Whether the interest of an heir in an estate constitutes "property"or a "right[] to property" to which the federal tax lien attachesunder 26 U.S.C. 6321 even though the heir thereafter purports retroactivelyto disclaim the interest under state law.



In the Supreme Court of the United States
OCTOBER TERM, 1998

No. 98-1101
ROHN F. DRYE, JR., ET AL., PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1a-18a) is reported at 152F.3d 892. The orders of the district court (Pet. App. 19a-24a, 25a-27a)are unreported.

The judgment of the court of appeals was entered on August 17, 1998. Thepetition for a writ of certiorari was filed on November 16, 1998 (a Monday).The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

1. Prior to June 1991, the Internal Revenue Service assessed income taxesand various penalties against petitioner Rohn Drye.1 Because petitionerfailed to pay these assessments, the Service filed notices of tax lien upon"all property and rights to property" belonging to him (26 U.S.C.6321). Pet. App. 3a, 21a.
In August 1994, petitioner's mother died intestate, leaving an estate witha total value of approximately $233,000 to petitioner as her sole legalheir. At the time of his mother's death, petitioner was insolvent and owedthe government approximately $325,000 on the unpaid tax assessments forwhich notices of outstanding liens had been filed. Pet. App. 3a, 22a.
Petitioner was appointed administrator of his mother's estate on August17, 1994. In February 1995, petitioner executed and filed in the probatecourt an instrument entitled "Disclaimer and Consent" in whichhe disclaimed his entire interest in his mother's estate. Pet. App. 3a,21a. Pursuant to that disclaimer, the estate passed by operation of statelaw to petitioner's daughter, Theresa Drye. Id. at 21a.2 Petitioner's daughterconcurrently established a trust (The Drye Family 1995 Trust), the beneficiariesof which were petitioner, his wife, and his daughter. Id. at 3a-4a, 22a.Petitioner resigned as administrator of the estate and his daughter replacedhim. Id. at 3a, 22a. The state probate court thereupon authorized the distributionof the estate property to petitioner's daughter, who used the property tofund the trust. Id. at 3a-4a.
After petitioner revealed his beneficial interest in this family trust duringnegotiations with the Internal Revenue Service in 1995, the government fileda notice of tax lien against the trust, as Drye's nominee. That lien encumbersthe real and personal property of the trust. Pet. App. 4a, 21a. The Servicealso levied upon accounts held in the trust's name at an investment company.The account proceeds of $134,004.33 were paid to the government pursuantto the levy. Id. at 4a, 23a.

2. On May 1, 1996, the trust filed a wrongful levy suit against the UnitedStates in federal district court under Section 7426 (26 U.S.C. 7426). Thetrust contended that, because of the disclaimer of petitioner's interestin the estate, petitioner never held an interest in that estate to whichthe federal tax liens could attach. Pet. App. 2a, 26a.
The district court granted the government's motion for summary judgment.Pet. App. 19a-24a. The court concluded that petitioner "obtained avested interest in the estate property of his mother upon her death to whichthe federal tax liens properly attached so that the state disclaimer lawthat was later invoked was incapable of removing those federal liens."Id. at 23a. In response to the trust's motion for reconsideration, the courtemphasized that federal law determines the proper application of federaltax liens and that "a state disclaimer law that is later invoked afterthe liens properly attached cannot remove those federal liens." Id.at 26a.

3. The court of appeals affirmed. Pet. App. 1a-18a. The court explainedthat, under the federal tax lien statute, the court is to look to statelaw to determine "whether a given set of circumstances creates a rightor interest" (id. at 12a) and then look to federal law to determinewhether that right or interest constitutes "property" or "rightsto property" (26 U.S.C. 6321) to which the federal tax lien attaches(Pet. App. 12a-13a (citing United States v. National Bank of Commerce, 472U.S. 713, 727 (1985))). See also id. at 6a-8a.3 The court held that an interestin property under state law constitutes "property" or "rightsto property" under federal law (to which the federal tax lien attachesunder 26 U.S.C. 6321) if the interest is transferable and has pecuniaryvalue (Pet. App. 7a, 14a).
The court of appeals concluded that petitioner's right to inherit the propertyof his mother's estate satisfied this standard because that right was transferableand had pecuniary value (Pet. App. 8a, 14a). Petitioner's interest thusrepresented "property" or "rights to property" for purposesof the federal tax lien statute, and the tax liens filed against petitionerattached to his right to inherit his mother's estate. Id. at 13a.
The court explained that petitioner's subsequent disclaimer of his interestunder state law could not extinguish the federal liens that previously attachedto that interest. The fact that, for purposes of state law, the disclaimeris treated as if it relates back to the date of the decedent's death doesnot mean that, at the time the lien attached, petitioner held no "property"or "rights to property" in the estate. Because the federal liensvalidly attached to that property before the disclaimer was made, petitioner'ssubsequent efforts to dispose of his interest could not defeat the federallien. Title to the property transferred to the trust remained subject tothe preexisting federal tax lien, and the levy on the assets of the trustto satisfy petitioner's debt was therefore not wrongful. Pet. App. 4a-5a,17a-18a.

The court of appeals correctly applied principles that have long been establishedin the decisions of this Court. Although two earlier court of appeals decisionsreach results that cannot be reconciled with the result in this case (seenote 3, supra), those earlier cases arose in sufficiently distinct contextsthat it cannot be said that they squarely conflict with the present decision.If a sufficiently clear conflict hereafter develops, we would acknowledgethat review by this Court would be appropriate. At the present time, however,it appears that a uniform resolution of this recurring issue may hereafterbe obtained in the courts of appeals. Review by this Court of the questionpresented in this case is thus unnecessary at this time.
1. The court of appeals correctly applied this Court's longstanding precedentunder Section 6321 of the Internal Revenue Code. That Section provides that,"[i]f any person liable to pay any tax neglects or refuses to pay thesame after demand, the amount * * * shall be a lien in favor of the UnitedStates upon all property and rights to property, whether real or personal,belonging to such person." 26 U.S.C. 6321 (emphasis added).4 As thisCourt has frequently emphasized, although "state law controls in determiningthe nature of the legal interest which the taxpayer had in the property,"whether that interest is sufficient to constitute "property" or"rights to property" under Section 6321 is determined solely asa matter of federal law and "state law is inoperative" for thispurpose. United States v. National Bank of Commerce, 472 U.S. 713, 722 (1985)(quoting United States v. Bess, 357 U.S. 51, 56-57 (1958)). See also UnitedStates v. Rodgers, 461 U.S. 677, 683 (1983); Bank One Ohio Trust Co. v.United States, 80 F.3d 173, 175-176 (6th Cir. 1996).5
There is no statutory definition of the terms "property" and "rightsto property" as used in Section 6321. Courts have routinely concluded,however, that an interest in property constitutes "property" ora "right[] to property" under the statute if it has pecuniaryvalue and is transferable. See United States v. Stonehill, 83 F.3d 1156,1159-1160 (9th Cir.) (chose-in-action is subject to federal tax lien becauseit has pecuniary value and is transferable), cert. denied, 519 U.S. 992(1996); In re Kimura, 969 F.2d 806, 810-811 (9th Cir. 1992) (liquor licenseis subject to federal tax lien because it has pecuniary value and is transferable);In re Terwilliger's Catering Plus, Inc., 911 F.2d 1168, 1171-1172 (6th Cir.1990) (same), cert. denied, 501 U.S. 1212 (1991); 21 West Lancaster Corp.v. Main Line Restaurant, Inc., 790 F.2d 354, 357-358 (3d Cir. 1986) (same);Little v. United States, 704 F.2d 1100, 1104-1106 (9th Cir. 1983) (rightof redemption, although classified as a "privilege" under statelaw, is subject to federal tax lien because it has pecuniary value and istransferable).6
Applying that established principle to the facts of this case, the courtof appeals correctly held (Pet. App. 7a-8a) that the interest that petitioneracquired in his mother's estate at the time of her death constituted "property"or a "right to property" because it had pecuniary value and wastransferable. See also note 5, supra. At the time of his mother's death,petitioner acquired the right to receive the entire value of the estate(approximately $233,000) less its administrative expenses. Id. at 3a. Thatright plainly had a substantial pecuniary value. Moreover, as the courtof appeals noted (id. at 8a), that right was transferable under Arkansaslaw. Because the interest thus obtained by petitioner was both valuableand transferable, it constitutes "property" or "rights toproperty" to which the federal tax lien could-and in fact did-attach.
By subsequently disclaiming his right to his intestate share of the estate,petitioner transferred that right to his daughter, who thereafter transferredthe underlying property to the trust. Those transfers, however, do not underminethe effectiveness of the tax lien-any property subject to a federal lienpasses "cum onere." United States v. Bess, 357 U.S. at 57. Asthe court of appeals correctly held in this case, petitioner's subsequentdisclaimer of his interest in the estate did not defeat the previously-attachedfederal tax lien because, "once a lien has attached to an interestin property, the lien cannot be extinguished * * * simply by a transferor conveyance of the interest." United States v. Rodgers, 461 U.S.at 691 n.16.
This conclusion also flows from the established principle that, "[o]nceit has been determined that state law creates sufficient interests in thetaxpayer to satisfy the requirements of the statute, state law is inoperative,and the tax consequences thenceforth are dictated by federal law."United States v. National Bank of Commerce, 472 U.S. at 722 (quoting UnitedStates v. Bess, 357 U.S. at 57) (internal brackets and quotation marks omitted).In particular, "legal fictions" adopted by state law under whicha subsequent disclaimer of a property interest is treated as if it wereeffective retroactively do not retroactively destroy an existing federallien. See, e.g., United States v. Comparato, 850 F. Supp. 153, 159 (E.D.N.Y.1993) ("state law is relevant only to the determination of whethera taxpayer has a right to certain property, not to whether he can thereafterrenounce his right"), aff'd, 22 F.3d 455 (2d Cir.), cert. denied, 513U.S. 986 (1994). For example, in United States v. Irvine, 511 U.S. 224,240 (1994), this Court held that a disclaimer of a remainder interest ina testamentary trust is a taxable gift by the disclaimant, even though understate law the disclaimer is treated as relating back to the original creationof the trust. The Court explained that "Congress had not meant to incorporatestate-law fictions as touchstones of taxability" and that federal taxationlooks to the reality of the transaction and is not "struck blind bya disclaimer." Ibid. See also United States v. Mitchell, 403 U.S. 190(1971) (although a wife's renunciation of a marital interest was deemedretroactive in effect under state law, that state-law fiction is not operativein determining the wife's liability for tax on her share of the communityincome realized before the renunciation); United States v. Comparato, 22F.3d 455, 457 (2d Cir. 1994) ("once the federal liens attached * ** , [the taxpayers'] subsequent renunciations pursuant to state law werenot effective against the federal liens").7

2. Even though the decision in this case merely applies principles longset forth in this Court's decisions under Section 6321, two prior courtof appeals decisions have reached results that are inconsistent with thedecision in this case. In Leggett v. United States, 120 F.3d 592 (5th Cir.1997), and Mapes v. United States, 15 F.3d 138 (9th Cir. 1994), the courtsheld that a renunciation of an inheritance is effective to invalidate afederal tax lien. Although those earlier decisions are inconsistent withthe decision in this case, they arise in sufficiently distinct contextsthat it cannot be said that they squarely conflict with the present decision.
a. In Leggett, the government mistakenly represented to the court of appealsthat the case involved solely a question of state law. The government failedto point out that the question whether a particular interest constitutes"property" or "rights to property" within the meaningof Section 6321 is a question of federal law. The Fifth Circuit was therebyled erroneously to give retroactive effect to the taxpayer's state-law renunciationof his property interest.
In Leggett, as in the present case, the United States acquired a tax lienin all property and rights to property of the taxpayer before she obtainedan interest in her aunt's estate. And, as in the present case, the taxpayerdisclaimed her interest in the estate and claimed, as a result, that thetax lien became invalid. The district court held in favor of the government.Leggett v. United States, 78 A.F.T.R.2d (RIA) 96-6344 (S.D. Tex. 1996),rev'd, 120 F.3d 592 (5th Cir. 1997). The court stated (i) that "whethera taxpayer has an interest in property to which a tax lien may attach"is controlled by "[s]tate law" and (ii) that the taxpayer hadsuch an interest in that case because, under Texas law, title to propertyvests in the beneficiaries immediately upon a decedent's death. Id. at 96-6346.The court concluded that the federal lien, once attached, could not be divestedby a subsequent state-law disclaimer. Id. at 96-6347.
In reversing that decision, the Fifth Circuit followed the erroneous submissionof the government in stating that the question whether the taxpayer hada property interest to which the federal tax lien could attach is solelya question of state law. 120 F.3d at 594. See also id. at 597 ("Section6321 adopts the state's definition of property interest."). The courtconcluded that the right to renounce an interest in an estate did not constitute"property" under Texas law. Because a "property" interestdid not exist under state law, the court held that the taxpayer "neverhad a property right" to which the federal tax lien could attach underSection 6321. 120 F.3d at 596.
In Leggett, the government failed to advise the Fifth Circuit that the controllingdecisions of this Court clearly establish that whether an interest createdunder state law constitutes "property" or "rights to property"for purposes of Section 6321 is a question of federal law. United Statesv. National Bank of Commerce, 472 U.S. at 727. Since the taxpayer's rightto receive the assets of the estate was plainly a valuable right and wastransferable (Clark v. Gauntt, 161 S.W.2d 270, 272 (Tex. 1942)), it constituteda "right[] to property" to which the tax lien would attach underfederal law. Because the court in Leggett was misinformed by the governmentas to the applicable law, and because that court has not had an opportunityto revisit this issue, it cannot be said that the decision in Leggett representsa fully mature conflict with the present case.
b. In Mapes, the taxpayer's mother died, leaving him one-half of her estate.At the time of his mother's death, the taxpayer and his wife owed the UnitedStates approximately $500,000 in outstanding taxes. One week after his mother'sdeath, in an effort to prevent the government's lien from attaching to hisinterest in his mother's estate, the taxpayer renounced his interest infavor of his children. 15 F.3d at 139.
The government argued in Mapes that (i) upon his mother's death, the taxpayeracquired a vested interest in his mother's estate under the applicable locallaw, (ii) an existing federal tax lien attached at that time to that vestedinterest and (iii) the taxpayer's subsequent renunciation of his interestdid not defeat the existing federal lien. 15 F.3d at 139-140, 141-142 n.4.The Ninth Circuit rejected the government's contention. While acknowledgingthat "federal law is controlling on the question of whether Mapes hada lienable interest in his mother's estate," the court concluded that"the fundamental question [is] whether Mapes had any interest in theproperty, lienable or not." Id. at 140. The court held that "[f]orthe answer to that question we must look to state law, not federal law."Ibid. Noting that the taxpayer's renunciation (one week after his mother'sdeath) was timely and valid under state law, the court held that, becausethe renunciation related back to the date of death under state law, thetaxpayer never had any interest in the property to which the federal taxlien could attach. Ibid. The court concluded that the federal tax lien wastherefore ineffective against the taxpayer's interest in his mother's estate.Id. at 140-141.
The conclusion of the court of appeals in Mapes- essentially that a renunciationunder state law can relate back to extinguish retroactively a taxpayer'sproperty interest to which a federal tax lien would otherwise have remainedattached (thus defeating the lien)-cannot be reconciled with the reasoningof this Court in United States v. Irvine, supra. In Irvine, which was decidedthree months after the Ninth Circuit entered its decision in Mapes, theCourt emphasized that, in determining whether a taxpayer possesses an interestin "property" for estate and gift tax purposes, federal courtsare to look to factual realities and not be "struck blind" bystate-law "legal fiction[s]" that permit renunciations of ownershipto be retroactively effective. 511 U.S. at 240. That holding in Irvine providesdirect support for the decision of the court of appeals in this case andfor the similar decision of the Second Circuit in United States v. Comparato,22 F.3d at 457:
The Supreme Court decision in United States v. Irvine supports the resultreached in Comparato. In Irvine * * * [t]he Supreme Court reaffirmed theprinciple followed in Comparato that "although state law creates legalinterests and rights in property, federal law determines whether and towhat extent those interests will be taxed." The Court then appliedfederal law in determining the validity of Irvine's disclaimer for federalgift tax purposes.
William D. Elliot, Federal Tax Collections, Liens, and Levies ¶ 9.09[3][d][ii],at S9-10 (2d ed. 1998 Cum. Supp. No. 1) (footnotes omitted).
In any future case presenting the same issue, the Ninth Circuit would berequired to consider the effect of this Court's decision in Irvine uponthe reasoning and holding of Mapes.8 Until the Ninth Circuit has had anopportunity to reconsider this issue, and to give effect to this Court'sdecision in Irvine, there is no direct and mature conflict among the circuitsthat requires resolution by this Court.

The petition for writ of certiorari should be denied.
Respectfully submitted.