Tax Court Reaffirms that a Tax Lien Attaches to Property Held in Tenancy by the Entireties: United States v. Barczyk

The Barczyk Decision

The Supreme Court of the United States recently denied the taxpayer's petition for certiorari in United States v. Barczyk, 6th Cir. No. 10-1498 (Aug. 18, 2011) cert denied (Jan. 17, 2012). In Barczyk, the Sixth Circuit upheld the lower court's order allowing the United States to foreclose on its tax lien and sell real property Deborah Barczyk owned with her tax-delinquent husband as tenants by the entirety. The Court of Appeals ordered an equal distribution of the sale proceeds, to the Internal Revenue Service and to Deborah Barczyk, applying the presumption that Deborah Barczyk and her husband had equal interests in the marital home.

Tenancy By The Entireties

Tenancy by the entirety is a type of joint tenancy that is reserved solely for married persons. Under Michigan law, spouses with a tenancy by the entirety "have identical rights to their marital home," including collection of rents, income, and profits. MCL 557.71. Each spouse individually, however, also has rights with respect to the entireties property, including the right of survivorship. United States  v. Craft, 535 U.S. 274, 278 (2002).  The right of survivorship can be extremely valuable and should not be overlooked.

Federal Tax Liens and Michigan Property Titled as a Tenancy in the Entireties

Until Craft, the IRS had difficulty collecting unpaid tax liabilities in cases in which a tax debtor was married and owned property titled as tenancy by the entireties with a spouse. In Craft the Supreme Court of the United States greatly expanded the IRS' ability to collect against the non-paying spouse. The Court held that a tax lien against one spouse could attach to Michigan property titled as a tenancy by the entireties.

The Service's Authority to Force the Sale of Property Titled as a Tenancy in the Entireties

Craft left open the question whether the Service could force the sale of the property to enforce the lien. In United States v. Rodgers, 461 U.S. 677 (1983), which involved jointly-held marital property in Texas, the Supreme Court held that "once a tax lien properly attaches to jointly-held marital property"..."a district court may order a forced sale of the property."  The Court of Appeals in United States v. Barr, 617 F.3d 370 (6th Cir. 2010) and again in Barczyk extended the holding of Rodgers to apply to Michigan property held as tenants by the entirety.

Michigan Law Applies a Presumption of Equal Division of the Foreclosure Sales Proceeds

One question until Barr and  Barcyzk remained unanswered: how to divide the proceeds from the forced sale. Deborah Barczyk argued that she was entitled to more than fifty percent of the proceeds because, actuarially, she is likely to outlive her husband and thus has a greater probability of exercising her survivorship interest. The Sixth Circuit in Barr previously had held that because tenants by the entirety "have equal interest in their home, division according to their interests results in an equal distribution of the proceeds of the sale of that home. Barr, 617 F.3d at 373. Non-liable spouses may only avoid the presumption of equal division of the foreclosure-sale proceeds when there is a compelling reason to depart from that presumption. In Barczyk, the Court held there was no such compelling reason because Mr. and Mrs. Barczyk were of similar ages (approximately five years' difference) and presented no other compelling reason for the exception.

The Implications

The Supreme Court's denial of a review in Barcyzk further demonstrates that the ability of a tenancy by the entireties to protect against judgment creditors at least when the creditor is the IRS may be illusory.  Rather, these cases confirm:

1. A federal tax lien of one spouse may attach to entireties property in Michigan;
2. Once a tax lien properly attaches to entireties property, a District Court may order a forced sale of that property; and
3. There is a rebuttable presumption that the non-defaulting spouse is entitled to fifty percent of the proceeds of the foreclosure sale of the home. This presumption is rebuttable only with a compelling reason, (e.g. atypically-wide age difference indicating that one spouse is nearing the end of life when the other expects to exercise rights in the entireties property for many more years).

Taxpayers and interested parties with questions about this, or other matters, may contact any of the listed Dykema tax attorneys.

---

_{As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2012 Dykema Gossett PLLC.}