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Sup. Ct.: Valid Disclaimer of Inheritance Under State Law Could Not Avoid Federal Tax Liens.

In 1994, T died intestate. Her son, D, was the sole heir under state (Arkansas) law. D was insolvent at this time and owed the IRS $325,000 in unpaid tax assessments; the Service had valid tax liens against all of D's property under Sec. 6321.

D was appointed administrator of T's estate. Several months after his mother's death, D filed a written disclaimer of all interests in T's estate and resigned as administrator. Thus, under Arkansas law, D's share of T's estate passed to his daughter (who then established a trust that included D as a beneficiary, but which was shielded from D's creditors).

The IRS then levied against the trust accounts to seize D's share in collection of his debts. The District Court held for the Service, as did the Court of Appeals; while state law determined whether a right or interest was created, the courts held that Federal law dictated whether that right or interest was "property" under Sec. 6321.

The Supreme Court (Ginsburg, J.) affirms the Eighth Circuit; D's disclaimer of his interest in his inherited property could not defeat the IRS's valid tax liens.

Under the relevant Code provisions, to satisfy a tax deficiency, the government may impose a lien on any of the taxpayer's "property" or "rights to property." Sec. 6321 provides: "If 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."

A complementary provision, Sec. 6331(a), states:

If any person table to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

The language in Secs. 6321 and 6331(a) is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. When Congress so broadly uses the term "property," it aims to reach every species of right or interest protected by law and having an exchangeable value.

Sec. 6334(a) is corroborative, listing property exempt from levy. The list includes 13 categories of items. Among the enumerated exemptions are certain items necessary to clothe and care for one's family, unemployment compensation and workers' compensation benefits. The enumeration contained in Sec. 6334(a) is exclusive: "Notwithstanding any other law of the United States.... no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)" Inheritances or devises disclaimed under state law are not included in Sec. 6334(a)'s catalog of property exempt from levy. The absence of any recognition of disclaimers in Secs. 6321, 6322, 6331(a) and 6334(a) and (c) (the relevant tax collection provisions) contrasts with Sec. 2518(a), which renders qualifying state-law disclaimers "with respect to any interest in property" effective for Federal wealth-transfer tax purposes and only for those purposes.

The question whether a state-law right constitutes "property" or "rights to property" is a Federal matter. We look initially to state law to determine what rights a taxpayer 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 domain of the Federal tax hen legislation.

The Eighth Circuit, with fidelity to the relevant Code provisions, determined first what rights state law accorded D in his mother's estate. It is beyond debate, the Court of Appeals observed, that under Arkansas law, D had, at his mother's death, a valuable transferable, legally protected right to the property at issue. The court noted, for example, that a prospective heir may effectively assign his expectancy in an estate under Arkansas law; the assignment will be enforced when the expectancy ripens into a present estate.

D emphasizes his undoubted right under Arkansas law to disclaim the inheritance, a right that is indeed personal and not marketable. But Arkansas law primarily gave D a right of considerable value--the right either to inherit or to channel the inheritance to a close family member (the next lineal descendant). That right cannot be written off as a mere personal right to accept or reject a gift.

In pressing the analogy to a rejected gift, D overlooks this crucial distinction. A donee who declines an inter vivos gift generally restores the status quo ante, leaving the donor to do with the gift what she will. In contrast, a disclaiming heir or devisee does not restore the status quo, for the decedent cannot be revived. Thus, the heir inevitably exercises dominion over the property. He determines who will receive the property--himself if he does not disclaim, a known other person if he does. This power to channel the estate's assets warrants the conclusion that D held "property" or a "right to property" subject to the government's hens.

In sum, in determining whether a Federal taxpayer's state-law rights constitute "property" or "rights to property" the important consideration is the breadth of the control the taxpayer could exercise over the property. D had the unqualified right to receive the entire value of his mother's estate (less administrative expenses) or to channel that value to his daughter. The control rein he held under state law rendered the inheritance "property" or "rights to property" belonging to him within the meaning of Sec. 6321, and hence subject to the Federal tax liens that sparked this controversy.

ROHN F. DRYE, JR., Sup. CT., 12/7/99, AFF'G 153 F3D 892 (8TH CIR. 1998)
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Author:Fiore, Nicholas J.
Publication:The Tax Adviser
Date:Apr 1, 2000
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