Drye v. United States - 528 U.S. 49, 120 S. Ct. 474 (1999)

Rule:

The language in 26 U.S.C.S. §§ 6321 and 6331(a) is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. When Congress so broadly uses the term "property," the aim is to reach every species of right or interest protected by law and having an exchangeable value.

Facts:

A taxpayer inherited an approximately 233,000 estate in Arkansas from his mother, who died intestate. Under Arkansas law, the taxpayer was the sole heir to the estate. At the time of the mother's death, (1) the taxpayer was insolvent, (2) the taxpayer owed the Federal Government approximately 325,000 on unpaid tax assessments, and (3) the Internal Revenue Service (IRS) had valid tax liens against all of the taxpayer's "property and rights to property" pursuant to 26 USCS 6321. After petitioning for the position, the taxpayer was appointed as administrator of the decedent's estate by the Pulaski County Probate Court in August 1994. The taxpayer resigned as administrator in February 1995, after filing in the Probate Court and county land records a written disclaimer of all interests in the estate. Under Arkansas law, (1) such a disclaimer created the legal fiction that the disclaimant predeceased the decedent, (2) the disclaimant's share of the estate passed to the person next in line to receive that share, and (3) the disavowing heir's creditors could not reach property thus disclaimed. The Probate Court declared valid the taxpayer's disclaimer in March 1995. The estate then passed to the taxpayer's daughter, who succeeded the taxpayer as administrator and established a trust with the funds from the estate, of which trust she and, during their lifetimes, her parents were the beneficiaries. The trust was spendthrift, and under state law, its assets were shielded from creditors seeking to satisfy the debts of the trust's beneficiaries. When the taxpayer revealed to the IRS his beneficial interest in the trust, the IRS in April 1996 (1) filed a notice of federal tax lien against the trust as the taxpayer's nominee, (2) served a notice of levy on accounts held in the trust's name by an investment bank, and (3) notified the trust of the levy. The trust then filed a wrongful levy action against the United States in the United States District Court for the Eastern District of Arkansas. The Federal Government counterclaimed against the trust, the trustee, and the trust beneficiaries, seeking to (1) reduce to judgment the tax assessments against the taxpayer, (2) confirm the government's rights to seize the trust's assets in collection of those debts, (3) foreclose on the tax liens, and (4) sell the trust property. On cross-motions for summary judgment, the District Court ruled in the government's favor. The Court of Appeals affirmed, reading the United States Supreme 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 to property" under 6321. Certiorari was granted. 

Issue:

Did a disclaimed interest in estate constitute property or right to property to which federal tax lien attaches under 26 U.S.C.S. § 6321? 

Answer:

Yes.

Conclusion:

On certiorari, the Supreme Court affirmed. The Court held that that the Internal Revenue 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. The court held that a taxpayer's control over the property was determinative and that petitioner's unqualified right to receive the entire value of his mother's estate or to channel that value to his daughter rendered the inheritance "property" or "rights to property" belonging to him within the meaning of 26 U.S.C.S. § 6321, and hence subject to the federal tax liens.