For generations, married couples in many states believed they had a shield. Put the house in both names as tenants by the entirety, and a creditor of only one spouse could not touch it. That belief was mostly right for ordinary creditors. In 2002, the Supreme Court said it was wrong for the IRS.
United States v. Craft is the reason a federal tax lien against one spouse can follow a home the couple owns together.
The Facts
In 1988, the IRS assessed $482,446 in unpaid income tax against Don Craft for failing to file federal returns for 1979 through 1986. When he did not pay, the federal tax lien under IRC § 6321 attached to "all property and rights to property" belonging to him.
Don and his wife, Sandra Craft, owned real estate in Grand Rapids, Michigan as tenants by the entirety. After the IRS filed notice of its lien, the couple executed a quitclaim deed transferring Don's interest to Sandra for one dollar. A few years later Sandra tried to sell the property. The title search turned up the lien. The IRS agreed to release the lien to allow the sale, on the condition that half of the net proceeds sit in escrow until the courts decided the government's rights.
Sandra sued to quiet title to the escrowed money. The Sixth Circuit held the lien never attached because, under Michigan law, a husband had no separate interest in entireties property. The case bounced through remand and a second appeal before the Supreme Court took it.
The Issue
Does a spouse who holds property as a tenant by the entirety have "property" or "rights to property" to which a federal tax lien can attach, when state law says neither spouse owns any separate interest?
The Holding
Yes. Justice O'Connor wrote for the Court: "We conclude that, despite the fiction, each tenant possesses individual rights in the estate sufficient to constitute 'property' or 'rights to property' for the purposes of the lien." The Court reversed the Sixth Circuit and sent the case back. Justices Scalia and Thomas dissented.
The Reasoning
The bundle of sticks
The Court started with a familiar idea. Property is a "bundle of sticks," a collection of individual rights. State law decides which sticks a taxpayer holds. Federal law decides whether that bundle is enough to be "property" for the lien statute. This is the same two-step approach the Court used in Drye v. United States and before that in United States v. National Bank of Commerce.
So what sticks did Don Craft hold under Michigan law? The Court listed them. He could use the property. He could exclude third parties. He could take a share of income it produced. He had a right of survivorship. He could sell or encumber the property with his wife's consent, and he could block her from selling it alone.
That is plenty
The Court said the right to use, the right to receive income and the right to exclude others are among the most essential property rights. Those alone might have been enough. The fact that Don could not sell the property on his own did not change the answer. The Court pointed to United States v. Rodgers, where a federal tax lien attached to Texas homestead property that one spouse could not sell without the other's consent. It also noted that some community property cannot be sold without both spouses' consent, and nobody thinks that kind of property is beyond the reach of a tax lien.
Somebody has to own it
Then the Court made the point that ends the argument. If the husband had no property interest, and the wife had no more interest than he did, then who owned the house? "This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system."
Michigan's choice does not bind the IRS
The Court acknowledged that Michigan does not let ordinary creditors of one spouse levy on entireties land. That did not matter. The meaning of § 6321 is a federal question, and the Court quoted its earlier holding that "exempt status under state law does not bind the federal collector."
What the Court did not decide
Craft answered whether the lien attaches. It did not answer how much the lien is worth. The Court expressly left the valuation of Don Craft's interest to the Sixth Circuit on remand. It also flagged that the fraudulent conveyance question would "no doubt be answered differently" in future cases, because the lower courts had reasoned that transferring entireties property could not defraud the IRS when no lien could attach. After Craft, that premise is gone.
What It Means for Taxpayers Today
Titling the house jointly is not a tax shield
If you owe the IRS and your spouse does not, owning the home as tenants by the entirety does not keep the federal tax lien off your interest. The lien attaches the moment it arises. A Notice of Federal Tax Lien recorded in the county will show up when you try to sell or refinance, just as it did for Sandra Craft. Our overview of how IRS tax liens work covers the basics of that process.
Quitclaiming to your spouse does not solve it either
The Crafts deeded the husband's interest to the wife for one dollar after the lien notice was filed. That did not stop the government from claiming half the sale proceeds. A transfer after the lien attaches generally takes the property subject to the lien, and the Court signaled that a transfer designed to put assets beyond the IRS's reach will look different now that the lien clearly attaches.
The innocent spouse still has real interests
Craft does not mean the IRS can take the whole house for one spouse's debt. The lien attaches to the debtor spouse's interest. The non-liable spouse keeps her own interest. When the IRS wants to force a sale of the entire property, it generally has to go to federal court under IRC § 7403, where the judge weighs the factors from Rodgers and the non-liable spouse must be compensated for her share. Valuing a survivorship-based interest is not simple, and that fight matters.
Plan for the closing table
In practice, Craft shows up at real estate closings. The lien blocks clear title. The usual solutions are a certificate of discharge of the property from the lien under IRC § 6325(b), an agreement to escrow part of the proceeds as the IRS did with the Crafts, or paying off the liability. Each one turns on how the debtor spouse's interest is valued. Get the valuation argument ready before you sign a sale contract, not after.
If you are the spouse who does not owe
Separate the two problems. The lien on your spouse's interest is one issue. Whether you are personally liable for the tax is another. If the debt came from joint returns you signed, look at innocent spouse relief under IRC § 6015, discussed in our article on innocent spouse relief. If the debt is your spouse's alone, your fight is about protecting your share of the property, not about the liability.
The Bottom Line
Craft took away a planning tool that many couples assumed was bulletproof. The federal tax lien reaches each spouse's interest in entireties property, no matter what state law says ordinary creditors can do. The questions that remain are valuation and procedure, and those are exactly where a married couple with a tax problem still has room to protect the non-owing spouse.