Drye, Rohn, et al. v. U.S. (12/07/1999)

By: Elisabeth Krebs, Medill News Service

Questions presented

Does an heir's interest in an estate constitute ""property"" or a ""right to property"" to which a federal tax lien attaches under 26 U.S.C. Section 6321 even though the heir thereafter purports retroactively to disclaim interest under state law?

Brief

When Irma Deliah Drye died on August 3, 1994, her son, Rohn F. Drye, Jr., stood to inherit approximately $236,000, of which $75,000 was realty located in Pulaski County, Ark. At that time, however, Rohn owed the government an estimated $325,000 in tax assessments for years 1988, 1989 and 1990.

So five months later, Rohn stepped down as the personal representative and administrator of his mothers estate, passing on the responsibilities to his daughter, Theresa. In probate court of Pulaski county, he formally disclaimed all interest in his mothers estate.

In the meantime, Theresa created The Drye Family 1995 Trust, which she funded with the interest she made off her grandmothers estate. The had three beneficiaries, one of which was Rohn. Distributions were made only for health, maintenance, and support of the beneficiaries. Since the was strictly spendthrift, ""its assets [could not] be attached by state law creditors to satisfy the debts of its beneficiaries."" In April 1995, the opened an investment account at Stephens, Inc., a banking organization that managed the account in the name of the.

But when the Internal Revenue Service found out Rohn had a beneficial interest in the in April 1996, it filed a notice of federal tax lien against the Trust as Rohns nominees in Pulaski County Circuit Court and served a notice of levy on Stephens, Inc. After several counterclaims made by both Rohn and the IRS, the U.S. District Court granted the governments motion for summary judgment.

The district courts final judgment in July 1997 dismissed Rohns complaint that the IRS had unlawfully levied its property to satisfy Rohns federal tax liabilities. The court reduced to judgment assessments against Rohn, which totaled $312, 932, plus statutory interest for the last quarters of 1988 and 1989 and the first quarter of 1990. The court determined that the government had valid tax liens against all of Rohns property and concluded Rohns disclaimer was ""invalid, null, and void, and fraudulent against the United States.""

Rohn appealed, claiming that he never had a property interest in his mothers estate to which federal liens could attach. He argued that there was a provision in the disclaimer statute, called ""relation back,"" that completely nullified any state law right to intestate succession that he might have had.

The government maintained that Rohns disclaimer was ineffective to remove the federal tax liens attached to his mothers estate, and further argued that Rohns right to intestate succession had pecuniary value and was transferable. Therefore, it constituted ""property"" or ""rights to property"" under Section 6321 of the Internal Revenue Code and was automatically subject to attachment by the preexisting federal tax liens. The government stated that the transfer of the estates assets to the constituted a ""fraudulent conveyance because the Trust is [Rohns] nominee or alter ego.""

The 8th Circuit Court of Appeals viewed the appeal as a ""narrow, but not uncomplicated, legal issue that conjoins state laws of inheritance and federal tax law."" The issue was whether a taxpayers disclaimer under state law had the legal effect of voiding state law interests in property such that federal tax liens were incapable of attachment. Was a federal court bound by state law governing disclaimers and the ""relation back"" provision, or did federal law governing the attachment of liens apply?

A unanimous appeals court affirmed, holding that state law determines whether a given set of circumstances creates a right or interest; federal law then dictates whether that right or interest constitutes ""property"" or ""rights to property"" under Section 6321.

""Peeled to the core, Rohns] efforts to bind the IRS by the legal fiction created under Arkansass disclaimer statute were unfruitful,"" the appeals court opinion concluded.

The U.S. Supreme Court granted certiorari on April 19, 1999.

On Dec. 7, 1999, a unanimous Court agreed with the 8th Circuit, holding that people cannot avoid using inherited money to pay overdue federal taxes by disclaiming their right to the inheritance. ""Arkansas law primarily gave Drye a right of considerable value -- the right either to inherit or to channel the inheritance to a close family member,"" Justice Ruth Bader Ginsburg wrote for the Court. ""That right simply cannot be written off as a mere personal right.""

The important consideration ""in determining whether a federal taxpayer's state-law rights constitute 'property' or 'rights to property',"" the opinion held, ""is the breadth of the control the taxpayer could exercise over the property.""