Annotations- State Exemption
Law
6334 Annotations:
State Exemption Law- Levy
Property Exempt from
Levy: State Exemption Laws
[99-2
USTC ¶51,006] 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.
[79-1
USTC ¶9181]Allstate Insurance Company, Plaintiff v. W. D.
"Donnie" Walker; United States of America; Internal Revenue
Service; Ford Motor Credit Company; Chattanooga Federal Savings &
Loan Association; Charles R. Ables; First Bank of Marion County,
Tennessee; and Small Business Administration, Defendants
U.
S. District Court, East. Dist.
Tenn.
, So. Div., CIV-1-78-72,
12/18/78
[Code Sec. 6323]
Lien for taxes: Priority of federal lien: Fire insurance proceeds.--A
prior IRS tax assessment claim took priority over other creditors, all
of whom were competing claimants for the proceeds of a fire insurance
policy. The priority extended to the portion of the interpled funds
attributable to both the personalty and realty losses respectively.
Because the federal tax lien was filed first, the court ordered that
disbursement of the proceeds be paid in satisfaction of the tax lien
plus accrued interest from the date of the commencement of the trial to
the end of December, 1978..
John
T. Rice, Luther,
Anderson
, Cleary, Luhowiak & Cooper, 19th
Flr.
Commerce
Union
Tower
,
Chattanooga
,
Tenn.
37450
, for plaintiff. David E. Nelson, Jr., Wagner, Nelson & Weeks, 1418
First Tennessee Bldg., Chattanooga, Tenn. 37402, J. V. Crockett,
Department of Justice, Washington, D. C. 20530, Horace L. Smith, Jr.,
1114 First Tennessee Bldg., Chattanooga, Tenn. 37402, J. Harvey Cameron,
Kelly, Leiderman, Cameron, Kelly & Graham, P. O. Box 488, Jasper,
Tenn. 37347, John C. Cook, Assistant United States Attorney,
Chattanooga, Tenn. 37402, William M. Ables, P. O. Box 270, South
Pittsburg, Tenn. 37380, for defendants.
Findings
of Fact and Conclusions of Law
WILSON,
District Judge:
This
is an interpleader action to determine the rights and priorities of the
parties to the lawsuit in the proceeds of a certain fire insurance
policy. The case was tried before the Court sitting without a jury. The
Court now enters the following findings of fact and conclusions of law
upon the stipulations of the parties as set forth in the final pretrial
order, the record made upon the trial of the case and the orders
heretofore entered in the case.
Findings
of Fact
(1)
This is an interpleader action wherein the original plaintiff, Allstate
Insurance Company, paid into the registry of the court upon the filing
of the lawsuit the sum of $112,500.00, representing the proceeds of a
fire insurance policy. The parties defendant making adverse claims are
as follows: The defendant Walker is a citizen and resident of Marion
County, Tennessee. The defendants, the Internal Revenue Service and the
Small Business Administration, are agencies of the
United States
. The defendant, the Ford Motor Credit Company, is a corporation
organized under the laws of
Delaware
and having its principal place of business in the State of
Michigan
. The defendant, the Chattanooga Federal Savings and Loan Association,
is a corporation chartered under the laws of the
United States
and having its principal place of business in
Chattanooga
,
Tennessee
. Charles R. Ables is a citizen and resident of Marion County,
Tennessee. The First Bank of Marion County, Tennessee is a banking
corporation organized under the laws of
Tennessee
and having its principal place of business in Marion County, Tennessee.
(2)
Under date of
October 31, 1977
, the plaintiff, Allstate Insurance Company, issued its homeowners
insurance policy to the defendant, W. D. Walker, as named insured,
insuring a residence belonging to the said Walker and located on Sweeden
Cove Road, South Pittsburg, Tennessee, against fire and other loss.
Under date of
December 18, 1977
, the insured residence was destroyed by fire. Simultaneously with the
filing of the lawsuit upon
March 29, 1978
, Allstate Insurance Company deposited the sum of $112,500.00 in the
registry of the court, representing the full proceeds due under its
policy of insurance with regard to the abovestated fire loss. Of the
total sum of $112,500.00 paid into court, the sum of $75,000.00
represents the proceeds of the insured loss to the residence, or loss of
realty, and $37,500.00 represents the proceeds of the insured loss to
the contents, or loss of personalty.
(3)
Subsequent to the filing of this lawsuit an order agreed to by all
parties in interest was entered directing the payment of the sum of
$892.44 unto the law firm of Luther, Anderson, Cleary, Luhowiak &
Cooper for initiating this interpleader action as counsel for Allstate
Insurance Company, discharging all claims on the part of any party
defendant against Allstate Insurance Company and dismissing Allstate
Insurance Company as a party to the lawsuit (Court File #16). The sum of
$892.44 paid to legal counsel for Allstate Insurance Company will be
charged against that portion of the interpled funds representing the
$37,500.00 proceeds from the insured loss to personalty.
(4)
At the time of the filing of this lawsuit the defendant, Chattanooga
Federal Savings and Loan Association, was asserting a claim against the
interpled fire insurance proceeds as the holder of a first mortgage upon
the insured residence and as having been named as such in the mortgage
loss clause of the subject insurance policy. Subsequent to the filing of
this lawsuit an order agreed to by all parties in interest was entered
directing the payment unto Chattanooga Federal Savings and Loan
Association from the interpled funds of the sum of $13,060.21 in full
satisfaction of its claims and dismissing the said defendant as a party
to the lawsuit (Court File #17). Chattanooga Federal Savings and Loan
being a mortgage claimant against the realty, the sum of $13,060.21 paid
to it will be charged against that portion of the interpled funds
representing the $75,000.00 proceeds from the insured loss to the
realty.
(5)
Since the trial of this lawsuit an order agreed to by all parties in
interest has entered directing the payment to the Small Business
Administration from the interpled funds of the sum of $5,363.70 in full
satisfaction of its claims and directing that a release of its second
mortgage upon the insured property be entered (Court File $25). The sum
paid unto the Small Business Administration is to be charged against
that portion of the interpled funds representing the $75,000.00 proceeds
from the insured loss to the realty.
(6)
There remains for decision by the Court the claims of five defendants,
W. D. Walker, the Internal Revenue Service, Ford Motor Credit Company,
Charles R. Ables and the First Bank of
Marion
County
. Each of the foregoing claimants asserts priority to a portion or all
of the remaining interpled funds. Pending the resolution of the issues
in this lawsuit the parties have by an agreed order deposited the
interpled funds in interest bearing accounts (Court File #21).
(7)
Under date of
June 7, 1976
the United States of America, Internal Revenue Service, assessed taxes
against the defendant, W. D. Walker, in the sum of $22,804.40, the taxes
being assessed pursuant to 26 U. S. C. §6672. A notice of federal tax
lien with regard to these taxes was duly filed in the Marion County
Register's Office, Jasper,
Tennessee
, upon
August 10, 1976
. The fact of filing the federal tax lien was properly indexed as
required by law. These taxes remain due and unpaid in the amount of the
original assessment and the notice of lien filed thereon has at all
times since the date of filing remained of record and unsatisfied. As of
the date of the trial (November 17, 1978) lien fees in the sum of $6.00
and interest in the sum of $3,723.28 had accrued upon the taxes,
rendering a balance due upon the tax account as of that date in the
total sum of $26,533.68. Interest continues to accrue upon the tax
account at the rate of $3.75 per day from and after
November 17, 1978
.
(8)
Under date of
October 13, 1977
the defendant, Ford Motor Credit Company, took final judgments against
the co-defendant, W. D. Walker, in the total sum of $284,587.43. The
judgments were taken in this court in the cases of Ford Motor Credit
Company v. W. D. Walker, Civil Action No. 1-76-266, wherein a
judgment in the sum of $89,524.14 was entered, and Ford Motor Credit
Company v. W. D. Walker, Civil Action No. 1-76-267, wherein a
judgment in the sum of $195,063.29 was entered. The judgments, together
with interest accruing from the date of entry at the rate of 8% per
annum, remain due and unpaid. Under date of
October 25, 1977
the judgments were duly recorded in the Register's Office of Marion
County, Tennessee as judgment liens against the property and assets of
W. D. Walker. Under date of
March 21, 1978
executions were issued in aid of collection in the above referred to
cases and the executions were thereafter served upon the original
plaintiff herein, Allstate Insurance Company, resulting in this
interpleader action having been filed upon
March 29, 1978
.
(9)
Under date of
January 18, 1974
the defendant, W. D. Walker, executed a note payable to Charles R.
Ables, a co-defendant herein, the note being in the principal sum of
$65,000.00 and being payable with interest at 6% per annum upon
January 18, 1984
(Exhibit No. 9). The note is secured by deed of trust upon the
residential property that is the subject of the fire loss here involved.
The deed of trust recites that it is a third lien upon the property
(presumably being subject to the prior security interest of the
Chattanooga Federal Savings and Loan Association and the Small Business
Administration). Notice of this note and trust deed having been given
unto the plaintiff, Allstate Insurance Company, the plaintiff issued its
policy rider on
January 3, 1978
noticing Charles R. Ables as a loss payee under the mortgage clause of
the policy.
The
Court finds the facts with regard to the execution by the defendant
Walker of the aforesaid note to the defendant Ables to be as follows.
Charles R. Ables was first admitted to practice law in 1965 and at that
time he began to practice law in
South Pittsburg
,
Tennessee
in association with his brother, Jerome Ables, who was a close personal
friend of
Walker
. According to the testimony of
Walker
and of Charles Ables, they entered into an oral agreement in 1965
whereby
Walker
would pay Ables a retainer of $2400.00 a year for legal services to be
rendered. The retainer was raised to $3600.00 a year in 1971 and to
$4000.00 a year in 1974. No actual payments were ever made upon the oral
retainer agreement. Rather, the $65,000.00 note executed in 1974 is
represented as being an accumulation of past due annual retainers plus
anticipated further annual retainers to the year 1984.
The
evidence appears to preponderate in favor of the following facts with
reference to the Ables note and his claim based thereon. The actual
legal services rendered by Ables in return for the retainer over the
past 12 years appear to have been minimal. Rather, it appears that
Walker
has been represented by legal counsel other than Ables upon most
occasions when he had need of legal counsel, including most significant
litigation in which he was involved during the period the retainer is
represented as having been in effect. In fact,
Walker
, representing himself to be indigent, moved this Court to appoint
counsel for him in the Ford Motor Credit Corporation litigation referred
to in paragraph (8) above. (See Exhibit No. 14) As previously
noted, no payments were ever made on the Ables retainer prior to the
execution of the note and none have since been made. Finally, it would
appear to be significant that the note and trust deed were executed by
Walker less than a month prior to the filing of voluntary bankruptcy
proceedings on the part of two automobile agencies in which he was a
principal stockholder and officer and for which he had personally
guaranteed the corporate debts to the Ford Motor Credit Corporation.
(10)
Under date of
April 12, 1976
the defendant, First Bank of
Marion
County
, took a judgment against the defendant Walker in the Circuit Court for
Marion County, Tennessee. The judgment became final upon
March 31, 1978
when it was affirmed on appeal in the sum of $5,500.00 plus interest at
8% thereafter. This judgment was duly recorded in the Register's Office
of Marion County, Tennessee upon
April 17, 1978
.
(11)
Under date of
October 24, 1978
the defendant, W. D. Walker, executed a sworn document entitled
"Claim for Exemptions" in which he asserted "that under
the above decided code section (i.e., TCA §26-201 et seq.)
he herewith claims as exempt the sum of $2,500.00 of the proceeds of the
Allstate Insurance policy . . ." covering the personalty loss in
the fire. (Exhibit No. 1) This claim appears to have been first filed
with the Court (as an exhibit) on
November 17, 1978
, the date of the trial.
Conclusions
of Law
(1)
The Court has jurisdiction of this interpleader action and of the
parties pursuant to 28
U. S.
C. §1335.
(2)
As between the remaining competing claimants, W. D. Walker, United
States of America-Internal Revenue Service, Ford Motor Credit Company,
Charles R. Ables, and the First Bank of Marion County, the United States
Internal Revenue Service tax assessment claim against W. D. Walker in
the sum of $26,533.68, plus interest at the rate of $3.75 per day from
and after
November 17, 1978
to the date of the final judgment entered upon these findings of fact
and conclusions of law, is entitled to take priority over the claims of
each of the remaining claimants. This priority will extend both to that
portion of the interpled funds attributable to the realty fire loss and
that portion of the interpled funds attributable to the personalty fire
loss.
As
regards the claim of W. D. Walker to share in the interpled funds to the
extent of a $2,500.00 personalty exemption asserted by him pursuant to
state law (26 T. C. A. §201 et seq.), such state exemption laws
are ineffective as against a tax claim asserted by the United States
pursuant to 26 U. S. C. §6323. As provided in Treasury Regulation
301.6334-1(c) (26 C. F. R.)
".
. . property exempt from execution under state personal or homestead
exemption laws is, nevertheless, subject to levy by the
United States
for collection of its taxes."
As
regards the claim of Ford Motor Credit Company to share in the interpled
funds to the extent of its judgments against the defendant, W. D.
Walker, such judgments were not entered until
October 13, 1977
, were not recorded until
October 25, 1977
, and execution was not levied thereon until
March 21, 1978
, all being dates subsequent to the filing of the Internal Revenue
Service tax assessment lien upon
August 10, 1976
. The tax assessment lien of the I
