Facts of the Case

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.

Question

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?

Conclusion

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."