6th Circuit in Hatchett Retroactively Applies Craft Supreme Court Ruling that Federal Tax Lien Applies to Tenancy by the Entireties Property
The Supreme Court's decision in Craft, 122 S.Ct. 1414, 2002-1 USTC ¶50,361 (S.Ct. 2002) established a new rule of law that entireties property was within the definition of "property and rights to property" to which a federal tax lien could attach.
In Hatchett v. U.S., 330 F.3d 875, 91 A.F.T.R.2d 2003-2457, 2003-1 USTC ¶50,504 (6th Cir, June 4, 2003), rev'g 2000-1 USTC ¶50,455 (DC Mich.), because the Supreme Court had answered the question of whether the Government may levy against real property held as a tenancy by the entirety, the 6th Circuit reversed the district court and remanded for entry of judgment consistent with current Supreme Court precedent, reversing the district court's refusal to allow the Government to amend its complaint and to assert its claim of fraudulent conveyance, and the summary judgment on the nominee and lien tracing theories, finding that:
- Craft could be applied retroactively because Hatchett was pending on direct review when the Craft decision was rendered;
- the government had the right to seize and sell the properties because the properties could not be divided;
- the government could collect a portion of the sale proceeds; and
- the government was entitled to present its nominee and lien-tracing theories in order to determine the exact value of the government's interest in the properties.
Husband's tax liability
Hatchett began in 1975 when Elbert Hatchett, a prominent Detroit trial attorney, decided not to pay federal and state income taxes. In 1989 Elbert was convicted by a jury of four misdemeanor counts of willful failure to pay federal income taxes. U.S. v. Hatchett, 918 F.2d 631, 633 [90-2 USTC ¶50,566 ] (6th Cir. 1990). Elbert was sentenced to 3 consecutive 1-year sentences, placed on 5 years' probation, fined $100,000 and ordered to pay "all back taxes" as a condition of probation. The IRS assessed more than $6.6 million in federal income taxes and penalties for the tax years 1975 to 1991. As of March 25, 1998, Elbert's tax liabilities totaled more than $8.6 million.
The IRS collection action
The US commenced administrative levy proceedings against 4 parcels of real property, and seizure of mortgage payments due to the Hatchetts on a 5th parcel to collect a portion of the more than $8 million in unpaid taxes owed by husband only. The Hatchetts brought a wrongful levy action based on the properties being held by the Hatchetts as tenants by the entirety.
The U.S. District Court holding
The district court found the lien did not attach to entireties property, and set forth three reasons for its refusal to permit the government to amend its answer to assert its fraudulent conveyance theory and granted summary judgment on the nominee and lien tracing theory.
After notice of appeal had been filed and the case had been set for oral argument, the Supreme Court granted certiorari on Craft (also a case from the 6th Circuit) and agreed with the Government's position there that federal tax liens may attach to property held by a delinquent taxpayer as a tenancy by the entirety.
In Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993), the Supreme Court abandoned the balancing test articulated in Chevron Oil for determining retroactivity. "[T]he Chevron Oil test cannot determine the choice of law by relying on the equities of the particular case" and federal law applicable to a particular case does not turn on "whether [litigants] actually relied on [an] old rule [or] how they would suffer from retroactive application of a new one". Id. at 95 n.9. The Supreme Court in Harper held that when it applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate its announcement of the rule. 509 U.S. at 97. Craft announced a new rule of federal law and applied it to the parties before it. Hatchett was pending on direct review when the Supreme Court's decision in Craft was rendered, and accordingly, Craft applied retroactively.
Pursuant to § 6331, the Government may levy upon property held by a delinquent taxpayer as a tenancy by the entirety. Section 6331(1) states that "[f]or proceedings applicable to sale of seized property, see section 6335." Title 26 U.S.C. § 6335(c) (2002) states that "[i]f any property liable to levy is not divisible, so as to enable the Secretary by sale of a part thereof to raise the whole amount of tax and expenses, the whole of such property shall be sold." The language of the statutes is clear. The power to levy includes the power to seize and sell the properties as prescribed by § 6335; property that cannot be divided in order to satisfy the whole of taxes and expenses shall be sold in its entirety.
Value of the Government's interest
The 6th Circuit held both the nominee and lien tracing theories were relevant in determining the Government's interest in the entireties properties and mortgage payments at issue, and that the Government was entitled to present its nominee and lien tracing theories on remand in order to determine the exact value of the Government's interests:
- a fraudulent conveyance theory, in which the Government claims that while insolvent, Elbert used his individual funds to purchase and enhance property that was titled as a tenancy by the entirety in order to prevent his creditors from attaching it;
- a nominee theory, in which the Government claims that other individuals are holding the entireties properties and rights to the mortgage payments as Elbert's nominees, and that Elbert shielded the properties and payments from his tax liabilities with these title arrangements; and
- a lien tracing theory, in which the Government claims that since it has a lien on Elbert's money, it is entitled to place a lien on the properties improved or purchased with that money.
The U.S. District Court decision on re-hearing
At the June 8, 2005 hearing resulting in Magistrate Judge Donald A. Scheer's Report and Recommendation, Hatchett's counsel conceded the validity of the government's position that the Hatchett's principal residence is subject to levy under 26 U.S.C. § 6334, and that the government may levy on the entireties property itself, not only on Plaintiff Elbert Hatchett's interest in the entireties property, Not Reported in F.Supp.2d, 2005 WL 4705862 (E.D. Mich.), 98 A.F.T.R.2d 2006-5850 (June 10, 2005). The District Court accepted the Magistrate's Report and denied Hatchett's Motion for Partial Judgment on the Pleadings. and set Trial for June 12, 2006, Not Reported in F.Supp.2d, 2006 WL 798970 (E.D. Mich.), 98 A.F.T.R.2d 2006-5855 (March 27, 2006). 12/2/06