Decedents Estates; Liens

Drye v United States, 120 S Ct 474, 145 L Ed 2d 466 (1999).

Facts: Irma Drye died intestate and left an estate worth approximately $233,000 in Arkansas. Under state law, the sole heir to her estate was her son, Rohn Drye, who petitioned and was appointed by the probate court as administrator of the estate. Rohn was insolvent at the time, and owed the federal government $325,000 in back taxes. The IRS also had tax liens against all of Rohn's "property and rights to property." 26 USC 6321. Several months later, Rohn filed a disclaimer of all his interests in the estate in the probate court and county land records, and soon after resigned as administrator. In Arkansas, a disclaimer allows an heir to disavow his or her inheritance, creating a legal fiction that the disclaimant predeceased the decedent. In effect, the inheritance passes over the disclaimant to the person next in line to receive it, in this case Drye's daughter, Theresa Drye. In addition, under state law the action shields the inheritance from the disclaimant's creditors. The probate court declared the disclaimer valid and Theresa Drye used the funds to establish a family trust of which she and her parents were beneficiaries. When the IRS was notified of Rohn's beneficial interest, it filed notice of federal tax lien against the trust. Rohn sued the IRS claiming a wrongful levy. The district court and the court of appeals, in affirming, ruled that once state law has determined that a person has "property or rights to property," state law is incapable of preventing the attachment of a federal lien, if authorized by federal statute, in favor of the United States. Rohn appealed.

Holding: Affirmed. The court explained that Congress, by using the broad term "property," regarding attachment of federal tax liens, intended to reach every interest or right in property that the taxpayer may possess. The process of determining what interests qualify as "property or right to property" consists of two parts. First, state law is used to properly determine what rights and interests a taxpayer has. After locating those interests, federal law decides which qualify as "property or rights to property," as defined by federal statute, and are therefore subject to attachment of a federal tax lien. It is through this divided process that property, otherwise inaccessible to regular creditors by being shielded under state law, is subject to attachment by the federal government. Additionally, Section 6334(a) of the tax code lists exceptions that are exempted from levy such as unemployment and workers compensation. Disclaimed property is not included in the list.

The court next distinguished the nature of the disclaimed inheritance from a rejected gift. In a typical gift between living persons, the donee, by rejecting the donor's offer, in effect restores the gift to the original possession and full ownership of the donor. In contrast, Rohn was heir to his mother's estate. Rejection of the inheritance would not restore the property to her possession, since deceased. Therefore he exercised dominion over the estate by disclaiming it and passing it to his daughter. The power to determine who will receive property is an exercise of one that holds "property or rights to property," and is subject to lien by the government.

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