Well, it's been over a month. Moving to a new office was far more complicated and difficult than I anticipated, but I'm back. And just in time to comment on a new development with respect to any lien asserted against tenancy by the entirety property when the tax liability is that of only one spouse.
In Notice 2003-60, the IRS has just issued its first post-Craft detailed guidance on collection from property held in tenancy by the entirety where only one spouse is liable for outstanding taxes. The guidance first articulates six general principles and then discusses them in nine questions and answers.
The principles are as follows:
Same As It Ever Was The federal tax lien has always attached to all property held by a taxpayer. This was the case even before Craft and Craft does not represent new law. By way of example, the Service cannot rescind an accepted offer in compromise or terminate an accepted installment agreement, since the Service presumably entered into the arrangements with knowledge of what the law was. But a pre-Craft lien that is in effect post-Craft will be as effective as a lien that went into place after the opinion was handed down.
The Rules Don't Change in the Middle of the Game Notwithstanding the "same as it ever was" principle, the Service will not act to enforce any pre-Craft liens if third parties, prior to Craft, reasonably relied upon the belief that state law precluded the attachment of a lien against only one spouse. This rule would apply only in "full bar" states (such as Maryland) in which creditors of only one spouse have no claim whatsoever against tenancy by the entirety property.
A Repo Man Is Practical The administrative sale of entireties property presents practical problems that limit the usefulness of seizure and sale procedures. Those practical problems are not presented when the entireties property is cash and cash equivalents, thus the fact that cash or cash equivalents are held in a tenancy by the entirety will not deter a levy. And, the entire property can be foreclosed upon with the Service only obtaining the equity of the delinquent spouse.
Share and Share Alike Generally, the value of each party's interest in tenancy by the entirety property will be deemed to be one-half of the total value of the property.
Whither Thou Goest, So I Will Go If tenancy by the entirety property is encumbered by a lien, the lien will be deemed to attach a one-half interest in the property taken by any transferee unless the transaction that effected the transfer extinguished the lien.
Of the nine q & a's, two deal with liens that arose prior to Craft, with the remainder dealing with liens that arise post-Craft.
Initially, the Service states that, as a matter of administrative grace, in so-called "full bar" states (states where property titled as a tenancy by the entirety cannot be attached by any creditor of only one spouse) it will not assert its lien rights against the class of creditors protected under I.R.C. Section 6323(a)--essentially, bona fide transferees for value who took their interest without knowledge of the lien. However, the Notice also makes it clear that in so-called "partial bar" states, transferors will not be so graced.
In cases of divorce, the Service will generally treat a spouse who received full title to formerly tenancy by the entirety property as having obtained the interest of the other spouse as an exchange for value. Of course, this would not extend to a transaction that the Service concludes is fraudulent. And, as is seen below, this rule only applies to pre-Craft transfers.
The Service's position with respect to property received via gift is somewhat unclear. It appears that it will only honor a transfer to a related party when there is some overriding equity on the side of the donee. Generally, no such overriding equity need be present if the donee is an arm's length third party, such as a charity.
The second question deals with deals the Service entered into with taxpayers pre-Craft. Here, the Notice takes the common sense approach that a deal is a deal and what is done is done. However, the Notice states that decisions as to uncollectibility can revisited in light of Craft.
The next four q & a's deal with the continued attachment of the lien in the case of subsequent events. Thus, notwithstanding a subsequent transfer to a third party in an arm's length transaction, the lien will continue to attach to one-half of the property. Similarly, neither a transfer incident to a divorce nor a subsequent mortgage will terminate a lien.
However, in all of these cases, the Notice sets up the possibility of some hard-nosed planning. Specifically, the Notice recognizes that death terminates the deceased spouse's interest in tenancy by the entirety property. The Notice states that if the deceased spouse is the spouse against whom the lien is filed, the property will no longer be encumbered by the lien. Of course, the converse is also true. That is, if the non-delinquent spouse dies, the entire property becomes subject to the lien. This brings new meaning to the phrase "Till death do us part."
A lien will continue to attach to property that is transferred in a transaction that "breaks the unity" of ownership if the deliquent taxpayer dies after the transfer. Thus, a lien will follow property conveyed pursuant to a divorce, because the divorce breaks up the unity of ownership. The lien will continue in effect even if the delinquent spouse dies after the divorce. Similarly, the lien follows property that is foreclosed upon, unless the delinquent spouse dies before the foreclosure. (Thinking about those planning possibilities?).
The final three q & a's deal with the ways in which the Service can turn its lien into cash. Interestingly, the Notice states that an adminstrative sale is "not a preferable method" of dealing with property, such as realty, that is not easily divisible, since it might be difficult to realize anything from the sale of a one-half tenant by the entirety interest. (For instance, how would a prospective purchaser value the likelihood of succeeding to the entire property if the delinquent spouse dies second versus losing the entire property if the delinquent spouse is the first to die.) Cash and cash equivalents, of course, do not pose this problem and the Service will just go in and take its share of these assets.
However, the Service believes that foreclosure, as opposed to an administrative sale, can be used to convert the delinquent spouse's interest into cash. The difference between an administrative sale and a foreclosure is that in the latter proceeding the entire property is sold and the proceeds divided. Thus, the Service does not face the problem of a sale at a depressed price due to the fact that the buyer is purchasing a somewhat speculative commodity.
Finally, the Notice discusses issues pertinent to discharge and subordination. In essence, the Service takes the position that the value of the lien is one-half of the equity to which it attaches. Thus, in the event of an insolvency proceeding, the Service gets one-half of the value of the property after payment of any senior encumbrances.
This post is somewhat longer than most of my postings, but I thought that it would be helpful to set forth the position taken in the Notice in some detail. Over the next week or two, I hope to offer some additional commentary on the Notice.