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Disclaimers and federal tax liens' effect on inheritances
Real Property, Probate and Trust Journal, Summer 2001 by Bluestein, Brett A
Editors' Synopsis: The author examines the effect of a taxpayer's disclaimer of an inheritance on a federal tax lien. Section 6321 of the Internal Revenue Code, which deals with Federal tax liens, and section 2518 of the Internal Revenue Code, which deals with disclaimers of inheritances for Federal wealth transfer tax purposes.
Can a taxpayer's disclaimer of an inheritance defeat a federal tax lien? Until 1999, when the United States Supreme Court ("Court") decided the case of Drye v. United States,1 the Second,2 Fifth,3 Eighth,4 and Ninth Circuits were split in their respective rulings on the matter.5 The Court resolved the conflict in Drye by holding that a disclaimer does not defeat a federal tax lien.6 Drye involved a conflict between section 6321 of the Internal Revenue Code ("Code"),7 which deals with federal tax liens, and section 2518 of the Code,8 which deals with state-law disclaimers of inheritances for federal wealth-transfer tax purposes.9
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On August 3, 1994, Irma Deliah Drye ("Decedent"), a resident of Pulaski County, Arkansas, died intestate, leaving an estate worth approximately $233,000.10 The gross estate included $158,000 of personal property and $75,000 of real property located in Pulaski County.11 Petitioner Rohn F. Drye, Jr. ("Drye"), the Decedent's son, was sole heir to the Decedent's estate under Arkansas intestacy laws.12 On the date of the Decedent's death, Drye was insolvent and owed the federal government approximately $325,000, which represented assessments for tax deficiencies in the years 1988, 1989, and 1990.13 The Internal Revenue Service ("Service") had made assessments against Drye in November 1990 and May 1991 and had executed valid tax liens against all of Drye's "property" and "rights to property" pursuant to Code sections 6321 and 6322.14
After petitioning the Pulaski County Probate Court for appointment as administrator of Decedent's estate, Drye was appointed on August 17, 1994.15 On February 4, 1995, Drye filed a written disclaimer in the Probate Court and land records of Pulaski County disclaiming his interest in the Decedent's estate. On February 6, 1995,16 Drye resigned as administrator of the estate.17
According to sections 28-2-101 and 28-2-107(a)(1) of the Arkansas Code, an heir may disclaim his inheritance by filing a written disclaimer within nine months after the death of the decedent. Section 28-2-101 states the following:
(a) A person or a representative of a deceased, incapacitated, or incompetent person to whom any property or interest therein devolves, by whatever means, may disclaim it in whole or in part by delivering a written disclaimer under this chapter.
(b) A disclaimer may be of a fractional share or any limited interest or estate.
(c) The right to disclaim granted by this chapter shall exist irrespective of any limitations imposed upon the interest of the disclaimant in the nature of an expressed or implied spendthrift provision or similar restriction.
(d) This chapter does not abridge the right of any person to waive, release, disclaim, or renounce property or an interest therein under any other statute.18
Section 28-2-107(aXI) states:
Except as provided in subsection (c), if the property or interest has devolved to the disclaimant under a testamentary instrument or by the laws of intestacy, the disclaimer shall be delivered, as to a present interest, not later than nine (9) months after the death of the deceased owner or deceased donee of a power of appointment and, as to a future interest, not later than nine (9) months after the event determining that the taker of the property or interest has become finally ascertained and his interest is indefeasibly vested.19
The Decedent died on August 3, 1994, and Drye disclaimed his interest on February 4, 1995. Accordingly, Drye satisfied the nine-month time requirement to file a disclaimer under Arkansas law.20 Under Arkansas law, upon the disclaimer of an inheritance, the disclaimant is treated as if the disclaimant had predeceased the decedent.21 Accordingly, upon the filing of a valid disclaimer, Drye was treated as if he had predeceased the Dececent.22 Pursuant to section 28-9-214 of the Arkansas Code, the Decedent's entire estate passed to Theresa Drye (Drye's daughter), the person next in line to receive the estate.23
Under section 28-2-108 of the Arkansas Code, a disclaimant's creditors may not reach the property disclaimed.24 Section 28-2-108(a) of the Arkansas Code states the following:
(1) If the property or interest devolved to a disclaimant under a testamentary instrument or under the laws of intestacy and the deceased owner or donee of a power of appointment has not provided for another disposition, it devolves as if the disclaimant had predeceased the decedent or, if the disclaimant was designated to take under a power of appointment exercised by a testamentary instrument, as if the disclaimant had predeceased the donee of the power.
(2) Any future interest that takes effect in possession or enjoyment after the termination of the estate or interest disclaimed takes effect as if the disclaimant had died before the event determining that the taker of the property or interest had become finally ascertained and his interest is indefeasibly vested.
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