Valuing Interest in Tenancies by the Entirety Under Craft

In the case of United States v. Craft, Mr. and Mrs. Craft owned property together. Mr. Craft didn’t pay his taxes, so the IRS said he owed a lot of money. To avoid the IRS taking their property, Mr. Craft gave his share to Mrs. Craft for just $1. But the IRS said this was a trick to avoid paying the taxes, so they went to court. In 1992, Mrs. Craft sold a property and agreed with the IRS to put half of the money from the sale into an escrow account until the government’s interest in the property was determined. The district court allowed the IRS to take half of the proceeds from the sale, even though the property was owned jointly by Mrs. Craft and her husband. The Sixth Circuit Court disagreed and said the IRS couldn’t take any money from the sale. However, the Supreme Court decided that the IRS could take money from the husband’s share of the property because he had present rights to it. This is because in some states, like Michigan and Florida, when a property is owned by a married couple as tenants by the entireties, it’s considered as belonging to both of them together, not separately. Even though the husband couldn’t sell the property without the wife’s agreement and he only fully owns the property if his wife dies, the court still said he had present rights to it, so the IRS could take some of the money from the sale. The court decided that the federal tax lien could attach to the property rights of each tenant, even though state law said they didn’t individually own the property. The court didn’t need to decide if Mr. Craft’s right of survivorship counted as “property” for the tax lien, because there were enough present rights for the lien to attach. The court was worried that if it didn’t find present rights for the tax lien to attach to, then the entireties property would belong to no one for tax purposes. This would let spouses avoid paying federal taxes by classifying their property as entireties property. A court recently changed a long-standing legal rule about protecting assets from creditors. Before, people could claim that their property was one big unit to avoid paying debts. But the court said this was just a trick and shouldn’t be allowed. Now, the government can put a lien on a person’s property if they owe taxes, even if it’s jointly owned. This means that the person can’t use this trick to protect their property from the government. The court’s decision in Craft allows the government to take property that was once protected from taxes. It’s unclear how far-reaching this decision will be and if it will affect other types of property exemptions. The court also didn’t consider the value of the property fairly, which could lead to the government getting more money than it should. In simple terms, the court’s decision in Craft could have big implications for property ownership and taxes. The IRS doesn’t allow for discounts on the value of property owned by multiple people if there is a right to survivorship, even though this goes against common valuation practices. This means that the value of the property may not accurately reflect its true market value. It’s important to consider valuation discounts to get a more accurate value for jointly owned property. Discounts on the value of property can be applied when there is a lack of control over the property. Even if someone owns less than 50% of the property, they may still have some control, so they shouldn’t have to pay as much in taxes. Other factors, like regulations and agreements, can also limit control and justify discounts. When property is hard to sell or share with others, its value goes down. This is called an illiquidity discount. It happens when there’s no market for selling, when it’s hard to split the property, or when the owners don’t get along. The IRS doesn’t like giving discounts for this, but some court cases have said it’s okay. The discounts can add up, but it’s not clear exactly how much they should add up. When figuring out the value of a fractional interest in real estate, the first step is to determine the initial fair market value of the property. This can be done using market data if there are willing buyers and sellers. Valuation professionals use different techniques to figure out the value of the property based on its income potential and other factors. Even if the property doesn’t generate income, its potential to do so and its replacement costs can still be considered. One way to figure out the value of the property is to use the earnings multiples approach, which looks at the earnings before taxes and multiplies it by a number that reflects the industry. Another way is the discounted cash flow method, which looks at the expected future cash flows and discounts them to present value. A way to figure out the value of an asset is by using option pricing methods, which look at the ability to buy or sell the asset in the future. This can also be applied to valuing intellectual property. When new information comes in, the value of the asset can change, so we can use probabilities to figure out the new value. For example, if a property is owned by two people and one of them becomes difficult to deal with, the value of the property may go down. We can also consider how easy it is to sell the property when figuring out its value. Studies have shown that these factors can make the value of the property go down by 20 to 40 percent. Courts need to decide if they should use different discounting when valuing the federal tax lien. Discounting is a common practice in valuing assets and can be a credible factor for courts to consider. This is a legal citation and analysis of a court case about joint property ownership and tax liabilities. It discusses how a tax authority can seize property owned by a married couple if they owe taxes individually. It also explains how the value of a person’s share of the property is determined in legal and financial terms. Jagdeep S. Bhandari and Mike E. Jorgensen are professors at Florida Coastal Law School. They have degrees in law and have published a lot of work in business and law. They also have experience practicing law. They are writing this column on behalf of the Tax Section.

Source: https://www.floridabar.org/the-florida-bar-journal/valuing-interest-in-tenancies-by-the-entirety-under-craft/