State
Law 6321
What
constitutes the taxpayer's property, subject to an
IRS
tax lien, is a question of state law.
[60-2 USTC ¶9539]
United States of America
, Petitioner v. Durham Lumber Company, and George H. Carter, Jr.
Supreme Court of the United States, No. 23, 363 US 522, 80
SCt 1282, 6/20/60, Affirming CA-4, 58-2 USTC ¶9736, 257 F. 2d 570
On Writ of Certiorari to the United States Court of Appeals for the
Fourth Circuit.
[1954 Code Secs. 6321-6323]
MR.
CHIEF
JUSTICE WARREN delivered the opinion of the Court:
This
case involves the competing claims of the Federal Government and certain
subcontractors to a sum of money owed to the taxpayers under a general
construction contract.
The
Court of Appeals was correct in asserting that the Government's tax lien
attached to the taxpayers' property interests in the fund as defined by
North Carolina
law. Aquilino v. United States, ante, pp. --, --; [60-2
USTC ¶9538]; 4
United States v. Bess. 357
U. S.
51, 55 [58-2 USTC ¶9595]; cf. Morgan v. Commissioner, 309
U. S.
78, 82 [40-1 USTC ¶9210]. It is suggested that the courts of North
Carolina have never specifically described the nature of the property
rights created by the North Carolina statutes involved in this case, and
that the Court of Appeals' interpretation of those statutes is probably
incorrect. However, where "[T]he
precise issue of state law involved . . . is one which has not been
decided by the . . . [state] courts," this Court has said that,
"[I]n dealing with issues of state law that enter into judgments of
federal courts, we are hesitant to overrule decisions by federal courts
skilled in the law of particular states unless their conclusions are
shown to be unreasonable." Propper v. Clark, 337
U. S.
472, 486-487. Since the Court of Appeals is much closer to North
Carolina law than we are, and since we cannot say that the court's
characterization of the taxpayers' property interests under that law is
clearly erroneous or unreasonable, 5
the judgment is
Affirmed.
1 Section 6321. Lien for taxes:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person."
2 Section 6322. Period of lien:
"Unless
another date is specifically fixed by law, the lien imposed by section
6321 shall arise at the time the assessment is made and shall continue
until the liability for the amount so assessed is satisfied or becomes
unenforceable by reason of lapse of time."
3 N. C. Gen. Stat., 1950, §§ 44-6 to 44-12.
4 This case points up the distinction we drew in Aquilino.
The facts here show how it simply begs the question to suggest that the
principle of the lien-priority cases is somehow subverted or evaded by
recognizing that what constitutes the taxpayer's property in the first
place is a question of state law. The facts show, too, that it does not
promote clarity to substitute, for the property interests created by
state law, a rule of federal property law, the main feature of which
seems to be an inquiry into what the consequences would be if state law
were different from what it in fact is. It is said that we should regard
the subcontractor's interest as equivalent to a lien on the general
contractor's claim against the owner, overlooking the fact that the law
of
North Carolina
, as interpreted by the Court of Appeals, indicates that there is no
such claim. If we are to equate the subcontractor's interest with
something it is not, it would be much more appropriate, in terms of
similarity, to equate it with the usual mechanic's lien of a
subcontractor on the owner's property being improved--which of course is
not the general contractor's property, and which could not be taken by
the United States under a lien against the general contractor. This only
points up the lack of precision and content in the proposed federal
definition of property. See also Fidelity & Deposit Co. of
Md.
v.
New York City
Housing Auth., 241 F. 2d 142 (C. A. 2d Cir.) [57-1 USTC ¶9410],
cited with approval in United States v. Bess, 357
U. S.
51, 55 [58-2 USTC ¶9595].
5 See Sims v. United States, 359 U. S. 108, 114 [59-1
USTC ¶9338]; Ragan v. Merchants Transfer & Warehouse Co.,
337 U. S. 530, 534; Estate of Spiegel v. Commissioner, 335 U. S.
701, 707-708 [49-1 USTC ¶10,703].
[61-2 USTC ¶9571]Robert Aquilino & ano, co-partners doing business
under the firm name and style of Home Maintenance Co.,
Plaintiffs-Respondents v. United States of America, Defendant-Appellant,
and Fleetwood Paving Corporation, Defendant, and Colonial Sandand Stone
Co., Inc., Defendant-Respondent
N.
Y. Court of Appeals, No. 106 (1957), 176 NE2d 826, 7/7/61
This case is before us on remand from the United States Supreme Court.
When it was previously here [58-1 USTC ¶9191] (3 N. Y. 2d 511), we
concluded that a tax lien asserted by the United States was superior to
claims advanced by subcontractors and, in consequence, held the
Government entitled to a sum of money owed under a general construction
contract performed by the taxpayer. The
Supreme Court, believing that we had slighted State law and given
undue emphasis to Federal decisions, vacated the judgment and remanded
the case for further consideration [60-2 USTC ¶9538] (363 U. S. 509).
The
courts below, each giving different reasons, denied the Government's
claim of priority for its tax lien and granted the plaintiffs' motions
for summary judgment. We reached a contrary decision; it was our opinion
that the Government's lien was asserted against the indebtedness of the
owner to the contractor-taxpayer and that such indebtedness constituted
"property" and "rights to property," as those terms
are used in the controlling Federal statute (Internal Revenue Code of
1939, U. S. Code, tit. 26, §3670 [now numbered §6321]).
[Property Rights Under State Law]
As
indicated above, the Supreme Court found our approach to the resolution
of the problem unsatisfactory. In United States v. Bess [58-2
USTC ¶9595] (357 U. S. 51), the court had explicitly declared that
section 3670 of the Internal Revenue Code "creates no property
rights but merely attaches consequences, federally defined, to rights
created under state law" (p. 55). Quoting this language, the
Supreme Court sent the present case back to us so that we might
"ascertain the property interests of the taxpayer under state
law" and then apply Federal law to determine the priority of the
competing claims (363 U. S., at pp. 515-516). More specifically, we were
directed to explore the meaning and impact of former section 36-a of our
Lien Law and to determine whether under its terms the
contractor-taxpayer holds bare legal title to the sum due from the
owner, as trustee for the subcontractors, or whether it has full
ownership of the debt, subject only to a lien in favor of the
subcontractors.
It
is to be noted at the outset that we are called upon the construe a
statute no longer on the books and deal with law as it existed between
1942 and 1959. Section 36-a of the Lien Law, enacted in 1930, was
repealed in 1959, its provisions, with modifications, being transferred
to a new article 3-A. (L. 1959, ch. 696, enacting Lien Law, §§ 70-79;
see 1959 Report of N. Y. Law Rev. Comm., p. 185; N. Y. Legis. Doc.,
1959, No. 65[F].)
Section
36-a was one among a series of provisions of the Lien Law directed
against various injurious and irresponsible practices in the
construction industry. Chief among the evils sought to be eradicated was
that of "pyramiding," a practice whereby owners or contractors
use money advanced in the course of one project, as loans or as contract
payments, to commence or complete another project. In the case of a
contractor, the so-called trust fund provisions of the Lien Law
prohibited diversion, to purposes unrelated to a particular improvement,
of contract payments from the owner which were intended to pay the
expense of that improvement, including the cost of labor and materials.
(See 1942 Report of N. Y. Law Rev. Comm., pp. 298-306; N. Y. Legis.
Doc., 1942, No. 65 [H], pp. 28-36.)
Our
conclusion, then, is that, as a
matter of New York law, a contractor does not have a sufficient
beneficial interest in the moneys, due or to become due from the owner
under the contract, to give him a property right in them, except insofar
as there is a balance remaining after all subcontractors and other
statutory beneficiaries have been paid. This being so, it
follows that the tax lien herein asserted by the Government against the
property of the contractor-taxpayer is ineffective to reach such moneys
and that the plaintiff subcontractors are entitled to the
court-deposited fund.
The
judgment of the Appellate Division should be affirmed, with costs.
Chief
Judge DESMOND and Judges DYE, FROESSEL, VAN VOORHIS, BURKE and FOSTER
concur.
Judgment
affirmed.
Once
it is determined that a delinquent taxpayer has an interest in property,
federal law and not state law controls whether the property will be
exempt from attachment.
[83-1 USTC ¶9374]United States, Petitioner v. Lucille Mitzi Bosco
Rodgers et al.Supreme
Court of the United States, No. 81-1476, 103 SCt 2132, 461 US 677,
5/31/83
, Reversing and remanding and vacating and remanding, 82-2 USTC
9536, 81-2 USTC ¶9533
On writ of certiorari to the United States Court of Appeals for the
Fifth Circuit.
[Code Sec. 7403]
Syllabus
These
cases present the issue whether §7403 of the Internal Revenue Code of
1954--which authorizes a federal district court, in a suit instituted by
the Government, to decree a sale of certain properties to satisfy the
tax indebtedness of delinquent taxpayers--empowers a district court to
order the sale of the family home in which a delinquent taxpayer had an
interest at the time he incurred his indebtedness, but in which the
taxpayer's spouse, who does not owe any of that indebtedness, also has a
separate "homestead" right as defined by Texas law. Under
Texas statutory and constitutional provisions, each spouse--regardless
of whether one or both owns the fee interest--has a separate and
undivided possessory interest in the homestead, which is only lost by
death or abandonment and may not be compromised by either the other
spouse or his or her heirs, and which in effect is an interest akin to
an undivided life estate in the property. In the Rodgers case,
the Government filed suit against respondents, the widow, children, and
executor of Philip Rodgers, to reduce to judgment, assessments made
against Philip before his death for unpaid taxes and to enforce the
Government's tax liens, including one that had attached to his interest
in the homestead. The District Court granted summary judgment on
respondents' claim that the tax liens could not defeat Mrs. Rodgers'
state-created right not to have her homestead (which she continued to
occupy) subjected to a forced sale. The Court of Appeals affirmed. In
the Ingram case, which involved tax assessments made before a
divorce both against the husband alone and against both spouses relating
to their joint income tax liability, the residence was destroyed by fire
shortly before the divorce, and the government, as a defendant in quiet
title proceedings in Federal District Court, filed a counterclaim
against both spouses, seeking judicial sale of the property under §7403.
Pursuant to the parties' stipulation, the property was sold and the
proceeds were deposited in the court's registry, the parties agreeing
that their rights would be determined as if the sale had not taken place
and that the proceeds would be divided according to their respective
interests. The District Court granted summary judgment on the
Government's counterclaim. Affirming in part, and reversing and
remanding in part, the Court of Appeals agreed that the Government could
foreclose its lien on the proceeds to collect for the income tax owed by
both spouses jointly, but held that the Government could not reach the
proceeds to collect the husband's individual liability if the wife had
maintained her homestead interest in the property. The court remanded
for a factual determination of whether the wife had
"abandoned" the homestead by dividing the fire insurance
proceedings with the husband and by attempting, before the stipulation
with the Government, to sell the property and divide the proceeds with
the husband.
Held:
1.
Section 7403 grants power to a federal district court to order the sale
of the home itself, not just the delinquent taxpayer's interest
in the property. If the home is sold, the nondelinquent spouse is
entitled, as part of the distribution of proceeds required under §7403,
to so much of the proceeds as represents complete compensation for the
loss of such spouse's separate homestead interest. Pp. 11-23.
(a)
While the Government's lien cannot extend beyond the property interests
held by the delinquent taxpayer, the plain meaning of the statute
authorizes sale of the entire property. Section 7403(a) provides that
the Government may seek to "subject any property, [of]
whatever nature, of the delinquent, or in which he has any right,
title, or interest, to the payment of such tax or liability."
Section 7403(b) then provides that all persons "claiming any
interest in the property involved in such action" shall be made
parties thereto, and §7403(c) provides that the district court should
"determine the merits of all claims" to the property
and if the Government's claim is established, "may decree a sale of
such property . . . and a proper distribution of the proceeds of such
sale according to the findings of the court in respect to the interests
of the parties and of the United States." Reading §7403 to
authorize sale of the entire property is also consistent with the policy
of prompt and certain collection of delinquent taxes and with the
history of state in rem tax enforcement proceedings, and is
further bolstered by a comparison with the statutory language which
limits the Government's administrative remedy, available under 26
U. S. C. §6331, to sale of the delinquent taxpayer's interest in
property. Moreover, §7403's requirements for distribution of the
proceeds of the sale provides compensation for the taking of the
property interest (such as the homestead estate in Texas) of an innocent
third party, thus precluding any difficulties under the Due Process
Clause of the Fifth Amendment. Pp. 11-21.
(b)
Nor do the special protections accorded by the exemption aspect of Texas
homestead law immunize property held as a homestead by a nondelinquent
third party from the reach of §7403. No such exception appears on the
face of §7403, and the Supremacy Clause--which provides the
underpinning for the Federal Government's right to sweep aside
state-created exemptions in the first place--is as potent in its
application to innocent bystanders as in its application to delinquent
debtors. Pp. 21-23.
2.
Section 7403, which provides that a district court "may"
decree the sale of property, does not require the court to authorize a
forced sale under absolutely all circumstances. Some limited room is
left in the statute for the exercise of reasoned discretion. Pp. 24-34.
(a)
The principle of statutory construction that the word "may"
usually implies some degree of discretion can be defeated by indications
of contrary legislative intent or by obvious inferences from the
statute's structure and purpose. Such indications or inferences are not
present here. Pp. 27-31.
(b)
In determining whether to authorize a sale under §7403 when the
interests of nondelinquent third parties are involved, a district court
should consider such factors as to following: (1) the extent to which
the Government's financial interests would be prejudiced if it were
relegated to a forced sale of the partial interest actually liable for
the delinquent taxes; (2) whether the third party with a nonliable
separate interest in the property would, in the normal course of events,
have a legally recognized expectation that such separate property would
not be subject to forced sale by the delinquent taxpayer or his or her
creditors: (3) the likely prejudice to the third party, both in personal
dislocation costs and in practical undercompensation; and (4) the
relative character and value of the nonliable and liable interests held
in the property. Pp. 31-33.
(c)
In the Rodgers case, no individualized equitable balance of such
factors has yet been attempted, this being a matter for the District
Court in the first instance. In the Ingram case, a question
remains under
Texas
law as to whether the divorced wife had abandoned the homestead.
Assuming no abandonment, and if the wife discharges her personal income
tax liability before the Government can proceed with its
"sale," the District Court will be obliged to strike an
equitable balance under the relevant factors. Pp. 33-34.
[81-2 USTC ¶9536] 649 F. 2d 1117, reversed and remanded;
[81-2 USTC ¶9533] 649 F. 2d 1128, vacated and remanded.
BRENNAN,
J., delivered the opinion of the Court, in which BURGER, C. J., and
WHITE, MARSHALL, and POWELL, JJ., joined. BLACKMUN, J., filed an opinion
concurring in part and dissenting in part, in which REHNQUIST, STEVENS,
and O'CONNOR, JJ., joined.
JUSTICE
BRENNAN delivered the opinion of the Court:
These
consolidated cases involve the relationship between the imperatives of
federal tax collection and rights accorded by state property laws.
Section 7403 of the Internal Revenue Code of 1954, 26
U. S.
C. §7403, authorizes the judicial sale of certain properties to satisfy
the tax indebtedness of delinquent taxpayers. The issue in both cases is
whether §7403 empowers a federal district court to order the sale of a
family home in which a delinquent taxpayer had an interest at the time
he incurred his indebtedness, but in which the taxpayer's spouse, who
does not owe any of that indebtedness, also has a separate
"homestead" right as defined by Texas law. We hold that the
statute does grant power to order the sale, but that its exercise is
limited to some degree by equitable discretion. We also hold that, if
the home is sold, the nondelinquent spouse is entitled, as part
of the distribution of proceeds required under §7403, to so much of the
proceeds as represents complete compensation for the loss of the
homestead estate.
I
[Statutory Background]
A
Section
7403 provides in full as follows:
"(a) Filling.--In any case where there has been a
refusal or neglect to pay any tax, or to discharge any liability in
respect thereof, whether or not levy has been made, the Attorney General
or his delegate, at the request of the Secretary [of the Treasury], may
direct a civil action to be filed in a district court of the United
States to enforce the lien of the United States under this title with
respect to such tax or liability or to subject any property, [of]
whatever nature, of the delinquent, or in which he has any right, title,
or interest, to the payment of such tax or liability. For purposes of
the preceding sentence, any acceleration of payment under section
6166(g) or 6166A(h) shall be treated as a neglect to pay tax.
"(b) Parties.--All persons having liens upon or claiming
any interest in the property involved in such action shall be made
parties thereto.
"(c) Adjudication and decree.--The court shall, after
the parties have been duly notified of the action, proceed to adjudicate
all matters involved therein and finally determine the merits of all
claims to and liens upon the property, and, in all cases where a claim
or interest of the United States therein is established, may decree a
sale of such property, by the proper officer of the court, and a
distribution of the proceeds of such sale according to the findings of
the court in respect to the interests of the parties and of the United
States. If the property is sold to satisfy a first lien held by the
United States
, the
United States
may bid at the sale such sum, not exceeding the amount of such lien with
expenses of sale, as the Secretary directs.
"(d) Receivership.--In any such proceeding, at the
instance of the
United States
, the court may appoint a receiver to enforce the lien, or, upon
certification by the Secretary during the pendency of such proceedings
that it is in the public interest, may appoint a receiver with all the
powers of a receiver in equity."
As
a general matter, 1 the "lien of the United States" referred to in
§7403(a) is that created by 26 U. S. C. §6321, which provides:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person." 2
Section
7403, whose basic elements go back to revenue legislation passed in 1868
(§106 of the Act of
July 20, 18
68 ch. 186, 15 Stat. 125, 167) is one of a number of distinct
enforcement tools available to the
United States
for the collection of delinquent taxes. 3
The Government may, for example, simply sue for the unpaid amount and,
on getting a judgment, exercise the usual rights of a judgment creditor.
See 26 U. S. C. §§ 6502(a), 7401, 7402(a). Yet a third route is
administrative levy under 26
U. S.
C. §6331, which provides:
"If
any person liable to pay any tax neglects or refuses to pay the same
within 10 days after notice and demand, it shall be lawful for the
Secretary or his delegate to collect such tax (and such further sum as
shall be sufficient to cover the expenses of the levy) by levy upon all
property and rights property (except such property as is exempt under
section 6334) belonging to such person or on which there is a lien
provided in this chapter for the payment of such tax. . . ."
Administrative
levy, unlike an ordinary lawsuit, and unlike the procedure described in
§7403, does not require any judicial intervention, and it is up to the
taxpayer, if he so chooses, to go to court if he claims that the
assessed amount was not legally owing. See generally Bull v. United
States, 295
U. S.
247, 260 (1935). 4
The
common purpose of this formidable arsenal of collection tools is to
ensure the prompt and certain enforcement of the tax laws in a system
relying primarily on self-reporting. See G. M. Leasing Corp. v.
United States [77-1 USTC ¶9140], 429
U. S.
338, 350 (1977); United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340
U. S.
47, 51 (1950); Bull v.
United States
, supra, at 259-260. 5
Moreover, it has long been an axiom of our tax collection scheme that,
although the definition of underlying property interests is left to
state law, the consequences that attach to those interests is a matter
left to federal law. See United States v. Mitchell, 403 U. S.
190, 205 (1971) (state law determines income attributable to wife as
community property, but state law allowing wife to renounce community
rights and obligations not effective as to liability for federal tax); United
States v. Union Central Life Insurance Co. [62-1 USTC ¶9103], 368
U. S. 291, 293-295 (1961) (federal tax lien not subject, even as against
good faith purchaser, to state filing requirements); Aquilino v.
United States [60-2 USTC ¶9538], 363 U. S. 509, 513-515 (1960), and
cases cited (attachment of federal lien depends on whether
"property" or "right to property" exist under state
law; priority of federal lien depends on federal law); United States
v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57 (1958) (once it has
been determined that state law has created property interests sufficient
for federal tax lien to attach, state law "is inoperative to
prevent the attachment" of such liens); Springer v. United
States, 102 U. S. 586, 594 (1981) (federal tax sale not subject to
state requirement that independent lots be sold separately).
B
[
Texas
Homestead
Right]
The
substance of
Texas
law related to the homestead right may usefully be divided into two
categories. Cf. Woods v. Alvarado State Bank, 118
Tex.
586, 590, 19 S. W. 2d 35, 35 (1929). First, in common with a large
number of States, Texas establishes the family home or place of business
6
as an enclave exempted from the reach of most creditors. Thus, under Tax
Const., Art. 16, §50.
"The
homestead of a family, or of a single adult person, shall be, and is
hereby protected from forced sale, for the payment of all debts except
for [certain exceptions not relevant here] . . .. No mortgage, trust
deed, or other lien on the homestead shall ever be valid, except for
[certain exceptions not relevant here]. . . ." 7
Second,
in common with a somewhat smaller number of states,
Texas
gives members of the family unit additional rights in the homestead
property itself. Thus, in a clause not included in the above quotation,
Tex. Const., Art 16, §50, also provides that "the owner or
claimant of the property claimed as a homestead [may not], if married,
sell or abandon the homestead without the consent of the other spouse,
given in such manner as may be prescribed by law." 8
Equally important, Art. 16, §52, provides that:
"On
the death of the husband or wife, or both, the homestead shall descend
and vest in like manner as other real property of the deceased, and
shall be governed by the same laws of descent and distribution, but it
shall not be partitioned among the heirs of the deceased during the
lifetime of the surviving husband or wife, or so long as the survivor
may elect to use or occupy the same as a homestead, or so long as the
guardian of the minor children of the deceased may be permitted, under
the order of the proper court having the jurisdiction to use and occupy
the same." 9
The
effect of these provisions in the Texas Constitution is to give each
spouse in a marriage a separate and undivided possessory interest in the
homestead, which is only lost by death or abandonment, and which may not
be compromised either by the other spouse or by his or her heirs. 10
It bears emphasis that the rights accorded by the homestead laws vest
independently in each spouse regardless of whether one spouse, or both,
actually owns the fee interest in the homestead. Thus, although analogy
is somewhat hazardous in this area, it may be said that the homestead
laws have the effect of reducing the underlying ownership rights in a
homestead property to something akin to remainder interests and vesting
in each spouse an interest akin to an undivided life estate in the
property. See Williams v. Williams, 569 S. W. 2d 867, 869 (
Tex.
1978), and cases cited; Paddock v. Siemoneit, 147
Tex.
571, 585, 218 S. W. 2d 428, 436 (1949), and cases cited; Hill v.
Hill, 623 S. W. 2d 779, 780 (Tex. Civ. App. 1981), and cases cited.
This analogy, although it does some injustice to the nuances present in
the Texas homestead statute, 11
also serves to bring to the fore something that has been repeatedly
emphasized by the Texas courts, and which was reaffirmed by the Court of
Appeals in these cases: that the Texas homestead right is not a mere
statutory entitlement, but a vested property right. As the Supreme Court
of Texas has put it, a spouse "has a vested estate in the land of
which she cannot be divested during her life except by abandonment or a
voluntary conveyance in the manner prescribed by law." Paddock
v. Siemoneit, supra, at 585, 218 S. W. 2d, at 436; see United
States v. Rogers [81-2 USTC ¶9536], 649 F. 2d 1117, 1127 (CA5
1981), and cases cited. 12
II
[Factual Background]
The
two cases before us were consolidated for oral argument before the
United States Court of Appeals for the Fifth Circuit, and resulted in
opinions issued on the same day. United States v. Rogers, supra; 13 Ingram v. Dallas Department of Housing & Urban
Rehabilitation [81-2 USTC ¶9533], 649 F. 2d 1128 (1981). They arise out of
legally comparable, but quite distinct, sets of facts.
A
[Rodgers]
Lucille
Mitzi Bosco Rodgers is the widow of Philip S. Bosco, whom she married in
1937. She and Mr. Bosco acquired, as community property, a residence in
Dallas
,
Texas
, and occupied it as their homestead. Subsequently, in 1971 and 1972,
the Internal Revenue Service issued assessments totalling more than
$900,000.00 for federal wagering taxes, penalties, and interest, against
Philip for the taxable years 1966 through 1971. These taxes remained
unpaid at the time of Philip's death in 1974. Since Philip's death,
Lucille has continued to occupy the property as her homestead, and now
lives there with her present husband.
On
September 23, 1977
, the Government filed suit under 26 U. S. C. §§ 7402 and 7403 in the
United States District Court for the Nothern District of Texas against
Mrs. Rodgers and Philip's son, daughter, and executor. The suit sought
to reduce to judgment the assessments against Philip, to enforce the
Government's tax liens, including the one that had attached to Philip's
interest in the residence, and to obtain a deficiency judgment in the
amount of any unsatisfied part of the liability. On cross-motions for
summary judgment, the District Court granted partial summary judgment
on, among other things, the defendants' claim that the federal tax liens
could not defeat Mrs. Rodgers's state-created right not to have her
homestead subjected to a forced sale. Fed. Rule Civ. Proc. 54(b).
The
Court of Appeals affirmed on the homestead issue, 14
holding that if "a homestead interest is, under state law, a
property right, possessed by the nontaxpayer spouse at the time the lien
attaches to the taxpayer spouse's interest, then the federal tax lien
may not be foreclosed against the homestead property for as long as the
nontaxpayer spouse maintains his or her homestead interest under state
law." 649 F. 2d, at 1125 (footnotes omitted). The court implied
that the Government had the choice of either waiting until Mrs. Rodger's
homestead interest lapsed, or satisfying itself with a forced sale of
only Philip Bosco's interest in the property.
B
[Ingram]
Joerene
Ingram is the divorced wife of Donald Ingram. During their marriage,
Joerene and Donald acquired, as community property, a residence in
Dallas
,
Texas
, and occupied it as their homestead. Subsequently, in 1972 and 1973,
the Internal Revenue Service issued assessments against Donald Ingram
relating to unpaid taxes withheld from wages of employees of a company
of which he was president. Deducting payments made on account of these
liabilities, there remains unpaid approximately $9,000, plus interest.
In addition, in 1973, the Service made an assessment against both Donald
and Joerene in the amount of $283.33, plus interest, relating to their
joint income tax liability for 1971. These amounts also remain unpaid.
In
March 1975, at about the time the Ingrams were seeking a divorce, their
residence was destroyed by fire. In September 1975, the Ingrams obtained
a divorce. In connection with the divorce, they entered into a property
settlement agreement, one provision of which was that Donald would
convery to Joerene his interest in the real property involved in this
case in exchange for $1,500, to be paid from the proceeds of the sale of
the property. Joerene tried to sell the property, through a trustee, but
was unsuccessful in those efforts, apparently because of the federal tax
liens encumbering the property. The make matters worse, she then
received notice from the City of Dallas Department of Housing and Urban
Rehabilitation (Dapartment) that unless she complied with local
ordinances, the remains of the fire-damaged residence would be
demolished. Following a hearing, the Department issued a final notice
and a work order to demolish. Joerene Ingram and the trustee then filed
suit in Texas state court to quiet title to the property, to remove the
federal tax liens, and to enjoin demolition. The defendants were the
United States, the Department, and several creditors claiming an
interest in the property.
The
United States removed the suit to the District Court for the Northern
District of Texas. It then filed a counterclaim against Joerene Ingram
and Donald Ingram (who was added as a defendant on the counterclaim) for
both the unpaid withholding taxes and the joint liability for unpaid
income taxes. In its prayer for relief, the Government sought, among
other things, judicial sale of the property under §7403. Pursuant to a
stipulation of the parties, the property was sold unencumbered and the
proceeds (approximately $16,250) were deposited into the registry of the
District Court pending the outcome of the suit. The parties agreed that
their rights, claims, and priorities would be determined as if the sale
had not taken place, and that the proceeds would be divided according to
their respective interests. On cross-motions for summary judgment, the
District Court granted summary judgment on the Government's
counterclaims.
The
Court of Appeals affirmed in part, and reversed and remanded in part. It
agreed that the Government could foreclose its lien on the proceeds from
the sale of the property to collect the $283.33, plus interest, for the
unpaid income tax owed by Joerene and Donald Ingram jointly. Applying
its decision in Rodgers, however, it also held that the
Government could not reach the proceeds of the sale of the property to
collect the individual liability of Donald Ingram, assuming Joerene
Ingram had maintained her homestead interest in the property. The court
remanded, however, for a factual determination of whether Joerene had
"abandoned" the homestead by dividing the insurance proceeds
with Donald and by attempting--even before the stipulation entered into
with the Government--to sell the property and divide the proceeds of
that sale with Donald. 15
C
The
Government filed a single petition for certiorari in both these cases.
See this Court's Rule 19.4. We granted certiorari, 456 U. S. 904 (1982),
in order to resolve a conflict among the Courts of Appeals as to the
proper interpretation of §7403.
III
[Opinion]
A
[Sale of Interest on Property]
The
basic holding underlying the Court of Appeals's view that the Government
was not authorized to seek a sale of the homes in which respondents held
a homestead interest is that "when a delinquent taxpayer shares his
ownership interest in property jointly with other persons, rather than
being the sole owner, his 'property' and 'rights to property' to which
the federal tax lien attaches under 26 U. S. C. §6321, and on which
federal levy may be had under 26 U. S. C. §7403(a), involve only his interest
in the property, and not the entire property." 649 F. 2d, at 1125
(emphasis in original). According to the Court of Appeals, this
principle applies, not only in the homestead context, but in any
cotenancy in which unindebted third parties share an ownership interest
with a delinquent taxpayer. See Folsom v. United States [62-2
USTC ¶9648], 306 F. 2d 361 (CA5 1962).
We
agree with the Court of Appeals that the Government's lien under §6321
cannot extend beyond the property interests held by the delinquent
taxpayer. 16
We also agree that the Government may not ultimately collect, as
satisfaction for the indebtedness owed to it, more than the value of the
property interests that are actually liable for that debt. But, in this
context at least, the right to collect and the right to seek a forced
sale are two quite different things.
The
Court of Appeals for the Fifth Circuit recognized that it was the only
Court of Appeals that had adopted the view that the Government could
seek the sale, under §7403, of only the delinquent taxpayer's "interest
in the property, and not the entire property." 649 F. 2d, at 1125,
n. 12. We agree with the prevailing view that such a restrictive reading
of §7403 flies in the face of the plain meaning of the statute. See, e.g.,
United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699, 702-703
(CA7 1964); Washington v. United States [68-2 USTC ¶15,864], 402
F. 2d 3, 6-7 (CA4 1968); United States v. Overman [70-1 USTC ¶9342],
424 F. 2d 1142, 1146 (CA9 1970); United States v. Kocher [72-2
USTC ¶9730], 468 F. 2d 503, 506-507 (CA2 1972); see also Mansfield
v. Excelsior Refining Co., 135 U. S. 326, 339-341 (1890). 17
Section
7403(a) provides, not only that the Government may "enforce [its]
lien," but also that it may seek to "subject any property,
[of] whatever nature, of the delinquent, or in which he has any
right, title or interest, to the payment of such tax or
liability" (emphasis added). This clause in and of itself
defendants the reading proposed by the Court of Appeals. 18
Section 7403(b) then provides that "[a]ll persons having liens upon
or claiming any interest in the property involved in such action
shall be made parties thereto" (emphasis added). Obviously, no
joinder of persons claiming independent interests in the property would
be necessary if the Government were only authorized to seek the sale of
the delinquent taxpayer's own interests. Finally, §7403(c) provides
that the district court should "determine the merits of all
claims to and liens upon the property, and, in all cases where a claim
or interest of the United States therein the established, may decree a
sale of such property . . . and a proper distribution of the proceeds
of such sale according to the findings of the court in respect to the
interests of the parties and of the United States" (emphasis
added). Again, we must read the statute to contemplate, not merely the
sale of the delinquent taxpayer's own interest, but the sale of the
entire property (as long as the United States has any "claim or
interest" in it), and the recognition of third-party interests
through the mechanism of judicial valuation and distribution.
[History
of Statute]
Our
reading of §7403 is consistent with the policy inherent in the tax
statutes in favor of the prompt and certain collection of delinquent
taxes. See supra, at 4. It requires no citation to point out that
interests in property, when sold separately, may be worth either
significantly more or significantly less than the sum of their parts.
When the latter is the case, it makes considerable sense to allow the
Government to seek the sale of the whole, and obtain its fair share of
the proceeds, rather than satisfy itself with a mere sale of the part.
Our
reading is also supported by an examination of the historical background
against which the predecessor statute to §7403 was enacted. In 1868, as
today, state taxation consisted in large part of ad valorem taxation on
real property. In enforcing such taxes against delinquent taxpayers, one
usual remedy was a sale by the State of the assessed property. The
prevailing--although admittedly not universla--view was that such sales
were in rem proceedings, and that the title that was created in
the sale extinguished not only the interests of the person liable to pay
the tax, but also any other interests that had attached to the property,
even if the owners of such interests could not otherwise be held liable
for the tax. See generally H. Black, The Law of Tax Titles §§ 231-236
(1888); W. Burroughs, Law of Taxation §122 (1877). Where in rem
proceedings were the rule, they were generally held to cut off as well
dower or homestead rights possessed by the delinquent taxpayer's spouse.
See Lucas v. Purdy, 142 Iowa 359, 120 N. W. 63 (1910); Robbins
v. Barron, 32 Mich. 36 (1875); Jones v. Devore, 8 Ohio St.
430 (1858); Black 299; Burroughs 348. But cf. Blackwell, Power to Sell
Land for the Non-Payment of Taxes *550 (3d ed. 1869).
One
evident purpose of the federal judicial sale provision enacted in 1868
was to obtain for the federal tax collector some of the advantages that
many States enjoyed through in rem tax enforcement. As one
commentator has put it, echoing almost exactly the usual description of
state in rem proceedings, the §7403 proceeding
"from
its very nature, is a proceeding in rem. The purchaser receives a
complete new title and not just somebody's interest. The court finds the
state of the title to the real estate in question, orders it sold if the
United States has a lien on it, and divides the proceeds accordingly.
All prior interests are cut off and the title starts over again in the
new purchaser." Rogge, The Tax Lien of the United States, 13 A. B.
A. J. 576, 577 (1927).
See
also G. Holmes, Federal Income Tax 546-547 (1920).
Even
as it gave the Government the right to seek an undivided sale in an in
rem proceeding, however, the predecessor to §7403 departed quite
sharply from the model provided by the States by guaranteeing that third
parties with an interest in the property receive a share of the proceeds
commensurate with the value of their interests. This apparently unique
provision was prompted, we can assume, by the sense that, precisely
because the federal taxes involved were not taxes on the real property
being sold, simple justice required significantly greater solicitude for
third parties than was generally available in state in rem
proceedings. 19
Finally,
our reading of the statute is significantly bolstered by a comparison
with the statutory language setting out the administrative levy remedy
also available to the Government. 20
Under 26 U. S. C. §6331, the Government may sell for the collection of
unpaid taxes all non-exempt "property and rights to property . . . belonging
to such person [i. e., the delinquent taxpayer] or on which there is
a lien provided in this chapter for the payment of such tax"
(emphasis added). This language clearly embodies the limitation that the
Court of Appeals thought was present in §7403, and it has been so
interpreted by the courts. 21
Section 6331, unlike §7403, does not require notice and hearing for
third parties, because no rights of third parties are intended to be
implicated by §6331. Indeed, third parties whose property or interests
in property have been seized inadvertently are entitled to claim that
the property has been "wrongfully levied upon," and may apply
for its return either through administrative channels, 26 U. S. C. §6343(b),
or through a civil action filed in a federal district court, §7426(a)(1);
see §§ 7426(b)(1), 7426(b)(2)(A). 22
In the absence of such "wrongful levy," the entire proceeds of
a sale conducted pursuant to administrative levy may be applied, without
any prior distribution of the sort required by §7403, to the expenses
of the levy and sale, the specific tax liability on the seized property,
and the general tax liability of the delinquent taxpayer. 26 U. S. C. §6342.
[Innocent
Third Parties]
We
are not entirely unmoved by the force of the basic intuition underlying
the Court of Appeals's view of §7403--that the Government, though it
has the "right to pursue the property of the [delinquent] taxpayer
with all the force and fury at its command," should not have any
right, superior to that of other creditors, to disturb the settled
expectations of innocent third parties. Folsom v. United States,
306 F. 2d, at 367-368. In fact, however, the Government's right to seek
a forced sale of the entire property in which a delinquent taxpayer had
an interest does not arise out of its privileges as an ordinary
creditor, but out of the express terms of §7403. Moreover, the use of
the power granted by §7403 is not the act of an ordinary creditor, but
the exercise of a sovereign prerogative, incident to the power to
enforce the obligations of the delinquent taxpayer himself, and
ultimately grounded in the constitutional mandate to "lay and
collect taxes." 23
Cf. Bull v. United States, 295 U.S., at 259-260; Phillips v.
Commissioner [2 USTC ¶743], 283 U. S. 589, 595-597 (1931); United
States v. Snyder, 149 U. S. 210, 214-215 (1893).
Admittedly,
if §7403 allowed for the gratuitous confiscation of one person's
property interests in order to satisfy another person's tax
indebtedness, such a provision might pose significant difficulties under
the Due Process Clause of the Fifth Amendment. 24
But, as we have already indicated, §7403 makes no further use of
third-party property interests than to facilitate the extraction of
value from those concurrent property interests that are properly
liable for the taxpayer's debt. To the extent that third-party property
interests are "taken" in the process, §7403 provides
compensation for that "taking" by requiring that the court
distribute the proceeds of the sale "according to the findings of
the court in respect to the interests of the parties and of the United
States." Cf. United States v. Overman, 424 F. 2d, at 1146.
Moreover, we hold, on the basis of what we are informed about the nature
of the homestead estate in Texas, that it is the sort of property
interest for whose loss an innocent third-party must be compensated
under §7403. Cf. United States v. General Motors Corp., 323 U.
S. 373, 377-378 (1945). 25
We therefore see no contradiction, at least at the level of basis
principle, between the enforcement powers granted to the Government
under §7403 and the recognition of vested property interests granted to
innocent third parties under state law.
The
exact method for the distribution required by §7403 is not before us at
this time. But we can get a rough idea of the practical consequences of
the principles we have just set out. For example, if we assume, only
for the sake of illustration, that a homestead estate is the exact
economic equivalent of a life estate, and that the use of a standard
statutory or commercial table and an 8% discount rate is appropriate in
calculating the value of that estate, then three non-delinquent
surviving or remaining spouses, aged 30, 50 and 70 years, each holding a
homestead estate, would be entitled to aproximately 97%, 89%, and 64%,
respectively, of the proceeds of the sale of their homes as compensation
for that estate. 26
In addition, if we assume that each of these hypothetical non-delinquent
spouses also has a protected half-interest in the underlying ownership
rights to the property being sold, 27
then their total compensation would be approximately 99%, 95%, and 82%,
respectively, of the proceeds from such sale.
In
sum, the Internal Revenue Code, seen as a whole, contains a number of
cumulative collection devices, each with its own advantages and
disadvantages for the tax collector. Among the advantages of
administrative levy is that it is quick and relatively inexpensive.
Among the advantages of a §7403 proceeding is that it gives the Federal
Government the opportunity to seek the highest return possible on the
forced sale of property interests liable for the payment of federal
taxes. The provisions of §7403 are broad and profound. Nevertheless, §7403
is punctilious in protecting the vested rights of third parties caught
in the Government's collection effort, and in ensuring that the
Government not receive out of the proceeds of the sale any more than
that to which it is properly entitled. Of course, the exercise in any
particular case of the power granted under §7403 to seek the forced
sale of property interests other than those of the delinquent taxpayer
is left in the first instance to the good sense and common decency of
the collecting authorities. 26 U. S. C. §7403(a). We also explore in
Part IV of this opinion the nature of the limited discretion left to the
courts in proceedings brought under §7403. But that the power exists,
and that it is necessary to the prompt and certain enforcement of the
tax laws, we have no doubt.
B
[Supremacy Clause]
There
is another, intermeshed but analytically distinguishable, ground
advanced by the Court of Appeals and the respondents--and reiterated by
the dissent--for denying the Government the right to seek the forced
sale of property held as a homestead by a non-delinquent third party.
Taken in itself, this view would hold that, even if §7403 normally
allows for the forced sale of property interests other than those
directly liable for the indebtedness of the delinquent taxpayer, the
special protections accorded by the exemption aspect of Texas homestead
law, see supra, at 6-7, should immunize it from the reach of §7403.
The
Court of Appeals conceded that "the homestead interest of a taxpayer
spouse, i.e., that of one who himself has tax liability, clearly
cannot by itself defeat [the enforcement under §7403 of] a federal tax
lien." 649 F. 2d, at 1121 (emphasis in original); see also 649 F.
2d, at 1132 (authorizing levy on proceeds in Ingram case to the
extent of the $283.33 liability jointly owed by Mr. and Mrs. Ingram).
This proposition, although not explicit in the Code, is clearly implicit
in 26 U. S. C. §6334(c) (relating to exemptions from levy), 28
and in our decisions in United States v. Mitchell, 403 U. S., at
204-205; Aquilino v. United States, 363 U.S., at 513-514; and United
States v. Bess, 357 U. S., at 56-57, discussed supra, at 4-5.
The Court of Appeals also held that, if the homestead interest under
Texas law were "merely an exemption" without accompanying
vested property rights, it would not be effective against the Federal
Government in a §7403 proceeding, even in the case of a non-delinquent
spouse. 649 F.2d, at 1125. Nevertheless, the court concluded that, if
the homestead estate both was claimed by a non-delinquent spouse and
constituted a property right under state law, then it would bar
the federal Government from pursuing a forced sole of the entire
property.
We
disagree. If §7403 is intended, as we believe it is, to reach the
entire property in which a delinquent taxpayer has or had any
"right, title, or interest," then statecreated exemptions
against forced sale should be no more effective with regard to the
entire property than with regard to the "right, title, or
interest" itself. Accord, United States v. Overman, 424 F.
2d, at 1145-1147; Herndon v. United States [74-1 USTC ¶16,127],
501 F. 2d 1219, 1223-1224 (CA8 1974) (Ross, J., concurring). 29
No exception of the sort carved out by the Court of Appeals appears on
the face of the statute, and we decline to frustrate the policy of the
statute by reading such an exception into it. Cf. Hisquierdo v.
Hisquierdo, 439 U. S. 572, 586-587 (1979); United States v.
Mitchell, 403 U.S. at 205-206. Moreover, the Supremacy Clause 30--which
provides the underpinning for the Federal Government's right to sweep
aside statecreated exemptions in the first place--is as potent in its
application to innocent bystanders as in its application to delinquent
debtors. See United States v. Union Central Life Insurance Co.,
368 U. S., at 293-295 (federal tax lien good against bona fide
purchaser, even though lien not filed in accordance with provisions of
state law); cf. Hisquierdo v. Hisquierdo, supra, at 585-; 586; United
States v. Carmack, 329 U.S. 230, 236-240 (1946). Whatever property
rights attach to a homestead under Texas law are adequately discharged
by the payment of compensation, and no further deference to state law is
required, either by §7403 or by the Constitution.
[Joint
Ownership Situations]
The
dissent urges us to carve out an exception from the plain language of §7403
in that "small number of joint-ownership situations . . . [in
which] the delinquent taxpayer has no right to force partition or
otherwise to alienate the entire property without the consent of the
co-owner." Post, at 3. Its primary argument in favor of such
an exception is that it would be consistent with traditional limitations
on the rights of a lienholder. Post, at 1-3, 12-13. If §7403
truly embodied traditional limitations on the rights of lienholders,
however, then we would have to conclude that Folsome v. United
States, 306 F. 2d 361 (CA5 1962), discussed supra, at 11-12,
18, was correctly decided, a proposition that even the dissent is not
willing to advance. See post, at 1, 3, n. 2, 14-15. More
importantly, we believe that the better analogy in this case is not to
the traditional rights of lienholders, but to the traditional powers of
a taxing authority in an in rem enforcement proceeding. See supra,
at 15-16. 31
IV
[Equitable Discretion]
A
[Compensation for Homestead]
Although
we have held that the Supremacy Clause allows the federal tax collector
to concert a non-delinquent spouse's homestead estate into its fair cash
value, and that such a conversion satisfies the requirements of due
process, we are not blind to the fact that in practical terms financial
compensation may not always be a completely adequate substitute for a
roof over one's head. Cf. United States v. 564.54 Acres of Land,
441 U. S. 506, 510-513 (1979). This problem seems particularly acute in
the case of a homestead interest. First, the nature of the market for
life estates or the market for rental property may be such that the
value of a homestead interest, calculated as some fraction of the total
value of a home, would be less than the price demanded by the market for
a lifetime's interest in an equivalent home. Second, any calculation of
the cash value of a homestead interest must of necessity be based on
actuarial statistics, and will unavoidably undercompensate persons who
end up living longer than the average. 32
Indeed, it is precisely because of problems such as these that a number
of courts, in eminent domain cases involving property divided between a
homestead interest and underlying ownership rights or between a life
estate and a remainder interest, have refused to distribute the proceeds
according to an actuarial formula, and have instead placed the entire
award in trust (or reinvested it in a new parcel of property) with the
income (or use) going to the life-estate holder during his or her
lifetime, and the corpus vesting on the holder of the remainder interest
upon the death of the life-estate holder. 33
If
the sale and distribution provided for in §7403 were mandatory, the
practical problems we have just described would be of little legal
consequence. The statute provides, however, that the court in a §7403
proceeding "shall . . . proceed to adjudicate all matters
involved therein and finally determine the merits of all claims to and
liens upon the property, and, in all cases where a claim or interest of
the United States therein is established, may decree a sale of
such property . . ." (emphasis added), and respondents argue that
this language allows a district court hearing a §7403 proceeding to
exercise a degree of equitable discretion and refuse to authorize a
forced sale in a particular case. See Tillery v. Parks, 630 F. 2d
775 (CA-10 1980); United States v. Eaves [74-2 USTC ¶9526], 499
F. 2d 869, 807-871 (CA-10 1974); United States vi Hershberger,
475 F. 2d, at 679-680; United States v. Overman, 424 F. 2d, at
1146; United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d
285, 289-291 (CA-5 1957). The Court of Appeals agreed with this
interpretation of the statute, although it does not appear to have
relied on it, 649 F. 2d, at 1125, and in any event neither it nor the
District Court undertook any particularized equitable assessment of the
cases now before us. We find the question to be close, but on balance,
we too conclude that §7403 does not require a district court to
authorize a forced sale under absolutely all circumstances, and that
some limited room is left in the statute for the exercise of reasoned
discretion.
B
[Discretion Is Limited]
The
word "may," when used in a statute, usually implies some
degree of discretion. 34
This common-sense principle of statutory construction is by no means
invariable, however, see Mason v. Fearson, 50 U. S. (9 How.) 248,
258-260 (1850); see generally United States ex rel. Siegel v. Thoman,
156 U. S. 353, 359-360 (1895), and cases cited, and can be defeated by
indications, of legislative intent to the contrary or by obvious
inferences from the structure and purpose of the statute, see ibid.
In
this case, we have little to go on in discerning Congress's intent
except for one crucial fact: before 1936, the predecessor statute to §7403
used the word "shall" rather than the word "may" in
describing the court's role in ordering a forced sale of property in
which a claim or interest of the United States had been shown. Revenue
Act of 1926, Pub. L. No. 20, §1127, 44 Stat. 9, 124-124 (Part 2). In
1936, as one of a number of amendments in the text of the provision,
Congress changed "shall" to "may." Revenue Act of
1936, Pub. L. No. 740, §802, 49 Stat. 1648, 1743-1744. The other
changes--specifically, expanding the scope of §7403 to include personal
as well as real property, and adding the receivership option new
embodied in §7403(d), see supra, at 2--are explained in the
legislative history. 35
There is no direct explanation for the change from "shall" to
"may." 36
The
Government argues that the only significance of the change from
"shall" to "may" was that "Congress recognized
it had specifically authorized sale of interests in property, sale of
the entire property, and receivership. Employing the term 'shall"
with respect to each may have been perceived as confusing insofar as it
could be read as directing contradictory requirements." Reply Brief
8, n. 5. We find this explanation plausible, but not compelling. If
Congress had really meant no more than to adjust the forced sale
language to take into account the receivership option, it could have
easily expressed that intention more clearly by language to the effect
of "the court shall either decree the sale of such property
. . . or, upon the instance of the United States, appoint a
receiver to enforce the lien, etc." Morever, the authors of an
earlier, unpassed, otherwise virtually identical proposal introduced in
the House, did not think it necessary to change "shall" to
"may" in their version of the legislation. See nn. 35-36, supra.
Faced
as we are with such an ambiguous legislative record, we come to rest
with the natural meaning of the language enacted into law. In light of
the fact that Congress did see fit to explain the other changes in the
1936 Act, we do not assert that Congress, without comment or
explanation, intended to create equitable discretion where none existed
before. On the other hand, there is support in our prior cases for the
proposition that an unexplained change in statutory wording from
"shall" to "may" is best construed as indicating a
congressional belief that equitable discretion existed all along. Moore
v. Illinois Central R. Co., 312 U. S. 630, 635 (1941); cf. Haig
v. Agee, 453 U. S. 280, 294, n. 26 (1981).
In
addition, reading "may" as either conferring or confirming a
degree of equitable discretion conforms to the even more important
principle of statutory construction that Congress should not lightly be
assumed to have enacted a statutory scheme foreclosing a court of equity
from the exercise of its traditional discretion. Weinberger v.
Romero-Barcelo, 456 U. S. 305, 313 (1982); Porter v. Warner
Holding Co., 328 U. S. 395, 398 (1946); Hecht Co. v. Bowles,
321 U. S. 321, 330 (1944). A §7403 proceeding is by its nature a
proceeding in equity, 37
and judicial sales in general have traditionally been accompanied by at
least a limited degree of judicial discretion. 38
Finally,
we are convinced that recognizing that district courts may exercise a
degree of equitable discretion in §7403 proceedings is consistent with
the policies of the statute: unlike an absolute exception, which we
rejected above, the exercise of limited equitable discretion in
individual cases can take into account both the Government's interest in
prompt and certain collection of delinquent taxes and the possibility
that innocent third parties will be unduly harmed by that effort.
C
[Paramount Consideration]
To
say that district courts need not always go ahead with a forced sale
anthorized by §7403 is not to say that they have unbridled discretion.
We can think of virtually no circumstances, for example, in which it
would be permissible to refuse to authorize a sale simply to protect the
interests of the delinquent taxpayer himself or herself. 39
And even when the interests of third parties are involved, we think that
a certain fairly limited set of considerations will almost always be
paramount.
First,
a court should consider the extent to which the Government's financial
interests would be prejudiced if it were relegated to a forced sale of
the partial interest actually liable for the delinquent taxes. Even the
Government seems to concede that, if such a partial sale would not
prejudice it at all (because the separate market value of the partial
interest is likely to be equal to or greater than its value as a
fraction of the total value of the entire property) then there would be
no reason at all to authorize a sale of the entire property. Tr. of Oral
Arg. 7, 13; Reply Brief 8, n. 5. 40
We think that a natural extension of this principle, however, is that,
even when the partial interest would be worth less sold
separately than sold as part of the entire property, the possibility of
prejudice to the Government can still be measured as a matter of degree.
Simply put, the higher the expected market price, the less the
prejudice, and the less weighty the Government's interest in going ahead
with a sale of the entire property. 41
Second,
a court should consider whether the third party with a non-liable
separate interest in the property would, in the normal course of events
(leaving aside §7403 and eminent domain proceedings, of course), have a
legally recognized expectation that that separate property would not be
subject to forced sale by the delinquent taxpayer or his or her
creditors. If there is no such expectation, then there would seem to be
little reason not to authorize the sale. Again, however, this factor is
amenable to considerations of degree. The Texas homestead laws are
almost absolute in their protections against forced sale. 42
The usual cotenancy arrangement, which allows any cotenant to seek a
judicial sale of the property and distribution of the proceeds, but
which also allows the other cotenants to resist the sale and apply
instead for a partition in kind, is further along the continuum. And a
host of other types of property interests are arrayed between and
beyond.
Third,
a court should consider the likely prejudice to the third party, both in
personal dislocation costs and in the sort of practical
undercompensation described supra, at 25-26.
Fourth,
a court should consider the relative character and value of the
non-liable and liable interests held in the property: if, for example,
in the case of real property, the third party has no present possessory
interest or fee interest in the property, there may be little reason not
to allow the sale; if on the other hand, the third party not only has a
possessory interest or fee interest, but that interest is worth 99% of
the value of the property, then there might well be virtually no reason
to allow the sale to proceed.
We
do not pretend that the factors we have just outlined constitute an
exhausive list; we certainly do not contemplate that they be used as a
"mechanical checklist" to the exclusion of common sense and
consideration of special circumstances. Cf. Moses H. Cone Hospital v.
Mercury Construction Corp., 460 U. S. --, -- (1983). We do
emphasize, however, that the limited discretion accorded by §7403
should be exercised rigorously and sparingly, keeping in mind the
Government's paramount interest in prompt and certain collection of
delinquent taxes.
V
[No Equitable Balancing]
In
these cases, no individualized equitable balance of the sort we have
just outlined has yet been attempted. In the Rodgers case, the
record before us, although it is quite clear as to the legal issues
relevant to the second consideration noted above, affords us little
guidance otherwise. In any event, we think that the task of exercising
equitable discretion should be left to the District Court in the first
instance.
The
Ingram case is a bit more complicated, even leaving aside the
fact of the stipulated sale by which we are constrained to treat the
escrow fund now sitting in the registry of the District Court as if it
were a house. First, as the Court of Appeals pointed out, there remains
a question under Texas law as to whether Joerene Ingram abandoned the
homestead by the time of the stipulated sale. Second, the Government, in
addition to its lien for the individual debt of Donald Ingram, has a
further lien for $283.33, plus interest, on the house, representing the
joint liability of Donald and Joerene Ingram. Because Joerene Ingram is
not a "third party" as to that joint liability, we can see no
reason, as long as that amount remains unpaid, not to allow a
"sale" of the "house" (i. e., a levy on the
proceeds of the stipulated sale) for satisfaction of the debt. Moreover,
once the dam is broken, there is no reason, under our interpretation of
§7403, not to allow the Government also to collect on the individual
debt of Donald Ingram out of that portion of the proceeds of the sale
representing property interests properly liable for the debt. On the
other hand, it would certainly be to Mrs. Ingram's advantage to
discharge her personal liability before the Government can proceed with
its "sale," in which event, assuming that she has not
abandoned the homestead, the District Court will be obliged to strike an
equitable balance on the same general principles as those that govern
the Rodgers case.
The
judgment of the Court of Appeals in Rodgers is reversed, its
judgment in Ingram is vacated, and both cases are remanded with
directions that they be remanded to the District Court for further
proceedings consistent with this opinion. So ordered.
1
See also 26 U. S. C. §5004 (lien in case of tax on distilled spirits);
§6324 (special liens for estate and gift taxes).
2
The validity and priority of a §6321 lien as against certain third
parties with subsequently arising interests in the property or interests
in property to which the lien has attached is governed by 26 U. S. C. §6323
(1976 ed. and Supp. IV). See also 26 U. S. C. §6322 (period of lien);
26 U. S. C. §6325 (1976 ed. and Supp. IV) (release of lien or discharge
of property).
3
See generally 4 B. Bittker, Federal Taxation of Income, Estates, and
Gifts ¶111.5 (1981) (hereinafter Bittker); McGregor & Davenport,
Collection of Delinquent Federal Taxes, Twenty Eighth Inst. on Fed. Tax.
589 (1976).
4
But cf. 26 U. S. C. §6218 (1976 ed. and Supp. IV) (relating to unpaid
taxes attributable to a deficiency).
5
See also United States v. Bisceglia [75-1 USTC ¶9247], 420 U. S.
141, 145-146 (1975) (26 U. S. C. §§ 7601, 7602); United States v.
American Friends Service Committee [74-2 USTC ¶9774], 419 U. S. 7,
12 (1974) (Anti-Injunction Act, 26 U. S. C. §7421).
6
Tex. Const., Art. 16, §51, provides in relevant part:
"[T]he
homestead in a city, town or village, shall consist of lot, or lots, not
to exceed in value Ten Thousand Dollars ["Five Thousand
Dollars" before 1970], at the time of their designation as the
homestead, without reference to the value of any improvements thereon;
provided that the same shall be used for the purposes of a home, or as a
place to exercise the calling or business of the homestead claimant,
whether a single adult person, or the head of a family."
See
also Tex. Civ. Rev. Civ. Stat. Ann. §3833 (Vernon Supp. 1982). No claim
seems to be made in these cases that the properties involved are not
homesteads by virtue of having exceeded, at the time of designation, the
monetary limit set out in the statute.
7
See also Tex. Rev. Civ. Stat. Ann. §§ 3834 (Vernon 1966) proceeds of
voluntary sale of homestead not subject to garnishment or forced sale
within six months after such sale); Ingram v. City of Dallas Dep't of
Housing & Urban Rehabilitation [81-2 USTC ¶9533], 649 F. 2d
1128, 1132, n. 6 (CA5 1981) (citing cases applying same rule to fire
insurance proceeds).
8
See also Tex. Fam. Code Ann. §§ 5.81-5.86 (1975).
9
See also Tex. Prob. Code Ann. §§ 283-285 (1980).
10
The homestead character of property is not destroyed even by divorce, if
one of the parties to the divorce continues to maintain the property as
a proper homestead. See Renaldo v. Bank of San Antonio, 630 S. W.
2d 638, 639 (Tex. 1982); Wierzchula v. Wierzchula, 623 S. W. 2d
730, 732 (Tex. Civ. App. 1981). The courts may, however, partition the
property, award it to one or the other spouse, or require one spouse to
compensate the other, as part of the disposition of marital property
attendant to the divorce proceedings. See Hedtke v. Hedtke, 112
Tex. 404, 248 S. W. 21 (1923); Brunell v. Brunell, 494 S. W. 2d
621, 622-628 (Tex. Civ. App. 1973).
11
See Fiew v. Qualtrough, 624 S. W. 2d 335, 337 (Tex. App. 1981)
(homestead estate, because it can be lost through abandonment, is not
identical to life estate; it nevertheless "partakes of the nature
of an estate for life").
12
Moreover, a homestead estate is treated in Texas as property for which
just compensation or its equivalent must be paid in case of condemnation
by the state. Lucas v. Lucas, 104 Tex. 636, 143 S. W. 1153
(1912). Cf. infra, at 18-19.
13
Mrs. Rodgers's name was misspelled in the complaint filed by the
Government. See 649 F. 2d, at 1119, n. 1.
14
It reversed on an attorney's fees issue not now before us.
15
The Court of Appeals did suggest that neither the fire nor the intention
to sell the house would, in and of themselves, necessarily indicate an
abandonment of the homestead. 649 F. 2d at 1132, and n. 6; see n. 7, supra.
16
Accord, In re Carlson [78-2 USTC ¶9562], 580 F. 2d 1365, 1369
(CA10 1978); Herndon v. United States [74-1 USTC ¶16,127], 501
F. 2d 1219 (CA8 1974); Economy Plumbing & Heating Co. v. United
States [72-1 USTC ¶9344], 197 Ct. Cl. 839, 843, 456 F. 2d 713, 716
(1972); United States v. Overman [70-1 USTC ¶9342], 424 F. 2d
1142, 1146 (CA9 1970); see United States v. Bess [58-2 USTC ¶9595],
357 U. S. 51, 55-57 (1963); Bittker ¶111.5.4, at 111-102 ("the tax
collector not only steps into the taxpayer's shoes but must go barefoot
if the shoes wear out.").
Of
course, once a lien has attached to an interest in property, the lien
cannot be extinguished (assuming proper filing and the like) simply by a
transfer or conveyance of the interest. See generally 26 U. S. C. §6323
(1976 ed. and Supp. IV); United States v. Bess, supra, at 57.
Thus, in these cases, liens still attach to the specific property
interests transferred by Philip Bosco at his death, and conveyed by
Donald Ingram as part of his divorce settlement with Joerene Ingram.
17
In Mansfield, this Court held that the federal tax collector
could not, by a sale pursuant to administrative levy, pass good title to
property leased by a tax-delinquent distiller but owned by a third
party, even though the third-party owner had previously signed a waiver
giving the Government a first lien on the fee interest. "Any other
construction would impute to Congress the purpose, in order that the
taxes against the delinquent distiller, having only a leasehold
interest, might be collected, to seize and sell the interest of the
owner of the fee, and to destroy the lien of an incumbrancer, without
giving either an opportunity to be heard." 135 U. S., at 340. Cf. infra,
at 17. The Court also noted, however, that
"[i]n
order to collect the taxes due from . . . the distiller, [the
Government] might have instituted a suit in equity [under the
predecessor statute to §7403], to which not only the distiller, who had
simply a leasehold interest, but all persons having liens upon,
or claiming any interest in, the premises could be made parties; in
which suit, it would have been the duty of the court to determine
finally the merits of all claims to and liens upon the property,
and to order a sale distributing the proceeds among the parties
according to their respective interests." 135 U. S., at 339
(emphasis added).
Read broadly, Mansfield is on "all fours" with our
holding today. Read more narrowly, it may be dependent on the fact of
the waiver signed by the fee owners. See id., at 339-340. The
former reading is more plausible, but we do not rest our decision on it.
In
denying even an ambiguity in Mansfield, post, at 9-11, the
dissent in our view makes two errors. First, it pays insufficient
attention to the general statement quoted above. Second, it ignores the
full context of the language upon which it does rely. In context, that
language suggests to us that the waiver obtained by the Government gave
it, not the right to seek a sale of the entire property, but the right, if
it sought a sale of the entire property, to gain access to the entire
proceeds of the sale rather than merely the value of the leasehold
interest once held by the taxpayr.
18
The statutory language does pose one difficulty, not discussed or relied
on by the Court of Appeals: It might be possible to read the phrase
"to enforce the lien of the United States under this title . . . or
to subject any property, of whatever nature, of the delinquent, or in
which he has any right, title, or interest, to the payment of
such tax or liability," (emphasis added) as suggesting that if a
lien has attached to a delinquent taxpayer's interest in property, but
the delinquent taxpayer has no current interest in that property,
then the Government would have no power to seek the sale of the entire
property. This reading is plausible on its face, but there is no
indication that Congress intended such a bifurcation, and there are no
cases of which we are aware that support it. Cf. Bittker ¶111.5.5, at
111-107; see generally n. 16, supra. Moreover, the remainder of
§7403 does not appear to recognize such a distinction.
Drawing
such a distinction would also make little sense as a policy matter. A
third party holding a property interest to which no lien has attached
has the same interests vis-a-vis the Government regardless of whether
the concurrent property interest to which a lien has attached is
still in the hands of the delinquent taxpayer, or has been conveyed to
someone else.
Even
if we were to adopt such an unprecedented reading of the statute, it
might well make no difference in these cases. By virtue of 26 U. S. C.
§6901(a), §7403(a) should actually be read to the effect that the
Government may seek "to subject any property, of whatever nature,
of the delinquent or his liable transferee, or in which he or
his liable transferee has any right, title, or interest, to the
payment of such tax or liability." See generally Phillips v.
Commissioner [2 USTC ¶743], 288 U. S. 589 (1931); Commissioner
v. Stern [58-2 USTC ¶9594], 357 U. S. 39 (1958). Whether the
present holders of the property interests to which tax liens have
attached are liable transferees under §6901 (a) is determined by state
law, see Stern, supra, at 42-45, but we do note that (1) Philip
Bosco's interests seem now to be held by his estate or heirs, and (2)
there may be some question as to whether the conveyance of Donald
Ingram's interest to Joerene Ingram was for full value. See generally
Bittker ¶111.5.7.
19
We should note, though, that some States, even outside the context of in
rem proceedings to enforce property taxation, were not averse to
seizing one person's property without compensation in order to
satisfy the unrelated tax delinquency of another person. See, e.g.,
Sears v. Cottrell, 5 Mich. 251 (1858); Hersee v. Porter, 100
N. Y. 403 (1885). Cf. International Harvester Corp. v. Goodrich,
350 U. S. 537 (1956).
20
See Mansfield v. Excelsior Refining Co., supra, at 339-341; National
Bank & Trust Co. of South Bend v. United States [79-1 USTC ¶9101],
589 F. 2d 1298, 1303 (CA7 1978).
21
See Mansfield v. Excelsior Refining Co., supra, at 339-341,
discussed in n. 17, supra; National Bank & Trust Co. of South
Bend v. United States, supra, at 1303; Herndon v. United States
[74-1 USTC ¶16,127], 501 F. 2d 1219, 1223 (CA8 1974); Stuart v.
Willis [57-1 USTC ¶9330], 244 F. 2d 925, 929 (CA9 1957); cf. S.
Rep. No. 1708, 89th Cong., 2d Sess. 17 (1966).
22
If the "wrongfully levied upon" property has already been
sold, the third party may, of course, have to settle for monetary
reimbursement. See 26 U.S.C. §§ 6343(b)(3), 7426(b)(2)(C).
23
U. S. Const., Art. I, §8, cl. 1; Amdt. 16.
24
But cf. cases cited in n. 19, supra.
If
there were any Takings Clause objection to §7403, such an objection
could not be invoked on behalf of property interests that came into
being after enactment of the provision. See United States v. Security
Industrial Bank, 459 U. S. --, -- (1982). In both cases here, the
homestead estates at issue came into being long after 1868.
25
We therefore reject the Government's contention at oral argument, Tr. of
Oral Arg. 10, 17-18, that the homestead estate would be irrelevant to a
distribution under §7403, and that, assuming that the entire underlying
ownership interest is liable for the delinquent taxes, see n. 27, infra,
the Government would be entitled to the entire proceeds of the sale.
We
also reject the Government's suggestion that the homestead estate held
by respondent Rodgers was only contingent at the time that the federal
tax lien attached to her husband's interests in her home, and is
therefore subordinate to the tax lien. Reply Brief 2, n. 2. The
"probate homestead" provided for in Tex. Const., Art. 16, §52,
is clearly, with respect to outside creditors, only a continuation of
the separate homestead rights vested in each spouse by Tex. Const., Art.
16, §50. See Norman v. First Bank & Trust, 557 S. W. 2d 797,
802 (Tex. Civ. App. 1977).
26
The figures in text are based on the table appearing in Ark. Stat. Ann.
§50-705 (Supp. 1981). See also, e.g., 26
CFR
§20.2031-10 (1982); Actuarial Publishing House, Inc., Commutation
Columns and Valuation Factors Based on 1980 CSO Mortality Table (1981).
27
In the cases before us, the Government argues that, under Texas law, the
entire community property (i. e., the underlying ownership
interest that we have analogized to a remainder interest), rather than
merely the delinquent spouse's half-interest in it, is liable for the
indebtedness of the delinquent spouse. Reply Brief 3; see Tex. Fam. Code
Ann. §5.61(c) (1975). The Court of Appeals did not address this issue,
and we leave it open for determination on remand. See Burks v. Lasker,
441 U.S. 471, 486 (1979).
28
Section 634(c) provides, "Nothwithstanding any other law of the
United States, no property or rights to property shall be exempt from
levy other than the property specifically made exempt by [§6334(a).]"
29
The Court of Appeals claimed that its view was consistent with that of
the Tenth Circuit in United States v. Hershberger [73-1 USTC ¶9289],
475 F. 2d 677 (1973). Hershberger does bear similarities to the
Fifth Circuit's analysis, particularly in the distinction it draws
between the two different types of homestead rights, and in its adoption
of an absolute rule against certain forced cales. As we read Hershberger,
however, it relies on an equitable analysis rather than on the inherent
forces of state homestead law to defeat a sale of entire property under
§7403. Id. at 679.
30
U. S. Const., Art. 6, cl. 2.
31
In addition to its reliance on the traditional limitations imposed on
lienholders, which we discuss in text, and on its reading of Mansfeld
v. Excelsior Refining Co., 135 U. S. 326 (1890), which we discuss at
n. 17, supra, the dissent makes a number of additional arguments
which require at least a brief response. First, it claims that the
weight of authority is on its side. Post, at 6, and nn. 6-7. The
dissent's use of sources largely overlooks, however, the important
distinction between the power of sale under §7403 on the one hand and
the extent of the underlying lien and the power of administrative levy
on the other. See supra, at 12, and n. 16, 17, and nn. 20-21. For
example, only one of the five cases cited in the dissent's n. 7 deals
with §7403. Three of the five deal with administrative levy, and are
therefore entirely consistent with the views we express in this opinion,
and one concerns a judicial foreclosure conducted in state court without
the benefit of §7403. Moreover, the one case that does deal with §7403,
United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677
(CA10 1973), gives only meager support to the dissent's position. See n.
29, supra. Similarly, not one of the secondary sources cited in
the dissent's n. 6 forcuses on §7403, and most merely report the line
of administrative levy cases with which we are in agreement.
Second,
the dissent relies on a piece of 1954 legislative history concerning the
application of the federal tax lien to interests in tenancies by the
entirely. Post, at 7-9. Quite apart from the fact that the
dissent's argument depends on events taking place almost a century after
enactment of the statute at issue, it suffers from two further serious
flaws.
(1)
The question at issue in 1954 bears only the most tangential
relationship to that at issue here. The amendments at issue in 1954 did
not concern §7403. More important, tenancies by the entirety pose a
problem quite distinct from that at issue in the case of homestated
rights. See Herndon v. United States [74-1 USTC ¶16,127], 501 F.
2d 1219, 1220-1221 (CA8 1974); W. Plumb, Federal Tax Liens 37-38 (1972).
The basic holding of the line of cases mentioned by the dissent was, not
merely that interests in a tenancy by the entirety could not be sold to
satisfy a tax debt of one spouse, but that, as a result of the peculiar
legal fiction governing tenancies by the entirety in some States, no ax
lien could attach in the first place because neither spouse possessed an
independent interest in the property. See, e.g., United States v.
American National Bank of Jacksonville [58-2 USTC ¶9564], 255 F.2d
504, 506 (CA5 1958); United States v. Hutcherson [51-1 USTC ¶9249],
188 F. 2d 826, 831 (CA8 1951). Indeed, in most of the cases in this
line, the Government was not trying to sell the property out from
under the non-delinquent spouse, but was merely trying to exercise one
of the more benign rights of a lienholder to which the dissent would
automatically relegate the Government in this case. In the homestead
context, by contrast, there is no doubt, even under state law, that not
only do both spouses (rather than neither) have an independent
interest in the homestead property, but that a federal tax lien can at
least attach to each of those interests. See Paddock v.
Siemoneit, 147 Tex. 571, 584-585, 218 S. W. 2d 428, 436 (1949).
Thus, if the tenancy by the entirety cases are correct, they do
no more than illustrate the proposition that, in the tax enforcement
context, federal law governs the consequences that attach to property
interests, but state law governs whether any property interests exist in
the first place.
See
supra, at 4-5.
(2)
Even if the 1954 legislative history cited by the dissent were relevant
to the issues in this case, our reading of the pertinent committee
reports suggests to us, not that "the Senate foiled an attempt by
the House to extend the reach of federal tax liens to tenancies
by the entirety," post, at 7-8 (emphasis added), but that
the House sought to "clarif[y] the term 'property and rights
to property' by expressly including therein the interest of the
delinquent taxpayer in an estate by the entirety." H. R. Rep. No.
1337, 83rd Cong., 2r Sess. A406 (1954) (emphasis added), and that the
Senate rejected that clarification, not necessarily because it disagreed
with it, but more likely because it found it superfluous, see S. Rep.
No. 1622, 83d Cong., 2d Sess. 575 (1954) ("It is not clear what
change in existing law would be made by the parenthethical phrase
[suggested by the House]. The deletion of the phrase is intended to
continue the existing law.")
Finally,
the dissent argues that our reading of §7403 is rendered less likely by
the fact that "[p]rior to 1936, . . . the predecessor to §7403(c) required
a court at the Government's request to sell the property in which the
tax debtor had an interest." Post, at 12. As we make clear
in our discussion of the may/shall issue, infra, at 28-31,
however, we are not at all convinced that a sale of the undivided
property was mandatory even prior to 1936.
32
See 1 L. Orgel, Valuation Under the Law of Eminent Domain §118, at 511
(2d ed. 1953) (hereinafter Orgel).
33
See, e.g., United States v. 403.15 Acres of Land, More or Less,
316 F. Supp. 655, 657-658 (MD Tenn. 1970); United States v. 380 Acres
of Land, 47 F. Supp. 6 (WD Ky. 1942); Bonner v. Peterson, 44
Ill. 253, 259 (1867); In re Camp, 126 N.Y. 377, 27 N. E. 799
(1891); Redevelopment Commission of Greenville v. Capehart, 268
N. C. 114, 118, 150 S. E. 2d 62, 65 (1966); Lucas v. Lucas, 104
Tex., at 641-642, 143 S. W., at 1155-1156 (condemantion of homestead).
But
compare, e.g., United States v. 818.76 Acres of Land, More or Less,
310 F. Supp. 210 (WD Mo. 1969); Brugh v. White, 267 Ala. 575, 103
So. 2d 800 (1957); School District of Colombus v. Jones, 229 Mo.
510, 129 S. W. 705 (1910); Aue v. State, 77 S. W. 2d 606 (Tex.
Civ. App. 1934), all allowing approtionment.
See
generally A. Jahr, Law of Eminent Domain: Valuation and Procedure §129
(1953); 4 J. Sackman, Nichols' Law of Eminent Domain §12.46[1] (rev. 3d
ed. 1980); 1 Orgel §118.
34
See Haig v. Agee, 453 U. S. 280, 294, n. 26 (1981); Anderson
v. Yungkau, 329 U. S. 482, 485 (1947); Farmers & Merchants
Bank v. Federal Reserve Bank of Monroe, 262 U. S. 649, 662-663
(1923); Thompson v. Lessee of Carroll, 63 U. S. (22 How.) 422,
434 (1859).
35
The 1936 provision was introduced in the Senate as a committee-approved
floor amendment to a comprehensive revenue bill originating in the
House. 80 Cong. Rec. 9072 (1936). Its origins can be traced, however, to
an earlier unpassed House bill seeking to amend certain administrative
features of the tax laws. See H. R. 12793, 74th Cong., 2d Sess. (1936).
The impetus for the provision, as explained in the House Report
accompanying the earlier bill, was that the only then-existing remedy
for the enforcement of tax liens against personal property was
administrative levy, which in certain cases caused considerable hardship
to both the taxpayer and the Government. The receivership option now
contained in §7408(d) was similarly conceived as a means of avoiding
undue disruption of ongoing concerns whose assets were seized as part of
a tax enforcement effort. See H. R. Rep. No. 2818, 74th Cong., 2d Sess.
7-8 (1936).
36
Virtually the only difference between the earlier House version and the
floor amendment introduced in the Senate was the crucial substitution of
"may" for "shall" in the descriptions of both the
court's power to order a forced sale and its power to appoint a
receiver. The sponsor of the floor amendment, however, only had the
following to say about its significance: "Mr. President, this
amendment would permit the collector of internal revenue to apply to the
United States courts, to file a petition in equity to enforce a lien for
taxes where he has reason to believe the taxpayer will not be able to
meet his obligations, and where the public interest will be prejudiced
by resorting to the provisions in the present law, for distraint on the
taxpayer's assets. In other words, it is an amendment more favorable to
the taxpayer than are the provisions of present law." 80 Cong.
Rec., at 9072 (Sen. Walsh).
Although
the last sentence of Senator Walsh's comments might, taken out of
context, be read to refer to the change from "shall" to
"may," we think it more likely that he was referring to the
same concerns that motivated the earlier House version.
37
This is even clearer in the statutory language as it existed prior to
1954: "In any case where there has been a refusal or neglect to pay
tax, . . . the Attorney General at the request of the Commissioner of
Internal Revenue may direct a bill in chancery to be filed, . .
." See Revenue Act of 1936, Pub. L. No. 740, §802, 49 Stat. 1648,
1743-1744. The language used in the 1954 Code was presumably adopted to
conform to Federal Rule of Civil Procedure 2, but it was not intended to
effect any material change from previous law. See H. R. Rep. No. 1337,
83rd Cong., 2d Sess. A431 (1954).
38
See, e.g., Semmes Nurseries, Inc. v. McDade, 288 Ala. 523,
530-531, 263 So. 2d 127, 132-133 (1972); Thomas v. Klein, 99
Idaho 105, 107, 577 P.2d 1153, 1155 (1978); National Bank of
Washington v. Equity Investors, 81 Wash. 2d 886, 924-927, 506 P. 2d
20, 43-44 (1973).
The
analogy to other types of judicial sales is strained somewhat by the
fact that most ordinary judicial sales do not implicate the interests of
third parties with independent possessory rights in the property being
sold. This difference, however, only strengthens the case for the
existence of judicial discretion in §7403 proceedings.
39
This is not to say that a forced sale may not be temporarily postponed,
or made subject to an upset price, in order to do justice in an
individual case.
40
There would also be no prejudice to the Government if the proceeds from
the sale of the partial interest, even though they might be less than
the value of the partial interest as a fraction of the total value of
the entire property, would still be more than enough to satisfy the
delinquent taxpayer's indebtedness, or if the taxpayer's indebtedness
could be satisfied out of other property to which he had sole and
complete title. In the former case, however, a court might still have to
strike an equitable balance between the interests of the delinquent
taxpayer and the interests of the nondelinquent third party.
41
The prejudice to the Government of forgoing an immediate sale of the
entire property might also be considered fairly minimal if the
third-party interest at stake could be expected to lapse in the
relatively near future.
42
But cf. n. 10, supra.
Dissenting and Concurring Opinion
JUSTICE
BLACKMUN, with whom JUSTICE REHNQUIST, JUSTICE STEVENS, and JUSTICE
O'CONNOR join, concurring in part and dissenting in part:
The
Court today properly rejects the broad legal principle concerning 26 U.
S. C. §7403 that was announced by the Court of Appeals. See ante,
at 9 and 11-12. I agree that, in some situations, §7403 gives the
Government the power to sell property not belonging to the
taxpayer. Our task, however, is to ascertain how far Congress intended
that power to extend. In my view, §7403 confers on the Government the
power to sell or force the sale of jointly-owned property only insofar
as the tax debtor's interest in that property would permit him
to do so; it does not confer on the Government the power to sell
jointly-owned property if an unindebted co-owner enjoys an indestructible
right to bar a sale and to continue in possession. Because Mrs. Rodgers
had such a right, and because she is not herself indebted to the
Government, I dissent from the Court's disposition of her case.
I
It
is basic in the common law that a lienholder enjoys rights in property
no greater than those of the debtor himself; that is, the lienholder
does no more than step into the debtor's shoes. 1 L. Jones, Liens, §9,
at 9-10 (1914). Thus, as a general rule, "[t]he lien of a judgment
. . . cannot be made effectual to bind or to convey any greater or other
estate than the debtor himself, in the exercise of his rights, could
voluntarily have transferred or alienated." 49 C. J. S. Judgments
§478 (1947) (collecting cases); Commercial Credit Co. v. Davidson,
112 F. 2d 54, 57 (CA5 1940); Wiltshire v. Warburton, 59 F. 2d
611, 614 (CA4 1932). Similarly, pursuant to a state tax lien, "no
greater interest in land than that which was held by the taxpayer and
taxable to him may be sold, so that, where a sale is had for unpaid
taxes on a leasehold estate, only the leasehold estate is subject to
conveyance." 1
85 C. J. S. Taxation §806 (1954) (footnote omitted) (collecting cases);
United States v. Erie County, 31 F. Supp. 57, 60 (WDNY 1939). The
lienholder may compel the debtor to exercise his property rights in
order to meet his obligations or the lienholder may exercise those
rights for him. But the debtor's default does not vest in the lienholder
rights that were not available to the debtor himself.
In
most situations in which a delinquent taxpayer shares property with an
unindebted third party, it does no violence to this principle to order a
sale of the entire property so long as the third party is fully
compensated. A joint owner usually has at his disposal the power to
convey the property or force its conveyance. Thus, for example, a joint
tenant or tenant in common may seek partition. See generally W. Plumb,
Federal Tax Liens 35 (1972). If a joint tenant is delinquent in his
taxes, the United States does no more than step into the delinquent
taxpayer's shoes when it compels a sale. 2
In
a small number of joint-ownership situations, however, the delinquent
taxpayer has no right to force partition or otherwise to alienate the
entire property without the consent of the co-owner. These include
tenancies by the entirety and certain homestead estates. See Plumb,
Federal Liens and Priorities--Agenda for the Next Decase II, 77 Yale L.
J. 605, 634 (1968). In this case, the homestead estate owned by the
delinquent taxpayer--Mrs. Rodgers' deceased husband--did not include the
right to sell or force the sale of the homestead during Mrs. Rodgers'
lifetime without her consent. Mrs. Rodgers had, and still has, an
indefeasible right to possession, an interest, as the Court recognizes,
"akin to an undivided life estate." Ante, at 7. A
lienholder stepping into the shoes of the delinquent taxpayer would not
be able to force a sale.
II
By
holding that the District Court has the discretion to order a sale of
Mrs. Rodgers' property, the Court necessarily finds in the general
language of §7403 a congressional intent to abrogate the rule that the
tax collector's lien does not afford him rights in property in excess of
the rights of the delinquent taxpayer. 3
I do not dispute that the general language of §7403, standing alone, is
subject to the interpretation the Court gives it. From its enactment in
1868 4
to the present day, the language of this statute has been sweeping; read
literally, it admits of no exceptions. But when broadly worded statutes,
particularly those of some antiquity, are in derogation of common-law
principles, this Court has hesitated to heed arguments that they should
be applied literally. See Imbler v. Pachtman, 424 U. S. 409, 417
(1976). In such cases, the Court has presumed in the absence of a clear
indication to the contrary that Congress did not mean by its use of
general langage to contravene fundamental precepts of the common law. 5
A
Apart
from the general language of the statute, the Court points to nothing
indicating a congressional intent to abrogate the traditional rule. It
seems to me, indeed, that the evidence definitely points the other way.
Scholarly comment on §7403, and on §6821, the tax lien provision,
consistently has maintained that, in States such as Texas that confer on
each spouse absolute rights to full use and possession of the homestead
for life, the homestead property rights of an unindebted spouse may not
be sold by the tax collector to satisfy the other spouse's tax debt. 6
Court decisions addressing this point have been to the same effect. 7
In 1966, the American Bar Association placed before Congress this
virtually undisputed view of the law of federal tax liens. Hearings on
H. R. 11256 and H. R. 11290, p. 134, Legislative History of the Federal
Tax Lien Act of 1966, at 177 (Committee Print compiled for House
Committee on Ways and Means, 89th Cong., 2d Sess., 1966) (hereinafter
Legislative History). 8
Since 1936, Congress repeatedly has addressed the law of federal tax
liens, directing some attention to §7403. 9
Against the background of this consensus among courts and commentators
that tax liens may not be enforced against such homesteads so long as an
unindebted spouse still lives, Congerss did not change the law.
In
fact, in 1954 the Senate foiled an attempt by the House to extend the
reach of federal tax liens to tenancies by the entirety, a spousal
property interest similar to the Taxas homestead. 10
The rule pronounced in the courts, e.g., United States v. Hutcherson
[51-1 USTC ¶9249], 188 F. 2d 326, 331 (CA8 1951); United States v.
Nathanson [45-1 USTC ¶9194], 60 F. Supp. 193, 194 (ED Mich. 1945),
and the view of the commentators, e.g., Anderson, note 3, supra,
at 254; Clark, note 3, supra, at 17, was that tenancies by the
entirety, like Texas homesteads, could not be sold to enforce the tax
liability of one spouse. The House passed an amendment that would have
extended the tax lien created by §6321 expressly to the taxpayer's
interest as tenant by the entirety. H. R. 8300, 83d Cong., 2d Sess., §6321
(1954) (Code bill). The Senate removed the language, stating: "The
deletion of the phrase is intended to continue the existing law."
S. Rep. No. 1622, 83d Cong., 2d Sess., 575 (1954).
It
is true, of course, that tenancies by the entirety were held to be
immune from federal tax sales on a theory different from that applied to
homestead property like Mrs. Rodgers'. See ante, at 24-25, n. 31.
But it was established that both types of property interests precluded
the Government from satisfying the tax debts of one spouse by selling
the jointly-owned property. In the absence of any evidence of
congressional intent to the contrary, this deliberate choice to leave
undisturbed the bar to tax enforcement created by a tenancy by the
entirety 11
suggests that Congress did not object to the similar effect of the Texas
homestead right, an effect consistent with principles basic to the
common law of liens.
B
Although
disclaiming it as a basis for decision, the Court relies on Mansfield
v. Excelsior Refining Co., 135 U. S. 326, 339-341 (1890), to support
its reading of §7403. Ante, at 13, n. 17. In Mansfield, a
tenant who operated a distillery on leased property fell delinquent in
its taxes. The Government sought to sell by administrative levy the
entire fee, not just the tenant's leasehold interest. The fee was owned
by a third party, and the delinquent taxpayer's leasehold interest
obviously did not give him the power to sell the fee. The Mansfield
Court would not allow a sale by administrative levy, but suggested that
on the facts of that case, the Government could seek a judicial sale of
the entire property under the predecessor of §7403. Focusing on just
this portion of the Mansfield opinion, the Court now states that
"[r]ead broadly, Mansfield is on 'all fours' with our
holding today." Ante, at 13, n. 17.
To
the contrary, Mansfield is not on "all fours" with
today's holding, and indeed undermines it. In the same 1868 act in which
it passed the original predecessor to §7403, Congress enacted a
separate provision to ensure the collection of taxes from distillers.
Section 8 of that Act required each distiller to own its distillery
property in fee and free from liens. Alternatively, a distiller could
file with the tax collector the fee owner's written consent granting a
tax lien of the United States priority over all other claims to the
property, and granting the United States full title in the property in
case of forfeiture. Act of
July 20, 18
68, ch. 186, §8, 15 Stat. 128.
The
taxpayer's landlord in Mansfield had executed such a waiver, and
the Court stated that "the vital question" was the waiver's
effect. 135 U. S., at 338. Rejecting the Government's position, the
Court held that the waiver did not permit sale of the property by
administrative levy. The Court made clear, however, that its reading of
the statute did not render the waiver requirement useless. "By the
waiver the government . . . acquired the right, by a suit [under the
predecessor of §7403], to have sold, under the decree of a court, not
only the distiller's leasehold interest, but the fee in the
premises." Id., at 340.
Thus,
the Mansfield Court considered the waiver to be a condition
precedent to the Government's power, under the predecessor of §7403, to
sell the landlord's fee interest when the tenant was in default in its
taxes. If §7403 gives the Government this power without the necessity
of a waiver--as the Court today holds--it seems unlikely that Congress
would have considered it necessary, in the very Act in which it passed
§7403's predecessor, to require that a distiller either own the fee
outright or obtain from its landloard advance authorization for a sale
of the fee to satisfy the distiller's tax liabilities. 12
Outside the distillery context, Congress must have intended that the
Government's power to force a sale of the fee would be no more extensive
than that of the delinquent taxpayer.
C
The
Court's "broad reading" of Mansfield's holding reflects
only the extraordinary breadth of its own. As read by the Court, Mansfield
authorizes, without the consent of the owner of the fee, a judicial sale
of a building should a tenant fail to pay his taxes, a judicial sale of
a farm should the holder of an easement across it become delinquent, 13
or a judicial sale of a condominium or cooperative apartment house to
satisfy the tax debt of any coowner. 14
The Court imputes to Congress an intent to permit the sale of the farm
or the building even though the fee owners have paid their taxes and
even though, in signing a lease or conveying an easement, the fee owners
did not surrender their indefeasible right to prevent the sale of their
property.
Prior
to 1936, moreover, the predecessor of §7403(c) required a court
at the Government's request to sell the property in which the tax debtor
had an interest. See ante, at 27-31. Thus, the Court's view
attributes to Congress the incredible intention to mandate the
sale of the entire property whenever the holder of an easement, a
tenant, or one with a similarly minimal interest fails to pay a tax and
the Government invokes its right to bring an action to enforce its lien.
It is hardly surprising that counsel for the Government has been unable
to cite a single instance before or after this Court's decision in Mansfield
in which the Government, outside the context of the homestead cases,
invoked §7403 or its predecessors to assert a property right greater
than the taxpayer himself could have asserted. Tr. of Oral Arg. 14-16.
To abrogate the common-law rule that the tax collector gains only the
property rights of the tax debtor leads to absurd results.
III
Without
direct evidence of congressional intent to contravene the
traditional--and sensible--common-law rule, the Court advances three
arguments purporting to lend indirect support for its construction of §7403.
A
First,
the Court claims that its construction is consistent with the policy
favoring "the prompt and certain collection of delinquent
taxes." Ante, at 15. This rationale would support any
exercise of governmental power to secure tax payments. Were there two
equally plausible suppositions of congressional intent, this policy
might counsel in favor of choosing the construction more favorable to
the Government. But when one interpretation contravenes both traditional
rules of law and the common sense and common values on which they are
built, the fact that it favors the Government's interests cannot be
dispositive. 15
Moreover,
the Government's interest would not be compromised substantially by a
rule permitting it to sell property only when the delinquent taxpayer
could have done so. In this case, the delinquent taxpayer's homestead
interest, it is assumed, gave him a "half-interest in the
underlying ownership rights to the property being sold. Ante, at
20. An immediate forced sale of the entire property would yield for the
Government no more than half the present value of the remainder
interest, the residue left after the present values of the nondelinquent
spouse's life estate and half-interest in the remainder are subtracted.
As the Court notes, the Government can expect to receive only a small
fraction of the proceeds. Ibid. An immediate sale of the
delinquent taxpayer's future interest in the property might well command
a commensurate price.
Alternately,
the Government could maintain its lien on the property until Mrs.
Rodgers dies and then could force a sale. Because the delinquent
taxpayer's estate retains a half interest in the remainder, the
Government would be entitled to half the proceeds at that time. The
Government's yield from this future sale, discounted to its present
value, should not differ significantly from its yield under the Court's
approach. The principal difference is that, following the common-law
rule, Mrs. Rodgers' entitlement to live out her life on her homestead
would be respected.
An
approach consistent with the common law need not prejudice the
Government's interest in the "certain" collection of taxes.
Under §7403(d), 16
the District Court has the power to appoint a receiver, who could
supervise the property to protect the Government's interests while
respecting Mrs. Rodgers' rights to possession and enjoyment. Plumb, 77
Yale L. J. at 638. Indeed, just such an approach was suggested by the
American Bar Association's Committee on Federal Liens, 84 A. B. A. Rep.
645, 681-682 (1959), which drafted the tax lien amendments adopted in
1966. Legislative History 108-109 (statement of Laurens Williams).
The
Court also would support its construction
The
court also would support its construction by contrasting §7403 with the
more restrictive language of §6331, the administrative tax levy
provision. Ante, at 17-18. It is true that §6331 permits the
sale only of "property and rights to property . . . belonging
to" the taxayer, while §7403 generally authorizes the sale of
property in which the taxapyer has an interest. But the greater power
conferred by §7403 is needed to enable the Government to seek the sale
of jointly-owned property whenever the tax debtor's rights in the
property would have permitted him to seek a forced sale. Section
7403 certainly permits the Government, in such circumstances, to seek
partition of the property in federal, rather than state, court, to seek
authority to sell the tax debtor's part or the whole, and, in the same
proceeding, to have determined the entitlements of the various
claimants, including competing lienholders, to the proceeds of the
property sold. See generally Plumb, 77 Yale L. J., at 628-629. Absent
the more expansive language of §7403, this would not be possible. That
language, however, does not manifest congressional intent to produce the
extraordinary consequences yielded by the Court's interpretation.
C
The
Court also asserts that its construction of §7403 is consistent with
"the traditional powers of a taxing authority in an in rem
enforcement proceeding," even if it is not consistent with the
traditional rights of lienholders. Ante, at 15-16 and 23. This,
with all respect, is not so. In rem tax-enforcement proceedings
never have been used to sell property belonging to unindebted third
parties in order to satisfy a tax delinquency unrelated to the property
sold. As the Court recognizes, ante, at 15, such proceedings are
brought to sell land in order to satisfy delinquent ad valorem taxes
assessed on the land itself. 2 T. Cooley, Law of Taxation 866, 910 (3d
ed. 1903). It is said that the land itself is liable for such taxes, and
that conflicting ownership rights thus do not bar its sale. See id.,
at 866-868; H. Black, Law of Tax Titles 296 (1888); W. Burroughs, Law of
Taxation 346-349 (1877). The cases relied upon by the Court for the
proposition that in rem tax proceedings extinguish the homestead
rights of an unindebted spouse merely applied this rule. Lucas v.
Purdy, 142 Iowa 359, 120 N. W. 1063 (1909); Robbins v. Barron,
32 Mich. 36 (1875); Jones v. Devore, 8 Ohio St. 430 (1858).
On
the other land, if the tax is assessed on an individual's separate
interest in the land, rather than on the land itself, the tax debt is
personal to the individual and "[n]othing more [than the
individual's interest] . . . can become delinquent; nothing more can be
sold." H. Black, supra, at 301; see R. Blackwell, On the
Power to Sell Land 908, 920, 942 (5th ed. 1889); Cooley, supra,
at 870-871; Burroughs, supra, at 347. The real property interests
of third parties cannot be sold through an in rem proceeding to
satisfy a personal tax liability. The "traditional powers of a
taxing authority" to sell the entire property and extinguish the
interests of unindebted third parties thus are limited to collection of
taxes assessed on the land itself, and have no application to delinquent
taxes, like those at issue in these cases, assessed personally against
one joint owner. 17
Some
States, it is true, have authorized by statute the sale of real property
to satisfy the owner's tax debts, even where the delinquent taxes are
unrelated to the property. See Larimer County v. National State Bank
of Boulder, 11 Colo. 564 (1888); Iowa Land Co. v. Douglas County,
8 S. D. 491 (1896). The Court does not suggest, however, that
jointly-owned real property ever has been sold pursuant to such a
statute when an unindebted co-owner has indefeasible rights therein.
Indeed, the traditional distinction between taxes for which the land is
liable and tax liabilities personal to the taxpayer would preclude such
a sale. Thus, even if one purpose of §7403's predecessor statute
"was to obtain for the federal tax collector some of the advantages
that many States enjoyed through in rem tax enforcement," ante,
at 16, Congress would not have intended the result the Court reaches
today. A state tax collector could not confiscate the indefeasible real
property interests of a nondelinquent third party to satisfy the
personal tax liability of a co-owner. 18
IV
The
Court rocognizes that Mrs. Rodgers has an indestructible property right
under Texas law to use, possess, and enjoy her homestead during her
lifetime, and that the delinquent taxpayer's property interests would
not have enabled him to disturb that right against her will. Ante,
at 6-7. The Court recognizes that Mrs. Rodgers has no outstanding tax
liability and that the Government has no lien on Mrs. Rodgers' property
or property rights. Because I conclude that Congress did not intend §7403
to permit federal courts to grant property rights to the Government
greater that those enjoyed by the tax debtor, I would hold that the
Government may not sell Mrs. Rodgers' homestead without her consent. To
the extent the Court holds to the contrary, I respectfully dissent.
V
Mrs.
Ingram's case, however, is materially different. Like her husband, Mrs.
Ingram was liable for back taxes, and consequently the Government had a
lien on her interests in property as well as on her husband's interests.
Exercising both spouses' rights in the homestead, the Government is
entitled to force a sale, Plumb, 13 Tax L. Rev., at 263; see Shambaugh
v. Scofield [42-2 USTC ¶9826], 132 F. 2d 345 (CA5 1942), subject
only to the discretion of the District Court. See ante, at 24-33.
Second, when Mrs. Ingram and her former husband were divorced, the
homestead became subject to partition under Texas law. See ante,
at 6, n. 10. In Mrs. Ingram's case, therefore, I concur in the result.
1
See infra, at 15-17.
2
"Every jurisdiction permits partition by sale in a proper
case." 4A R. Powell, Real Property ¶613, p. 655 (1982). The same
treatise observes: "Lip service is still given to the historical
preference for physical division of the affected land, but sale normally
is the product of a partition proceeding, either because the parties all
wish it or because courts are easily convinced that sale is necessary
for the fair treatment of the parties." ¶612, p. 652. The
Government views application of §7403 as constrained by like
principles. Tr. of Oral Arg. 7; see id., at 13; n. 14, infra.
Thus,
stepping into the shoes of the tenant in common or joint tenant, the
Government may force a sale of the entire property where sale is
necessary for fair treatment of the parties or where the parties desire
it. For these reasons, I agree with the Court that the Court of Appeals
in these cases erred in relying on Folsom v. United States [62-2
USTC ¶9648], 306 F. 2d 361 (CA5 1962), which held that the Government
cannot seek the sale of jointly-owned property, even when the tax
debtor's rights in the property include the right to partition the
property or seek a forced sale. See id., at 365.
3
In the Court's words, when the Government exercises its "right to
seek a forced sale" under §7403, ante, at 12, Congress
means it to walk not in the tax debtor's shoes, but in the full panoply
of "sovereign prerogative." Ante, at 18. Yet the Court
recognizes that the common-law principle limiting the property rights of
the lienholder to those of the debtor long has been assumed in the
federal law of tax liens. Ante, at 12 and n. 16, quoting 4 B.
Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.4, p.
111-102 (1981) ("the tax collector not only steps into the
taxpayer's shoes but must go barefoot if the shoes wear out"). See
Anderson, Federal Tax Liens--Their Nature and Priority, 41 Calif. L.
Rev. 241, 250 (1958) ("The rights of the Government to the
taxpayer's property under a tax lien are no greater than the rights of
the taxpayer. Or, to put it more simply, the tax collector stands in the
shoes of the taxpayer when reaching the taxpayer's property");
Reid, Tax Liens, Their Operation and Effect, New York University Ninth
Annual Institute on Federal Taxation 563, 568 (1951) ("It is clear,
of course that the government's rights as lienor are no greater than the
rights of the tax-debtor"); Clark, Federal Tax Liens and Their
Enforcement, 33 Va. L. Rev. 13, 17 (1947) ("It is obvious, of
course, that the federal tax lien can only reach the property of the
tax-debtor and that [the Government's] rights as lienor to property or
rights to property of its tax-debtor can rise no higher that the rights
of the latter in that property or rights to property").
4
Much like the current §7403, the initial version authorized suit by the
Commissioner "to enforce the lien of the United States for tax upon
any real estate, or to subject any real estate owned by the delinquent,
or in which he has any right, title, or interest, to the payment of such
tax." Act of
July 20, 19
68, ch. 186, §106, 15 Stat. 125, 167.
5
Despite the absolute language of 42 U. S. C. §1983, the Court has
concluded that "§1983 is to be read in harmony with general
principles of tort immunities and defenses rather than in derogation of
them." Imbler v. Pachtman, 424 U. S. 409, 418 (1976). The
Court has assumed that "members of the 42d Congress were familiar
with common-law principles, including defenses previously recognized in
ordinary tort litigation, and that they likely intended these common-law
principles to obtain, absent specific provisions to the contrary." Newport
v. Fact Concerts, Inc., 453 U. S. 247, 258 (1981). Pursuant to this
approach, the Court has applied various common-law immunities to §1983
actions. See, e.g., Briscoe v. LaHue, -- U. S. -- (1983)
(witnesses); Nixon v. Fitzgerald, -- U. S. -- (1982) (President);
Imbler v. Pachtman, supra (state prosecutor); Scheuer v.
Pachtan, 416 U. S. 232 (1974) (state executive officers); Pierson
v. Ray, 386 U. S. 547 (1967) (state judge); Tenney v. Brandhove,
341 U. S. 367 (1951) (state legislator).
Similarly,
in United States v. Sanges, 144 U. S. 310, 322-323 (1892), the
Court refused to permit the Government to appeal an adverse judgment in
a criminal case, despite a statute conferring appellate jurisdiction
"[i]n any case that involves the construction or application of the
Constitution of the United States," Act of
March 3, 18
91, ch. 517, §5, 26 Stat. 827, 828. The Court declared: "This
statute, like all acts of Congress, and even the Constitution itself, is
to be read in the light of the common law," 144 U. S., at 311,
which disfavored such appeals. Before it would conclude that Congress
intended to legislate in derogation of a basic common-law rule, the
Court required a specific expression of intent.
The
concern underlying the rule that the lienholder gains only the property
rights of the debtor are as basic as those underlying the rules in Sanges
the the §1983 immunity cases. The taking of one person's indefeasible
property rights to pay another person's debts, even with compensation,
strikes a discordant note. Cf. Hoeper v. Tax Comm'n, 284 U. S.
206 (1931) (uncompensated taking of wife's property to pay husband's tax
debt violates Due Process and Equal Protection Clauses of Fourteenth
Anemdnent); Id., at 219 (Holmes. J., dissenting). The question
here, as in Sanges and the §1983 cases, is whether Congress
intended this statute to reach that far. It is a well recognized rule of
statutory construction, flowing from a strong policy of respecting
traditional property rights, that legislative grants of the takings
power may be found in legislation only by express provision or necessary
implication. See 3 C. Sands, Sutherland on Statutes and Statutory
Construction §64.06 (4th ed. 1974) (collecting cases); cf. United
States v. Wilson, 420 U. S. 332, 336 (1975) (Sanges based on
common-law rule of construction requiring explicit legislative
authorization for state appeal in criminal case). As shown below,
neither may be found in the language, policies, or legislative history
of §7403.
6
See W. Plumb, Federal Tax Liens 38 (1972); American Bar Association,
Report of the Special Committee on Federal Liens, 84 A. B. A. Rep. 645,
682 (1959); Anderson, n. 3, supra, at 254; Clark, n. 3, supra,
at 17; Plumb, Federal Liens and Priorities--Agenda for the Next Decade
II, 77 Yale L. J. 605, 634 and n. 194 (1968); Plumb, Federal Tax
Collection and Lien Problems, pt. I, 13 Tax L. Rev. 247, 262-263 (1958);
Reid, n. 8, supra, at 568. Mr. Plumb's views may be due
particular attention, because he was the principal draftsman of the
Federal Tax Lien Act of 1966. See Hearings on H. R. 11256 and H. R.
11290, p. 60, Legislative History of the Federal Tax Lien Act of 1966,
at 104 (Committee Print Compiled for House Committee on Ways and Means,
89th Cong., 2d Sess., 1966) (hereinafter Legislative History) (statement
of Lauren Williams). The commentators also consistently have observed
that state homestead laws that merely exempt homestead property from the
reach of creditors, rather than vesting indestructible rights in each
spouse, are ineffective against federal tax liens, E.g., Plumb,
77 Yale L. J., at 634. See United States v. Heasley [60-2 USTC ¶9744],
283 F. 2d 422, 427 (CA8 1960).
7
United States v. Hershberger [75-1 USTC ¶9289], 475 F. 2d 677,
682 (CA10 1973); Jones v. Kamp, 144 F.2d 478, 480 (CA10 1944); Morgan
v. Moynahan, 86 F. Supp. 522, 525 (S. D. Tex. 1949); Bigley v.
Jones [46-1 USTC ¶9161], 64 F. Supp. 389, 391 (W. D. Okla. 1946); Paddock
v. Siemoneit, 147 Tax. 571, 585, 218 S. W. 2d 428, 436 (1949).
8
The Government, in its brief, relies on the American Bar Association's
recommendation to Congress, contained in the Report of the ABA Committee
on Federal Liens, that federal tax liens not be made subject to the
exemption laws of the States. Brief for United States 30, quoting Final
Report of the Committee on Federal Liens, reprinted in Legislative
History 75, 175-176. As the Government says, "[t]he committee . . .
rejected the basis notion as inappropriate, and Congress thereafter
refrained from implementing it." Brief for United States 30.
In
light of its reliance on this aspect of the ABA report, it is strange
that the Government did not call to the Court's attention a passage
appearing on the very next page of the ABA Report, under the heading "Homesteads":
"The
homestead exemption laws of the States do not apply as against the
federal tax lien. But the homestead laws of some States have been held
to create an indivisible and vested interest in the husband and wife,
which cannot be subjected to levy and sale for the separate tax of one
of them." Legislative History, at 177 (citations omitted).
The
Report cites the leading cases, Jones v. Kemp, supra, and Paddock
v. Siemoneit, supra, which held that the Oklahoma and Texas
homestead rights block levy on or forced judicial sale of the homestead
for the separate tax liability of one spouse. The ABA Report did
Amendment); id., at 219 (Holmes, J., dissenting). settled law.
Instead, it suggested that a court could "declare, but not
foreclose, the lien (so that litigable questions may be disposed of
within the period of limitations)." Legislative History 177. The
Report went on to suggest that a court could "make such order as
may be necessary to protect the Government's interest during the joint
lives" of the spouses. Ibid. In the Government's words,
Congress thereafter refrained from implementing any change in the status
of Texas homesteads.
9
See Federal Tax Lien Act of 1966, Pub. L. 89-719, §107(b), 80 Stat.
1140; Tax Reform Act of 1976, Pub. L. 94-455, §§ 1906(b)(13)(A) and
2004(f)(2), 90 Stat. 1834 and 1872; Economic Recovery Tax Act of 1981,
Pub. L. 97-34, §422(e)(8), 95 Stat. 316.
10
The effect of tenancies by the entirety is to create an immunity from
the tax collector far broader than that created by Texas homestead
provisions. In addition to homestead property, "[b]usiness assets,
personal property, and even money may be so held in some states."
Plumb, 13 Tax L. Rev., at 262.
11
The Court implies that the Senate's stated intention "to continue
the existing law" may have indicated a view that existing law
permitted sales of a tenancy by the entirety to satisfy a single
spouse's tax debts. Ante, at 25, n. 31. This argument is
difficult to understand, given the Court's apparent agreement that
judicial interpretation of the tax lien provisions was unequivocally to
the contrary. Ante, at 24, n. 31. Moreover, the Senate Report's
suggestion that the amendment might not significantly have changed the
law, see ante, at 25, n. 31, does not advance the Court's case.
The amendment would have allowed the federal tax lien merely to attach
to the interests in property of the delinquent spouse. Like Texas
homestead property, however, a tenancy by the entirely usually vests the
entire estate in both spouses, bars either spouse from disposing of it
without the concurrence of the other, and prevents either spouse from
destroying the other's survivorship rights. United States v.
Hutcherson [51-1 USTC ¶9249], 188 F. 2d 326, 329 (CA8 1951). Thus,
even if the lien attached to the delinquent spouse's interest in the
property by virtue of the amendment, the traditional rule that the
lienholder gains only those property rights possessed by the debtor
would have precluded a sale. See generally Plumb, 77 Yale L. J., at
637-638.
12
It is the Court that quotes out of context from Mansfield. The
waiver provision of the 1868 Act ensured that all distillery property
either would be owned in fee by the distiller or would be owned by a
third party subject to a waiver of ownership rights in favor of the
Government in the event of a default. The "general statement"
on which the Court relies, see ante, at 13, n. 17, refers
specifically to the application of §7403's predecessor to the sale of
distillery property: "In order to collect the taxes due from . . .
the distiller, [the Government] might have instituted a suit in
equity, to which not only the distiller, . . . but all persons .
. . claiming any interest in, the premises could be made parties. . .
." 135 U. S., at 339 (emphasis supplied). Even viewed in isolation,
this statement need not be read as applying outside the distillery
context. On the next page of its opinion, the Mansfield Court
resolved whatever doubt might have remained about the breadth of this
passage. It stated that the waiver, in addition to giving the
Government priority over the owner of the property, gave the Government
the right, by a suit in equity, to sell the fee in the premises. Id.,
at 340.
13
At oral argument, the Government admitted that its interpretation of
§§ 6321 and 7403 would entitle it to seek the sale of residential
property across which a neighbor, delinquent in his taxes, held an
easement. Tr. of Oral Arg. 9-10. The Government indicated that it would
exercise its discretion to sell just the easement "where there is a
separate market" for it. Id., at 9.
14
Even the Internal Revenue Service does not take its approach to the
statute this far. The Service has ruled that when a delinquent taxpayer
owns a time-sharing condominium interest, "[t]he federal tax lien
may be enforced against the delinquent taxpayer's interest but not
against the condominium unit itself." Rev. Rul. 79-55, 1979-1 Cum.
Bul. 400, 401. The Service apparently reads its own limitation into the
statute's plain language: sale of property in which a delinquent
taxpayer owns a partial interest is permitted only where "the
property is not capable of being divided among the co-owners." Ibid.
Presumably,
the Court would agree that it would be an abuse of discretion for a
court to order a sale of an entire property capable of division among
co-owners. See ante, at 31-32. If the Court is willing to read
this limit into the statute, however, I fail to see how the Court can
refuse to recognize a limit in the basic common-law proposition that the
lienholder obtains no rights that the debtor did not have. See United
States v. Hershberger, 475 F. 2d at 679, 682.
15
Similarly important but general policies, coupled with broad statutory
language, were insufficient to overcome the common-law rules in both Sanges
and the §1983 cases. See n. 5, supra.
16
Section 7403(d) provides:
"In
any such proceeding, at the instance of the United States, the court may
appoint a receiver to enforce the lien, or, upon certification by the
Secretary during the pendency of such proceedings that it is in the
public interest, may appoint a receiver with all the powers of a
receiver in equity."
17
Congress was fully aware of this distinction in 1868. In 1863, Congress
amended a tax statute, explicitly imposing a tax directly on land, and
vesting title upon default "in the United States or in the
purchasers at [a tax] sale, in fee simple," free and discharged
from "all . . . claim[s] whatsoever." See Turner v. Smith,
14 Wall. 553, 554-555 (1871). The Court distinguished between this tax,
"clearly a direct tax on the land, and on all the estates,
interests, and claims connected with or growing out of the land," id.,
at 563, and the tax authorized by the prior statute, which arguably was
imposed merely "on the owner of the land, and levied on the
interest of the owner in it." Id., at 562. The Court held
that these amendments made clear that Congress intended to permit the
sale of all interests in the property upon default.
Congress
did not include similar language in the predecessor statute to §7403,
enacted only five years later, presumably because it was aware that it
authorized the sale of land to satisfy personal tax liabilities, rather
than to collect direct taxes on the land. As the Mansfield case
makes clear, supra, at 9-11, Congress knew how to gain the
benefits of in rem proceedings in this context if it so desired:
it could obtain a waiver from the owner of the fee, acquiring the right
to sell the property regardless of ownership, and permitting a fee
simple to vest in the United States, or in a purchaser at a tax sale,
upon default.
18 The Court also relies on certain cases "outside the
context of in rem proceedings" upholding state statutes
specifically authorizing enforcement of property taxation through the
sale of all personalty in the delinquent taxpayer's possession, whether
or not the taxpayer owns it. Ante, at 16, n. 19. The courts in
these cases expressed considerable discomfort with such statutes, but
deferred to the legislatures' explicit intention that ownership was to
be presumed from possession. See Sears v. Cottrell, 5 Mich. 251,
254-255 (1858); id., at 257 (concurring opinion). Section 7403,
in contrast, is not explicit on the issue before the Court. Moreover,
these state statutes hardly could have provided a model for Congress;
they did not affect real property, which was the sole subject of the
predecessor statute to §7403. See n. 4, supra. They simply
created an irrebuttable presumption that one in possession of personal
property was its owner, in order to avoid the fraud and collusion that
inevitably would result from a contrary rule. See Hersee v. Porter,
100 N. Y. 403, 409-410 (1885); Sears v. Cottrell, at 266
(concurring opinion). Real property, which is immovable and subject to
stringent recording requirements, does not pose these dangers and this
does not require similar measures.
International Harvester Credit Corp. v. Goodrich,
350 U. S. 537 (1956), relied upon ante, at 17, n. 19, is not
relevant. There, the Court merely ratified a State's choice to give its
tax lien priority over competing liens.
[2002-1 USTC ¶50,361] United States, Petitioner v. Sandra L. Craft
Supreme Court of the United States, 00-1831, 4/17/2002, 122
SCt 1414, Reversing and remanding an Appellate Court decision, 2000-2
USTC ¶50,860
233 F3d 358.
On Writ of Certiorari to the United States Court of Appeals for the
Sixth Circuit.
[Code
Secs. 6321 and 6323 ]
Lien for tax: Family transactions: Tenancy by the entireties: Real
property: Transfer of interest to spouse: State law.--A husband's
interest in entireties property constituted "property" or
"rights to property" to which a federal tax lien could attach,
despite the fact that, under state (Michigan) law, the property was
exempt from the claims of creditors. Following the
IRS
's issuance of the lien against all of the husband's property, he and
his wife jointly executed a quitclaim deed transferring his interest in
a parcel of realty to her for $1. Upon the wife's sale of the property,
half of the proceeds were placed in escrow pending a determination of
the government's interest in the realty, and the wife brought a quiet
title action seeking to recover the funds. According to the U.S. Supreme
Court, the interpretation of Code
Sec. 6321 is a federal question, and exempt status under state law
is not binding on the federal tax collector. The Court examined the
individual rights created by Michigan law in order to determine whether
the husband possessed property or rights to property, and concluded that
the broad language of Code
Sec. 6321 demonstrates that Congress intended to reach every
property interest that a taxpayer might have. BACK REFERENCES: ¶2250.23
, ¶38,136.66 ,
¶38,160.85 , ¶38,160.926
, ¶39,020.19 ,
¶40,720.177 , ¶40,720.189
, ¶41,605.3406
and ¶41,743.10
Syllabus
When
respondent's husband failed to pay federal income tax liabilities
assessed against him, a federal tax lien attached to "all [of his]
property and rights to property." 26 U.S.C. §6321. After the
notice of the lien was filed, respondent and her husband 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 respondent to sell the property
with half the net proceeds to be held in escrow pending determination of
the Government's interest in the property. She brought this action to
quiet title to the escrowed proceeds. The Government claimed, among
other things, that its lien had attached to the husband's interest in
the tenancy by the entirety. The District Court granted the Government
summary judgment, but the Sixth Circuit held that no lien attached
because the husband had no separate interest in the entireties property
under Michigan law, and remanded the case for consideration of an
alternative claim not at issue here. In affirming the District Court's
decision on remand, the Sixth Circuit held that its prior opinion on the
issue whether the lien attached to the husband's entireties property was
the law of the case.
Held: The
husband's interests in the entireties property constitute
"property" or "rights to property" to which a
federal tax lien may attach. Pp. 3-15.
(a)
Because the federal tax lien statute itself creates no property rights, United
States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, this Court looks
initially to state law to determine what rights the taxpayer has in the
property the Government seeks to reach and then to federal law to
determine whether such state-delineated rights qualify as property or
rights to property under §6321, Drye v. United States [99-2 USTC
¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 58. A common idiom describes
property as a "bundle of sticks"--a collection of individual
rights which, in certain combinations, constitute property. State law
determines which sticks are in a person's bundle, but federal law
determines whether those sticks constitute property for federal tax lien
purposes. In looking to state law, this Court must consider the
substance of the state law rights, not the labels the State gives them
or the conclusions it draws from them. Pp. 3-4.
(b)
Michigan law gave respondent's husband, among other rights, the right to
use the entireties property, the right to exclude others 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 respondent's
consent and to receive half the proceeds from such a sale, the right to
encumber the property with respondent's consent, and the right to block
respondent from selling or encumbering the property unilaterally. Pp.
4-8.
(c)
The rights Michigan law granted respondent's husband qualify as
"property" or "rights to property" under §6321. The
broad statutory language authorizing the tax lien reveals that Congress
meant to reach every property interest that a taxpayer might have. United
States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S.
713, 719-720. The husband's rights of use, exclusion, and income alone
may be sufficient to subject his entireties interest to the lien, for
they gave him a substantial degree of control over the property. See
Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra, at 61.
He also had the right to alienate the property with respondent's
consent. The unilateral alienation stick is not essential to
"property." Federal tax liens may attach to property that
cannot be unilaterally alienated, United States v. Rodgers [83-1
USTC ¶9374], 461 U.S. 677, and excluding such property would exempt a
rather large amount of what is commonly thought of as property. A number
of the sticks in respondent's husband's bundle were presently existing,
so it is not necessary to consider whether his survivorship right alone,
which respondent claims is an expectancy, would qualify as property or
rights to property. Were this Court to reach a contrary conclusion, the
entireties property would belong to no one for §6321 purposes because
respondent had no more interest in the property than her husband. Such a
result seems absurd and would allow spouses to shield their property
from federal taxation by classifying it as entireties property,
facilitating abuse of the federal tax system. Legislative history does
not support respondent's position that Congress did not intend that a
federal tax lien attach to an entireties property interest. And the
common-law background of the tax lien statute's enactment is not enough
to overcome the broad language Congress actually used. Pp. 8-14.
(d)
That Michigan makes a different choice with respect to state law
creditors does not dictate the choice here. Because §6321's
interpretation is a federal question, this Court is in no way bound by
state courts' answers to similar questions involving state law. P. 14.
[2000-2
USTC ¶50,860], 233 F.3d 358, reversed and remanded.
O'CONNOR,
J., delivered the opinion of the Court, in which REHNQUIST, J., and
KENNEDY, SOUTER, GINSBURG, and BREYER, JJ., joined. SCALIA, J., filed a
dissenting opinion, in which THOMAS, J., joined. THOMAS, J., filed a
dissenting opinion, in which STEVENS and SCALIA, JJ., joined.
Justice
O'CONNOR
delivered
the opinion of the Court: This case raises the question whether a tenant
by the entirety possesses "property" or "rights to
property" to which a federal tax lien may attach. 26 U.S.C. §6321.
Relying on the state law fiction that a tenant by the entirety has no
separate interest in entireties property, the United States Court of
Appeals for the Sixth Circuit held that such property is exempt from the
tax lien. 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, and reverse the judgment of the Court of Appeals.
I
In
1988, the Internal Revenue Service (
IRS
) assessed $482,446 in unpaid income tax liabilities against Don Craft,
the husband of respondent Sandra L. Craft, for failure to file federal
income tax returns for the years 1979 through 1986. App. to Pet. for
Cert. 45a, 72a. When he failed to pay, a federal tax lien attached to
"all property and rights to property, whether real or personal,
belonging to" him. 26 U.S.C. §6321.
At
the time the lien attached, respondent and her husband owned a piece of
real property in Grand Rapids, Michigan, as tenants by the entirety.
App. to Pet. for Cert. 45a. After notice of the lien was filed, they
jointly executed a quitclaim deed purporting to transfer the husband's
interest in the property to respondent for one dollar. Ibid. When
respondent attempted to sell the property a few years later, a title
search revealed the lien. The
IRS
agreed to release the lien and allow the sale with the stipulation that
half of the net proceeds be held in escrow pending determination of the
Government's interest in the property. Ibid.
Respondent
brought this 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. It further asserted that the transfer of
the property to respondent was invalid as a fraud on creditors. Id.,
at 46a-47a. The District Court granted the Government's motion for
summary judgment, holding that the federal tax lien attached at the
moment of the transfer to respondent, which terminated the tenancy by
the entirety and entitled the Government to one-half of the value of the
property. [94-2 USTC ¶50,493], No. 1:93-CV-306, 1994 WL 669680, *3 (WD
Mich.,
Sept. 12, 1994
).
Both
parties appealed. The Sixth Circuit held that the tax lien did not
attach to the property because under Michigan state law, the husband had
no separate interest in property held as a tenant by the entirety. [98-1
USTC ¶50,305], 140 F.3d 638, 643 (1998). It remanded to the District
Court to consider the Government's alternative claim that the conveyance
should be set aside as fraudulent. Id., at 644.
On
remand, the District Court concluded that where, as here, state law
makes property exempt from the claims of creditors, no fraudulent
conveyance can occur. [99-2 USTC ¶50,618], 65 F.Supp. 2d 651, 657-658
(WD Mich. 1999). It found, however, that respondent's husband's use of
nonexempt funds to pay the mortgage on the entireties property, which
placed them beyond the reach of creditors, constituted a fraudulent act
under state law, and the court awarded the
IRS
a share of the proceeds of the sale of the property equal to that
amount. Id., at 659.
Both
parties appealed the District Court's decision, the Government again
claiming that its lien attached to the husband's interest in the
entireties property. The Court of Appeals held that the prior panel's
opinion was law of the case on that issue. [2000-2 USTC ¶50,860], 233
F.3d 358, 363-369 (CA6 2000). It also affirmed the District Court's
determination that the husband's mortgage payments were fraudulent. Id.,
at 369-375.
We
granted certiorari to consider the Government's claim that respondent's
husband had a separate interest in the entireties property to which the
federal tax lien attached. 533 U.S. 976 (2001).
II
Whether
the interests of respondent's husband in the property he held as a
tenant by the entirety constitutes "property and rights to
property" for the purposes of the federal tax lien statute, 26
U.S.C. §6321, is ultimately a question of federal law. The answer to
this federal question, however, largely depends upon state law. The
federal tax lien statute itself "creates no property rights but
merely attaches consequences, federally defined, to rights created under
state law." United States v. Bess [58-2 USTC ¶9595], 357
U.S. 51, 55 (1958); see also United States v. National Bank of
Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722 (1985). Accordingly,
"[w]e look initially to state law to determine what rights the
taxpayer has in the property the Government seeks to reach, then to
federal law to determine whether the taxpayer's state-delineated rights
qualify as 'property' or 'rights to property' within the compass of the
federal tax lien legislation." Drye v. United States [99-2
USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 58 (1999).
A
common idiom describes property as a "bundle of sticks"--a
collection of individual rights which, in certain combinations,
constitute property. See B. Cardozo, Paradoxes of Legal Science
129 (1928) (reprint 2000); see also Dickman v. Commissioner [84-1
USTC ¶9240; 84-1 USTC ¶13,560], 465 U.S. 330, 336 (1984). State law
determines only which sticks are in a person's bundle. Whether those
sticks qualify as "property" for purposes of the federal tax
lien statute is a question of federal law.
In
looking to state law, we must be careful to consider the substance of
the rights state law provides, not merely the labels the State gives
these rights or the conclusions it draws from them. Such state law
labels are irrelevant to the federal question of which bundles of rights
constitute property that may be attached by a federal tax lien. In Drye
v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra,
we considered a situation where state law allowed an heir subject to a
federal tax lien to disclaim his interest in the estate. The state law
also provided that such a disclaimer would "creat[e] the legal
fiction" that the heir had predeceased the decedent and would
correspondingly be deemed to have had no property interest in the
estate. Id., at 53. We unanimously held that this state law
fiction did not control the federal question and looked instead to the
realities of the heir's interest. We concluded that, despite the State's
characterization, the heir possessed a "right to property" in
the estate--the right to accept the inheritance or pass it along to
another--to which the federal lien could attach. Id., at 59-61.
III
We
turn first to the question of what rights respondent's husband had in
the entireties property by virtue of state law. In order to understand
these rights, the tenancy, by the entirety must first be placed in some
context.
English
common law provided three legal structures for the concurrent ownership
of property that have survived into modern times: tenancy in common,
joint tenancy, and tenancy by the entirety. 1 G. Thompson, Real Property
§4.06(g) (D. Thomas ed. 1994) (hereinafter Thompson). The tenancy in
common is now the most common form of concurrent ownership. 7 R. Powell
& P. Rohan, Real Property §51.01[3] (M. Wolf ed. 2001) (hereinafter
Powell). The common law characterized tenants in common as each owning a
separate fractional share in undivided property. Id., §50.01[1].
Tenants in common may each unilaterally alienate their shares through
sale or gift or place encumbrances upon these shares. They also have the
power to pass these shares to their heirs upon death. Tenants in common
have many other rights in the property, including the right to use the
property, to exclude from third parties from it, and to receive a
portion of any income produced from it. Id., §§50.03-50.06.
Joint
tenancies were the predominant form of concurrent ownership at common
law, and still persist in some States today. 4 Thompson §31.05. The
common law characterized each joint tenant as possessing the entire
estate, rather than a fractional share: "[J]oint-tenants have one
and the same interest . . . held by one and the same undivided
possession." 2 W. Blackstone, Commentaries on the Laws of England
180 (1766). Joint tenants possess many of the rights enjoyed by tenants
in common: the right to use, to exclude, and to enjoy a share of the
property's income. The main difference between a joint tenancy and a
tenancy in common is that a joint tenant also has a right of automatic
inheritance known as "survivorship." Upon the death of one
joint tenant, that tenant's share in the property does not pass through
will or the rules of intestate succession; rather, the remaining tenant
or tenants automatically inherit it. Id., at 183; 7 Powell §51.01[3].
Joint tenants' right to alienate their individual shares is also
somewhat different. In order for one tenant to alienate his or her
individual interest in the tenancy, the estate must first be
severed--that is, converted to a tenancy in common with each tenant
possessing an equal fractional share. Id., §51.04[1]. Most
States allowing joint tenancies facilitate alienation, however, by
allowing severance to automatically accompany a conveyance of that
interest or any other overt act indicating an intent to sever. Ibid.
A
tenancy by the entirety is a unique sort of concurrent ownership that
can only exist between married persons. 4 Thompson §33.02. Because of
the common-law fiction that the husband and wife were one person at law
(that person, practically speaking, was the husband, see J.
Cribbet et al., Cases and Materials on Property 329 (6th ed.
1990)), Blackstone did not characterize the tenancy by the entirety as a
form of concurrent ownership at all. Instead, he thought that entireties
property was a form of single ownership by the marital unity. Orth,
Tenancy by the Entirety: The Strange Career of the Common-Law Marital
Estate, 1997 B.Y.U. L.Rev. 35, 38-39. Neither spouse was considered to
own any individual interest in the estate; rather, it belonged to the
couple.
Like
joint tenants, tenants by the entirety enjoy the right of survivorship.
Also like a joint tenancy, unilateral alienation of a spouse's interest
in entireties property is typically not possible without severance.
Unlike joint tenancies, however, tenancies by the entirety cannot easily
be severed unilaterally. 4 Thompson §33.08(b). Typically, severance
requires the consent of both spouses, id., §33.08(a), or the
ending of the marriage in divorce, id., §33.08(d). At common
law, all of the other rights associated with the entireties property
belonged to the husband: as the head of the household, he could control
the use of the property and the exclusion of others from it and enjoy
all of the income produced from it. Id., §33.05. The husband's
control of the property was so extensive that, despite the rules on
alienation, the common law eventually provided that he could
unilaterally alienate entireties property without severance subject only
to the wife's survivorship interest. Orth, supra, at 40-41.
With
the passage of the Married Women's Property Acts in the late 19th
century granting women distinct rights with respect to marital property,
most States either abolished the tenancy by the entirety or altered it
significantly. 7 Powell §52.01[2]. Michigan's version of the estate is
typical of the modern tenancy by the entirety. Following Blackstone,
Michigan characterizes its tenancy by the entirety as creating no
individual rights whatsoever: "It is well settled under the law of
this state that one tenant by the entirety has no interest separable
from that of the other. . . . Each is vested with an entire title."
Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577, 581 (1936). And
yet, in Michigan, each tenant by the entirety possesses the right of
survivorship. Mich. Comp. Laws Ann. §554.872(g) (West Supp. 1997),
recodified at §700.2901(2)(g) (West Supp. Pamphlet 2001). Each
spouse--the wife as well as the husband--may also use the property,
exclude third parties from it, and receive an equal share of the income
produced by it. See §557.71 (West 1988). Neither spouse may
unilaterally alienate or encumber the property, Long v. Earle, supra,
at 517, 269 N.W., at 581; Rogers v. Rogers, 136 Mich. App. 125,
134, 356 N.W.2d 288, 292 (1984), although this may be accomplished with
mutual consent, Eadus v. Hunter, 249 Mich. 190, 228 N.W. 782
(1930). Divorce ends the tenancy by the entirety, generally giving each
spouse an equal interest in the property as a tenant in common, unless
the divorce decree specifies otherwise. Mich. Comp. Laws Ann. §552.102
(West 1988).
In
determining whether respondent's husband possessed "property"
or "rights to property" within the meaning of 26 U.S.C. §6321,
we look to the individual rights created by these state law rules.
According to Michigan law, respondent's husband had, among other rights,
the following rights with respect to the entireties property: 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 respondent's consent and to
receive half the proceeds from such a sale, the right to place an
encumbrance on the property with the respondent's consent, and the right
to block respondent from selling or encumbering the property
unilaterally.
IV
We
turn now to the federal question of whether the rights Michigan law
granted to respondent's husband as a tenant by the entirety qualify as
"property" or "rights to property" under §6321. The
statutory language authorizing the tax lien "is broad and reveals
on its face that Congress meant to reach every interest in property that
a taxpayer might have." United States v. National Bank of
Commerce [85-2 USTC ¶9482], 472 U.S., at 719-720. "Stronger
language could hardly have been selected to reveal a purpose to assure
the collection of taxes." Glass City Bank v. United States [45-2
USTC ¶9449], 326 U.S. 265, 267 (1945). We conclude that the husband's
rights in the entireties property fall within this broad statutory
language.
Michigan
law grants a tenant by the entirety some of the most essential property
rights: the right to use the property, to receive income produced by it,
and to exclude others from it. See Dolan v. City of Tigard, 512
U.S. 374, 384 (1994) ("[T]he right to exclude others" is
" 'one of the most essential sticks in the bundle of rights that
are commonly characterized as property' ") (quoting Kaiser Aetna
v. United States, 444 U.S. 164, 176 (1979)); Loretto v.
Teleprompter Manhattan CATV Corp., 458 U.S. 419, 435 (1982)
(including "use" as one of the "[p]roperty rights in a
physical thing"). These rights alone may be sufficient to subject
the husband's interest in the entireties property to the federal tax
lien. They gave him a substantial degree of control over the entireties
property, and, as we noted in Drye, "in determining whether
a federal taxpayer's state-law rights constitute 'property' or 'rights
to property,' [t]he important consideration is the breadth of the
control the [taxpayer] could exercise over the property." [99-2
USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S., at 61 (internal quotation
marks omitted).
The
husband's rights in the estate, however, went beyond use, exclusion, and
income. He also possessed the right to alienate (or otherwise encumber)
the property with the consent of respondent, his wife. Loretto,
supra, at 435 (the right to "dispose" of an item is a
property right). It is true, as respondent notes, that he lacked the
right to unilaterally alienate the property, a right that is often in
the bundle of property rights. See also post, at 7. There is no
reason to believe, however, that this one stick--the right of unilateral
alienation--is essential to the category of "property."
This
Court has already stated that federal tax liens may attach to property
that cannot be unilaterally alienated. In United States v. Rodgers [83-1
USTC ¶9374], 461 U.S. 677 (1983), we considered the Federal
Government's power to foreclose homestead property attached by a federal
tax lien. Texas law provided that " 'the owner or claimant of the
property claimed as homestead [may not], if married, sell or abandon the
homestead without the consent of the other spouse.' " Id.,
at 684-685 (quoting Tex. Const., Art. 16, §50). We nonetheless stated
that "[i]n the homestead context . . ., there is no doubt . . .
that not only do both spouses (rather than neither) have an
independent interest in the homestead property, but that a federal tax
lien can at least attach to each of those interests." [83-1
USTC ¶9374], 461 U.S., at 703, n. 31; cf. Drye [99-2 USTC ¶51,006;
99-2 USTC ¶60,363], supra, at 60, n. 7 (noting that "an
interest in a spendthrift trust has been held to constitute 'property
for purposes of §6321' even though the beneficiary may not transfer
that interest to third parties").
Excluding
property from a federal tax lien simply because the taxpayer does not
have the power to unilaterally alienate it would, moreover, exempt a
rather large amount of what is commonly thought of as property. It would
exempt not only the type of property discussed in Rodgers, but
also some community property. Community property states often provide
that real community property cannot be alienated without the consent of
both spouses. See, e.g., Ariz. Rev. Stat. Ann. §25-214(C)
(2000); Cal. Fam. Code Ann. §1102 (West 1994); Idaho Code §32-912
(1996); La. Civ. Code Ann., Art. 2347 (West Supp. 2002); Nev. Rev. Stat.
§123.230(3) (1995); N.M. Stat. Ann. §40-3-13 (1999); Wash. Rev. Code
§26.16.030(3) (1994). Accordingly, the fact that respondent's husband
could not unilaterally alienate the property does not preclude him from
possessing "property and rights to property" for the purposes
of §6321.
Respondent's
husband also possessed the right of survivorship--the right to
automatically inherit the whole of the estate should his wife predecease
him. Respondent argues that this interest was merely an expectancy,
which we suggested in Drye would not constitute
"property" for the purposes of a federal tax lien. [99-2 USTC
¶51,006; 99-2 USTC ¶60,363], 528 U.S., at 60, n. 7 ("[We do not
mean to suggest] that an expectancy that has pecuniary value . . . would
fall within §6321 prior to the time it ripens into a present
estate"). Drye did not decide this question, however, nor do
we need to do so here. As we have discussed above, a number of the
sticks in respondent's husband's bundle were presently existing. It is
therefore not necessary to decide whether the right to survivorship
alone would qualify as "property" or "rights to
property" under §6321.
That
the rights of respondent's husband in the entireties property constitute
"property" or "rights to property" "belonging
to" him is further underscored by the fact that, if the conclusion
were otherwise, the entireties property would belong to no one for the
purposes of §6321. Respondent had no more interest in the property than
her husband; if neither of them had a property interest in the
entireties property, who did? 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. Johnson, After Drye: The Likely Attachment of
the Federal Tax Lien to Tenancy-by-the-Entireties Interests, 75 Ind.
L.J. 1163, 1171 (2000).
Justice
SCALIA's and Justice THOMAS' dissents claim that the conclusion that the
husband possessed an interest in the entireties property to which the
federal tax lien could attach is in conflict with the rules for tax
liens relating to partnership property. See post, at 1; see
also post, at 6, n. 4. This is not so. As the authorities cited by
Justice THOMAS reflect, the federal tax lien does attach to an
individual partner's interest in the partnership, that is, to the fair
market value of his or her share in the partnership assets. Ibid.
(citing B. Bittker & M. McMahon, Federal Income Taxation of
Individuals ¶44.5[4][a] (2d ed. 1995 and 2000 Cum. Supp.)); see also
A. Bromberg & L. Ribstein, Partnership §3.05(d) (2002-1 Supp.)
(hereinafter Bromberg & Ribstein) (citing Uniform Partnership Act §28,
6 U.L.A. 744 (1995)). As a holder of this lien, the Federal Government
is entitled to "receive . . . the profits to which the assigning
partner would otherwise be entitled," including predissolution
distributions and the proceeds from dissolution. Uniform Partnership Act
§27(1), id., at 736.
There
is, however, a difference between the treatment of entireties property
and partnership assets. The Federal Government may not compel the sale
of partnership assets (although it may foreclose on the partner's
interest, Bromberg & Ribstein §3.05(d)(3)(iv)). It is this
difference that is reflected in Justice SCALIA's assertion that
partnership property cannot be encumbered by individual partner's debts.
See post, at 1. This disparity in treatment between the two forms
of ownership, however, arises from our decision in United States v.
Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983) (holding that the
Government may foreclose on property even where the co-owners lack the
right of unilateral alienation), and not our holding today. In this
case, it is instead the dissenters' theory that departs from partnership
law, as it would hold that the Federal Government's lien does not attach
to the husband's interest in the entireties property at all, whereas the
lien may attach to an individual's interest in partnership property.
Respondent
argues that, whether or not we would conclude that respondent's husband
had an interest in the entireties property, legislative history
indicates that Congress did not intend that a federal tax lien should
attach to such an interest. In 1954, the Senate rejected a proposed
amendment to the tax lien statute that would have provided that the lien
attach to "property or rights to property (including the interest
of such person as tenant by the entirety)." S. Rep. No. 1622, 83d
Cong., 2d Sess., p. 575 (1954). We have elsewhere held, however, that
failed legislative proposals are "a particularly dangerous ground
on which to rest an interpretation of a prior statute," Pension
Benefit Guaranty Corporation v.
LTV
Corp., 496 U.S. 633, 650 (1990), reasoning that "
'[c]ongressional inaction lacks persuasive significance because several
equally tenable inferences may be drawn from such inaction, including
the inference that the existing legislation already incorporated the
offered change' " Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164, 187 (1994). This case
exemplifies the risk of relying on such legislative history. As we noted
in United States v. Rodgers [83-1 USTC ¶9374], 461 U.S., at 704,
n. 31, some legislative history surrounding the 1954 amendment indicates
that the House intended the amendment to be nothing more than a
"clarification" of existing law, and that the Senate rejected
the amendment only because it found it "superfluous." See
H. R. Rep. No. 1337, 83d Cong., 2d Sess., A406 (1954) (noting that the
amendment would "clarif[y] the term 'property and rights to
property' by expressly including therein the interest of the delinquent
taxpayer in an estate by the entirety"); S. Rep. No. 1622, 83d
Cong., 2d Sess., 575 (1954) ("It is not clear what change in
existing law would be made by the parenthetical phrase. The deletion of
the phrase is intended to continue the existing law").
The
same ambiguity that plagues the legislative history accompanies the
common-law background of Congress' enactment of the tax lien statute.
Respondent argues that Congress could not have intended the passage of
the federal tax lien statute to alter the generally accepted rule that
liens could not attach to entireties property. See Astoria Fed. Sav.
& Loan Assn. v. Solimino, 501 U.S. 104, 108 (1991)
("[W]here a common-law principle is well established . . . the
courts may take it as given that Congress has legislated with an
expectation that the principle will apply except 'when a statutory
purpose to the contrary is evident' "). The common-law rule was not
so well established with respect to the application of a federal tax
lien that we must assume that Congress considered the impact of its
enactment on the question now before us. There was not much of a
common-law background on the question of the application of federal tax
liens, as the first court of appeals cases dealing with the application
of such a lien did not arise until the 1950's. United States v.
Hutcherson [51-1 USTC ¶9249], 188 F.2d 326 (CA8 1951); Raffaele
v. Granger [52-1 USTC ¶9321], 196 F.2d 620 (CA3 1952). This
background is not sufficient to overcome the broad statutory language
Congress did enact, authorizing the lien to attach to "all property
and rights to property" a taxpayer might have.
We
therefore conclude that respondent's husband's interest in the
entireties property constituted "property" or "rights to
property" for the purposes of the federal tax lien statute. We
recognize that Michigan makes a different choice with respect to state
law creditors: "[L]and held by husband and wife as tenants by
entirety is not subject to levy under execution on judgment rendered
against either husband or wife alone." Sanford v. Bertrau,
204 Mich. 244, 247, 169 N.W. 880, 881 (1918). But that by no means
dictates our choice. The interpretation of 26 U.S.C. §6321 is a federal
question, and in answering that question we are in no way bound by state
courts' answers to similar questions involving state law. As we
elsewhere have held, " 'exempt status under state law does not bind
the federal collector.' " Drye v. United States [99-2 USTC
¶51,006; 99-2 USTC ¶60,363], 528 U.S., at 51. See also Rodgers
[83-1 USTC ¶9374], supra, at 701 (clarifying that the Supremacy
Clause "provides the underpinning for the Federal Government's
right to sweep aside state-created exemptions").
V
We
express no view as to the proper valuation of respondent's husband's
interest in the entireties property, leaving this for the Sixth Circuit
to determine on remand. We note, however, that insofar as the amount is
dependent upon whether the 1989 conveyance was fraudulent, see post,
at 1, n. 1 (THOMAS, J., dissenting), this case is somewhat anomalous.
The Sixth Circuit affirmed the District Court's judgment that this
conveyance was not fraudulent, and the Government has not sought
certiorari review of that determination. Since the District Court's
judgment was based on the notion that, because the federal tax lien
could not attach to the property, transferring it could not constitute
an attempt to evade the Government creditor, [99-2 USTC ¶50,618], 65
F.Supp.2d, at 657-659, in future cases, the fraudulent conveyance
question will no doubt be answered differently.
The
judgment of the United States Court of Appeals for the Sixth Circuit is
accordingly reversed, and the case is remanded for proceedings
consistent with this opinion.
It is so ordered.
Dissenting Opinion
Justice
THOMAS, with whom Justice STEVENS and Justice SCALIA join
The
Court today allows the Internal Revenue Service (
IRS
) to reach proceeds from the sale of real property that did not belong
to the taxpayer, respondent's husband, Don Craft, 1
because, in the Court's view, he "possesse[d] individual rights in
the [tenancy by the entirety] estate sufficient to constitute 'property
and rights to property' for the purposes of the lien" created by 26
U.S.C. §6321. Ante, at 1. The Court does not contest that the
tax liability the
IRS
seeks to satisfy is Mr. Craft's alone, and does not claim that, under
Michigan law, real property held as a tenancy by the entirety belongs to
either spouse individually. Nor does the Court suggest that the federal
tax lien attaches to particular "rights to property" held
individually by Mr. Craft. Rather, borrowing the metaphor of
"property as a 'bundle of sticks'--a collection of individual
rights which, in certain combinations constitute property," ante,
at 4, the Court proposes that so long as sufficient "sticks"
in the bundle of "rights to property" "belong to" a
delinquent taxpayer, the lien can attach as if the property itself
belonged to the taxpayer. Ante, at 11.
This
amorphous construct ignores the primacy of state law in defining
property interests, eviscerates the statutory distinction between
"property" and "rights to property" drawn by §6321,
and conflicts with an unbroken line of authority from this Court, the
lower courts, and the
IRS
. Its application is all the more unsupportable in this case because, in
my view, it is highly unlikely that the limited individual "rights
to property" recognized in a tenancy by the entirety under Michigan
law are themselves subject to lien. I would affirm the Court of Appeals
and hold that Mr. Craft did not have "property" or
"rights to property" to which the federal tax lien could
attach.
I
Title
26 U.S.C. §6321 provides that a federal tax lien attaches to "all
property and rights to property, whether real or personal, belonging
to" a delinquent taxpayer. It is uncontested that a federal tax
lien itself "creates no property rights but merely attaches
consequences, federally defined, to rights created under state
law." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51,
55 (1958) (construing the 1939 version of the federal tax lien statute).
Consequently, the Government's lien under §6321 "cannot extend
beyond the property interests held by the delinquent taxpayer," United
States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 690-691 (1983),
under state law. Before today, no one disputed that the
IRS
, by operation of §6321, "steps into the taxpayer's shoes,"
and has the same rights as the taxpayer in property or rights to
property subject to the lien. B. Bittker & M. McMahon, Federal
Income Taxation of Individuals ¶44.5[4][a] (2d ed. 1995 and 2000 Cum.
Supp.) (hereinafter Bittker). I would not expand " 'the nature of
the legal interest' " the taxpayer has in the property beyond those
interests recognized under state law. Aquilino v. United States [60-2
USTC ¶9538], 363 U.S. 509, 513 (1960) (citing Morgan v. Commissioner
[40-1 USTC ¶9210], 309 U.S. 78, 82 (1940)).
A
If
the Grand Rapids property "belong[ed] to" Mr. Craft under
state law prior to the termination of the tenancy by the entirety, the
federal tax lien would have attached to the Grand Rapids property. But
that is not this case. As the Court recognizes, pursuant to Michigan
law, as under English common law, property held as a tenancy by the
entirety does not belong to either spouse, but to a single entity
composed of the married persons. See ante, at 6-7. Neither spouse
has "any separate interest in such an estate." Sanford v.
Bertrau, 204 Mich. 244, 249, 169 N.W. 880, 882 (1918); see also
Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577, 581 (1936)
("Each [spouse] is vested with an entire title and, as against the
one who attempts alone to convey or incumber such real estate, the other
has an absolute title"). An entireties estate constitutes an
indivisible "sole tenancy." See Budwit v. Herr, 339
Mich. 265, 272, 63 N.W.2d 841, 844 (1954); see also Tyler v. United
States [2 USTC ¶532], 281 U.S. 497, 501 (1930) ("[T]he tenants
constitute a unit; neither can dispose of any part of the estate without
the consent of the other; and the whole continues in the
survivor"). Because Michigan does not recognize a separate spousal
interest in the Grand Rapids property, it did not "belong" to
either respondent or her husband individually when the
IRS
asserted its lien for Mr. Craft's individual tax liability. Thus, the
property was not property to which the federal tax lien could attach for
Mr. Craft's tax liability.
The
Court does not dispute this characterization of Michigan's law with
respect to the essential attributes of the tenancy by the entirety
estate. However, relying on Drye v. United States [99-2 USTC ¶51,006;
99-2 USTC ¶60,363], 528 U.S. 49, 59 (1999), which in turn relied upon United
States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224 (1994), and United
States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190 (1971), the
Court suggests that Michigan's definition of the tenancy by the entirety
estate should be overlooked because federal tax law is not controlled by
state legal fictions concerning property ownership. Ante, at 4.
But the Court misapprehends the application of Drye to this case.
Drye, like Irvine
and Mitchell before it, was concerned not with whether state law
recognized "property" as belonging to the taxpayer in the
first place, but rather with whether state laws could disclaim or exempt
such property from federal tax liability after the property interest was
created. Drye held only that a state-law disclaimer could not
retroactively undo a vested right in an estate that the taxpayer already
held, and that a federal lien therefore attached to the taxpayer's
interest in the estate. [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528
U.S., at 61 (recognizing that a disclaimer does not restore the status
quo ante because the heir "determines who will receive the
property--himself if he does not disclaim, a known other if he
does"). Similarly, in Irvine, the Court held that a state
law allowing an individual to disclaim a gift could not force the Court
to be "struck blind" to the fact that the transfer of
"property" or "property rights" for which the gift
tax was due had already occurred; "state property transfer rules
do not transfer into federal taxation rules." [94-1 USTC ¶60,163],
511 U.S., at 239-240 (emphasis added). See also Mitchell [71-1
USTC ¶9451], supra, at 204 (holding that right to renounce a
marital interest under state law does not indicate that the taxpayer had
no right to property before the renunciation).
Extending
this Court's "state law fiction" jurisprudence to determine
whether property or rights to property exist under state law in
the first place works a sea change in the role States have traditionally
played in "creating and defining" property interests. By
erasing the careful line between state laws that purport to disclaim or
exempt property interests after the fact, which the federal tax lien
does not respect, and state laws' definition of property and property
rights, which the federal tax lien does respect, the Court does not
follow Drye, but rather creates a new federal common law of
property. This contravenes the previously settled rule that the
definition and scope of property is left to the States. See Aquilino
[60-2 USTC ¶9538], supra, at 513, n. 3 (recognizing unsoundness
of leaving the definition of property interests to a nebulous body of
federal law, "because it ignores the long-established role that the
States have played in creating property interests and places upon the
courts the task of attempting to ascertain a taxpayer's property rights
under an undefined rule of federal law").
B
That
the Grand Rapids property does not belong to Mr. Craft under Michigan
law does not end the inquiry, however, since the federal tax lien
attaches not only to "property" but also to any "rights
to property" belonging to the taxpayer. While the Court concludes
that a laundry list of "rights to property" belonged to Mr.
Craft as a tenant by the entirety, 2
it does not suggest that the tax lien attached to any of these
particular rights. 3
Instead, the Court gathers these rights together and opines that there
were sufficient sticks to form a bundle, so that "respondent's
husband's interest in the entireties property constituted 'property' or
'rights to property' for the purposes of the federal tax lien
statute." Ante, at 11, 13.
But
the Court's "sticks in a bundle" metaphor collapses precisely
because of the distinction expressly drawn by the statute, which
distinguishes between "property" and "rights to
property." The Court refrains from ever stating whether this case
involves "property" or "rights to property" even
though §6321 specifically provides that the federal tax lien attaches
to "property" and "rights to property"
"belonging to" the delinquent taxpayer, and not to an
imprecise construct of "individual rights in the estate sufficient
to constitute 'property and rights to property' for the purposes of the
lien." Ante, at 1. 4
Rather
than adopt the majority's approach, I would ask specifically, as the
statute does, whether Mr. Craft had any particular "rights to
property" to which the federal tax lien could attach. He did not. 5
Such "rights to property" that have been subject to the §6321
lien are valuable and "pecuniary," i.e., they can be
attached, and levied upon or sold by the Government. 6
Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S., at
58-60, and n. 7. With such rights subject to lien, the taxpayer's
interest has "ripen[ed] into a present estate" of some form
and is more than a mere expectancy, id., at 60, n. 7, and thus
the taxpayer has an apparent right "to channel that value to
[another]," id., at 61.
In
contrast, a tenant in a tenancy by the entirety not only lacks a present
divisible vested interest in the property and control with respect to
the sale, encumbrance, and transfer of the property, but also does not
possess the ability to devise any portion of the property because it is
subject to the other's indestructible right of survivorship. Rogers
v. Rogers, 136 Mich. App. 125, 135-137, 356 N.W.2d 288, 293-294
(1984). This latter fact makes the property significantly different from
community property, where each spouse has a present one-half vested
interest in the whole, which may be devised by will or otherwise to a
person other than the spouse. See 4 G. Thompson, Real Property §37.14(a)
(D. Thomas ed. 1994) (noting that a married person's power to devise
one-half of the community property is "consistent with the
fundamental characteristic of community property": "community
ownership means that each spouse owns 50% of each community
asset"). 7
See also Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S.,
at 61 ("[I]n determining whether a federal taxpayer's state-law
rights constitute 'property' or 'rights to property,' the important
consideration is the breadth of the control the taxpayer could exercise
over the property" (emphasis added, citation and brackets
omitted).
It
is clear that some of the individual rights of a tenant in entireties
property are primarily personal, dependent upon the taxpayer's status as
a spouse, and similarly not susceptible to a tax lien. For example, the
right to use the property in conjunction with one's spouse and to
exclude all others appears particularly ill suited to being transferred
to another, see ibid., and to lack "exchangeable
value," id., at 56.
Nor
do other identified rights rise to the level of "rights to
property" to which a §6321 lien can attach, because they
represent, at most, a contingent future interest, or an
"expectancy" that has not "ripen[ed] into a present
estate." Id., at 60, n. 7 ("Nor do we mean to suggest
that an expectancy that has pecuniary value and is transferable under
state law would fall within §6321 prior to the time it ripens into a
present estate"). Cf. Bess [58-2 USTC ¶9595], 357 U.S., at
55-56 (holding that no federal tax lien could attach to proceeds of the
taxpayer's life insurance policy because "[i]t would be anomalous
to view as 'property' subject to lien proceeds never within the
insured's reach to enjoy"). By way of example, the survivorship
right wholly depends upon one spouse outliving the other, at which time
the survivor gains "substantial rights, in respect of the property,
theretofore never enjoyed by [the] survivor." Tyler [2 USTC
¶532], 281 U.S., at 503. While the Court explains that it is "not
necessary to decide whether the right to survivorship alone would
qualify as 'property' or 'rights to property' " under §6321, ante,
at 11, the facts of this case demonstrate that it would not. Even
assuming both that the right of survivability continued after the demise
of the tenancy estate and that the tax lien could attach to such a
contingent future right, creating a lienable interest upon the death of
the nonliable spouse, it would not help the
IRS
here; respondent's husband predeceased her in 1998, and there is no
right of survivorship at issue in this case.
Similarly,
while one spouse might escape the absolute limitations on individual
action with respect to tenancy by the entirety property by obtaining the
right to one-half of the property upon divorce, or by agreeing with the
other spouse to sever the tenancy by the entirety, neither instance is
an event of sufficient certainty to constitute a "right to
property" for purposes of §6321. Finally, while the federal tax
lien could arguably have attached to a tenant's right to any
"rents, products, income, or profits" of real property held as
tenants by the entirety, Mich. Comp. Laws Ann. §557.71 (West 1988), the
Grand Rapids property created no rents, products, income, or profits for
the tax lien to attach to.
In
any event, all such rights to property, dependent as they are upon the
existence of the tenancy by the entirety estate, were likely destroyed
by the quitclaim deed that severed the tenancy. See n. 1, supra.
Unlike a lien attached to the property itself, which would survive a
conveyance, a lien attached to a "right to property" falls
squarely within the maxim that "the tax collector not only steps
into the taxpayer's shoes but must go barefoot if the shoes wear
out." Bittker ¶44.5[4][a] (noting that "a state judgment
terminating the taxpayer's rights to an asset also extinguishes the
federal tax lien attached thereto"). See also Elliott ¶9.09[3][d][i]
(explaining that while a tax lien may attach to a taxpayer's option on
property, if the option terminates, the Government's lien rights would
terminate as well).
Accordingly,
I conclude that Mr. Craft had neither "property" nor
"rights to property" to which the federal tax lien could
attach.
II
That
the federal tax lien did not attach to the Grand Rapids property is
further supported by the consensus among the lower courts. For more than
50 years, every federal court reviewing tenancies by the entirety in
States with a similar understanding of tenancy by the entirety as
Michigan has concluded that a federal tax lien cannot attach to such
property to satisfy an individual spouse's tax liability. 8
This consensus is supported by the
IRS
' consistent recognition, arguably against its own interest, that a
federal tax lien against one spouse cannot attach to property or rights
to property held as a tenancy by the entirety. 9
That
the Court fails to so much as mention this consensus, let alone address
it or give any reason for overruling it, is puzzling. While the
positions of the lower courts and the
IRS
do not bind this Court, one would be hard pressed to explain why the
combined weight of these judicial and administrative sources--including
the
IRS
' instructions to its own employees--do not constitute relevant
authority.
III
Finally,
while the majority characterizes Michigan's view that the tenancy by the
entirety property does not belong to the individual spouses as a
"state law fiction," ante, at 1, our precedents,
including Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528
U.S., at 58-60, hold that state, not federal, law defines property
interests. Ownership by "the marriage" is admittedly a fiction
of sorts, but so is a partnership or corporation. There is no basis for
ignoring this fiction so long as federal law does not define property,
particularly since the tenancy by the entirety property remains subject
to lien for the tax liability of both tenants.
Nor
do I accept the Court's unsupported assumption that its holding today is
necessary because a contrary result would "facilitat[e] abuse of
the federal tax system." Ante, at 11. The Government created
this straw man, Brief for United States 30-32, suggesting that the
property transfer from the tenancy by the entirety to respondent was
somehow improper, see id., at 30-31, n. 20 (characterizing scope
of "[t]he tax avoidance scheme sanctioned by the court of appeals
in this case"), even though it chose not to appeal the lower
court's contrary assessment. But the longstanding consensus in the lower
courts that tenancy by the entirety property is not subject to
lien for the tax liability of one spouse, combined with the Government's
failure to adduce any evidence that this has led to wholesale tax fraud
by married individuals, suggests that the Court's policy rationale for
its holding is simply unsound.
Just
as I am unwilling to overturn this Court's longstanding precedent that
States define and create property rights and forms of ownership, Aquilino
[60-2 USTC ¶9538], 363 U.S., at 513, n. 3, I am equally unwilling to
redefine or dismiss as fictional forms of property ownership that the
State has recognized in favor of an amorphous federal common-law
definition of property. I respectfully dissent.
1 The Grand Rapids property was tenancy by the entirety
property owned by Mr. and Mrs. Craft when the tax lien attached, but was
conveyed by the Crafts to Mrs. Craft by quitclaim deed in 1989. That
conveyance terminated the entirety estate. Mich. Comp. Laws Ann. §557.101
(West 1988); see also United States v. Certain Real Property Located
at 2525 Leroy Lane, 910 F.2d 343, 351 (CA6 1990). The District Court
and Court of Appeals both held that the transfer did not constitute a
fraudulent conveyance, a ruling the Government has not appealed. The
IRS
is undoubtedly entitled to any proceeds that Mr. Craft received or to
which he was entitled from the 1989 conveyance of the tenancy by
the entirety property for $1.00; at that point the tenancy by the
entirety estate was destroyed and at least half of the proceeds, or 50
cents, was "property" or "rights to property"
"belonging to" Mr. Craft. By contrast, the proceeds that the
IRS
claims here are from Mrs. Craft's 1992 sale of the property to a
third party. At the time of the sale, she owned the property in fee
simple, and accordingly Mr. Craft neither received nor was entitled to
these funds.
2 The parties disagree as to whether Michigan law recognizes
the "rights to property" identified by the Court as individual
rights "belonging to" each tenant in entireties property.
Without deciding a question better resolved by the Michigan courts, for
the purposes of this case I will assume, arguendo, that Michigan
law recognizes separate interests in these "rights to
property."
3 Nor does the Court explain how such "rights to
property" survived the destruction of the tenancy by the entirety,
although, for all intents and purposes, it acknowledges that such rights
as it identifies exist by virtue of the tenancy by the entirety estate.
Even Judge Ryan's concurrence in the Sixth Circuit's first ruling in
this matter is best read as making the Federal Government's right to
execute its lien dependent upon the factual finding that the conveyance
was a fraudulent transaction. See [98-1 USTC ¶50,305], 140 F.3d
638, 648-649 (1998).
4 The Court's reasoning that because a taxpayer has rights to
property a federal tax lien can attach not only to those rights but also
to the property itself could have far-reaching consequences. As
illustration, in the partnership setting as elsewhere, the Government's
lien under §6321 places the Government in no better position than the
taxpayer to whom the property belonged: "[F]or example, the lien
for a partner's unpaid income taxes attaches to his interest in the
firm, not to the firm's assets." Bittker ¶44.5[4][a]. Though
partnership property currently is "not subject to attachment or
execution, except on a claim against the partnership," Rev. Rul.
73-24, 1973-1 Cum. Bull. 602; cf. United States v. Kaufman [1
USTC ¶116], 267 U.S. 408 (1925), under the logic of the Court's opinion
partnership property could be attached for the tax liability of an
individual partner. Like a tenant in a tenancy by the entirety, the
partner has significant rights to use, enjoy, and control the
partnership property in conjunction with his partners. I see no
principled way to distinguish between the propriety of attaching the
federal tax lien to partnership property to satisfy the tax liability of
a partner, in contravention of current practice, and the propriety of
attaching the federal tax lien to tenancy by the entirety property in
order to satisfy the tax liability of one spouse, also in contravention
of current practice. I do not doubt that a tax lien may attach to a
partner's partnership interest to satisfy his individual tax liability,
but it is well settled that the lien does not, thereby, attach to
property belonging to the partnership. The problem for the
IRS
in this case is that, unlike a partnership interest, such limited rights
that Mr. Craft had in the Grand Rapids property are not the kind of
rights to property to which a lien can attach, and the Grand Rapids
property itself never "belong[ed] to" him under Michigan law.
5 Even such rights as Mr. Craft arguably had in the Grand
Rapids property bear no resemblance to those to which a federal tax lien
has ever attached. See W. Elliott, Federal Tax Collections,
Liens, and Levies ¶¶9.09[3][a]-[f] (1995 and 2000 Cum. Supp.)
(hereinafter Elliott) (listing examples of rights to property to which a
federal tax lien attaches, such as the right to compel payment; the
right to withdraw money from a bank account, or to receive money from
accounts receivable; wages earned but not paid; installment payments
under a contract of sale of real estate; annuity payments; a
beneficiary's rights to payment under a spendthrift trust; a liquor
license; an easement; the taxpayer's interest in a timeshare; options;
the taxpayer's interest in an employee benefit plan or individual
retirement account).
6 See 26 U.S.C. §§6331, 6335-6336.
7 And it is similarly different from the situation in United
States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983), where the
question was not whether a vested property interest in the family home
to which the federal tax lien could attach "belong[ed] to" the
taxpayer. Rather, in Rodgers, the only question was whether the
federal tax lien for the husband's tax liability could be foreclosed
against the property under 26 U.S.C. §7403, despite his wife's
homestead right under state law. See [83-1 USTC ¶9374], 461
U.S., at 701-703, and n. 31.
8 See
IRS
v. Gaster [94-2 USTC ¶50,622], 42 F.3d 787, 791 (CA3 1994)
(concluding that the
IRS
is not entitled to a lien on property owned as a tenancy by the entirety
to satisfy the tax obligations of one spouse); Pitts v. United States,
946 F.2d 1569, 1571-1572 (CA4 1991) (same); United States v. American
Nat. Bank of Jacksonville [58-2 USTC ¶9564], 255 F.2d 504, 507
(CA5), cert. denied, 358 U.S. 835 (1958) (same); Raffaele v.
Granger [52-1 USTC ¶9321], 196 F.2d 620, 622-623 (CA3 1952) (same);
United States v. Hutcherson [51-1 USTC ¶9249], 188 F.2d 326, 331
(CA8 1951) (explaining that the interest of one spouse in tenancy by the
entirety property "is not a right to property or property in any
sense"); United States v. Nathanson [45-1 USTC ¶9194], 60
F.Supp. 193, 194 (ED Mich. 1945) (finding no designation in the Federal
Revenue Act for imposing tax upon property held by the entirety for
taxes due from one person alone); Shaw v. United States [39-1
USTC ¶9463], 94 F.Supp. 245, 246 (WD Mich. 1939) (recognizing that the
nature of the estate under Michigan law precludes the tax lien from
attaching to tenancy by the entirety property for the tax liability of
one spouse). See also Benson v. United States [71-1 USTC ¶9278],
442 F.2d 1221, 1223 (CADC 1971) (recognizing the Government's concession
that property owned by the parties as tenants by the entirety cannot be
subjected to a tax lien for the debt of one tenant); Cole v. Cardoza [71-1
USTC ¶15,986], 441 F.2d 1337, 1343 (CA6 1971) (noting Government
concession that, under Michigan law, it had no valid claim against real
property held by tenancy by the entirety).
9 See, e.g., Internal Revenue Manual §5.8.4.2.3 (RIA
2002), available at WESTLAW, RIA-
IRM
database (Mar. 29, 2002) (listing "property owned as tenants by the
entirety" as among the assets beyond the reach of the Government's
tax lien); id., §5.6.1.2.3 (recognizing that a consensual
lien may be appropriate "when the federal tax lien does not attach
to the property in question. For example, an assessment exists against
only one spouse and the federal tax lien does not attach to real
property held as tenants by the entirety.");
IRS
Chief Counsel Advisory (Aug. 17, 2001) (noting that consensual liens, or
mortgages, are to be used "as a means of securing the Government's
right to collect from property the assessment lien does not attach to, such
as real property held as a tenancy by the entirety" (emphasis
added));
IRS
Litigation Bulletin No. 407 (Aug. 1994) ("Traditionally, the
government has taken the view that a federal tax lien against a single
debtor-spouse does not attach to property or rights to property held by
both spouses as tenants by the entirety.");
IRS
Litigation Bulletin No. 388 (Jan. 1993) (explaining that neither the
Department of Justice nor
IRS
chief counsel interpreted United States v. Rodgers [83-1 USTC ¶9374],
461 U.S. 677 (1983), to mean that a federal tax lien against one spouse
encumbers his or her interest in entireties property, and noting that it
"do[es] not believe the Department will again argue the broader
interpretation of Rodgers," which would extend the reach of
the federal tax lien to property held by the entireties); Benson
[71-1 USTC ¶9278], supra, at 1223; Cardoza [71-1 USTC ¶15,986],
supra, at 1343.
Dissenting Opinion
Justice
SCALIA, with whom Justice THOMAS joins
I
join Justice THOMAS's dissent, which points out (to no relevant response
from the Court) that a State's decision to treat the marital partnership
as a separate legal entity, whose property cannot be encumbered by the
debts of its individual members, is no more novel and no more
"artificial" than a State's decision to treat the commercial
partnership as a separate legal entity, whose property cannot be
encumbered by the debts of its individual members.
I
write separately to observe that the Court nullifies (insofar as federal
taxes are concerned, at least) a form of property ownership that was of
particular benefit to the stay-at-home spouse or mother. She is
overwhelmingly likely to be the survivor that obtains title to the
unencumbered property; and she (as opposed to her business-world
husband) is overwhelmingly unlikely to be the source of the individual
indebtedness against which a tenancy by the entirety protects. It is
regrettable that the Court has eliminated a large part of this
traditional protection retained by many States.
Notice
2003-60 ,
I.R.B. 2003-39,
September 11, 2003
.
[ Code
Secs. 6321, 6323
and 6325]
Lien for taxes: Family transactions: Tenancy by the entireties: Real
property: Transfer of interest to spouse. --
The
IRS
has released guidance on collection efforts with respect to property
held by a married couple in a tenancy by the entirety in circumstances
where only one of the spouses is liable for outstanding tax liabilities.
These guidelines have been issued in light of the ruling in S.L.
Craft, SCt, 2002-1
USTC ¶50,361, that a federal tax lien arising under Code
Sec. 6321 on all property and rights to property of a delinquent
taxpayer attaches to the taxpayer's rights in entireties property, even
though state (Michigan) law insulates such property from creditors'
claims against only one spouse. The
IRS
has set forth the general principles on which it will rely in addressing
issues raised as a result of the Craft ruling. Also, it has
provided nine questions and answers illustrating how it will apply Craft.
Back references: ¶2250.23,
¶38,136.01,
¶38,136.66,
¶38,160.048,
¶38,160.926
and ¶38,170.1095.
PURPOSE
This notice provides guidance on collection from property held in a
tenancy by the entirety, where only one spouse (referred to here as the
taxpayer) is liable for the outstanding taxes, in light of the Supreme
Court decision in United States v. Craft, 535 U.S. 274 (2002).
BACKGROUND
On April 17, 2002, the Supreme Court issued its decision in United
States v. Craft, 535 U.S. 274 (2002), and held that the federal tax
lien that arises under section
6321 of the Internal Revenue Code on "all property and rights
to property" of a delinquent taxpayer attaches to the rights of the
taxpayer in property held as a tenancy by the entirety (entireties
property), even though local Michigan law insulates entireties property
from the claims of creditors of only one spouse. The Court stated that
while state law determines what rights a taxpayer has in property,
federal law determines whether the state-defined rights are
"property" or "rights to property " for purposes of section
6321. The Court's decision in Craft has consequences in the
approximately twenty-six jurisdictions that recognize tenancy by the
entirety as a form of property ownership.
While state law governing property ownership varies by jurisdiction,
there are a number of principles generally applicable to a tenancy by
the entirety. Tenancy by the entirety is a form of property ownership,
including personal property in some jurisdictions, available only to a
husband and wife as a marital unit. A key feature of the tenancy is the
right of survivorship-the surviving spouse becomes the fee simple owner
of the property upon the death of the other spouse. The tenancy also is
terminated by the transfer of the property or upon the spouses' divorce.
Entireties property is subject to the claims of the joint creditors of
the spouses. However, the majority of jurisdictions that recognize
tenancy by the entirety, so-called full bar jurisdictions, completely
prohibit creditors from attaching entireties property to satisfy the
debts of only one spouse. The state law rationale is that a spouse
individually has no interest in the property; rather, the property is
held by the marital unit. The other jurisdictions that recognize tenancy
by the entirety, so-called modified or partial bar jurisdictions, permit
creditors to attach one spouse's interest in entireties property for the
debts of only that spouse, subject to the rights of the non-liable
spouse.
Issues related to entireties property can arise in a number of areas,
including enforcing collection through administrative and judicial
means, evaluating offers in compromise and proposed installment
agreements, valuing the Service's secured claim in bankruptcy,
applications for discharge and subordination, and determining the nature
of the Service's rights vis-a-vis a transferee in a transfer in which
the federal tax lien has not been discharged.
OVERVIEW
The Service will rely on a number of general principles in addressing
issues raised as a result of the Court's decision in Craft :
(1)
Under section
6321, the federal tax lien attaches to all the property and rights
to property of the taxpayer. The Court's decision confirms that, for
purposes of section
6321, a taxpayer's property and rights to property have always
included any rights that taxpayer may have in entireties property under
state law. The Court's decision, therefore, does not represent new law
and does not affect other law applicable to federal tax liens and
federal tax collection. For example, the Craft decision does not
change any limitation on the ability of the Service to rescind an
accepted offer in compromise or terminate an accepted installment
agreement.
(2)
As a matter of administrative policy, the Service will, under certain
circumstances, not apply Craft, with respect to certain interests
created before Craft, to the detriment of third parties who may
have reasonably relied on the belief that state law prevents the
attachment of the federal tax lien.
(3)
The administrative sale of entireties property subject to the federal
tax lien presents practical problems that limit the usefulness of the
Service's seizure and sale procedures. Levying on cash and cash
equivalents held as entireties property is considerably less problematic
and will be used by the Service in appropriate cases.
(4)
Because of the potential adverse consequences to the non-liable spouse
of the taxpayer, the use of lien foreclosure for entireties property
subject to the federal tax lien will be determined on a case-by-case
basis.
(5)
As a general rule, the value of the taxpayer's interest in entireties
property will be deemed to be one-half.
(6)
Where there has been a sale or other transfer of entireties property
subject to the federal tax lien that does not provide for the discharge
of the lien, whether the transfer is to the non-liable spouse or a third
party, the lien thereafter encumbers a one-half interest in the property
held by the transferee.
QUESTIONS
AND
ANSWERS
The following questions and answers illustrate how the Service will
apply Craft. The first two Q&As address the application of Craft
with respect to interests in entireties property acquired before the
date of the decision, while the remaining questions and answers address
its application with respect to interests acquired after the date of the
decision.
Q1. If the Service has filed a notice of federal tax lien with respect
to the taxpayer before Craft and an interest in entireties
property was later acquired by a purchaser, holder of a security
interest, a mechanic's lienor, or a judgment lien creditor within the
meaning of section
6323, then will the Service assert lien priority over the
subsequently acquired interest? What if the entireties property was
transferred, before Craft, to the non-taxpayer spouse in a
divorce? Does the result differ if, before Craft, the transfer
was to a donee, such as a family trust? Do the results differ depending
on whether the jurisdiction at issue is one that recognizes tenancy by
the entirety and completely prohibits the attachment of entireties
property for separate debts of one spouse ( i.e., a full bar
jurisdiction) or one that permits attachment to entireties property in
connection with the separate debts of one spouse ( i.e., a
modified or partial bar jurisdiction)?
A1. Application of Section
6323. Section
6323 provides that "[t]he lien imposed by section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor until
notice thereof which meets the requirements of subsection (f) has been
filed by the Secretary." Section
6323(a). The rule of Craft, with respect to entireties
property, applies to federal tax liens regardless of when they arose. A
federal tax lien, therefore, has priority over any interest of a
purchaser, a holder of a security interest, a mechanic's lienor, or a
judgment lien creditor ( i.e., the class of persons protected by section
6323(a)) if notice of the federal tax lien was filed before such
other interest arose.
As a matter of administrative policy, the Service will not assert its
federal tax lien rights where doing so may disturb the settled
expectations of certain classes of persons who may have been under the
belief that a federal tax lien arising from the liability of only one
spouse does not attach to entireties property. Accordingly, with respect
to entireties property located in full bar jurisdictions, the Service
will not assert its federal tax lien priority over the interests of the
class of persons protected under section
6323(a), if the section
6323(a) interests were created before Craft was decided. For
example, if a purchaser acquired entireties property before Craft
was decided and meets the definition of a purchaser under section
6323(h)(6), the Service will not assert lien priority even though a
notice of federal tax lien had been filed prior to the purchase.
In contrast to full bar jurisdictions, there are no settled expectations
in modified or partial bar jurisdictions, where a creditor is permitted
to attach some or all of a debtor-spouse's interest in entireties
property. For example, while Oklahoma law recognizes tenancy by the
entireties as a form of property ownership, creditors collecting the
debt of one spouse can force the sale of entireties property, severing
the tenancy. In modified or partial bar jurisdictions, the Service will
assert its lien priority against the class of persons protected under section
6323(a) regardless of when those persons may have acquired interests
in entireties property, so long as those interests were acquired after a
notice of federal tax lien had been filed.
Divorce. A spouse of the taxpayer who obtained entireties
property in a divorce acquires the property subject to the federal tax
lien. In the context of a divorce, a spouse is not in the class of
persons protected by section
6323(a). Consequently, if the assessment giving rise to the federal
tax lien under section
6321 had occurred prior to the divorce, then the lien also attached
to the taxpayer's rights in the entireties property. As a general rule,
if the transfer occurred before Craft, then the Service will
treat the transfer as one for value and will not assert its lien against
the property in the hands of the ex-spouse of the taxpayer. This will
not apply if the Service determines that, notwithstanding the divorce,
the transfer was fraudulent.
Donation. A donee who obtains entireties property acquires the
property subject to the federal tax lien. As in the case of a transfer
pursuant to a divorce, the donee is not in the class of persons
protected by section
6323(a). Transfers to donees that occurred before Craft will
be evaluated on a case-by-case basis to determine whether the equities
favor or disfavor the Service asserting the federal tax lien against
property held by a donee. There may be circumstances where, although the
donee gave nothing of value in exchange for the property, it would be
inequitable for the Service to assert the federal tax lien because of
the donee's reliance on the mistaken view that the property was
unencumbered. For example, if the transfer was of real property to which
the donee has made substantial improvements, the equities may favor not
asserting the federal tax lien (or agreeing to limit its reach by
carving out the value of the improvements). On the other hand, the
absence of such reliance may warrant assertion of the federal tax lien.
The identity of the donee is also a factor that will be considered by
the Service. The federal tax lien is more appropriately not asserted
where the donee is a disinterested person, having no relation to the
taxpayer, than where the donee and taxpayer are closely related. For
example, the Service may decide to assert the federal tax lien where the
taxpayer transferred entireties property to a family trust, but may
decide not to assert the lien where the taxpayer transferred entireties
property to a charitable organization.
Q2. Does the Craft decision provide a basis for the Service to
rescind offers in compromise, terminate installment agreements, or
revoke certificates of discharge and subordination? Will the Service
amend bankruptcy proofs of claim? Can the Service revisit a
determination that an account is currently not collectible?
A2. The decision in Craft does not provide legal authority to
rescind any accepted offer in compromise, terminate an installment
agreement, or revoke any certificate of subordination or discharge.
With respect to bankruptcy proofs of claims, the Service has made an
administrative decision not to routinely amend such proofs of claim to
adjust the amount of the Government's secured claim to reflect the
federal tax lien on the taxpayer's interest in entireties property.
There may be circumstances, however, where the Service elects to amend
the claim to assert the federal tax lien on entireties property,
depending on the value of the property and the status of the bankruptcy
case. The existence of entireties property will be considered in filing
new proofs of claim and in future investigations related to determining
whether there is any property subject to post-bankruptcy collection.
Finally, based on an evaluation of a taxpayer's interest in entireties
property, the Service may revisit a prior determination that an account
is currently not collectible.
Q3. If entireties property subject to the federal tax lien is sold or
transferred after Craft and the Service does not discharge the
lien, is the property subject to the federal tax lien in the hands of
the transferee?
A3. A conveyance of entireties property terminates the entireties estate
with respect to that property. Accordingly, after Craft, unless
the Service discharges the property from the federal tax lien, the lien
will encumber a one-half interest in the hands of the transferee,
regardless of whether the transferee is a donee or gives value. As
explained below, the Service generally will deem the value of the
taxpayer's interest in entireties property to be one-half of the total
value of the property.
Q4. Does the federal tax lien on entireties property survive the death
of the taxpayer? What effect does the death of the non-taxpayer have on
the federal tax lien?
A4. As is the case with joint tenancy with the right of survivorship, if
a taxpayer's interest in entireties property is extinguished by
operation of law at the death of the taxpayer, then there is no longer
an interest of the taxpayer to which the federal tax lien attaches. When
a taxpayer dies, the surviving non-liable spouse takes the property
unencumbered by the federal tax lien.
When a non-liable spouse predeceases the taxpayer, the property ceases
to be held in a tenancy by the entirety, the taxpayer takes the entire
property in fee simple, and the federal tax lien attaches to the entire
property.
The rule that the federal tax lien does not survive the death of the
taxpayer does not apply if the entireties estate previously has been
terminated. For example, if the property has been conveyed to a third
party, the federal tax lien will be deemed to encumber a one-half
interest in the hands of the transferee and will not be affected by the
subsequent death of either spouse.
Q5. Does the federal tax lien remain on entireties property awarded to a
non-liable spouse in a divorce decree?
A5. Entireties property subject to the federal tax lien and then
transferred after Craft to a non-liable spouse pursuant to a
divorce remains encumbered in the hands of the ex-spouse.
Q6. After a notice of federal tax lien is filed, the taxpayer and spouse
jointly mortgage entireties property to a bank. What effect would the
death of either spouse have on the respective rights of the Government
and the bank? Where the property is transferred either to a third party
or as a result of a divorce, does the federal tax lien have priority
over the bank?
A6. Under section
6323, the federal tax lien has priority over the bank's interest
with respect to the taxpayer's interest in the entireties property.
If the taxpayer survives the spouse, the federal tax lien will be a
senior lien against the whole property. The taxpayer's interest in the
entireties property to which the federal tax lien attaches includes the
taxpayer's right of survivorship. With the death of the taxpayer's
spouse, the taxpayer becomes the fee simple owner of the property, and
the federal tax lien attaches to that interest in the property, which is
senior to the bank's interest.
As discussed in Q&A 4, if the taxpayer predeceases the spouse and
his or her interest is extinguished by operation of law, the federal tax
lien will be extinguished. The mortgage lien becomes the first lien on
the property.
Since a divorce or transfer to a third party terminates the entireties
estate (and, with it, the spouses' rights of survivorship), if the
property is transferred to a third-party or to either spouse as a result
of a divorce, then the federal tax lien generally will have priority
with respect to a one-half interest in the property over the bank's
subsequent security interest.
Q7. Will the Service administratively seize and sell the taxpayer's
interest in entireties property?
A7. The Service can administratively seize and sell a taxpayer's
interest in real and personal property held in a tenancy by the
entirety. Because of the nature of entireties property, it would be very
difficult to gauge what market there would be for the taxpayer's
interest in the property. The amount of any bid would in all likelihood
be depressed to the extent that the prospective purchaser, given the
rights of survivorship, would take the risk that the taxpayer may not
outlive his or her spouse. In addition, a prospective purchaser would
not know with any certainty if, how, and the extent to which the rights
acquired in an administrative sale could be enforced. For example,
rights acquired would include the right to use the property and the
right to exclude others from the property. It is not clear how the
rights of a prospective purchaser ultimately would be balanced with the
co-existing rights of the spouse of the taxpayer. Therefore, the Service
has determined that an administrative sale is not a preferable method of
collection with respect to entireties property.
Levying on cash and cash equivalents held as entireties property does
not present the same impediments as seizing and selling entireties
property. For example, where the Service levies on a bank account that a
taxpayer holds as entireties property and has the right to withdraw the
funds in the account, the bank is obligated to turn over the funds in
response to the levy. While the taxpayer's spouse, as the other account
holder, may have an administrative or judicial claim under sections
6343(b) or 7426, respectively, see United States v. National
Bank of Commerce, 472 U.S. 713 (1985), the amount realizable by the
Service is not, at the outset, depressed as it is in the case of
administrative sales.
Q8. Will the Service foreclose the federal tax lien against entireties
property?
A8. The Service will foreclose the federal tax lien against entireties
property in appropriate cases. While in an administrative sale the
Service can sell only the taxpayer's interest in entireties property ( i.e.,
not the entire property itself), in a foreclosure action, pursuant to section
7403, the district court has discretion to order the sale of the
entire property, even where a non-liable spouse has a protected interest
in the property. See United States v. Rodgers, 461 U.S. 677
(1983) (principle applied with respect to the sale of homestead
property). If the court orders the sale of the property, then the
non-liable spouse must be compensated for his or her interest: section
7403 requires "a distribution of the proceeds of such sale
according to the findings of the court in respect to the interests of
the parties and the United States." Section
7403(c).
Q9. How is the Government's federal tax lien interest in entireties
property valued for the purposes of discharge and subordination under section
6325? After private foreclosure on entireties property, what is the
value of the Government's interest in proceeds left after the
satisfaction of senior liens? How is entireties property valued for
bankruptcy purposes? How is entireties property valued in offers in
compromise?
A9. Discharge and Subordination. Under section
6325(b)(2)(A), the Service may issue a certificate of discharge of
property subject to a federal tax lien upon payment of an amount not
less than the value of the Government's interest in that property to be
discharged. If a taxpayer applies for a certificate of discharge when
entireties property is to be sold by the taxpayer and the taxpayer's
spouse, then the taxpayer generally must pay the Service one-half the
proceeds of the sale in partial satisfaction of the liability secured by
the federal tax lien.
Foreclosing mortgagees with interests that are senior to the federal tax
lien often seek a certificate of discharge, rather than joining the
United States in a judicial proceeding. By obtaining a discharge of the
mortgaged property, the mortgagee eliminates the Service's right under section
7425(d) to redeem the property from the purchaser after the
foreclosure sale. As in the case of a taxpayer who seeks a certificate
of discharge of the entireties property, the Service generally will
determine the value of the Government's interest to be one-half the
value of the property, which is determined for this purpose by first
taking into account the amount of senior liens.
Under 6325(b)(4), an owner of property subject to a tax lien (for
example, a subsequent purchaser), other than the taxpayer whose
liability gave rise to the lien, may seek a certificate of discharge by
making a deposit or posting a bond equal to the value of the interest of
the Government in the property. In connection with an application for
discharge of former entireties property under section
6325(b)(4), the Service generally will determine the value of the
Government's interest to be one-half the value of the property.
In light of the Craft decision, taxpayers and taxpayers' spouses
will seek subordination of the federal tax lien in connection with
refinancing mortgages on entireties property. If the requested
subordination is for the purpose of securing a loan to refinance a
senior lien, the Service will apply section
6325(d)(2). The Service will generally issue a certificate of
subordination if the terms of the refinance loan, as compared to the
terms of the loan secured by the senior lien, ultimately will enhance
the taxpayer's equity or facilitate the collection of the tax from other
property or income of the taxpayer.
If a taxpayer and a taxpayer's spouse seek a certificate of
subordination for the purpose of obtaining cash or paying other debts
not secured by a senior lien on the property (for example, in the case
of a home equity loan), the Service will apply section
6325(d)(1). The Service generally will treat the value of the
taxpayer's interest as one-half of the value of the entireties property.
The Service would issue a certificate of subordination upon payment of
one-half the amount of the lien or interest to which the federal tax
lien will be subordinated.
Private Foreclosure. Where a senior creditor is foreclosing a
mortgage or other lien on the property, the Service generally will
determine the value of the taxpayer's interest to be one-half of the
excess of the value of the property over the amount of the senior lien.
Bankruptcy. In bankruptcy cases, the Service, in determining the
value of its secured claim, generally will value the debtor's interest
in entireties property to be one-half of the total value of the
property.
Offers in Compromise. Procedures for valuing entireties property
for offer in compromise purposes are set forth in the Offer in
Compromise Handbook,
IRM
5.8.5.3.11.
The principal author of this notice is Deborah Grogan of the Office of
Associate Chief Counsel (Procedure and Administration). For further
information regarding this notice, contact Ms. Grogan at (202) 622-3610
(not a toll-free call)
