described.
Under section 557.71 of the Michigan Code, which is quoted at page 41 of the joint appendix and page 3 of our reply brief, each spouse in... since 1975 each spouse in Michigan has had the right to equal portion of the income from the property, that is, the interest, the dividends, the rents, to the profits, and is entitled to half of the proceeds on the sale of the property.
Each spouse under Michigan law is entitled to half of the property on divorce, and has a right of survivorship that gives him the fee simple, absolute--
Mr. Sutton: Presumably the Government could get a lien on any of those things if they ever came into being.
Mr. Jones: --They are in being, and that's what the supreme court of Michigan pointed out in Dow v. State.
The court held that these significant interests in property possessed by each spouse are property for purposes of the constitutional Due Process Clause, and that each spouse must separately be given notice of any action affecting their significant property interests.
Mr. Sutton: Given notice by whom?
Mr. Jones: Of any action that might be brought with respect to the property.
In other words, under the Due Process Clause you have to have notice and an opportunity to be heard if there's property affected, and what the court said is that these significant... I'm quoting.
These significant interests in property of each spouse entitle each of them to separate notice, because they have separate rights.
Mr. Sutton: How did that case come up?
I mean, was somebody suing the tenants by the entirety, or--
Mr. Jones: --My recollection is that it was a foreclosure-type case.
Now, the pecuniary right of each spouse to half the income and half of the proceeds on the sale is an ordinary kind of right to money.
It is a quintessential--
Mr. Sutton: --May I just interrupt you once more?
You, in describing the case, said that each of them was entitled to notice because each of them had a separate right in the property.
Is that what the State court said--
Mr. Jones: --Yes.
Mr. Sutton: --or is that your sort of interpretation?
Mr. Jones: It said that... the words... well, I don't have the text in front of me.
It said the separate--
Mr. Sutton: It makes a big difference.
They're each entitled to notice--
Mr. Jones: --Each spouse--
Mr. Sutton: --which is... because each had a separate right--
Mr. Jones: --It says each spouse is entitled to separate notice--
Mr. Sutton: --Right.
Mr. Jones: --because they have a significant interest in the property, and--
Mr. Sutton: Mr. Jones, you're not asserting that the Government's lien gives it any greater right than he has, so the recitation that you had, you're not saying that the Government lien means that they could preempt her right, are you?
Mr. Jones: --No.
We're saying that we have those rights.
In fact, in this case that is the issue.
There was the sale.
There was a consensual sale of the property.
Half of the proceeds were placed in escrow.
Half were given to the wife as her undisputed 50-percent share, half were placed in escrow pending determination of the validity of the lien.
That's what this case is.
Mr. Sutton: Would the case be any different if that transaction you just referred to hadn't taken place?
Would the Government's case be weaker?
Mr. Jones: --The Government's case would be significantly different if the sale had not occurred.
Then we would presumably be waiting to see what happened, or we would under Rodgers be attempting to bring a foreclosure case.
We haven't attempted to do that here because we didn't need to do it and, in fact, we rarely do, and while I'm on the foreclosure issue, let me point out that Rodgers held that a joint interest can be foreclosed notwithstanding that neither spouse by themselves force the sale of it.
What the Court explained was that Congress specifically provided in 7403 of the code that the foreclosure applies to the entire property, and that in that sale the rights of the innocent spouse are protected and, indeed, the court, the district court has discretion not even to order a foreclosure if it so chooses.
Mr. Sutton: But--
--Well, let's assume you do foreclose because we find that, indeed, the husband has a property interest in the tenancy by the entirety, so you foreclose.
Now, I guess some of his interest you've just pointed out is a right to half of the income from the property, but surely his most significant interest is that he is entitled to half of the whole property if the marriage dissolves, right?
Mr. Jones: Or of it's sold, and he's entitled to all of it if he's the survivor.
Mr. Sutton: Right.
These are all contingencies, okay.
How do you... you foreclose... how do we value these contingencies?
Mr. Jones: This--
Mr. Sutton: What do we... we have people come in and say how stable the marriage is, or what?
Mr. Jones: --This Court discussed that exact, what the Court called the practical reality in the Rodgers case, and gave a detailed example that I think took three or four pages of the Court's opinion in Rodgers, explaining how you would value the respective interests of the parties.
Let me also suggest to the Court that there is a very thorough and thoughtful decision of the district court in New Jersey in United States v. Jones in 1995 that discusses the circumstances when discretion would not be exercised to allow foreclosure of tenancy-by-the-entirety property, and the Court concluded that there were circumstances which that case was one, where instead of foreclosing on the property, the property rights of... the United States would simply be put in the position of holding the right of survivorship of the delinquent spouse, and in addition, the right of that spouse to half of the rents would be recognized immediately on behalf of the United States.
The foreclosure remedy, I've heard cases describe it as a drastic remedy.
Well, I don't know if it's drastic, but it's a remedy that doesn't have to be exercised, and that there are cases that explain circumstances when it's appropriate in the court's view not to do so.
Mr. Sutton: But in your view, you always value the taxpayer's interest at 50 percent?
Mr. Jones: No.
I think in the Rodgers... well, if the property's been sold, yes.
If the property hasn't been sold, and we're talking about in a foreclosure context, I believe the Rodgers court goes through the example of the varying life expectancies of the two tenants, and which one... and I believe what the Court in Rodgers said was that each of them should be treated as if they have a life estate plus a right of survivorship, and the Court explains how that could well... I think in the facts of Rodgers resulted in only 10 percent of the proceeds being applied to the husband's interest and 90 percent being retained on behalf of the spouse, but--
Mr. Sutton: But there must be a foreclosure to that extent?
Mr. Jones: --There... that was a... I believe those were hypothetical facts that the Court discussed in Rodgers.
Mr. Sutton: Mr. Jones, during the continuance of the marriage can either spouse force a sale?
Mr. Jones: No, and that was the point made in Rodgers also, that in any kind of joint tenancy... by the way, I should emphasize--
Mr. Sutton: But I thought joint... I may be wrong in this.
I thought a joint tenancy could be converted into a common tenancy by the action of one--
Mr. Jones: --I misspoke.
It's not in every joint tenancy.
It is a common feature of joint tenancies that they can't be forcibly sold by one and, indeed--
Mr. Sutton: --During the continuance of the joint tenancy.
Mr. Jones: --Correct, and that that was the case in Rodgers--
Mr. Sutton: Okay.
Mr. Jones: --where the homestead right could not be--
Mr. Sutton: But I take it from your earlier answer that there is, in tenancies by the entirety there is no such legal means of converting that tenancy into a tenancy in common which then can either be the subject of a forced sale or petition, is that correct?
Mr. Jones: --I believe that's correct, and I believe it was also true in Rodgers of the homestead estate, which is a common... which is also a common estate.
In fact, in this Court's opinion in Jacobs in 1939, where the Court said that we were not... the Federal tax laws were not bound by the ancient fictions of tenancies by the entirety, the Court pointed out that a joint tenancy and a tenancy by the entirety create the same rights.
The only difference is the fiction of the marital unit, and the Court held in the Jacobs case, as it had held 9 years earlier in the Tyler case, that that feudal fiction or ancient fiction did not bind the tax provisions, that the tax provisions were to be implied in light of the actual rights of the tenants and not based upon the artificial rules of State law, and then in Irvine and in Drye just two terms ago this Court, in interpreting the term, property, and rights to property and Federal tax legislation and in the lien statute said that we look to the realities of the taxpayer's right, and we're not struck blind by legal fictions of artificial--
Mr. Sutton: But the realities of taxpayer rights depend on State law, don't they?
Mr. Jones: --The realities of the taxpayer's right are drawn from State law, but we're not supposed to... I mean, in the words of the Court, let the artificial rules of State law blind us to the realities of those rights, and let me give you--
Mr. Sutton: Well now, what's the difference, do you think, between the artificial rules and the realities?
Mr. Jones: --Well, this Court has said that difference can be seen in tenancies by the entirety, that the realities are that the tenants... I mean, it is a fiction.
The respondent admits it's a fiction.
Mr. Sutton: Well--
Mr. Jones: --The word fiction is what is implied here.
Mr. Sutton: --You say it's a fiction.
What do you mean by it?
Mr. Jones: What is a fiction is the idea that neither spouse actually owns an interest in this property.
That's the fiction.
Mr. Sutton: So is a corporation a fiction, but we don't tax the shareholders for income of the corporation.
It's a fiction acknowledged at law and--
Mr. Jones: It's a legal entity.
It has an existence.
The marital unit is the fiction.
Mr. Sutton: --So is the marriage--
Mr. Jones: The marriage--
Mr. Sutton: --for purposes of the tenancy by the entirety.
Mr. Jones: --The marriage is the fact.
What's the fiction is that these spouses don't own anything.
Under State law they do own something.
They own something significant, as the supreme court of Michigan has said, and let me give you an example of how courts have been blinded by this fiction.
The line of cases that respondent relies on begins with the Eighth Circuit decision of the United States v. Hutcherson in 1951.
In that case, which started us down this path, the court made what are now clearly, I think, two errors under this Court's precedents.
The first error that the court made was to say that we own... that this question about what's property or a right to property is solely a question of State law.
Well, we know that what's a question of State law is what are the interests created, but whether it's property or right to property is a question of Federal law.
The Court made that clear in '56 in Bess, emphasized it again in National Bank of Commerce, and held it specifically, what, two terms ago.
Now, the other thing that Hutcherson got wrong right from the beginning was this idea that you... that the fiction of State law is controlling, and I'm... what the court said is, the interest of a tenant by the entirety in the property cannot be subject to the Federal lien because, in the words of the court, that interest is like a rainbow in the sky, or like the morning fog rising across the valley.
Well, once we get past the metaphorical fog, there is indisputably actual value at the end of this fictional rainbow.
It is... these people have pecuniary rights, the rights to receive money, and in this case the tenant had a right to receive half the proceeds of the sale, and the United States is attaching that right to receive money just like it would any other right to receive money.
Mr. Sutton: These are all contingent rights.
Would the Government attach or foreclose a piece of real estate that had been bequeathed to the taxpayer's brother and which would eventually come to the taxpayer, perhaps--
Mr. Jones: No.
Mr. Sutton: --depending upon what contingencies occurred?
Mr. Jones: And the Court made that point in Drye.
It made the difference between what is a legally protected right and what is a... what was the word you were using?
Mr. Sutton: Contingent.
Mr. Jones: No, not a contingency.
Mr. Sutton: A contingency.
Mr. Jones: It was--
Mr. Sutton: Expectancy.
Mr. Jones: --An expectancy, thank you.
An expectancy is something that is not a legally protected right.
The expectancy that was described in Drye was the hope that the will on which you're a beneficiary won't be changed before the decedent dies.
You have no right that the decedent won't change the will.
That's just an expectancy.
But once the decedent died, the right, the legally protected right that was at issue in Drye was the irrevocable right to inherit or to disclaim.
Now, once this tenancy has been created, these tenants have these vested rights.
Now, their rights may be contingent in terms of events happening in the future, but it's nothing more... nothing is more common than to say that a contingent right is a property interest.
Mr. Sutton: Well--
--Certainly the community property States, the concept of a marital community has some significance, I think.
It isn't just a rainbow in the sky.
That doesn't mean that you don't look at what rights the individual members of the community may have, but what you're saying is--
Mr. Jones: Well--
Mr. Sutton: --Go ahead.
Mr. Jones: --If I might, in a case called United States v. Mitchell, involving the community property right of a spouse to disclaim her interest in the income of her spouse, this Court said that the disclaimer, this retroactive disclaimer, this fiction of State law would not be recognized and would not upset the application of Federal tax principles.
Mr. Sutton: But it was retroactive.
Mr. Jones: It was a fiction.
Mr. Sutton: Before the disclaimer occurred there's no doubt who was entitled to the money.
She was, and this was more than a fiction.
It was undoing a property right that the State recognized until the disclaimer occurred.
Mr. Jones: Well, and indeed the State recognizes these property rights.
The State says there's significant interest in property, and it isn't silly just for me to stand here and say it's a fiction.
It is a fiction.
This Court has said it's a fiction.
Mr. Sutton: Mr. Jones, would you comment on one aspect of the case that troubles me?
Let's assume... I think there are two court of appeals decisions out there that are squarely on point and against you, and you say are incorrectly decided.
Mr. Jones: --Yes.
Mr. Sutton: Let's assume they are incorrectly decided, but they've been the only guidance for the tax bar for 40 or 50 years, and is there other reliance interests that the tax bar can say, well, we always thought that, given those cases that Congress had not sought to overrule, we have a right to follow them?
Mr. Jones: Well, the tax bar is not a party to this case, and... but that's--
Mr. Sutton: No, but we have to be concerned about--
Mr. Jones: --Okay, well, that's--
Mr. Sutton: --the community's reliance on decisions that have been given by the Federal courts.
Mr. Jones: --The answer... I believe the answer to your question is no, that there is no embedded reliance on this principle because, as we pointed out in our brief, even in Michigan there is an express caution given by the State bar to title examiners saying that, in light of the 1975 enactment of this statute that gives each spouse an equal right to all of the income and profits from the property, that the State bar advised title examiners that they could not give an opinion that the interest of an individual spouse was not subject to the lien.
Moreover, in 1983, I believe it was, this Court had a discussion about the status of tenancy by the entirety under the Federal lien, and the majority opinion in a footnote questioned these older cases, so I do not think that a title examiner, especially in Michigan, would be able to say that he had upset settled expectations.
Mr. Sutton: So this case involves only Michigan, and if you have States that do not provide that the... each spouse has an interest in the income, it might be a different answer.
Mr. Jones: There is, indeed, a narrow basis that you just described for resolving this case, and it would be an appropriate way to resolve the case because we have the fund... we have here the voluntary... the sale, with the proceeds available for distribution, so we don't have to reach the broader question of whether the existence of the right of survivorship, which is an undisputed personal interest, is sufficient for the lien to attach and, a la Rodgers, be subject to a foreclosure action.
It would... and--
Mr. Sutton: I must say, when you get to the survivorship, that's there I have real problems with your case.
I could just... you answered my earlier hypothetical by just saying, well, you know, there's a contingency that the will might be changed.
Well, let's assume it's not a will.
Let's assume it's an irrevocable trust, under which you have a contingent future interest.
Would you really say that the Government can move against the entire corpus of the trust just because there's a contingent future interest on the part of a defaulting taxpayer?
Mr. Jones: --The Government's lien attaches to the interests of the contingent remaindermen, and there are cases on that very point.
I am not familiar with the problem I think you're describing which is, well, can you then foreclose on the trust, and how would we value--
Mr. Sutton: Well, that's how the statute reads.
You can assert the lien on any property in which the taxpayer has an interest.
Mr. Jones: --That's correct.
Mr. Sutton: And you're saying the taxpayer has an interest--
Mr. Jones: Yes.
Mr. Sutton: --in this trust--
Mr. Jones: Yes.
Mr. Sutton: --in which he has a future contingency.
Mr. Jones: That's correct.
Mr. Sutton: I mean, that's a... I--
Mr. Jones: That's correct, but also that section 7403 reserves the right of a district court not to award foreclosure and, of course, foreclosure requires the Government to do something.
Mr. Sutton: --We hope you get a tenderhearted district judge.
I don't think that that's--
Mr. Jones: Well, the United States, so far as I know this controversy that you're concerned about has not been presented in an actual case, so I'm not sure that it's a... I mean, it's a theoretical issue that I don't believe has been confronted, but what has been confronted is, does the lien attach to contingent remainders, and that's In re... well, there's a lot of In re's.
I think it's Rosenberg's Will is the leading case on this.
We cited it in a footnote, and it explains that the Federal tax lien applies to all property and rights to property.
Mr. Sutton: --Well then, how... do you then value the contingent remainder?
Mr. Jones: Well, as I was saying, I don't know of a case where a foreclosure has been sought on a contingent remainder.
What's probably the more likely result, because it's the more economical result, is to wait for the contingency to occur, and that's--
Mr. Sutton: And the case you're talking about where a lien was asserted against the contingent remainder, what was it asserted against, after the remainder had no longer been contingent?
Mr. Jones: --I would... I'm... to be honest, I would be guessing, but my guess is--
Mr. Sutton: Okay.
I mean, that's a different question.
Mr. Jones: --Well, the--
Mr. Sutton: I want a case in which, on the basis that the taxpayer had an interest--
Mr. Jones: --Right.
Mr. Sutton: --had a purely contingent interest in some corpus.
The Federal Government was enabled to assert a lien against the entire corpus.
That seems to me extravagant.
Mr. Jones: Well, as you use the word contingency, that would include Rodgers, because that was a case where there was... a right of survivorship was the valued interest, but there's also the Bank One case, Spendthrift Trust, the right of a person to obtain income from a Spendthrift Trust is subject to the Federal lien.
Any kind of right, legally protected, valuable interest has been subjected to the Federal lien, and what the... this case reduces to is the idea that simply by, that even though they've, the State recognizes that there are valuable, legally protected interests in each spouse, that by calling it a... a something else, that the lien wouldn't apply, and that's exactly what the Court indicated in Drye shouldn't happen, that the Court indicated that the mere fact that the State doesn't characterize this valuable, legally protected right as property doesn't prevent the Federal lien from attaching.
I would like to reserve my time for rebuttal.
Mr. Sutton: Very well, Mr. Jones.
Mr. Sutton, we'll hear from you.
ORAL ARGUMENT OF JEFFREY S. SUTTON ON BEHALF OF THE RESPONDENT
Mr. Sutton: Thank you, Mr. Chief Justice, and may it please the Court:
There are some serious misunderstandings about the meaning of Michigan law which go to the heart of the proper resolution of this case under Federal law.
First of all, the Government has relied very heavily on a 1975 Michigan statute that says, spouses in a tenancy by the entirety have equal rights to rent and income and to profits.
That's section 1 of the statute that I just quoted.
If you look at page 209 of that statute in the Sixth Circuit appendix, regrettably not in your appendix, you'll see that the second section of that statute says that only applies to tenancies by the entirety created after 1975.
This tenancy was created in 1972.
That statute is utterly irrelevant.
It in all events was designed primarily just to deal with what happens when the tenancy ends, that is, when there's a divorce, just to make sure that both spouses have a right to the property.
A second misunderstanding, the Government says that the rights to proceeds, once you have proceeds as a spouse, that somehow that means the tenancy is over and the creditors, Federal, State, city, private, can get at it.
Under Michigan law, Muskegon Lumber, 1953, Michigan supreme court case, says that it continues as a tenancy in the entirety.
Because most people sell their house to buy another.
You wouldn't destroy it--
Mr. Sutton: Well, we're not used to resolving questions of State law here.
If you say the State law of Michigan is one thing and the Government says the State law of Michigan is the other, it's difficult for us to go in and referee the thing.
What is the strongest Michigan case for your point of view?
Mr. Sutton: --Your Honor, 1885, Vinton v. Beamer, going forward to Sanford, going to Budwit v. Herr... those are, you know, separated by 20 or 30 years each... every single one of them makes clear that with respect to the specific belonging-to language in this statute there is no interest that belongs to one spouse or another.
They're indivisible interests.
There's a unity of title and, critically, if that unity of title is broken, Michigan law says under Budwit v. Herr, a Michigan supreme court decision, the tenancy is destroyed.
Mr. Sutton: And you say the 1975 statute does not affect this case at all?
Mr. Sutton: It's irrelevant, Your Honor.
By its terms it only applies to tenancies that are created after 1975.
That's section 2.
It's in the act.
That's not legislative history.
That's in the act.
Mr. Sutton: Mr. Sutton, how does it differ from other cases where under State law a predator can't touch the thing, like a Spendthrift Trust, or like what was involved in Drye?
Even though not a single predator in that State could touch that inheritance, the Federal taxing authorities could, so there are many situations where the property is exempt from reach, even where the State doesn't call it property, calls it something else, but the elements of what the person had leads the Federal authorities to say this is the property of so-and-so, as in the Spendthrift Trust, as in the case of the disclaiming heir in Drye, so why is this any different?
Mr. Sutton: This is not a disclaimer or exemption case for this basic reason.
We're not relying on the results under Michigan law.
We're relying on the rationale under Michigan law for the exemption.
The rationale under Michigan law is that neither spouse owns an independent interest in any respect.
Not even the survivorship right under Sanford is considered an independent interest.
Mr. Sutton: Why was that different from a State law that said Mr. Drye never had anything, we assume under our State's law that he predeceased his mother?
Mr. Sutton: Your Honor, under Arkansas law in Drye, the opinion notes that he did have a right to alienate that interest once his wife died.
That's exactly what... that was the point of the decision.
For 9 months, he had a right of control over the property and it may be helpful... I want to make sure I'm answering your question... to think about these interests in present terms and future terms, and if you talk about present interest, I think the way Drye talks about it is, you have to have a present interest of pecuniary value over which the taxpayer has exclusive dominion.
That is not true in a tenancy by the entirety.
The closest you can come to finding something over which the individual taxpayer might have dominion of control are the future interests, the right to proceeds, the right... survivorship rights if you outlive your spouse.
Mr. Sutton: Could the Congress with ease enact a statutory amendment to make tenants by the entirety subject to liens?
Mr. Sutton: Absolutely, Your Honor.
I would submit that that's one of the strongest points supporting Mrs. Craft's position.
For 136 years--
Mr. Sutton: Well, I mean, if you were a Senator from Michigan wouldn't you say, well, you're taxing property that doesn't belong to the taxpayer, this is improper as a matter of law?
Mr. Sutton: --That's exactly what Tyler recognized, the 1936 or so U.S. Supreme Court decision that yes, these are fictions under State law but, under the Supremacy Clause, the Federal Government is entitled to disregard them if it wishes and, notably in the estate tax setting, that's an estate tax case, the Court... in that law, Congress specifically said tenancies by the entirety are covered by the estate tax.
Indeed, page 502 of Tyler says, but for the specification of tenancies by the entirety by terms, the estate tax would not cover those interests.
Mr. Sutton: Well, our--
Mr. Sutton: That's our case.
That's this case.
Mr. Sutton: --Our universe here is that the State defines what's property and the Federal Government defines what property can be liened.
Mr. Sutton: Yes, Your Honor.
Mr. Sutton: That doesn't quite work, because one of the sticks in the property definition is the right to be liened, and so we're compromising that dichotomy even by stating it, and it seems to me that all the Government is doing here is saying, we're saying what property can be liened, we're entitled to define that one stick in the bundle.
Mr. Sutton: I'm not relying, Your Honor, on what's lienable and what's not.
Well, I am in terms of the common law background.
That's highly relevant that in 1866 no one would have thought this was a lienable property interest, but when it comes to the present Michigan law, I'm not relying on whether it's lienable under Michigan law.
I'm relying on why that's true, the rationale for why it's not lienable.
You can't lien... maybe this is the better way to put it.
You can't lien an innocent property owner's property.
If everything they're saying is true about this somehow belonging to Don Craft, it is most assuredly also true that it belonged to Sandy Craft, and Justice Ginsburg, she did file her tax returns, independent tax returns.
She paid her taxes, and there's no more right for the Federal Government to put that lien on your property or mine, that it was--
Mr. Sutton: Well, but if you're right about that, Mr. Sutton, then your statement that Congress could easily amend the statute to collect in this situation probably isn't correct.
Mr. Sutton: --Well, Your Honor, I did not mean to say... I did say easily, and I misspoke, and I'm glad to have an opportunity to correct.
I think it would be very difficult, because of the fact that under Michigan law the property ownership interest might create a situation where the minute you foreclosed, great, you got $100,000 for Don's interest in the property.
Every dollar they took belongs to Sandy, so it's... it is a difficult area to regulate.
It would be a... and... but that's again exactly why, in gift tax, estate tax, fair debt collection... that's the Federal fraudulent conveyance law, bankruptcy, every one of these areas not only mentions the tenancy specifically, but it then goes on to do what Justice Kennedy and Mr. Chief Justice Rehnquist's questions indicate.
You've got to be very specific about how in the world you value these interests, and what you decide to do once you've decided to regulate them.
Mr. Sutton: Mr. Sutton, is it true that any conventional property interest in Michigan can be held in the entirety form?
Mr. Sutton: No, Your Honor.
Personal property... it does not apply to personal property.
The only exceptions are proceeds from real estate, the example I gave when you sell the house.
Mr. Sutton: Does--
--What about... bank accounts can't be--
Mr. Sutton: No, Your Honor.
Mr. Sutton: --And shares can't be--
Mr. Sutton: No, Your Honor.
Mr. Sutton: --What about the income from the real estate?
Is it your position that before this statute was passed even the income from the real estate was held--
Mr. Sutton: Absolutely, and that's--
Mr. Sutton: --in tenancy by the entirety?
Mr. Sutton: --Let me give you... S&B Trust, it's one of the cases we've cited, says that very point, and that makes sense.
It's still property that they... it came from their joint marital asset, and they use it together.
I want to go--
Mr. Sutton: How does it differ from community property?
Mr. Sutton: --Community property has several differences.
It's much more like a joint tenancy.
First of all, you can petition, which incidentally is exactly what the effect of this statute is, to by law petition their interests.
Secondly, you have shares in the property, and this is exactly like Rodgers and National Bank of Commerce.
There were divisible shares that could be levied.
Mr. Sutton: I thought the community property is owned by the community, which is a separate entity.
Mr. Sutton: No, Your Honor.
Mr. Sutton: Community property is not owned by a community which is a separate entity?
Mr. Sutton: No.
It really works a lot like the homestead.
I want to be clear here.
It's true that the... in one sense the home in a community property State or a homestead State is still one where they both have interests as to all the property, so in that respect you're right, they still have joint interests.
But the critical legal distinction respecting the 19th Century all the way to this century is that in one setting you had divisible shares, and that's why one spouse in a home State setting, community property setting, could unilaterally incumber or destroy the tenancy.
Mr. Sutton: I'm not sure you can generalize as to community property.
I think the law varied in... among... between the community property States.
Some would say one thing, some would say the other.
Mr. Sutton: Your Honor, you're right, and if I--
Mr. Sutton: The hornbook that we looked up just says that community property can be severed only with the consent of both spouses in the event of divorce, or in the event of death of one of the spouses.
It's a book called Real Property, by Bernhardt and Burkhardt.
Mr. Sutton: --Well--
Mr. Sutton: Again, I don't know that that's authoritative, or maybe we made a mistake, but it certainly was my impression that community property is owned by a community, which is a different legal entity, and I also thought that community property couldn't be separate without the consent of the spouse.
Mr. Sutton: --Well, that... Your Honor--
Mr. Sutton: Is that wrong?
Mr. Sutton: --if... let's assume for the sake of argument, and I'm not... let's assume it's true, you said it's true, that community property States are just like tenancy-in-the-entirety States.
That's fine by us.
Mr. Sutton: Well, I know, but all it means is--
Mr. Sutton: The exact same argument applies.
Mr. Sutton: --that if you're right, that in probably a third or more of the country, suddenly the IRS can't assert any liens, and it's a little tough to believe that Congress would have thought that that's what it was doing with this statute.
Mr. Sutton: Oh, Your Honor, I respectfully disagree.
In the very... the backyard of Congress they are saying tenancies by the entirety are exempt.
I mean, in the District of Columbia, which Congress has sovereign prerogatives over, they've said from the beginning that we favor these marital community property interests over those of creditors.
Mr. Sutton: Mr. Sutton--
--Yes, that may be, but why... I mean, here, a lot of property in this country is owned by communities, i.e., the husband and wife together, and I imagine that people are quite free to take their real property in the form of tenancy by the entirety.
All right, now here the property interest is definite.
There's no doubt that the husband is entitled to a lot of money, and there's nothing imprecise about it, nor is there really anything speculative about it, unless you go and divide it into a present and future.
All those divisions you've made are purely legal ways of looking at what in reality is an absolutely precise and valuable property interest owned by the husband.
All right, now why should I accept an interpretation that's going to exempt vast amounts of property from this statute--
Mr. Sutton: A couple of thoughts, Your Honor.
Mr. Sutton: --under those circumstances?
Mr. Sutton: This is not a community property case, and I think it would be dangerous for me to--
Mr. Sutton: But I'd like to know what the implications are--
Mr. Sutton: --If--
Mr. Sutton: --because it's one thing if we're deciding a case... yes.
Mr. Sutton: --If you find, in each of the States that you're concerned about, the interests are defined just as they are in Michigan, which is to say, it's an indivisible interest, no shares, it follows just from what you've said in Rodgers and National Bank of Commerce that you can't lien the property, and what you've got to do is wait for a survivorship interest, wait for a sale, destruction of the tenancy.
But if there's a problem here, Your Honor, Congress has known about it.
This has been true for 136 years.
Mr. Sutton: Mr. Sutton, how many States are there that have tenancies by the entireties?
Mr. Sutton: 14 that have them in the traditional way we're talking about, where it's an indivisibility of title, plus the District of Columbia.
Mr. Sutton: And some of them, at least according to a case that both of you cited, do provide tenancy.
Tenancies by the entirety can hold business assets, personal property, even money may be held in some States, so if your theory holds, then a couple could insulate everything that they have simply by holding it all--
Mr. Sutton: Well, to the extent Congress is worried about that, it's surprising in 1954 that they didn't amend the statutes, even more surprising--
Mr. Sutton: --Well, didn't this Court comment on that in the Rodgers decision by saying that the fact that Congress didn't do something... you can't infer much from not doing, according to this Court.
Maybe the Senate rejected the clarification that the House sought, not because it disagreed with it, but more likely because it found it superfluous.
Mr. Sutton: --The 1954 history is relevant, I would think all would agree, when it comes to the notion that somehow this is a great tax-avoidance problem.
Congress at a minimum was told about this issue and decided not specifically to do anything about it.
Whether the law was changed or not--
Mr. Sutton: And this Court commented on it, that maybe Congress didn't do anything because it thought that the... this--
Mr. Sutton: --Your Honor, by 1966... I mean... well, by the present, we've got seven courts of appeals.
Every court of appeal that's looked at the issue has said the tax lien does not apply when just one spouse has a tax debt.
In 1990, critically--
Mr. Sutton: --In this particular case, wasn't the Sixth Circuit saying, well, maybe there are good arguments on both sides, but we've got that old precedent that we have to follow.
Wasn't that the background of this case?
Mr. Sutton: --I'm not sure what the Sixth Circuit had in mind, but it certainly followed its precedent, didn't think Drye, Irvine had changed the law necessarily--
Mr. Sutton: Well, it couldn't have thought about Drye the first time around, because Drye wasn't there.
Mr. Sutton: --No, but the second time it did.
Mr. Sutton: They had already made the decision.
Then there was a big discussion about law of the case and law of the circuit, so I don't think that they ever had this case with Drye squarely in front of them, because they decided the basic case without Drye and later they were relying on law of the case, law--
Mr. Sutton: Well, I certainly don't know why each court of appeals has done what it did, including the Sixth Circuit, but the fact is, they've all done the same thing.
I think it's also notable to the extent there's a tax avoidance concern lurking here, why is it in 1990, when Congress passed the Fair Debt Collection Act... that's the Federal fraudulent conveyance statute... why did it specifically exempt tenancy by the entirety property?
Under that law today you could do exactly what happened in this case and the Federal Government would have nothing to say about it.
Mr. Sutton: --I suppose, if you follow the... your rationale to its furthest extent in a State such as the one Justice Ginsburg referred to in which business assets can be held in tenancy by the entirety, a husband and wife could hold a... have a closely held corporation by the entirety and, on your theory, they wouldn't even be liable for income tax because it would be the entirety alone that would be liable.
Is that the--
Mr. Sutton: No.
No, Your Honor.
Mr. Sutton: --fair consequence of what you're saying?
Mr. Sutton: Under section 61, which is the provision of the Internal Revenue Code that taxes property, income from tenancy by the entirety property is still taxed.
It's never been a--
Mr. Sutton: No, but the income goes into a bank account held by the... held in entirety form.
If they're careful enough, so that they set up their corporation, their savings account, their checking account, everything's held in entirety form, there wouldn't be any individual taxpayers under your theory.
Mr. Sutton: --Well, I'm not going to be in a position to cite any cases for this point, the point that I'm going to make, so you're going to want to check me on it, but I don't think there's any doubt that when it comes to income from tenancies-by-the-entirety property, the case law, the code, the regulations make it clear that they're still... you're still taxable.
It's just a question of--
Mr. Sutton: Well, I don't think there's any doubt, either, but I think the fact that there isn't any serious doubt about it is, at least so far as the States that Justice Ginsburg's example referred to, there also is an inconsistency between the fact that we have no doubt, as you say, about taxability and the consequences of your theory.
Mr. Sutton: --Well, it's a... they're very different concepts and maybe it's important, particularly in light of Justice Breyer's comment about this just seeming to be a fiction, there's a real function behind this concept, and the function is that, while the tenancy is premised on this nice notion of two hearts beating as one, the fact is that doesn't always happen, and the whole point of the tenancy and the indivisibility of title is that it precludes one spouse unilaterally from destroying or otherwise incumbering the tenancy.
Keep in mind, that's exactly what happened in this case.
Mr. Sutton: Well, but the--
--Then in your mind the critical factor is the factor that creditors under State law can't get a hold of it.
Mr. Sutton: No, Your Honor.
If it's indivisibly owned, that means that every lien on Don's interest was a lien on Sandy's interest, and Sandy paid her taxes.
If there's one first principle of lien law, it's that--
Mr. Sutton: Okay.
Then you're saying it's the theory of the thing.
Mr. Sutton: --It's--
Mr. Sutton: Okay.
If it's the theory of the thing--
Mr. Sutton: --It's a theory that has a fact--
Mr. Sutton: --If it's the theory of the thing, primarily, plus the fact... all right.
If it's the theory of it, why--
If it's the theory of it, doesn't the same theory exist with community property?
Doesn't the same theory exist with joint tenancies?
For all I know, the same theory exists when people said, you don't own any land, you just hold it from the king, and you have feudal obligations unless you pass along the seasons.
I mean, that's... if we're going on the theory of the thing--
Mr. Sutton: --I really hope I can clarify this because I do think it cuts the heart of this case.
Most States that don't have tenancies by the entirety do have joint tenancy, so that really is the key comparison, and as to those States, when you have a joint tenancy, first of all they are divisible interests.
If they're divisible interests, that means one spouse unilaterally can incumber and in some instances sell that right, whether it's a future right, the right of survivorship, or a present right with respect to some interest in the property, so that's the whole point.
The whole point is, in those States people have decided to marry, buy property together, but yet from the beginning one spouse unilaterally could destroy or incumber the property.
In a tenancy by the entirety, at the outset, every decision you make regarding that property has to be made with the consent of your spouse.
Mr. Sutton: --Well, is the question of taxability at bottom a question of Federal law, do you suppose?
Mr. Sutton: I would submit, Your Honor, that when it comes to the tax lien statute the Court has said several times that Congress did not define the words, property, rights to property belonging to.
We look first to State law--
Mr. Sutton: But is it a question of Federal law, and as a policy matter we generally look to State law?
But isn't that itself a question of Federal law, the extent to which we're going to look to State law?
Mr. Sutton: --Well, Your Honor, I had thought that you take the State law's property interests as you find them in the 50 or 51 jurisdictions, depending on how you want to look at it, and then, depending how the States--
Mr. Sutton: But for tax purposes, I'm just wondering if at bottom it isn't, in fact, a question of Federal law.
Mr. Sutton: --It is a question of Federal law what the, quote, consequences of those State law definitions are, but let me give you, I think, a good indication of this, and it relates to a hard issue raised by Justice Ginsburg.
What about tenancy by the entirety where it was a joint bank account, which is clearly a much harder case, not presented here.
Here, we're talking about the marital home.
But in National Bank of Rodgers, which was about a joint tenancy, the Court said in a 5-4 decision that you could levy on one person's joint bank account.
Why was that?
Because under State law, the taxpayer, or he had a right to all of the money in the account unilaterally, whenever he wanted it, and if he misused it, that was simply to be a fight among the other joint tenants.
Justice Blackmun in writing that decision made it crystal clear that that case turned on the fact that under State law the taxpayer had a unilateral right to take all the proceeds.
If that State law had said differently, that the only way you can take out the proceeds is with the consent of the spouse, there's--
Mr. Sutton: Which case are we talking about now?
Mr. Sutton: --National Bank of Commerce, 1985, joint bank account.
If that State law had said, the only way you can take out the money in the bank account is with the consent of the other, the Court, by the terms of its decision, would not have allowed that levy, and remember, the levy and lien statutes have the exact same language, which, you know, in order to lien something you've got to be able to levy it, generally speaking.
So I don't... that proves to me... I hope this answers your question, Justice O'Connor... that these definitions of State law do matter.
They are controlling when it comes to the consequences, and I hope I've showed, when it comes to--
Mr. Sutton: Mr. Sutton, I think that there was considerable attention in the Drye case to exactly what it was you look to State law for.
You look to State law to find out what the person had.
Whether that was characterized as property or not was a Federal law question, and Drye could not have been clearer that you look to see what sticks the State law gives.
Mr. Sutton: --But Your Honor, what have I said that makes you think I'm disagreeing with that?
Mr. Sutton: Well, I thought you said that whether it's property is determined by State law.
Mr. Sutton: I'm simply saying the interests in the property are determined by State law.
Mr. Sutton: What the taxpayer had is determined by State law.
Mr. Sutton: Exactly.
Mr. Sutton: But not the label that we put on it.
Mr. Sutton: Absolutely.
Mr. Sutton: For Federal tax purposes.
Mr. Sutton: Absolutely, and I'm sorry if I left that ambiguous.
I mean, let's talk about this in terms of the classic--
Mr. Sutton: Your point there is right there.
Your point is, I take it, that in this case State law defines the property such that it belongs to both parties and, indeed, it is not possible under State law without the death, divorce, or consent of one of the parties for anyone to get a hold of a penny of the... of that interest.
Mr. Sutton: --Absolutely, Your Honor.
Mr. Sutton: That's your point--
Mr. Sutton: To use the sticks--
Mr. Sutton: --that both of those things have to be true, the theory and the practice.
Mr. Sutton: --Yes.
Mr. Sutton: All right.
Mr. Sutton: To use the sticks in the bundle analogy, every interest under State law in Michigan regarding this tenancy, each stick has to be exercised two by two, not one by one, but every one of them is two by two, husband and wife, and certainly not three by three, which is what the Federal Government is saying here.
Mr. Sutton: But it is for the Federal Government to determine to what property the lien extends.
Mr. Sutton: I couldn't agree more, Your Honor.
I mean, not... I wouldn't say the executive branch.
I mean, in the 1971 Benson decision they admitted that the lien does not cover tenancy by the entirety.
If you look at that 1971 decision, they admitted in that case it doesn't cover it, so this is not an administrative deference situation at all, but the Federal Government, through Congress and the President, does have a right to extend it.
I will admit, it's not going to be easy, and if we could go back to thinking about--
Mr. Sutton: Their point to the contrary is basically, you're right, or assuming you're right, it's still definite enough to get at, and you really violate State law policy there only if you sell the property, you see, but as long as... and, indeed, if they sell it on their own, that's their problem.
You'll get the proceeds.
If they don't sell it on their own, you know, the community... if they don't sell it on their own, then it becomes a question of how the judge will enforce the lien, and there your clients or the equivalent would be free to go in and say, don't force me to sell the property, et cetera.
Mr. Sutton: --I hope I'm responding to your question.
I think what I hear you saying is that boy, this is just a lien, they're just placeholders, it doesn't mean they'll necessarily foreclose, and therefore Sandy's interests really aren't being hurt.
I would submit that's wrong.
Mr. Sutton: You say Sandy.
She's noted as the respondent as Sandra.
Mr. Sutton: --Excuse me, Your Honor.
I'll say Mrs. Craft, to be even more careful.
But in this particular case, the lien does have an impact on their ability collectively to make decisions about the property.
Let's say the month after the lien attached, they decided, we need to borrow against the house to have enough money to pay for our kids' college education, because the roof has collapsed.
They can't do that.
Prior to the lien, she had a right to make a decision not with the Federal Government about how to use this property, but with her husband, and a classic tenet of lien law is you get no more lien rights than the debtor had, and you've got a situation here where they're 1) trying to act as a spouse, but 2) dictating how this property ought to be used, when that was a decision that under Michigan law only the two spouses could make together.
I want to go back to a point that I went over a little bit too quickly.
Mr. Sutton: I'd just like to ask you one question about Michigan law in origin, because you said this goes back to 1866, so it was probably before the Married Women's Property Act, so... at least in some States it was, so whatever rights there were to control and make decisions, they were all in the husband at that time.
Mr. Sutton: --Most of the Married Women's Property Acts, almost all of them were passed before 1866, so first of all that defect, I would call it, in the old tenancy simply was no longer true, and even in some States where that continued, it was still this, I guess it's jure uxoris concept, that it wasn't the husband as an individual having an opportunity to do this, it was the husband acting on behalf of the wife, but that just isn't true under Michigan law.
They still have these equal interests in the property, as proved by the fact of what happens on a divorce.
The point I glossed over and I wanted to make sure was understood, the issue here is not just whether the lien attaches to the tenancy, I would submit that under Michigan law, if a lien does attach, it destroys the tenancy, so we have a situation where a unilateral act of one spouse has destroyed the tenancy by operation of law under Michigan.
It becomes a tenancy in common that destroys the right of survivorship, and that also means because there are now divisible interests in the property that one spouse, unilaterally again, can incumber the property and expose the marital home to these debts of just one spouse, so this is not just a modest question then.
Mr. Sutton: But--
--I thought, Mr. Sutton, this is a question of what the Federal taxing authority can do.
Everything that you've been speaking about is something that Michigan can say, no creditor of these people--
Mr. Sutton: Your Honor, I agree with you, Michigan could change the law, though I think at that point the rationale and the effect would line up.
Mr. Sutton: --I don't think there's any question that Michigan law, just as Arkansas law, continues to say, creditors, you can't get at this disclaimed property, same thing Michigan can say.
The only thing that Michigan can't control if this decision should go the other way is what the Federal taxing authorities can do, not one thing about any other creditor under Michigan law.
Mr. Sutton: The problem for people like the Crafts is that they've already said it.
In Budwit v. Herr they say, the minute you destroy the unity of ownership you destroy the tenancy, so I--
Mr. Sutton: Isn't the concern that the tenancy not be destroyed, in effect as a result of a consensual act by one of the spouses, an alienation by a spouse alone--
Mr. Sutton: --The nonconsensual act, right.
Mr. Sutton: --the incurring of debt by one spouse alone as a consensual act, i.e., going on a spending spree?
But here, the consensual act of the spouse has nothing to do with it.
It's not a consensual act of the spouse that the spouse has to pay income act--
Mr. Sutton: Oh, but Your Honor, it is.
Mr. Sutton: --and therefore it seems to me outside the rationale that you're proposing for the tenancy.
Mr. Sutton: I respectfully disagree, Your Honor.
It's exactly the rationale.
There's no difference from Mr. Craft unilaterally trying to incumber the property with his own loan, using the property as a mortgage to back it up.
Mr. Sutton: Sure it is.
He goes out and says, I want a loan to buy a Cadillac.
That's certainly a fair concern of the State in protecting the wife.
That concern doesn't extend to a situation in which the tax law of the United States says, you're going to pay tax on your income whether you like it or not.
Mr. Sutton: But Your Honor, it's a unilateral act, number 1, by the spouse, and number 2, it is a lot like a loan.
Mr. Sutton: What's a unilateral act, earning the money?
Mr. Sutton: It is a lot like a loan, Your Honor.
If you need $50,000 a month to support some bad habit, you can get it by borrowing from a bank or not paying your taxes.
It has the exact same effect when it comes to the unilateral conduct of one spouse undermining the marital property.
Mr. Sutton: And then, if Congress said this explicitly, the same thing would follow, everything that you said.
Congress would then be destroying--
Mr. Sutton: --They could do what they did in the estate tax, which is regulate it specifically.
I would submit, it is not an easy process.
Mr. Sutton: --I thought that the... oh.
Mr. Sutton: Why doesn't Mrs. Craft have a takings argument the minute this lien attaches for the entire value of her property?
Why is that not the case?
It's not obvious to me.
Mr. Sutton: Just as Mr. Drye didn't when his State law said--
Mr. Sutton: But there was only one taxpayer in Drye.
You didn't allow a lien... excuse me.
Mr. Sutton: --Thank you, Mr. Sutton.
Mr. Sutton: Thank you, Your Honor.
Mr. Sutton: Mr. Jones, you have 3 minutes remaining.
REBUTTAL ARGUMENT OF KENT L. JONES ON BEHALF OF THE PETITIONER
Mr. Jones: Thank you.
I have only a couple of points.
The first one is that the tenancy involved in this case was destroyed when it was transferred from the husband to the spouse.
That's the first instance when it was destroyed, and secondly it was destroyed when the wife then sold it to a third party.
What we have are proceeds that are not subject to a tenancy by the entirety.
We have proceeds that are... to which the former tenants are each entitled to 50 percent.
The right, their right to have 50 percent of the proceeds is confirmed by 577.71 of the Michigan Code, which was enacted in 1975, but it preexisted that as we pointed out in the cases that we've cited in our reply brief.
I will say that the suggestion that this statute that gives each spouse an equal right in the property only applies to tenancies created after 1975 is a new contention.
It's not addressed in the briefs.
It catches us by surprise, but I will point out that the Dow case--
Mr. Sutton: It shouldn't be a surprise if it's in the statute you're quoting to us.
Mr. Jones: --What I will... what is in the statute that I--
Mr. Sutton: Is it in the statute?
Mr. Jones: --What I have in my possession is a copy that says that the effective date is 1975, and I do know that in Dow v. State, decided by the supreme court of Michigan in 1976, they applied that statute to a tenancy that had been created prior to 1965.
This statute that was enacted in 1975 reflects a policy of, I suspect, every State in the modern era to recognize the equal rights of the spouses and the tenants in the property, and not to respect--
Mr. Sutton: Suppose it didn't.
I mean, is it your... are you conceding, then, that the Government cannot assert a lien on a real tenancy by the entirety?
Mr. Jones: --No, not at all.
I'm saying that we have such a lien in this case, both from the right of survivorship, if we ever had to get there, but more importantly because we have a lien in the right to receive proceeds.
This statute that was enacted in '75 does not directly address the proceeds issue.
The proceeds right preexisted the statute.
What the statute addressed was the equal right to income during the existence of the tenancy by the entirety, and the equal right to control the management.
Mr. Sutton: Mr. Jones, can I ask you one question?
I hate to take up your reply time.
In your view, will the decision in this case control in community property States, raising the same question?
Mr. Jones: Well, I think the principles that you apply will, of course, control, and--
Mr. Sutton: Yes, but--
Mr. Jones: --And whether a decision in this case addressed principles that would extend or apply in that situation as well as this, I can't say.
Mr. Sutton: --Can... do they... in a community property State, can one spouse force division over... to an unwilling spouse?
Mr. Jones: --Under State law there are limitations, but those State law limitations have already been held to be ineffective against Federal tax provisions.
Mr. Sutton: But the community property is subject to the debts incurred during the marriage?
Mr. Jones: That's correct and, again, in the Mitchell case the Court held that State law fictions about the relative rights in community property States are no more binding on the Federal tax collector than in other contexts.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.
Argument of Speaker
Mr. Sutton: The opinion of the court in No. 00-1831, United States against Craft will be announced by Justice O’Connor.
Argument of Justice O’connor
Mr. O’connor: This case comes here on writ of certiorari to the Court of Appeals for the Sixth Circuit.
When the respondent’s husband failed to pay his federal income tax, a federal tax lien attached to all his property and rights to property.
At the time that respondent and her husband owned a piece of property classified by Michigan Law as tenancy by the entirety, a unique form of co-ownership reserved for married people.
The question before the Court is whether her husband had property or rights to property in the tenancy by the entirety to which the tax lien could have attached.
The Sixth Circuit held that under Michigan Law, respondent’s husband had no property right in the entirety’s estate.
We now reverse.
Because the federal tax lien statute itself creates no property rights, this court looks initially to State Law to determine what rights the taxpayer has in the relevant property.
Ultimately however, whether these rights constitute property for purposes of the federal tax lien as a question of federal law.
If property is as they say a bundle of sticks, a collection of individual rights which in certain combination may constitute property, State Law determines which sticks are in the taxpayers bundle, while federal law determines whether the label property may attach to those sticks.
Whether a State Law would also label those sticks as property is irrelevant.
Michigan Law gave respondent’s husband rights in the tenancy by the entirety’s property consisting of the right to use the property, the right to exclude others from it, the right to receive income from it, and the right to alienate (or otherwise encumber) the property with the permission of his spouse.
We hold that these rights are sufficient to constitute property for the purposes of the federal tax lien statute.
If they were not considered properly, the entirety’s estate would have no longer, a result that not only seems strange but with also facilitate tax evasion.
It is true that Michigan Law exempts entirety’s property from the reach of State Law creditors but we have elsewhere held that State Law exemptions do not bind the federal government and they should not do so here.
Justice Thomas has filed a dissenting opinion in which Justice Stevens and Justice Scalia have joined; Justice Scalia has also file a dissenting opinion which Justice Thomas has joined.