Relinquishments and disclaimers

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United States of America, Plaintiff v. Sidney Davidson, as fiduciary and executor of the Jerome Crane Estate, and Sidney Davidson, as fiduciary and trustee of the Jerome M. Crane Trust, Defendant

U.S. District Court, Dist. Colo. , Civ. 97-Z-1029, 7/8/99 , 55 FSupp 2 d 1152, 55 FSupp2d 1152

[Code Sec. 6321 ]

Tax liens: Estates and trusts: Inherited property: Relinquishments and disclaimers: State law: Acceptance-rejection theory: Colorado.--Federal tax liens did not attach to property inherited by a delinquent taxpayer who disclaimed his interest in the inheritance. State law, not federal law, controls a determination as to the nature of the legal interest that a taxpayer has in property. The taxpayer herein timely disclaimed his interest in an inheritance from his uncle in accordance with state ( Colorado ) law. For purposes of determining whether the taxpayer ever had a property interest in the inheritance to which the tax liens could attach, the court determined that Colorado followed the "acceptance-rejection theory," under which a property interest vests only when the beneficiary accepts the gift or grant. Since the taxpayer's right to choose whether to inherit was not a right to property, the tax liens did not attach to his inheritance. Similarly, see N.H. Leggett (CA-5,) 97-2 USTC ¶50,635 ; Drye Family 1995 Trust (CA-8), 98-2 USTC ¶50,651 , and A. Comparato (CA-2), 94-2 USTC ¶50,354 , distinguished.

MEMORANDUM OPINION AND ORDER

WEINSHIENK, Senior District Judge:

This matter is before the Court on cross-motions for summary judgment. Jurisdiction is based on 28 U.S.C. §1340 and 26 U.S.C. §7402(a). Plaintiff United States of America brings this lawsuit to recover money owed by defendant Sidney Davidson for tax deficiencies totaling $1,005,178.51 for the years 1980, 1981, and 1993. In an attempt to collect on this tax deficiency, the government, pursuant to 26 U.S.C. §6361, filed tax liens on defendant's property. On April 26, 1993 , one Jerome M. Crane died and left defendant Davidson, Crane's nephew by marriage, as the fiduciary and executor of the estate of Jerome M. Crane, and also the fiduciary and trustee for the Jerome M. Crane Trust. Davidson is named as a devisee of the estate and a beneficiary of the Trust as well. On or about November 9, 1995 , the United States Government filed notices of levy against the two estates to satisfy the debt owed by defendant. A final demand was made on or about February 2, 1996 . This Court must determine whether the federal government can levy on the properties that defendant stood to receive as a beneficiary of the estate and the trust.

I. BACKGROUND

Both parties agree regarding the essential facts of this case. There is no dispute as to the amount of debt owed by defendant to the federal government, or that defendant was designated as a beneficiary of the estate and the trust. In addition, the parties agree that under Colorado law a person has a right to choose whether to inherit property left to them, and that defendant Davidson filed a valid renunciation under state law disclaiming his interest in the two estates on or about August 18, 1993 . Thus, because there is no dispute as to material facts, the cross-motions for summary judgment may be decided as a matter of law. The Court has reviewed the briefs of the parties as well as an amicus brief filed by the Taxation Law Section and the Trust And Estate Section of the Colorado Bar Association, and is familiar with the facts and circumstances of the case.

II. CHOICE OF LAW

This case presents the issue of whether a valid lien, pursuant to a federal statute, can attach to defendant's right to choose whether to inherit property. This question appears to be a matter of first impression for the federal court in the District of Colorado and for the United States Court of Appeals for the Tenth Circuit. However, four circuit courts have addressed essentially the identical issue with the Fifth and Ninth Circuits deciding one way and the Second and Eighth Circuits going the other way. ¹

Federal tax statute 26 U.S.C. §6321 allows the government to file a lien against any property or right to property of a taxpayer for outstanding debt. ² The statute reads, "[i]f 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." 26 U.S.C. §6321. However, the federal statute is silent as to the definition of "property" or "rights to property." In view of this statutory silence, as a preliminary matter, the Court must decide whether to rely on state or federal law in applying the federal statute. ³

Over 40 years ago, the United States Supreme Court struggled with the issue of whether state or federal law determined what was "property" or "rights to property" to which a federal lien could attach. See United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51 (1958). In Bess, the issue presented was whether the government could file a lien on a tax debtor's insurance policy. The Supreme Court held that an owner of a life insurance policy did not have state property rights in the future death proceeds of the life insurance policy, but did have state property rights in the cash surrender value of the policy. Thus, as to the death proceeds, federal tax liens could not attach. However, as to the surrender value, federal tax liens could attach to these state property rights despite the fact that the surrender value was not subject to state creditor's liens.

A few years later, the Supreme Court clarified this ruling by holding that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property." Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960). This holding made clear that federal law does not create property rights, but merely attaches consequences, such as federal tax liens, to property rights created under state law. In Aquilino, the Court explained the policy behind the holding: "This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform administration of the federal revenue statutes." Aquilino [60-2 USTC ¶9538], 363 U.S. at 514.

The Bess-Aquilino line of cases stood firmly as the law of the land for the next 25 years until the issue was raised again in United States v. National Bank Of Commerce [85-2 USTC ¶9482], 472 U.S. 713 (1985). In the present case at bar, the government relies on National Bank to support its position that a tax lien can attach to Davidson's right to choose whether to inherit property as a matter of federal law. Building on the suggestion of Justice Powell's dissenting opinion in National Bank, the government's position is that the majority opinion in National Bank effectively overruled Bess and Aquilino sub silentio. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 748 (1985) (Powell, J., dissenting).

While the language in National Bank has been subject to considerable debate, this Court does not interpret National Bank as overruling Bess and Aquilino. Both Bess and Aquilino are cited by the majority decision with approval. See e.g., National Bank [85-2 USTC ¶9482], 472 U.S. at 722, 727. There is no sign from the treatment of either of these cases that they have been overruled.

Moreover, the essential statement from National Bank that the Government uses as its authority, "the question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law," is cited as if it was a quotation taken directly from Bess. See National Bank [85-2 USTC ¶9482], 472 U.S. at 727. This citation is incorrect, as Bess does not contain the language attributed to it. However, even understanding this quotation as the essential holding of National Bank, as the government argues, a difficulty emerges. Essentially, the government's reading of the above quotation means that National Bank cites Bess as an authority to overrule Bess. A case cannot overrule itself. In view of the weakness of this crucial argument by the government, and the favorable treatment of Bess and Aquilino in the majority decision of National Bank, it is clear that National Bank does not overrule Bess and Aquilino.

Lastly, this Court will not assume that National Bank ignored the stare decisis effect of Bess and Aquilino in interpreting a federal statute. While no explicit discussion of this issue appears in National Bank, considerations of stare decisis are especially forceful when the Supreme Court is interpreting federal statutory law because Congress has an opportunity to respond. See e.g., Hilton v. South Carolina Public Railways Commission, 502 U.S. 197, 202 (1991); Patterson v. McClean Credit Union, 491 U.S. 164, 175 n.1 (1989) ("considerations of stare decisis have added force in statutory cases because Congress may alter what we have done by amending the statute"). Twenty-five year old precedents interpreting Congressional intent regarding a tax statute do not vanish without a discussion as to why they are no longer the law.

In view of National Bank's discussion of Bess and Aquilino, and the role of stare decisis in interpreting federal statutes, this Court does not interpret National Bank as effectively overruling Bess or Aquilino. Instead, National Bank should be read to support the holdings of Aquilino and Bess that state law, not federal, determines the nature of the taxpayer's legal interest in the property. See National Bank [85-2 USTC ¶9482], 472 U.S. at 722. Accordingly, this case hinges on whether a right to choose whether to inherit is a property right as a matter of Colorado law.

III. COLORADO LAW

In Colorado , at the time of Jerome Crane's death in 1987, COLO. REV. STAT. §15-11-801 allowed a potential beneficiary to renounce and disclaim any interest in property that is bequeathed by will. ⁴ Similarly, COLO. REV. STAT. §15-1-901 allowed a grantee to renounce any interest bequeathed in a non-testamentary instrument or contract. ⁵ Under either provision of the 1987 version of the Colorado statute, the disclaimer or renunciation must take place within nine months of the death of the testator or grantor. Once the interest is renounced or disclaimed by the potential beneficiary or grantee, the statute distributes the property as if the beneficiary predeceased the testator. ⁶ The language of the Colorado statute is taken from the Uniform Probate Code and is essentially indistinguishable from a number of other state statutes. See Leggett [97-2 USTC ¶50,635; 97-2 USTC ¶60,286], 120 F.3d at 596.

The Colorado statute's purpose in distributing the property as if the beneficiary predeceased the testator is to correct an unfair situation that arose under the common law. Id. at 595. At common law, a beneficiary under a will could renounce a gift and thus avoid the tax consequences while the non-testamentary beneficiary could not avoid the tax liabilities by renouncing the gift. With this statute in place, beneficiaries to a will and beneficiaries by statute face the same tax consequences.

While the Colorado statute solves this common law tax problem, there remains the issue of whether the person disclaiming an interest ever has a property interest as a matter of state law. State law can follow either the Acceptance-Rejection Theory or the Transfer Theory. See Leggett [97-2 USTC ¶50,635; 97-2 USTC ¶60,286], 120 F.3d at 595. If the state follows the Acceptance-Rejection Theory, a property interest vests only when the beneficiary accepts the gift or the grant. Thus, a person who disclaims or renounces an inheritance never has a right to property as a matter of state law. Id. In contrast, under the Transfer Theory, the property vests in the beneficiary immediately upon the death of the testator or grantor, and a renunciation functions as a transfer of interest from the beneficiary to the next beneficiary. Even if the person never enjoys the use of the property, in a Transfer Theory jurisdiction, a right to inherit is a right to property as a matter of state law.

After reviewing the Colorado statute, and the applicable case law, this Court determines that Colorado is an Acceptance-Rejection jurisdiction. ⁷ Thus, as a matter of Colorado law, a right to choose whether to inherit is not a right to property. Consequently, because the right to choose whether to inherit is not a state property right, the federal lien pursuant to 26 U.S.C. §6321 cannot attach. Accordingly, it is

ORDERED that defendant's Motion For Summary Judgment is granted. It is

FURTHER ORDERED that United States ' Cross-Motion For Summary Judgment is denied. It is

FURTHER ORDERED that the Complaint and cause of action are dismissed with prejudice.

¹ Compare Leggett v. United States [97-2 USTC ¶50,635; 97-2 USTC ¶60,286], 120 F.3d 592 (5th Cir. 1997), and Mapes v. United States, 15 F.3d 138 (9th Cir. 1994), with Drye Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F.3d 892 (8th Cir. 1998), cert. granted in part, 67 U.S.L.W. 3469, 3493, 3633, 3640 (U.S. Apr. 19, 1999) (No. 98-1101), and United States v. Comparato [94-2 USTC ¶50,354], 22 F.3d 455 (2nd Cir. 1994).

² To enforce the lien, the government must file a notice of levy against the property pursuant to 26 U.S.C. §6331. In the present case, the government has taken all necessary steps to enforce the valid lien obtained against defendant Davidson.

³ Obviously, Congress could obviate the need for a choice of law analysis by amending the statute to either define property or include a choice of law section.

⁴ COLO. REV. STAT. §15-11-801 (1987) (amended 1995):

1) A person . . . who is an heir, devisee, person succeeding to a renounced interest, beneficiary under a testamentary instrument, . . . may renounce in whole or in part the succession to any property or interest therein by filing a written instrument within the time and at the place provided in this section. The instrument shall describe the part thereof or interest therein renounced, be signed by the person renouncing, and declare the renunciation and the extent thereof.

3) Unless the decedent or donee of the power has otherwise indicated by his will, the interest renounced, and any future interest which is to take effect in possession or enjoyment at or after the termination of the interest renounced, passes as if the person renouncing had predeceased the decedent, or if the person renouncing is one designated to take pursuant to a power of appointment exercised by a testamentary instrument, as if the person renouncing had predeceased the donee of the power. In every case the renunciation relates back for all purposes to the date of death of the decedent or the donee, as the case may be.

⁵ COLO. REV. STAT. §15-1-901 (1987) (repealed 1994):

1) A person . . . who is grantee, donee, [or] . . . beneficiary under a nontestamentary instrument or contract, or person designated to take pursuant to a power of appointment . . . may disclaim in whole or in part the right of succession or transfer to him of any property, real or personal, or interest therein by delivering or filing a written disclaimer within the time and at the place as provided in section 15-1-902.

2) The disclaimer shall describe the property or part thereof or interest therein disclaimed, declare the disclaimer and the extent thereof, and be signed and acknowledged by the disclaimant.

⁶ COLO. REV. STAT. §15-1-903 (1987) (repealed 1994):

1) Unless otherwise provided in the nontestamentary instrument, the property or part thereof or interest therein disclaimed . . . shall be distributed as if the disclaimant had died before the effective date of the nontestamentary instrument or, if later, before the disclaimant was finally ascertained to be the taker . . . and the disclaimer shall relate back for all purposes to that date.

⁷ See e.g., Hoecker v. United Bank of Boulder , 476 F.2d 838 (10th Cir. 1973); In Re Estate of Colacci, 549 P.2d 1096 (Colo.App. 1976). Further, on February 26, 1999 , an Amicus Brief On Behalf Of The Taxation Law Section And The Trust And Estate Section Of The Colorado Bar Association was filed. The Taxation Law Section and the Trust And Estate Section of the Colorado Bar Association on pages seven and eight of the brief state that Colorado is an Acceptance-Rejection jurisdiction. It should be noted that during oral argument attorney for the federal government stated that plaintiff did not have a position regarding whether Colorado is an Acceptance-Rejection jurisdiction.

 

 

 

Nelda Huebner Leggett, In the Matter of the Estate of Nelda Huebner Leggett, Deceased, et al., Plaintiffs v. United States of America, Defendant- -Appellee v. Patricia Huebner Schuette, Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 96-41103, 9/4/97 , 120 F3d 592, 120 F3d 592. Reversing a District Court decision, 96-2 USTC ¶50,698 ; 96-2 USTC ¶60,249

[Code Secs. 6321 and 6323 ]

Lien for taxes: Property subject to: Inherited property: Beneficiaries: Disclaimer: Application of state law.--A federal tax lien on property held by a decedent's estate that was imposed with respect to a beneficiary's tax liabilities was extinguished when the beneficiary executed a timely disclaimer of her interest in the property. Since state ( Texas ) law recognizes no property interest in the right to accept a bequest, the beneficiary lacked a property interest to which the tax lien could attach. Thus, the provision under state law that disclaiming beneficiaries are to be treated as having predeceased the decedent was applicable.

Before: POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit Judges.

SMITH, Circuit Judge:

In this tax case, we review a judgment that Patricia Huebner Schuette had a state property interest in property bequeathed to her by her aunt, despite the fact that she had filed a timely disclaimer and never took possession of, or exercised control over, the property. The district court held that a federal tax lien had attached to the property and the disclaimer was ineffective. We reverse.

I.

The relevant facts are not in dispute. In 1995, Schuette owed the Internal Revenue Service ("IRS") nearly $20,000. In May 1995, Schuette's aunt, Nelda Leggett, died testate, leaving one-twentieth of her estate, or $19,500, to Schuette. In June 1995, executors were appointed for Leggett's estate. The executors have distributed all of the estate's assets to the beneficiaries, except for Schuette's share. ¹

In August 1995, Schuette filed a disclaimer of all rights and interests in Leggett's estate. She believes that her disclaimed share should go to her children, Melissa Ann Oakes and Donald Van Schuette II. In September 1995, the estate filed in county court a petition to quiet title and for declaratory judgment. Specifically, the estate requested that the court declare that the IRS has no lien against the estate's property.

The IRS removed the case to federal court. ² Because the facts were uncontested, all parties moved for summary judgment. The IRS asked the court to rule that its lien is valid, and Schuette asked the court to hold that the United States has no interest in the property. The estate expressed disinterest in this question but requested attorney's fees and costs under Tex. Civ. Prac. & Rem.Code Ann. §37.009 ( Vernon 1986) (authorizing the award of fees and costs in a declaratory action case when "equitable and just").

In August 1996, the district court held in favor of the IRS. Instead of deciding the fees issue, the court sua sponte remanded it to the state court. This had the effect of disposing of all claims in the federal case.

II.

A.

The only issue before us is whether the district court correctly interpreted federal and state law in determining whether a federal lien attached to Schuette's share of Leggett's estate. Questions of law resolved on summary judgment are reviewed de novo. See BellSouth Telecomms., Inc. v. Johnson Bros. Corp., 106 F.3d 119, 122 (5th Cir.1997).

When a person fails to pay his taxes, all property rights that he has or acquires thereafter immediately and automatically are subject to a federal tax lien, see 26 U.S.C. §6321, that is not subject to any state laws that govern ordinary liens or to any perfection requirements, see United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 51, 71 S.Ct. 111, 113-14, 95 L.Ed. 53 (1950). Section 6321 is intended to be broad in scope and applies to every interest the taxpayer has in property. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985). The section does not, however, create or define what constitutes a property interest. Instead, state law determines whether a taxpayer has a property interest to which a federal lien may attach. See id. at 722-23, [85-2 USTC ¶9482], 105 S.Ct. at 2925-26; United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Therefore, we must decide whether, under Texas law, Schuette ever had a property interest in Leggett's estate.

B.

1.

Texas probate law contains two provisions that bear on our determination. The Texas Probate Code provides that "when a person dies, leaving a lawful will, all of his estate devised or bequeathed by such will, and all powers of appointment granted in such will, shall vest immediately in the devisees or legatees of such estate and the donees of such powers. . . ." Tex. Prob.Code Ann. §37 ( Vernon Supp.1997). This rule prevents any lapse in title, insures that someone always is responsible for property taxes, allows family settlements agreements, see In re Estate of Hodges, 725 S.W.2d 265, 267 (Tex.App.--Amarillo 1986, writ ref'd n.r.e.), guarantees that the beneficiaries will receive any income generated by the estate, see Hurt v. Smith, 744 S.W.2d 1, 6 (Tex.1987), and prevents a beneficiary from criminal prosecution for using estate property, see Palmer v. Texas, 764 S.W.2d 332, 334 (Tex.App.--Houston [1st Dist.] 1988, no pet.).

Texas law also provides for the possibility of a disclaimer or renunciation of an inheritance:

Any person . . . who may be entitled to receive any property as a beneficiary and who intends to effect disclaimer irrevocably . . . shall evidence same as herein provided. A disclaimer evidenced as provided herein shall be effective as of the death of decedent and shall relate back for all purposes to the death of the decedent and is not subject to the claims of any creditor of the disclaimant. Unless the decedent's will provides otherwise, the property subject to the disclaimer shall pass as if the person disclaiming . . . had predeceased the decedent. . . .

Tex. Prob.Code Ann. §37A(flush) (Vernon Supp.1997). A disclaimer must follow a certain form, see id. §37A(a), and is irrevocable, see id. §37A(d). It must be made within nine months of death, see id. §37A(a), and cannot be made if the disclaimant has used the property, see id. §37A(g). A disclaimer is distinct from an assignment, which is a gift from an assignor to an assignee of inherited property. See id. §37B(d).

These provisions are somewhat contradictory. Section 37 states that the intended beneficiary had a vested property right from the moment of death, while section 37A teaches that the intended beneficiary never had a property interest at all. Determining which provision is real and which is the fiction decides this issue.

2.

There are two plausible ways to view the statutory scheme. We could regard §37 as the reality and §37A as a legal fiction. Under this view, the intended beneficiaries own the estate's property at the moment of death. If one of them files a valid disclaimer, the property is transferred to other beneficiaries. The legislature, cognizant of the tax consequences of such a transfer, adopted the legal fiction that the intended beneficiary never owned the property. The IRS urges this view, which we will call the "Transfer Theory."

The second possibility is that §37A is the reality and §37 is the legal fiction. Under this theory, property at death goes to the estate of the decedent. The intended beneficiaries may accept or reject their inheritances. If one accepts, the law engages in the legal fiction that he owned the property from the moment of death, thus ensuring the continuity of title and responsibility to pay taxes. Schuette urges this theory, which we will call the "Acceptance-Rejection Theory."

The difference is vital to the outcome of the case. Under the Transfer Theory, Schuette had a property right in Leggett's estate, so the federal lien attached and prevented her from making a disclaimer. Under the Acceptance-Rejection Theory, Schuette never had a property right, as she never accepted the inheritance, so there was nothing to which a federal lien could attach.

C.

At common law, a beneficiary of a will had the power to accept or reject a legacy or devise. The reason was that no person could be made an owner against his consent. An heir at law, on the other hand, became the owner of the property, irrespective of whether he wanted it. Presumably, a contrary rule would allow an heir to defeat an entail.

This distinction had two negative effects. First, it forced heirs to take possession of property they did not want. ³ Second, it had unintended tax consequences. A disclaiming beneficiary of a will was not subject to gift tax liability, see, e.g., Brown v. Routzahn [1933 CCH ¶9231], 63 F.2d 914, 917 (6th Cir.1933), while a disclaiming heir was subject to tax liability, see, e.g., Hardenbergh v. Commissioner [52-2 USTC ¶10,859], 198 F.2d 63, 66 (8th Cir.1952), aff'g [CCH Dec. 18,456], 17 T.C. 166, 1951 WL 326 (1951).

The purpose of the disclaimer law is to rectify this common-law anomaly by putting an heir in the same position as a beneficiary of a will. That is, the purpose is to state that no person, whether heir at law or intended beneficiary of a will, can be forced to take inherited property against his will. See Unif. Disclaimer Of Transfer By Will, Intestacy Or Appointment Act §1 comment, 8A U.L.A. 166, 166-68 (1993). This, of course, is the Acceptance-Rejection Theory.

The Texas courts have adopted this view of §37A: "This "relation back' doctrine is based on the principle that a bequest or gift is nothing more than an offer which can be accepted or rejected." Dyer v. Eckols, 808 S.W.2d 531, 533 (Tex.App.--Houston [14th Dist.] 1991, writ dism'd by agr.). In fact, "acceptance of the inheritance occurs "only if the person making such disclaimer has previously taken possession or exercised dominion and control of such property in the capacity of beneficiary.' " Id. at 534 (quoting Tex. Prob.Code Ann. §37A(f) (Vernon Supp.1991)).

Because the Dyer court adopted the Acceptance-Rejection Theory, it discarded the notion that a disclaimer could be a fraudulent transfer, reasoning that a transfer is impossible unless the "transferor" had rights in the thing "transferred." Because a disclaimant "never possesses the property," he cannot transfer it. Id. ; accord Simpson v. Penner (In re Simpson), 36 F.3d 450, 452-53 (5th Cir.1994) (per curiam) (stating that this is the law in Texas ).

This settles the instant dispute. Under Texas law, Schuette had the right to accept Leggett's intended gift by taking possession of it, by exercising control and dominion over it, or by taking no action within the set time. She also had the right to reject Leggett's intended gift by filing a valid disclaimer within nine months. This right of decision was not, itself, a property right under Texas law. Because Schuette rejected the intended gift, she never had a property right. Therefore, the federal lien had nothing to which to attach.

III.

A.

Texas 's disclaimer statute is based on a uniform act and, therefore, is similar to acts in other states. We recognize that the Second and Ninth Circuits have come to different conclusions from each other, interpreting New York and Arizona law, respectively. Compare United States v. Comparato [94-2 USTC ¶50,354], 22 F.3d 455, 458 (2d Cir.1994) (holding that a disclaimer was rendered ineffective by a federal tax lien) with Mapes v. United States , 15 F.3d 138, 141 (9th Cir.1994) (holding that, because of a timely disclaimer, the federal tax lien did not attach). Because New York law is substantially different from Arizona 's or Texas 's, these cases are reconcilable.

The Second Circuit, citing In re Estate of Scrivani, 116 Misc.2d 204, 455 N.Y.S.2d 505 (N.Y.Sup.Ct.1982), stated that the New York statute "creates a legal fiction that allows distributees to avoid attachment by creditors or the payment of taxes." Comparato [94-2 USTC ¶50,354], 22 F.3d at 457. The view that the disclaimer is a legal fiction is the Transfer Theory and supports the holding that a property right existed before the disclaimer.

In Scrivani, the conservator of Julia Molinelli, an incompetent person, sought to renounce Molinelli's inheritance. See 116 Misc.2d at 204-05, 455 N.Y.S.2d 505. The problem was that a transfer of a "resource considered available" would have made Molinelli ineligible for Medicaid benefits. N.Y. Soc. Serv. Law §366(5)(a) (McKinney 1992 & Supp.1997). The court, therefore, was forced to determine whether a renunciation of an inheritance constitutes the transfer of a resource.

At first, the court appeared to follow the Texas view that "[t]he law forces no one to accept a gift." Scrivani, 116 Misc.2d at 208, 455 N.Y.S.2d 505. The court, however, then held that the Molinelli had "an inchoate property interest" in the right to accept the inheritance. Id. at 209, 455 N.Y.S.2d 505; cf. Adam J. Hirsch, The Problem of the Insolvent Heir, 74 Cornell L.Rev. 587, 601-03 (1989) (arguing that Scrivani is internally contradictory). Therefore, the court reasoned, renouncing the inheritance would constitute the transfer, or rather the waste, of an available resource. ⁴

Because the Comparatos had a property interest in their right to accept the inheritance, the federal tax lien attached to it. Therefore, the Comparatos could not destroy that asset by disclaiming the underlying inheritance. It should be evident, however, that this conclusion derives from the manner in which the New York courts have interpreted that state's disclaimer statute.

As we have explained, Texas law follows the Acceptance-Rejection Theory and does not recognize a property interest in the right to accept a bequest. Our decision today, therefore, is not in conflict with Comparato.

B.

Similarly, the Ninth Circuit's decision in Mapes does not actually conflict with Comparato. There, the court was construing an Arizona statute that had not (and still has not) been interpreted by its courts. Thus, the Ninth Circuit assumed that Arizona 's view of its statutory scheme would follow the majority rule that Texas follows. ⁵ Thus, it may be presumed that Arizona , unlike New York , follows the Acceptance-Rejection Theory and does not recognize a property interest in the right to accept a bequest.

The fact that three states have adopted similar statutory schemes does not necessarily mean that the law functions the same way in each state. New York law creates a property interest in an intended beneficiary's right to accept a gift and may follow the Transfer Theory. Arizona and Texas do not. It is one of the complexities (and, ultimately, one of the strengths) of the federal system that different states may interpret similar statutes in very different ways.

IV.

A.

We pause to address two of the IRS's arguments for ignoring the plain import of Texas law in determining the existence of a state property right. In United States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994), the Court held that the disclaimer of a remainder interest in a trust after a reasonable time had passed was a taxable gift, even though the interest was created before the passage of the gift tax. See id. at 226, [94-1 USTC ¶60,163], 114 S.Ct. at 1475. The Court's interpretation of the gift tax does not dictate this court's interpretation of §6321.

Section 6321 adopts the state's definition of property interest. Title 26 U.S.C. §2511(a), which defines "transfer" and "property" for purposes of the gift tax, does not adopt state law. Instead, it aims to reach "every species of right or interest protected by law and having an exchangeable value." Jewett v. Commissioner [82-1 USTC ¶13,453], 455 U.S. 305, 309, 102 S.Ct. 1082, 1086, 71 L.Ed.2d 170 (1982) (quoting S.REP. NO. 72-665, at 39 (1932); H.R.REP. NO. 72-708, at 27 (1932)).

In dictum, the Court recognized the conundrum that we face today and the Second and Ninth Circuits have faced in the past:

Although a state-law right to disclaim with such consequences might be thought to follow from the common-law principle that a gift is a bilateral transaction, requiring not only a donor's intent to give, but also a donee's acceptance, state-law tolerance for delay in disclaiming reflects a less theoretical concern. An important consequence of treating a disclaimer as an ab initio defeasance is that the disclaimant's creditors are barred from reaching the disclaimed property. The ab initio disclaimer thus operates as a legal fiction obviating a more straightforward rule defeating the claims of a disclaimant's creditors in the property disclaimed.

Irvine [94-1 USTC ¶60,163], 511 U.S. at 239-40, 114 S.Ct. at 1481-82 (citations omitted). The Court recognized that the right to disclaim might, under state law, be based on the Acceptance-Rejection Theory and, therefore, not be a legal fiction. The Court then pointed out that allowing a late disclaimer, ⁶ on the other hand, can be explained only as a rule aimed at frustrating creditors.

Because the Texas statute does not allow late disclaimers, it is based solely on the Acceptance-Rejection Theory. Thus, treating this rule as a non-fiction, as Texas caselaw requires, is fully consistent with the principles laid down in Irvine .

B.

In United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 191, 91 S.Ct. 1763, 1765, 29 L.Ed.2d 406 (1971), Anne Goyne Mitchell, upon divorce, renounced her right to the proceeds of the marital community (and the corresponding obligation to pay the debts of that community). ⁷ Mitchell argued that, because she had renounced the community income, she was not responsible for the corresponding tax liability. See id. at 192, [71-1 USTC ¶9451], 91 S.Ct. at 1765-66.

The Court noted that tax liability follows ownership and, therefore, if Mitchell ever had ownership of the income, she was liable for the tax. See id. at 196-97, [71-1 USTC ¶9451], 91 S.Ct. at 1767-68. The Court proceeded as we do today, examining the state law in great detail. See id. at 197-203, [71-1 USTC ¶9451], 91 S.Ct. at 1768-71. The Court determined that, under Louisiana law, the wife had a property interest in the community's income from the moment of inception, rather than "a mere expectancy." Id. at 199, [71-1 USTC ¶9451], 91 S.Ct. at 1769 (quoting Phillips v. Phillips, 160 La. 813, 107 So. 584, 588 (1926), overruled by Creech v. Capitol Mack, Inc., 287 So.2d 497, 510 (La.1973)).

It should be evident that we have followed the same methodology as did the Mitchell Court . Like that Court, we have examined state law to determine whether it creates a property interest. Unlike the statutory scheme considered in Mitchell , Texas law did not create a property interest for Schuette in Leggett's estate. Although the IRS correctly argues that Mitchell "underscored the supremacy of federal law with respect to the taxation of state created property interests," Mitchell does not disturb the principle that a federal tax lien cannot attach in the absence of a state-created property interest.

V.

In closing, we note that Congress easily can expand the IRS's lien power, if it so desires. For example, Congress can follow what it did with §2511(a), and define property more broadly than state law does. Alternatively, Congress simply can prohibit persons subject to §6321 from filing disclaimers. We decline the IRS's invitation to rewrite the law ourselves, as that power lies exclusively in the legislative branch. See Rodriguez v. INS, 9 F.3d 408, 414 (5th Cir.1993).

REVERSED.

¹ In August 1995, the estate sold certain property. In exchange for the IRS's release of its lien against that property, the estate paid the IRS 1/20 of the proceeds, or $2,515.95. The IRS credited this money against Schuette's debt and rejected the estate's request for a refund. Although our opinion makes it evident that the IRS's position was incorrect, neither party challenges these actions on appeal. We leave the proper resolution of this issue to whatever further proceedings there may be among the parties.

² Under 28 U.S.C. §2410(a)(1), federal district courts have jurisdiction over actions to quiet title to land on which the United States claims to have a lien. Under 28 U.S.C. §1444, such actions are removable.

³ There are many situations, in addition to Schuette's, in which a person rationally might prefer not to accept an inheritance. For example, a person might be offered a plot of real property with several troublesome tenants. The cost in time and aggravation of dealing with the tenants easily might outweigh the value of the property.

⁴ See Scrivani, 116 Misc.2d at 209, 455 N.Y.S.2d 505; see also In re Molloy v. Bane, 214 A.D.2d 171, 175, 631 N.Y.S.2d 910 (N.Y.App.Div.1995) (stating, under similar facts, that "petitioner's renunciation of a potentially available asset was the functional equivalent of a transfer of an asset").

⁵ See Mapes, 15 F.3d at 141; see also Robert M. Hoffman & Aaron L. Mitchell, Deceptive Trade Practices and Commercial Torts, 45 SW. L.J. 1667, 1710 (stating that Texas follows the majority rule); cf. Frances Slocum Bank & Trust Co. v. Matter of Estate of Martin, 666 N.E.2d 411, 415 (Ind.Ct.App.1996) (adopting Dyer).

⁶ In Irvine , the disclamation occurred 62 years after the trust's creation. See [94-1 USTC ¶60,163], 511 U.S. at 226-27, 114 S.Ct. at 1475. Texas law, by contrast, prohibits a disclaimer filed more than nine months after death. See TEX. PROB.CODE. ANN. §37A(a) ( Vernon Supp.1997). It is worth noting that the disclaimer in Comparato was filed over seven years after the devisor's death. See [94-2 USTC ¶50,354], 22 F.3d at 456.

⁷ See La. Civ.Code art. 2410 (1870) ("Both the wife and her heirs or assigns have the privilege of being able to exonerate themselves from the debts contracted during the marriage, by renouncing the partnership or community of gains.").

 

 

 

 

 

 

 

 

Nancy Choate, Plaintiff v. Barbara Tubbs, Tracy Tubbs and the United States of America , Defendants.

U.S. District Court, West Dist. Tenn. , East. Div.; 01-1288-T, April 4, 2003 .

[ Code Sec. 6321]

Tax liens: Property subject to tax liens: Relinquishments and disclaimers: Annuity proceeds. --

An individual had a beneficial interest in annuity proceeds owned by his father at the time of his father's death that constituted a right to property. Consequently, the government was entitled to summary judgment with respect to attachment of valid federal tax liens outstanding against the taxpayer to the annuity proceeds. Although the taxpayer disclaimed his interest in the annuity proceeds pursuant to state ( Tennessee ) law, the liens attached to the entire value of the annuity at the time of the death of the taxpayer's father, and were not defeated by the taxpayer's disclaimer. R.F. Drye, Jr. (SCt), 99-2 USTC ¶51,006, followed.

ORDER ON MOTION FOR SUMMARY JUDGMENT

TODD, District Judge: This interpleader action was filed by the plaintiff, Nancy Choate, in the Chancery Court of Madison County, Tennessee, seeking a determination as to the appropriate disposition of certain funds held in escrow. The named defendants were Tracy Tubbs and Barbara Tubbs; the Internal Revenue Service was identified only as an interested party. The United States , on behalf of the IRS, which claims an interest in the funds based on federal tax liens against Tracy Tubbs, removed the action to this Court and was subsequently granted leave to intervene. An amended complaint was filed on January 2, 2002 , including the United States as a defendant in interest. Before the Court is a motion for summary judgment on behalf of the United States . Tracy Tubbs and Barbara Tubbs have filed separate responses to the motion. ¹

Motions for summary judgment are governed by Fed. R. Civ. P. 56. If no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law, summary judgment is appropriate. Fed. R. Civ. P. 56(c). The moving party may support the motion for summary judgment with affidavits or other proof or by exposing the lack of evidence on an issue for which the nonmoving party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The opposing party may not rest upon the pleadings but must go beyond the pleadings and "by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Celotex Corp., 477 U.S. at 323.

"If the defendant ... moves for summary judgment ... based on the lack of proof of a material fact, ... [t]he mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). However, the court's function is not to weigh the evidence, judge credibility, or in any way determine the truth of the matter but only to determine whether there is a genuine issue for trial. Id. at 249. Rather, "[t]he inquiry on a summary judgment motion ... is ... 'whether the evidence presents a sufficient disagreement to require submission to a [trier of fact] or whether it is so one-sided that one party must prevail as a matter of law.'" Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989) (quoting Anderson , 477 U.S. at 251-52). Doubts as to the existence of a genuine issue for trial are resolved against the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970).

The escrowed funds that are the subject of this action were paid into the registry of the Madison County Chancery Court upon the filing of the original interpleader complaint. Following removal of the case those funds, in the amount of $226,942.21, were transferred into the registry of this Court. The funds represent the proceeds of an annuity owned by John Allen Tubbs, who died on June 18, 2000 . Defendant Tracy Tubbs, the son of John Allen Tubbs, is the designated beneficiary of the annuity. Defendant Barbara Tubbs, widow of John Allen Tubbs and stepmother of Tracy Tubbs, is the contingent beneficiary. According to the IRS, there are currently, and were at the time of John Allen Tubbs' death, several tax liens outstanding against Tracy Tubbs. Therefore, the IRS claims an interest in the proceeds of the annuity pursuant to 26 U.S.C. §6321.

On February 26, 2001, Tracy Tubbs disclaimed, in writing, his interest in any of the annuity proceeds, pursuant to Tenn. Code Ann. §31-1-103(a)(7). Pursuant to the state statute, if a beneficiary of an annuity contract disclaims his interest in the proceeds within nine months after the death of the decedent, the interest then passes as if the beneficiary had pre-deceased the decedent. §31-1-103(c). In this case, under the statute, the annuity proceeds would pass to Barbara Tubbs, the contingent beneficiary, as if Tracy Tubbs had died prior to his father. In the amended interpleader complaint, it is alleged that the escrow agreement entered into by Tracy Tubbs and Barbara Tubbs provides that the debts of John Allen Tubbs would be paid from the proceeds of the annuity, and any remaining balance would be distributed in accordance with the terms of the decedent's will. (Am. Compl. ¶8.) ²

Under §6321, a federal tax lien attaches to "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer, including property subsequently acquired by the taxpayer. See United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 448 (1993); United States v. Dishman Indep. Oil, Inc. [ 99-2 USTC ¶50,992], 46 F.3d 523, 525 (6th Cir. 1995). The United States asserts that tax liens have been filed against Tracy Tubbs for 1992 through 1998 income taxes; employment taxes (Form 941) for portions of 1996, 1997 and 1998; and unemployment taxes (Form 940) for 1997, and that these liens were recorded in 1994, 1995, 1998 and 2000. The United States maintains that the liens attached to the entire value of the annuity at the time of John Allen Tubbs' death, and that the liens are not defeated by Tracy Tubbs' disclaimer of his interest in the proceeds.

This case is governed by the decision of the United States Supreme Court in Drye v. United States [ 99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49 (1999). In Drye, the Court confirmed that, while the inquiry has two parts, the determination of whether certain property or rights to property may be subject to a federal tax lien is ultimately a question of federal law rather than state law:

As restated in [ United States v.] National Bank of Commerce: "The question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law." [ 85-2 USTC ¶9482], 472 U.S. at 727, 105 S. Ct. 2919. We look initially to state law to determine what rights the 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 compass of the federal tax lien legislation.

Drye [ 99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. at 58.

In Drye, the delinquent taxpayer's mother died, leaving him the sole heir to her estate under Arkansas law. Arkansas had a statute that is similar to Tenn. Code Ann. §31-1-103, allowing an heir to disclaim his inheritance. See Ark. Code Ann. §§28-2-101, -107 (1987). Drye executed a timely written disclaimer of all interest in his mother's estate, which then passed to his daughter. The Supreme Court held, notwithstanding the disclaimer, that Drye possessed property or rights to property to which an IRS lien could attach:

The Eighth Circuit, with fidelity to the relevant Code provisions and our case law, determined first what rights state law accorded Drye in his mother's estate. It is beyond debate, the Court of Appeals observed, that under Arkansas law Drye had, at his mother's death, a valuable, transferable, legally protected right to the property at issue....

 

Drye 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 Drye 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 simply cannot be written off as a mere "personal right ... to accept or reject [a] gift."

 

In pressing the analogy to a rejected gift, Drye 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. The disclaiming heir or devisee, in contrast, 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 if he does. This power to channel the estate's assets warrants the conclusion that Drye held "property" or a "righ[t] to property" subject to the Government's liens.

 

In sum, in determining whether a federal taxpayer's state-law rights constitute "property" or "rights to property," "[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property." Drye had the unqualified right to receive the entire value of his mother's estate ... or to channel that value to his daughter. The control rein he held under state law, we hold, rendered the inheritance "property" or "rights to property" belonging to him within the meaning of §6321, and hence subject to the federal tax liens that sparked this controversy.

[ 99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. at 59-61 (citations omitted).

Tracy Tubbs does not dispute that Drye is controlling. However, he argues that "a careful reading" of the decision shows that it requires the opposite outcome in this case. Specifically, Tubbs relies upon the "crucial distinction" mentioned by the Supreme Court between disclaimer of an inter vivos gift and a disclaimer by an heir or devisee. Tubbs contends that his disclaimer of the annuity proceeds paved the way for his father's wishes, as evidenced by the terms of his last will and testament, to be carried out. Thus, he claims that this case is more like the disclaimer of an inter vivos gift which restores the status quo, leaving the donor to do with the property what he will.

The Court does not find this argument persuasive. While it is asserted that John Allen Tubbs intended the annuity proceeds to be used to pay the debts of his estate, the fact remains that he failed to execute a change of beneficiary for the annuity prior to his death. As the Supreme Court pointed out, when the donor is deceased, the status quo cannot be restored. As the beneficiary named in the annuity contract, Tracy Tubbs had a right to the entire amount of the proceeds, and could use those proceeds as he saw fit. Tubbs implies that he had no other option but to disclaim the funds. However, the fact that Tracy Tubbs may have voluntarily, or under threat of other litigation, agreed to carry out the alleged intent of his father is irrelevant. While the option of taking the proceeds and facing possible litigation may have been unpalatable, it clearly was an option. In the words of the Supreme Court, Tracy Tubbs held the "control rein" to the annuity proceeds. He exercised control over the proceeds by determining who would receive the property, himself or a known other.

Barbara Tubbs attempts to distinguish Drye on the grounds that the taxpayer in that case deliberately sought to avoid the IRS tax liens by executing the disclaimer. She argues that in this case, the disclaimer was made only for the purpose of entering into a family agreement to carry out the decedent's wishes. However, there is nothing in Drye clearly supporting the assertion that the taxpayer intentionally sought to avoid the IRS tax liens. Even if such a motive could be inferred in Drye, ³ the Supreme Court does not suggest that its holding is at all based on Drye's reasons for the disclaimer. Therefore, Tracy Tubbs' motives for disclaiming the annuity proceeds have no bearing on whether he possessed a right to property that is subject to the IRS tax liens.

As Drye is controlling in this case, the Court concludes that, at the time of his father's death, Tracy Tubbs had a beneficial interest in the annuity proceeds which constituted a right to property. Therefore, the United States is entitled to judgment as a matter of law on the issue of whether valid federal tax liens filed against Tracy Tubbs attached to the annuity proceeds pursuant to 26 U.S.C. §6321.

In the motion for summary judgment, the United States asserts that the amount owed, including penalties and interest as of February 4, 2002 , was $187,821.65. On February 25, 2003 , the United States filed a notice stating that the updated balance was $197,779.50, including interest calculated through January 29, 2003 . However, as evidence of this assertion, the United States has submitted only various computer printouts and computer-generated notice-of-lien forms. The United States has offered no supporting affidavits and no explanation of how the printouts and notice-of-lien forms correlate. Furthermore, while certain official IRS documents have been held self-authenticating, see United States v. Burdine [ 2002-2 USTC ¶50,560], 205 F.Supp.2d 1175, 1178 (W.D. Wash. 2002), computer forms such as those offered by the United States in this case are not self-authenticating under the Federal Rules of Evidence. See Fed. R. Evid. 902.

With his response to the motion for summary judgment, Tracy Tubbs has submitted a copy of a letter dated April 16, 2002, that was sent to Tubbs' counsel by Jason S. Zarin, the attorney of record for the United States in this case. In the letter, Mr. Zarin states:

Enclosed as per your requests are the balances due (with breakdowns into penalties and interest) on the employment and income tax liabilities owed by Tracy Tubbs. The balances are calculated as of February 4, 2002 . Please note that the Service is asserting that only $155,767.45 of these liabilities are secured by the federal tax liens.

(T. Tubbs Mem., Ex. A.) As stated, in the motion for summary judgment, the United States asserts that the balance owed as of February 4, 2002 was $187,821.65. Yet, Mr. Zarin's letter indicates that the balance actually covered by valid federal tax liens on that date was only $155,767.45. The United States has made no attempt to explain this discrepancy. ⁴ Therefore, the Court finds that there is a genuine dispute regarding the amount of Tracy Tubbs' tax liability.

For the foregoing reasons, the motion for summary judgment is GRANTED on the issue of whether the escrowed annuity proceeds are subject to valid federal tax liens filed against Tracy Tubbs. However, as there are material facts in dispute regarding the amount of tax liability, the motion is DENIED on that issue.

IT IS SO ORDERED.

¹ Both Barbara Tubbs and Tracy Tubbs assert that the motion for summary judgment should be denied because it does not comply with Local Rule 7.2(d)(2). The rule states that in motions for summary judgment, the material facts should be set out, in the accompanying memorandum, by serial numbering. However, the rule does not state that failure to comply with that provision alone is grounds for denial of the motion.

² The record does not contain a copy of the actual escrow agreement. The original complaint, which is attached to the Notice of Removal, and the amended complaint both briefly describe the escrow agreement and state that a copy is attached. Tracy Tubbs' response to the motion for summary judgment also purports to have a copy of the escrow agreement attached. However, no such copy is actually attached to any of those documents.

³ In setting out the facts of the case, the Supreme Court stated that when the estate passed to Drye's daughter following his disclaimer, she set up a spendthrift trust with herself and her parents as beneficiaries, which under Arkansas law is shielded from the beneficiaries' creditors. When negotiating with the IRS, Drye revealed his beneficial interest in the trust. [ 99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. at 53-54.

⁴ On each of the computer-generated notice-of-lien forms is the following statement: "With respect to each assessment below, unless notice of lien is refiled by the date in column (e), this notice shall constitute the certificate of release of lien as defined in IRC 6325(a)." Each assessment has a corresponding date of ten years and one month within which the notice of lien must be refiled in order to remain effective. Thus, if the notice of lien is not refiled by the specified date, the original notice acts as a "certificate of release," unless it is revoked. 26 U.S.C. §6325(a), (f). As to the assessments made against Tracy Tubbs on November 18, 1991 , and June 1, 1992 , the period for refiling has expired. The United States has offered no evidence that the notice of lien for those assessments was refiled within the required time frame.

 

 

United States of America , Appellee v. Anthony Comparato, Individually and as the Administrator of the Estate of John Comparato, Mildred Comparato, Millicent Comparato, Diana Comparato Carlucci, Appellants

(CA-2), U.S. Court of Appeals, 2nd Circuit, 93-6237, 93-6293, 4/18/94, 22 F3d 455, Affirming a District Court decision, 93-2 USTC ¶50,424

[Code Sec. 6321 ]

Lien for taxes: Settlement proceeds: Property rights: Renunciation.--The parents of a deceased child could not defeat IRS tax liens by renouncing their interest in escrow accounts representing settlement proceeds from malpractice actions relating to their son's death. Under state ( New York ) law, the parents acquired vested interests in the accounts at the time of their son's death. Once the IRS liens attached, they could not be displaced by subsequent state law renunciation of the parents' property rights to the accounts.

[Code Sec. 6334 ]

Levy and distraint: Vested interests: State law renunciation.--State ( New York ) law permitting renunciation of parents' interests in their deceased son's estate could not defeat an existing IRS lien on estate property. Once the parents had vested interests in escrow accounts holding the proceeds from malpractice actions relating to their son's death, federal law controlled whether the parents' interests were exempt from levy.

Zachary W. Carter, United States Attorney, Brooklyn, N.Y. 11201, Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Gilbert S. Rothenberg, Sara S. Holderness, Department of Justice, Washington, D.C. 20530, for appellee. Richard F. Thurston, Denver , Colo. , for appellants.

Before: TIMBERS, CARDAMONE, and KEARSE, Circuit Judges.

TIMBERS, Circuit Judge:

Appellants appeal from a summary judgment in favor of the government entered in the Eastern District of New York, Reena Raggi, District Judge. The court held that federal tax liens had attached to Anthony and Mildred Comparato's property interests in malpractice claims arising from their son's death. The court also held that Anthony and Mildred Comparato's renunciations of their interests in their son's estate did not defeat the federal liens because the liens attached prior to the attempted renunciations. Summary judgment was entered against Anthony and Mildred Comparato for their tax liabilities for the years 1974, 1975, 1976, and 1985.

Appellants contend that Anthony and Mildred Comparato's renunciations of their interests in their son's estate defeated the federal tax liens. They claim that, pursuant to New York law, their renunciations retroactively extinguished their interests in their son's estate.

We affirm.

I.

We summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

The United States commenced this action to collect on tax assessments against Anthony and Mildred Comparato. Between 1985 and 1989, the Internal Revenue Service (IRS) assessed Anthony Comparato a total of $676,534.99 in taxes, interest, and penalties for the tax years 1974-1976 and 1981-1985. In 1989, the IRS assessed Mildred Comparato a total of $215,515.22 in taxes, interest, and penalties for the years 1974-1976 and 1981-1984.

Anthony and Mildred Comparato's principal asset is $650,000 held in escrow accounts pending the outcome of the litigation related to their tax obligations. This money represents the proceeds of the settlement of malpractice actions arising from the death of John Comparato--Anthony and Mildred Comparato's quadriplegic son who died intestate on March 30, 1984. While John Comparato was still alive, a malpractice action which sought damages for pain and suffering was commenced in New York State Supreme Court, New York County . After John Comparato's death, the Queens County Surrogate's Court appointed Anthony Comparato as administrator of John's estate. As administrator, Anthony Comparato pursued the pain and suffering claim and commenced another action for wrongful death. Eventually, the pain and suffering claim was settled for $350,000. The wrongful death claim was settled for $500,000.

In 1989, Anthony Comparato petitioned the Surrogate's Court to approve the settlement and to permit payment of various expenses, including legal fees. He asked that the net proceeds be distributed equally between himself and his wife as John's statutory distributees. In August 1989, before the Surrogate's Court acted on this request, the IRS served notices of levy on Baron & Vesel, attorneys for the Comparato estate, citing tax liens against Anthony and Mildred Comparato. The Surrogate's Court entered an order permitting payment of $200,000 in attorney's fees, the remainder of the money ($650,000) to be deposited in eleven separate escrow accounts pending the outcome of Anthony and Mildred Comparato's challenge to the federal tax assessments.

On April 10, 1991, Anthony and Mildred Comparato executed separate renunciations of their interests in John's estate pursuant to N.Y. Estates, Powers and Trusts Law, §2 -1.11 (McKinney 1981 & Supp. 1994). On September 23, 1991, the Surrogate's Court permitted the renunciations to be filed, despite the fact that the renunciations had not been filed within the nine-month statutory period.

On July 21, 1992 , the Surrogate's Court permitted Diana and Millicent Comparato to intervene in the administration of their brother John's estate. Under New York law, they would succeed their parents as the statutory distributees of John. N.Y. Estates, Powers and Trusts Law, §4 -1.1(a)(5) ( McKinney Supp. 1994).

On July 15, 1992, the government commenced this action which sought to reduce to judgment the tax liabilities of Anthony and Mildred Comparato. In a July 2, 1993 order, the court held that Anthony and Mildred Comparato, as the presumptive heirs and sole statutory distributees of their intestate son, acquired property interests in the proceeds of the malpractice claims as of the date of their son's death. The court also held that Anthony and Mildred Comparato could not renounce their interests in their son's estate to defeat the federal tax liens. The court granted summary judgment in favor of the government. On August 17, 1993, the court entered a final judgment pursuant to Fed. R. Civ. P. 54(b) with respect to the assessments for the years 1974-1976 and 1985 against Anthony Comparato, and for the years 1974-1976 against Mildred Comparato. Enforcement of the judgment was stayed pending a final settlement order by the Surrogate's Court.

Appellants contend that Anthony and Mildred Comparato never had an interest in the settlement proceeds to which the federal tax liens attached as a result of their renunciations pursuant to New York law. The parties stipulated to dismissal of the cross-appeal.

II.

Section 6321 of the Internal Revenue Code provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty . . .) 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". 26 U.S.C. §6321 (1988). The scope of §6321 "is broad and reveals . . . that Congress meant to reach every interest in property that a taxpayer might have". United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-20 (1985). Moreover, a tax lien attaches automatically at the time of the assessment and remains in effect until the liability is satisfied. 26 U.S.C. §6322 (1988). State law controls whether a taxpayer has an interest in property to which a lien may attach. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960).

Appellants contend that Anthony and Mildred Comparato's renunciations of their interests in their son's estate retroactively extinguished any property interests they may have had in the malpractice claims. Absent the renunciations, appellants do not dispute that Anthony and Mildred Comparato had property interests in the malpractice claims as the presumptive heirs and statutory distributes of their intestate son. Instead, appellants rely on New York law, which provides that "[a]ny beneficiary of a disposition may renounce all or part of his interest". N.Y. Estates, Powers and Trusts Law, §2 -1.11(b)(1) ( McKinney 1981). In New York , a renunciation is deemed "retroactive to the creation of the disposition" and it "has the same effect with respect to the renounced interest as though the renouncing person had predeceased the creator or the decedent". N.Y. Estates, Powers and Trusts Law, §2 -1.11(d) ( McKinney Supp. 1994). This statute creates a legal fiction that allows distributees to avoid attachment by creditors or the payment of taxes. In re Estate of Scrivani, 455 N.Y.S.2d 505, 509, 116 Misc. 2d 204, 207-08 (Sup. Ct. N.Y. County 1982).

Appellants rely on §2 -1.11 in contending that Anthony and Mildred Comparato's renunciations resulted in Diana and Millicent Comparato becoming the exclusive owners of the malpractice claims as of John's death on March 30, 1984. Since this date preceded the IRS's assessments against Anthony and Mildred Comparato, appellants contend that Anthony and Mildred Comparato did not have an interest in the malpractice claims pursuant to §2 -1.11 at the time the federal tax liens attached. We reject this contention.

The court properly held that, once the federal liens attached to Anthony and Mildred Comparato's interests in the malpractice actions, their subsequent renunciations pursuant to state law were not effective against the federal liens. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 203-04 (1971) (a state law renunciation could not defeat a federal tax lien that attached to property rights that vested prior to the renunciation). The court held that both Anthony and Mildred Comparato had a vested interest in the settlement proceeds from the malpractice claims. Obviously, the government could have enforced the liens against Anthony and Mildred Comparato prior to the attempted renunciations. We hold that, once state law provided both Anthony and Mildred Comparato with a vested interest in the proceeds of the malpractice actions, federal law controlled whether their interests were exempt from levy by the United States . United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983) ("[O]nce it has been determined that state law has created property interests sufficient for federal tax lien[s] to attach, state law 'is inoperative to prevent the attachment' of such liens") (quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 56-57 (1958)).

Section 6334(c) of the Internal Revenue Code provides that no property is exempt from levy other than property specifically made exempt by §6334(a) . 26 U.S.C. §6334 (1988 & Supp. IV 1992). Since §6334(a) does not provide an exemption for Anthony and Mildred Comparato's interests in their son's estate, the federal tax liens are effective against their interests despite their subsequent renunciations pursuant to §2 -1.11. Mitchell, supra, [71-1 USTC ¶9451 ], 403 U.S. at 205 (§6334 does not provide "for automatic exemption of property that happens to be exempt from state levy under state law"). We reject appellants' contention that the retroactive ownership provision in §2 -1.11 may defeat federal tax liens that attached prior to the attempted renunciations. Rodriguez v. Escambron Dev. Corp. [84-2 USTC ¶9698 ], 740 F.2d 92, 98 (1 Cir. 1984) (the legal fiction of retroactive ownership recognized in the adverse possession statute could not be invoked to defeat federal liens). We affirm the court's decision that Anthony and Mildred Comparato could not renounce their interests in their son's estate to defeat federal tax liens that attached prior to their attempted renunciations.

III.

To summarize:

We hold that the court properly held that appellants' renunciations of their interests in their deceased son's estate did not defeat federal tax liens that attached prior to the renunciations.

Affirmed.

 

 

 

United States of America , Plaintiff v. Lowell R. Gearries, Defendant

U. S. District Court, East. Dist. Ky., Covington, Civil Action No. 75-35, 11/17/81

[Code Sec. 6321]

Lien for taxes: Property subject to lien: Curtesy: Summary judgment.--The motion of the United States for summary judgment in respect to federal tax liens against real and personal property that had been owned by the taxpayer's deceased wife was denied. Under Kentucky law, a husband's right of curtesy in his wife property is an inchoate right during her lifetime and does not become an interest in property to which a federal tax lien can attach until her death. A post-nuptial agreement, exected during the wife's lifetime, although lost, was effective to release the taxpayer's rights in his wife's property so that he had no interest in it after her death.

Louis G. DeFalaise, United States Attorney, Lexington , Ky. 40501 , for plaintiff. Lowell R. Gearries, 111 Bermuda, Louisville, Ky. 40205, pro se. William Schmaedeke, 401 Pike Street, Covington, Ky. 41012, for Burnett Building & Loan Associates. Ware, Bryson, Nolan, West & Hiltz, First Nat'l Bank Building, Covington, Ky. 41011, for First Nat'l Bank & Trust Co. R. Barry Wehrman, Wehrman & Wehrman, 301 Pike Street, Covington, Ky. 41011, for Judy C. Guffey.

Opinion and Order

BERTELSMAN, District Judge:

This matter is before the court on the motion of the United States for summary judgment. For the purposes of this motion only, the United States admits that the post-nuptial agreement claimed to exist by the defendant did in fact exist and was lost, although the United States reserves the right to raise this issue on trial, if its legal contentions on its summary judgment motion are not accepted by the court. For the reasons hereinafter stated, the court believes that the motion for summary judgment must be denied.

Facts

Lowell R. Gearries has failed to pay income taxes due to the United States for the years 1968, 1969 and 1970 in the amount of $11,137.36. A default judgment was entered against Mr. Gearries on June 9, 1977, in the above amount, plus interest.

Lowell Gearries and Lorraine Carson were married on January 19, 1968. The marriage was terminated by the death of Lorraine Carson Gearries on October 13, 1974. On October 13, 1974, Lorraine Carson Gearries was the owner in fee of three parcels of real property. On the date of her death Lorraine Gearries also owned personal property with the value of $11,196.27. Lorraine Carson Gearries died intestate on October 13, 1974. All of the above-described real and personal property was subsequently distributed to the defendant Judy C. Guffey, the daughter of the decedent.

On June 6, 1969, and May 22, 1970, and May 14, 1971, assessments were made against Lowell R. Gearries in the amounts $6,250.60, $2,784.88, and $2,101.88 respectively. On these dates federal tax liens arose and attached all property and rights to property of the taxpayer. Notices of federal tax liens were duly filed with the Kenton County Clerk, Covington , Kentucky , on October 21, 1969, March 31, 1971, and November 29, 1971.

On October 24, 1974, Lowell R. Gearries executed warranty deeds purporting to convey the subject real properties to July C. Guffey. On January 22, 1975, the taxpayer executed a release in favor of Judy C. Guffey of all of his interest in Lorraine Carson Gearries. The total consideration for the deeds and the release was a 1970 Mercury Sedan. On a date subsequent to August 15, 1969, Lowell R. Gearries and Lorraine Gearries entered into a post-nuptial agreement whereby Lowell Gearries released all claim to curtesy or other distributable share and the real or personal property then owned or thereafter to be acquired by Lorraine Gearries. This alleged agreement is admitted to by the U. S. only for the purposes of summary judgment. The post-nuptial agreement has never been recorded.

Issues

1. Does an inchoate right to dower or curtesy constitute property or right to property to which a federal tax lien can attach.

2. Was the alleged post-nuptial agreement between Lowell Gearries and Lorraine Carson Gearries sufficient to extinguish the curtesy rights of Lowell Gearries?

Analysis

It would appear that the central question in this case is whether the agreement between Lowell Gearries and Lorraine Carson Gearries was effective to extinguish the curtesy rights of Lowell Gearries, thereby providing "no property or rights to property" to which a tax lien could attach.

On the date of assessment against a taxpayer for unpaid tax liability, a federal tax lien arises and attaches to all real or personal property and rights to property of the taxpayer. Nevada Rock & Sand Co. v. United States Department of Treasury Internal Revenue Service [74-2 USTC ¶9617], 376 F. Supp. 161 (D. C. Nov. 1974); 26 U. S. C. §6321. After-acquired property is reached by a federal tax lien and the lien is effective from the date of assessment. Rice, Inv. Co. v. U. S. [80-2 USTC ¶9654], 625 F. 2d 565 (5th Cir. 1980). In determining whether "property or a right to property" exists, so as to be subject to a federal tax lien, state law is determinative. Matter of Carlson [78-2 USTC ¶9562], 580 F. 2d 365 (10th Cir. 1978). In the case at bar, the U. S. asserts that a federal tax lien arose out assessment on June 6, 1969, May 22, 1970, and May 14, 1971, in the respective amounts of $6,250.60, $2,784.88 and $2,101.88. The U. S. asserts that insofar as the June 6th lien is concerned, it attached to Mr. Gearries curtesy rights prior to the alleged post-nuptial agreement which purportedly occurred after August 15, 1969. The U. S. asserts that the transfer of property subsequent to the attachment of a federal lien does not affect a lien; the lien passes with the property. The U. S. is correct in asserting that once the lien attaches it follows the property unaffected by subsequent transfers. U. S. v. Bess [58-2 USTC ¶9595], 375 U. S. 51 (1958). The question that therefore arises is whether the tax lien actually attached to Mr. Gearries' inchoate curtesy interest or whether the inchoate right to curtesy is "property or a right to property" as envisioned by 26 U. S. C. §6321.

Federal tax liens attach to all "property and rights to property" which are subject to ownership and which can be transferred and brought under dominion of court by its usual process. Randall v. Colby [61-1 USTC ¶9178], 190 F. Supp. 319 (D. C. Iowa 1961); 35 Am. Jur. 2d Fed. Tax Enforcement §§ 10 and 11. As previously mentioned, state law determines whether the tax debtor has property or right to property. See Matter of Carlson, supra. The right to dower and curtesy in the commonwealth is governed by KRS 392.020. An examination of the statute and the decisions thereunder reveals that the before the spouse's death, the right of the other spouse to curtesy or dower is an inchoate interest or only a potential right of dower. Rowe v. Ratliff, 104 S. W. 2d 437 ( Ky. 1937); Richardson , Kentucky Practice, Vol. 4, §1606. The actual right of dower or curtesy is not existent or more properly is in fact not consummate until the spouse dies. At this point it becomes a "chose in action." See 81 ALR 1110 (1932). The chose in action is property to which a tax lien may attch. The Texas Western Financial Corporation v. McGraw [72-2 USTC ¶9530], 347 F. Supp. 445 (D. C. Tex. 1972). The inchoate right of dower is not an ownership right in the other spouse's land; it is not an estate, a title, or interest in land, and confers upon the spouse no right of possession or control. See Richardson , supra, §1606. The inchoate right cannot be conveyed but only released and cannot be separated from the fee and can pass only in connection with a transfer of the husband's estate to which it is incident. See Richardson , §1612. Hence, it would not appear that the inchoate right of dower is a right in property which is subject to ownership or which can be transferred and brought under the dominion of the court. See Colby, 190 F. Supp. 319 (D. C. Iowa 1961). Therefore, the inchoate right of dower would not appear to be property or an interest in property to which a federal tax lien could attach. This conclusion would be in conformity with the general rule that the inchoate right of dower and curtesy is not such a right that can be subjected to the payment of the wife or husband's debts by a creditor's bill. 25 Am. Jur. 2d Dower and Curtesy, §6. It should also be noted that KRS 404.010 proclaims that a husband has no interest during the wife's life and the wife's separate estate, such estate being free from the debts of the husband.

In Carroll v. Sanford, 35 R. I. 337, 83 A. 855, the court held that a statute similar to KRS 404.010 did not affect a husband's right of curtesy initiate during the life of the wife, but such right was not attachable and creditors who do so before the wife's death acquire nothing. Hence, it would appear that a conclusion that an inchoate right of curtesy is not an interest to which a tax lien could attach is warranted by the aforementioned citations. However, the Court of Appeals has described the inchoate right of dower as a vested right defeasible only by prior death. Truitt v. Truitt's Adm'r., 290 Ky. 632, 162 S. W. 2d 31 (1942). This language, which is used repeatedly in the Kentucky cases when referring to inchoate dower would appear to cast the right of inchoate dower as a sufficient interest in property to which a tax lien could attach. The language used by the Court of Appeals however ignores the true reality of the inchoate right of dower. Under Kentucky law a vested right is freely transferable an inchoate right of dower is not. The inchoate right of dower cannot be separated from the fee and can only pass in connection with a transfer of the husband's estate to which it is incident. See Richardson , §1612. For this reason, it is proper to conclude that a federal tax lien could not attach to the inchoate right of curtesy possessed by Mr. Gearries on June 6th. As noted previously, however, when a spouse dies, the right to dower or curtesy becomes a chose in action. See 81 ALR 1110 (1932). Federal tax liens can attach to a chose in action. Under Kentucky law the right to dower though not assigned to the widow can be attached by creditors. Wintersmith v. Goodin, 4 Ky. Op. 67 ( Ky. 1870). Therefore the question becomes whether the alleged post-nuptial agreement between Mr. Gearries and Mrs. Gearries was sufficient to release Mr. Gearries' right to curtesy before the right became consummate at Mrs. Gearries' death.

The United States first asserts that a post-nuptial agreement is ineffectual against the creditors of the husband under Kentucky law. However it was clear that if the creditors had no rights to the property conveyed or released (as it would appear to be in the case of inchoate rights to curtesy), it cannot be contended that the creditors are prejudiced in any way. See Campbell v. Campbell 's Trustee, 79 Ky. Rep. 395 (1881).

The United States next contends that the alleged post-nuptial agreement was ineffectual because it was not reduced to writing as required by Kentucky law. The defendants contend that a post-nuptial agreement releasing dower of curtesy need not be in writing. The law in the Commonwealth is that a widow's right of dower or curtesy in a spouse's property is an individual interest, not merely a lien, and can be released only when the widow pursues the law in that regard. Wides v. Wides Exr., 299 Ky. 103, 184 S. W. 2d 579 (1944). Ante-nuptial agreements are recognized in the Commonwealth as a valid means of relinquishing dower rights. Johnson's Adm'r v. Johnson, 231 Ky. 740, 22 S. W. 2d 124 ( Ky. 1929); King v. King, 274 S. W. 2d 656 ( Ky. 1954). Such contracts, it would appear, must be in writing however. See Wigginton v. Leech's Adm'r., 149 S. W. 2d 531 ( Ky. 1941). In the present case it would appear from the defendant's affidavit that the agreement was actually reduced to writing. However, the writing is not available now because it was allegedly lost. "A contract is not rendered unenforceable by the loss or destruction of the memorandum required by statute. The rule is that where the memorandum required by the statute was duly made and signed by the party to be charged and is afterwards lost or destroyed, its contents may be proved by oral testimony in an action against such party. The contents of the memorandum may be proved by parol if the court is satisfied either that it was in the possession of the defendant or was lost and destroyed by him." See 72 Am. Jur. 2d Statute of Frauds, §288. As applied to the present case it would appear that the lost writing may be of proof is heavy. The U. S. asserts that even if such a contract existed, the husband did not release his curtesy rights by deed which was required in the Commonwealth by KRS §382.010, which provides as follows:

"The owner may convey any interest in real property not in the adverse possession of another; but no estate of inheritance or freehold, or for a term of more than one year, and real property shall be conveyed except by will or deed."

The above statute does not expressly require that the inchoate right of dower or curtesy be released by deed. Moreover, [t]he inchoate right to dower or curtesy cannot be conveyed, it can only be released and a valid release operates only as an extinguishment and not as a conveyance." See Richardson , §1612. As such, since the release of dower or curtesy is not a conveyance, it is not subject to the provision of KRS 382.010. The United States also, in the alternative, points to 382.02, which provides:

"Every deed of release shall be executed as deeds are executed and shall be as effectual for the purposes therein expressed without the execution of a lease, as if a lease had been executed."

On its face, this section does not require release of inchoate right of dower be accomplished by deed to be directly applicable to the release of the inchoate right of dower. However, at least one case has observed that "a married woman's potential dower interest in her husband's land can be relinquished only in the modes pointed out by statute. By execution of a deed with her husband, or by a separate deed if he has already conveyed, and by privy acknowledged before a proper officer of her execution of the deed." Hanna's Assignees v. Gay, 78 S. W. 2d 915 ( Ky. 1904). This statement however would appear to refer only to the situations wherein an actual piece of property is being transferred by the husband. In this situation the wife must join in the deed or if the husband has already conveyed execute a separate deed of release. See 41 KLJ 678. However, in the present situation the spouse merely wishes to relinquish inchoate dower rights to the other spouse without any transfer of the property to which the inchoate right has attached. In none of the Kentucky cases which discuss and approve of relinquishment of dower by antinuptial or post-nuptial agreement is there any statement that the transaction must be accomplished by deed. See King v. King, 274 S. W. 2d 658 (1955); Jones Adm'r v. Jones, 280 Ky. 509, 132 S. W. 509 (1939).

The only requirement which is explicitly stated, for the validity of a post-nuptial agreement where a spouse relinquishes the right of dower or curtesy, is that it be in writing. See Wigginton v. Leech's Adm'r., 149 S. W. 2d 531 ( Ky. 1941). Indeed it would be difficult to release such right by deed in that during the marital relationship the right of inchoate dower or curtesy is not final and it can attach to specific pieces of property that are acquired after the release is executed. Hence it would appear that dower can be released by post-nuptial agreement and it will be valid though not accomplished by deed.

Therefore, the court being advised,

IT IS ORDERED as follows:

1. That the motion of the United States for summary judgment herein be, and it is, hereby denied.

2. That the parties confer concerning settlement of this matter and future proceedings in this case, and make an oral report to the court at its status call of December 1, 1981, at 1:00 P. M.

 

 

 

United States of America, Plaintiff v. Harold G. Steiner, Ollie Mae Steiner, Sandra Sue Steiner Young, First Wisconsin Trust Co., Robert J. Downing, Equitable Life Assurance Society of the United States, New York Life Insurance Co., Catholic Family Insurance Society, Knights of Columbus, Bank of Mauston, New Lisbon State Bank, Farmers & Merchants Bank, Roland Steiner, Margaret Steiner, Wisconsin River Power Co., S & Y Tree Farms, Inc., and Vacuum Platers, Inc., Defendants

U. S. District Court, West. Dist. Wis., 70-C-195, 441 FSupp 1069, 9/13/77

[Code Sec. 6321--result unchanged by '76 Tax Reform Act]

Tax liens: Property subject to: Real property: Stock: Fraudulent conveyances.--Certain property purchased in the name of the defendant Sandra Steiner when she was a minor was subject to a federal tax lien. Other property conveyed to her when she was a minor was subject to a lien to the extent she used mortgages to repay loans. Other property conveyed to her when she was of age was not subject to a lien. Property that she once held but reconveyed to her father (who had provided the original consideration) was not subject to a lien because the government failed to trace any economic benefit to Sandra. Property that the defendant Harold Steiner reconveyed at a time when he was insolvent was subject to a lien. There was no obligation from the defendant S & Y corporation to Sandra to which a lien could apply. One of her 146 shares in the corporation had been issued to her as a gift from her father at a time when he was insolvent and was subject to a lien. No lien applied to a debt that her father allegedly forgave Sandra at a time he was insolvent.

David C. Melbane, United States Attorney, Madison , Wis. , for plaintiff. William M. Ward, 120 South La Salle St., Suite 2120, Chicago, Ill. 60603, for Harold, Ollie and Sandra Steiner; Hollis Thompson, 107 S. Monroe, New Lisbon, Wis. 53950, for New Lisbon State Bank; Ralph W. Bushnell, 204 S. Hamilton, Madison, Wis., for Equitable Life Assurance Society and New York Life Insurance Co.; Anthony J. Brondino, 501 E. Pleasant St., Mauston, Wis. 53948, for Catholic Family Insurance Society, Curran & Curran, 111 Oak St., Mauston, Wis. 53948, for Bank of Mauston; John A. Cole, Cole & Conway, P. O. Box 666, Wisconsin Rapids, Wis. 54494, for Wisconsin River Power Company; E. H. Radtke, 128 S. Walnut St., Reedsburg, Wis. 53959, for Farmers & Merchants Bank.

Opinion and Order

DOYLE, District Judge:

This is an action in which the United States seeks:

(a) Judgment against defendant Harold G. Steiner for taxes, penalties and interest for the year 1945, plus statutory interest from June 7, 1969, and against Harold G. Steiner and Ollie Mae Steiner for taxes, penalties and interest for the years 1946 to 1947, plus statutory interest from June 7, 1969.

(b) An order requiring defendant First Wisconsin Trust Company to account for the interest resulting from a certain escrow fund, and judgment of the amount of said interest, less the cost of administration of the escrow, with the amount for the judgment to be applied to the tax liability of defendant Harold G. Steiner.

(c) An order to require defendants Equitable Life Assurance Company of the United States, New York Life Insurance Company, Catholic Family Insurance Society, and the Knights of Columbus, to pay to the United States , for application to the tax liability of the defendant Harold G. Steiner, the cash surrender value of certain life insurance policies issued by said defendants.

(d) A determination that certain real property in the name of defendant Sandra Sue Steiner Young belongs to defendant Harold G. Steiner, and an order that said property be sold by the Marshal and the proceeds applied to the claims of creditors of defendant Harold G. Steiner, according to the legal priority of such claims.

(e) The enforcement of plaintiff's liens against stock in Lyndon Wood Products, a corporation, owned by defendant Harold G. Steiner; and against stock in S & Y Tree Farms, Inc., a corporation, owned by defendant Harold G. Steiner and Ollie Mae Steiner. Also, a determination that one share of stock in S & Y Tree Farms, Inc., in the name of defendant Sandra Sue Steiner Young belongs to defendant Harold G. Steiner, and an enforcement of plaintiff's liens against said share of stock. Also, enforcement of plaintiff's liens against the assets of S & Y Tree Farms, Inc., and against the assets of Vacuum Platers, Inc., a wholly owned subsidiary of S & Y Tree Farms, Inc.

(f) A determination that certain real property once in the name of defendant Sandra Sue Steiner Young, but conveyed to others by her prior to commencement of this suit, belonged to defendant Harold G. Steiner, and judgment against the defendant Sandra Sue Steiner Young in a sum equal to the amount of the net proceeds realized by her from the conveyance of said real property.

(g) A determination that certain real property once in the name of defendant Roland Steiner, but conveyed to others by him and his wife, defendant Margaret Steiner, prior to commencement of this suit, belonged to defendant Harold G. Steiner, and judgment against the defendant Roland Steiner in a sum equal to the amount of the net proceeds realized by him from the conveyance of said real property.

(h) A determination that certain real property once in the name of S & Y Tree Farms, Inc., but conveyed to others by it prior to the commencement of this suit, belonged to defendant Harold G. Steiner, and judgment against defendant S & Y Tree Farms, Inc., in a sum equal to the amount of the net proceeds realized by it from the conveyance of said real property.

At trial, leave was granted to plaintiff to amend the complaint so as to seek a further item of relief, namely:

(i) A determination that at a time when defendant Harold G. Steiner was insolvent and one of his creditors was the United States, he forgave a debt due him from defendant Sandra Sue Steiner Young, and judgment against defendant Sandra Sue Steiner Young in a sum equal to the amount of said debt.

With respect to item (a), plaintiff's motion for summary judgment has been granted, and the order below will direct the entry of such judgment.

With respect to item (b), judgment in plaintiff's favor against defendant First Wisconsin Trust Company has previously been entered. Implicit in that ruling was a decision adverse to the position of defendant Robert J. Downing, and the order below will direct judgment foreclosing any claim by him against any of the property described in the complaint, as amended. Defendant First Wisconsin Trust Company has complied with the terms of the judgment.

With respect to item (c), judgment in plaintiffs favor has previously been entered against defendants Equitable Life Assurance Company of the United States, New York Life Insurance Company, Catholic Family Insurance Society and the Knights of Columbus. Said defendants have complied with the terms of said judgment. On its motion, judgment has been entered dismissing this action as to defendant Knights of Columbus.

With respect to item (g), judgment on the merits has been entered in favor of defendants Roland Steiner and Margaret Steiner.

Trial has been had to the court in the course of which and at the conclusion of which certain findings have been made and certain orders have been entered with respect to items (d), (e), (f), (h) and (i). Such findings and orders will be referred to hereinafter in this opinion. As indicated. the subject matters of items (d), (e), (f), (h), and (i) are:

I. The relationship between defendant Harold G. Steiner and defendant Sandra Sue Steiner Young with respect to certain parcels of real property; to certain obligations of S & Y Tree Farms, Inc., to defendant Sandra Sue Steiner Young; to a share or shares of stock in S & Y Tree Farms, Inc.; and to a certain loan.

II. The ownership of stock in Lyndon Wood Products by defendant Harold G. Steiner, and of stock in S & Y Tree Farms, Inc., by defendants Harold G. Steiner and Ollie Mae Steiner.

III. The relationship between defendant Harold G. Steiner and defendant S & Y Tree Farms, Inc., with respect to a certain parcel of real property.

The opinion to follow will be organized according to the subject matters referred to in I, II, and III, above.

I. The Relationship Between Defendant Harold G. Steiner and Defendant Sandra Sue Steiner Young With Respect to Certain Parcels of Real Property; to Certain Obligations of S & Y Tree Farms, Inc., to Defendant Sandra Sue Steiner Young; to a Share or Shares of Stock in S & Y Tree Farms, Inc.; and to a Certain Loan.

A. With respect to certain parcels of real property held by Sandra Sue Steiner Young at time this suit was commenced.

In Count One of the complaint, as amended, it is alleged, and I now find, that certain parcels of real property described in paragraphs XIII(A), XVII(A), and XVIII(A), were conveyed by deed by various grantors to Sandra Sue Steiner Young. ¹ It is further alleged, and I now find, that at the time this lawsuit was commenced, defendant Sandra Sue Steiner Young continued to hold the parcel described in paragraph XIII(A), except for certain portions thereof described in the complaint at paragraphs XXXVI(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y), ² and that she continued to hold the parcels described in paragraphs XVII(A) and XVIII(A). With respect to each such conveyance to defendant Sandra Sue Steiner Young of said real property which she was continued to hold, it is alleged, and I now find, that the consideration for the conveyance to her was provided by defendant Harold G. Steiner.

In Count One, it is further alleged, and I now find, that a certain parcel of real property described in paragraph XIX(A) (except for that portion described in (XIX(B)), and in paragraphs XX and XXI was also conveyed by deed to defendant Sandra Sue Steiner Young. It is further alleged, and I now find, that at the time this lawsuit was commenced, defendant Sandra Sue Steiner Young continued to hold the said parcel. With respect to each such conveyance to defendant Sandra Sue Steiner Young of said real property, it is alleged that the consideration for the conveyance to her was provided by defendant Harold G. Steiner, but I find that this allegation is not true. Rather, with respect to the parcel described in paragraph XIX(A) (except for that portion described in XIX(B)), XX and XXI, I make those findings of fact which appear below.

(1) The paragraph XIII(A) property. In the course of the trial, I determined, and now reaffirm, that the parcel described in paragraph XIII(A) of the complaint, except for the portions thereof described in paragraphs XXXVI(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y), is subject to plaintiff's liens.

(2) The paragraphs XVII(A) property. To determine the issues related to this parcel, findings with respect to a certain guardianship proceeding are necessary, and my findings on that subject are set forth in the following paragraph.

Defendant Sandra Sue Steiner Young was born May 10, 1941. Defendant Harold G. Steiner is her father and defendant Ollie May Steiner is her mother. At times prior to February 28, 1958, defendant Harold G. Steiner had provided the funds by which certain real estate was acquired in his daughter's name. On February 28, 1958, defendant Harold G. Steiner petitioned the County Court for Juneau County , Wisconsin , to be appointed as guardian for his daughter. The petition was granted and with the approval of the County Court, certain of the real property in the name of defendant Sandra Sue Steiner Young was sold for the gross sum of $23,000. The net proceeds from said sale would have been sufficient to repay defendant Harold G. Steiner the sum of $14,817 which he had loaned to his daughter for the acquisition of the particular properties sold. However, the debt was not then repaid and with the consent of the court, the property described in paragraph XVII(A), together with another parcel, ³ was purchased in the name of defendant Sandra Sue Steiner Young from Rosetta Powers through the guardianship, with an additional $12,500 then loaned to her by defendant Harold G. Steiner. When the defendant Sandra Sue Steiner Young became 21 years of age the guardianship was terminated. The cash then on hand ($19,494.47) was paid out to defendant Harold G. Steiner to apply on the loans, leaving a balance of $7,822.53 due him. The real property then part of the corpus of the guardianship, including that described in paragraph XVII(A) and that described in footnote 3 of this opinion, was turned over to defendant Sandra Sue Steiner Young, subject to her indebtedness to defendant Harold G. Steiner in the sum of $7,822.53.

Upon the basis of the facts as found in the preceding paragraph of this opinion, I conclude that the real property described in paragraph XVII(A) of the complaint is subject to plaintiff's lien to the extent of $7,822.53. uNow find, that a certain parcel of real property in this court, leave was granted the defendant Sandra Sue Steiner Young to sell the property described in paragraph XVII(A) of the complaint and to deposit the net proceeds with the clerk of this court. Such a deposit in the sum of $14,241.79 was made. In the order entered below, the clerk will be directed to pay to the plaintiff from said deposit the sum of $7,822.53.

(3) The paragraph XVIII(A) property. On July 2, 1959 , this property was conveyed by deed to Sandra Sue Steiner Young by a Frank Steiner, her great uncle, and his wife Marcella Steiner. Defendant Sandra Sue Steiner Young was unaware of this conveyance at the time. Defendant Harold Steiner obtained a loan from the New Lisbon State Bank at about that time and paid $12,000 to Frank Steiner and Marcella Steiner, in consideration for the conveyance of the XVIII(A) property to defendant Sandra Sue Steiner Young. Defendant Harold Steiner was unable to pay his loan from the New Lisbon State Bank and defendant Sandra Sue Steiner Young assumed the obligation to the bank. In 1967 defendant Sandra Sue Steiner Young renegotiated the said loan with the New Lisbon State Bank and at that time provided, as security for the negotiated loan, mortgages on the paragraph XIII(A) property and the paragraph XVII(A) property. Over a period of time defendant Sandra Sue Steiner Young paid off the loan from the New Lisbon State Bank and used for the purpose of such payments the following sums realized from the sale of the following properties:

(a) $1,018 from sale of the property described at paragraph XXXVI(M).

(b) $1,200 from the sale of the property described at paragraph XXXVI(O).

(c) $3,240 from the sale of the property described at paragraph XXXVI(U).

(d) $2,045 from the sale of the property described at paragraph XXXVI(W).

(e) $1,400 from the sale of the property described at paragraph XXXVI(Y).

(f) $7,000 from the sale of that portion of the property described at paragraph XIV(A) which is not described at paragraph XXXVII(E).

At the times at which the properties described at paragraphs XXXVI(M), XXXVI(O), XXXVI(U), XXXVI(W), XXXVI(Y) and XIV(A) had been conveyed to defendant Sandra Sue Steiner Young the consideration for each conveyance had been provided by defendant Harold G. Steiner. That portion of the property described in paragraph XIV(A) which is not described at paragraph XXXVII(E), from the sale of which to one Glowacki, defendant Sandra Sue Steiner Young obtained $7,000 to apply to the loan from the New Lisbon State Bank (see (f) above), was a part of the corpus of the guardianship discussed above in connection with the paragraph XVII(A) property and was turned over to the defendant Sandra Sue Steiner Young when that guardianship was terminated. Therefore, I determine and conclude that the paragraph XVIII(A) property is not subject to the plaintiff's lien as to the sum of $7,000 realized from the sale of that portion of the property described at paragraph XIV(A) which is not described at XXXVII(E). However, I conclude that the XVIII(A) property is subject to plaintiff's lien to the extent of $8,903 (which is the aggregate of the proceeds of the sales referred to in (a), (b), (c), (d) and (e) on page 10 of this opinion).

(4) The paragraph XIX(A) property (except for that portion described in XIX(B), the property XX property, and the paragraph XXI property. On November 4, 1968 all of this property, which is contiguous, was conveyed by the Bank of Mauston to defendant Sandra Sue Steiner Young for the sum of $35,000. Shortly prior to that transaction, defendant Sandra Sue Steiner Young had obtained the $35,000 paid to the bank by borrowing that sum from George Steiner, Sr., who is the father of defendant Harold G. Steiner and the grandfather of the defendant Sandra Sue Steiner Young. George Steiner Sr., in turn had borrowed the $35,000 from the Bank of Mauston. Defendant Sandra Sue Steiner Young gave her grandfather a note, but not a mortgage on said property as security, for his loan to her. Defendant Harold G. Steiner provided none of the $35,000 used by defendant Sandra Sue Steiner Young to purchase the said real property from the Bank of Mauston. ⁴

On November 21, 1968 , defendant Sandra Sue Steiner Young paid George Steiner the sum of $10,405, to apply on her $35,000 debt to him. She had obtained said sum as the net proceeds of a 1969 sale of the South 1/2 of the Southwest 1/4 of Sec. 23, T16N, R4E, Juneau County to one Biersach. ⁵ On June 15, 1959 , the said property (together with an adjoining parcel) had been conveyed to defendant Sandra Sue Steiner Young by John Kanarowski and Clara Kanarowski. No cash consideration was paid to the Kanarowskis by defendant Sandra Sue Steiner Young or defendant Harold G. Steiner. However, the deed provided that it was not to become operative until June 15, 1969; that during said ten year period, the grantors were to receive any and all subsidies or benefits which might accure to the owners of the property; and that the grantee (defendant Sandra Sue Steiner Young) had the right to plant trees upon said property. At the time of the conveyance to defendant Sandra Sue Steiner Young in 1959, in was agreed among the Kanarowskis, the defendant Harold G. Steiner, the defendant Sandra Sue Steiner Young and her then husband Joel Frederick Young, that seedling would be planted on the property, and that during the ten year period the Kanarowskis would receive and retain certain so-called "soil bank" benefits from the government. Defendant Sandra Sue Steiner Young and her husband did proceed to plant the seedlings which had been raised from seed by S & Y Tree Farms, Inc., and which were the property of S & Y Tree Farms, Inc., and the Kanarowskis did proceed to collect the soil bank benefits. The relationship between defendant Harold G. Steiner and the defendant Sandra Sue Steiner Young with respect to the shares of stock in S & Y Tree Farms, Inc., will be dealt with later in this opinion, but for the present purpose, I will assume, as plaintiff contends, that at the time the said seedlings were planted on the Kanarowski property, all of the outstanding stock in S & Y Tree Farms, Inc., was owned by defendant Harold G. Steiner.

It is the contention of the government that because defendant Sandra Sue Steiner Young was enabled to purchase the property described in paragraphs XIX(A) (except for that portion described in XIX(B)), XX, and XXI, only by reason of the loan of $35,000 from her grandfather, and because she promptly repaid $10,405 of the loan from the net proceeds of her 1969 sale of the S 1/2 of the SW 1/4 of Section 23 to Biersach, and the seedlings were the consideration for the 1959 conveyance of the S 1/2 of the SW 1/4 of Section 23 to defendant Sandra Sue Steiner Young, and because in 1959 the seedlings were the property of S & Y Tree Farms, Inc., and because in 1959 the issued stock of S & Y Tree Farms, Inc., was owned by defendant Harold G. Steiner, plaintiff's lien should now be applied to the property described in paragraph XIX(A) (except for that portion described in XIX(B)), XX, and XXI. The extent of the lien, the government contends, should be about 30 percent of the present value of the property (the proportion of $10,405 to $35,000), but, alternatively, not less than $10,405.

I cannot accept this contention. The legal principle purportedly underlying it is a tracing of the res. The government has failed to prove that the labor involved in planting the seedlings was labor provided by S & Y Tree Farms, Inc., rather than by defendant Sandra Sue Steiner Young, to whom the Kanarowski deed ran, and by her then husband. If such labor was provided by defendant Sandra Sue Steiner Young and her husband, as individuals, their labor as individuals also was a cause of the existence of another item of consideration, namely, the value of the "soil bank" payments to the Kanarowskis. Since the government's theory must be that the seedlings, alone, constitute the res to be traced, it is important to the application of equitable principles to consider the value of the seedlings, but the government has been of little assistance in this respect. Moreover, accepting the government's premise, the purported res (the seedlings) was the property of S & Y Tree Farms, Inc., rather the property of defendant Harold G. Steiner. Accepting, also, the government's thesis that the res (the seedlings) should be traced back to S & Y Tree Farms, Inc., because in 1959 defendant Harold G. Steiner owned all the issued stock of the corporation, the government has failed to demonstrate that as of the time of trial, the res should be traced back through S & Y Tree Farms, Inc. to defendant Harold G. Steiner alone, and thus made vulnerable to the government's lien against defendant Harold G. Steiner personally. As of the time of trial, as will be discussed below, ownership of the issued stock had become diffused. It is not at all clear, therefore, that equitable considerations would support the present tracing of the res through the corporation to defendant Harold G. Steiner alone. Finally, the entire theory developed by the government at the conclusion of the trial represents a rather stubborn improvisation developed only when it had failed to prove up the allegation of its complaint that defendant Harold G. Steiner had provided the consideration for the conveyance by the Bank of Mauston to defendant Sandra Sue Steiner Young of the property described in XIX(A) (except for that portion described in XIX(B)), XX, and XXI.

I conclude that plaintiff's lien applies in no way to the property described in paragraphs XIX(A) (except for that portion described in XIX(B)), XX, and XXI of the complaint.

B. With respect to certain parcels of real property once held by Sandra Sue Steiner Young but no longer held by her at time of trial.

In Count Two of the complaint it is alleged, and I now find, that there were conveyed by various grantors to defendant Sandra Sue Steiner Young the parcels of real property described at paragraphs XXXVI(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y), XXXVII(E), XXXVIII(E), XXXIX(E) and (G), XL(E), XLI(E), XLII(E), XLIII(E), and (G), XLIV(E), XL(E), XLVI(E), XLVII(E), XLVIII(E), and XLIX(E). With respect to each of said parcels, it is alleged that the consideration for the conveyance to her was provided by defendant Harold G. Steiner. I find that the consideration for such conveyances was provided by defendant Harold G. Steiner as to the property described in paragraphs XXXVI(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y), XL(E) XLI(E), XLII(E), XLIII(E) and (G), XLIV(E), XLV(E), XLVI(E), XLVII(E), XLVIII(E), and XLIX(E). My findings on the question as to XXXVII(E), XXXVIII(E), and XXXIX(E) and (G) appear below. It is further alleged, and I now find, that defendant Sandra Sue Steiner Young subsequently reconveyed to others each of the said parcels. The remedy sought in Count Two is a money judgment against defendant Sandra Sue Steiner Young in a sum equal to the amount of the net proceeds realized by her from the later conveyance of said real property by her to others.

At the trial herein, the plaintiff was granted leave to amend its complaint to include similar allegations with respect to a parcel of real property not referred to in the complaint, described as the South One-half of the Southwest one-quarter (S 1/2 of SW 1/4) of Section 23, T16N, R4E, Juneau County. For reasons explained above in part I(A)(4) of this opinion, I find that the consideration for the conveyance to defendant Sandra Sue Steiner Young was not provided by defendant Harold G. Steiner, although some portion of the consideration was provided by S & Y Tree Farms, Inc., and I conclude that as to this parcel plaintiff is entitled to no money damages against defendant Sandra Sue Steiner Young; no further reference will be made in this opinion and order to the S 1/2 of the SW 1/4 of Section 23.

At trial, plaintiff was also permitted to amend its complaint to include similar allegations with respect to that part of the real property described at paragraph XIV of the complaint which is not described in paragraph XXXVII(E). This contention relates to the receipt by Sandra Sue Steiner Young of $7,000 from the proceeds of the sale of a portion of the paragraph XIV property to one Glowacki. For reasons explained in section I(A)(3) of this opinion, the said portion of the paragraph XIV property was not subject to plaintiff's lien. I conclude that the proceeds from its sale, even if traceable, are not subject to plaintiff's lien. ⁶

Insofar as Count Two rests upon the contention that defendant Sandra Sue Steiner Young engaged in fraudulent conduct, or in a conspiracy to defraud, with respect to the above-described parcels of real property, I dismissed the contention at the time of trial. I now conclude that with respect to all those items of property named in paragraphs XXXVI(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y), XL(E), XLI(E), XLII(E), XLIII(E) and (G), XLIV(E), XLV(E), XLVI(E), XLVII(E), XLVIII(E), and XLIX(E) of the amended complaint, for the conveyance of which to defendant Sandra Sue Steiner Young the consideration was provided by defendant Harold G. Steiner, the said defendant Harold G. Steiner engaged in a constructive fraud against the plaintiff. I now conclude that during the times that defendant Sandra Sue Steiner Young held the above-described real property, she held it in constructive trust for the plaintiff and other creditors of defendant Harold G. Steiner, and I further conclude that the said trust can now be impressed to the extent, but only to the extent, that the plaintiff has succeeded in tracing economic benefits to defendant Sandra Sue Steiner Young which have been reduced to her possession and control.

I now find and conclude that plaintiff has failed to trace any economic benefit to defendant Sandra Sue Steiner Young, which has been reduced to her possession and control, from the reconveyances by her of the property described in: XXXVI(E), (G), (I), and (Q); XLI(E), XLII(E); XLIII(G); XLIV(E); XLV(E); XLVI(E); XLVIII(E); and XLIX(E). The remaining parcels described in Count Two as having been reconveyed by Sandra Sue Steiner Young prior to the trial of this case are discussed in the immediately following paragraphs of this opinion.

(1) The proceeds from the sale of the XXXVI(M), (O), (U), (W), and (Y) properties. In subsection 3 of Section I(A) of this opinion, these proceeds, totalling $8,903, have been held to have been traced to the XVIII(A) property.

(2) The proceeds from the sale of the following properties: XXXVI(K); XXXVII(E); XXXVIII(E); XXXIX(E) and (G); XL(E); XLIII(E); and XLVII(E).

With respect to the proceeds from the sale of the XXXVIII(E) and XXXIX(E) and (G) properties, I make the following findings: At the conclusion of the guardianship discussed in part I(A)(2) of this opinion, there was turned over to defendant Sandra Sue Steiner Young that part of the so-called Powers property described in footnote 3 to this opinion and order, subject only to the balance of $7,822.53 due from her to defendant Harold G. Steiner. Provision for the payment of said balance of $7,822.53 to the plaintiff in satisfaction of its lien against defendant Harold G. Steiner is made in part I(A)(2) of this opinion and in the order entered below. Therefore, as of the termination of the guardianship, the property described in footnote 3 of this opinion is considered to have been turned over to defendant Sandra Sue Steiner Young, free and clear of plaintiff's liens. Subsequently, defendant Sandra Sue Steiner Young traded the said property described in footnote 3 of this opinion for the parcels described in XXXVIII(E) and XXXIX(E) and (G). Thus she came to hold the XXXVIII(E) and XXXIX(E) and (G) properties free and clear of plaintiff's liens. When she then reconveyed the XXXVIII(E) and XXXIX(E) and (G) properties to other persons, she was entitled to retain the proceeds from such reconveyances free and clear of plaintiff's liens. When she elected to arrange that such proceeds be paid into S & Y Tree Farms, Inc., she was entitled to enjoy, free and clear of plaintiff's liens, any credit which S & Y Tree Farms, Inc., elected to afford her.

With respect to the XXXVII(E) property, this parcel is a part of the property described in XIV(A). The entire property described at XIV(A) (including that part conveyed by defendant Sandra Sue Steiner Young to Glowacki, as described above) was a part of the guardianship discussed in part I(A)(2) of this opinion, and was turned over to defendant Sandra Sue Steiner Young when that guardianship was terminated. Therefore, I determine and conclude that the XXXVII(E) property was not subject to plaintiff's lien and that the proceeds from its sale are not subject to plaintiff's lien.

With respect to the XXXVI(K), XL(E), XLIII(E), and XLVII(E) properties, the plaintiff has made a valiant effort in its post-trial brief to trace the proceeds into S & Y Tree Farms, Inc., apparently to support one or both of these contentions: that the issued stock in S & Y Tree Farms, Inc., in the name of Sandra Sue Steiner Young as of the time of trial is subject to plaintiff's lien, or that a credit showing to Sandra Sue Steiner Young on the books of S & Y Tree Farms, Inc., is subject to plaintiff's lien. However, the plaintiff has failed to prove up its case in this respect. The court is asked to draw inferences that a rough correlation between the dates of the reconveyances of these properties by Sandra Sue Steiner Young and the amounts received by her, on the one hand, and the dates and amounts of certain credits to Sandra Sue Steiner Young entered in a document (plaintiff's exhibit 133) purporting to be an S & Y Tree Farms, Inc. record of Sandra Sue Steiner Young's account with it, on the other, is sufficient to trace the res. With the possible exception of the XXXVI(K) property, the asserted correlation as to times and amounts is too rough to support the findings sought. Assuming that the correlations were otherwise sufficient as to the XXXVI(K) property, a subsequent entry in exhibit 133 (on December 18, 1968) appears to cancel the credit allowed Sandra Sue Steiner Young on June 1, 1966. While this cancellation of the credit may be related to the issuance of 145 shares of stock to Sandra Sue Steiner Young at about that time, this is unclear and undeveloped in the record. See section I(D) of this opinion. In any event, although an abortive attempt was made at trial, the government produced no reliable or definitive evidence concerning the course of dealing between Sandra Sue Steiner Young and S & Y Tree Farms, Inc.

I conclude that plaintiff failed to trace any economic benefit to defendant Sandra Sue Steiner Young, which has been reduced to her possession and control, from the reconveyances by her of the XXXVI(K), XL(E), XLIII(E), and XLVII(E) properties.

C. With respect to certain obligations of S & Y Tree Farms, Inc. to defendant Sandra Sue Steiner Young.

Exhibit 133 was supplied by defendants Harold G. Steiner and Sandra Sue Steiner Young in response to plaintiff's interrogatories. It appears to be a statement by S & Y Tree Farms, Inc. of defendant Sandra Sue Steiner Young's account with the corporation from August 1, 1964, through January, 1972, and it shows a concluding credit balance of $8,330.46 in favor of the corporation. On its face, therefore, it revealed no obligation from the corporation to defendant Sandra Sue Steiner Young as of the time of trial. In any event, as mentioned earlier, the plaintiff failed to produce definitive evidence at trial concerning the transactions between the corporation and defendant Sandra Sue Steiner Young during the period in question. I conclude that there is no res, in the form of an obligation from S & Y Tree Farms, Inc. to defendant Sandra Sue Steiner Young, to which plaintiff's lien can apply.

D. With respect to a share or shares of stock in S & Y Tree Farms, Inc.

As of the time of trial, 146 issued shares of the stock of S & Y Tree Farms, Inc. were in the name of defendant Sandra Sue Steiner Young. I find that one of these shares was issued to defendant Sandra Sue Steiner Young as a gift from defendant Harold G. Steiner at a time when defendant Harold G. Steiner was insolvent and was indebted to plaintiff. I hold that plaintiff's lien applies to said share.

The remaining 145 shares were issued to defendant Sandra Sue Steiner Young on about December 8, 1968. Defendant Sandra Sue Steiner Young contends that they were issued to her in exchange for her payment into S & Y Tree Farms, Inc. of the proceeds of the sale of the property described in paragraphs XXXVIII(E) and XXXIX(E) and (G) of the complaint, which proceeds, as I have determined above in section I(B)(2) of this opinion, were not subject to plaintiff's lien. The evidence of this explanation of the transaction is not clear and convincing, but plaintiff has failed to meet its burden to prove any other explanation which would render such shares subject to its lien. I conclude that the said 145 shares are held by defendant Sandra Sue Steiner Young free and clear of plaintiff's lien.

E. With respect to a certain loan.

At trial, plaintiff was granted leave to amend the complaint by adding an additional claim for relief. Because leave to make the amendment was granted at a point in the trial subsequent to the court's determination that the plaintiff had failed to allege or prove that defendant Sandra Sue Steiner Young had defrauded the plaintiff, or had engaged in a conspiracy to defraud the plaintiff, plaintiff invites a finding with respect to this new claim that defendant Sandra Sue Steiner Young did participate in such a fraud or in such a conspiracy to defraud. I decline to make such a finding.

This new claim appears to rest entirely upon the plaintiff's assertion that at the conclusion of the guardianship, the payment of $19,494.47 to defendant Harold G. Steiner, as shown in the final account, did not occur. I decline to make such a finding. I, therefore, conclude that plaintiff cannot prevail in its prayer for judgment against defendant Sandra Sue Steiner Young in a sum equal to the amount of a debt from her to defendant Harold G. Steiner, which defendant Harold G. Steiner allegedly forgave at a time when he was insolvent and when one of his creditors was the plaintiff.

II. The Ownership of Stock in Lyndon Wood Products by Defendant Harold G. Steiner, and of Stock in S & Y Tree Farms, Inc., by Defendants Harold G. Steiner and Ollie Mae Steiner

I find and determine that defendant Harold G. Steiner is the owner of a one-half percent interest in Lyndon Wood Products, Inc., and that plaintiff's lien applies to said interest.

I find and determine that defendant Harold G. Steiner is the owner of three shares of stock, and defendant Ollie Mae Steiner is the owner of one share of stock in S & Y Tree Farms, Inc., and that plaintiff's lien applies to each of said shares of stock.

III. The Relationship Between Defendant Harold G. Steiner and Defendant S & Y Tree Farms, Inc., With Pespect to a Certain Parcel of Property

I find that on April 30, 1956, Edward Christensen and Edna Christensen conveyed to defendant S & Y Tree Farms, Inc., a certain parcel of land; that the consideration for such conveyance was provided by defendant Harold G. Steiner; that at such time, defendant Harold G. Steiner was insolvent and that one of his creditors was the plaintiff; that by deed dated December 28, 1967, said S & Y Tree Farms, Inc. reconveyed said property to Arthur Freier, Harold Freier, and Irving Freier for the sum of $800; and that said sum of $800 is among the present assets of S & Y Tree Farms, Inc. I conclude that the assets of S & Y Tree Farms, Inc. are subject to plaintiff's lien to the extent of $800.

Order

Upon the basis of the entire record herein, it is hereby ordered that:

1. Any and all judgments heretofore entered in this case are reaffirmed.

2. Judgment be entered in favor of the plaintiff pursuant to the order entered herein January 11, 1972 , without costs.

3. Judgment be entered dismissing this action as to defendant Wisconsin River Power Company, without prejudice and without costs.

4. Judgment be entered dismissing this action against defendants Roland Steiner and Margaret Steiner, with prejudice and without costs.

5. Judgment be entered denying any and all claims of defendant Robert J. Downing against any of the property described in the complaint as amended, with prejudice and without costs.

6. Judgment be entered ordering the clerk of this court to pay to the plaintiff the sum of $7,822.53 from the sum of $14,241.79 heretofore deposited with the clerk by defendant Sandra Sue Steiner Young, and to pay to the defendant Sandra Sue Steiner Young the sum of $6,419.26 from said sum.

7. Judgment be entered ordering the clerk of this court to pay to the plaintiff the sum of $58,127.67 heretofore deposited with the clerk by defendant New York Life Insurance Co. and defendant Equitable life Assurance Society of the United States.

8. Judgment be entered that the following described property be sold by the United States Marshal and that the proceeds thereof be applied to the tax liabilities of defendant Harold G. Steiner:

(a) that property described in paragraph XII(A) of the complaint, except for those portions described in paragraphs XIII(E), (G), (I), (K), (M), (O), (Q), (U), (W), and (Y);

(b) that property described in paragraph XVIII(A) of the complaint, to the extent of $8,903.00;

(c) that one share of the stock of S & Y Tree Farms, Inc., first issued to defendant Sandra Sue Steiner Young;

(d) that interest in the issued stock of Lyndon Wood Products, Inc., in the name of defendant Harold G. Steiner;

(e) that property described in paragraph LV of the complaint, to the extent of $800.00.

9. Judgment be entered dismissing the complaint on its merits as to all the defendants in all other respects, without costs.

¹ Paragraph XVI(A) alleges that another parcel was so conveyed, but the allegation was denied and abandoned.

² Paragraph XXXVI(S) alleges that another portion there described is no longer held by defendant Sandra Sue Steiner Young, but the allegation was denied and abandoned.

³ The other parcel is not described in the complaint, but is property described as Lot 10 and the West 60 feet of Lot 11, Block 11, Boorman's Addition to the City of Mauston . This parcel is discussed in part I(B) of this opinion in connection with the property described at paragraphs XXXVIII(A) and XXXIX(A) of the complaint.

⁴ Some time prior to November 4, 1968 , defendant Harold G. Steiner had enjoyed an interest in this property, but in an action commenced by the Bank of Mauston in a Wisconsin state court, to which the United States was a party, the said interest of defendant Harold H. Steiner had been foreclosed. At trial in the present case, I concluded, and now reaffirm the conclusion, that neither the fact that defendant Harold G. Steiner once enjoyed an interest in this property, nor the allegation in the complaint that defendant Harold G. Steiner provided the consideration for the conveyance of the property to defendant Sandra Sue Steiner Young, supports the application of plaintiff's lien to the said property.

⁵ This parcel is not referred to in the complaint, but in light of testimony at trial, plaintiff was granted leave to amend its complaint to allege, in substance, that it had been purchased in 1959 from a John and Clara Kanarowski with consideration furnished by defendant Harold G. Steiner; that it had been owned by him although defendant Sandra Sue Steiner Young was named as grantee in the deed; that defendant Sandra Sue Steiner Young had conveyed the property to Biersach in 1969; and that defendant Sandra Sue Steiner Young is liable in money damages to plaintiff in a sum equal to the net proceeds of the sale to Biersach. This theory of plaintiff is discussed in part I(B) of this opinion.

In its post-trial brief, plaintiff objects to the manner in which defendant Sandra Sue Steiner Young handled the sale to Biersach on her income tax return for 1969, but such an irregularity, if it occurred, is no part of the present lawsuit.

⁶ At trial, plaintiff was also granted leave to amend its complaint by removing paragraph XVII from Count One to Count Two because, during the pendency of this present lawsuit, the property was sold by leave of court and the net proceeds deposited with the clerk of this court. However, in part I(A)(2) of this opinion, I have dealt with the paragraph XVII(A) property under Count One as if it were still held by defendant Sandra Sue Steiner Young.

 

 

 

Donald J. Pieper and Donna Madge Pieper, husband and wife, Plaintiffs v. Brian Stevens; Phillis L. Stevens; et al., Defendants

State Court, Second Judicial District of Idaho, Nez Perce County, Case No. 22007, 5/15/74

[Code Sec. 6321]

Lien for taxes: Property of another.--A tax lien on property held by the mortgagor was not effective against the mortgagee who took possession of the property upon the default of the mortgagor, where the mortgagor discharged the lien by filing in bankruptcy.

Wynne M. Blake, Blake & Feeney, 1901 Idaho St. , Lewiston , Idaho , for plaintiffs. Paul L. Westberg, Assistant United States Attorney, Boise , Idaho , for defendants.

Findings of Fact and Conclusions of Law

MAYNARD, District Judge:

This cause having come on duly and regularly for trial before the Court in Lewiston, Nez Perce County, Idaho, on the 6th day of February, 1974, the plaintiff Donald Pieper having appeared in person and with his attorney, Wynne M. Blake, and the only appearing defendant, United States of America, having appeared through its attorney, Paul L. Westberg, Assistant United States Attorney for Idaho, and the parties having during the trial adduced evidence and thereafter having submitted to the Court briefs in support of their respective positions, and subsequent to the trial it having been shown unto the Court upon motion for default that the defendant Brian Stevens, by deed quitclaimed any interest he had in and to the property unto the plaintiffs, which deed was recorded in the records of Nez Perce County, State of Idaho, as Instrument No. 360401, and that the defendant Phillis L. Stevens by deed had quitclaimed any interest she had in and to the property described in the caption of the complaint unto the plaintiffs herein by instrument recorded in the records of Nez Perce County, State of Idaho, being No. 360402, and it further appearing to the court upon said motion for default that the State of Idaho had heretofore filed in the above entitled matter its disclaimer and that Big West Oil Company was a foreign corporation who had at one time nominated Lucille McGovern Smith of Hayden Lake, Idaho, as its statutory agent, which said statutory agent at the time of the institution of this action and attempted service upon her, no longer resided in Idaho, but resided in Vancouver, B. C., and no other statutory agent had been designated for said corporation, that by reason thereof said corporation and the unknown owners were served process by publication, the affidavit of publication is on file as a part of the records and files herein; that service has been made upon all of said defendants; that all of said defendants, other than the appearing defendant, being in default, an order of default therefor having heretofore entered, and the matter having been fully submitted to the court,

NOW, THEREFORE, the court being fully advised in the premises, makes and enters the foregoing and following as its findings of fact and conclusions of law, to-wit:

Findings of Fact

I. The plaintiffs were on March 31, 1972 , the date this action and the Lis Pendens therein were filed, and had been at all times since September 13, 1965 , owners in fee simple absolute in possession and entitled to possession of all the real property described in paragraph II of the complaint on file herein.

II. The plaintiffs and their predecessor in interest had prior to March 31, 1972 , for a period of more than five years, paid all taxes levied and assessed upon said real property described in paragraph II of the complaint.

III. The plaintiffs entered into a contract for sale of said real property under date of March 21, 1967, wherein the plaintiffs agreed to sell unto the defendants Brian Stevens and Phillis L. Stevens the said property for the sum of $50,000.00, payable $10,000.00 upon execution of the contract, and the remaining balance of $40,000.00 in monthly installments of $535.44, which monthly payments included interest upon the unpaid principal balance at the rate of 61/2% per annum.

IV. The defendants Stevens thereupon took possession and remained in possession of the said property until early June, 1969, at which time defendant Stevens advised the plaintiff Donald J. Pieper that by reason of family and financial difficulties Stevens could no longer make payments upon the contract and asked the plaintiff Donald Pieper to retake possession of said property, and thereupon surrendered and abandoned said property unto the plaintiff Donald Pieper.

[Tax Assessment]

V. The unpaid balance owing by the defendant Stevens upon said contract at the time of surrender of possession and abandonment of said property was in the approximate sum of $36,000.00. Thereafter, the plaintiff Pieper leased said property for the sum of $350.00 per month, and subsequently sold the same for $32,700.00. Subsequent to the surrender of the real property by the defendant Stevens to the plaintiff Pieper, the Internal Revenue Service made an assessment upon the defendant Stevens for unpaid taxes upon the dates and in amounts as follows:

June 13, 1969
 ......         $ 410.28

June 20, 1969
 ......         1,862.63

July 4, 1969
 .......           394.36

August 15, 1969
 ....           397.40

Notice of lien covering the first two assessments was recorded in the office of the Recorder of Nez Perce County on October 13, 1969 , and the second notice of lien covering the third and fourth assessments was recorded on October 20, 1969 , in the office of the County Recorder of Nez Perce County as Instruments Nos. 340522 and 340627, respectively.

The defendant Stevens was discharged in bankruptcy in October of 1971.

VI. There is no evidence in the record indicating that the plaintiffs were unjustly enriched as against the United States of America as a result of the forfeiture and abandonment by the defendant Stevens of his interest in the above described real property.

VII. The defendant United States of America has contended that this court lacks jurisdiction over said defendant; that the plaintiffs possessed no more than an equitable mortgage in the above described property which could not be surrendered without an action in forfeiture, both of which contentions are without merit.

VIII. The defendant Big West Oil Company of Montana had an interest in said property by reason of a mortgage executed by the defendants Brian Stevens and Phillis L. Stevens under date of October 29, 1967, which said interest terminated upon the discharge of the obligation of the defendant Brian Stevens, which said mortgage was given to secure in bankruptcy and upon the default of said defendant heretofore entered.

IX. There are other persons unknown who claim some right, title of interest or estate in and to the real property described in the caption of the complaint and in paragraph II thereof adverse to the rights of the plaintiffs; that the claims of such persons are without merit.

X. That each and all of the defendants, both known and unknown, named in the caption of the complaint on file herein, claim some right, title or interest, estate or demand, in and to the real property described in paragraph II of the complaint, and in the caption thereof, adverse to the rights of the plaintiffs, but that none of the defendants either known or unknown, have any right, title or interest in and to said real property.

Based upon the foregoing facts found, the Court makes and enters herein its CONCLUSIONS OF LAW, as follows:

I. This quiet title action is a proper remedy and this Court has jurisdiction over the defendant United States of America .

II. The defendants Brian Stevens and Phillis L. Stevens had no further interest in and to the above described real property from and after their surrender and abandonment thereof.

III. The title of the plaintiffs in and to the above described real property ought to be quieted as against the tax liens filed by the United States of America on October 13 and October 20, 1969, upon tax assessments dated subsequent to the date of the surrender of possession and abandonment of the said real property by the defendant Brian Stevens.

IV. The plaintiffs are entitled to a decree adjudging them to be the owners in fee simple absolute, in possession and entitled to possession of the property described in paragraph II of the complaint, and adjudging that all of the defendants named in plaintiffs' complaint, both known and unknown, and each of them, and any person claiming by, through or under them and each of them, and all persons claiming to have acquired any estate or interest in said premises, or any part thereof, or parcel thereof, subsequent to the filing of the Lis Pendens in this action, have not nor has any of them any right, title or interest whatsoever in said premises and quieting the title to the plaintiffs thereto and debarring and enjoining the said defendants, and each of them, and all persons claiming to have acquired any right, title or interest of, in or to said property, as described in paragraph II of the complaint, or any part thereof, subsequent to the filing of the Lis Pendens, from asserting any claim, right, title or interest of, in or to said real property, or any part thereof adverse to said plaintiffs.

 

 

 

United States of America , Plaintiff v. Maurice F. McCrackin and Julia M. Watson, Administratrix of the Estate of Elizabeth Findley McCrackin, Julia M. Watson, Robert H. McCrackin, Defendants

U. S. District Court, So. Dist. Ohio , West. Div., Civil Action 4535, 189 FSupp 632, 11/7/60

[1954 Code Sec. 6321]

Tax liens: Property subject thereto: Renounced legacy.--Where the taxpayer had effectively renounced his legacy under his mother's will in accordance with state law, there was no property or property right belonging to him to which a Federal tax lien could attach. While one of his motives was to prevent the Government from satisfying its lien, this was not "fraud." The court had no authority to compel him to revoke his renunciation. Nor could the court determine the disposition of the renounced legacy, that determination being within the province of the Probate Court.

Hugh K. Martin, U. S. Attorney and Thomas Stueve, First Assistant U. S. Attorney for plaintiff. Morse Johnson, 921 Dixie Terminal Bldg., Cincinnati 2, Ohio for defendants other than Maurice McCracken.

Findings of Fact, Discussion, Conclusions of Law, Order

Findings of Fact

WEINMAN, District Judge:

1. On December 13, 1957 , Elizabeth Findley McCrackin executed her last Will and Testament. Item I of the will provides for the debts and expenses. Item II provides:

"All the property, real and personal, of every kind and description, wheresoever situate, which I may own or have the right to dispose of at the time of my decease, I give, bequeath and devise to my children, Robert Hanawalt McCrackin of San Diego, California, Julia McCrackin Watson of Brookfield, Illinois, and Maurice F. McCrackin of Cincinnati, Ohio, absolutely and in fee simple, share and share alike.

"Any and all debts which may be owing by my son, Robert Hanawalt McCrackin, or his estate, to me at the time of my decease are to be deemed advancements against my said son's residuary share herein and shall by my Executor be charged against said son and deducted from his residuary share herein accordingly."

2. Elizabeth Findley McCrackin died testate in Cincinnati , Ohio , October 15, 1958 , leaving an estate exceeding $10,000.00 in value and consisting entirely of personalty.

3. Her will was presented to the Probate Court of Hamilton County for probate October 21, 1958 and on November 7, 1958 , said will was admitted to probate.

4. On January 13, 1959 , Maurice F. McCrackin resigned as executor of said estate and Julia M. Watson was later named administratrix of said estate.

5. On October 30, 1958 , Maurice F. McCrackin filed in the Probate Court of Hamilton County a paper titled "REFUSAL TO TAKE BEQUEST OR LEGACY UNDER WILL" which provides as follows:

"Prior to admission of the Last Will and Testament of my mother, Elizabeth Findley McCrackin, to probate by the Probate Court of Hamilton County, Ohio, I, Maurice F. McCrackin, do hereby, absolutely and forever refuse to accept any specific or residuary bequest or legacy which may be or has been granted me under said Will."

6. On August 19, 1959 , Maurice F. McCrackin filed in the Probate Court of Hamilton County a paper titled "CONFIRMATION OF REFUSAL TO TAKE BEQUEST OR LEGACY UNDER WILL" which provides as follows:

"Prior to the admission of the Last Will and Testament of Elizabeth Findley McCrackin to probate by the Probate Court of Hamilton County, Ohio, I, Maurice F. McCrackin, did absolutely and forever refuse to accept any specific or residuary bequest or legacy granted me under said Will. The Will having now been admitted to probate, I hereby confirm said refusal to accept any specific or residuary bequest or legacy granted me under it."

7. Maurice F. McCrackin filed no federal income tax returns for the years 1955 through 1958.

8. Maurice F. McCrackin, during all the taxable years herein involved has been, and still, is, a Presbyterian Minister employed by the Board of Trustees of West Cincinnati-St. Barnabas Church, Cincinnati , Ohio .

9. On various dates during the year 1958 a delegate of the Secretary of the Treasury made assessments of income taxes against the defendant, Maurice F. McCrackin, for the years 1955, 1956, 1957 and for the period from January 1, 1958 to October 29, 1958 . The assessments for the years 1955, 1956 and 1957 each included penalties imposed by Title 26 U. S. C. A. (I. R. C. 1954) §§ 6653(b) and 6654(a) and the assessment for the said period in 1958 included a penalty imposed by Title 26 U. S. C. A. (I. R. C. 1954) §6654(a). The assessments for the years 1955, 1956 and 1957 also included interest computed to the date of the assessment. Notice was given to and demand made of the defendant, Maurice F. McCrackin, for payment of the amounts of said assessments. Thereafter, notices were filed with the Recorder's Office, Hamilton County , Ohio , wherein the United States claims liens upon all the properties and rights to properties of the said defendant in the amounts of the assessments. The dates of the aforesaid acts and the amounts of each are as follows:

                           Date of                                                                                  Notice           Notice

Tax Period              Assessment             Tax         Penalties         Interest             Total         and Demand          of Lien

1955 ..........            
6/13/58
         $813.00           $429.24          $105.49         $1,347.73            6/13/58          6/27/58

1956 ..........            
6/13/58
          872.50            460.65            60.87          1,394.02            6/13/58          6/27/58

1957 ..........            
8/29/58
          979.61            517.40            21.85          1,518.86            8/29/58         10/23/58

1958* .........           
10/29/58
          467.00              2.06                             469.06           
10/29/58

* Includes period from January 1, 1958 to July 31, 1958 .

On June 30, 1958 , a payment in the amount of $47.29 was made against the assessment for the year 1955. No part of the balance of said assessments has been paid.

10. On September 5, 1958, Maurice F. McCrackin wrote a letter (plaintiff's exhibit D) to Elmer C. Beckers, a revenue officer in the Internal Revenue Service, wherein the said Maurice F. McCrackin stated that he would no longer file income tax returns and he "[would] not honor any summons, subpoena or indictment from the department of internal revenue, Judge of The District Court or United States Commissioner."

11. On December 12, 1958, Maurice F. McCrackin was found guilty by a jury of violating Title 26 U. S. C. A. (I. R. C. 1954) §7210 in that he neglected to appear in accordance with an administrative summons issued by the Internal Revenue Service.

12. One of the motives for Maurice F. McCrackin's refusal to accept the legacy under his mother's will was to prevent the United States Government from satisfying the liens which it has against his property.

Discussion

The questions of law presented to the Court are as follows:

First. Is Maurice F. McCrackin's renunciation valid or does he possess any "property" or "rights to property" as to the legacy under his mother's will to which the tax liens of the United States may attach?

Second. Even if Maurice F. McCrackin's renunciation is valid, may this Court order him to withdraw said renunciation?

Third. Even if the Court holds that Maurice F. McCrackin's renunciation of his legacy is valid, what is the disposition of said legacy?

First. There can be no doubt that the Court must look to the law of Ohio to determine whether Maurice F. McCrackin possesses any "property" or "rights to property" under Title 26 U. S. C. A. (I. R. C. 1954) §6321 to which the tax liens of the United States may attach. The Supreme Court of the United States in the very recent decision of Aquilino v. United States, 363 U. S. 509, 512-514 (1960) [60-2 USTC ¶9538] stated:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' Morgan v. Commissioner, 309 U. S. 78, 82 [40-1 USTC ¶9210]. Thus, as we held only two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . .' United States v. Bess, 357 U. S. 51, 55 [58-2 USTC ¶9595]. However, once that tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights of property.' (Citations omitted). The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform administration of the federal revenue statutes." (Footnotes omitted).

The most important question before this Court is whether under the law of Ohio Maurice F. McCrackin may renounce his legacy. In Ohio National Bank of Columbus v. Miller, 41 O. L. A. 250, 253 (1943), an Ohio Court of Appeals quoted with approval the following language from 69 C. J. 974:

". . . a beneficiary under a will is not bound to accept a legacy or devise therein provided for, but may disclaim or renounce his right under the will, even where the gift to him is beneficial, provided he has not already accepted it. The motives which prompt a renunciation are immaterial in the absence of fraud or collusion; and the rejection of a gift by a legatee is not equivalent to a conveyance by him for the purpose of defeating creditors."

At pages 254 and 255 the Court quoted with approval the following language from Bradford v. Calhoun, 120 Tenn. 53, 109 S. W. 502 (1907):

"The renunciation is not a voluntary conveyance void as against existing creditors, because, when he has properly renounced, the renunciation relates back to the date of the gift, and, if he has never accepted the gift, he has had nothing that could be made the subject of a voluntary conveyance."

And at page 256 of the Miller case the Court stated:

"The right of a beneficiary to reject an interest created in his behalf where no mention is made thereof in the will arises independent of the instrument."

This statement made by the Court of Appeals nullifies the Government's argument that the law as announced in the Miller case is inapplicable because in that case there was a provision in the decedent's will as to the disposition of certain property should one of the legatees renounce.

See In re Estate of Louis H. Hartman, 29 Ohio Op. 256, 258 (1944), wherein the Probate Court of Lucas County stated:

"The motive prompting renunciation is immaterial.

"In Ohio the law may be said to be that title passes upon the death of the testator to the devisee or legatee subject to being divested by renunciation."

See also Wallace v. McMicken, 2 Disney 564 (1859), for a case from the Superior Court of Cincinnati to the same effect.

[No Fraud Involved]

The United States Government in its brief argues that Maurice F. McCrackin's motive in renouncing his legacy was to defraud the United States . The Court, in its Findings of Fact, concluded that one of the motives for his renunciation was to prevent the United States Government from satisfying its lien. Though this Court in no way condones the action of Maurice F. McCrackin, it is of the opinion that what he has done does not constitute "fraud" within the true meaning of the word as used by the Court of Appeals in the Miller case. For Maurice F. McCrackin's action to have constituted a "fraud", it would have been necessary for him to have made a false representation to the United States Government and for the United States Government to have relied, to its detriment, on said false representation. This Court need not discuss the various elements of fraud since it is clear that one of the most important, a false representation, is lacking. The true position of the United States Government is that of a disappointed creditor, not one who has been defrauded.

Though the case of Ohio National Bank of Columbus v. Miller, supra, is not a decision of the highest court in Ohio , this Court is bound by its pronouncements. In Fidelity Union Trust Co. v. Field, 311 U. S. 169, 177, 178 (1940), the Supreme Court of the United States stated:

. . . The highest state court is the final authority on state law . . ., but it is still the duty of the federal courts, where the state law supplies the rule of decision, to ascertain and apply that law even though it has not been expounded by the highest court of the State. . . . An intermediate state court in declaring and applying the state law is acting as an organ of the State and its determination, in the absence of more convincing evidence of what the state law is, should be followed by a federal court in deciding a state question . . .." (Footnotes omitted).

Our own Circuit Court of Appeals, in the case of John Hancock Mutual Life Insurance Company v. Tarrence, 244 F. 2d (C. C. A. 6th 1957) stated:

. . . There can no longer be any question of the unqualified obligation of a district court in a diversity case to follow the law expressed by an intermediate state appellate court, if the state's highest court has not declared it, and to do so even if the federal court may think the law as so expressed is unsound in principle. . . ."

Though the instant case is not a diversity case, it is one in which this Court must apply state law; therefore, the pronouncements in Fidelity Union Trust Co. v. Field, supra, and John Hancock Mutual Life Insurance Company v. Tarrence, supra, are applicable to this case.

[Renunciation Valid]

From the foregoing discussion this Court is led to the conclusion that Maurice F. McCrackin's renunciation is valid and he owns no "property" or "rights to property" under his mother's will to which the tax liens of the United States Government may attach.

Before passing to the second question presented, the Court wishes to comment on two Ohio Supreme Court cases which have been cited and discussed by both plaintiff and defendants in their briefs. The first syllabus of Orlopp v. Schueller, Admr., De Bonis Non, 72 O. S. 41 (1905) states:

"1. Property or money held by the executor or administrator of an estate in his representative capacity, cannot be reached by attachment or garnishee process in an action against the heir or legatee before an order of distribution has been made."

The syllabus of Union Properties, Inc. v. Patterson, 143 O. S. 192 (1944) provides:

"A judgment creditor, during the administration of an estate in the Probate Court and before an order of distribution is made, may maintain an action in the nature of a creditor's bill in the Court of Common Pleas to reach an interest of the judgment debtor-legatee in funds or property in the hands of the executor of such estate."

The Court finds it unnecessary to rely on either of these cases after concluding that under Ohio law Maurice F. McCrackin, after filing his renunciation, has no interest in the proceeds of his mother's estate.

Second. The United States Government urges that this Court may compel Maurice F. McCrackin to revoke his renunciation and accept his legacy. In support of this argument, the Government cites United States v. Ison, 67 F. S. 40 (D. C. S. D. N. Y. 1946) [46-1 USTC ¶9269]. In that case, the District Court required the taxpayer to assign to the United States his interest in two policies insuring his life. That case in no way supports the contention of the Government in the instant case. In the Ison case, it was determined that the taxpayer owned the property in question and the Court was merely enforcing the Government's lien. In this case, under the law of Ohio , Maurice F. McCrackin does not own the property in question.

Though this Court believes that Maurice F. McCrackin could, under the Ohio law, revoke his renunciation before an order of distribution is made [see Erman v. Erman, 101 O. A. 245 (1956),] this Court has no authority to compel him to do so. In the first syllabus of Schoonover v. Osborne, 193 Iowa 474, 187 N. W. 20 (1920), quoted with approval in Ohio National Bank of Columbus v. Miller, supra, at page 254, the Court stated:

"Creditors have no right nor courts jurisdiction, to compel acceptance or prevent renunciation or rejection of a benefit conferred by will."

Third. The United States Government has argued that even if Maurice F. McCrackin's renunciation of his legacy is valid, and even if the Court refuses to order him to revoke his renunciation, Maurice F. McCrackin's legacy will pass by the intestacy laws of Ohio, there being no residuary clause in his mother's will, and he will inherit one third of his renounced legacy. See Ohio Revised Code §§ 2105.06 and 2113.60. The defendants' argue that their mother's will does contain a residuary clause and the refused legacy should go into the residue to be shared by the two remaining legatees.

This Court is of the opinion that the foregoing is a question solely within the province of the Probate Court of Hamilton County , since a determination of this question by this Court would not be binding on the Probate Court.

Conclusions of Law

1. This Court has jurisdiction of the parties in this cause.

2. This Court has jurisdiction of the subject matter of this cause. Title 26 U. S. C. A. (I. R. C. 1954) §7402.

3. This Court must look to the law of Ohio to determine whether and to what extent Maurice F. McCrackin has "property" or "rights to property" under Title 26 U. S. C. A. (I. R. C. 1954) §6321 to which the Government's tax lien could attach. Aquilino v. United States, 363 U. S. 509 (1960) [60-2 USTC ¶9538].

4. There being no decision of the Ohio Supreme Court in point, this Court is bound by a decision of an Ohio appellate court, Ohio National Bank of Columbus v. Miller, 41 O. L. A. 250 (1943), though that court is not the highest state court. Fidelity Union Trust Company v. Field, 311 U. S. 169 (1940) and John Hancock Mutual Life Insurance Company v. Tarrence, 244 F. 2d 86 (C. C. A. 6th 1957).

5. In Ohio , the law with respect to renunciations is as follows:

". . . a beneficiary under a will is not bound to accept a legacy or devise therein provided for, but may disclaim or renounce his right under the will, even where the gift to him is beneficial, provided he has not already accepted it. The motives which prompt a renunciation are immaterial in the absence of fraud or collusion; and the rejection of a gift by a legatee is not equivalent to a conveyance by him for the purpose of defeating creditors." 69 C. J. 974 quoted with approval in Ohio National Bank of Columbus v. Miller, supra.

6. Maurice F. McCrackin's renunciation is valid and he therefore owns no "property" or "rights to property" under this mother's will to which the tax liens of the United States Government may attach.

7. The actions of Maurice F. McCrackin do not constitute a "fraud" so as to void his renunciation.

8. It is not within the jurisdiction of this Court to compel Maurice F. McCrackin to revoke the renunciation of his legacy. Ohio National Bank of Columbus v. Miller, supra.

Order

In accordance with the foregoing Findings of Fact, Discussion and Conclusions of Laws, it is ORDERED, ADJUDGED and DECREED that judgment should be and it hereby is entered in favor of each defendant in the action and against the plaintiff.

 

 

 

Drye Family 1995 Trust, Daniel M. Traylor, Trustee, Appellants v. United States of America, Appellee United States of America Appellee v. Drye Family 1995 Trust, Daniel M. Traylor, Rohn F. Drye, Sue C. Drye, Theresa K. Drye, Appellants

(CA-8), U.S. Court of Appeals, 8th Circuit, 97-3249, 8/17/98 , 152 F3d 892, 152 F3d 892. Affirming an unreported District Court opinion

[Code Secs. 6321 and 6334 ]

Liens: Property subject to: Interest in property: Estates: Disclaimer: State law: Nullification of interest: Effect of: Federal law: Time of attachment.--Recognizing a split among the appellate circuits, the Eighth Circuit Court of Appeals held that federal tax liens attached to a delinquent taxpayer's interest in an estate, despite his disclaimer. Under state ( Arkansas ) law, the interest was a right to property because it had pecuniary value, was transferable, and arose at the time the estate was created. State law also allowed an heir to nullify the interest by making a disclaimer that related back to the creation of the interest. However, once state law creates a property interest, federal law governs the application of tax liens. Federal law defines "property subject to liens" in the broadest possible terms, and does not exempt disclaimed property from liens. Thus, the liens attached to the interest immediately upon the creation of the estate, and they were unaffected by the taxpayer's subsequent disclaimer. Following A. Comparato (CA-2), 94-2 USTC ¶50,354 ; distinguishing N. Leggett (CA-5), 97-2 USTC ¶50,635 .

Daniel M. Traylor, 900 W. Third St. , Little Rock , Ark. 72201 , for plaintiffs-appellants. Raymond R. Mulera, Anthony T. Sheehan, Department of Justice, Washington , D.C. 20530 , for defendant-appellee. David I. Pincus, Department of Justice, Washington , D.C. 20530 , for counter-claimant-appellee.

Before: BOWMAN ¹, Chief Judge, and MCMILLIAN and MURPHY, Circuit Judges.

MCMILLIAN, Circuit Judge:

The Drye Family 1995 Trust, Daniel M. Traylor, Rohn F. Drye, Jr., Sue C. Drye, and Theresa K. Drye (collectively, appellants) appeal from a final judgment entered in the United States District Court ² for the Eastern District of Arkansas in favor of the United States of America (hereinafter, the government) on its counterclaim to reduce certain tax assessments to judgment. Drye Family 1995 Trust v. United States , No. LR-C-96-346 (E.D. Ark. July 14, 1997) (judgment). For reversal, appellants contend that the district court erred in failing to hold that a taxpayer's disclaimer under Arkansas law has the legal effect of voiding interests created under Arkansas law such that federal tax liens are incapable of attachment. For the reasons discussed herein, we affirm.

Jurisdiction

The district court had jurisdiction over the underlying wrongful levy action pursuant to 26 U.S.C. §7426, which waives sovereign immunity to allow such suits, and 28 U.S.C. §1346(e), which grants subject matter jurisdiction over such suits. The district court also had jurisdiction over the government's counterclaim pursuant to 26 U.S.C. §7402(a) and 28 U.S.C. §§1340, 1346(c). Jurisdiction on appeal is proper under 28 U.S.C. §1291. The notice of appeal was timely filed pursuant to Rule 4(a) of the Federal Rules of Appellate Procedure.

Facts

The relevant facts are undisputed. On August 3, 1994 , Irma Deliah Drye died intestate at her home in Pulaski County , Arkansas , leaving an estate worth approximately $236,000.00, of which $158,000.00 was personalty and $75,000.00 was realty located in Pulaski County , Arkansas . Ms. Drye was survived by her son and sole heir-at-law, Rohn F. Drye, Jr. (Drye), and his daughter, Theresa K. Drye. On the date of his mother's death, Drye was insolvent and owed the government approximately $325,000.00 representing assessments for tax years 1988, 1989, and 1990. The Internal Revenue Service (IRS) had made assessments against Drye in November 1990 and May 1991 and had valid tax liens against all of Drye's property or rights to property pursuant to 26 U.S.C. §§6321 and 6322 of the Internal Revenue Code (the Code).

On August 17, 1994 , Drye was appointed the Personal Representative and Administrator of his mother's estate in Pulaski County Probate No. 94-1440. Drye resigned from that position on February 6, 1995 . Before resigning, Drye filed in the probate court and the land records of Pulaski County an instrument dated February 4, 1995, entitled "Disclaimer and Consent" to disclaim all interests in his mother's estate. ³ Also, on or about February 4, 1995 , Theresa Drye created The Drye Family 1995 Trust (the Trust). Theresa Drye was appointed Successor Personal Representative and Administratrix of Irma Deliah Drye's estate on February 8, 1995 .

On March 10, 1995 , the Probate Court found that Drye had effected a valid disclaimer of his mother's estate under Arkansas law and ordered final distribution of the estate to Theresa Drye. Theresa Drye then funded the Trust with her interest in the estate. The Trust's beneficiaries are Theresa Drye and, during their lifetimes, Drye and his wife, Sue C. Drye. Pursuant to the terms of the Trust, distributions are at the discretion of the trustee, Daniel M. Traylor, and may be made only for the health, maintenance, and support of the beneficiaries. The Trust is spendthrift and, therefore, its assets cannot be attached by state law creditors to satisfy the debts of its beneficiaries.

On April 18, 1995 , the Trust opened an investment account at Stephens, Inc., an investment banking organization which managed the account in the name of the Trust. Also in 1995, Drye began negotiations with the IRS regarding his tax liabilities during the course of which he revealed his beneficial interest in the Trust. On April 11, 1996 , the IRS filed in the office of the Pulaski County, Arkansas, Circuit Clerk and Recorder a Form 668 Notice of Federal Tax Lien against the Trust as Drye's nominee and, subsequently, served a Notice of Levy on Stephens, Inc. and notified the Trust of the levy.

The Trust brought the underlying wrongful levy action on May 1, 1996 , alleging that the IRS had unlawfully levied its property to satisfy Drye's federal tax liabilities and seeking, among other things, injunctive relief. On May 2, 1996 , Stephens, Inc. paid over to the IRS $134,004.33 representing the account's proceeds. On June 28, 1996 , the government filed a counterclaim against the Trust, the trustee, and the trust beneficiaries seeking, among other things, to reduce to judgment the tax assessments against Drye, confirm its right to seize the Trust's assets in collection of those debts, foreclose on its liens and sell the Trust property. The Trust and the government filed cross-motions for summary judgment. ⁴ The district court granted the government's motion for summary judgment, id. at 6 ( Feb. 25, 1997 ), and thereafter denied Drye's motion to reconsider its order. Id. at 2 ( April 4, 1997 ).

On July 14, 1997 , the district court entered final judgment in favor of the government and against the Trust and the counterclaim defendants. In addition, that judgment (1) dismissed with prejudice the complaint of the Trust and the trustee; (2) reduced to judgment assessments against Drye for $220,980.00, plus statutory interest, for the last quarters of 1988 and 1989 and the first quarter of 1990, and assessments against Drye for $91,952.00, plus statutory additions to tax, for 1988; (3) determined that the government had valid tax liens against all of Drye's property and rights to property including the personalty and realty conveyed in the estate (particularly the funds seized by levy from Stephen's, Inc., and the real property in Pulaski County); (4) determined that Drye's disclaimer was invalid, null, and void, and fraudulent against the United States, and that the Trust was merely Drye's nominee or alter ego; and (5) ordered the foreclosure of the federal tax liens, the sale of the real property, and the application of the sale proceeds and of the funds seized by levy in satisfaction of the assessments against Drye. Id. at 1-3 (July 14, 1997) (judgment). This appeal followed.

Discussion

This appeal presents a narrow, but not uncomplicated, legal issue that conjoins state laws of inheritance and federal tax law, and one that has fomented a split among three federal courts of appeal. ⁵ The issue is whether a taxpayer's disclaimer under state law has the legal effect of voiding state law interests in property such that federal tax liens are incapable of attachment. The law of Arkansas is the applicable state law in the instant case. We review de novo the district court's interpretation and application of both federal and state law. Norwest Bank North Dakota, N.A. v. Doth, No. 97-3113, 1998 WL 432471, at *4 (8th Cir. July 31, 1988) (federal law); Salve Regina College v. Russell, 499 U.S. 231 (1991) (state law); Lindsay Mfg. Co. v. Hartford Accident & Indem. Co. , 118 F.3d 1263, 1267 (8th Cir. 1997) (same).

Section 6321 of the Internal Revenue Code creates a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to any person who has neglected or refused to pay any tax (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) after demand has been made. 26 U.S.C. §6321. " '[S]tate law controls in determining the nature of the legal interest which the taxpayer had in the property.' " Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960) (Aquilino) (quoting Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82 (1940)). However, whether a right or interest created under state law "constitutes 'property' or 'rights to property' is a matter of federal law." United States v. National Bank of Commerce [85-2 USTC ¶9767], 472 U.S. 713, 727 (1985) (Bank of Commerce) (citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 56-57 (1958) (Bess)). " '[O]nce it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [§6321], state law is inoperative,' and the tax consequences thenceforth are dictated by federal law." Bank of Commerce [85-2 USTC ¶9767], 472 U.S. at 722 (quoting Bess [58-2 USTC ¶9595], 357 U.S. at 56-57); see also United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 197 (1971) (Mitchell) ("[S]tate law creates legal interests but the federal statute determines when and how they shall be taxed.") (emphasis added) (citations omitted); United States v. Solheim [92-1 USTC ¶50,043], 953 F.2d 379, 382 (8th Cir. 1992) (Solheim) ("Once the tax lien has attached to the taxpayer's state-created interest, federal law applies.") (citing Aquilino [60-2 USTC ¶9538], 363 U.S. at 513-14)). This bifurcated application of state and federal law derives from the fact that the federal statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Bess [58-2 USTC ¶9595], 357 U.S. at 55 (holding in bankruptcy context that state law that "[an] insured's property right represented by the cash surrender value [of a life insurance policy] is not subject to creditors' liens' was irrelevant" to whether federal tax lien could attach).

The Code does not define "property" or "rights to property" as those terms are used in §6321. The Supreme Court has held that Congress's language with respect to those terms "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. . . . 'Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.' " Bank of Commerce [85-2 USTC ¶9767], 472 U.S. at 719-20 (quoting Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945)) (other citations omitted). But cf. Leggett v. United States [97-2 USTC ¶50,635], 120 F.3d 592, 598 (5th Cir. 1997) (Leggett) (suggesting that Congress's failure to define property more broadly than state law does (as is the case in the gift tax provisions of the Code) or to expressly prohibit taxpayers from filing disclaimers precludes an expansive reading of §6321). In enforcing §6321, appellate courts have interpreted "property" or "rights to property" to mean state-law rights or interests that have pecuniary value and are transferable. See, e.g., United v. Stonehill, 83 F.3d 1156, 1159-60 (9th Cir.) (Stonehill) (holding that a chose-in-action is "property" or a "right to property" under §6321 in light of its pecuniary value and transferability), cert. denied, 117 S. Ct. 480 (1996); In re Kimura [92-2 USTC ¶50,397], 969 F.2d 806, 811 (9th Cir. 1992) (Kimura) (holding that liquor license is subject to §6321 lien because it has independent value and sufficient transferability); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1171-72 (6th Cir. 1990) (Terwilliger's Catering Plus) (same); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 357-58 (3d Cir. 1986) (21 West Lancaster Corp.) (noting that federal tax lien may attach to liquor license because license has value and transferability, notwithstanding fact that, under state law, license is not property or subject to a security interest); Southern Bank v. IRS [85-2 USTC ¶9670], 770 F.2d 1001, 1005 (11th Cir. 1985) (Southern Bank) (holding that an equitable right of redemption constitutes "property" or "right to property" under §6321 because it has pecuniary value and is transferable).

Under Arkansas law the right to inherit has pecuniary value, see, e.g., Bransford v. Jones, 679 S.W.2d 798, 799 (Ark. 1984) (holding that heirs to intestate part of residual portion of estate who were also specific legatees to a bequest had a right to post-judgment interest on intestate share), and is transferable. See Clark v. Rutherford, 298 S.W.2d 327, 330 (Ark. 1957) (upholding conveyance, through assignment, of expectancy in mother's estate); Hutchison v. Sheppard, 279 S.W.2d 33, 38 (Ark. 1955) (recognizing conveyance of an "entire interest" in land irrespective of whether heir had received by will or by intestacy a share in the reversionary estate or whether conveyance preceded decedent's death); Bradley Lumber Co. v. Burbridge, 210 S.W.2d 284, 288 (Ark. 1948) (reasserting that, although unenforceable at law, assignments of expectancies by prospective heirs have generally been upheld in courts of equity); Leggett v. Martin, 156 S.W.2d 71, 74-75 (Ark. 1941) (holding that expectant heirs may release to an ancestor for adequate consideration their anticipated interests in that ancestor's estate); Felton v. Brown, 145 S.W. 552, 554 (Ark. 1912) (same). The Arkansas Probate Code provides that an heir may disclaim, in whole or in part, an intestate interest in or right to a heritable estate within nine months of the decedent's death. Ark. Code Ann. §§28-2-101 & 28-2-107(a)(1). The Arkansas Probate Code further provides that a disclaimer effected under these provisions creates the legal fiction that the disclaimant predeceased the decedent and "relates back for all purposes to the date of death of the decedent." Id. §28-2-108(a)(1) & (3) (emphasis added).

Appellants contend that, in light of Drye's legally valid disclaimer, Drye never had a property interest in his mother's estate to which federal liens could attach. Specifically, appellants argue that the "relation back" provision in the disclaimer statute has the effect of completely nullifying any state law right to intestate succession that Drye might once have had. Appellants urge this court either to reverse the district court's denial of their motion for summary judgment in favor of the government or to certify to the Arkansas Supreme Court the question of what effect, if any, the "relation back" doctrine has on federal tax liens.

The government maintains that the federal tax liens attached to Drye's interest in his mother's estate on the date of her death and that the subsequent disclaimer was ineffective to remove them. The government further argues that, because Drye's right to intestate succession has pecuniary value and is transferable, it constitutes "property" or "rights to property" under §6321 and was automatically subject to attachment by the preexisting federal tax liens. In addition, the government argues that the transfer of the estate's assets to the Trust constitutes a fraudulent conveyance because the Trust is Drye's nominee or alter ego. ⁶

The Second, Ninth, and Fifth Circuits addressed similar arguments in determining the effect of a state law disclaimer on preexisting federal tax liens and reached differing results. In Leggett, the most recent case, the Fifth Circuit determined that a disclaimer under Texas law nullifies any interest that the disclaimant has in the property, thereby defeating the attachment of federal tax liens. [97-2 USTC ¶50,635] 120 F.3d at 596. As in the instant case, the IRS had made assessments against a taxpayer and acquired a lien against all of her property and rights to property pursuant to §6321 when her aunt died testate, leaving the taxpayer a one-twentieth interest in her estate. Id. at 593. The taxpayer subsequently disclaimed her entire interest in the estate pursuant to Texas 's disclaimer statute and sought a declaration that the IRS had no lien against the estate's property in view of the disclaimer. Id. The district court ruled in favor of the IRS on the ground that Texas law creates only a right to accept or reject inheritance; that is, the taxpayer merely had a right of decision which does not constitute a property right under state law. Id. at 596. The Fifth Circuit reversed, applying Texas law to determine whether the state-law right constituted "property or rights to property" under §6321. Id. at 594 ("[S]tate law determines whether a taxpayer has a property interest to which a federal lien may attach. . . . Therefore, we must decide whether, under Texas law, [the taxpayer] ever had a property interest in [the subject] estate.") (citations omitted). Reading the Texas Probate Code's vesting and disclaimer provisions together, the Fifth Circuit concluded that " 'a bequest or gift is nothing more than an offer which can be accepted [by taking possession, exercising dominion, or taking no action within the set time] or rejected [by timely filing a disclaimer].' " Id. at 595-96 (citing Texas authority). Furthermore, the Fifth Circuit distinguished its holding from a contrary holding in United States v. Comparato [94-2 USTC ¶50,354], 22 F.3d 455 (2d Cir. 1994) (Comparato), on the ground that New York law is substantially different from Texas law and from Arizona law, which was applied in Mapes v. United States, 15 F.3d 138, 140 (9th Cir. 1994) (Mapes). Leggett [97-2 USTC ¶50,635], 120 F.3d at 596-97.

In Mapes, the taxpayer's mother died, leaving him half of her estate. 15 F.3d at 139. In order to prevent preexisting federal tax liens from attaching to his interest in the estate, the taxpayer renounced his interest in favor of his children pursuant to Arizona 's Probate Code. ⁷ Id. at 140. The district court's ruled in favor of the government and against the taxpayer's children in their wrongful levy action. Id. at 141. The Ninth Circuit reversed, holding that "state law, not federal law" determined "whether [the taxpayer] had any interest in property, lienable or not." Id. at 140. From this premise, the court concluded that the taxpayer did not have an interest under state law because the effect of the taxpayer's proper and timely renunciation was to prevent him from acquiring any interest to which a federal tax lien could have attached. Id. at 140-41. The court further held that the taxpayer's renunciation was not compromised by his temporary use of part of the estate (a vehicle, constituting one percent of the value of the estate) in order to prevent its loss or theft. Id. at 141.

As noted above, the Second Circuit reached a contrary result in Comparato. Comparato involved the estate of a quadriplegic who died intestate in 1984, leaving his parents, the Comparatos, as his statutory distributees. [94-2 USTC ¶50,354] 22 F.3d at 456. In 1989 Anthony Comparato, the decedent's father, petitioned the Surrogate's Court to approve the settlement of a malpractice action that decedent had commenced before his death and a derivative wrongful death claim, and to distribute the proceeds equally between himself and his wife as the decedent's heirs. Id. In August 1989, before the Surrogate Court disposed of the petition, the IRS served notice of levy on the decedent's estate in the amount of the Comparatos' tax liability. Id. The Comparatos executed separate, untimely renunciations of their respective interests in their son's estate on April 10, 1991 , which the Surrogate Court permitted them to file on September 23, 1991 . Id. In 1992 the government commenced an action in the district court to reduce to judgment the assessments against the Comparatos. Id. The district court held that the Comparatos acquired property interests in the proceeds of the malpractice claims on the date of their son's death and that the preexisting federal tax liens attached to the interests prior to the Comparatos' renunciation. Id. at 458. The Second Circuit affirmed, holding that, under New York law, the Comparatos' interests vested upon their son's death, thereby obviating any analysis of the retroactive effect of the renunciation. Id. at 457-58. "[O]nce state law provided [the Comparatos] with a vested interest in the proceeds of the malpractice actions, federal law controlled whether their interests were exempt from levy by the United States." Id. at 458 (citing United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683 (1983)). Applying federal law, the court further determined that the express terms of the Code precluded any determination that the Comparatos' interests were exempt from levy by operation of a state law. Id. (citing 26 U.S.C. §6334). We agree with the conclusion reached in Comparato. ⁸ The central question undergirding each circuit court's analysis is what law applies: Is a federal court bound by state law governing disclaimers and the "relation back" thereof or does federal law governing the attachment of liens apply? Leggett concludes that "state law determines whether a taxpayer has a property interest to which a federal lien may attach." See Leggett [97-2 USTC ¶50,635], 120 F.3d at 594. Similarly, Mapes holds that state law concerning property interests and disclaimers determine whether a taxpayer has "property" or a "right to property." Mapes, 15 F.3d at 140. However, as we noted earlier, the Supreme Court has pronounced that "once it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative," Bess [58-2 USTC ¶9595], 357 U.S. at 56-57, and that "[w]hether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law.' " Bank of Commerce [85-2 USTC ¶9767], 472 U.S. at 727 (emphasis added). The principle that emerges from these seemingly contradictory statements is 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 the "right to property" under §6321. The concomitant state law consequences of a state law interest or right "are of no concern to the operation of the federal tax law." Id. at 723.

By extension, we hold that the state law consequences of Drye's right to his mother's estate, namely, the legal fiction that is created through Drye's disclaimer under Ark. Stat. Ann. §28-2-101 et seq., is "of no concern to the opera tion of the federal tax law." Cf. Bess [58-2 USTC ¶9595], 357 U.S. at 57 ("Such state laws 'are not laws for the United States . . . unless they have been made such by Congress itself.' ") (quoting Fink v. O'Neil, 106 U.S. 272, 276 (1882) (concerning bankruptcy liens)); Leggett [97-2 USTC ¶50,635], 120 F.3d at 596 ("The view that the disclaimer is a legal fiction . . . supports the holding that property right existed before the disclaimer."); Terwilliger's Catering Plus [90-2 USTC ¶50,460], 911 F.2d at 1171-72 ("Although it is true that the state has the right to decide what property interests it wishes to create, it cannot thwart the operation of the Tax Code by classifying the interests it has created as something other than property rights."). Under this view, we conclude that the preexisting federal tax liens attached to Drye's state law right to his intestate share which vested on or about the time of his mother's death. See, e.g., Keenan v. Peevy, 590 S.W.2d 259, 269-70 (Ark. 1979) (holding that the title to real property vests immediately upon death of owner if heirs take through intestate succession, subject to appropriate provisions for administration under the probate code and subject to widow's dower and homestead rights, if any); Dean v. Brown, 227 S.W.2d 623, 628 (1950) (deciding under prior law that the personalty of an intestate became vested in the personal representative when appointed and remained so vested until distribution upon proper order of the probate court); see also Ark. Stat. Ann. §28-9-203(c) ("Real estate passes immediately to the heirs upon the death of the intestate. . . . However, personalty will pass to the personal representative, if any, for distribution to the heirs. . . .").

Appellants suggest that Drye cannot be forced to "accept" his share of the estate. Brief of Appellants at 4. We disagree. Although the Arkansas disclaimer statute provides that "an acceptance of the property or interest of a benefit thereunder" constitutes a bar to the right to disclaim property or an interest in property, Ark. Code. Ann. §28-2-102, (thereby supporting inferentially appellants' argument), we conclude that "acceptance" in this context is a term of art particular to the issue of state law disclaimer which we have already rejected as irrelevant to our analysis. But see Leggett [97-2 USTC ¶50,635], 120 F.3d at 595-97; cf. Mapes, 15 F.3d at 141(holding that the taxpayer's use of the estate's property prior to disclaimer was de minimis and thus did not constitute acceptance of benefits from the property). In actuality, if Drye did nothing, he still had an interest in the estate as the sole heir-at-law. Subject to the administration of the estate, that interest is enforceable and transferable upon the death of Irma Deliah Drye and, more important, during the nine-month disclaimer period. Moreover, it is the existence of Drye's right to a share of his mother's estate that allowed him the right under state law to disclaim the estate; in other words, Drye's mere ability to invoke a legal fiction under state law that has the effect of redirecting the succession of the estate reifies his state law interest in the estate. Unfortunately for Drye, our inquiry regarding his rights under state law terminates upon identifying this elementary interest. The "relation back" of Drye's disclaimer is therefore of no effect to our analysis.

As a matter of federal law, Drye's state law right to inherit his mother's estate is a "right to property" under §6321 because that right has pecuniary value (the estate was valued at approximately $233,000 minus administrative expenses) and is transferable. See, e.g., Stonehill [96-1 USTC ¶50,318], 83 F.3d at 1159-60; Kimura [92-2 USTC ¶50,397], 969 F.2d at 810; Terwilliger's Catering Plus [90-2 USTC ¶50,460], 911 F.2d at 1171-72; 21 West Lancaster Corp. [86-2 USTC ¶9516], 790 F.2d at 357-58; Southern Bank [85-2 USTC ¶9670], 770 F.2d at 1005. In light of the foregoing, we hold that Drye's state law interest in the estate of his mother is subject to the "federal consequence" of the preexisting tax liens, irrespective of Drye's subsequent disclaimer of that interest under state law.

To be sure, there are policy considerations that arguably militate in favor of an opposite result. In Leggett, the Fifth Circuit provided a thoughtful analysis of some of these considerations. At common law, beneficiaries could accept or reject a legacy or devise on the theory that no person can be made an owner without his or her consent; heirs could not. Leggett [97-2 USTC ¶50,635], 120 F.3d at 595-96. We agree with the Fifth Circuit's conclusion that the purpose of disclaimer law is to rectify the disparate tax treatment that resulted from this distinction whereby disclaiming beneficiaries were not subject to gift tax liability while disclaiming heirs were. See id. However, under the Fifth Circuit's reasoning, limiting the application of state law disclaimers to state tax liability goes against the spirit and purpose of disclaimer laws. We find, however, that the Supreme Court's instruction that "state-law consequences of [a state-law defined interest] are of no concern to the operation of the federal tax law" and its express limitation of the role of state law in determining federal tax liability under §6321 counsel against interpreting broadly the scope of state disclaimer laws. State disclaimer statutes may fulfill their intended purpose with respect to state tax liability but cannot affect federal tax consequences.

Furthermore, holding that state law disclaimers can defeat federal tax liability ignores the clear intent of Congress embodied in the broad scope of §6321. The purpose of §6321 is to reach any and all interests of pecuniary value to which a taxpayer may be entitled in order to satisfy outstanding tax liability. It follows, therefore, that Congress did not intend that taxpayers have the prerogative to relinquish rights in property in favor of avoiding tax liability. See Bank of Commerce [85-2 USTC ¶9767], 472 U.S. at 723-25 (holding that "[c]ommon sense dictates" that taxpayer's unqualified, unrestricted, and absolute right under state law and his bank contract to compel payment of outstanding balances in two accounts constitutes property [or] rights to property under §§6331 and 6332); United States v. First Nat'l Bank [72-2 USTC ¶9654], 348 F. Supp. 388, 389 (D. Ariz. 1970) ("[I]t is inconceivable that Congress . . . intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer[].") (quoted in Bank of Commerce [85-2 USTC ¶9767], 472 U.S. at 726); cf. St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282], 617 F.2d 1293, 1302 (8th Cir. 1980) ("The unqualified contractual right to receive property is itself a property right subject to seizure by [§6321] levy, even though the right to payment of the installments has not matured at the time of the levy.").

Section 6334 of the Internal Revenue Code also convinces us of Congress's intention to reach property and rights to property disclaimed under state law.

Section 6334 specifically exempts certain property or rights to property from the ambit of the Code's levy provisions. 26 U.S.C. §6334(a). Property or rights to property disclaimed under state law are not included in the list of exempt property. Subsection (c) expressly provides that the list is exhaustive. Id. §6334(c) ("[N]o property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."); see also Mitchell [71-1 USTC ¶9451], 403 U.S. at 205 (holding that §6334(c) is specific and clear and provides "no room . . . for automatic exemption of property that happens to be exempt from state levy under state law"); Comparato [94-2 USTC ¶50,354], 22 F.3d at 458 (relying on exhaustive list of exempt property in §6334(a) as evidence of Congress's intent not to exempt property taxpayers renounced under state law). Accordingly, Congress's failure to exclude property exempt from levy under state law is indicative of its intention that such property be subject to federal levy. Cf. In re Detlefsen, 610 F.2d 512, 515 (8th Cir. 1979) (Detlefsen) (holding that under §70(a) of the old Bankruptcy Act, a post-petition state law disclaimer defeated federal liens, but recognizing that the more expansive language anticipated in the new bankruptcy code would obviate this question by expanding the definition of property and thus the scope of federal liens); Stephen E. Parker, Can Debtors Disclaim Inheritances to the Detriment of Their Creditors?, 25 Loy. U. Chi. L.J. 31, 37-39 (1993) (discussing Detlefsen and noting that courts that have reviewed the same issue under the new bankruptcy code "have in fact reached the different result referred to by the Detlefsen court"). Finally, we would be remiss in setting forth our analysis, if we failed to note that Drye's retention of a life estate in the Trust, which was funded in large part if not entirely by the disclaimed property, gives us considerable pause.

Considered in their totality, these factors clearly outweigh, and obviate consideration of, the goal of state disclaimer statutes to equalize the gift tax consequences between intestate and probate heirs. Thus, having determined that Drye's right to his intestate share of his mother's estate is property or a right to property within the meaning of §6321 and assuming for purposes of analysis that Drye's disclaimer was properly executed under Arkansas law, we further conclude that the only relevant legal effect of Drye's disclaimer is to direct the proceeds of the estate to his daughter subject to the federal liens. The liens pass cum onere with the estate until they are satisfied or become unenforceable. See 26 U.S.C. §6322 (unless otherwise provided by law, a lien imposed by §6321 arises at the time of assessment and continues until the liability for the assessed amount "(or judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time"); cf. Bess [58-2 USTC ¶9595], 357 U.S. at 57 (referring to liens under bankruptcy code). The liens are, therefore, enforceable against the Trust and the trust beneficiaries to the extent that they are heretofore unpaid.

Conclusion

Peeled to their core, Drye's efforts to bind the IRS by the legal fiction created under Arkansas 's disclaimer statute were unfruitful. For the reasons stated in this opinion, we affirm the judgment of the district court granting summary judgment in favor of the government and denying appellants' motion for summary judgment. In light of the foregoing, we do not reach the government's argument that the disclaimer effected a fraudulent conveyance.

¹ The Honorable Pasco M. Bowman succeeded the Honorable Richard S. Arnold as Chief Judge of the United States Court of Appeals for the Eighth Circuit at the close of business on April 17, 1998.

² The Honorable George Howard, Jr., United States District Judge for the Eastern District of Arkansas.

³ Pursuant to Ark. Code Ann. §28-2-109(b), Sue C. Drye, Drye's wife, joined in the election of the disclaimer in order to consent to the disclaiming of any dower or homestead interests that she might have had.

⁴ On or about January 17, 1997, the Trust served on the government a motion for summary judgment but inadvertently omitted to file that motion with the district court. The district court later granted the Trust's motion to accept the filing of the motion for summary judgment pursuant to Fed. R. Civ. P. 60(b).

⁵ Leggett v. United States [97-2 USTC ¶50,635], 120 F.3d 592, 598 (5th Cir. 1997) (state law disclaimer of right to accept or reject property defeated attachment of federal tax liens); United States v. Comparato [94-2 USTC ¶50,345], 22 F.3d 455 (2d Cir. 1994) (state law disclaimer ineffective against federal tax liens); Mapes v. United States, 15 F.3d 138, 140 (9th Cir. 1994) (state law disclaimer defeated attachment of federal tax liens).

⁶ The government briefed this issue below but the district court did not reach it.

⁷ Like the Arkansas Probate Code's disclaimer provisions, the disclaimer provisions of the Arizona Probate Code have not been interpreted in a reported Arizona State Court opinion or federal court opinion.

⁸ Comparato appears to be factually distinguishable from the instant case because the Comparatos disclaimed their vested interest in the proceedings approximately seven years after the disclaimer period. However, the timeliness of the disclaimer did not drive the court's decision in Comparato. Rather, the court relied mainly on the fact that Congress did not specifically exempt from §6321 levy property that state law has made exempt from state levy. See United States v. Comparato [97-2 USTC ¶50,635], 22 F.3d 455, 458 (2d Cir. 1994).

 

 

 

Rohn F. Drye, Jr., et al. v. United States

Supreme Court of the United States, 98-1101, 12/7/99 , 120 SCt 474, Affirming a Court of Appeals decision, 98-2 USTC ¶50,651

152 F3d 892.

On Writ of Certiorari to the United States Court of Appeals for the Eighth Circuit.

[Code Secs. 6321 , 6323 and 6334 ]

Tax liens: Property subject to: Relinquishments and disclaimers: Validity and priority against third parties: Inherited property: Property exempt from levy: State exemption laws.--Federal tax liens attached to a delinquent taxpayer's interest in an estate, despite his disclaimer. Under state ( Arkansas ) law, the interest was a right to property because it had pecuniary value, was transferable and arose at the time the estate was created. State law also allowed an heir to nullify the interest by making a disclaimer that related back to the creation of the interest. However, once state law creates a property interest, federal law governs the application of tax liens. Federal law defines "property subject to liens" in the broadest possible terms, and Code Sec. 6334 does not exempt disclaimed property from liens. Thus, the liens attached to the interest immediately upon the creation of the estate, and they were unaffected by taxpayer's subsequent disclaimer.

Syllabus

In 1994, Irma Drye died intestate, leaving a $233,000 estate in Pulaski County , Arkansas . Petitioner Rohn Drye, her son, was sole heir to the estate under Arkansas law. Drye was insolvent at the time of his mother's death and owed the Federal Government some $325,000 on unpaid tax assessments. The Internal Revenue Service (IRS) had valid tax liens against all of Drye's "property and rights to property" pursuant to 26 U.S.C. §6321. Drye petitioned the Pulaski County Probate Court for appointment as administrator of his mother's estate and was so appointed. Several months after his mother's death, Drye resigned as administrator after filing in the Probate Court and county land records a written disclaimer of all interests in the estate. Under Arkansas law, such a disclaimer creates the legal fiction that the disclaimant predeceased the decedent, consequently, the disclaimant's share of the estate passes to the person next in line to receive that share. The disavowing heir's creditors, Arkansas law provides, may not reach property thus disclaimed. Here, Drye's disclaimer caused the estate to pass to his daughter, Theresa Drye, who succeeded her father as administrator and promptly established the Drye Family 1995 Trust (Trust). The Probate Court declared Drye's disclaimer valid and accordingly ordered final distribution of the estate to Theresa, who then used the estate's proceeds to fund the Trust, of which she and, during their lifetimes, her parents are the beneficiaries. Under the Trust's terms, distributions are at the discretion of the trustee, Drye's counsel, and may be made only for the health, maintenance, and support of the beneficiaries. The Trust is spendthrift, and under state law, its assets are therefore shielded from creditors seeking to satisfy the debts of the Trust's beneficiaries. After Drye revealed to the IRS his beneficial interest in the Trust, the IRS filed with the county a notice of federal tax lien against the Trust as Drye's nominee, served a notice of levy on accounts held in the Trust's name by an investment bank, and notified the Trust of the levy. The Trust filed a wrongful levy action against the United States in the United States District Court for the Eastern District of Arkansas. The Government counterclaimed against the Trust, the trustee, and the trust beneficiaries, seeking the reduce to judgment the tax assessments against Drye, confirm its right to seize the Trust's assets in collection of those debts, foreclose on its liens, and sell the Trust property. On cross-motions for summary judgment, the District Court ruled in the Government's favor. The Court of Appeals for the Eighth Circuit affirmed, reading this Court's precedents to convey that state law determines whether a given set of circumstances creates a right or interest, but federal law dictates whether that right or interest constitutes "property" or the "right[t] to property" under §6321.

Held: Drye's disclaimer did not defeat the federal tax liens. The Internal Revenue Code's prescriptions are most sensibly read to look to state law for delineation of the taxpayer's rights or interests in the property the Government seeks to reach, but to leave to federal law the determination whether those rights or interests constitute "property" or "rights to property" under §6321. Once it has been determined that state law creates sufficient interests in the taxpayer to satisfy the requirements of the federal tax lien provision, state law is inoperative to prevent the attachment of the federal liens. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 56-57, Pp. 5-11.

(a) To satisfy a tax deficiency, the Government may impose a lien on any "property" or "rights to property" belonging to the taxpayer. §§6321, 6331(a). When Congress so broadly uses the term "property" this Court recognizes that the Legislature aims to reach every species of right or interest protected by law and having an exchangeable value. E.g., Jewett v. Commissioner [82-1 USTC ¶13,453], 455 U.S. 305, 309. Section 6334(a), which lists items exempt from levy, is corroborative. Section 6334(a)'s list is rendered exclusive by §6334(c), which provides that no other "property or rights to property shall be exempt." Inheritances or devises disclaimed under state law are not included in §6334(a)'s catalog of exempt property. See, e.g., Bess [58-2 USTC ¶9595], 357 U.S. , at 57. The absence of any recognition of disclaimers in §§6321, 6322, 6331(a), and 6334(a) and (c), the relevant tax collection provisions, contrasts with §2518(a), which renders qualifying state-law disclaimers "with respect to any interest in property" effective for federal wealth-transfer tax purposes and for those purposes only. Although this Court's decisions in point have not been phrased so meticulously as to preclude the argument that state law is the proper guide to the critical determination whether Drye's interest constituted "property" or "rights to property" under §6321, the Court is satisfied that the Code and interpretive case law place under federal, not state, control the ultimate issue whether a taxpayer has a beneficial interest in any property subject to levy for unpaid federal taxes. Pp. 5-7.

(b) The question whether a state-law right constitutes "property" or "rights to property" under §6321 is a matter of federal law. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 727. This Court looks initially to state law to determine what rights the 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 compass of the federal tax lien legislation. Cf. Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 80. Just as exempt status under state law does not bind the federal collector, United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 204, so federal tax law is not struck blind by a disclaimer, United States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224, 240, Pp. 7-9.

(c) The Eighth Circuit, with fidelity to the relevant Code provisions and this Court's case law, determined first what rights state law accorded Drye in his mother's estate. The Court of Appeals observed that under Arkansas law Drye had, at his mother's death, a valuable, transferable, legally protected right to the property at issue, and noted, for example, that a prospective heir may effectively assign his expectancy in an estate under Arkansas law, and the assignment will be enforced when the expectancy ripens into a present estate. Drye 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 him 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 simply cannot be written off as a mere personal right to accept or reject a gift. In pressing the analogy to a rejected gift, Drye overlooks this crucial distinction. A donee who declines an inter vivos gift restores the status quo ante, leaving the donor to do with the gift what she will. The disclaiming heir or devisee, in contrast, 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 if he does. This power to channel the estate's assets warrants the conclusion that Drye held "property" or a "righ[t] to property" subject to the Government's liens under §6321. Pp. 9-11.

[98-2 USTC ¶50,651], 152 F. 3d 892, affirmed.

Justice GINSBURG

delivered the opinion of the Court.

This case concerns the respective provinces of state and federal law in determining what is property for purposes of federal tax lien legislation. At the time of his mother's death, petitioner Rohn F. Drye, Jr., was insolvent and owed the Federal Government some $325,000 on unpaid tax assessments for which notices of federal tax liens had been filed. His mother died intestate, leaving an estate with a total value of approximately $233,000 to which he was sole heir. After the passage of several months, Drye disclaimed his interest in his mother's estate, which then passed by operation of state law to his daughter. This case presents the question whether Drye's interest as heir to his mother's estate constituted "property" or a "righ[t] to property" to which the federal tax liens attached under 26 U. S. C. §6321, despite Drye's exercise of the prerogative state law accorded him to disclaim the interest retroactively.

We hold that the disclaimer did not defeat the federal tax liens. The Internal Revenue Code's prescriptions are most sensibly read to look to state law for delineation of the taxpayer's rights or interests, but to leave to federal law the determination whether those rights or interests constitute "property" or "rights to property" within the meaning of §6321. "[O]nce it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [the federal tax lien provision], state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 56-57 (1958).

I.

A.

The relevant facts are not in dispute. On August 3, 1994 , Irma Deliah Drye died intestate, leaving an estate worth approximately $233,000, of which $158,000 was personalty and $75,000 was realty located in Pulaski County , Arkansas . Petitioner Rohn F. Drye, Jr., her son, was sole heir to the estate under Arkansas law. See Ark. Code Ann. §28-9-214 (1987) (intestate interest passes "[f]irst, to the children of the intestate"). On the date of his mother's death, Drye was insolvent and owed the Government approximately $325,000, representing assessments for tax deficiencies in years 1988, 1989, and 1990. The Internal Revenue Service (IRS or Service) had made assessments against Drye in November 1990 and May 1991 and had valid tax liens against all of Drye's "property and rights to property" pursuant to 26 U. S. C. §6321.

Drye petitioned the Pulaski County Probate Court for appointment as administrator of his mother's estate and was so appointed on August 17, 1994 . Almost six months later, on February 4, 1995 , Drye filed in the Probate Court and land records of Pulaski County a written disclaimer of all interests in his mother's estate. Two days later, Drye resigned as administrator of the estate.

Under Arkansas law, an heir may disavow his inheritance by filing a written disclaimer no later than nine months after the death of the decedent. Ark. Code Ann. §§28-2-101, 28-2-107 (1987). The disclaimer creates the legal fiction that the disclaimant predeceased the decedent; consequently, the disclaimant's share of the estate passes to the person next in line to receive that share. The disavowing heir's creditors, Arkansas law provides, may not reach property thus disclaimed. §28-2-108. In the case at hand, Drye's disclaimer caused the estate to pass to his daughter, Theresa Drye, who succeeded her father as administrator and promptly established the Drye Family 1995 Trust (Trust).

On March 10, 1995 , the Probate Court declared valid Drye's disclaimer of all interest in his mother's estate and accordingly ordered final distribution of the estate to Theresa Drye. Theresa Drye then used the estate's proceeds to fund the Trust, of which she and, during their lifetimes, her parents are the beneficiaries. Under the Trust's terms, distributions are at the discretion of the trustee, Drye's counsel Daniel M. Traylor, and may be made only for the health, maintenance, and support of the beneficiaries. The Trust is spendthrift, and under state law, its assets are therefore shielded from creditors seeking to satisfy the debts of the Trust's beneficiaries.

Also in 1995, the IRS and Drye began negotiations regarding Drye's tax liabilities. During the course of the negotiations, Drye revealed to the Service his beneficial interest in the Trust. Thereafter, on April 11, 1996, the IRS filed with the Pulaski County Circuit Clerk and Recorder a notice of federal tax lien against the Trust as Drye's nominee. The Service also served a notice of levy on accounts held in the Trust's name by an investment bank and notified the Trust of the levy.

B.

On May 1, 1996, invoking 26 U. S. C. §7426(a)(1), the Trust filed a wrongful levy action against the United States in the United States District Court for the Eastern District of Arkansas. The Government counterclaimed against the Trust, the trustee, and the trust beneficiaries, seeking to reduce to judgment the tax assessments against Drye, confirm its right to seize the Trust's assets in collection of those debts, foreclose on its liens, and sell the Trust property. On cross-motions for summary judgment, the District Court ruled in the Government's favor.

The United States Court of Appeals for the Eighth Circuit affirmed the District Court's judgment. Drye Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F. 3d 892 (1998). The Court of Appeals understood our precedents to convey 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 the 'right to property' under §6321." Id. , at 898.

We granted certiorari, 526 U.S.-- (1999), to resolve a conflict between the Eighth Circuit's holding and decisions of the Fifth and Ninth Circuits. ¹ We now affirm.

II.

Under the relevant provisions of the Internal Revenue Code, to satisfy a tax deficiency, the Government may impose a lien on any "property" or "rights to property" belonging to the taxpayer. Section 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." 26 U. S. C. §6321. A complementary provision, §6331(a), states:

"If any person liable 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 tax . . . by 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." ²

The language in §§6321 and 6331(a), this Court has observed, "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720 (1985) (citing 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.4, p. 111-100 (1981)); see also Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945) ("Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes."). When Congress so broadly uses the term "property," we recognize, as we did in the context of the gift tax, that the Legislature aims to reach " 'every species of right or interest protected by law and having an exchangeable value.' " Jewett v. Commissioner [82-1 USTC ¶13,453], 455 U.S. 305, 309 (1982) (quoting S. Rep. No. 665, 72d Cong., 1st Sess., 39 (1932); H. R. Rep. No. 708, 72d Cong., 1st Sess., 27 (1932)).

Section 6334(a) of the Code is corroborative. That provision lists 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. §§6334(a)(1), (2), (4), (7). The enumeration contained in §6334(a), Congress directed, 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)." §6334(c). Inheritances or devises disclaimed under state law are not included in §6334(a)'s catalog of property exempt from levy. See Bess [58-2 USTC ¶9595], 357 U.S., at 57 ("The fact that . . . Congress provided specific exemptions from distraint is evidence that Congress did not intend to recognize further exemptions which would prevent attachment of [federal tax] liens[.]"); United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 205 (1971) ("Th[e] language [of §6334] is specific and it is clear and there is no room in it for automatic exemption of property that happens to be exempt from state levy under state law."). The absence of any recognition of disclaimers in §§6321, 6322, 6331(a), and 6334(a) and (c), the relevant tax collection provisions, contrasts with §2518(a) of the Code, which renders qualifying state-law disclaimers "with respect to any interest in property" effective for federal wealth-transfer tax purposes and for those purposes only. ³

Drye nevertheless refers to cases indicating that state law is the proper guide to the critical determination whether his interest in his mother's estate constituted "property" or "rights to property" under §6321. His position draws support from two recent appellate opinions: Leggett v. United States [97-2 USTC ¶50,635; 97-2 USTC ¶60,286], 120 F. 3d 592, 597 (CA5 1997) ("Section 6321 adopts the state's definition of property interest."); and Mapes v. United States, 15 F. 3d 138, 140 (CA9 1994) ("For the answer to th[e] question [whether taxpayer had the requisite interest in property], we must look to state law, not federal law."). Although our decisions in point have not been phrased so meticulously as to preclude Drye's argument, ⁴ we are satisfied that the Code and interpretive case law place under federal, not state, control the ultimate issue whether a taxpayer has a beneficial interest in any property subject to levy for unpaid federal taxes.

III.

As restated in National Bank of Commerce: "The question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law." [85-2 USTC ¶9482], 472 U.S. , at 727. We look initially to state law to determine what rights the 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 compass of the federal tax lien legislation. Cf. Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 80 (1940) ("State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed.").

In line with this division of competence, we held that a taxpayer's right under state law to withdraw the whole of the proceeds from a joint bank account constitutes "property" or the "righ[t] to property" subject to levy for unpaid federal taxes, although state law would not allow ordinary creditors similarly to deplete the account. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. , at 723-727. And we earlier held that a taxpayer's right under a life insurance policy to compel his insurer to pay him the cash surrender value qualifies as "property" or a "righ[t] to property" subject to attachment for unpaid federal taxes, although state law shielded the cash surrender value from creditors' liens. Bess [58-2 USTC ¶9595], 357 U.S. , at 56-57. ⁵ By contrast, we also concluded, again as a matter of federal law, that no federal tax lien could attach to policy proceeds unavailable to the insured in his lifetime. Id. , at 55-56 ("It would be anomalous to view as 'property' subject to lien proceeds never within the insured's reach to enjoy."). ⁶

Just as "exempt status under state law does not bind the federal collector," Mitchell [71-1 USTC ¶9451], 403 U.S. , at 204, so federal tax law "is not struck blind by a disclaimer," United States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224, 240 (1994). Thus, in Mitchell, the Court held that, although a wife's renunciation of a marital interest was treated as retroactive under state law, that state-law disclaimer did not determine the wife's liability for federal tax on her share of the community income realized before the renunciation. See [71-1 USTC ¶9451], 403 U.S. , at 204 (right to renounce does not indicate that taxpayer never had a right to property).

IV.

The Eighth Circuit, with fidelity to the relevant Code provisions and our case law, determined first what rights state law accorded Drye in his mother's estate. It is beyond debate, the Court of Appeals observed, that under Arkansas law Drye had, at his mother's death, a valuable, transferable, legally protected right to the property at issue. See [98-2 USTC ¶50,651], 152 F. 3d, at 895 (although Code does not define "property" or "rights to property," appellate courts read those terms to encompass "state-law rights or interests that have pecuniary value and are transferable"). The court noted, for example, that a prospective heir may effectively assign his expectancy in an estate under Arkansas law, and the assignment will be enforced when the expectancy ripens into a present estate. See id., at 895-896 (citing several Arkansas Supreme Court decisions, including: Clark v. Rutherford, 227 Ark. 270, 270-271, 298 S. W. 2d 327, 330 (1957); Bradley Lumber Co. of Ark. v. Burbridge, 213 Ark. 165, 172, 210 S. W. 2d 284, 288 (1948); Leggett v. Martin, 203 Ark. 88, 94, 156 S. W. 2d 71, 74-75 (1941)). ⁷

Drye emphasizes his undoubted right under Arkansas law to disclaim the inheritance, see Ark. Code Ann. §28-2-101 (1987), a right that is indeed personal and not marketable. See Brief for Petitioners 13 (right to disclaim is not transferable and has no pecuniary value). But 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 (the next lineal descendant). That right simply cannot be written off as a mere "personal right . . . to accept or reject [a] gift." Brief for Petitioners 13.

In pressing the analogy to a rejected gift, Drye 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. The disclaiming heir or devisee, in contrast, 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 if he does. See Hirsch, The Problem of the Insolvent Heir, 74 Cornell L. Rev. 587, 607-608 (1989). This power to channel the estate's assets warrants the conclusion that Drye held "property" or a "righ[t] to property" subject to the Government's liens.

***

In sum, in determining whether a federal taxpayer's state-law rights constitute "property" or "rights to property," "[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property." Morgan [40-1 USTC ¶9210], 309 U.S. , at 83. Drye had the unqualified right to receive the entire value of his mother's estate (less administrative expenses), see National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. , at 725 (confirming that unqualified "right to receive property is itself a property right" subject to the tax collector's levy), or to channel that value to his daughter. The control rein he held under state law, we hold, rendered the inheritance "property" or "rights to property" belonging to him within the meaning of §6321, and hence subject to the federal tax liens that sparked this controversy.

For the reasons stated, the judgment of the Court of Appeals for the Eighth Circuit is

Affirmed.

¹ In the view of those courts, state law holds sway. Under their approach, in a State adhering to an acceptance-rejection theory, under which a property interest vests only when the beneficiary accepts the inheritance or devise, the disclaiming taxpayer prevails and the federal liens do not attach. If, instead, the State holds to a transfer theory, under which the property is deemed to vest in the beneficiary immediately upon the death of the testator or intestate, the taxpayer loses and the federal lien runs with the property. See Leggett v. United States [97-2 USTC ¶50,635; 97-2 USTC ¶60,286], 120 F. 3d 592, 594 (CA5 1997); Mapes v. United States, 15 F. 3d 138, 140 (CA9 1994); accord, United States v. Davidson [99-2 USTC ¶50,696], 55 F. Supp. 2d 1152, 1155 ( Colo. 1999). Drye maintains that Arkansas adheres to the acceptance-rejection theory.

² The Code further provides:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time." 26 U. S. C. §6322.

³ See Pennell, Recent Wealth Transfer Tax Developments, in Sophisticated Estate Planning Techniques 69, 117-118 (ALI-ABA Continuing Legal Ed. 1997) ("The fact that a qualified disclaimer by an estate beneficiary is deemed to relate back to the decedent's death for state property law or federal gift tax purposes is not sufficient to preclude a federal tax lien for the disclaimant's delinquent taxes from attaching to the disclaimed property as of the moment of the decedent's death. . . . [T]he qualified disclaimer provision in §2518 only applies for purposes of Subtitle B and the lien provisions are in Subtitle F.").

⁴ See, e.g., United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722 (1985) ("[T]he federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' ") (quoting United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55 (1958)).

⁵ Accord, Bank One Ohio Trust Co. v. United States [96-1 USTC ¶50,188], 80 F. 3d 173, 176 (CA6 1996) ("Federal law did not create [the taxpayer's] equitable income interest [in a spendthrift trust], but federal law must be applied in determining whether the interest constitutes 'property' for purposes of §6321."); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F. 2d 354, 357-358 (CA3 1986) (although a liquor license did not constitute "property" and could not be reached by creditors under state law, it was nevertheless "property" subject to federal tax lien); W. Plumb, Federal Tax Liens 27 (3d ed. 1972) ("[I]t is not material that the economic benefit to which the [taxpayer's local law property] right pertains is not characterized as 'property' by local law.").

⁶ Compatibly, in Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509 (1960), we held that courts should look first to state law to determine " 'the nature of the legal interest' " a taxpayer has in the property the Government seeks to reach under its tax lien. Id. , at 513 (quoting Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82 (1940)). We then reaffirmed that federal law determines whether the taxpayer's interests are sufficient to constitute "property" or "rights to property" subject to the Government's lien. Id. , at 513-514. We remanded in Aquilino for a determination whether the contractor-taxpayer held any beneficial interest, as opposed to "bare legal title," in the funds at issue. Id. , at 515-516; see also Note, Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485, 1491 (1964) ("Aquilino supports the view that the Court has chosen to apply a federal test of classification, for the contractor concededly had legal title to the funds and yet in remanding the Court indicated that this state-created incident of ownership was not a sufficient 'right to property' in the contract proceeds to allow the tax lien to attach. In this sense Aquilino follows Bess in requiring that the taxpayer must have a beneficial interest in any property subject to the lien." (footnote omitted)).

⁷ In recognizing that state-law rights that have pecuniary value and are transferable fall within §6321, we do not mean to suggest that transferability is essential to the existence of "property" or "rights to property" under that section. For example, although we do not here decide the matter, we note that an interest in a spendthrift trust has been held to constitute " 'property' for purposes of §6321" even though the beneficiary may not transfer that interest to third parties. See Bank One [96-1 USTC ¶50,188], 80 F. 3d, at 176. Nor do we mean to suggest that an expectancy that has pecuniary value and is transferable under state law would fall within §6321 prior to the time it ripens into a present estate.