Appendix — United States v. Craft

Supreme Court, U.S.

EITE U

00181 - 8 2001

No.

—— . ̃¶ . 8...

In the Supreme Court of the United States

UNITED STATES OF AMERICA, PETITIONERS

V.

SANDRA L. CRAFT

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

APPENDIX TO THE

PETITION FOR A WRIT OF CERTIORARI

BARBARA D. UNDERWOOD

Acting Solicitor General

CLAIRE FALLON

Acting Assistant Attorney

General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor

General

DAVID ENGLISH CARMACK

JOAN I. OPPENHEIMER

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

TABLE OF AUTHORITIES

Appendix A (court of appeals opinion, Nov. 22,

2000)

Appendix B (court of appeals judgment, Nov. 22,

Appendix C (court of appeals opinion, Apr. 1,

1998)

Appendix D (district court findings of fact and

conclusions of law, Mar. 30, 1999)

Appendix E (district court opinion, Oct. 26,

1995)

Appendix F (district court opinion, Sept. 12,

1994)

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APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 99-1734, 99-1737

SANDRA L. CRAFT, PLAINTIFF-APPELLEE/

CROSS-APPELLANT

V.

UNITED STATES OF AMERICA, ACTING THROUGH THE

COMMISSIONER OF INTERNAL REVENUE,

DEFENDANT-APPELLANT/CROSS-APPELLEE

Appeal from the United States District Court for the

Western District of Michigan at Grand Rapids

No. 93-00306-Gordon J. Quist, District Judge

Argued: August 10, 2000

Decided and Filed: November 22, 2000

Before: KEITH, COLE, and GILMAN, Circuit Judges

OPINION

COLE, Circuit Judge.

This case is before us for the second time. In Craft v.

United States, 140 F.3d 638 (6th Cir. 1998) (hereinafter,

“Craft I’), we held that a federal tax lien against

Plaintiff-Appellee Sandra L. Craft’s now-deceased hus-

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band, Don, did not attach to property held by the couple

in a “tenancy by the entirety” under Michigan law. On

remand, the district court found that Defendant-

Appellant the United States of America (“IRS,” or “the

government”) was nonetheless entitled to $6,693 with

which Don had fraudulently enhanced the entireties

property. Now, the IRS appeals the district court’s

judgment on the basis that the Craft J panel mis-

construed the law. Sandra responds that the IRS is

precluded from raising this argument on appeal by the

“law of the case” doctrine and other principles. Sandra

also raises a number of claims in a cross-appeal. For

the following reasons, we DISMISS the IRS's effort to

overturn Craft I as precluded by both the law of the

case doctrine and the rule that one panel of this court

may not overrule the prior decision of another panel.

We AFFIRM the decision of the district court regarding

Sandra’s claims.

I. BACKGROUND

The essential facts of the case are as follows.’ In May

1972, Sandra Craft and her husband, Don, purchased

real property (known as the “Berwyck Property,” for

the road on which it was located) in Michigan as tenants

by the entirety. Craft I, 140 F.3d at 639. Don failed

to file federal income tax returns for tax years 1979

through 1986, and, in July 1988, the IRS assessed

$482,446.73 against him in unpaid tax liabilities. Id.

Don failed to pay his tax debts, and the IRS filed a

notice of federal tax lien in March 1989 against all of

Don’s property and rights to property. Id., see also

1 Craft I contains a detailed factual and procedural back-

ground of this case. See 140 F.3d at 639-41.

3a

I.R.C. § 6321. Don was insolvent during the period

from April 1980 through August 1989.

On August 28, 1989, Don and Sandra transferred the

Berwyck Property to Sandra by way of a quitclaim

deed, in exchange for one dollar. Craft I, 140 F.3d at

639. In June 1992, Sandra sold the property to a third

party for $119,888.20. Jd. at 640. Pursuant to an

agreement between Sandra and the IRS, Sandra kept

half of the proceeds ($59,944.10); the other half was

placed in a non-interest-bearing escrow account, sub-

ject to the same right, title, and interest that the

federal tax lien had on the property. Id. In April 1998,

Sandra filed a complaint pursuant to 28 U.S.C.

§ 2410(a), seeking to quiet title to the proceeds in the

escrow account. Id. In its answer, the government

argued that it was entitled to half of the proceeds from

Sandra’s sale of the property because its lien attached

to Don’s interest in the Berwyck Property, even though

Don and Sandra had held the property as tenants by

the entirety. Jd. The government also claimed that

Don had fraudulently conveyed his interest in the

property to Sandra. Id.

Both parties moved for summary judgment in

September 1993. The district court denied Sandra’s

motion and granted the government’s motion in

September 1994. See id. at 640. The district court held

that at the time of the August 1989 conveyance, Don

and Sandra’s entireties estate terminated and each

spouse took an equal half interest in the estate. Id.

Accordingly, the district court held that the federal tax

lien attached to Don’s interest at that time. Jd. Upon

Sandra’s motion, the court conducted further pro-

ceedings to determine the value of Don’s interest at the

time of the termination of the tenancy by the entirety.

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See id. After a telephonic hearing, the court found in

October 1996 that the value of Don’s property to which

the IRS lien attached was $50,293.94." See id. at 641.

The court then ordered that the IRS receive that

amount from the escrowed proceeds. Id.

On cross-appeals to this court, the Craft I panel

reversed the district court’s ruling, holding that “[b]e-

cause Michigan law does not recognize one spouse’s

separate interest in an entireties estate, a federal tax

lien against one spouse cannot attach to property held

by that spouse as an entireties estate.” 140 F.3d at 643.

The panel also held that, under Michigan law, “Don did

not possess a separate future interest in the Berwyck

Property; therefore, the federal tax lien could not

attach to a future interest that did not exist under

Michigan law.“ Id. at 644. After finding that Don had

no present or future interest in the disputed property,

the court remanded the case for determination of

“whether a fraudulent conveyance occurred in this

case. Id. at 644. Judge Ryan concurred in the ma-

jority’s result, but argued that Don had a separate,

future interest in the entireties property to which the

tax lien might attach if the August 1989 transfer to

Sandra were set aside as fraudulent. See id. at 649.

On remand, the district court conducted a bench trial.

In written findings of fact and conclusions of law made

in March 1999, the district court concluded that, al-

though the transfer of the Berwyck Property to Sandra

by quitclaim deed did not constitute a typical fraudu-

2 The court reached the figure by dividing in half the differ-

ence between the fair market value of the property as of the date

of the August 1989 transfer ($120,000) and the amount of the

outstanding mortgage balance at the time ($19,412.12). See Craft I,

140 F. ad at 641.

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lent conveyance under Michigan law, the government

was entitled to relief under an exception to that law, see

McCaslin v. Schouten, 294 Mich. 180, 292 N.W. 696, 699

(1940). The court found that under the exception, a

creditor may obtain relief “where the debtor, while

insolvent, places non-exempt funds beyond the reach of

his creditors by enhancing the entireties property.” See

id. The court reasoned that from 1980 through 1985,

while he was insolvent, Don and Sandra had used Don’s

funds to enhance the property by making a total of

$6,693 in mortgage payments (excluding interest) on its

behalf. The court found that Don’s actions constituted a

type of fraudulent conveyance under Michigan law, and

that the government was entitled to recover the value

of the mortgage payments ($6,693) plus interest (from

the date of the court’s October 1995 judgment) from the

escrowed sales proceeds.* Sandra filed a motion to

amend the judgment, arguing that the court should

reverse its award of interest on the $6,693 it awarded to

the IRS. Sandra also moved the court to award her

interest, pursuant to 28 U.S.C. § 2411, on the funds that

the IRS would have to return to her.“ The court

granted Sandra’s motion in part, deleting the interest

awarded to the IRS, but denied her request for

interest.

The government filed a timely notice of appeal and

Sandra filed a timely notice of cross-appeal in June

8 The district court also rejected Sandra's theories to bar the

government’s relief. Sandra raises many of these theories on ap-

peal, and we discuss them infra.

The IRS was in possession of $50,293.94 of escrowed funds

that the district court had awarded it in October 1995. Sandra was

seeking interest on the $43,600.94 that the IRS would be returning

to her (i. e., 50,293.94 less $6,693).

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1999. In October 1999, the government petitioned this

court for en banc review of the Craft I decision. The

government argued that the Craft I decision—as well

Cole v. Cardoza, 441 F.2d 1337 (6th Cir. 1971) (holding

that federal government may not, under Michigan law,

attach lien to entireties property to satisfy individual

tax liability of one spouse), a prior decision upon which

the Craft I court relied—conflicted with established,

controlling precedent. This court rejected the petition

in December 1999.

II. THE GOVERNMENT’S APPEAL

At this juncture, this case is not really about federal

tax liens. Nor is it about state law property rights. This

case is about the extent to which a prior decision of this

court binds a subsequent panel when neither the facts,

the parties, nor the law has changed. On appeal, the

IRS reasserts its argument that a § 6321 federal tax

lien against an individual taxpayer attaches to a

tenancy by the entirety that the taxpayer shares, pur-

suant to Michigan law, with his spouse. This is, of

course, the very argument we rejected in Craft J. For

the reasons that follow, the government is precluded

from re-arguing its case at this time.

A. Law of the Case

Under the law of the case doctrine, a court ought not

reopen issues decided at an earlier point in the same

litigation. See Agostini v. Felton, 521 U.S. 203, 236, 117

S. Ct. 1997, 138 L.Ed.2d 391 (1997). “Issues decided at

an early stage of the litigation, either explicitly or by

necessary inference from the disposition, constitute

the law of the case.” Hanover Ins. Co. v. American

Eng’g Co., 105 F.3d 306, 312 (6th Cir. 1997) (citation and

quotation marks omitted). Although the doctrine of law

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of the ease is not an inexorable command,“ and courts

must use common sense“ in applying it, see id., the

power of this court to reach a result inconsistent with a

prior decision reached in the same case is “to be exer-

cised very sparingly, and only under extraordinary

conditions.” General Am. Life Ins. Co. v. Anderson,

156 F.2d 615, 619 (6th Cir. 1946) (citation and quotation

marks omitted). We have delineated three such

extraordinary conditions in which we will reconsider a

prior ruling in the same case: “(1) where substantially

different evidence is raised on subsequent trial; (2)

where a subsequent contrary view of the law is decided

by the controlling authority; or (3) where a decision is

clearly erroneous and would work a manifest injustice.”

Hanover Ins. Co., 105 F.3d at 312. For the reasons that

follow, the IRS fails to articulate the “extraordinary

conditions” necessary for us to rehear the claims we

have already rejected.

1. Clearly Erroneous and Manifest Injustice

The IRS looks first to the third exception, arguing

that this court can revisit the issues decided by the

Craft I panel because that panel’s decision was clearly

erroneous and would work a manifest injustice.’ The

government’s argument is not persuasive because Craft

I was not clearly erroneous.

The Craft I panel had before it circuit precedent that

squarely addressed the issue before the court. In Cole,

6 The IRS points to General Am. Life Ins. Co. as an example

of a case in which this court reconsidered its prior holding at a

later stage in the same case. See 156 F.2d at 618-21. We do not

dispute that we have the power to reach a result different from one

reached earlier in the litigation; the government, however, has not

met its burden in the instant case of showing the “extraordinary

conditions” that will permit us to do so. See id. at 619.

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this court held that a federal tax lien against a taxpayer

did not attach to property owned by the taxpayer and

his wife in a tenancy by the entirety. See 441 F.2d at

1343. Neither this court nor the Supreme Court has

ever expressly overruled Cole. Nonetheless, the IRS

contends that Cole has been effectively overruled by

Supreme Court decisions subsequent to it. But no

Supreme Court case has directly addressed the

question before both the Cole and Craft I courts.* It is

true that the Court has addressed the power of a

federal tax lien to attach to state law property con-

structs other than a tenancy by the entirety, but the

Court has done so only on narrow grounds. For in-

stance, in United States v. National Bank of Com-

merce, 472 U.S. 713, 105 S. Ct. 2919, 86 L.Ed.2d 565

(1985), the Court held that the IRS had a right to levy

upon a joint bank account for delinquent federal income

taxes owed by only one of the owners of the account.

See id. at 715, 724, 105 S. Ct. 2919. After discussing the

specific characteristics of the taxpayer’s rights under

state law and under his contract with the bank, see id.

at 723-24, 105 S. Ct. 2919, the Court was crystal clear

about the specificity of its holding:

We stress the narrow nature of our holding. By

finding that the right to withdraw funds from a joint

bank account is a right to property subject to ad-

ministrative levy under § 6331, we express no

opinion concerning the federal characterization of

other kinds of state-law created forms of joint

All of the cases to which the IRS cites for its contention that

Cole has been overruled were before the Craft I panel save Drye v.

United States, 528 U. S. 49, 120 S. Ct. 474, 145 L.Ed.2d 466 (1999),

which we discuss infra.

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ownership. This case concerns the right to levy only

upon joint bank accounts.

Id. at 726 n. 10, 105 S. Ct. 2919.’ Likewise, in United

States v. Rodgers, 461 U.S. 677, 103 S. Ct. 2132, 76

L.Ed.2d 236 (1983), the Court held that I.R.C. § 7403

permits a district court to order the sale of a delinquent

taxpayer’s home, despite the fact that his wife, with

whom he owned the home pursuant to a state home-

stead law, did not owe any of the indebtedness. See id.

at 680, 103 S. Ct. 2132. As the Craft I panel noted,

however, the Rodgers Court “recognized that tenancies

by the entirety posed a problem distinct from that of

homestead estates, in that neither spouse owns an

independent interest in an entireties property while

both spouses own independent interests in a homestead

estate.” 140 F.3d at 643 (citing Rodgers, 461 U.S. at

702-03 n. 31, 103 S. Ct. 2132). Thus, as the Craft J panel

was presented with no binding precedent that over-

ruled Cole, we cannot say that its decision was clearly

erroneous.

Indeed, the Third Circuit has stated that, in National Bank

of Commerce the Supreme Court acknowledged that if money is

held by a husband and wife in a joint bank account as tenants by

the entireties under applicable state law ‘the Government could not

use the money in the account to satisfy the tax obligations of one

spouse.” Internal Revenue Serv. v. Gaster, 42 F.3d 787, 791 (3d

Cir. 1994) (citing National Bank of Commerce, 472 U. S. at 729 n.

11, 105 S. Ct. 2919) (internal footnote omitted; emphasis added).

Nor do Cole and Craft I stand alone. As the Craft I panel

noted, this court reiterated the rule of Cole in subsequent cases.

See 140 F.3d at 642 (citing United States v. Certain Real

Located at 2525 Leroy Lane (“Leroy Lane I”), 910 F.2d 343, 351

(6th Cir. 1990)); id. (citing United States v. Certain Real Property

Located at 2525 Leroy Lane (“Leroy Lane IT’), 972 F.2d 136, 138

(6th Cir. 1992)); see also Gaster, 42 F.3d at 791 n. 3, 793 (holding

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In finding that our decision in Craft I was not clearly

erroneous, we acknowledge that there are colorable

arguments on both sides of the question whether a

federal tax lien against a taxpayer’s “property” or

“rights to property,” see I. R. C. § 6321, attaches to a

tenancy by the entirety. Indeed, Judge Ryan’s con-

currence in Craft J illustrates this point, see 140 F.3d at

645-49 (Ryan, J., concurring) (arguing that, if transfer

of property to Sandra Craft were to be set aside,

federal tax lien would attach to Don Craft’s “future

interest” in Berwyck property), as does Judge Gilman’s

separate concurrence in the instant appeal. We further

recognize that this court has held that federal law

supersedes state property law in other circumstances.

See, e.g., Bank One Ohio Trust Co., N.A. v. United

States, 80 F.3d 173, 176 (6th Cir. 1996) (finding that

restraint on alienation created by state law does not

prevent federal lien from attaching to spendthrift trust

under § 6321); Liberty State Bank and Trust v. Gros-

slight (In re Grosslight), 757 F.2d 773, 775 (6th Cir.

1985) (finding that property held as tenancy by the

entirety is part of bankruptcy estate). But the fact that

colorable arguments exist on both sides of a particular

issue does not imply that the Craft I panel’s decision is

“clearly erroneous.” There are colorable arguments in

virtually every case we hear. To hold that their exis-

tence in the present case permits us to reopen an issue

we have already settled in this very case would destroy

the concept of finality in our courts, negate the pre-

dictability our legal system provides to people in the

conduct of their affairs, and risk the unjust results that

that IRS may not levy against bank account of delinquent taxpayer

held in tenancy by the entirety where taxpayer did not have

unilateral right to withdraw funds).

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would surely follow were litigants to “panel-shop” and

pursue, willy-nilly, two or more bites at the apple of

settled law.

The Craft I panel was bound by circuit precedent

that was directly on point in reaching the conclusion it

reached.’ It was faced with no Supreme Court pre-

cedent that directly held otherwise, and this court has

reiterated the holding relied upon by the Craft I panel

on more than one occasion. Further, other courts have

reached results consistent with that reached by the

Craſt I panel. For these reasons, we reject the IRS’s

argument that the decision reached by the Craft I panel

was “clearly erroneous.””

2. Subsequent Contrary View of the Law

The IRS also argues that the law of the case doctrine

does not apply here because the Supreme Court’s

recent decision in Drye v. United States, 528 U.S. 49,

120 S. Ct. 474, 145 L.Ed.2d 466 (1999), decided after

Craft I, states a view of the law that is contrary to that

expressed in Craft I. See Hanover Ins. Co., 105 F.3d at

312. In Drye, the Court held that a taxpayer could not

As the concurrence acknowledges, the law-of-the-circuit

doctrine prohibits a subsequent panel of this court from revisiting

an earlier panel’s decision when there has not been a change in the

substantive law or an intervening Supreme Court decision. Inas-

much as the rule of Cole v. Cardoza remained good law, the Craft I

panel was bound to follow it.

10 Because the third exception to the law of the case doctrine

requires a finding that a prior decision was both clearly erroneous

and that it would work a manifest injustice, see Hanover Ins. Co.,

105 F.3d at 312, our holding that Craft I is not clearly erroneous

makes it unnecessary for us to address the question of whether

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defeat a federal tax lien by disclaiming, pursuant to

state law, his interest in his mother’s estate. 120 S. Ct.

at 478. The IRS argues that Craft J conflicts with the

Drye Court’s statements that: 1) federal law deter-

mines whether a right or interest created under state

law constitutes “property” or “rights to property” for

purposes of the federal tax lien statute, see Drye, 120 S.

Ct. at 481; and 2) state law legal fictions do not bind the

federal government for purposes of the federal tax lien

statute, see Drye, 120 S. Ct. at 482. At oral argument,

the IRS added that Drye stands for the “new” legal rule

that a federal tax lien attaches to a taxpayer’s right to

inherit property. Upon careful review, we find that

Craft I is essentially consistent with the Drye Court’s

reasoning.

a.

In Drye, the taxpayer (Drye) was insolvent, and the

IRS had obtained valid tax liens against all of his

“property and rights to property” pursuant to I.R.C.

§ 6321." Id. at 479. Drye’s mother died, and Drye was

sole heir to her $233,000 estate. Id. at 478. Drye dis-

claimed” all his interests in his mother’s estate pur-

suant to state law; as a result, the estate passed to

Drye’s daughter. Id. at 479. Drye's daughter estab-

lished a spendthrift trust with the proceeds of her

grandmother’s estate, naming as beneficiaries herself,

1 I. R. C. § 6321 provides:

If any person liable to pay any tax neglects or refuses to

pay the same after demand, the amount (ineluding any in-

terest, additional amount, addition to tax, or assessable pen-

alty, together with any costs that may accrue in addition

thereto) shall be a lien in favor of the United States upon all

property and rights to property, whether real or personal,

belonging to such person.

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Drye, and her mother. Id. Although applicable state

law provided that the assets of a spendthrift trust were

shielded from creditors seeking to satisfy debts of the

trust’s beneficiaries, see id., the Court held that Drye’s

disclaimer did not defeat the government’s tax liens.

Id. at 478. The Court summarized the relationship be-

tween § 6321 and state law as follows:

The Internal Revenue Code’s prescriptions are most

sensibly read to look to state law for delineation of

the taxpayer’s rights or interests, but to leave to

federal law the determination whether those rights

or interests constitute “property” or “rights to pro-

perty” within the meaning of § 6321. “[O]nce it has

been determined that state law creates sufficient

interests in the [taxpayer] to satisfy the require-

ments of [the federal tax lien provision], state law is

inoperative to prevent the attachment of liens

created by federal statutes in favor of the United

States.”

Id. at 478 (quoting United States v. Bess, 357 U.S. 51,

56-57, 78 S. Ct. 1054, 2 L.Ed.2d 1135 (1958) (brackets in

original)). Under the approach taken in Drye, “We look

initially to state law to determine what rights the tax-

payer has in the property the Government seeks to

reach, then to federal law to determine whether the

taxpayer’s state-delineated rights qualify as ‘property’

or ‘rights to property’ within the compass of federal tax

lien legislation.” Jd. at 481.

The IRS argues that the Craft I panel failed to apply

this rule and relied instead on Michigan law to deter-

mine whether a taxpayer’s involvement in a tenancy by

the entirety constitutes property for the purposes of

§ 6321. We are not persuaded. First, we note that the

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Supreme Court had stated prior to Drye the rule that a

court must look to federal law to determine whether

something constitutes “property” or “rights to pro-

perty” for purposes of § 6321. See, e.g., United States v.

Irvine, 511 U.S. 224, 238, 114 S. Ct. 1473, 128 L.Ed.2d

168 (1994) (noting the “general and longstanding rule in

federal tax cases that although state law creates legal

interests and rights in property, federal law determines

whether and to what extent those interests will be

taxed”); National Bank of Commerce, 472 U.S. at 727,

105 S. Ct. 2919 (stating that, the question whether a

state-law right constitutes ‘property’ or ‘rights to pro-

perty’ is a matter of federal law” for purposes of federal

tax collection)”. The Craft I court was aware of that

12 This precise nature of this rule appears to have wavered

over time. Compare Aquilino v. United States, 363 U. S. 509, 514,

80 S. Ct. 1277, 4 L.Ed.2d 1365 (1960) (discussing the “application of

state law in ascertaining the taxpayer’s property rights” in deter-

mining whether property is subject to federal tax lien) with

National Bank of Commerce, 472 U. S. at 727, 105 S. Ct. 2919.

Regardless of which formulation of the rule is adopted, the key

point is that the federal question—i.e., whether a state-law

right constitutes “property” or “rights to property” under the

statute—cannot be considered independently from the state-law

question— i.e., what is the nature and extent of the state-law

right. When, as in this case, state law provides that there can be

no individual interest in property held in a tenancy by the

entireties, there is nothing which can be deemed “property” or

“rights to property” under federal law. This understanding of

§ 6321 does not reflect a failure on the part of the Craft I majority

to put substance over form, as the concurrence charges, but rather

comports with the long-established principle that “federal law

creates no property rights but merely attaches consequences . . .

to rights created under state law.“ Bess, 357 U. S. at 55, 78 S. Ct.

1054 (1958).

15a

rule, see 140 F. 3d at 641, and, more important, applied it

properly.“

The Craft I court’s analysis is consistent with the

two-step analysis described in Drye. See 120 S. Ct. at

481. The Craft I court first looked to Michigan law and

found that: 1) Michigan law holds that an individual

spouse possesses no separate interest in entireties pro-

perty, Craft I, 140 F.3d at 643, and 2) Michigan law

holds that an individual spouse possesses no future

interest in entireties property, see id. at 644.“ Thus,

The IRS attacks the court’s statement that, “state law

governs the issue of whether any property interests exist in the

first place,” Craft I, 140 F.3d at 649 (citing Rodgers, 461 U. S. at

683, 103 S. Ct. 2132), as being inconsistent with Drye. As did the

Supreme Court in Drye, we note that, upon careful review, some of

the language we used in Craft I was not “phrased so meticulously”

as we would have liked. See Drye, 120 S. Ct. at 481. We do not,

however, read the sentence of which the IRS complains nor the

epproach taken in Craft I to be inconsistent with the analytic

approach taken by the Drye Court: that state law determines the

rights a taxpayer has in property and federal law determines

whether those rights constitute “property” or “rights to property”

pursuant to § 6321. See Drye, 120 S. Ct. at 481.

In his separate concurrence, Judge Gilman cites to Rogers v.

Rogers, 136 Mich. App. 125, 356 N.W.2d 288, 293 (1984), to support

the proposition that Don Craft possessed a contingent future

interest in the Berwyck Property. Although the Rogers court did

acknowledge that each spouse “is entitled to the enjoyment of the

entirety and to survivorship,” it emphasized that “neither the

husband nor the wife has an individual, separate interest in ent-

ireties property, and neither has an interest in such property

which may be conveyed, encumbered or alienated without the

consent of the other.” Rogers is thus consistent with Michigan

Supreme Court’s refusal to recognize a severable future interest

held by one spouse in an entireties property. See Sanford v.

Bertrau, 204 Mich. 244, 169 N.W. 880, 881 (1918). Moreover, to the

extent that Rogers can be construed as being inconsistent with

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under Michigan law, Don had no individual interest in

the entireties property: and, because state law deline-

ated no individual interest or right held by Don, there

was nothing for federal tax law to deem to be pro-

perty” or rights to property” for purposes of I. R. C.

§ 6321. Accordingly, Craft I is fundamentally con-

sistent with Drye. See Rodgers, 461 U.S. at 702-03 n. 31,

103 S. Ct. 2132 (stating that cases which have found

that a federal tax lien does not attach to a tenancy by

the entirety “because neither spouse possessed an

independent interest in the property ... do no more

than illustrate the proposition that, in the tax en-

forcement context, federal law governs the conse-

quences that attach to property interests, but state law

governs whether any property interests exist in the

first place.“ (citing United States v. American Nat'l

Bank of Jacksonville, 255 F.2d 504, 506 (5th Cir. 1958);

United States v. Hutcherson, 188 F.2d 326, 331 (8th Cir.

1951)); see also 14 Mertens Law of Fed. Income Tax’n

§ 54A:13 (Supp. 2000) (citing Craft I for proposition

that, although federal law determines whether a lien

will attach to property interests held by delinquent tax-

payer, “whether and to what extent a taxpayer has

‘property’ or ‘rights to property’ are [sic] determined

under the applicable state law.” (foutnote omitted)).

b.

The IRS also argues Craft J is inconsistent with the

Drye Court’s refusal to subjugate federal tax law to

state law legal fictions. See Drye, 120 S. Ct. at 482

(stating that “federal tax law ‘is not struck blind by a

disclaimer’ “ (quoting Irvine, 511 U.S. at 240, 114 S. Ct.

Sanford (which we believe it cannot), Sanford remains good law

and is thus the controlling rule of decision.

17a

1473)). But this proposition, too, had been established

prior to Craft I, and the Craft J court was well aware of

it. See Craft I, 140 F.3d at 643 (discussing Irvine, 511

U.S. at 240). Indeed, the Craft J court rejected the

IRS’s argument that it was being duped by a state law

legal fiction. See id. We again reject the IRS's argu-

ment and find that the aspect of Drye reiterating the

admonition regarding state law fictions is not a sub-

- sequent contrary view of the law. See Hanover Ins.

Co., 105 F.3d at 312; Craft I, 140 F. 3d at 643.

e.

we are not at all persuaded by the IRSꝰs last-minute

characterization of Drye as standing for the proposition

that a right to inherit property is subject to a federal

tax lien. Because Don Craft had a conditional right to

take the Berwyck property by survivorship pursuant to

Michigan law (i.e., should Susan predecease him), the

argument goes, see Craft I, 140 F.3d at 642 (citing

Leroy Lane I, 910 F.2d at 347), he comes under this pur-

portedly “new” rule. This rendering of Drye is patently

overbroad. If the Supreme Court intended to hold that

every conceivable interest in property, no matter how

remote, is subject to a federal tax lien, we have little

doubt that it would have said so outright. We do not

think it so held. Indeed, the Drye Court specifically

stated (demonstrating that “analogy is somewhat

hazardous in this area,” see Rodgers, 461 U.S. at 685-86,

103 S. Ct. 2132) that a mere expectancy is not sufficient

to constitute “property” or “rights to property” pur-

suant to § 6321: “Nor do we mean to suggest that an

expectancy that has pecuniary value and is transferable

under state law would fall within § 6321 prior to the

18a

time it ripens into a present estate.” 120 S. Ct. at 482-

83 n. 7; see also United States v. Murray, 217 F.3d 59,

63 (1st Cir. 2000) (stating that, pursuant to Drye, § 6321

is to be construed broadly, “but there are limits that

reflect both common usage and policy. For example,

the lien would likely not attach to land owned by a still-

living relative of [the taxpayer], or to [his] expected

inheritance of it, even if the relative had provided in his

will that the land would go to [the taxpayer] on the

relative’s death.“). Thus, we reject the government’s

argument that Drye stands for the proposition that a

federal tax lien attaches to any right to inherit pro-

perty, no matter how remote.

d.

In sum, Drye has not so fundamentally changed the

legal landscape as to overrule Craft I. See Blachy v.

Butcher, 221 F.3d 896, 907 (6th Cir. 2000) (Gilman, J.)

(post-Drye decision distinguishing holding of Craft J

from question of how to treat entireties property in

bankruptcy case); United States v. Green, 201 F.3d 251,

253 (3d Cir. 2000) (citing Drye, 120 S. Ct. at 478, and

indicating that federal tax lien does not attach to pro-

perty held as tenancy by entirety pursuant to Penn-

1 In the instant case, Don Craft’s expectancy of inheritance

never ripened into a present estate. Indeed, Don predeceased

Sandra.

16 This is significant because the only interest which any mem-

ber of the Craft I panel concluded might be subject to a federal tax

lien was a future interest. Compare 140 F. 3d at 644 with id. at 646

(Ryan, J., concurring).

17 The concurrence criticizes the court for “going too far” in

characterizing the IRS’s argument in these terms. However, IRS

counsel expressly endorsed this reading of the Drys decision dur-

ing oral argument.

19a

sylvania law); see also Edward Kessel and Steven R.

Klammer, Supreme Court Finds Disclaimer Ineffective

to Avoid Federal Tax Lien, 92 J. Tax’n 118, 122 (2000)

(discussing impact of Drye and suggesting that, even

after decision, federal tax lien law may not apply to

dower, curtesy, or elective share rights). Accordingly,

the IRS’s argument cn appeal is precluded by the law

of the case doctrine.

B. Law of the Circuit

Our decisions in Craft I and in Cole are also law of

the circuit. As we recently stated, “One panel of this

court may not overturn the decision of another panel of

this court—that may only be accomplished through an

en banc consideration of the argument.” Pollard v. E. I.

DuPont de Nemours Co., 213 F.3d 933, 945 (6th Cir.

2000). As discussed, supra, Craft I is not clearly erro-

neous, and it has not been called into doubt by any deci-

sion of the Supreme Court.” Because this panel may

not conduct a plenary review of the result reached by a

18 In his concurrence, Judge Gilman twice “recommend{s] that

this case be revisited en banc.” There is a clearly delineated pro-

cedure under the Federal Rules for a party to seek review of a

matter en banc. See Fed. R. App. P. 35(b). The government is

obviously aware of this procedure in that it previously filed a

petition for en banc review of Craft J, although its petition did not

garner a single vote. Moreover, this court’s published Internal

Operating Procedures provide that any active judge of this court

may request, sua sponte, a request for a poll for rehearing on [sic]

banc, even in the absence of a petition from a party. See 6 Cir.

IO. P. 35(c). We think it appropriate to reserve any discussion of

whether this case should be reheard en banc as a part of the

process contemplated by the aforementioned rules.

20a

prior panel, the decision reached by the Craft I must

stand.”

III. SANDRA’S CROSS-APPEAL

In her cross-appeal, Sandra first argues that the IRS

was precluded from arguing on remand the fraudulent

enhancement theory upon which it ultimately won

relief. Next, Sandra argues that the governing statute

of limitations barred the IRS’s recovery under its

fraudulent enhancement theory. Third, she claims that

the IRS’s remedy became moot upon Don’s death.

Finally, Sandra asserts that the IRS owes her interest

on the funds to which she became entitled pursuant to

our opinion in Craft J. Sandra has also submitted to

this court a motion for costs under both Fed. R. App. P.

38 and the Equal Access to Justice Act, 28 U.S.C.

§ 2412. For the reasons that follow, we AFFIRM the

judgment of the district court and DENY Sandra’s

motion for costs.

A.

Upon remand, the IRS argued two theories of re-

covery before the district court: first, that the August

1989 transfer from Don and Sandra to Sandra was a

fraudulent conveyance pursuant to Michigan law, see

Mich. Comp. Laws §§ 566.11-.23; and second, in the

alternative, that Don’s payment of mortgage and prop-

erty tax obligations” from 1979 to 1985 on behalf of the

18 All of the IRS’s arguments on appeal require us to reject the

holding of Craft I. Since we are unable to do that for the reasons

discussed above, we DISMISS the government’s appeal.

2 On appeal, the government argues only that the mortgage

payments—and not the property tax payments—constituted a

fraudulent enhancement of the property.

21a

entireties property constituted a voidable, fraudulent

enhancement of the property. Sandra objected to the

fraudulent enhancement theory (she contends that she

did do early and often, see infra) on the grounds that

the IRS had not raised the theory until immediately

prior to trial, and that the theory went beyond the

scope of this court’s remand. The district court rejected

Sandra’s objection, and found that although the IRS

had not raised specifically the fraudulent enhancement

issue in its answer to Sandra's complaint,“ the issue

was tried by the implied consent of the parties, pur-

suant to Fed. R. Civ. P. 15(b).

In her cross-appeal, Sandra argues that the district

court erred by permitting the IRS to argue on remand

its new theory of fraudulent enhancement. First,

Sandra asserts that the fraudulent enhancement issue

went beyond the scope of this court’s remand. Second,

Sandra claims that she did not consent to trial of the

new theory, but rather “objected repeatedly, vehe-

mently and at every possible opportunity to the IRS

raising a new issue for the first time on remand.”

Appellee’s Br. at 16. For the reasons that follow,

Sandra’s arguments fail.

1. Scope of Remand

Sandra contends that the only issue before the

district court on remand was whether she and Don

fraudulently transferred the property to Sandra when

they executed the August 28, 1989 quitclaim deed. See

Craft I, 140 F.3d at 644. The IRS claims that this court

left open the broader question of whether any fraudu-

21 The IRS had raised the fraudulent conveyance argument as

a defense in its answer to Sandra’s complaint.

22a

lent conveyance occurred with regard to the Berwyck

Property. The Craft I court stated as follows:

[Tjhere remains an issue of whether a fraudulent

conveyance occurred in this case, an issue that the

district court did not address. Under Michigan law,

one spouse cannot use the doctrine of tenancy by the

entirety to defeat the rights of a judgment creditor.

Such a fraudulent transfer can be set aside

The issue of whether a fraudulent conveyance oc-

curred in this case is a matter that should be

determined by the district court. If the conveyance

was fraudulent and therefore set aside, the IRS

could be entitled to half the proceeds of the June

1992 sale, or $59,944.10. Accordingly, upon remand,

the district court should consider whether the

Berwyck Property was transferred for fraudulent

purposes.

Id. (citations omitted).

The district court did not exceed the scope of our

remand by considering the issue of whether Don’s

mortgage payments constituted a fraudulent transfer

under Michigan law. The last sentence of the above-

quoted section of Craft I, which directed the district

court to “consider whether the Berwyck Property was

transferred for fraudulent purposes,” does not raise

exclusively the question of whether the August 1989

transfer itself was fraudulent; rather, it permitted the

district court to consider also whether Don and Sandra

transferred the property for other fraudulent purposes

as well. See id. This conclusion is consistent with the

opening sentence of the Craft I court’s fraudulent con-

veyance discussion, which states in broad terms that

“there remains an issue of whether a fraudulent con-

23a

veyance occurred in this case.” See id. It is also con-

sistent with this court’s broad statement that, “(t]he

issue of whether a fraudulent conveyance occurred in

this case is a matter that should be determined by the

district court.” See id. As we read this language, Craft

I directed the district court to investigate whether the

facts of this case constituted a fraudulent conveyance

under Michigan law. This is exactly what the district

court did. It found that under Michigan law, the

August 1989 transfer could not be fraudulent, because

Michigan courts have “consistently held that creditors

have no right to complain of a debtor’s disposition of

exempt i. e., entireties] property because such property

could not be reached to satisfy debts had it remained in

the debtor’s hands.” See, e.g., Cross v. Commons, 336

Mich. 665, 59 N.W.2d 41, 43 (1953) (en banc). The court

went on, however, to find that Don’s mortgage pay-

ments were fraudulent under an exception to that rule.

See McCaslin, 292 N.W. at 699. The court’s considera-

tion and application of Michigan fraudulent conveyance

law was in harmony with the scope of the Craft J

court’s remand, and we reject Sandra’s contention

otherwise.

2. Implied Consent

Sandra also argues that the district court erred in

permitting the IRS to argue its fraudulent enhance-

ment theory upon remand because she did not consent

to trial of the issue. The district court found that

Sandra had impliedly consented to trial of the fraudu-

lent enhancement theory by failing to object to the

IRS's claim until after the trial; by consenting to the

Joint Final Pretrial Order, which indicated that the

enhancement claim was a controverted issue for trial;

and by failing to object at trial to the government’s

24a

evidence that Don made payments on behalf of the

entireties property from 1979 to 1985, which “could

have been relevant only to the Government’s con-

tention that Don’s payments into the entireties pro-

| erty from 1979 through 1985 while he was insolvent

were fraudulent.” Sandra asserts that she objected to

the fraudulent enhancement theory at the final pretrial

conference, “an event for which there is unfortunately

no recorded transcript,” Appellee’s Br. at 18, and in her

post-trial brief. Sandra also alleges that the fact that

the Joint Final Pretrial Order lists among the “Con-

troverted and Unresolved Issues for Trial” the issue of

whether Don made fraudulent conveyances into the

tenancy by the entirety at a time when he was insol-

vent actually shows that she objected to the issue prior

to trial. Sandra further argues that she did not object

to the enhancement theory at trial because the judge

had indicated that the trial would be “relaxed,” and that

he had ordered the parties to submit their legal argu-

ments as part of their post-trial briefs rather than

present them at trial. Lastly, Sandra argues that the

evidence that the government put on at trial did not

necessarily go to the enhancement issue; thus, her

failure to object to it did not imply her consent to try

the issue.

“Fed. R. Civ. Pro. [sic] 15(b) states that issues tried

by the express or implied consent of the parties shall be

treated in all respects as if they had been raised in the

pleadings.” Carlyle v. United States, 674 F.2d 554, 556

(6th Cir. 1982); see also Fed. R. Civ. P. 15(b). Although

the parties agree that this court reviews for clear error

the district court’s finding that the IRS was not pre-

cluded from raising the fraudulent enhancement issue,

we think the better view is that we review for abuse of

25a

discretion the district court’s decision regarding

whether an issue not raised in the pleadings has been

tried by the implied consent of the parties. See

Moncrief v. Williston Basin Interstate Pipeline Co., 174

F.3d 1150, 1160 (10th Cir. 1999); 6A Charles Alan

Wright, Arthur R. Miller & Mary Kay Kane, Federal

Practice and Procedure § 1493, at 41 (2d ed. 1990).

The district court did not abuse its discretion in

finding that Sandra impliedly consented to trial of the

fraudulent enhancement theory. First, because the

theory of fraudulent enhancement constitutes a well-

established exception to Michigan fraudulent convey-

ance law, see supra, Sandra was on notice from the time

of the government’s answer to her complaint that

fraudulent enhancement could be at issue in the case.

Further, as the government points out, although

Sandra agreed that whether the government should

prevail on the enhancement theory was a controverted

issue for trial, she did not move to include the question

of whether the government could argue the theory as a

controverted issue in the Joint Final Pretrial Order.

Finally, although the trial on remand was, in the words

of the court, “more casual than a trial sometimes

looks”—the trial took place with the parties, witnesses,

and the judge sitting around a table in the courtroom—

the court admonished the parties that “it’s still a federal

court, and all the rules apply.“ See Carlyle, 674 F. ad at

556 (finding that where defendant raised defense for

first time at trial, and then offered evidence of the

defense, defense was argued by implied consent of the

plaintiff for purposes of Rule 15(b)). Cf. Yellow Freight

Sys., Inc. v. Martin, 954 F.2d 353, 358 (6th Cir. 1992).

Regardless of whether Sandra objected in a timely

fashion to the government’s theory, her argument fails

26a

because she cannot show that she has been prejudiced

by the district court’s decision to permit the IRS to

argue the enhancement theory. Under Rule 15(b), “a

district court may consider claims outside of those

raised in the pleadings so long as doing so does not

cause prejudice.” Cruz v. Coach Stores, Inc., 202 F.3d

560, 569 (2d Cir. 2000); see also 6A Wright et al., § 1493,

at 36-40 (“Prejudice in this context means a lack of

opportunity to prepare to meet the unpleaded issue.”).

Sandra cannot show that she suffered prejudice simply

because the IRS changed its legal theory. See Cruz,

202 F.3d at 569. “Instead, a party’s failure to plead an

issue it later presented must have disadvantaged its

opponent in presenting its case.” Id. (quotation marks

and citation omitted). Sandra knew of the govern-

ment’s theory prior to trial because the government

had argued it in its pre-trial brief. Further, she argued

the issue in her post-trial brief, which the district court

considered. She was not prohibited from cross-examin-

ing the government’s witnesses on the issue if she so

chose, and she does not argue that she needed to dis-

cover additional evidence to defend against the fraudu-

lent enhancement theory. Thus, the government’s

argument did not prejudice Sandra, and the issue was

tried by her implied consent.

Sandra next argues that the district court erred by

failing to find that the government’s fraudulent en-

hancement claim was not barred by the statute of

limitations contained in I.R.C. § 6502. Sandra asserts

no case law in her favor, and her claim has no merit.

We review de novo a district court’s determination

that a complaint was filed outside the relevant statute

of limitations. See Tolbert v. State of Ohio Dep’t of

27a

Transp., 172 F.3d 934, 938 (6th Cir. 1999). The parties

agree that the IRS assessed Don’s federal tax liabilities

in July 1988. At that time, § 6502 contained a six-year

limitations period within which the IRS could begin

collection proceedings on a tax assessment. See I.R.C.

§ 6502(a)(1) (1989). The statute provided that the

limitations period begins to run on the date of the

assessment of the tax. See id. Thus, under the statute

in effect at the time, the IRS had until July 1994 to

begin collection proceedings against Don. However,

Congress amended the statute in 1990 to increase the

§ 6502 limitations period to ten years. See I. R. C. § 6502

(Historical and Statutory Notes). The amendment

applied the new ten-year period to taxes already as-

sessed for which the six-year limitations period had not

expired. See id. Because Don’s tax debts had already

been assessed and the six-year limitations period had

not run on the IRS’s claim, the ten-year limitations

period applied to Don’s tax debts. Accordingly, the IRS

had until July 1998 to begin collection proceedings

against Don.

The government filed its answer to Sandra’s com-

plaint in July 1993. Because the government’s fraudu-

lent enhancement claim was tried by implied consent,

see supra, its claim must be “treated in all respects as if

[it] had been raised in the pleadings.” See Fed. R. Civ.

P. 15(b). The claim is thus deemed filed on the date that

the IRS filed its answer in July 1993, well within the

ten-year limitations period that began running in July

1988. See id.; Fed. R. Civ. P. 15(c).

C.

Sandra argues that Don's death in August 1998

makes moot the IRS’s remedy in this case. She claims

that the government stipulated at an early point in the

28a

case that its lien attached to proceeds of the sale of the

Berwyck Property to the same extent that the lien

attached to the property itself once this court found

that the tax lien did not attach to the property, see

Craft I, 140 F.3d at 643-44, the lien attached to nothing

and the IRS had nothing to enforce. In the alternative,

Sandra asserts that the Craft J holding requires that

the government’s lien against the property was unen-

forceable until either Don and Sandra died, or until the

couple divorced. See Leroy Lane II, 972 F.2d at 138.

Under Sandra’s theory, the proceeds of the sale of the

entireties property revert to Sandra upon Don’s death,

and the IRS cannot reach them. These theories fail.

We review questions of mootness de novo. See

Comer v. Cisneros, 37 F.3d 775, 787 (2d Cir. 1994). By

operation of law, the IRS’s lien attached to all of Don’s

property and rights to property. See I. R. C. § 6321.

Although this court found that Don had no individual

interest—present or future—in the entireties property,

see Craft I, 140 F.3d at 643-44, the IRS did not gain

recovery upon a theory that Don had an individual

interest in the entireties property. Rather, the district

court found that the IRS could recover the value of

mortgage payments Don made on behalf of the entire-

ties property under a fraudulent enhancement theory.

In other words, Don essentially hid funds to which the

IRS was entitled (by virtue of its lien) by investing

them in a property to which the lien could not attach.

See McCaslin, 292 N.W. at 699; accord Hoerner v.

2 The government disputes the stipulation to which Sandra

refers, arguing that it agreed to release of the proceeds upon

“resolution of the tax lien dispute.” The exact nature of the stipu-

lation is not clear from the record, but that does not impede our

resolution of the issue. See infra.

29a

Elkins (In re Elkins), 94 B.R. 982, 934-35 (Bankr. W.D.

Mich. 1988). Thus, Sandra’s arguments, which presume

that the district court awarded the IRS proceeds of the

sale of the property on the basis that Don had some

kind of individual interest in the Berwyck Property, are

misplaced. Rather, the court awarded the IRS's

remedy on the basis that Don used his own funds to

enhance the property in order to avoid paying his tax

debts.

On October 26, 1995, the district court ordered that

the government receive $50,293.94 of the escrowed

proceeds from the sale of the Berwyck Property. Sub-

sequent to this court’s remand, the district court

determined that the government was entitled to only

$6,693 from the escrowed sales proceeds. Sandra

argues that, pursuant to 28 U.S.C. § 2411, she is en-

titled to interest on the $43,600.94 (i.e., $50,293.94 less

$6,693) that the government has possessed since

October 1995.

Section 2411 provides as follows:

In any judgment of any court rendered (whether

against the United States, a collector or deputy col-

lector of internal revenue, a former collector or

deputy collector, or the personal representative in

case of death) for any overpayment in respect of any

internal-revenue tax, interest shall be allowed at the

overpayment rate established under section 6621 of

the Internal Revenue Code of 1986 upon the amount

of the overpayment, from the date of the payment or

collection thereof to a date preceding the date of the

refund check by not more than thirty days, such

30a

date to be determined by the Commissioner of

Internal Revenue.

28 U.S.C. § 2411. Citing Spawn v. Western Bank-

Westheimer, 989 F.2d 830, 834 (5th Cir. 1993), the

district court denied Sandra’s motion for an award of

interest on the basis that Is 2411] applies only to tax

refund cases.” The court reasoned that the statute’s

use of the terms “overpayment” and “payment” indi-

cates that it was intended to apply only in cases where

the taxpayer has paid a disputed tax liability and then

seeks a refund. Because Sandra brought the instant

case as an action to quiet title rather than as a tax

refund case, and because the government obtained

Sandra’s funds pursuant to a court judgment rather

than by virtue of an overpayment or payment of tax

obligations, the court rejected Sandra’s request for

interest payments. We review de novo the district

court’s interpretation of § 2411. See State of Mich. v.

United States, 141 F.3d 662, 664 (6th Cir. 1998).

Sandra asserts that § 2411 applies to her case

because the funds she will recover constitute an over-

payment, and because she will recover them pursuant

to a court judgment. The IRS responds that a plaintiff

may not collect interest against the federal government

unless it has specifically waived its sovereign immunity,

and § 2411 contains no such waiver for suits to quiet

title. In addition, the IRS argues that the funds Sandra

will receive are not an “overpayment” of taxes. See 28

U.S. C. § 2411.

A plaintiff may not recover interest from the federal

government in the absence of an express waiver of its

sovereign immunity from suit. See Library of Congress

v. Shaw, 478 U.S. 310, 314, 106 S. Ct. 2957, 92 L. Ed. 2d

31a

250 (1986). In determining whether Congress has ex-

pressly waived the government’s immunity, a court

must “construe waivers strictly in favor of the sover-

eign, and not enlarge the waiver beyond what the

language requires.” Id. at 318, 106 S. Ct. 2957 (citations

and quotation marks omitted). As the Shaw Court

noted, Congress has expressly authorized interest

claims against the government in the circumstances

described by § 2411. See id. at 318-19 n.6, 106 S. Ct.

2957. Because § 2411 authorizes payment of interest

based upon “any judgment of any court rendered

for any overpayment in respect of any internal-revenue

tax,” the question in this case becomes whether the

escrowed $43,600.94 held by the IRS constitutes an

“overpayment” with respect to an internal-revenue tax.

See 28 U.S.C. § 2411.

As did the district court, the government relies on

Spawn to suggest that an “overpayment” refers only to

tax refunds. See 989 F.2d 830. The Spawn court stated

that § 2411 “expressly authorizes awards of prejudg-

ment and postjudgment interest against the United

States in tax refund cases.” Id. at 834. But the court

made this statement only in passing—Cpawn was not a

tax case—and lifted it directly from the Supreme

Court’s description of § 2411 in Shaw. See id. (citing

Shaw, 478 U.S. at 318-19 n. 6, 106 S. Ct. 2957). In

Shaw, the Supreme Court simply cited § 2411 as one

of several examples of Congress expressly waiving

the government’s immunity with respect to interest

awards, describing § 2411 in a parenthetical as “ex-

pressly authorizing prejudgment and postjudgment

interest payable by the United States in tax-refund

cases.” Shaw, 478 U.S. at 318-19 n.6, 106 S. Ct. 2957.

This parenthetical description of a statute, contained in

32a

a footnote within dicta, is not dispositive of the meaning

of § 2411.

The language of § 2411 is broad. Cf. Jones v. Liberty

Glass Co., 332 U.S. 524, 531, 68 S. Ct. 229, 92 L.Ed. 142

(1948). Sandra, however, has not met her burden of

proof on the interest claim. The only case she cites in

support of her theory is Steiner v. Nelson, 199 F.Supp.

441 (E. D. Wis. 1961), aff d, 309 F.2d 19 (7th Cir. 1962).

In Steiner, the court held that even where the IRS

obtains funds from a taxpayer based on an illegal tax

assessinent, the taxpayer is not entitled to interest

under § 2411. See 199 F. Supp. at 441-42. Thus, as the

government notes, Steiner actually lends support to its

position. Although we are not bound by the reasoning

or result of the Steiner court, we hold that, on the facts

of this case, Sandra has failed to carry her burden of

proving her case pursuant to § 2411.

In June of this year, Sandra filed a motion with this

court to recover litigation costs pursuant to either the

Equal Access to Justice Act, 28 U.S.C. § 2412, or under

Fed. R. App. P. 38. The panel deferred ruling on the

motion until oral argument. In the motion, Sandra

argues that the government’s appeal simply asserts the

same issue, arguments, and case law rejected by the

Craft I panel. Because the government is bound by the

law of the case doctrine, Sandra claims its appeal is

brought in bad faith. The government responds that

Sandra should be denied costs because it was

substantially justified in bringing its appeal, see I.R.C.

§ 7430, and because its appeal is not frivolous, as re-

quired by Rule 38.

33a

Fed. R. App. P. 38. That rule provides:

If a court of appeals determines that an appeal is

frivolous, it may after a separately filed motion or

notice from the court and reasonable opportunity to

respond, award just damages and single or double

costs to the appellee.

In Martin v. CIR, this court warned litigants of our

“ample authority” to assess double costs and “just dam-

ages” against an appellant in a frivolous appeal: “In

future such cases this court will not hesitate to award

damages when the appeal is frivolous, or taken merely

for purposes of delay, involving an issue or issues

already clearly resolved.” 756 F.2d 38, 41 (6th Cir.

1985) (quotation marks omitted); accord Sisemore v.

United States, 797 F.2d 268, 271 (6th Cir. 1986); Wilton

Corp. v. Ashland Castings Corp., 188 F.3d 670, 676 (6th

Cir. 1999). Recently, this court concluded that even

though an appeal is not made in “bad faith,” an appellee

may garner costs if an appeal is “wholly without merit.”

Wilton Corp., 188 F.3d at 677. Although the IRS’s

appeal is precluded by both the law of the case and law

of the circuit doctrines, we have acknowledged that the

government raised colorable—if not persuasive—

arguments in its appeal, see supra. Accordingly, we

deny Sandra’s motion for costs pursuant to Rule 38.

We also deny Sandra’s motion for costs pursuant to

§ 2412. Sandra has failed to articulate why she merits

costs pursuant to that statute. Rather, she simply

reasserts her argument that the government’s appeal is

precluded at this time. Further, certain monetary

awards in tax cases may be awarded only pursuant to

LR. C. § 7430. See 28 U.S.C. § 2412(e); see also Sise-

more, 797 F 2d at 271. The provisions of § 7430 are “not

34a

automatic,” and “are limited by a whole host of con-

ditions and requirements.” Beaty v. United States, 937

F.2d 288, 292 (6th Cir. 1991). Sandra has articulated

none of these conditions or requirements, and, indeed,

has failed even to discuss whether § 7430 applies to her

case. Accordingly, we reject her motion for costs.”

IV. CONCLUSION

For the reasons discussed above, we DISMISS the

government’s appeal as precluded by both the law of

the case and law of the circuit doctrines. We further

AFFIRM the district court’s judgment, and DENY

Sandra’s motion for litigation costs brought pursuant to

Rule 38 and 28 U.S.C. § 2412.

2 The motion also sought dismissal of the government’s appeal.

We DENY Sandra’s motion in its entirety.

CONCURRENCE

RONALD LEE GILMAN, Circuit Judge, concurring in

the judgment. Because I agree that we are bound by

Craft I for the reasons that are well stated in the

court’s opinion, I concur in the judgment. I also fully

concur in the court’s disposition of Sandra Craft’s cross-

appeal. Nevertheless, I believe that the result reached

in Craft I, and that this court endorses today, is incon-

sistent with Supreme Court precedent and should be

reversed. I therefore write separately to identify the

bases for my disagreement with Craft I and to re-

commend that this case be revisited en banc.

As Judge Ryan pointed out in his dissent in Craft J,

the legal landscape has changed considerably since

1971, when this court held in Cole v. Cardoza, 441 F.2d

1337, 1343 (6th Cir. 1971), that a federal tax lien against

an individual taxpayer cannot attach to property held

by that taxpayer as a tenant by the entirety. In the

interim, the Supreme Court has made clear that the

IRS’s power under 26 U.S.C. § 6321 to attach the

individual property rights of a delinquent taxpayer is

extensive, if not plenary. See United States v. National

Bank of Commerce, 472 U.S. 713, 719-20, 105 S. Ct.

2919, 86 L.Ed.2d 565 (1985) (holding that § 6321 “is

broad and reveals on its face that Congress meant to

reach every interest in property that a taxpayer might

have”); Jewett v. Commissioner of Internal Revenue,

455 U. S. 305, 309, 102 S. Ct. 1082, 71 L.Ed.2d 170 (1982)

(concluding that Congress intended federal tax liens to

attach to “every species of right or interest protected

by law and having an exchangeable value” (citation and

36a

internal quotation marks omitted)). Although state

property law determines what rights to property a

person enjoys, federal law dictates whether a tax lien

may attach to those rights. See National Bank of

Commerce, 472 U.S. at 722, 727, 105 S. Ct. 2919.

In the years since Cole, the Supreme Court has held

that state law “legal fictions” will be ignored insofar as

the federal tax laws are concerned. See United States v.

Irvine, 511 U.S. 224, 240, 114 S. Ct. 1473, 128 L.Ed.2d

168 (1994). The Irvine Court considered whether the

federal gift tax applied to a transfer that occurred when

a mother disclaimed her interest in a trust, thereby

allowing that interest to pass to her children. Upon the

termination of a trust established by her grandfather,

Sally Irvine became entitled to a share of the trust

principal. She disclaimed part of her share, effectively

transferring that part to her children. Under Minne-

sota law, “an effective disclaimer of a testamentary gift

is generally treated as relating back to the moment of

the original transfer of the interest being disclaimed,

having the effect of canceling the transfer to the

disclaimant ab initio and substituting a single transfer

from the original donor to the beneficiary of the

disclaimer.” Id. at 239, 114 S. Ct. 1473. Thus, the share

that Irvine’s children received was considered by

Minnesota law as if it had never been possessed by

Irvine, but rather as if it had been transferred directly

from the trust to Irvine’s children.

Nevertheless, the Supreme Court held that Irvine’s

disclaimer in favor of her children was taxable, declar-

ing that “the federal gift tax is not struck blind by a

disclaimer.” Id. at 240, 114 S. Ct. 1473. In other words,

for federal tax purposes, the key inquiry is what rights

an individual actually possesses under state law, not

37a

how the state characterizes those rights. See id., see

also Drye v. United States, 528 U.S. 49, 120 S. Ct. 474,

482 n.5, 145 L.Ed.2d 466 (1999) (IIlt is not material

that the economic benefit to which the [taxpayer’s local

law property] right pertains is not characterized as

‘property’ by local law.” (quoting W. Plumb, Federal

Tax Liens 27 (3d ed. 1972) (alterations in original))).

The appropriate inquiry, then, as stated by Judge

rot in ate * is ae state-defined rights, if any,

n ve in the Berwyck property?” Craft I,

140 F.3d 638, 645 (Ryan, J., concurring). Pana, Des

Craft had the right to enter and enjoy the property to

the exclusion of all others, except for Sandra Craft. See

Mich. Comp. Laws § 557.71. If the Crafts had decided

to rent or sell the property, Don Craft would have

received half of the proceeds. See id. He further

possessed a contingent future interest, because he

would have taken the entire estate in fee simple if

Sandra had predeceased him. See Rogers v. Rogers,

136 Mich. App. 125, 356 N.W.2d 288, 298 (1984) (IElach

spouse is considered to own the whole and, therefore, is

entitled to the enjoyment of the entirety and to sur-

vivorship.”). Finally, if the Crafts had divorced, they

would have become tenants in common, and Don Craft

would have had the right to bring an action for partition

and sale. See Mich. Comp. Laws § 552.102.

The fact that Don Craft could not have independently

sold his share in the tenancy by the entirety does not

alter the fact that his rights to the property had value.

“Under the great weight of federal authority, .. .

such restraints on alienation are not effective to

prevent a federal tax lien from attaching under 26

U.S.C. § 6321.“ Bank One Ohio Trust Co. v. United

States, 80 F.3d 173, 176 (6th Cir. 1996).

38a

The majority in Craft I was aware of these rights,

and acknowledged that “a federal tax lien can attach to

a future or contingent interest in property.“ Craft I,

140 F.3d at 644. Craft I rejected the IRS’s claim, how-

ever, on the ground that “state law determines the

nature of the legal interest which a taxpayer has in a

property,” and “(ijn Michigan, it is well established that

one spouse does not possess a separate interest in an

entireties property.” Craft I, 140 F.3d at 643-44.

I believe that the Craft I majority committed a subtle

but critical error in accepting at face value Michigan’s

description of the property interests held by a tenant

by the entirety, rather than looking past that descrip-

tion to the actual substance of those interests under

Michigan law. In Irvine, the Supreme Court acknowl-

edged that, under Minnesota law, a disclaimant is con-

sidered as if she never held any interest in the property

whatsoever. Irvine, 511 U.S. at 239. Nevertheless, the

Court looked past Minnesota’s characterization of

Irvine’s property interest and held that the gift tax

could attach because, in actuality, Irvine exercised con-

trol over the disposition of the property—a right that

had unquestionable value. Id. at 240.

In contravention of Irvine, the majority in Craft I

failed to look past Michigan’s characterization of an

individual’s interest in entireties property and ignored

the substantial rights actually held by Don Craft, which

similarly had undeniable value. In other words, I

believe that the majority in Craft I was “struck blind”

by Michigan’s “legal fictions.”

To my mind, then, Craft I reached the wrong result,

and the IRS ought to have had the right to attach Don

Craft’s valuable interest in the tenancy by the entirety.

Nevertheless, two related doctrines require that I

39a

concur with the result reached by the court. The first is

the law-of-the-case doctrine, which provides that “{a]n

earlier appellate court’s decision [in the same case] as to

a particular issue may not be revisited unless ‘sub-

stantially new evidence has been introduced, . . .

there has been an intervening change of law, or

the first decision was clearly erroneous and enforce-

ment of its command would work substantial injustice.’

“United States v. Corrado, 227 F.3d 528, 533 (6th Cir.

2000) (citation omitted). Second, the law-of-the-circuit

doctrine provides that, absent an intervening change in

the law, “a panel of this court may not overrule a pre-

vious panel’s decision.” Meeks v. Illinois Cent. Gulf

R. R., 738 F.2d 748, 751 (6th Cir. 1984).

Craft I is both the law of this case and the law of the

circuit. Without delving into the precise differences

between the two, suffice it to say that the law-of-the-

circuit is the stronger of the two doctrines, and there-

fore provides the relevant test for whether Craft I can

be revisited by this panel. See LaShawn v. Barry, 87

F.3d 1389, 1395 (D.C. Cir. 1996) (“While the law-of-the-

case doctrine offers several exceptions . . . the law-of-

the-circuit doctrine is much more exacting.”). Under

the law-of-the-circuit doctrine, a subsequent panel can

only revisit an earlier panel’s decision if there has been

“a change in the substantive law or an intervening

Supreme Court decision.” Smith v. U.S. Postal Service,

766 F.2d 205, 207 (6th Cir. 1985). There has been no

substantive change since Craft I to the relevant pro-

— of either Michigan property law or federal tax

W.

The IRS argues, however, that the case of Drye v.

United States, 528 U.S. 49, 120 S. Ct. 474, 145 L. Ed. 2d

466 (1999), decided after Craft J, is a contrary, inter-

40a

vening Supreme Court decision. In that case, a delin-

quent taxpayer who was subject to a federal tax lien

disclaimed any interest in his mother’s estate after

her death, causing the estate to pass to his daughter.

Under the relevant state law, “such a disclaimer

creates the legal fiction that the disclaimant pre-

deceased the decedent,” with the consequence that

“(the disavowing heir’s creditors . . . may not reach

property thus disclaimed.” Jd. at 476. Nevertheless,

the Supreme Court relied on Irvine and disregarded

the legal fiction, holding that the taxpayer’s interest in

his mother’s estate was a “right to property” subject to

the federal tax lien.

Sandra Craft responds that Drye does not represent

a change in the law, but is simply a reaffirmation and

application of prior cases in this area. I agree. To the

extent that Drye is inconsistent with Craft J—and I

believe that it is—that inconsistency was considered,

and rejected, by this court in Craft J in its discussion of

Irvine and National Bank of Commerce. Although the

IRS is technically correct that Drye is a “subsequent,

contrary view of the law by a controlling authority,”

this formulation is incomplete. The purpose of the

intervening-controlling-authority exception is to allow a

subsequent panel of this court to respond to a new

precedent, unavailable to the prior panel, not just a new

decision. Otherwise, a loophole would exist under

which a subsequent panel could freely revisit a decided

issue simply by referencing a later Supreme Court

decision that does nothing more than restate the exist-

ing precedent. “Were matters otherwise, the finality of

our appellate decisic.is would yield to constant conflicts

within the circuit.” LaShawn, 87 F.3d at 1395 (examin-

ing the law- of-the-circuit doctrine).

4la

I disagree, however, with the court’s conclusion in

Part II.A.2. that Craft I is essentially consistent with

the Drye Court’s reasoning.” Op. at 366. The court also

asserts that “under Michigan law, Don had no individ-

ual interest in the entireties property.” Op. at 367. I do

not believe that this statement squares with either

reality or with Michigan law. As discussed above, Don

Craft in fact possessed at the very least a contingent

future interest under Michigan law and would have

taken the entire estate in fee simple had he survived

Sandra. See Rogers v. Rogers, 186 Mich. App. 125, 356

N.W.2d 288, 293 (1984).

Furthermore, the court goes too far when it suggests

that the IRS is arguing that “Drye stands for the

proposition that a federal tax lien attaches to any right

to inherit property, no matter how remote.” Op. at

368-69. A key distinction between a tenancy by the en-

tirety and a contingent expectancy is the latter’s

revocability. Although a hoped-for inheritance could be

subject to the whims of an ailing, fickle relative, the

rights associated with an entireties property are clearly

irrevocable. Such was the case with the Berwyck

property.

In sum, I believe that we are bound by the holding of

Craft I, and I therefore concur in the result reached by

the court. But I also believe that Craft I contravenes

recent Supreme Court decisions and would therefore

recommend that this case be revisited en banc.

42a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 99-1734; 99-1737

SANDRA L. CRAFT,

PLAINTIFF -APPELLEE/CROSS-APPELLANT

U.

UNITED STATES OF AMERICA,

ACTING THROUGH THE COMMISSIONER

OF INTERNAL REVENUE,

DEFENDANT -APPELLANT/CROSS-APPELLEE

Before: KEITH, COLE, and GILMAN, Circuit Judges.

JUDGMENT

On Appeal from the United States District Court for

the Western District of Michigan at Grand Rapids.

THIS CAUSE was heard on the record from the

district court and was argued by counsel.

IN CONSIDERATION WHEREOF, it is ORDERED

that the government’s appeal is DISMISSED as pre-

cluded by both the law of the case and law of the circuit

doctrines. IT IS FURTHER ORDERED that the judg-

ment of the district court regarding plaintiff Sandra

Craft’s claims is AFFIRMED.

ENTERED BY ORDER OF THE COURT

LEONARD GREEN _

LEONARD GREEN, CLERK

43a

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 99-1734/1737

SANDRA L. CRAFT,

PLAINTIFF -APPELLEE/CROSS-APPELLANT

V.

UNITED STATES OF AMERICA,

DEFENDANT-APPELLANT/CROSS-APPELLEE

Before: KEITH, COLE, and GILMAN, Circuit Judges.

The court having received a petition for rehearing en

banc, and the petition having been circulated not only

to the original panel members but also to all other

active judges of this court, and less than a majority of

the judges having favored the suggestion, the petition

for rehearing has been referred to the original panel.

The panel has further reviewed the petition for

rehearing and concludes that the issues raised in the

petition were fully considered upon the original

submission and decision of the cases. Accordingly, the

petition is denied.

ENTERED BY ORDER OF THE COURT

LEONARD GREEN, CLERK

44a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 96-1038, 96-1039

SANDRA L. CRAFT,

PLAINTIFF -APPELLANT/CROSS-APPELLEE

V.

UNITED STATES OF AMERICA,

ACTING THROUGH THE COMMISSIONER

OF INTERNAL REVENUE,

DEFENDANT -APPELLEE/CROSS-APPELLANT

Argued September 16, 1997

Decided and Filed: April 1, 1998

Before: RYAN, SUHRHEINRICH, and COLE, Circuit

Judges.

COLE, J., delivered the opinion of the court, in which

SUHRHEINRICH, J., joined. RYAN, J. (pp. 645-649),

delivered a separate concurring opinion.

COLE, Circuit Judge

R. GUY COLE, Jr., Circuit Judge. Sandra Craft ap-

peals the district court’s order granting summary

45a

judgment in favor of the United States, in which the

district court found that a federal tax lien filed against

rr

unpai ilities at to pro held b

Sandra and her husband, first as tenants by the en.

tirety and then jointly conveyed to Sandra. The United

States, in turn, cross-appeals the district court’s deter-

minations of when the lien attached and the value of

Sandra's husband's interest in the property. For the

following reasons, we REVERSE the distriet eourt's

grant of summary judgment in favor of the United

States and REMAND for further proceedings in accor-

dance with this opinion.

L

Sandra Craft and her husband, Don, purchased real

property located at 2656 Berwyck Road in Grand

Rapids, Michigan (hereinafter the “Berwyck Property”)

as tenants by the entirety on May 26, 1972 for $48,000,

encumbered by a $37,000 mortgage. Don failed to file

income tax returns for the taxable years 1979 through

1986. The Internal Revenue Service accordingly pre-

pared substitute income tax returns for these years as

permitted by the provisions of 26 U.S.C. § 6020(b) and

assessed $482,446.73 in unpaid tax liabilities against

him. The IRS advised Don of these liabilities in 1988;

Don nonetheless failed to pay these assessments. The

— nition of Sees tax Ban on Have 90,

against s property or rights in property

with the Register of Deeds in Kent County, Michigan.

tan and Sendra thereatter executed — deed

on Berwyck Property, transferring the property to

Sandra in exchange for one dollar on August 28, 1989.

On January 30, 1992, Don filed a petition for relief

46a

under Chapter 7 of the Bankruptcy Code. The bank-

ruptey court entered a discharge order on June 1, 1992

and closed the case on June 11, 1992.

Sometime later, Sandra entered into a contract to sell

the property, but a title search revealed the IRS's lien

and prevented the sale. Upon Sandra’s request, the

IRS refused to release the lien. Don then filed a motion

to reopen the bankruptcy case on August 14, 1992, and

also filed an adversary complaint against the IRS that

sought to determine the dischargeability of the federal

tax lien. Although the bankruptcy court reopened the

case, it determined on January 27, 1993 that it did

not have jurisdiction to determine the validity of the

government’s lien on the Berwyck Property because

the property never had become a part of Don’s bank-

ruptcy estate. The bankruptcy court thus closed the

case for a second time.

The IRS subsequently agreed to release its lien on

the property to enable Sandra to sell it. The IRS con-

ditioned its release on the establishment of a non-

interest-bearing escrow account containing fifty per-

cent of the proceeds of the sale and subject to the same

right, title, and interest that the federal tax lien had on

the property. Sandra finally sold the property in June

1992 and received half the proceeds, amounting to

$59,944.10.

On April 23, 1993, Sandra filed a complaint pursuant

to 28 U.S.C. § 2410(a) in the United States District

Court for the Western District of Michigan against the

United States, seeking to quiet title to the proceeds in

the escrow account. The government asserted in

response that the federal tax lien attached to Don’s

interest in the property, even though Don and Sandra

had held the property as tenants by the entirety, and

47a

that it was entitled to half the proceeds from the sale of

the property. The government further asserted that

Don’s conveyance to his wife was fraudulent.

Sandra filed a motion for summary judgment on

September 10, 1993, arguing that the completion of the

bankruptcy proceedings estopped the government’s

ability to bring an action for fraudulent conveyance. On

September 13, 1993, the government also filed a motion

for summary judgment, contending that the federal tax

lien had attached to Don’s interest in the property.

21, 1994, the district court issued an opinion and order

on September 12, 1994, denying Sandra’s motion for

summary judgment and granting the government’s

motion. The district court found that the federal tax

lien attached to the property at the time Don and

Sandra conveyed the property to Sandra, stating, in

essence, that this conveyance effectively: (1) termi

nated the tenancy by the entirety; (2) after which, each

spouse owned an equal one-half interest; and (3) was

followed by the conveyance of the property to Sandra.

The federal tax lien thus attached at the moment in

time that Don possessed a separate one-half interest in

the property.

On September 22, 1994, Sandra filed four motions:

the first sought either to amend the judgment to

include the conclusions of law supporting denial of her

motion for judgment against the government’s action

for fraudulent conveyance, or, in the alternative, a new

trial; the second sought to amend the judgment to

include a determination of the value of Don’s interest in

the property on the date when Don and Sandra termi-

nated the tenancy by the entirety; the third sought to

refer the case to the bankruptcy court for it to make

48a

this determination; and, the fourth sought to stay exe-

cution of the judgment pending resolution of the other

motions.

The district court entered another opinion and order

on November 17, 1994, denying Sandra’s first motion

and stating that, having resolved the matter on other

grounds, it did not need to decide whether a fraudulent

conveyance had occurred. However, the court granted

Sandra’s second motion, concluding that further pro-

ceedings were necessary to determine the value of

Don’s interest at the time of the termination of his joint

tenancy. Still, the court found that it, and not the

bankruptcy court, was the proper forum to make this

determination and thus denied Sandra’s third motion.

Finally, the court granted Sandra’s fourth motion and

stayed execution of the judgment.

Following a telephonic hearing on September 11,

1995, the district court issued an opinion on October 26,

1995, finding that the government held a valid lien on

the interest Don held in the property on August 28,

1989—the date of the termination of the entireties

estate and the subsequent conveyance to Sandra. The

parties stipulated that the property had a fair market

value of $120,000 and an outstanding mortgage balance

of $19,412.12 on August 28, 1989. The district court

thus determined that Don’s interest in the property at

the time of the conveyance was $50,293.94 and entered

a final judgment awarding the government this amount.

Sandra timely filed her appeal on December 22, 1995.

The government timely filed its notice of cross-appeal

on December 26, 1995.

49a

II.

We review de novo a district court’s grant of

summary judgment. Harrow Prods., Inc. v. Liberty

Mutual Ins. Co., 64 F.3d 1015 (6th Cir.1995); Copeland

v. Machulis, 57 F.3d 476, 479 (6th Cir. 1996).

judgment is appropriate if the record shows “that the

moving party is entitled to a judgment as a matter of

law.” Fed.R.Civ.P. 56(c). We assess the record in the

light most favorable to the non-movant, drawing all

reasonable inferences in its favor. See Matsushita Elec.

Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,

587-88, 106 S. Ct. 1848, 1856-57, 89 L.Ed.2d 588 (1986).

III.

A.

The Internal Revenue Code provides for the creation

of a federal tax lien on a taxpayer’s property, stating

that: lil any person liable to pay any tax neglects or

refuses to pay the same after demand, the amount

shall be a lien in favor of the United States upon all

property and rights to property, whether real or

personal, belonging to such person.” 26 U.S.C. § 6821.

Under the succeeding section, the Code further pro-

vides that the lien generally arises when the assess-

ment is made, and it continues until the taxpayer’s

liability “is satisfied or becomes unenforceable by

reason of lapse of time.” 26 U.S.C. § 6322.

Federal tax law “creates no property rights but

merely attaches consequences, federally defined, to

rights created under state law.” United States v. Bess,

357 U.S. 51, 55, 78 S. Ct. 1054, 1057, 2 L.Ed.2d 1135

(1958). Thus, in order to determine whether property is

subject to a federal tax lien, “‘state law controls in

50a

determining the nature of the legal interest which the

taxpayer had in the property.’ “Aquilino v. United

States, 363 U.S. 509, 513, 80 S. Ct. 1277, 1280, 4 L.Ed.2d

1365 (1960) (quoting Morgan v. Commissioner, 309 U.S.

78, 82, 60 S. Ct. 424, 426, 84 L.Ed. 585 (1940). JOlnce

it has been determined that state law creates sufficient

interest in the [taxpayer] to satisfy the requirements of

[the statute], state law is inoperative,’ and the tax con-

sequences thenceforth are dictated by federal law.”

United States v. National Bank of Commerce, 472 U.S.

713, 722, 105 S. Ct. 2919, 2925, 86 L.Ed.2d 565 (1985)

(quoting Bess, 357 U.S. at 56-57, 78 S. Ct. at 1057- 58).

Under federal tax law, the government’s tax liens

attach to every interest in property a taxpayer might

have, regardless of whether that interest is less than

full ownership or is only one among several claims

of ownership. United States v. Safeco Ins. Co. of

America, Inc., 870 F.2d 338, 341 (6th Cir.1989) (citing

National Bank of Commerce, 472 U.S. at 725, 730, 105

S. Ct. at 2926-27, 2929).

B.

In the present case, Sandra and her husband held the

Berwyck Property as tenants by the entirety. Under

Michigan law, a tenancy by the entirety can be held

only by a husband and wife, who possess an interest

in the property under single title with a right of sur-

vivorship. See Sanford v. Bertrau, 204 Mich. 244, 169

N. W. 880 (1918); Matter of Grosslight, 757 F.2d 778, 775

(6th Cir.1985). In Michigan, a tenancy by the entirety

can be created only by a written instrument of con-

veyance, which produces unity of persons, time, title,

interest, and possession. See Rogers v. Rogers, 136

Mich. App.125, 356 N.W.2d 288, 292-93 (1984). Neither

5la

husband nor wife acting alone can alienate any interest

in the property, nor can creditors of one spouse levy

upon the property. See Grosslight, 757 F.2d at 773.

Further, creditors of one spouse cannot reach that

spouse’s share of proceeds from a foreclosure sale of an

entireties property. See Muskegon Lumber & Fuel Co.

v. Johnson, 338 Mich. 655, 62 N.W.2d 619, 623 (1954). If

a marriage terminates in divorce, however, Michigan

law converts an entireties estate into a tenancy in com-

mon by operation of statute. See M.C.L.A. § 552.102;

United States v. Certain Real Property Located at 2525

Leroy Lane, 910 F.2d 343, 351 (6th Cir.1990) ( “Leroy

Lane I”). Husband and wife can also terminate an

entireties estate by joint conveyance of the property b

husband and wife. See Leroy Lane I, 910 Fade at 351. d

Although the government may levy entireties pro-

perty for nonpayment of real estate taxes on the real

property itself under Michigan law, see, e.g., Robbins v.

Barron, 32 Mich. 36 (1875), we have held that the

federal government may not, under Michigan law,

attach a lien to the entireties property to satisfy the

personal tax liability of a single spouse. See Cole v.

Cardoza, 441 F.2d 1337, 1343 (6th Cir. 1971). In Cole,

the IRS filed a lien against property held by a husband

and wife as tenants by the entirety for unpaid tax

a against the husband. See id. at 1338. We

the federal tax lien does not attach to the subject

property owned by [a husband] and [wife] by the

entirety, because the Government’s tax lien is

against [the husband] only. If the lien constitutes a

cloud on the title to the property, [husband and

wife] are therefore entitled to have the lien declared

a nullity as to the property.

52a

Id. at 1343. In Cole, we concluded that “the lien is with-

out legal effect as it pertains to [the husband’s and

wife's] house.” Id. at 1344.

After Cole, we had occasion to consider again the

entireties estate under Michigan law in Leroy Lane I.

See 910 F.2d at 343. In that case, the United States

seized entireties property under a criminal forfeiture

statute; however, the district court awarded all the

proceeds from the forced sale of the property to the

innocent spouse. See id. at 344. On appeal, we found

that the government’s position with respect to the

forfeiture was most analogous to the position of a judg-

ment creditor of one spouse. See id. at 351. In

discussing the entireties estate, we reiterated that

“entireties property may not be attached to satisfy the

personal tax liability of a single spouse,” id. at 350

(citing Cole, 441 F.2d at 1343), and noted that the

innocent spouse had “not only an indivisible interest in

the entireties property, but also a survivorship interest

which would entitle her to sole ownership of the pro-

perty upon her husband’s death.” Id. at 347.

Upon remand, the district court, having discovered

that the couple divorced, again awarded all the pro-

ceeds to the innocent spouse based on the division of

property as set out in the divorce decree. See United

States v. Certain Real Property Located at 2525 Leroy

Lane, 972 F.2d 136, 137 (6th Cir.1992) (“Leroy Lane

II”). In Leroy Lane II, we again reiterated that, under

Michigan law, a judgment creditor cannot levy against

the entireties estate to satisfy one spouse’s debt and

further noted that the government’s interest does not

come into being until the entireties estate is destroyed.

See 972 F.2d at 138. We thus held that the government

was entitled only to whatever interest the debtor-

53a

spouse held after the entireties estate was destroyed; in

Leroy Lane II, that was a zero amount because the

debtor- spouse received no interest in the property pur-

suant to the divorce decree.’ See id.

C.

Turning to the present case, Sandra argues on appeal

that Cole remains controlling authority and that be-

cause Michigan substantive real property law has not

changed, the IRS’s tax lien could not attach to Don’s

interest in the Berwyck Property. It was error, Sandra

continues, for the district court to find that the lien

attached because it was a nullity as to the entireties

property. Thus, Sandra disputes the district court’s

finding that upon the joint conveyance of the Berwyck

Property to Sandra, the tenancy by the entirety was

terminated and Don—for a moment in time—owned a

one-half interest in the property to which the lien could

attach.

The United States, on the other hand, goes a step

further than the district court, contending that the lien

attached to the Berwyck Property at the time the lien

arose. In so arguing, the United States relies on two

Supreme Court decisions in which the federal govern-

ment’s interests have trumped state law. See United

States v. Irvine, 511 U.S. 224, 114 S. Ct. 1473, 128

L.Ed.2d 168 (1994); United States v. Rodgers, 461 U.S.

677, 103 S. Ct. 2132, 76 L.Ed.2d 236 (1983).

We nonetheless voiced concern about the United States’ lack

of opportunity to assert its entireties interest prior to the Michigan

Cireuit Court’s grant of the divorce and remanded the case for

such evidence as was necessary to insure total disclosure to the

Michigan Circuit Court. See Leroy Lane II, 972 F. 2d at 188.

54a

The United States cites Irvine for the proposition

that federal laws cannot be avoided or “struck blind” by

state-law legal fictions. 511 U.S. at 240, 114 S. Ct. at

1482. Irvine addressed the issue of whether a tax-

payer’s disclaimer of her remainder interest in a

trust—which caused her interest to be distributed to

her children—resulted in a taxable gift. See id. The

taxpayer argued that under Minnesota law, an effective

disclaimer was valid ab initio, as if the disclaiming party

never owned the property; thus, there was no taxable

transfer. See id. at 227-28, 114 S. Ct. at 1475-76. The

Supreme Court disagreed. In citing Irvine, the govern-

ment thus contends that Michigan’s recognition of the

entireties estate—like Minnesota’s disclaimer—is in-

valid because it is a legal fiction that facilitates the

circumvention of federal tax laws.

In Rodgers, a case also cited by the government, the

Court held that homestead rights under Texas law did

not protect property—or a nondelinquent spouse—from

in rem proceedings under 26 U.S.C. § 7403. See 461

U.S. at 692-700, 103 S. Ct. at 2142-46. The Court based

its ruling on a broad interpretation of the tax laws,

which permitted the government to “subject any pro-

perty, of whatever nature, of the delinquent, or in

which he has any right, title, or interest, to the payment

of such tax or liability.” Id. at 692, 103 S. Ct. at 2142.

The Court did, however, formulate a mechanism where-

by the nondelinquent spouse would be compensated.

See id. at 710-11, 103 S. Ct. at 2151-52. Moreover, the

Court recognized that tenancies by the entirety posed a

problem distinct from that of homestead estates, in that

neither spouse owns an independent interest in an

entireties property while both spouses own independ-

55a

ent interests in a homestead estate. See id. at 702 n. 31,

103 S. Ct. at 2147 n. 31.

We are not persuaded that the Supreme Court de-

cisions cited by the United States have any effect

whatsoever on the government’s ability to attach a lien

to an entireties estate, because these cases do not alter

the basic tenet that state law governs the issue of

whether any property interests exist in the first place.

See id. at 683, 103 S. Ct. at 2137. Irvine and Rodgers

stand for the proposition that once a property interest

exists under state law, state law cannot interfere with

attachment of a lien to that property interest—a matter

that is governed by federal law. See id. Irvine and

Rodgers do not support the proposition that federal law

can be used to trump a state’s definition of a property

interest.

In Michigan, it is well established that one spouse

does not possess a separate interest in an entireties

property. See, e.g., Rogers, 356 N. W. ad at 292-93. This

principle of Michigan law has not been overruled by

Michigan courts, nor trumped by federal law, despite

the United States’ arguments to the contrary. Because

Michigan law does not recognize one spouse’s separate

interest in an entireties estate, a federal tax lien against

one spouse cannot attach to property held by that

spouse as an entireties estate.

D.

In the alternative, the government argues—and the

district court held—that upon the conveyance of the

Berwyck Property to Sandra, the entireties estate

terminated and Don, for a transitory moment, had an

undivided one-half interest in the property, to which

the lien could attach.

56a

Although the entireties estate was terminated upon

conveyance of the Berwyck Property to Sandra, Don’s

interest in the property terminated at the same time.

We are unaware of any precedent indicating that an

entireties estate is automatically transformed into a

tenancy in common as an intermediary step in the

conveyance of the property. To the contrary, it is clear

that at the time the entireties estate terminated,

Sandra was vested “with full and complete title.”

Hearns, 53 N.W.2d at 320. Thus, Don never held an

interest in the Berwyck Property to which the United

States’ lien could attach.

E.

Despite our conclusion that the IRS lien could not

attach to the entireties property per se, an issue re-

mains regarding whether the lien attached to any

inchoate interest that Don possessed in the entireties

property. It is axiomatic that a federal tax lien can

attach to “rights to property” as well as to the property

itself. See, e.g., National Bank of Commerce, 472 US.

at 730, 105 S. Ct. at 2929. It follows that a federal tax

lien can attach to a future or contingent interest in

property. See, e.g., Safeco Ins. Co., 870 F.2d at 341.

Although federal law controls whether an interest

constitutes such a “right to property,” see National

Bank of Commerce, 472 U.S. at 727, 105 S. Ct. at 2933

(citation omitted), state law determines the nature of

the legal interest which a taxpayer has in a property.

See Aquilino, 368 U.S. at 513, 80 S. Ct. at 1280. Under

federal law, then, any separate future interest that Don

had in the Berwyck Property would be subject to

attachment; however, the nature of that interest must

be determined by Michigan law.

57a

Michigan law does not recognize a severable future

interest held by one spouse in an entireties property.

See Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880,

881 (1918) (“We think the better doctrine is that the

right of survivorship is merely an incident of an estate

by entirety, and does not constitute a remainder, either

vested or contingent.”); see also Budwit v. Herr, 339

Mich. 265, 68 N.W.2d 841, 844 (1954) (citing Sanford,

169 N. W. at 881). But see Leroy Lane I, 910 F. 2d at 352

(Wae have found no cases which would preclude the

attachment of a creditor’s lien on one spouse’s interest

which could be satisfied to the extent of that spouse’s

—— — —ů

statements in Leroy Lane I t

be construed to indicate the pervs yr pgp om

interest subject to attachment in an entireties estate,

see Fischre v. United States, 852 F. Supp. 628, 630

(W.D. Mich. 1994), we are bound to define Don’s future

interests in the Berwyck Property under Michigan law.

See gree 863 U.S. at 513, 80 S. Ct. at 1280.

Michigan law, as set out by the Michigan Supreme

— 1 —— Sout

ingly, under Michigan law, Don did not possess a

separate future interest in the Berwyck Property;

therefore, the federal tax lien could not attach to a

future interest that did not exist under Michigan law.

IV.

Despite the fact that the tax lien did not attach to the

Berwyck Property, there remains an issue of whether a

fraudulent conveyance occurred in this case, an issue

that the district court did not address. Under Michigan

law, one spouse cannot use the doctrine of tenancy by

the entirety to defeat the rights of a judgment creditor.

,

58a

See McCaslin v. Schouten, 294 Mich. 180, 292 N. W. 696,

698 (1940); Morris v. Wolfe, 48 Mich. App. 40, 210

N. W. 2d 16, 17 (1973). Such a fraudulent transfer can be

set aside. See Mich. Comp. Laws § 566.1901).

The issue of whether a fraudulent conveyance oc-

curred in this case is a matter that should be deter-

mined by the district court. If the conveyance was

fraudulent and therefore set aside, the IRS could be

entitled to half the proceeds of the June 1992 sale, or

$59,944.10. Accordingly, upon remand, the district

court should consider whether the Berwyck Property

was transferred for fraudulent purposes.

V.

For the foregoing reasons, we REVERSE the distriet

court’s grant of summary judgment in favor of the

United States, in which the distriet eourt determined

that the United States’ tax lien attached to entireties

property at the time that Sandra and Don Craft con-

veyed the property to Sandra, and REMAND to the

district court for further proceedings in accordance

with this opinion.

RYAN, Circuit Judge, concurring.

In my judgment, there can be no doubt that Don

Craft had valuable property interests in the 2656

Berwyck Road home and that he ceded those interests

for little or no consideration, most likely intending to

defeat the IRS lien at issue here. Binding authority,

sound reasoning, and equitable principles require that

the IRS be awarded some portion of the proceeds of the

sale of the 2656 Berwyck home if Don Craft paid for

entirety property instead of paying his taxes, and then

transferred his interest in the property to his wife to

avoid the consequences of his tax delinquency. I agree

with the majority that summary judgment should not

have been granted and that this case should be

remanded for further proceedings; however, the

remand should be for the sole purpose of determining

whether Don Craft’s conduct was fraudulent.

L

The majority relies on Cole v. Cardoza, 441 F.2d 1337

(6th Cir. 1971), in holding that “a federal tax lien cannot

attach to property held as a tenancy by the entirety,”

and thus that the IRS could have no interest in the

Berwyck home. However, binding cases decided since

1971 clearly state a different doctrine: (1) state pro-

perty law determines which rights, in the bundle of

rights we call “property,” a person may exercise; (2) an

IRS lien attaches to all those rights; (3) and state-law

“fictions” cannot serve to defeat a valid lien. In this

case, Don Craft had a contingent remainder. He had a

right to the entire Berwyck property if his wife pre-

deceased him, and he had a right to half the proceeds of

the sale or lease of the home if the property were ever

sold or leased. Although Don Craft did not have the

60a

whole bundle of property rights, it cannot be denied

that he had some of them. And, most assuredly, the IRS

could attach these rights.

Pursuant to the Internal Revenue Code, the IRS

must attach a tax lien to all property or rights to

property, real or personal, of any person who neglects

or refuses to pay his income tax after demand. See 26

U.S.C. § 6321. As the Supreme Court has noted, Con-

gress intended by this provision “to reach every

interest in property that a taxpayer might have.”

United States v. National Bank of Commerce, 472 US.

713, 720, 105 S. Ct. 2919, 2924, 86 L.Ed.2d 565 (1985). In

fact, “‘[s)tronger language could hardly have been

selected to reveal a purpose to assure the collection of

taxes.’” Id. at 720, 105 S. Ct. at 2924 (citation omitted).

Although state law must be relied on in determining

what constitutes “property or rights to property”

attachable by the IRS, this is hardly surprising con-

sidering the fact that there is no federal law of pro-

perty. See United States v. Certain Real Property

Located at 2525 Leroy Lane, 910 F. 2d 343, 347, 351 (6th

Cir. 1990) (Leroy I). It also should be no surprise that

state-law doctrines that would prevent ordinary credi-

tors from reaching state-defined interests cannot

prevent a federal tax lien from attaching. See United

States v. Irvine, 511 U.S. 224, 240, 114 S. Ct. 1478, 1482,

128 L.Ed.2d 168 (1994); National Bank of Commerce,

472 U.S. at 727, 105 S. Ct. at 2927-28; United States v.

Mitchell, 403 U.S. 190, 205, 91 S. Ct. 1763, 1771-72, 29

L.Ed.2d 406 (1971).

Thus, the first question in this case should be: what

state-defined rights, if any, did Don Craft have in the

Berwyck property? Under Michigan law, he had the

rights to use and enjoy the property in tandem with

6la

Sandra Craft, to exclude all others from the property

save Sandra Craft, to share equally in the proceeds of

any lease or sale of the home, and to receive the entire

estate upon the death of Sandra Craft. See Mich. Comp.

Laws § 557.71; Rogers v. Rogers, 186 Mich. App. 125,

356 N.W.2d 288, 293 (1984). The majority implicitly

acknowledges that Don Craft had individual rights

when it states that “a husband can convey his interest

to his wife.” (Emphasis added.)

However, it does appear that a federal tax lien only

attaches to exclusive rights in property held by a

delinquent taxpayer. See (Leroy I), 910 F.2d at 351. In

sively exercise any of the incidents of property owner-

ship, he has nothing to attach. The only rights ex-

clusively held by Don Craft were future interests—the

right to share in future proceeds and right of sur-

vivorship.

Arguably, Don Craft did not have the right to sell or

entirety property, including future interests. See

Budwit v. Herr, 389 Mich. 265, 63 N.W.2d 841, 844

(1954); Zeigen v. Roiser, 200 Mich. 328, 166 N.W. 886,

890 (1918); Bauer v. Long, 147 Mich. 351, 110 N. W. 1059,

1060 (1907); Tamplin v. Tamplin, 168 Mich. App. 1, 413

N.W.2d 713, 715 (1987). However, the proposition that

a spouse’s future interest is inalienable does not appear

to have ever been the rule of decision in any case de-

cided by Michigan courts. For instance, in all four cases

cited above, the interest at issue was the present right

to title in the property, not a future interest, and thus

62a

insofar as the language could be read broadly to pre-

clude separate future contingent interests, it is dicta.

Additionally, even if Michigan law forbids the alienation

or encumbrance of one spouse’s contingent interest,

this merely lessens the value of that interest, it does

not necessarily make the interest worthless. That is,

even an inalienable contingent interest is likely to have

some value. Thus, I am not confident that a spouse’s

future interest in a tenancy by the entirety is truly

unencumberable, and even if it is, this still does not

mean that the spouse has no valuable interest that may

be attached under federal tax law.

This conclusion is required, I think, by Bank One

Ohio Trust Co. v. United States, 80 F.3d 173 (6th Cir.

1996), which indicates that inalienability is immaterial

in determining whether a federal tax lien can attach to

property rights. There, despite the fact that the Ohio

Supreme Court had declared that a trust beneficiary

“does not have any interest in [a spendthrift trust such

as the one in Bank One] because the settlor did not

give the beneficiary an interest,” Domo v. McCarthy, 66

Ohio St. 3d 312, 612 N.E.2d 706, 709 (1993) (emphasis

added), and despite the fact that the trust was neither

alienable or encumberable, this court held that the IRS

could attach the income from the trust because ti.

delinquent beneficiary did have an interest in the trust

despite its inalienability. Bank One, 80 F.3d at 176. As

we noted:

Restraints on alienation are not effective to

prevent a federal tax lien from attaching. . . .

. . . Thus when Congress says, as it has done in

§ 6321, that an unpaid tax “shall” constitute a lien

upon “all” of a delinquent taxpayer’s property or

63a

rights to property, it follows that the tax is a lien

both on property that is alienable under state law

and on property that is not.

Id.

Similarly, in Leroy Lane I, 910 F.2d 343, this court

held that, although the federal government could not

attach an entirety estate, the government would be

entitled to the property if the innocent spouse pre-

deceased the debtor spouse or if the marital estate was

otherwise “terminated by dissolution of the marriage or

joint conveyance.” Jd. at 351. In effect, then, the

government in Leroy Lane I had a lien on the debtor

spouse’s contingent remainder. Thus, regardless

whether Don Craft could alienate his contingent re-

mainder pursuant to Michigan law, under federal tax

law the IRS lien attached to it in 1989. This future

interest was a rightl ] to property” as defined by

— law, and attachable as provided by federal

W.

made clear, such state-law fictions, while they are

perhaps valid defenses against state-law creditors, have

no effect on an IRS lien. For example, in National

Bank of Commerce, the fact that no Arkansas creditor

could reach funds of a taxpayer-debtor that were held

in a joint account with other nondebtor individuals did

not prevent the IRS from attaching the entire account.

See 472 U.S. at 726, 105 S. Ct. at 2927. The Court deter-

mined that the taxpayer’s unconditional and unilateral

right to withdraw money from the joint bank account

64a

was “property” or a “right[ ] to property” for purposes

of section 6331(a) of the I. R. C. (a section analogous to

6321). Id. at 725-26, 105 S. Ct. at 2926-27. Thus, since

the taxpayer could at any time withdraw all the money

from the account without permission from the joint

account holders, the IRS could likewise levy the entire

account. Again, state law determines the practical

incidents of certain types of ownership, but the state-

law consequences of those determinations vis—vis

creditors are of no concern in the application of federal

tax law. See id. at 723, 105 S. Ct. at 2925-26.

Although the majority disagrees, I am satisfied that

United States v. Irvine, 511 U.S. 224, 114 S. Ct. 1478,

128 L.Ed.2d 168 (1994), also undermines Sandra Craft’s

position. In Irvine, the Court reiterated that legal

fictions—although valid protection from creditors

under state law—could not be used to avoid federal tax

liabilities. There, the taxpayer was the beneficiary of a

trust established by her grandfather in 1917. Jd. at 226,

114 S. Ct. at 1475. The income from the trust was to go

to the taxpayer’s grandmother and her aunts and

uncles (the settlor’s wife and children). Upon the death

of the last of these primary beneficiaries, the trust was

to terminate and the funds were to be divided among

the surviving grandchildren, including the taxpayer,

Sally Irvine. Id. at 227, 114 S. Ct. at 1475-76. After the

trust terminated, but before its assets were distributed,

Irvine disclaimed her interest in favor of her children.

Such disclaimers were valid under state law, and had

the effect of removing the disclaiming party from the

transaction altogether, id. at 239-40, 114 S. Ct. at 1481-

82; thus, state law deemed the transfer to be directly

from Irvine’s grandfather to her children. Id.

65a

The I. R. C. section in question taxed “all gratuitous

transfers, by whatever means, of property and

rights of significant value.” Id. at 233, 114 S. Ct. at 1478

(emphasis added). An exception existed for disclaimed

interests in property if the disclaimer was effective

under local law and made within a reasonable time after

knowledge of the existence of the transfer. Jd. The

IRS claimed that the transfer from Irvine to her

children was subject to the gift tax because it was not

made within a reasonable time after her knowledge of

her interest in the estate. Id. at 229, 114 S. Ct. at 1476.

The Court held that the 47-year delay in disclaimi

her interest was not reasonable, and thus upheld the

denial of Irvine’s request for a refund. Id. at 235-36,

114 S. Ct. at 1479-80.

Significantly, the Court rejected Irvine’s argument

that her disclaimer related back to the moment of the

original transfer of the interest to her as provided by

state law. Id. at 239, 114 S. Ct. at 1481-82. This “legal

fiction” implemented the state’s policy to defeat the

claims of the disclaimer’s creditors. Id. at 240, 114

S. Ct. at 1482. However, the state-law rationale for this

legal fiction provided no justification vis—vis the

federal gift tax, which was meant to curb estate-tax

abuse. Id. “Since the reasons for defeating a dis-

claimant’s creditors would furnish no reasons for

defeating the gift tax as well, . . . Congress [must not

have intended] to incorporate state law fictions as

touchstones of taxability when it enacted the Act.” Id.

Nothing in the majority opinion distinguishes Irvine

or National Bank of Commerce. Nor does the majority

address cases previously decided by this court, such as

Bavely v. United States (In re Terwilliger’s Catering

Plus, Inc.), 911 F.2d 1168, 1171 (6th Cir. 1990) and

66a

United States v. Safeco Insurance Co., 870 F.2d 338,

341 (6th Cir. 1989), which support the above analysis.

Michigan’s tenancy by the entirety doctrine serves to

protect the marital home from being compromised to

satisfy the debts of one spouse. This rationale does not

furnish any reason to defeat the federal tax code when

the operation of the I.R.C. will not terminate the en-

tirety estate. Although the majority argues that an

IRS lien on one spouse’s future interest will place a

cloud on the title to the marital home, even this would

not interfere with the couple’s use and enjoyment of

their property. And, even if the possible detrimental

effect of the IRS lien on the couple’s ability to sell their

home were an appropriate consideration here, I believe

that a properly filed lien, identifying only the delin-

quent taxpayer’s interest and giving no indication of

joint liability for the debt, sufficiently mitigates this

possibility. Moreover, the adverse effect of allowing a

lien on one spouse’s future interest is further lessened

by the fact that, in Michigan, it appears that creditors

may not reach the proceeds of the sale of entirety

property if the married couple immediately reinvests

the proceeds in new entirety property. See Muskegon

Lumber & Fuel Co. v. Johnson, 338 Mich. 655, 62

N.W.2d 619, 622 (1954).

Thus, on March 30, 1989, when the IRS filed its lien

on all of Don Craft’s property and rights to property, it

acquired a lien on his future interest in the Berwyck

home. More importantly, the August 28, 1989, transfer

of the property to Sandra Craft did not extinguish the

IRS’s lien on this contingent remainder. Under

Michigan law, one spouse cannot use the doctrine of

67a

tenancy by the entirety to defeat the rights of a judg-

ment creditor. For instance, in McCaslin v. Schouten,

294 Mich. 180, 292 N.W. 696, 698 (1940), Mr. Schouten

had been adjudged liable to a bank for $10,000. Evi-

dence indicated that he had used $8104 of this money to

pay the mortgage on the marital estate. The bank

sought a lien on the tenancy by the entirety, because

Mr. Schouten was insolvent, and no other means of

recovery could be effected. The Michigan Supreme

Court granted the lien, reasoning:

Being insolvent at the time and indebted to the

bank, in so far as Mr. Schouten invested or used his

individual funds to pay the mortgaged debt on the

— — — thereby placed or at-

p is individual Hy I d the

reach of his creditors, the transaction 2

fraud in law

. . The debtor might be satisfied to give his

assets to a stranger or to exchange them for some

worthless chattel. But the law will not permit him

to do so if he thereby renders himself uncollectible

to the detriment of his creditors.

Id., 292 N.W. at 699.

The court rejected Mrs. Schouten’s contention that

her entirety estate should not be disturbed by a forced

sale in light of the fact that she was innocent of any

fraud, finding that “to so hold would enable her to

benefit by Mr. Schouten’s wrongful use of his individual

funds.” Id., 292 N. W. at 700. Thus, the bank was

awarded $5504—the amount by which the Schoutens’

68a

equity in the tenancy increased as the result of Mr.

Schouten’s wrongful use of funds he owed the bank. Id.

Similarly, the Michigan Court of Appeals has re-

cently reiterated this holding on essentially the same

facts. See Miller v. Irwin, 190 Mich.App. 610, 476

N.W.2d 632 (1991). As in Schouten, Mr. Irwin failed to

satisfy a judgment against him, and the creditor

attempted to attach the marital estate of Mr. and Mrs.

Irwin. Michigan Compiled Laws § 566.19(1) provides

that a creditor may set aside any fraudulent conveyance

to the extent necessary to satisfy his claim. The Miller

court relied on this provision in ruling that mortgage

payments on the entirety estate made after the judg-

ment of indebtedness, to the extent that they increased

the Irwins’ equity in the property, would entitle the

creditors—the Millers—to a lien on the property. Id.,

476 N.W.2d at 635.

III.

These cases make clear, at least to me, that if the

transfer to Sandra Craft was made with the intent to

place Don Craft’s monies beyond the reach of the IRS,

the federal government is entitled to set aside the

conveyance and execute its lien. See Mich. Comp. Laws

§ 566.19(1); McCaslin, 292 N.W. at 700. However, the

critical factual point has not been settled—the district

court rested on alternative reasoning and did not need

to discuss fraud. However, the facts that Don Craft

conveyed his interest shortly after the IRS recorded its

lien, that he received only one dollar in consideration

for the transfer, and that the grantee was Sandra Craft

instead of some disinterested party, are certainly suffi-

cient to raise the inference that the transaction was

69a

fraudulent. See Farrell v. Paulus, 309 Mich. 441, 15

N.W.2d 700, 704 (1944).

If the transfer is set aside, then the IRS maintains its

lien on Don Craft’s future interest. Of course, the pro-

perty was sold and his future right to half of the

proceeds became a present interest in June 1992. I

agree with the majority that, if the transfer is set aside,

the IRS would be entitled to half of the proceeds of the

June 1992 sale, or $59,944.10, plus interest. The fact

that the IRS agreed that its interest in the escrowed

funds would extend no further than its interest in the

home itself is irrelevant. If the transfer to Sandra

Craft was fraudulent, McCaslin v. Schouten authorizes

a a forced sale of the marital property. See 292 N. W. at

700. If the IRS could force a sale in order to enforce its

lien, surely it must be able to take an equal amount

when the sale has been consummated without

compulsion.

IV.

For the foregoing reasons, I concur in the result

reached by the majority only because the summary

judgment entered in favor of the IRS must be reversed.

The majority opinion, erroneously I believe, denies that

Don Craft had a separate, attachable, future interest in

the tenancy by the entirety. This holding not only

contravenes established precedent, but provides an

avenue for easy avoidance of federal income-tax laws.

Respectfully, we are bound to reject this result.

70a

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Case No. 1:93-CV-306

SANDRA L. CRAFT, PLAINTIFF

U.

THE UNITED STATES OF AMERICA, ACTING THROUGH

THE INTERNAL REVENUE SERVICE, DEFENDANT

Filed: Mar. 30, 1999]

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Before: QUIST, District Judge.

Background

Plaintiff, Sandra L. Craft (“Sandra”), filed this action

seeking to quiet title to the proceeds of the sale of

certain real property located at 2656 Berwyck Road in

Grand Rapids, Michigan (the “Berwyck Property”),

which Plaintiff had owned with her husband, Don Craft

(“Don”) as tenants by the entireties. Specifically,

Plaintiff alleged that a tax lien filed by the Internal

Revenue Service (“IRS” or Government“) for taxes

owed by Don did not attach to the Berwyck Property

while Sandra and Don owned it as tenants by the

entireties or when Don terminated the entireties estate

by delivering a quitclaim deed to Sandra on August 28,

1989. Sandra filed a motion for summary judgment on

September 10, 1993, in which she argued that the

71a

Government was precluded from maintaining a fraudu-

lent conveyance action on the grounds that Don had

been discharged from his debts in bankruptcy. The

Government also moved for summary judgment on

Sandra’s claim, contending that its lien did attach to

Don’s interest in the Berwyck Property. On September

12, 1994, this Court issued an Opinion and Order deny-

ing Sandra’s motion for summary judgment and

granting the Government’s motion for summary judg-

ment on the basis that the IRS’s lien attached in the

interval of time between Don’s termination of the

entireties and his conveyance of his interest to Sandra.

On November 17, 1994, the Court issued another

Opinion and Order which granted two and denied two

of four motions filed by Sandra on September 22, 1994.

In particular, the Court granted Sandra’s motion to

determine the value of Don’s interest at the time of the

termination of the joint tenancy and her motion for stay

of execution of the judgment, and denied her motions

amend the judgment to include its findings supporting

denial of her motion on the Government’s fraudulent

conveyance claim and to refer the case to the bank-

ruptcy court for determination of the value of Don’s

interest. On October 26, 1995, the Court issued an

Opinion and Final Judgment in which it found that the

value of Don’s interest in the property at the time of

the conveyance was $50,293.94.

Sandra appealed the September 12, 1994, Order

granting summary judgment in favor of the Govern-

ment. The Sixth Circuit reversed the Order on the

grounds that the lien could not have attached to the

entireties interest under Michigan law and that the

entireties estate was not “transformed into a tenancy in

common as an intermediary step in the conveyance of

72a

the property” to which the lien could have attached. See

Craft v. United States, 140 F.2¢ 638, 643-44 (6th Cir.

1998). In addition, the Sixth (irc it held that Don did

not possess a separate future interest in the Berwyck

Property to which the lien could have attached. See id.

at 644. Thus, the Sixth Circuit effectively held that

Sandra prevailed on her complaint to quiet title.

However, the court found that “[dJespite the fact that

the tax lien did not attach to the Berwyck Property,

there remains an issue of whether a fraudulent

conveyance occurred in this ease. Id. Accord-

ingly, the court remanded the case for determination of

the fraudulent conveyance issue. On December 1, 1998,

the Court conducted a bench trial on the fraudulent

conveyance issue. The Court’s findings of fact and con-

clusions of law pursuant to Fed. R. Civ. P. 52(a) are set

forth below.

I. Findings of Fact’

Sandra and Don purchased the Berwyck Property on

May 26, 1972, as tenants by the entireties for $48,000.

In connection with the purchase, Don and Sandra

obtained a mortgage in the amount of $37,000. Don, a

practicing attorney, failed to timely file federal income

tax returns for his taxable years 1979 through 1987. As

a result, the IRS filed substitute income tax returns for

Don pursuant to 26 U.S.C. § 6020(b). In 1988, the IRS

assessed Don’s tax liabilities in the amount of

$482,446.73. On March 30, 1989, the IRS filed a Notice

of Federal Tax Lien against all of Don’s property with

the Register of Deeds for Kent County, Michigan.

1 Any finding of fact that is a conclusion of law shall be

considered as such.

73a

As of April 15, 1980, the date on which the Govern-

ment’s claim for unpaid taxes first accrued, the fair

market value of the Berwyck Property was $62,000

and the outstanding balance on the mortgage was

$31,628.95, leaving Don and Sandra with net equity in

the property of about $31,000. From 1979 to 1985, Don

and Sandra made timely payments on their mortgage in

the total amount of $19,692, which consisted of $12,999

in interest and $6,693 in principal. As a result, the

mortgage balance was reduced to $25,301.05 by January

1, 1986. During the same period, Don and Sandra paid

approximately $17,000 in real property taxes. After

January 1, 1986, Sandra paid all of the mortgage and

tax payments with her own money.

On July 28, 1988, the IRS assessed Don tax for the

years 1979 through 1985 in the amount of $168,264.90.

The final tax included deductions for all mortgage

interest and property tax payments made by Don and

Sandra from 1979 to 1985. On March 30, 1989, the IRS

2 In her response to the Government’s post-trial brief, Sandra

— — ———

deduet mortgage interest and property tax payments

because the taittel tam — ty IRD Revenue Agent

Rosie Wilson (“Wilson”), which substantiated only a portion of the

property tax and mortgage interest deductions, were the same as

the final assessment. Sandra contends that the lack of difference

between the initial and final numbers shows that Don was not

allowed any deductions other than those substantiated in the initial

figures prepared by Ms. Wilson. However, the fact that a greater

amount of property tax or mortgage interest deductions was not

substantiated does not mean that those deductions were not taken

into account by Ms. Wilson in preparation of the initial figures. Ms.

Wilson testified that her work papers containing the initial figures

were not complete because she had not completed her investi-

gation. Furthermore, there is no indication that Ms. Wilson did not

take into account the entire amount of all claimed deductions at the

74a

filed a Notice of Federal Tax Lien against Don in the

amount of $482,446. On August 28, 1989, Don conveyed

his interest in the Berwyck Property to Sandra by quit

claim deed for the sum of $1.00. During the period of

April 15, 1980 through August 28, 1989, Don was

insolvent.

Don filed a petition for relief under Chapter 7 of the

Bankruptcy Code on January 30, 1992. The bankruptcy

court entered an order of discharge on June 1, 1992, and

the bankruptcy case was closed on June 11, 1992. In

June 1992, the Berwyck Property was sold, yielding net

proceeds of $119,888.20, after payment of the mortgage.

Pursuant to an agreement between the parties, one-

half of the net proceeds were distributed to Sandra, and

the balance of the proceeds were deposited into an

escrow pending a resolution of the dispute of the IRS

lien. Don died on August 17, 1998.

Il. Conclusions of Law*

The issue presented for determination by the Court

is whether the conveyance from Don to Sandra on

August 28, 1989, constituted a fraudulent conveyance

under Michigan’s Uniform Fraudulent Conveyance Act

(“Fraudulent Conveyance Act”), M.C.L. §§ 566.11 to

566.23. Prior to trial, the Government also raised in its

trial brief, for the first time, the issue of whether the

conveyance was fraudulent to the extent that Don

time she prepared her initial figures. Finally, Ms. Wilson testified

that Don was allowed to deduct all mortgage and property tax

payments and the Government demonstrated that Sandra did not

claim any mortgage interest or property tax deductions on her

separate returns.

Any conclusion of law that is a finding of fact shall be con-

sidered as such.

75a

enhanced the entireties property by paying both the

property tax and mortgage payments from 1979 to 1985

while he was insolvent. Apart from her arguments on

the merits, Sandra asserts that the Government’s claim

is not properly before the Court for various reasons.

The Court will address these arguments first.

A. Procedural and Limitations Issues

The Government raised its fraudulent conveyance

argument as an affirmative defense in its answer to

Sandra’s complaint. Sandra contends that the Govern-

ment cannot assert a fraudulent conveyance claim be-

cause it has not filed a complaint or a counterclaim. In

addition, Sandra contends that the Government cannot

now cure this omission by moving to amend its answer

to file a counterclaim because the Government was

required to assert any such counterclaim in its answer.

Sandra also contends that any counterclaim would be

barred by the statute of limitations.

Sandra has not cited any authority to support her

proposition that when fraudulent conveyance is raised

to defeat a quiet title claim it may only be asserted as a

counterclaim and not as an affirmative defense. In fact,

courts have allowed fraudulent conveyance to be raised

as an affirmative defense to quiet title claims. See, e. g.,

Snyder v. United States, No. 88-CV-2136 (RR), 1995

WL 724529, at *13 (E.D.N.Y. July 26, 1995) (denying

the plaintiffs motion to strike the Government’s af-

firmative defense of fraudulent conveyance to the

plaintiff's quiet title action); Buffalo Valley Golf Club

Partnership v. United States, No. 2:93-CV-172, 1994

WL 574119, at *2 (E.D. Tenn. July 19, 1994) (finding

“no reason why the United States cannot move to set

aside a fraudulent conveyance as its affirmative defense

to this quiet title action”). Because Sandra has not

76a

offered any persuasive reason why the Government

cannot assert fraudulent conveyance as an affirmative

defense, the Court finds that the Government has

properly pled the issue as an affirmative defense.

Consequently, the Government asserted its claim well

within any limitations period cited by Sandra because

its answer was filed on July 15, 1993.*

Even if a fraudulent conveyance argument could only

be asserted as a counterclaim to a quiet title action, the

Court would still find that the Government is not

barred from asserting its claim. Rule 8(c) of the Federal

Rules of Civil Procedure provides that (when a party

has mistakenly designated a defense as a counterclaim

or a counterclaim as a defense, the court on terms, if

justice so requires, shall treat the pleading as if there

had been a proper designation.” Fed. R. Civ. P. 8(c).

“The purpose of Rule 8(c) is to give the opposing party

notice of the issue and opportunity to argue his posi-

tion.” Richmond Steel, Inc. v. Legal & Gen. Assurance

Soc’y, Ltd., 821 F. Supp. 793, 797 (D. Puerto Rico 1993).

In Richmond Steel, the court held that the plaintiff

4 Because the Court has concluded that the Government’s

fraudulent conveyance claim was timely asserted within any of the

limitations periods at issue, it is unnecessary for the Court to

decide the proper limitations period. Nonetheless, the Court con-

cludes that the proper limitations period is the ten year period set

forth in 26 U.S.C. § 6502, because [it is well settled that the

United States is not bound by state statutes of limitation . . in

enforcing its rights.” United States v. Summerlin, 310 U.S. 414,

416, 60 S. Ct. 1019, 1020, 84 L.Ed. 1283 (1940); of. United States v.

Peoples Household Furnishings, Inc. 75 F. 3d 252, 255-57 (6th Cir.

1996) (holding that the United States was not bound by Michigan’s

statute of limitations for collection of judgments in suit to enforce

judgment on loan where the United States was acting in its

sovereign capacity).

77a

complied with Rule 8(c) by raising an affirmative de-

fense to a defendant’s counterclaim in its amended

complaint, even though the affirmative defense should

have been asserted by the plaintiff in its answer to the

counterclaim, because the defendant had notice of the

defense through the amended complaint, the plaintiff’s

motion for summary judgment, and the proposed pre-

trial order. See id. The Supreme Court applied Rule

8(c) in Reiter v. Cooper, 507 U.S. 258, 113 S. Ct. 1213,

122 L. Ed.2d 604 (1993), where, as Sandra alleges here,

the defendants asserted counterclaims as defenses.

Citing Rule 8(c), the Court stated, “it makes no differ-

ence that petitioners may have mistakenly designated

ee .. .” Id. at 263, 113 8.

. at 1217.

In this case, the Government’s assertion of its fraudu-

lent conveyance claim in its answer met the

ments of Rule 8(c). Sandra had ample notice of the claim

because the Government asserted it as its first

affirmative defense to Sandra’s complaint. In addition,

Sandra was also on notice of the claim because it was

raised as an issue in the parties’ motions for summary

judgment. Therefore, Sandra’s argument must be

rejected.

5 Although the Government has moved to amend its answer to

assert its fraudulent conveyance claim as a counterclaim, the Court

finds it unnecessary for the Government to do so because its

answer serves the purposes of Rule (e). On the other hand, even

if the Court concluded that the Government is required to amend

its answer to assert a counterclaim, the amendment would relate

back to its answer and not be barred by the statſut je of limitations.

See Index Fund, Inc. v. Hagopian, 91 F.R.D. 599, 604 (S. D. N. V.

1981).

78a

Sandra also argues that the Government may not

raise the argument that Don’s enhancement of the

entireties estate while he was insolvent constituted a

fraudulent conveyance because the Government did not

raise the issue until shortly before trial. The Court

rejects this argument. Although the Government did

not raise the specific issue in its affirmative defense, the

circumstances under which the issue was presented fall

squarely within Fed. R. Civ. P. 15(b), which provides in

pertinent part:

When issues not raised by the pleadings are tried

by express or implied consent of the parties, they

shall be treated in all respects as if they had been

raised in the pleadings. Such amendment of the

pleadings as may be necessary to cause them to

conform to the evidence and to raise these issues

may be made upon motion of any party at any time,

even after judgment; but failure so to amend does

not affect the result of the trial of these issues.

Fed. R. Civ. P. 15(b); see also Smith v. Transworld Sys.,

Inc., 953 F.2d 1025, 1030 (6th Cir. 1992); Carlyle v.

United States, 674 F. 2d 554, 556 (6th Cir. 1982) (noting

that an issue raised and argued at trial and upon which

evidence was offered was an issue tried by implied

consent); Agricultural Servs. Ass’n v. Ferry-Morse

Seed Co., 551 F.2d 1057, 1069 (6th Cir. 1977) (finding

that failure to amend does not affect resolution of an

issue, especially where the opposing party did not

object at trial regarding the issue).

Rule 15(b) does not require a formal motion to amend

the pleadings. See Fed. R. Civ. P. 15(b). “All that is

required is that the issue be tried by consent, and con-

sent is generally inferred from a failure to object.”

79a

Lavean v. Cowels, 835 F. Supp. 375, 383 (W. D. Mich.

1993). While Sandra objects because the Government

did not raise the issue until trial, Sandra did not object

to the Government raising the issue until after trial.

The issue of whether Don was insolvent at the time he

made payments which increased the value of the

entireties property was set forth in the Joint Final Pre-

trial Order. Issues 11 through 13 of the controverted

issues set forth in paragraph 3 of the Pretrial Order

were whether during 1979 through 1985: (i) Don made

fraudulent conveyances into the entireties property;

(ii) Don contributed approximately $38,000 into the

tenancy by the entireties in property tax and mortgage

payments; and (iii) Don was insolvent while he was

making contributions for the benefit of the entireties.

(See Joint Final Pretrial Order IJ 3.) Sandra did not

object to the inclusion of these as controverted issues

for trial. Moreover, Sandra’s counsel did not object at

trial to the Government’s evidence regarding the

amounts contributed by Don to the entireties property

from 1979 to 1985. Such evidence could have been rele-

vant only to the Government’s contention that Don’s

payments into the the [sic] entireties from 1979 through

1985 while he was insolvent were fraudulent. Thus, the

Court finds that the issue was tried by the implied

consent of the parties.

B. Fraudulent Conveyance

The Government contends that Don’s August 28,

1989, conveyance of his interest in the Berwyck Prop-

erty by quit claim deed for one dollar was a fraudulent

conveyance under sections 4 and 7 of the Fraudulent

Conveyance Act, M.C.L. §§ 566.14, 566.17. Section 4,

which applies to conveyances made by debtors without

actual intent to defraud, provides:

80a

Every conveyance made and every obligation

incurred by a person who is or will be thereby

rendered insolvent is fraudulent as to creditors

without regard to his actual intent if the convey-

ance is made or the obligation is incurred without a

fair consideration.

M.C.L. § 566.14. Section 7, which requires proof of

actual intent, provides:

Every conveyance made and every obligation in-

curred with actual intent, as distinguished from

intent presumed in law, to hinder, delay, or defraud

either present or future creditors, is fraudulent as

to both present and future creditors.

M.C.L. § 566.17. Thus, a fraudulent conveyance may be

proved either by demonstrating that a conveyance was

made by a transferor who was either insolvent at the

time or rendered insolvent as a result of the conveyance

or that the transferor acted with intent to defraud.

The party seeking to have a conveyance set aside as

fraudulent has the burden of producing evidence to

support his claim. See Dean v. Torrence, 299 Mich. 24,

35, 299 N. W. 793, 797 (1941). Even though transactions

between a husband and wife must be closely scruti-

nized, the party alleging that the conveyance was

fraudulent still bears the burden of proof. See id.;

Nicholson v. Scott, 50 F. Supp. 209, 212 (E.D. Mich.

1943). Actual intent to-defraud may be shown through

“badges of fraud,” or As lurrounding circumstances

which usually accompany an intent to hinder, delay or

defraud creditors and from which fraud may be

inferred. . . .” Bentley v. Caille, 289 Mich. 74, 78, 286

N.W. 163, 164 (1939) (en banc). “Badges of fraud”

include lack of consideration, a close relationship be-

81a

tween transferor and transferee, pendency or threat of

litigation, financial difficulties of the transferor, and

retention of possession or control by the transferor.

Coleman-Nichols v. Tixon Corp., 203 Mich. App. 645,

660, 513 N.W.2d 441, 449 (1994). Such circumstances

are not conclusive evidence of fraud, “but may be

strong or weak depending upon their nature and

number occurring in the same case.” Id.

Sandra contends that the Government cannot attack

the August 28, 1989, conveyance from Don as a

fraudulent conveyance for a number of reasons. The

Court will discuss each argument separately.

1. Can the August 28, 1989, Conveyance By Don Of

His Interest In Entireties Property To Sandra Be

Set Aside As A Fraudulent Conveyance?

Sandra contends that the Government may not

attack Don’s August 28, 1989, conveyance of his

interest in the Berwyck Property to Sandra as fraudu-

lent under the Fraudulent Conveyance Act because a

conveyance of property which is exempt from claims of

creditors cannot be a fraudulent conveyance under

Michigan law. In support of her position, Sandra cites

the definition of “assets” under section 1 of the

Fraudulent Conveyance Act which provides that

“‘assets’ of a debtor means property not exempt from

liability for his debts.” M.C.L. § 566.11. Sandra con-

tends that because exempt assets are not considered

among a debtor’s assets under the Fraudulent Con-

veyance Act, Don’s conveyance of his interest in the

Berwyck Property could not be fraudulent. The

Government responds that sections 4 and 7 of the

Fraudulent Conveyance Act are concerned with a “con-

veyance” by the debtor without limitation to the

debtor’s “assets” and that the definition of “assets”

82a

applies solely for the purpose of determining the

debtor’s insolvency under section 4.

Sandra’s argument finds support in numerous cases,

decided both before and after Michigan enacted the

Fraudulent Conveyance Act, which have consistently

held that creditors have no right to complain of a

debtor’s disposition of exempt property because such

property could not be reached to satisfy debts had it

remained in the debtor’s hands. See, e.g., Cross v.

Commons, 336 Mich. 665, 669, 59 N.W.2d 41, 43 (1953)

(en banc) (holding that the debtor had “the absolute

right” to transfer homestead property where the

amount of the exemption exceeded his equity in the

homestead); Turner v. Davidson, 227 Mich. 459, 462, 198

N.W. 886, 887 (1924) (finding that the exchange by the

debtor and his wife of one entireties property for

another property in the name of the wife was of no

concern to creditors because It] he uniform rule of this

court has been that creditors are not concerned with

the disposition which a debtor makes of his exempt

property”), overruled in part by Glazer v. Beer, 343

Mich. 495, 498-99, 72 N.W.2d 141, 142-43 (1955);

Bresnahan v. Nugent, 92 Mich. 76, 81, 52 N.W. 735, 736-

37 (1892) (observing that “[i}t has been frequently held

that a creditor cannot complain of any disposition

which a debtor sees fit to make of exempt property”);

Emerson v. Bacon, 58 Mich. 526, 527, 25 N.W. 503

(1885) (holding that creditors had no right to complain

of the debtor’s disposition of exempt property); cf.

Baltrusaitis v. Cook, 174 Mich. App. 180, 185, 435

N.W.2d 417, 419 (1988) (per curiam) (indicating that dis-

claimer by beneficiary of interest in life insurance

proceeds which was exempt from creditors’ claims was

not a fraudulent conveyance under the Fraudulent

83a

Conveyance Act). Because Don’s creditors, including

the I.R.S., could not attach Don’s interest in the

Berwyck Property to satisfy Don’s individual debts, see

Craft, 140 F.3d at 642-43, Don’s conveyance of his

interest to Sandra could not have constituted a fraud

upon his creditors because the property was beyond

their reach.

Other cases, without explicitly holding that a

spouse's conveyance of an interest in entireties prop-

erty to the other spouse is not a fraudulent conveyance,

support this result. Thus, in Farrell v. Paulus, 309

Mich. 441, 15 N.W.2d 700 (1944) (en banc), the court

held that the remedy of setting aside a quitclaim deed

by a husband to his wife of his interest in entireties

property would be ineffective, because it would afford

the creditor no relief. The court observed:

The validity of the quitclaim deed is attacked by

plaintiff, but if it were set aside the title would again

be in the name of Paulus and wife as tenants by the

entirety and plaintiff would not be aided thereby

because neither the land nor the rents and profits

therefrom would be subject to levy on execution for

the sole debt of the husband.

Id. at 445, 15 N.W.2d at 702; see also Morris v. Wolfe, 48

Mich. App. 40, 43, 210 N.W.2d 16, 17 (1973) (stating that

even if fraud were proven, title to the entireties

property would revert to husband and wife and could

not be used to satisfy a judgment rendered against only

one spouse). Thus, a conveyance cannot be set aside

where title would merely revert to husband and wife as

tenants by the entireties. Under the facts of this case,

title to the Berwyck Property would revert to Don and

Sandra as tenants by the entireties and, because Don

84a

predeceased Sandra, sole title would pass to Sandra as

the survivor.

The Government cites Lasich v. Estate of Wickstrom

(In re Wickstrom ), 113 B.R. 339 (Bankr. W.D. Mich.

1990) as support for its argument that the Court should

ignore the so-called “no harm-no foul” rule found in

Michigan case law. However, the Court finds Wick-

strom both factually and legally distinguishable from

this case. Wickstrom differs on its facts from this case

because the conveyances of entireties property in that

case were from the debtor and his spouse to the

debtor’s parents and the debtor’s son. See id. at 341.

While the facts in Wickstrom do not materially distin-

guish the case, the legal issue does. The specific

question was whether the bankruptcy trustee could

avoid a prepetition transfer of entireties property

either as a preference or a fraudulent conveyance pur-

suant to 11 U.S.C. §§ 547(b) and 548(a). See id. at 343.

The bankruptcy court rejected the “no harm-no foul”

analysis adopted in Cross and other Michigan cases

because, under the Bankruptcy Code, all property

interests of a debtor, including those in entireties

property, are included in the bankruptcy estate, where-

as such interests were not part of the bankruptcy

estate under the Bankruptcy Act of 1898, which

governed the court’s analysis in Cross. See id. at 350.

Moreover, although the court found that creditors have

rights in potentially exempt property, its reasoning was

based upon the trustee’s right to sell the debtor’s

interest in entireties property which the debtor fails to

exempt. See id. at 347. Here, the same considerations

do not apply because a bankruptcy trustee is not seek-

ing to recover property under the Bankruptcy Code.

Therefore, under Michigan law, the conveyance from

85a

Don to Sandra did not, by itself, constitute a fraudulent

conveyance.

Even though the conveyance from Don to Sandra

was not fraudulent, the Government may still be

entitled to relief. An exception to the no harm- no foul

rule” exists where the debtor, while insolvent, places

non-exempt funds beyond the reach of his creditors by

enhancing the entireties property. Michigan courts

have “consistently held that during insolvency entire-

ties estates cannot be created or enhanced at the

expense of creditors and that relief may be granted

without reference to any actual fraudulent intent.”

Glazer v. Beer, 343 Mich. 495, 498, 72 N.W.2d 141, 142

(1955) (en banc); see also La Bour v. Bergin, 334 Mich.

437, 439, 54 N.W.2d 710, 711 (1952); Morris, 48 Mich.

App. at 43, 210 N.W.2d at 17. In McCaslin v.

Schouten, 294 Mich. 180, 292 N.W. 696 (1940) (en banc),

the court held that payments made by the debtor while

he was insolvent which reduced the balance of his

mortgage were fraudulent regardless of actual intent.

The court stated:

Being insolvent at the time and indebted to the

bank, in so far as Mr. Schouten invested or used his

individual funds to pay the mortgaged debt on the

entireties property and thereby placed or at-

tempted to place his individual property beyond the

reach of his creditors, the transaction constituted a

® Ash v. Ash, 280 Mich. 198, 273 N. W. 446 (1987) (en banc), cited

by the Government, only dealt with the question of whether a

conveyance of an interest in entireties property by one spouse to

the other was procured through fraud. That case does not provide

a basis for a creditor of one spouse to attack a conveyance of an

entireties interest from one spouse to the other on the basis of

fraud.

86a

fraud in law. Such payment cannot be held proper

on the theory that Mr. Schouten was indebted to

the mortgagee and had a right to pay that creditor

in preference to others. Instead the payment on the

mortgage debt was tantamount to an investment of

Mr. Schouten’s funds in property which he and his

wife would hold as tenants by the entireties; and

thus he would hinder and possibly prevent

his creditors from reaching the funds invested by

Id. at 185, 292 N.W. at 699.

The parties have stipulated that Don was insolvent

during the period from April 15, 1980 through August

28, 1989, when he was indebted to the I.R.S. for delin-

quent taxes. In addition, the Government has pre-

sented evidence that during this period, Don made

property tax and mortgage payments on the Berwyck

Property which reduced the principal balance of the

mortgage and thereby enhanced the value of the en-

tireties property. Thus, unless otherwise precluded,

the Government is entitled to a lien on Don’s share of

the proceeds of the sale of the Berwyck Property equal

to the amount by which the value of the entireties

property was enhanced by payments made by Don

during the period of insolvency. See La Bour, 334 Mich.

at 440, 54 N.W.2d at 712.

2. Does Don’s Discharge In Bankruptcy Foreclose

The Government From Seeking Relief?

Sandra contends that the Government is precluded

from asserting a fraudulent conveyance claim because

Don’s debt was discharged, as was the L R. S. lien, which

the Sixth Circuit has held did not attach to the

Berwyck Property. The Government relies on the case

87a

of Morris v. Wolfe, 48 Mich. App. 40, 210 N.W.2d 16

(1973), as support for its right to pursue its claim, even

after the debt has been discharged in bankruptcy. As

Sandra points out, however, Morris differs from this

case in certain respects. In that case, the plaintiff

received a worker’s compensation award on January 28,

1963, and a partial summary judgment was entered

against the defendant husband in February 1967. An

execution on the judgment was issued on December 31,

1969, and notice of levy was recorded on March 4, 1970,

against property originally held by the defendants as

tenants by the entireties, but which was transferred to

the wife when the husband conveyed his interest by

quit claim deed on September 23, 1966. The husband

then filed a petition in bankruptcy and received a

discharge on August 17, 1971. The court held that be-

cause the plaintiff was a judgment creditor whose lien

had not been affected by the defendant’s bankruptcy

discharge’, the plaintiff was not precluded from pur-

suing fraudulently conveyed property in state court.

It is fundamental that a discharge in bankruptcy is

personal in nature and releases only the bankrupt’s

personal liability. This discharge affects the under-

lying debts of secured and unsecured creditors alike

but does not dispose of a valid lien not avoided by

the bankruptcy act. [Flor this reason, we conclude

that a lien creditor may pursue the attached collat-

eral in a state court subsequent to the debtor’s dis-

charge in bankruptcy.

It is unclear from the court’s opinion whether the judgment

was only against the husband. If that was the case, it seems to this

Court that the Morris court’s conclusion that the lien attached to

the entireties property was wrong in light of the Sixth Circuit’s

holding in this case.

88a

Id. at 45-46, 210 N. W. ad at 18.

Sandra points out that Morris does not apply in this

case because the Government is not a judgment eredi-

tor and its lien did not attach to the Berwyek Property

and was therefore discharged. It is true that the Morris

court drew a distinction between secured and unse-

cured creditors. See id. at 44-45, 210 N.W.2d 16.

However, much of the court’s discussion was dicta and

was also based upon the Bankruptcy Act of 1898, under

which fraudulently conveyed property was automati-

cally included in the bankruptcy estate. Although as

far as this Court can tell, no Michigan court has ad-

dressed the issue, the court in Dixon v. Bennett, 72 Md.

App. 620, 531 A.2d 1318 (1987), held that a debtor’s dis-

charge in bankruptcy did not prevent an unsecured

creditor from bringing a subsequent action under the

Uniform Fraudulent Conveyance Act. See id. at 637-38,

531 A.2d at 1326-27. The court’s reasoning explains

why Morris, to the extent it can be read to preclude

claims by unsecured creditors, is incorrect:

The discharge provision of the Bankruptcy Code,

11 U.S.C. § 524, consistent with fundamental bank-

ruptcy policy, provides the debtor with a fresh start

free from the burdens of preexisting liabilities.

Under § 524, the discharge only (i) extinguishes

personal liability of the debtor; and (ii) prevents

creditors whose claims arose pre-bankruptcy from

any actions to impose personal liability on the

debtor. 11 U.S.C. § 524 (1978). Section 524(e) ex-

pressly provides that the “discharge of a debt of the

debtor does not affect the liability of any other

entity on, or the property of any other entity for,

such debt.” § 524(e).

Under § 16 of the Bankruptcy Act of 1898, Ch.

541, 30 Stat. 544, 550 (1898), the limitation of dis-

charge provision restricted actions to those against

co-debtors, guarantors, or other sureties. The

In Kathy B. Enterprises, Inc. v. United States,

779 F.2d 1413 (9th Cir. 1986), a debtor fraudulently

taxes owed by the debtor by seizing the proceeds

the third party was receiving from the sale of the

debtor’s assets. The I.R.S. claimed that it could

collect the taxes in this way because under Illinois

law the transfers had been fraudulent. The third

party argued that the debtor’s discharge barred the

I.R.S.’s cause of action. The Court, relying on the

change in the statutory language, held that under

§ 524(e) the I.R.S. could bring a cause of action

against a fraudulent transferee despite the debtor/

taxpayer’s discharge. Kathy B., 779 F.2d at 1415.

We agree with the 9th Circuit. In the case sub

judice, appellant did not seek to impose personal

liability on the debtor but brought her cause of

action against the fraudulent transferee. We be-

lieve appellant’s claim is precisely the type contem-

plated by the expanded scope of § 524(e).

90a

Id. The holding in Dixon has been followed by courts in

other states in addressing the same question under

those states’ versions of the Uniform Fraudulent Con-

veyance Act. See Citizens Bank of Mass. v. Callahan,

38 Mass. App. Ct. 702, 705-06, 653 N.E.2d 600, 602-03;

J.P. Castagna, Inc. v. Castagna, No. CV 92 0523960,

1995 WL 225473, at *2-3 (Conn. Super. Ct. Apr. 7, 1995)

(mem. op.). This Court finds the Dixon court’s rea-

soning persuasive and therefore concludes that the

Government is not barred from pursuing its claim.

3. Is The Government’s Right To Relief Affected By

Don’s Death?

Sandra argues that Don’s death precludes the

Government from recovering any of the proceeds of the

sale of the Berwyck Property because even if the

August 28, 1989, conveyance was set aside, title to the

property would revert back to Don and Sandra as

tenants k 7 the entireties and, as a result of Don’s death,

would then go to Sandra as the survivor. While this

argument would be applicable if the Court found that

the conveyance itself was fraudulent, it does not

prevent the Government from recovering the amounts

which Don paid to enhance the entireties property

while he was insolvent.

4. How Much Is The IL. R. S. Entitled To Recover?

The Government asserts that it is entitled to recover

all mortgage and property tax payments which Don

made from April 15, 1980 through 1985, which enhanced

the value of the entireties estate, as well as accretions

in Don’s share of the net equity, based either upon

payments which reduced the mortgage balance or

market forces which increased the value of the pro-

perty. The Government is not seeking to recover

9la

mortgage or property tax payments made after 1985

because those payments were made with Sandra’s

funds.

The cases cited by the Government do not support its

position. The creditors in those cases were allowed to

recover only the amount by which value of the equity

was increased as a result of payments that somehow

put money into the hands of the debtors, either directly

or indirectly, and beyond the reach of creditors. For

example, in Dunn v. Minnema, 328 Mich. 687, 36

N.W.2d 182 (1949) (en banc), the court held that the

creditor was entitled to a lien in the amount of $3,305,

which represented the total amount of payments on the

principal balance of the land contract by the debtor

after the date he became insolvent. See id. at 696, 36

N. W. ad at 185. In Glazer, the court imposed a lien on

the entireties property equal to the value of improve-

ments which the debtor used to remodel a barn on the

property for use in his business. See Glazer, 343 Mich.

at 496-97, 72 N.W.2d at 141-42. In La Bour, the court

awarded the trustee of the defendant’s bankruptcy

estate a lien in the amount of $2,300, representing

payments which the defendant had made to reduce the

balance of the mortgage. See La Bour, 334 Mich. at 438,

54 N.W.2d at 711. Similarly, in McCaslin, the court

awarded the creditor a lien in the amount of $5,404, the

amount of the defendants’ equity in their entireties

property. See McCaslin, 294 Mich. at 180, 292 N.W. at

700.

To this Court’s knowledge, no Michigan court has

ever held that the interest component of mortgage

payments or property tax payments enhance entireties

property to the detriment of creditors. The reason is

obvious: such payments do not increase a debtor’s

92a

equity or constitute a fraud on creditors. Rather,

payments of interest and property taxes are no more

than payments made by the debtor to certain creditors

in preference over other creditors, which the law allows

debtors to do. As anyone who has ever had a thirty-

year mortgage can attest, substantial payments in the

first several years covering interest, principal, property

taxes, and insurance, contribute only slightly in re-

ducing the amount of the debt. Thus, in Pearce v.

Micka, 62 Md. App. 265, 489 A.2d 48 (1985), the court

held “that payment of interest, taxes and insurance

premiums did not constitute fraudulent conveyances

under the Uniform [Fraudulent Conveyance Act].“ Id.

at 275, 489 A.2d 48. The court in Pearce distinguished

McCaslin on the basis that the payments in “McCaslin

did not involve monthly mortgage payments which

included interest and funds to be escrowed for payment

of taxes and insurance premiums.” Id. at 274, 489 A.2d

at 53.

The evidence presented by the Government shows

that from 1980 through 1985, Don and Sandra made a

total of $19,692 in mortgage payments, which included

$12,999 in interest and $6,693 in principal. Thus, during

the period in question, payments made using Don’s

funds reduced the outstanding balance of the mortgage

and constituted a fraudulent conveyance in the amount

of $6,693. Accordingly, the Government is entitled to

$6,693 of the escrowed sales proceeds from the

Berwyck Property.

® Likewise, there is no arguable basis for awarding the Govern-

ment any increase in equity due to the general increase in property

values. The value of value of [sic] the Berwyck Property would

have increased regardless of whether payments were made to

reduce the principal balance of the mortgage.

98a

Conclusion

For the foregoing reasons, the Court concludes that

the August 28, 1989, conveyance by Don to Sandra of

his interest in the Berwyck Property was not a fraudu-

lent conveyance, but that payments made by Don from

April 15, 1980 through December 31, 1985, which re-

duced the principal balance of the mortgage in the

amount of $6,693 did constitute a fraudulent con-

veyance. Therefore, the Government is entitled to re-

cover that amount from the escrowed funds from the

sale of the Berwyck Property.

A judgment consistent with these Findings of Fact

and Conclusions of Law will be entered.

94a

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Case No. 1:93-CV-306

SANDRA L. CRAFT, PLAINTIFF

V.

THE UNITED STATES OF AMERICA, ACTING THROUGH

THE INTERNAL REVENUE SERVICE, DEFENDANT

Filed: Mar. 30, 1999]

JUDGMENT

Before: QUIST, District Judge.

In accordance with the Findings of Fact and Con-

clusions of Law issued this date,

IT IS HEREBY ORDERED that the United States is

awarded $6,693 of the escrowed sales proceeds from the

Berwyck Property, plus interest on that amount from

October 26, 1995.

IT IS FURTHER ORDERED that the remainder ©“ the

escrowed sales proceeds plus interest shall be deli red

to the plaintiff.

95a

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Case No. 1:93-CV-306

SANDRA L. CRAFT, PLAINTIFF

V.

THE UNITED STATES OF AMERICA, ACTING THROUGH

THE INTERNAL REVENUE SERVICE, DEFENDANT

Filed: Oct. 26, 1995]

OPINION

Before: QUIST, District Judge. ;

Plaintiff filed this action in an attempt to quiet title to

the proceeds from the sale of certain real property. In a

prior opinion, this Court held that when Mr. and Mrs.

Craft jointly conveyed the property on August 28, 1989,

the entireties estate terminated and each spouse took

an equal half interest in the estate. The Court must

now determine the value of Mr. Craft’s interest in the

property as of August 28, 1989. The Court held a

hearing on September 11, 1995, and subsequently each

party submitted a supplemental brief.

1 The September 11, 1995, hearing was conducted by telephone.

96a

The parties have stipulated that on August 28, 1989,

the Berwyck property had a fair market value of

$120,000.00. The parties also agree that on that date

the property had an outstanding mortgage balance of

$19,412.12. The parties do not, however, agree upon

the value of Mr. Craft’s interest in the property.

Plaintiff contends that even though the property was

not sold in 1989, she should be entitled to deduct the

hypothetical transaction costs such as those which were

incurred when the property was sold in June of 1992.

Plaintiff asserts that Mr. Craft’s interest in the prop-

erty as of August 28, 1989, was 845,682.44. In support

of her position, she cites 11 U.S.C. § 506(a) and In re

Claeys, 81 B.R. 985, 990-91 (Bankr. D.N.D. 1987).

The United States insists that it is entitled to 50% of

the net sales proceeds resulting from the June 1992 sale

of the property. It argues in the alternative, that if the

lien interest is limited to 50% of the value of the prop-

erty as of August 28, 1989, the United States would be

entitled to statutory interest as with a failure to honor

levy action under 26 U.S.C. § 6832(d) of the Internal

Revenue Code. The United States has attached an ex-

hibit which indicates that the lien interest computed

2 Plaintiff’s calculation is as follows:

Fair Market Value of real property $120,000.00

(-) Mortgage balance 19,412.12

(-) Realtor’s commission 8,400.00

(-) Survey, termite inspection 215.00

(-) Title insurance 476.00

(-) Transfer tax — 132.00

£21.364.88

97a

through June 1, 1992, the month of sale, would total

$67,006.85. This amount exceeds the balance of the

escrowed fund. Thus, the United States contends that

the entire escrowed fund should be awarded to the

United States.

This Court is unwilling to accept plaintiff's argument

that she be permitted to subtract hypothetical closing

costs. Nor is this Court convinced that 26 U.S.C.

§ 6332(d) is analogous to this fact situation.

Therefore, the Court will determine Mr. Craft’s

interest in the property as of August 28, 1989, by

subtracting the out

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