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Tax Notes

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Tax Notes



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Scientists often observe that answering one question about the world or universe causes many new questions to arise. Chess players understand that to win material in the opening or middle game is empty without playing the end game properly. Military commanders and their civilian superiors know that winning a battle is not an end in itself. They must then address what do with their victory, how to turn it to useful result. Having to confront these second-generation or follow-up problems clearly beats the alternatives (remaining ignorant or losing the game or battle), but initial success ushers in not immediate repose but the need for further work. Indeed, often it is as hard (sometimes harder) to properly exploit the success as it was to achieve it initially.

So it is in law as well. The establishment of a legal rule will resolve or obviate some disputes but will force decisionmakers to address a variety of definitional or implementational issues attending the new rule. The IRS now finds itself in this desirable but demanding position as a result of its recent win in the Craft case. In Craft, the Supreme Court held that the federal tax lien attaches to a tax-debtor spouse's interest in tenancy-by-the-entireties property even when the other spouse is not jointly liable for the unpaid taxes and state law provides that entireties property is beyond the reach of separate creditors of one spouse. Attachment of the tax .lien - although important – only begins the collection process. If the taxes remain unpaid, the IRS may have to proceed against the property. Legally how might it proceed, and prudentially how should it proceed?

This article addresses the “follow-up” or “second-stage” questions. The IRS is currently engaged in formulating its positions on these questions, in light of Craft. No matter what perspicacity and sensitivity it brings to bear in this process, however, subsequent disputes and litigation are likely. The difficulty of the questions virtually assures this controversy.

This article has three parts. Part I describes the Court's decision in Craft and the background to it. Part II sounds a general chord, urging the IRS to proceed cautiously with the implementation of Craft. Part III strikes individual notes. It takes up four issues: (1) post-lien-attachment options available to the IRS, (2) protection of the nondebtor spouse, (3) retroactivity, and (4) valuation.


© 2002 Steve R. Johnson


First published in Tax Notes.

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