Daily Development for Thursday, December 9, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

TITLE; DISCLAIMERS; FEDERAL TAX LIENS: Even though state law defines property interests, federal law determines whether an inheritance expectancy can be subject to levy even when the putative heir disclaims the inheritance and state law would then treat the heir as having no property interest. Drye v. United States, No. 981011 (12/7/99)

http://supct.law.cornell.edu/supct/html/981101.ZS.html

Irma Drye died intestate, leaving a $233,000 estate in Arkansas. Her sole heir was her son, Rohn. Rohn was subject to over $300,000 in federal tax liens. Although Rohn at first applied for letters of administration, he later withdrew from any involvement in the estate and disclaimed his interest. Under Arkansas law, the effect of the disclaimer of interest is to treat the heir as having predecesed the decedent, thus leaving those parties next in line to inherit as the recipients of the estate.

In this case, Rohn's disclaimer under Arkansas law meant that his mother's state passed to his daughter, Theresa. Theresa then set up a family trust with spendthrift provisions, making herself and her parents beneficiaries, and providing that funds can be expended during the lifetime of the parties only for the health, maintenance and support of the beneficiaries.

When the IRS got wind of Rohn's activities, it took action to attach the trust assets under its tax liens, and this litigation ensued.

Affirming the Eighth Circuit Court of Appeals ( 152 F.3d 892) the U.S. Supreme Court here concluded that the IRS lien is good. Although state law determines in the first instance whether a party has a property interest, federal law determines whether the interest created by state law is subject to levy. The Court concluded that Arkansas law here created a valuable right in Rohn, the right to decide whether or not to accept his inheritance. The fact that, once he decided not to accept the inheritance, state law treated him as having no interest, was of no consequence. Rohn had a valuable property right prior to that event, and the IRS lien attached to it and followed it into Theresa's hands. Comment 1: The Court does not mention what would have happened if Theresa had kept the inheritance and had done nothing to transfer the money back to her father. It would appear from reading the case that the IRS at least had discretion to pursue the money into Theresa's hands and assert the tax lien.

Comment 2: There has been increasing attention focussed on disclaimer of rights. The National Conference of Commissioners on Uniform State Laws is evaluating a Uniform Disclaimer of Property Interests Act. To the extent that this focus is the result of attempts to avoid federal tax liens, the attempts appear to be futile. Whether a disclaimer would permit an heir to avoid liability under CERLCA or other horrific consequences of ownership remains to be seen. The situation would be different in the case of CERLCA, because the liability may fall upon an individual to an extent greater than the value of the inheritance. Nevertheless, it is problematic that the federal government gets to decide whether to write its laws in such a way as to ignore the state's determination of ownership of property. This is an idea that could spread to other contexts.

Comment 3: Is there a "taking" of Theresa's property? Since the federal government would claim that its interest attached even before Theresa's interest arose, the answer is probably no in this case.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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