CHAIRPERSON'S
MESSAGE
by Lawrence M. Schonberger*
In case you missed the news, the U.S. Supreme Court has ruled that (at least in Michigan) a federal tax lien will attach to the real property interest of an individual who holds title with his or her spouse as tenants by the entirety. In the landmark case United States v. Craft, 535 U.S. ___, 70 U.S.L.W. 4249 (Apr. 17, 2002), the Supreme Court concluded that Michigan law granted each tenant by the entirety "rights to property," under the federal tax lien statute, and therefore a lien filed pursuant to the statute attached to the tenant's individual interest in the entireties property. In this issue Douglass W. Dewing, Virginia State Counsel for Lawyer's Title Corporation, provides a detailed analysis of the Supreme Court opinion, and the Virginia law on tenants by the entirety.
It is an amazing opinion and well worth reading, along with the dissents. To paraphrase Lewis Carroll from Alice's Adventures in Wonderland, "it gets curiouser and curiouser" as the Supreme Court slices and dices the form of concurrent property ownership known as "tenants by the entirety with the full common law right of survivorship" in order to make a tax lien stick.
In fact, "sticks" are exactly what the Court starts talking about. In a return to first-year property law, the Court tells us about "the bundle of sticks" -- that special "collection of individual rights which, in certain combinations, constitute property." In this case, the Court starts pruning away at tenancy by the entirety until it collects enough of the husband's sticks which it considers "rights to property," bundles them together and attaches a federal tax lien to them.
Perhaps the most remarkable stick the Court picks up, but ultimately tosses aside after it pokes the marital tenancy in the eye, is the "survivorship" stick. The Court, in it dissertation on the marital tenancy, states that a tenancy by the entirety with the right of survivorship is an estate of inheritance. The Court categorizes survivorship as the "right of automatic inheritance" and considers this to be one of the "rights to property" that the individual tenant possesses. As the Court puts it, the non-taxpaying tenant by the entirety "possessed the right of survivorship -- the right to automatically inherit the whole estate should the wife predecease him."
The problem with this is that it is an inaccurate understanding and application of how the right of survivorship works in a tenancy by the entirety. The reality is that the surviving spouse inherits nothing. In Lang v. Commissioner of Internal Revenue, 53 S. Ct 534 (1933), a federal estate tax case involving a statute requiring the valuation of property at the time it is "acquired by bequest, devise or inheritance," the Court got it right when it said:
An estate by the entirety is held by the husband and wife in single ownership, by a single title. They do not take by moieties, but both and each take the whole estate, that is to say, the entirety. Upon the death of one of the tenants the survivor does not take as a new acquisition, but under the original limitation, his estate being simply freed from participation by the other. * * * In the present case, therefore, when the husband died, the wife, in respect of this estate, did not succeed to anything. She simply continued, in virtue of the nature of the tenancy, to possess and own what she already had . . . it is obvious that nothing passed to her by bequest, devise or inheritance.
But in Craft the Court takes a contrary path and, with the Respondent, wanders down the "inheritance" trail in a debate over whether the right to inherit through survivorship is a mere expectancy and should not be counted as a "property right" for federal tax lien purposes. In the end the Court dismisses the issue out of hand declaring that it already has enough sticks in its bundle (such as the right to use the property and exclude others from using it) without having to consider whether "survivorship" really is a "right to property" for a tenant by the entirety under the federal tax lien statute.
Obviously, this opinion has a significant impact on real estate law. (I have never seen title underwriters get their agency alerts out so fast.) The decision gives the real estate practitioner much to think about. Yet, it troubles me that, in its analysis of the common law marital tenancy, the United States Supreme Court got the fundamental concept of the application of the common law right of survivorship in a tenancy by the entirety so wrong -- especially after their predecessors got it right seventy years earlier. As one learned attorney employed by a major title underwriter in Virginia (who requested anonymity for himself/herself and the title company) so aptly put it as we discussed this opinion, "The Supreme Court claims it gathers a bundle of sticks, but all it really does is grasp at straws."
*Lawrence Mason Schonberger practices with Fagelson, Schonberger, Payne & Deichmeister, P.C., in Fairfax and is Chair of the Board of Governors of the Real Property Section of the Virginia State Bar. He is a resident of the Town of Leesburg and member of the town's Planning Commission.