Wednesday, June 11, 2003

An Act of Faith

One of the best things about participating in Bar activities is that you get exposed to a group of people who have a high degree of pride in their profession. That is, for them, being a lawyer is not merely a job, but a calling as well.

Now most of those who populate these meetings are what I call "average smart guys." That is, they're people who are well-educated and very bright, but not necessarily on the intellectual level of a Brandeis or Holmes. (By the way, on my best days, I rate myself at the lower rungs of the "average smart guy" scale.) Occasionally, however, you get the opportunity to meet people who go to the top of the scale and then beyond.

Once of the people who I've had the opportunity to meet and who is beyond the category of "average smart guy" is Susan Pace Hamill. (Ok, she's not a guy, but you get the idea.)

Susan was with the I.R.S. when LLCs were in their infancy and, I suspect, did a great deal to advance their acceptance within the Service. Subsequently, she became a professor at the University of Alabama School of Law. More recently, she has caused a bit of stir by publishing an article in the University of Alabama Law Review entitled An Argument for Tax Reform Based on Judeo-Christian Ethics. (Susan also has a Masters in Theology from the Beeson Divinity School.)

The article focuses on Alabama's tax system, labeling it unfair to the poor. It is easy to see, however, that a similar analysis would apply to most state and local tax regimes in this country, since, to a great degree, they all rely on regressive taxes. And the President's welfare bill for the wealthy? Although not a theologian, I think that to ask the question is to answer it.

In an editorial piece in the New York Times on Tuesday, Adam Cohen outlined the impact that Susan's article has had on tax policy in Alabama, moving even an arch-conservative governor to back tax reform. But don't hold your breath waiting for the alleged conservatives in the White House to get religion.

Hatchett Link

You can link to the opinion in Hatchett v. U.S. by clicking the title.

Sunday, June 08, 2003

A Hatchett Job

The Sixth Circuit just issued an opinion applying U.S. v. Craft. It is certain to send shivers down the spines of title insurance companies.

The case, Hatchett v. U.S., arose out of an assessment that grew from the tax fraud of Mr. Hatchett, formerly a prominent Detroit trial attorney. While the Craft case was wending its way to the Supreme Court, the Hatchetts had been contesting the government's attempt to enforce its lien against Mr. Hatchett by attaching their tenancy by the entirety property.

The Sixth Circuit admitted that the Supreme Court in Craft had enunciated "a new rule of federal law" since, prior to that decision, "several federal and state courts, including [the Sixth Circuit], as well as the IRS, had assumed that entireties property was excluded from the definition of 'all property and rights to property' as defined by the tax code." However, the Court applied the rule found in Reynoldsville Casket Co. v. Hyde, 514 U.S. 749, 752 (1995), that: "[W]hen (1) the Court decides a case and applies the (new) legal rule of that case to the parties before it, then (2) it and other courts must treat that same (new) legal rule as 'retroactive,' applying it, for example, to all pending cases, whether or not those cases involve predecision events."

The problem with Sixth Circuit's application of the rule is that it assumes that the litigation contesting the lien is the applicable "case" for purposes of the Reynoldsville Casket rule. The problem this raises is not obvious, but is extremely troublesome.

Assume that a tax lien was filed prior to the date the Craft decision was handed down. The parties subsequently (either before or after Craft, I don't think that it matters) sold tenancy by the entirety property to a third party bona fide purchaser for value. The third party's title insurer issued title insurance because, after all, the IRS's administrative practice in the state in which the property was located was not to attempt to levy against tenancy by the entirety property to enforce a lien against one spouse and the title insurer, correctly it seems to me, assumed that the lien did not attach to the property.

Now, the IRS attempts to assert its lien against the property. After all, Craft holds that the lien was good when it was initially filed and when the third party purchased the property. Presumably, the third party (or its title insurer) will attempt to judicially challenge the lien. However, by applying the Reynoldsville Casket rule to the "case," that is, the filing of the challenge to the lien, the third party loses because the case was instituted subsequent to Craft.

If the foregoing analysis holds, there are numerous tax liens that title insurers thought were dead, at least as to tenancy by the entirety property that had been conveyed, but which can presumably spring back to life. Thus, if the hypothetical third party in my illustration attempts to subsequently convey the property, should (or will) a title insurer issue a policy without a specific exception? And, if an exception is noted, will a lender participate in the purchase?

The Sixth Circuit's website is down this evening. When it comes back up, I will post a link to the Hatchett opinion.