Sunday, April 27, 2003

A Crafty Bash

In U.S. v. Craft, 535 U.S. 274 (2002), the Supreme Court held that a federal tax lien against one spouse attaches to the interest of that spouse in property held with the other spouse that is titled as a tenancy by the entirety. The Craft opinion gave no direction as to the manner in which that interest should be valued. In In re Basher, the United States Bankruptcy Court for the Eastern District of Pennsylvania gave one answer.

Mark Basher owned his residence with his wife as a tenancy by the entirety. The property had a net equity of $101,000.00. The IRS held a tax lien against him (but not his wife) in the amount of $285,000.00. As part of a "cram down" proceeding in a Chapter 13 bankruptcy proceeding, the court had to assign a valuation to the interest to which the lien attached.

Basher claimed that the value of the property to which the lien attached was zero since he had no power, due to the tenancy by the entirety interest, to force a sale of the property. The Court rejected that approach to valuation based on a line of bankruptcy cram-down cases which held that valuation of property that a debtor elects to retain in a cram down proceeding is based upon the value of the various interests to be retained by the debtor, here, Basher's right to the use and enjoyment of the property and his survivorship interest in the property. The court specifically rejected the use of a foreclosure valuation.

The Service contended that the value of Basher's interest was 50% of the net equity value of the property. The court rejected this approach as well, since Basher, who was 46, had a shorter life expectancy than his wife, who was 45. Without determining the precise allocation factors, the court noted that the valuation had to "give . . . consideration to the impact of the [husband's] survivorship interest vis a vis [his wife's]."

Basher will inevitably be cited for the proposition that one merely applies actuarial tables to properly allocate the value of tenancy by the entirety property as between spouses. It is not clear to me that the opinion goes quite that far. Moreover, numerous other factors may affect the determination of the value of the tax debtor's "interest" in tenancy by the entirety property. By way of example, in Basher, the court was specifically able to point to the stability of Basher's marriage. Assume a case in Maryland where that stability is not present. Can the non-debtor spouse argue that part of the value of the property is non-marital under Maryland law, thus further reducing the value of the interest of the debtor spouse? Even the procedural issues are not as clear-cut as the Basher court would indicate, since a good argument could be made that the non-debtor spouse is a necessary party to any proceeding. This would be a particularly significant issue if the proceeding between the debtor spouse and the IRS took place against a background of domestic strife.

Basher is merely the first in what will become a torrent of opinions attempting to fathom the meaning of Craft.

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