Craft v. United States

COLE, J., delivered the opinion of the court, in which SUHRHEINRICH, J., joined. RYAN, J. (pp. 645-649), delivered a separate concurring opinion.

OPINION

COLE, Circuit Judge.

Sandra Craft appeals the district court’s order granting summary judgment in favor of the United States, in which the district court found that a federal tax hen filed against the property of Sandra’s husband for his individual unpaid tax liabilities attached to property held by Sandra and her husband, first as tenants by the entirety and then jointly conveyed to Sandra. The United States, in turn, cross-appeals the district court’s determinations of when the hen attached and the value of Sandra’s husband’s interest in the property. For the following reasons, we REVERSE the district court’s grant of summary judgment in favor of the United States and REMAND for further proceedings in accordance with this opinion.

I.

Sandra Craft and her husband, Don, purchased real property located at 2656 Berwyck Road in Grand Rapids, Michigan (hereinafter the “Berwyek Property”) as tenants by the entirety on May 26, 1972 for $48,000, encumbered by a $37,000 mortgage. Don failed to file income tax returns for the taxable years 1979 through 1986. The Internal Revenue Service accordingly prepared substitute income tax returns for these years as permitted by the provisions of 26 U.S.C. § 6020(b) and assessed $482,446.73 in unpaid tax liabilities against him. The IRS advised Don of these liabilities in 1988; Don nonetheless failed to pay these assessments. The IRS then filed a notice of federal tax lien on March 30, 1989 against all of Don’s property or rights in property with the Register of Deeds in Kent County, Michigan.

Don and Sandra thereafter executed a quitclaim deed on the Berwyek Property, transferring the property to Sandra in exchange for one dollar on August 28, 1989. On January 30, 1992, Don filed a petition for *640relief under Chapter 7 of the Bankruptcy Code. The bankruptcy court entered a discharge order on June 1, 1992 and closed the case on June 11,1992.

Sometime later, Sandra entered into a contract to sell the property, but a title search revealed the IRS’s lien and prevented the sale. Upon Sandra’s request, the IRS refused to release the lien. Don then filed a motion to reopen the bankruptcy case on August 14, 1992, and also filed an adversary complaint against the IRS that sought to determine the dischargeability of the federal tax lien. Although the bankruptcy court reopened the case, it determined on January 27, 1993 that it did not have jurisdiction to determine the validity of the government’s lien on the Berwyck Property because the property never had become a part of Don’s bankruptcy estate. The bankruptcy court thus closed the case for a second time.

The IRS subsequently agreed to release its lien on the property to enable Sandra to sell it. The IRS conditioned its release on the establishment of a non-interest-bearing escrow account containing fifty percent of the proceeds of the sale and subject to the same right, title, and interest that the federal tax lien had on the property. Sandra finally sold the property in June 1992 and received half the proceeds, amounting to $59,944.10.

On April 23,1993, Sandra filed a complaint pursuant to 28 U.S.C. § 2410(a) in the United States District Court for the Western District of Michigan against the United States, seeking to quiet title to the proceeds in the escrow account. The government asserted in response that the federal tax lien attached to Don’s interest in the property, even though Don and Sandra had held the property as tenants by the entirety, and that it was entitled to half the proceeds from the sale of the property. The government further asserted that Don’s conveyance to his wife was fraudulent.

Sandra filed a motion for summary judgment on September 10, 1993, arguing that the completion of the bankruptcy proceedings estopped the government’s ability to bring an action for fraudulent conveyance. On September 13, 1993, the government also filed a motion for summary judgment, contending that the federal tax lien had attached to Don’s interest in the property.

Following a hearing on the parties’ motions on July 21, 1994, the district court issued an opinion and order on September 12, 1994, denying Sandra’s motion for summary judgment and granting the government’s motion. The district court found that the federal tax lien attached to the property at the time Don and Sandra conveyed the property to Sandra, stating, in essence, that this conveyance effectively: (1) terminated the tenancy by the entirety; (2) after which, each spouse owned an equal one-half interest; and (3) was followed by the conveyance of the property to Sandra. The federal tax lien thus attached at the moment in time that Don possessed a separate one-half interest in the property.

On September 22, 1994, Sandra filed four motions: the first sought either to amend the judgment to include the conclusions of law supporting denial of her motion for judgment against the government’s action for fraudulent conveyance, or, in the alternative, a new trial; the second sought to amend the judgment to include a determination of the value of Don’s interest in the property on the date when Don and Sandra terminated the tenancy by the entirety; the third sought to refer the case to the bankruptcy court for it to make this determination; and, the fourth sought to stay execution of the judgment pending resolution of the other motions.

The district court entered another opinion and order on November 17, 1994, denying Sandra’s first motion and stating that, having resolved the matter on other grounds, it did not need to decide whether a fraudulent conveyance had occurred. However, the court granted Sandra’s second motion, concluding that further proceedings were necessary to determine the value of Don’s interest at the time of the termination of his joint tenancy. Still, the court found that it, and not the bankruptcy court, was the proper forum to make this determination and thus denied Sandra’s third motion. Finally, the court granted Sandra’s fourth motion and stayed execution of the judgment.

*641Following a telephonic hearing on September 11, 1995, the district court issued an opinion on October 26, 1995, finding that the government held a valid hen on the interest Don held in the property on August 28, 1989—the date of the termination of the entireties estate and the subsequent conveyance to Sandra. The parties stipulated that the property had a fair 'market value of $120,000 and an outstanding mortgage balance of $19,412.12 on August 28, 1989. The district court thus determined that Don’s interest in the property at the time of the conveyance was $50,293.94 and entered a final judgment awarding the government this amount.

Sandra timely filed her appeal on December 22, 1995. The government timely filed its notice of cross-appeal on December 26, 1995.

II.

We review de novo a district court’s grant of summary judgment. Harrow Prods., Inc. v. Liberty Mutual Ins. Co., 64 F.3d 1015 (6th Cir.1995); Copeland v. Machulis, 57 F.3d 476, 479 (6th Cir.1995). Summary judgment is appropriate if the record shows “that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). We assess the record in the light most favorable to the non-movant, drawing all reasonable inferences in its favor. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538 (1986).

III.

A.

The Internal Revenue Code provides for the creation of a federal tax lien on a taxpayer’s property, stating that: “[i]f any person hable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a hen in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” 26 U.S.C. § 6321. Under the succeeding section, the Code further provides that the hen generally arises when the assessment is made, and it continues until the taxpayer’s liability “is satisfied or becomes unenforceable by reason of lapse of time.” 26 U.S.C. § 6322.

Federal tax law “creates no property rights but merely attaches consequences, federally defined, to rights created under state law.” United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Thus, in order to determine whether property is subject to a federal tax hen, “ ‘state law controls in determining the nature of the legal interest which the taxpayer had in the property.’ ” Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960) (quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940)). “ ‘[Ojnce it has been determined that state law creates sufficient interest in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative,’ and the tax consequences thenceforth are dictated by federal law.” United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (quoting Bess, 357 U.S. at 56-57, 78 S.Ct. at 1057-58). Under federal tax law, the government’s tax hens attach to every interest in property a taxpayer might have, regardless of whether that interest is less than full ownership or is only one among several claims of ownership. United States v. Safeco Ins. Co. of America, Inc., 870 F.2d 338, 341 (6th Cir.1989) (citing National Bank of Commerce, 472 U.S. at 725, 730, 105 S.Ct. at 2926-27, 2929).

B.

In the present case, Sandra and her husband held the Berwyck Property as tenants by the entirety. Under Michigan law, a tenancy by the entirety can be held only by a husband and wife, who possess an interest in the property under single title with a right of survivorship. See Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880 (1918); Matter of Grosslight, 757 F.2d 773, 775 (6th Cir.1985). In Michigan, a tenancy by the entirety can be created only by a written instrument of conveyance, which produces unity of persons, time, title, interest, and possession. See Rogers v. Rogers, 136 Mich. *642App. 125, 356 N.W.2d 288, 292-93 (1984). Neither husband nor wife acting alone can alienate any interest in the property, nor can creditors of one spouse levy upon the property. See Grosslight, 757 F.2d at 773. Further, creditors of one spouse cannot reach that spouse’s share of proceeds from a foreclosure sale of an entireties property. See Muskegon Lumber & Fuel Co. v. Johnson, 338 Mich. 655, 62 N.W.2d 619, 623 (1954). If a marriage terminates in divorce, however, Michigan law converts an entireties estate into a tenancy in common by operation of statute. See M.C.L.A. § 552.102; United States v. Certain Real Property Located at 2525 Leroy Lane, 910 F.2d 343, 351 (6th Cir.1990) {“Leroy Lane P). Husband and wife can also' terminate an entireties estate by joint conveyance of the property by husband and wife. See Leroy Lane I, 910 F.2d at 351.

Although the government may levy entire-ties property for nonpayment of real estate taxes on the real property itself under Michigan law, see, e.g., Robbins v. Barron, 32 Mich. 36 (1875), we have held that the federal government may not, under Michigan law, attach a lien to the entireties property to satisfy the personal tax liability of a single spouse. See Cole v. Cardoza, 441 F.2d 1337, 1343 (6th Cir.1971). In Cole, the IRS filed a lien against property held by a husband and wife as tenants by the entirety for unpaid tax assessments against the husband. See id. at 1338. We held that:

the federal tax lien does not attach to the subject property owned by [a husband] and [wife] by the entirety, because the Government’s tax lien is against [the husband] only. If the lien constitutes a cloud on the title to the property, [husband and wife] are therefore entitled to have the lien declared a nullity as to the property.

Id. at 1343. In Cole, we concluded that “the lien is without legal effect as it pertains to [the husband’s and wife’s] house.” Id. at 1344.

After Cole, we had occasion to consider again the entireties estate under Michigan law in Leroy Lane I. See 910 F.2d at 343. In that case, the United States seized entireties property under a criminal forfeiture statute; however, the district court awarded all the proceeds from the forced sale of the property to the innocent spouse. See id. at 344. On appeal, we found that the government’s position with respect to the forfeiture was most analogous to the position of a judgment creditor of one spouse. See id. at 351. In discussing the entireties estate, we reiterated that “entireties property may not be attached to satisfy the personal tax liability of a single spouse,” id. at 350 (citing Cole, 441 F.2d at 1343), and noted that the innocent spouse had “not only an indivisible interest in the entireties property, but also a survivorship interest which would entitle her to sole ownership of the property upon her husband’s death.” Id. at 347.

Upon remand, the district court, having discovered that the couple divorced, again awarded all the proceeds to the innocent spouse based on the division of property as set out in the divorce decree. See United States v. Certain Real Property Located at 2525 Leroy Lane, 972 F.2d 136, 137 (6th Cir.1992) {“Leroy Lane II”). In Leroy Lane II, we again reiterated that, under Michigan law, a judgment creditor cannot levy against the entireties estate to satisfy one spouse’s debt and further noted that the government’s interest does not come into being until the entireties estate is destroyed. See 972 F.2d at 138. We thus held that the government was entitled only to whatever interest the debtor-spouse held after the entireties estate was destroyed; in Leroy Lane II, that was a zero amount because the debtor-spouse received no interest in the property pursuant to the divorce decree.1 See id.

C.

Turning to the present case, Sandra argues on appeal that Cole remains controlling authority and that because Michigan sub*643stantive real property law has not changed, the IRS’s tax lien could not attach to Don’s interest in the Berwyck Property. It was error, Sandra continues, for the district court to find that the lien attached because it was a nullity as to the entireties property. Thus, Sandra disputes the district court’s finding that upon the joint conveyance of the Berwyck Property to Sandra, the tenancy by the entirety was terminated and Don—for a moment in time—owned a one-half interest in the property to which the lien could attach.

The United States, on the other hand, goes a step further than the district court, contending that the lien attached to the Berwyck Property at the time the lien arose. In so arguing, the United States relies on two Supreme Court decisions in which the federal government’s interests have trumped state law. See United States v. Irvine, 511 U.S. 224, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994); United States v. Rodgers, 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983).

The United States cites Irvine for the proposition that federal laws cannot be avoided or “struck blind” by state-law legal fictions. 511 U.S. at 240, 114 S.Ct. at 1482. Irvine addressed the issue of whether a taxpayer’s disclaimer of her remainder interest in a trust—which caused her interest to be distributed to her children—resulted in a taxable gift. See id. The taxpayer argued that under Minnesota law, an effective disclaimer was valid ab initio, as if the disclaiming party never owned the property; thus, there was no taxable transfer. See id. at 227-28, 114 S.Ct. at 1475-76. The Supreme Court disagreed. In citing Irvine, the government thus contends that Michigan’s recognition of the entireties estate—like Minnesota’s disclaimer—is • invalid because it is a legal fiction that facilitates the circumvention of federal tax laws.

In Rodgers, a case also cited by the government, the Court held that homestead rights under Texas law did not protect property—or a nondelinquent spouse—from in rem proceedings under 26 U.S.C. § 7403. See 461 U.S. at 692-700,103 S.Ct. at 2142-46. The Court based its ruling on a broad interpretation of the tax laws, which permitted the government 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.” Id. at 692, 103 S.Ct. at 2142. The Court did, however, formulate a mechanism whereby the nondelinquent spouse would be compensated. See id. at 710-11, 103 S.Ct. at 2151-52. Moreover, the Court recognized that tenancies by the entirety posed a problem distinct from that of homestead estates, in that neither spouse owns an independent interest in an entireties property while both spouses own independent interests in a homestead estate. See id. at 702 n. 31, 103 S.Ct. at 2147 n. 31.

We are not persuaded that the Supreme Court decisions cited by the United States have any effect whatsoever on the government’s ability to attach a lien to an entireties estate, because these cases do not alter the basic tenet that state law governs the issue of whether any property interests exist in the first place. See id. at 683, 103 S.Ct. at 2137. Irvine and Rodgers stand for the proposition that once a property interest exists under state law, state law cannot interfere with attachment of a lien to that property interest—a matter that is governed by federal law. See id. Irvine and Rodgers do not support the proposition that federal law can be used to trump a state’s definition of a property interest.

In Michigan, it is well established that one spouse does not possess a separate interest in an entireties property. See, e.g., Rogers, 356 N.W.2d at 292-93. This principle of Michigan law has not been overruled by Michigan courts, nor trumped by federal law, despite the United States’ arguments to the contrary. Because Michigan law does not recognize one spouse’s separate interest in an entireties estate, a federal tax lien against one spouse cannot attach to property held by that spouse as an entireties estate.

D.

In the alternative, the government argues—and the district court held—that upon the conveyance of the Berwyck Property to Sandra, the entireties estate terminated and Don, for a transitory moment, had an *644undivided one-half interest in the property, to which the lien could attach.

Although the entireties estate was terminated upon conveyance of the Berwyck Property to Sandra, Don’s interest in the property terminated at the same time. We are unaware of any precedent indicating that an entireties estate is automatically transformed into a tenancy in common as an intermediary step in the conveyance of the property. To the contrary, it is clear that at the time the entireties estate terminated, Sandra was vested “with full and complete title.” Hearns, 53 N.W.2d at 320. Thus, Don never held an interest in the Berwyck Property to which the United States’ lien could attach.

E.

Despite our conclusion that the IRS lien could not attach to the entireties property per se, an issue remains regarding whether the lien attached to any inchoate interest that Don possessed in the entireties property. It is axiomatic that a federal tax lien can attach to “rights to property” as well as to the property itself. See, e.g., National Bank of Commerce, 472 U.S. at 730, 105 S.Ct. at 2929. It follows that a-federal tax lien can attach to a future or contingent interest in property. See, e.g., Safeco Ins. Co., 870 F.2d at 341. Although federal law controls whether an interest constitutes such a “right to property,” see National Bank of Commerce, 472 U.S. at 727, 105 S.Ct. at 2933 (citation omitted), state law determines the nature of the legal interest which a taxpayer has in a property. See Aquilino, 363 U.S. at 513, 80 S.Ct. at 1280. Under federal law, then, any separate future interest that Don had in the Berwyck Property would be subject to attachment; however, the nature of that interest must be determined by Michigan law.

Michigan law does not recognize a severable future interest held by one spouse in an entireties property. See Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880, 881 (1918) (“We think the better doctrine is that the right of survivorship is merely an incident of an estate by entirety, and does not constitute a remainder, either vested or contingent.”); see also Budwit v. Herr, 339 Mich. 265, 63 N.W.2d 841, 844 (1954) (citing Sanford, 169 N.W. at 881). But see Leroy Lane I, 910 F.2d at 352 (“[W]e have found no cases which would preclude the attachment of a creditor’s hen on one spouse’s interest which could be satisfied to the extent of that spouse’s interest upon the termination of the entireties estate.”). Although statements in Leroy Lane I arguably might be construed to indicate the existence of a future interest subject to attachment in an entireties estate, see Fischre v. United States, 852 F.Supp. 628, 630 (W.D.Mich.1994), we are bound to define Don’s future interests in the Berwyck Property under Michigan law. See Aquilino, 363 U.S. at 513, 80 S.Ct. at 1280. Michigan law, as set out by the .Michigan Supreme Court in Sanford, has never been overruled. Accordingly, under Michigan law, Don did not possess a separate future interest in the Berwyck Property; therefore, the federal tax lien could not attach to a future interest that did not exist under Michigan law.

IV.

Despite the fact that the tax lien did not attach to the Berwyck Property, there remains an issue of whether a fraudulent conveyance occurred in this case, an issue that the district court did not address. Under Michigan law, one spouse cannot use the doctrine of tenancy by the entirety to defeat the rights of a judgment creditor. See McCaslin v. Schouten, 294 Mich. 180, 292 N.W. 696, 698 (1940); Morris v. Wolfe, 48 Mich.App. 40, 210 N.W.2d 16, 17 (1973). Such a fraudulent transfer can be set aside. See Mich. Comp. Laws § 566.19(1).

The issue of whether a fraudulent conveyance occurred in this case is a matter that should be determined by the district court. If the conveyance was fraudulent and therefore set aside, the IRS could be entitled to half the proceeds of the June 1992 sale, or $59,944.10. Accordingly, upon remand, the district court should consider whether the Berwyck Property was transferred for fraudulent purposes.

V.

For the foregoing reasons, we REVERSE the district court’s grant of summary judg*645ment in favor of the United States, in which the district court determined that the United States’ tax lien attached to entireties property at the time that Sandra and Don Craft conveyed the property to Sandra, and REMAND to the district court for further proceedings in accordance with this opinion.

. We nonetheless voiced concern about the United States’ lack of opportunity to assert its entire-ties interest prior to the Michigan Circuit Court's grant of the divorce and remanded the case for such evidence as was necessary to insure total disclosure to the Michigan Circuit Court. See Leroy Lane II, 972 F.2d at 138.