DRYE v. UNITED STATES
In 1994, Irma Drye died, leaving a $233,000 estate. The sole heir to the estate under Arkansas law was Rohn Drye, Jr., her son. Drye owed the Federal Government approximately $325,000 in unpaid tax assessments. The Internal Revenue Service (IRS) had valid tax liens against all of Drye's "property and rights to property" under federal law, 26 USC section 6321. Several months after Drye was appointed the administrator of his mother's estate, he disclaimed his interest in the estate, which then passed under state law to his daughter. Arkansas law provides that the disavowing heir's creditors may not reach property thus disclaimed. Drye's daughter then proceeded to use the estate's proceeds to establish a family trust (Trust), of which she and her parents are the beneficiaries. Under state law the Trust was shielded from creditors seeking to satisfy the debts of the Trust's beneficiaries. After Drye revealed his beneficial interest in the Trust to the IRS, the IRS filed a notice of federal tax lien against the Trust. Ultimately, the District Court ruled in favor of the Government and its lien. In affirming, the Court of Appeals interpreted precedent to mean that state law determines whether a given set of circumstances creates a right or interest, but federal law determines whether that right or interest constitutes "property" or "rights to property" under section 6321, thus subjecting it to federal tax liens.
Does an heir's interest to an estate constitute "property" or "rights to property" such that federal liens are valid against the heir's interest, even if the heir has disclaimed the interest under state law?
Legal provision: Internal Revenue Code
Yes. In a unanimous opinion delivered by Justice Ruth Bader Ginsburg, the Court held that Drye's disclaimer did not defeat the federal tax liens. The Court read the Internal Revenue Code to look to state law for a delineation of a taxpayer's rights or interests, but to leave to federal law the determine whether those rights or interests constitute "property" or "rights to property" under section 6321. Justice Ginsburg wrote for the Court that "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 [section] 6321, and hence subject to the federal tax liens that sparked this controversy."
Argument of Daniel M. Traylor
Chief Justice Rehnquist: We'll hear argument next in Number 98-1101, Rohn F. Drye v. United States.
You're the only lawyer to come by himself we've seen in a long time.
Mr. Traylor: Mr. Chief Justice, members of the Court, may it please the Court:
For our Socratic dialogue I am armed with a borrowed Gideon and the fruit.
This is... these aids go right to the jugular of this case, and the genesis of the case, which is Chapter 3 of Genesis.
What we have here is, when the serpent extended the fruit to the offeree, free will said that the offeree had a right to accept or reject the gift.
Assuming that that offeree was a tax delinquent, the Government's position is that their 6321 Federal tax lien attached at the moment that the serpent extended the fruit.
That is not...
Justice Kennedy: Well, of course, the IRS was not in Paradise.
Mr. Jones: [Laughter]
Mr. Traylor: I'm... that is where the case starts, is with the idea of free will, that people have a right to accept or reject a gift.
The Government don't believe that.
They believe that when you have the right to make that decision and grab the fruit, that their lien attached to that personal right of decision to elect.
I don't believe that that's the law of this Court, as announced by this Court.
I don't believe...
Justice Ginsburg: Mr. Traylor, the Government is not relying on the Good Book, but it is relying on title 26 of the Internal Revenue Code and there the matter of disclaimer is dealt with in the estate and gift tax context, but it isn't... the permission for a disclaimer appears expressly in the estate and gift tax.
There is no such provision for the Tax Lien Act, so the Government is saying, Congress did not choose to provide for disclaimer in that context, so there is none.
Mr. Traylor: What Congress said was that for their tax lien to attach, the taxpayer must have property or rights to the property.
When Mrs. Drye died, at the instant of her death, the Government's position is that Mr. Drye acquired a right to property, or property in her estate.
That is not the law of the State of Arkansas, and it is not the law that this Court has pronounced.
Chief Justice Rehnquist: But as I understood it, Mr. Traylor, at least the Eighth Circuit felt that way, that under Arkansas law your client acquired a property interest upon death, because he didn't remit it for a number of months afterwards.
Mr. Traylor: Well, he has 9 months within which to make that personal...
Justice O'Connor: Yes, well, who owned the real estate during the 9 months before the decision was made?
Who owned it, do you suppose?
Mr. Traylor: The law is very clear that the estate owned it.
Justice O'Connor: You don't think, in the case of real property, that the title went to the beneficiary...
Mr. Traylor: Absolutely not.
Justice O'Connor: under Arkansas law?
Mr. Traylor: Absolutely not.
Justice O'Connor: Let me ask you this.
Did Mr. Drye have a right to transfer whatever right he had to his mother's estate before he acquired it...
Mr. Traylor: He would acquire...
Chief Justice Rehnquist: under Arkansas law?
Mr. Traylor: acquire that right if, and only if, he accepted, took a bite of the apple.
Justice O'Connor: You don't think there's any way, under Arkansas law, that before all of this happened, even before his mother died, could he transfer whatever right he had to someone?
Mr. Traylor: Only if he took a bite of the apple.
Nothing vests until you accept the gift, the offer of the gift.
You... there has to be an act of an acceptance.
At that point, Mr. Drye would acquire an interest or a property in his mother's estate sufficient for the tax lien to attach.
That never happened.
Chief Justice Rehnquist: Mr. Traylor, the district judge who, I'm sure, must have been an Arkansas practicing lawyer before he was appointed to the bench, found against you on this point, and the court of appeals, which certainly knows more about Arkansas law than we do, found against you, saying that there was a property interest under Arkansas law, so you have kind of a heavy burden to persuade us otherwise.
Mr. Traylor: Well, very simply, Judge Howard in the Eighth Circuit got it backwards.
Chief Justice Rehnquist: They don't realize it, though.
Mr. Jones: [Laughter]
Mr. Traylor: They will when this Court instructs them what the fact of the matter is, and the fact of the matter is that the Fifth... the Fifth Circuit and the Ninth Circuit on... I'm on all fours in near identical facts... found just the opposite, on very recent opinions.
Justice Souter: But they didn't do it on the grounds that you had no property interest.
They did it on the grounds that the disclaimer relates back, isn't that right?
Mr. Traylor: I don't think, Your Honor.
I think that they found that the taxpayer in both States never acquired an interest sufficient for a tax lien to attach.
This is not really about the disclaimer and the relation back.
It's whether anything ever vested, a right in property, or property itself, that under Federal law is sufficient.
Justice Souter: Let me ask you this.
If the administrator had announced that he was going to liquidate the estate and take the money and go to Las Vegas and have a good time, would you have had the right to do anything about that, your client have the right to do anything about it?
Mr. Traylor: Well, see, my client was the administrator...
Justice Souter: Would he have sat back and said, too bad, I have no property interest, or rights to property, so I guess the administrator can look forward to a good time?
Mr. Traylor: Had he disclaimed prior to that...
Justice Souter: That's not my question.
He hadn't taken any action one way or the other.
The administrator is on the way to Las Vegas.
Can he do anything about it?
Mr. Traylor: Yes.
Justice Souter: What?
Mr. Traylor: He can accept... he can take a bite of the apple and go to State court and say, enjoin that administrator from going to Las Vegas.
Justice Souter: And he would say, when he got to court, would he not, I have a right to inherit that property if I want to, and therefore he can't go to Las Vegas with it?
Mr. Traylor: He's bitten the apple, and he's... the tax lien has attached.
Justice Souter: Let's assume you are representing him, and he says, I'm not biting the apple, I am simply asserting a right to bite the apple, haven't bitten yet.
Justice Breyer: Can he stop?
Mr. Traylor: I believe that by... that that would be an act of acceptance by going to court and saying that I am protecting my interest.
Justice Souter: And he had a right to do that, I take it?
Mr. Traylor: I am acknowledging...
Justice Souter: And he has a right to go into court and do that, doesn't he?
Mr. Traylor: He has a right to do that when he does it.
Justice Souter: But not before?
Mr. Traylor: That is exactly right.
Justice Souter: He creates it himself?
Mr. Traylor: It's inchoate.
Justice Souter: He creates the right himself?
Mr. Traylor: By an act of faith...
Justice Souter: The law of the State has nothing to do with it?
Mr. Traylor: an act of free will.
Justice Stevens: Yes, but may I suggest the difference in your hypothetical.
It seems to me that if the offeree said to the offeror, I'm not sure what I want to do.
I'll let you know in 30 days.
During that 30 days, the offeror could have taken the apple back.
But in Arkansas the court would not have allowed the offeror to take it back for 30 days, because he has a 9-month period in which to make a decision.
Mr. Traylor: This Court... well, Congress has said that you have a reasonable period of time within... to make that election.
The State of Arkansas has said that you have a reasonable period of time to make that election.
Justice Ginsburg: Where did Congress say that?
Mr. Traylor: In their identical qualified disclaimer for gift and generation...
Justice Ginsburg: Where they say, for purposes of this subchapter, being the estate and gift tax, so it's clear that they didn't say it with respect to tax liens.
Mr. Traylor: It's in the same book.
I would say...
Justice Ginsburg: It's not in the same subchapter.
Mr. Traylor: A different subchapter.
I'm not a tax expert, but I can tell you for sure that the model probate code of which Arkansas, Texas, Arizona, North Dakota, and by my count 30 other States have said that you have 9 months as a reasonable... and it tracks the Federal system.
Justice Scalia: Mr. Traylor, what about stock options?
Are they taxable as property?
I mean, I have an option to buy stock in a company that I've worked for for a number of years.
I don't have to exercise the option.
I can just let it lapse.
Mr. Traylor: If you are a tax delinquent, a 6321 Federal tax lien has attached to your rights in those stock options, and...
Justice Scalia: I thought so.
Now, how does that... but how does that square with your case?
I have free will.
Mr. Traylor: Well, because you...
Justice Scalia: I don't have to bite the apple.
Mr. Traylor: No.
Justice Scalia: I can let the stock option just lapse.
Mr. Traylor: You have a vested interest.
Justice Scalia: Oh, I don't have a vested interest.
I have an ability...
Mr. Traylor: Because...
Justice Scalia: to assert an interest by agreeing to exercise the option, but I don't have to agree to exercise it.
Mr. Traylor: Assuming the options are not underwater, then that stock option is property or rights to property for 6321 because it's transferable and has pecuniary value.
Justice Scalia: Transferable?
Mr. Traylor: You could transfer the option to another.
Justice Scalia: No.
This is a nonassignable option.
Mr. Traylor: The Government says transferability, and I really don't care about... but it has pecuniary value.
Justice Scalia: It has pecuniary value only... so does your client's, only if exercised.
I have a nontransferable option to buy this stock.
The employee can only exercise it personally.
He can't assign it to anybody else.
Mr. Traylor: I believe the Government could come and seize that option and step in...
Justice Kennedy: I'm sure it can.
Mr. Traylor: And step into your shoes.
Justice Scalia: And I don't understand why it can't come and seize your client's interest in the estate.
Mr. Traylor: Because nothing had ever vested.
It was a personal right of decision that was without pecuniary value.
It was nontransferable.
It's not recognized at law or in equity in Arkansas.
Justice Scalia: How does that differ from the stock... does my stock option have any pecuniary value, if I cannot assign it to anybody?
I couldn't sell it to anyone.
I can't get a bank loan on it.
Mr. Traylor: The Government can step into your shoes and exercise...
Justice Scalia: Of course.
Mr. Traylor: Can the Government step in...
Justice O'Connor: Why?
Justice Scalia: Because it's property.
Because it's property.
So why can't the Government step into your client's shoes...
Mr. Traylor: Because...
Justice Scalia: and exercise it because it's property?
Mr. Traylor: Because the right of election is not property.
It has no value.
My client can't take a nickel for his right of decision.
By definition, a disclaimer has to be without consideration, otherwise the Government would have sued us under the Federal Debt Collection Procedures Act of 1990, the fraudulent transfer.
In fact, that is what Judge Howard has called me, and Judge Brantley, the chancellor and probate judge who adjudicated the disposition of this interesting question, called us both a... fraudulent transferors.
This thing is... Mr. Drye's disclaimer, his personal right of election, it's one of two things.
It was either a lawful act or a fraudulent transfer.
It's either a transfer, or it's not.
I suggest it...
Justice Ginsburg: I don't understand this very basic thing.
It seems to me that if I have a right to receive the entire estate, a right to receive it if I want it, then I have something of large value, and it's up to me whether I want to realize on it.
But to say that it's valueless until he takes a bite of it, I mean, he's... he can realize on it if he wants to.
He's solely in control.
Mr. Traylor: Your Honor, it's been the common law of England and this country, codified by statute in Arkansas, until you take that bite of the apple, you do not have a vested interest in her estate.
Justice Ginsburg: That's, you say is the Arkansas law.
There are States, are there not, where a person in the position of Mr. Drye would be deemed to have had the property and then given it up.
Mr. Traylor: Absolutely.
Justice Ginsburg: And then... so if we took your view of it, it would depend which State you come from whether the tax lien would attach.
Mr. Traylor: That is correct, and one of the beauties of our Federal system that different States define their interest a little bit different.
Chief Justice Rehnquist: Suppose...
Has the supreme court of Arkansas ever held that the sort of expectancy that your client had before he disclaimed was transferable, or saleable, or that it was not transferable or saleable?
Mr. Traylor: Has never interpreted our probate code since the model act was adopted in '84.
To answer your question, sure.
I mean, if Mr....
Chief Justice Rehnquist: No, I'm asking you a specific question about the holdings of the supreme court of Arkansas.
Has the supreme court of Arkansas ever held that the sort of interest your client had before he disclaimed was or was not transferable or saleable?
Mr. Traylor: The court would say that it is a transferable interest, and once you have transferred it, you've bitten the apple, your right to...
Chief Justice Rehnquist: No, I mean before you disclaimed.
During the period before you disclaimed, has the supreme court of Arkansas ever said whether or not that interest was transferable or saleable?
Mr. Traylor: I'm doing my best, Your Honor.
It's... that is an act of the bite of the apple, and...
Chief Justice Rehnquist: I'm not... don't tell me about the bite of the apple any more.
Just tell me what the supreme court of Arkansas has done, or if it hasn't done anything... I mean, this seems the key to your whole case, and if there's a case out there that is... shows the Eighth Circuit and the district court were wrong, you should surely have it.
What is that case?
Mr. Traylor: The Fifth and Ninth Circuit decisions.
Justice Kennedy: What about the Rutherford case of the State of Arkansas, which as I understand it says that one can agree to convey an expectancy in an estate?
Mr. Traylor: You can.
Justice Kennedy: All right, so why doesn't that indicate that a transfer of an expectancy is transferable, it's property, it has value?
That's what I get from the Rutherford case, and it seems to me that's the case we ought to talk about.
Now, maybe you have ways to distinguish it.
Mr. Traylor: Because it begs the question.
The interest has already vested.
The act of assignment of the...
Justice Kennedy: An expectancy is not vested.
Mr. Traylor: It is once you assign it.
You can no longer disclaim.
It would be a bar to disclaimer.
Justice Scalia: Well, I guess after you accept the devise, and while the estate is still in administration, what you have might be called an expectancy.
I'm not sure I'm that interested in what the supreme court of Arkansas has to say.
To come back to my stock option example, suppose the State of Delaware, in order to make itself even more attractive to corporations, passes a law that says, henceforward stock options in the stock of Delaware corporations are not property...
Mr. Traylor: This Court...
Justice Scalia: would the Federal Government still be able to tax those stock options?
Mr. Traylor: This Court answered that question very clearly in the National Bank of Commerce case, which I believe to be the leading case on the question, and States can't define what is or is not property.
Justice Scalia: For purposes of the Federal tax law.
Mr. Traylor: Yes.
Chief Justice Rehnquist: So...
You say States can't define what is or is not property for purposes of Federal tax law?
Mr. Traylor: They cannot.
Chief Justice Rehnquist: I thought our cases held just the opposite, that the statute says if you have property the Government can get it, but whether or not you have property is up to State law.
Mr. Traylor: You look at the interest under State law, and then under National Bank of Commerce you then look to see if that interest is property or rights to property, and the definition primarily is, does it have pecuniary value.
Justice Scalia: The State law defines your rights, but whether that bundle of rights, whatever it is, rises to the level of being property under the Internal Revenue Code is a matter of Federal law.
Mr. Traylor: Precisely, because of your Delaware example.
You can't let States define what has incumbered the tax man.
Justice Stevens: Then it's irrelevant for our purposes that as a matter of Arkansas law the decision to disclaim relates back to the date of death, and that therefore the... as a matter of Arkansas law he never had any property.
That's irrelevant, is that right?
Mr. Traylor: My best answer is, you look in depth at State law to ascertain what is the nature of the interest or right under State law, and if you'll do that in this example, you will find that Mr. Drye never acquired an interest sufficient to be defined under Federal law as property, or rights to property.
Justice Ginsburg: Mr. Traylor, I'm just curious about why the taxpayer, Mr. Drye being in this situation, he didn't have his mother write a will leaving the estate to the daughter.
Mr. Traylor: We had an appointment with her on the day of her death to execute a will.
That really affected... I mean, that's why my name is in the caption.
I mean, that was what was to happen, and it's just one of those things in life that, in fact, Mr. Drye did not want to go talk to his mamma and tell her... Mr. Drye was 70, his mamma was almost 92, I believe, at the time.
He didn't want to go tell his mother, sign this piece of paper so that we don't have to be up here today.
Justice Scalia: If he had done that, what if you... if it's not an intestate disposition, but there is a will, and you are one of the beneficiaries of the will, all right, and what if you say, I don't want this property.
You simply decline the bequest.
Mr. Traylor: That has been the common law of England and this country for...
Justice Scalia: You can do it?
Mr. Traylor: hundreds of years.
Justice Scalia: You can do it?
Mr. Traylor: Absolutely.
Justice Scalia: And are you... is that considered... your interest in that bequest considered property for purposes of the Federal tax law?
Mr. Traylor: The Fifth and Ninth Circuit said it wasn't.
The only circuit that has said it is is the Eighth Circuit.
Justice Scalia: No, I'm talking... yes.
I'm not talking about intestate disposition.
I'm talking about a bequest, and...
Mr. Traylor: The Fifth and Ninth Circuit were both... were both bequests.
Justice Scalia: Do you think the two should be the same?
Mr. Traylor: Absolutely, and that was the purpose that the commissioners on uniform State laws got together and said, look, there isn't any reason... for the last 500 years we have let people have the freedom to decline gifts in... bequests, not make a person an owner against their consent, but if it's an inheritance you will take, whether you will or not.
That was the law in England and the United States for a long time.
The commissioner got together and said, look, there isn't any reason for that, particularly as you look at the Federal tax consequences.
One is a transfer, one is not.
They got together back in the mid-sixties, they removed the common law anomaly of... feudalism is where that distinction arose hundreds and hundreds of years ago, and the State of Arkansas has adopted it, Texas, Arizona, North Dakota, and by my count 30 other jurisdictions.
They have removed the distinction between the two of them.
This case is... the Fifth Circuit decision is right on point, and it's the best analysis that I have seen of it, and the recent Ninth Circuit decision.
Both of them to me are very thoughtful decisions, and I understand that this is not a very palatable result that has resulted.
Mr. Drye didn't pay his taxes.
The Government needs the taxes, and through this sleight of hand... but these people across the street over...
Justice Scalia: The Government doesn't really need the tax.
They had a surplus, I think.
Mr. Jones: [Laughter]
Mr. Traylor: Well, the people across the street in Congress can very easily change it.
In their wisdom, they have chosen not to make a disclaimer a fraudulent conveyance.
In fact, in the State of Arkansas Mr. Drye would not have had this ability to have disclaimed up until about the mid-eighties, because at that time the law was an insolvent beneficiary could not disclaim.
That bar was removed, oh, in the mid eighties.
Chief Justice, if I might, if there's no other present questions, could I reserve the balance of my time?
Chief Justice Rehnquist: Yes, you may.
Mr. Traylor: Thank you.
Argument of Kent L. Jones
Chief Justice Rehnquist: Mr. Jones, we'll hear from you.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Justice Scalia: Mr. Jones, you don't have a stick that you're going to turn into a snake or anything like that, do you?
Mr. Jones: [Laughter]
Mr. Jones: I knew this day was going to come.
I just was hoping it wouldn't be today.
I wanted to say 5 seconds' worth about the apple, and then talk about the law.
This case does not involve an offer of a gift.
This case... an offeree doesn't have any legal rights in the proposed gift.
He can't enforce the offer.
This case involves an intestate succession to which petitioner is the sole heir, had lawfully and legally enforceable rights in Arkansas.
With that background, I'd like to now talk about what the legal issue is.
The legal issue is, what's the scope of the Federal tax lien?
Section 6321 of the Internal Revenue Code creates a Federal lien in all property and rights to property of any delinquent taxpayer, and in a long series of cases, beginning with the Glass City Bank case in 1945, the Court has plainly set out the way that we're supposed to answer these questions.
First, you look to State law to see what the nature of the interest that the taxpayer has is, and then secondly, Federal law governs the determination of whether that interest is property or rights to property under the Federal lien.
Justice Scalia: Would you treat testate and intestate the same?
Mr. Jones: Almost certainly the answer would be the same, and certainly the method of answering the question is the same.
The method is, did the taxpayer have a valuable, legally protected right to receive the property.
Justice Scalia: If you treat testate the same, then what about the Government's attaching a tax lien to a gift that I've offered?
I haven't died yet, but I've offered my son a particular gift.
Mr. Jones: Your son would have no legally protected right, no enforceable right to make you transfer that property to him.
That's why I wanted to make that point at the beginning.
This case does not involve that situation.
Justice Scalia: What if State law is that, like an offer, the offer of a gift remains open until it's accepted?
Mr. Jones: I'm not sure what that would mean, but if I understand it correctly, you're saying that...
Justice Scalia: It means, all he has to say is, I accept, and the property...
Mr. Jones: Oh, he has a legally enforceable right under State law to accept.
Justice Scalia: To accept the gift?
Mr. Jones: That is a valuable interest, a valuable, legally protected right that this Court has explained in many cases.
It falls within the Federal concept of what's property for purposes of the tax lien.
Chief Justice Rehnquist: Supposing that you have some State court cases on the subject that don't speak directly to the issue in question.
What is the test?
What do you look for in State law to see whether the person has a legally protected interest?
Mr. Jones: Well, one clear example is the situation we have here, where it's the sort of interest that can be transferred, that the State will allow you to transfer the interest.
Chief Justice Rehnquist: Transferability is sufficient, then?
Mr. Jones: That would certainly be sufficient to indicate that it was a legally protected right.
Justice Stevens: But you don't think it's necessary?
Mr. Jones: No, sir, not at all.
I think there are lots of legally protected rights that involve property interests that you can't transfer, like a spendthrift trust.
Indeed, that's where this money ended up in this case.
Justice Breyer: It's true that this is a little unusual in that here you have the Arkansas statute, which says for all purposes, once it's disclaimed, it disappears.
It's not like a stock option in that sense, which I guess for a lot of purposes of State law, even after the expiration date, State law might have had some bite.
I mean, there are all kinds of State laws.
So I looked up the bankruptcy law to see how Federal law treats it.
It seems to me that under the bankruptcy provisions this would not count as an interest in property for purposes of a fraudulent transfer.
I can check it again, but I don't know if you've looked into that.
Mr. Jones: I'm not prepared to address that question.
Justice Breyer: Well, if it turns out that for bankruptcy purposes this isn't treated as an interest, I mean, I... why... you haven't thought about it, so I... you're not...
Mr. Jones: Well, I... even without thinking about it in much depth at all, I mean, what we're dealing with is not only section 6321 of the Internal Revenue Code, but a fairly large body of precedent of this Court under that statute, and...
Justice Breyer: Well...
On the precedent, I couldn't find any.
That is to say, the reason is, statutorily this doesn't count as a property right for tax purposes, because they have all these statutes, you know, that let you disclaim.
Then I couldn't find something other than that.
Now, tell me, what is... what do you...
Mr. Jones: I'm not even sure what you're referring to, these statutes that let you dis...
Justice Breyer: You have a gift tax, you have an estate tax...
Mr. Jones: Only for those purposes.
The Internal... what... and, of course, that's an entirely different subject.
Justice Breyer: Yes.
Mr. Jones: The reason that the disclaimers are allowed if they're made within this window under... for purposes of the gift and estate tax, is to avoid imposing a double tax on what's essentially a single flow-through.
But the reason that the Federal tax lien reaches this property is because the taxpayer had that legally enforceable right to decide what he wanted to do with it, which was a valuable right, and the fairness interest that I think Congress is concerned about under the Tax Lien Act is the fairness of requiring taxpayers B, C, D, and E, to pay more than their fair share to make up for the fact that taxpayer A hasn't paid his taxes.
Justice Breyer: You were going to tell me some Federal precedent.
Mr. Jones: Yes.
Well, to me the case that really tells us how to decide this question is the National Bank of Commerce case, where the Court said that in view of the comprehensive nature of the statutory language that Congress employed, that this lien reaches every valuable right, every species of right or interest that a taxpayer might invest in...
Justice Breyer: Every specie of right or interest, so in fact you would say this reaches even a similar situation under a will where the testator isn't dead yet?
Mr. Jones: Well, I... the testator can revoke his will.
Justice Breyer: Exactly, so...
Mr. Jones: But what we're talking about is something that is a right that the taxpayer has, and under Arkansas law, for example, the taxpayer could assign his expectancy in such an estate, and so I suppose we could take the position, which we don't need to reach in this case.
Chief Justice Rehnquist: Well, but the devisee has no action against the testator to...
Mr. Jones: Of course not.
Chief Justice Rehnquist: if the testator revokes.
Mr. Jones: Right, so I mean, it would be very hard to figure out what would be the value that the lien would attach to.
But what I want to... the point I keep heading toward is that in National Bank of Commerce what the Court said was that nothing more than common sense is required to conclude that a right to receive property is itself a interest in property that the lien attaches to, and that is precisely the nature of the interest that the taxpayer in this case has.
Justice Kennedy: What is the legal error of the Fifth Circuit right?
Mr. Jones: The Fifth Circuit in Leggett was wrong exactly for the reasons I've just described.
In Leggett, the Court said that the Federal lien doesn't attach to this right to receive property because under State law that is just a personal privilege, and it's not a property interest for purposes of State law.
And that's flatly inconsistent with the two fundamental holdings of the Court in National Bank of Commerce, the first of which is that Federal law, not State law, governs in deciding what's property under the tax lien and, secondly, that the right to receive property is property under the tax lien.
Justice Kennedy: So you look to State law to find the nature of the interest, and you look to the Federal law to see if it's property?
Mr. Jones: That's exactly what the Court held in National Bank of Commerce.
Chief Justice Rehnquist: Well, that's a little bit more intricate, more intricate than one needs, perhaps.
Mr. Jones: Well, these intricacies rarely arise, but when they arise, that's how they're to be resolved.
Chief Justice Rehnquist: What was the interest under Texas law?
Was it Texas the Fifth Circuit was deciding?
Mr. Jones: Yes.
It was... I... it was interest under a will, but the principles of property that govern the disposition of that interest are the same, whether it's intestate or testate and, indeed, as we pointed out in our brief, the State court... I mean, I'm sorry, the Fifth Circuit in Leggett seems to us to have erred in its description of how State law operates, to say all they had was a right of decision.
They had a lot more than a right to decision.
As the Eighth Circuit pointed out in this case, under the similar provisions of Arkansas...
Justice Kennedy: Excuse me, a right of rescission or decision?
Mr. Jones: Decision is what the Fifth Circuit called it.
Under the State law they have an absolute right to receive the property without doing anything.
They don't have to make a decision, any more than I have to make a decision to withdraw money out of my bank account.
It's still my property.
If I withdraw it...
Justice Scalia: He has a property right, but does he have a property right in the assets of the estate?
Mr. Jones: Yes.
Justice Scalia: Well, I...
Mr. Jones: There's a right to receive it.
Justice Scalia: Suppose I make you a contractual offer that is open for 90 days, and under most States' laws nowadays, if I say it's open for 90 days, you can count on that.
That is worth something.
It's a beneficial contract to you.
Mr. Jones: If it's an irrevocable offer for 90 days.
Justice Scalia: It's an irrevocable offer for 90 days.
Mr. Jones: Then you have a right to accept it.
It's a valuable right.
Justice Scalia: You have a right to accept it.
Mr. Jones: It's subject to Federal lien.
Justice Scalia: Right, now what would you slam your lien on, my... the property that I have... that's the subject of the contract?
Mr. Jones: What I would... the lien would be... I would have the... I would... it depends at what stage we're at.
If I... if I try to...
Justice Scalia: The 90 days have gone by.
Mr. Jones: If I try to...
Justice Scalia: The 90 days have now gone by, the guy never exercised the...
Mr. Jones: Oh, the offer wasn't accepted?
Justice Scalia: It wasn't accepted.
Mr. Jones: Has it expired?
Justice Scalia: It's expired.
Mr. Jones: Well then, there's nothing left for us to attach to.
Justice Scalia: Well, he had a power to accept it.
He just didn't.
Just as in this case he had a power to accept it, but he didn't.
Mr. Jones: No, he doesn't have a power to accept it.
He has the right to accept it.
It's not a power, it's a right.
Justice Scalia: Okay, I'll call it a right in the other case, too, then.
Mr. Jones: He can transfer...
Justice Scalia: They're both the same.
Mr. Jones: This really is a fundamentally different concept.
He can transfer this right away.
He can, quote, disclaim it, which the Court said in the... in the Irvine case was an indirect transfer of it.
He can get rid of it.
But as this Court's held in Best, and Phelps...
Justice Scalia: What do you mean, transfer it?
Can he give it to somebody else to accept it?
Mr. Jones: Who?
We're talking about this taxpayer?
Justice Kennedy: Yes.
Mr. Jones: Yes.
He could transfer his right to receive the property by an assignment under State law.
Indeed, you don't have to look further than the State's disclaimer provisions to see that an assignment... that this interest can be assigned, because once you've assigned it, you can then no longer disclaim it.
Justice Scalia: Well, I suppose the same in the contract case.
I could say, you know, if I accept this contract, I assign to you my rights under it.
Mr. Jones: And the Federal...
Justice Scalia: You can't accept it for me, but if I do accept it, you'll have my rights under it.
I see no difference in the two cases, and I don't... in other words, I acknowledge that it's property, but is the property the assets of the estate, or is it, rather, this right to accept it, which is intangible, and which I don't know how you can...
Mr. Jones: The easiest way to answer it is by reference to the Court's decision in the Phelps case.
The Federal lien attaches to the property and to... however it is transferred, and to anything substituted for it, and because of that, the lien exists at all phases of this... I'm sorry, at all phases of this...
Justice Scalia: Well...
Mr. Jones: factual pattern.
Justice Scalia: But it seems to me that's too fast to say the lien attaches to the property.
I agree, but what is the property?
It is not the assets of the estate.
It is his right to obtain those assets.
Mr. Jones: It's his right to receive them initially.
Justice Scalia: Okay.
Mr. Jones: And then when he transfers that right the lien follows that along to whoever obtained that right.
In this case, it was his daughter, and then it attached to the assets themselves when she received them, and then it continued to attach to the assets as they were transferred to the trust, and because it continued to exist in these properties, the properties were lawfully seized for collection of taxes.
That's the fact pattern.
There was one other opinion of the court of appeals that I do need to discuss, the Mapes decision in the Ninth Circuit, which reached a similarly incorrect as Leggett, but did it by a different route.
What the Court held in the Mapes case was that the Federal lien doesn't attach to the taxpayer's right to receive the estate, because once the taxpayer renounces the interest, it's said to be renounced for all purposes under State law, and the Court said, therefore the taxpayer should be treated as if he never owned an interest in the property.
The clear error in that decision is, the court didn't cite any of this Court's decisions and, in particular, didn't cite the Mitchell case, where this Court held that a retroactive renunciation of a property interest... and I'm quoting... should not be misinterpreted as an indication that the taxpayer never owned an interest in the property.
This Court has consistently held that you look to the realizable economic value of the taxpayer's rights, and you don't look to the State law fictions of retroactive renunciations and disclaimers.
As the Court held in the Irvine case, Federal tax law is not struck blind by the State's legal fiction of a retroactive disclaimer.
The lien attached to the rights at the time that it arose, and subsequent dispositions of that, of the interest could not destroy the Federal lien.
Unless the Court has further questions...
Justice Breyer: I do, actually.
I might... I have one, and you're probably not going to have an answer, because we haven't looked it up, and I haven't, either, but as I was looking at the bankruptcy law, the reason that I was concerned is the following.
Imagine the taxpayer in this case had done just what he did, but he did it 30 days before going bankrupt.
What... if I'm right about the bankruptcy law, the interpretation would mean, if we got yours, is that his creditors, who were private, couldn't get at the money, and the reason is, it would not be a, quote, interest in property, but the Government, as taxpayer, would be able to get at the money, and the reason would be because it is, quote, a right to property.
Mr. Jones: Well...
Justice Breyer: Now, that seemed, you know, a little odd.
Mr. Jones: That is possible.
I'm not in a position to say yea or nay, but I can say it's a very common situation that the Federal tax lien applies in a situation where private creditors have no opportunity to... I mean, that's what the Best case was precisely about.
And the courts held that it doesn't matter whether under other law, State law in that case, whether you have a... whether other creditors could seize it.
This is a question of Federal law under section 6321, and under the Federal law, if the Federal law provides a lien, that's the answer to the question.
Justice Scalia: And...
Mr. Jones, can I pursue... you said that the lien attaches to his right to get the property.
If he exercises that right, it attaches to the property which is the product.
But if he doesn't exercise the option, and somebody else gets the property, that... I don't see it as being the product of his option any more.
Justice Kennedy: How can you...
Mr. Jones: I don't... what do you mean by doesn't exercise the option that... this taxpayer doesn't have to do anything to get the property.
It's his automatically.
That's the point I was trying to make earlier.
He can transfer his right, but if he doesn't do anything, if he doesn't write a disclaimer, he doesn't make an assignment, that property comes to him.
Because he already has a vested right to receive that property under State law.
Justice O'Connor: Well, indeed, this was real property, I take it...
Mr. Jones: Some of it.
Justice O'Connor: and I thought the title went to Mr. Drye immediately, subject to this State law right to disclaim later, but I thought he held the title immediately.
Is that right, or wrong?
Mr. Jones: That's the way the court of appeals described it, and that's my understanding of Arkansas law as well.
The court of appeals, I...
Justice Stevens: But again, that's not necessary to your position, as I understand your position.
Mr. Jones: No.
Justice Stevens: It would be different, though, would it not, if State law provided that a beneficiary, an intestate... an heir has to file a piece of paper in court identifying himself or herself and saying affirmatively, I want the money?
Mr. Jones: It would only be different if the right were not...
Justice Stevens: He would have no right to the money unless he filed that piece of paper?
Mr. Jones: Well, if they had the right to the money, if they had a legally protected right to...
Justice Stevens: But he had to take an affirmative step to do it?
Mr. Jones: That goes back to the colloquy I had with Justice Scalia.
If he has a legally protected right that is vested in him to receive this money...
Justice Stevens: As a matter of State law, though, the nature of the interest... the nature of the interest is, he has nothing, unless he files that piece of paper.
Mr. Jones: Well, you... that's an interesting point.
I really haven't thought about that.
Justice Kennedy: It's different.
Mr. Jones: If he had to take a specific act, and he doesn't take the act, that would be a harder problem, and I'm not sure how we come out.
This case is not like that.
Justice Kennedy: You say the...
Mr. Jones: I want to point out, the Eighth Circuit said that he doesn't have to do anything.
Justice Stevens: No, I understand.
Mr. Jones: They made that point.
Justice Stevens: I understand that.
But the Commerce case was a bank account.
I mean, he clearly owned the money.
It's just a question of how much, between the joint account, isn't that right, because he had... you relied there on the fact he had a right to withdraw the money.
Mr. Jones: He had a right to receive the money, which is... I'm using the words of the Court in the National Bank of Commerce case, and they pointed out that it didn't matter whether that was a right that the State law would call a property right.
It didn't matter that he couldn't get the money until some day in the future.
What mattered was that at the time the lien attached, he had a vested right to get that money at some point.
Rebuttal of Daniel M. Traylor
Chief Justice Rehnquist: Thank you, Mr. Jones.
Mr. Traylor, you have 5 minutes remaining.
Mr. Traylor: Thank you, Your Honor.
The Government has taken all of my cases.
They're... Mitchell, down in Louisiana, those delinquent taxpayers, they had a present right, and then they tried to disclaim it, and the Court said, look, an act of God cannot remove a Federal tax lien once it's attached, and I agree with that.
The question... the problem here is, it never attached.
Irvine, the Court recently has stated that the... this idea of acceptance or rejection of estates can be based on a gift theory.
That is what we're talking... we're not talking about a mechanism to defeat creditors.
We're talking about transfer and succession of estates.
Best, that's my case.
The delinquent taxpayer at any time could go get the cash value of his life insurance policies.
The fact that he later executed a disclaimer, you can't... a State disclaimer can't extinguish a Federal tax lien once it attached.
The only people who can do that are the people across the street.
Two interesting things, the Government says that, in his opening statement that... I... that this idea of the bite of the apple, look at page 22 of their brief.
It says in the second full paragraph, an offer which can be accepted or rejected is itself an interest in property.
Here's an offer you can accept or reject.
The Government lien has attached.
I submit to you that that ain't the law of the country.
Justice Scalia: Well, it's... the Government's changed his position a little bit.
I... and says that if the offer is framed in such a way that the property is yours unless you affirmatively reject, you have property on which the lien...
Mr. Traylor: The act of doing nothing is an affirmative act that cooks your goose.
Justice Scalia: The act of doing nothing is an affirmative act?
Mr. Traylor: Exactly.
Justice Scalia: Let me contemplate that for a minute.
Mr. Jones: [Laughter]
Mr. Traylor: Over the passage of time, and I would like to...
Justice Breyer: The statute doesn't say interest, it says right.
It says you have a right to property, and if you do nothing, and you get the property, and legally you're entitled to it, how don't you have a right to property?
It didn't say interest.
Mr. Traylor: You have a right to accept or reject, but more importantly, I would like to go to your bankruptcy question.
Justice Breyer: Well, I just distinguished it away, because I said it uses interest and not right.
Mr. Traylor: On the...
Justice Kennedy: You go ahead and defend it.
Mr. Traylor: On the bankruptcy question, whether a trustee has a right to avoid a disclaimer made within, oh, I guess it would be 4 months, the Government ought to read note 17 of its own brief, where they represent that the trustee does have such a right.
I submit to you that they do not read that section of the Bankruptcy Code properly.
The only thing that generally the bankruptcy trustee can avoid are transfers.
Disclaimers, by definition, cannot be a transfer, because you cannot accept any consideration for it.
Justice Ginsburg: Mr. Traylor, do I take it from what you've just said, cannot be a transfer, that the estate gift tax provision for disclaimer, that was unnecessary, that the provision for it, for purposes of that subchapter, Congress didn't need to do that?
Mr. Traylor: Congress had to do it, because it treated people differently.
If you received under a will, you were not taxed.
If you received it by an inheritance, you will take it whether you will or not.
You can transfer it the next day, but you're going to be taxed.
And people raised Cain and said, what's the difference?
Congress said there is no difference, so we're going to treat both of you the same.
And then the State law commissioners got on the same bandwagon and...
Chief Justice Rehnquist: Thank you, Mr. Traylor.
Mr. Traylor: Thank you, Your Honor.
Chief Justice Rehnquist: The case is submitted.
Argument of Speaker
Mr. Jones: The opinion of the Court in No. 98-1101, Drye against United States will be announced by Justice Ginsburg.
Argument of Justice Ginsburg
Mr. Ginsburg: This case concerns the respective provinces of State and Federal Law in determining what is property for purposes of federal tax lien legislation.
The tax payer, Mr. Drye was insolvent, and owed the Federal Government some $325,000.00 on unpaid tax assessments for which notices of Federal Tax Liens had been filed.
His mother died intestate leaving an estate worth approximately $233,000.00 to which Drye was sole heir.
Some six months after his mother’s death, Drye disclaimed his entire interest in his mother’s estate.
By operation of Arkansas Law, the estate then passed to Drye’s daughter who set up a Spendthrift Trust under which she and her parents were beneficiaries.
In a contest between Drye and the Internal Revenue Service, the Federal District Court and the Court of Appeals for the Eighth Circuit held for the government.
Those courts concluded that despite the disclaimer, Drye’s interest in his mother’s estate qualified as a right to property, to which the government’s tax lien attached.
We agree that Drye’s disclaimer did not defeat the federal tax liens, and we affirm the Court of Appeals decision.
The Internal Revenue Code's prescriptions are most sensibly read to look to state law for delineation of the tax payer’s rights or interests, but to leave to federal law the determination whether those rights or interests rank as Property or rights to property within the meaning of the federal tax lien legislation.
Congress used the term ‘Property’ broadly in that legislation, it aimed to reach every legally protected right and property that one can keep or exchange for value.
Drye’s right as sole heir fit that description.
Relying on decisions of the Arkansas Supreme Court, the Court of Appeals concluded that under State Law, Drye had, at his mother’s death, a legally protected right to receive the property at issue, a Right he could transfer to others for money’s worth.
Drye takes a different view; he maintains that on the date of his mother’s death, he held nothing more than a personal non-transferable right to accept or reject a gift.
But Arkansas Law primarily gave Drye a right of considerable value; the unqualified right either to inherit or to channel the inheritance to a close family member, the next lineal descendent.
Thus, a disclaiming heir inevitably exercises dominion over the property, unlike a donee, who by declining a gift restores his status quo ante, leaving the donor what to do with the gift what she will.
Drye’s power to channel the estate’s assets to himself or to his daughter, the control rein he held under state law warrants the conclusion that under federal law he had a right to property, subject to the government’s tax liens.
The decision is unanimous.