North Carolina General Statutes and N.C. case law provide for a special form of real property ownership for a husband and wife called "tenants by the entirety." 

Under this form of ownership, the property is owned by the marital unit, and each spouse does not own a separate interest. With this form of ownership interest come special protections:

  1. A right of survivorship so that the property passes to the surviving spouse automatically and is not included in the deceased spouse’s estate.
  2. The property cannot be conveyed without the signature of both spouses.
  3. A lien or judgment against one spouse, only, does not attach to the real property owned as "tenants by the entirety."

The protection provided by No. 3 above is a great form of asset protection because the judgment creditors of one spouse cannot reach the property. The marital ownership was so strong that many believed that nothing could sever this bond. That was until 2002 and the landmark case of United States v. Craft came along. 

Don Craft had tax liabilities of $482,446 for failure to file federal income tax returns. The IRS assessed Don Craft for the unpaid taxes, which became a lien on "all property and rights to property, whether real or personal belonging to" him. 

Don Craft and his wife, Sandra Craft, owned real property in Michigan that was titled as tenants by the entirety. In an attempt to be crafty, the couple executed a quitclaim deed to Sandra Craft for $1. Sandra then tried to sell the property, and a title search revealed the lien. 

The IRS took the position that they were entitled to one-half of the proceeds representing Mr. Craft’s interest in the property. The Sixth Circuit Court of Appeals upheld the longstanding principle that property held as tenants by the entireties was not subject to an individual spouse’s tax lien. The IRS appealed to the U.S. Supreme Court. 

In a stretch to reach a desired result, the court looked beyond established state statutes and established case law. The court looked to the rights that each spouse has in connection with ownership as tenants by the entirety such as:

  1. The right to use the property;
  2. The right to exclude third parties;
  3. The right to share in income produced;
  4. The right of survivorship;
  5. The right to become a tenant in common upon divorce;
  6. The right to sell the property with spousal consent; and
  7. The right to encumber the property with spousal consent.

It was the opinion of the court that these rights are sufficient enough for the federal tax lien to attach to the property. Therefore, the Federal Tax Lien does attach to the taxpayer’s interest in entireties property. 

It was clear that the court was trying to reach a particular result. Justice Clarence Thomas, in his dissent, pointed out that even the Internal Revenue Service manual states that the federal tax lien does not attach to real property held as tenancy by the entirety. This ruling will be particularly harsh on an innocent spouse.

Like it or not, this is the law of the land. When a married couple is purchasing real property, if one spouse has a federal tax lien, it is an important consideration in the titling of the land. Thankfully, at this point, the IRS is the only creditor that can reach real property held as tenants by the entirety.

Published on December 7, 2015