Federal Tax Liens and Renounced Inheritances:

'Tis The Season For Giving Back

January 1999

I approached the bar of the Title 26 Inn, I was startled by the presence of the Grim Reaper. He didn't like the relaxed atmosphere that prevailed at the Inn during the last week of December. The new Internal Revenue Code provisions and amendments were no longer the subject of feisty debate because they were well-worn from the grueling schedule of seminars they had attended since the date of their enactment. The existing and unaltered Code sections were taking advantage of their last chance to relax before the flurry of new year activity just around the corner. So I assumed that Grim was not there to talk about death and taxes.

"Enjoying the holidays, Counselor?" said Grim in a tone that left no question about its intended sarcastic nature.

"I was until now," I replied in as calm a tone as I could muster.

"Don't worry, Counselor," said Grim. "I'm not here for you. But I'd like to introduce you to some new friends of mine that I'm sure you'll find interesting. Please join as at our table."

I followed Grim to one of the large round tables in the middle room of the Inn. I immediately recognized IRC Section 6321 otherwise known as the Federal Tax Lien. He was big, powerful and all-encompassing.

"I see you two already know each other," said Grim as I was shaking hands with Section 6321. "Let me introduce you to the rest of my guests."

Grim then identified the others at the table as Comparato [U.S. v. Comparato, 22 F.3d 455 (2nd Cir 1994)], Mapes [Mapes v. U.S., 15 F.3d 138 (9th Cir 1994)], Leggett [Leggett v. U.S., 120 F.3d 592 (5th Cir 1997)] and Drye [Drye Family 1995 Trust v. U.S., 152 F.3d 892 (8th Cir 1998)].

Comparato looked familiar to me. Before I could ask if we had ever met, Grim drew our attention to a figure approaching the table. "Ah . . .here is our final guest for the night," said Grim as he welcomed the Uniform Probate Code to our group.

I was barely back in my seat before Grim started the discussion by asking me to opine about a hypothetical.

"Counselor, we'd like you to tell us whether you think a federal tax lien against a beneficiary of an estate can attach to whatever the beneficiary would have received but for that beneficiary's filing of a timely disclaimer or renunciation?"

Grim's question jogged my memory about Comparato. He was the Second Circuit case that allowed the IRS to impose a lien on a renounced inheritance. "Well, Counselor, what's your answer?" Grim said somewhat impatiently.

"All right, all right," I said. "I think the lien attaches despite the declination."

"Way to go, Counselor!" shouted Section 6321. "Now pay up, Mapes and Leggett. And you, too, Probate!"

As soon as I saw the money being passed across the table I realized that I'd been used as an arbiter of some kind of bet among Grim's acquaintances.

"Hold on!" I said. "I'm not an expert on this issue and I only said that the lien attached because I recognized Comparato. Maybe I should hear from the rest of you before I render an opinion on the matter."

"So you are renouncing your opinion?" said Probate as she reached across the table to retrieve her money.

"Oh, here we go again!" said Drye. "First we renounce inheritances and now we renounce opinions. Doesn't anybody just accept what they get anymore?"

"No, Drye," I replied. "I'm not renouncing my opinion. I'm just letting you know that it was more of a guess than an opinion. I'll need a lot more information about the arguments and law before I can render an opinion about this issue."

"Let me give you a quick summary," said Grim. "Leggett and Mapes held that the federal tax lien did not attach to a renounced inheritance. Comparato and Drye held that the lien attaches despite the renunciation. Section 6321 obviously believes that the lien attaches to everything. Probate thinks Section 6321 should stay out of the affairs entrusted to her. So what's your opinion now?"

"Not so fast, Grim," I said. "I need to know the underlying rationale of those decisions."

"Okay," said Section 6321. "I'll start. Then Probate can give her spiel. Mapes, Comparato, Leggett, and Drye can join in with their positions."

Given Section 6321's size and strength no one cared to argue with his suggestion.

"As you all should know by now," said Section 6321, "a federal tax lien arises if an assessed tax is not paid after notice and demand for payment. Until the liability is extinguished or expires, I impose a lien on all property and rights to property, whether real or personal, that belong to the taxpayer. I'm often referred to as the 'secret lien' because initially my existence is known only by the IRS and the taxpayer. My lien is effective without the filing of a public notice. The Supremacy Clause of the U.S. Constitution prevents any local or state recording acts from otherwise interfering with my attachment to all property and rights to property of the debtor taxpayer.

"However, section 6323(a) of the Code sets forth certain interests that are not subject to a federal tax lien until a notice of the federal tax lien has been filed, and section 6323(b) identifies certain interests that are not subject to the federal tax lien even though a notice of federal tax lien has been filed. But if you are not one of those lucky so-called 'super priorities' then you are subject to my lien on a 'first in time, first in line' basis beginning with the date of assessment even though you didn't know, and had no way of knowing, of my existence."

"Well, that seems to settle the issue," said Grim. "If the lien attaches to everything then it attaches to a beneficiary's share of an estate even if the beneficiary files a disclaimer."

"Not so fast, Grim!" said Probate. "Federal law governs issues of federal tax lien priority. But state law controls for purposes of determining the nature of the legal interest in the property to be reached by the statute. See Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280 (1960). State law creates legal interests and rights in property, but federal law determines whether and to what extent those interests will be taxed. See United States v. Irvine, 511 U.S. 242, 114 S.Ct. 1473, 1481 (1994). Federal tax laws do not create property rights but merely attach consequences, federally defined, to rights created under state law. See United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057 (1958). That's where I come into the picture. We need to determine whether, under applicable state law, the beneficiary has a property interest in a disclaimed or renounced share of an estate before we can determine whether Section 6321's lien has anything to attach."

Finally taking a breath, but holding out her hands with fingers spread apart to quell any interruption, Probate continued: "Generally, a beneficiary who disclaims or renounces is treated as if he or she had pre-deceased the decedent. The renunciation 'relates back' to the date of the decedent's death, thereby effectively eliminating any interest of the renouncing beneficiary in the estate of the decedent. In essence, state law treats a renounced interest in an estate as never having existed."

"Now I'm really confused!" said Grim. "If the beneficiary renounces then he or she has no property interest under state law to which the federal lien can attach. So what are you guys always arguing about?"

"It's not that simple, Grim," said Comparato. "The beneficiary might not have a state law-created interest in the estate after renouncing, but he or she might have had a state law-created interest in the estate before renouncing. And that is exactly what I found under New York law in the case of Anthony Comparato and his gang. In my case, Section 6321 had imposed a federal tax lien against Anthony and Mildred Comparato. Mr. and Mrs. Comparato were the statutory distributees of their son's estate, the major asset of which was the proceeds of a successful malpractice action. They filed renunciations of their interest in their son's estate. They obviously hoped to have the assets of their son's estate pass to their surviving children as the next-in-line intestate heirs of their son, rather than have those assets fall into the hands of the IRS as a creditor of Mr. and Mrs. Comparato."

"Based on Estate of Scrivani, 116 Misc.2d 204, 455 N.Y.S.2d 505 (Sup. Ct. N.Y. County, 1982)," Comparato continued, "I held that under New York law Mr. and Mrs. Comparato's interest in their son's estate vested upon the death of their son. Thus, their subsequent 'election' to divest themselves of that vested interest did not prevent the federal tax lien from attaching to that interest. I've said it before and I'll say it again I hate to repeat myself. But the holding of my decision (at page 458) is worth repeating:

We hold that, once state law provided both Anthony and Mildred Comparato with a vested interest in the proceeds of the malpractice actions, federal law controlled whether their interests were exempt from levy by the United States.

United States v. Rodgers, 461 U.S. 677, 683, 76 L. Ed. 2d 236, 103 S. Ct. 2132 (1983) ["Once it has been determined that state law has created property interests sufficient for federal tax lien[s] to attach, state law 'is inoperative to prevent the attachment' of such liens") (quoting United States v. Bess, 357 U.S. 51, 56-57, 2 L. Ed. 2d 1135, 78 S. Ct. 1054 (1958)].

"State law controls in determining the nature of the legal interest which the taxpayer had in the property." Aquilino v. United States, 363 U.S. 509, 513, 4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960) (Aquilino) [quoting Morgan v. Commissioner, 309 U.S. 78, 82, 84 L. Ed. 585, 60 S. Ct. 424 (1940)]. However, whether a right or interest created under state law "constitutes 'property' or 'rights to property' is a matter of federal law." United States v. National Bank of Commerce, 472 U.S. 713, 727, 86 L. Ed. 2d 565, 105 S. Ct. 2919 (1985) (Bank of Commerce) [citing United States v. Bess, 357 U.S. 51, 56-57, 2 L. Ed. 2d 1135, 78 S. Ct. 1054 (1958) (Bess)]. "Once it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [§6321], state law is inoperative,' and the tax consequences thenceforth are dictated by federal law." Bank of Commerce, 472 U.S. at 722 (quoting Bess, 357 U.S. at 56-57); see also United States v. Mitchell, 403 U.S. 190, 197, 29 L. Ed. 2d 406, 91 S. Ct. 1763 (1971) (Mitchell) ("State law creates legal interests but the federal statute determines when and how they shall be taxed.") (emphasis added) (citations omitted); United States v. Solheim, 953 F.2d 379, 382 (8th Cir. 1992) (Solheim) ["Once the tax lien has attached to the taxpayer's state-created interest, federal law applies.") (citing Aquilino, 363 U.S. at 513-14)].

The Code does not define "property" or "rights to property" as those terms are used in §6321. The Supreme Court has held that Congress's language with respect to those terms "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have 'Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.'" Bank of Commerce, 472 U.S. at 719-20 [(quoting Glass City Bank v. United States, 326 U.S. 265, 267, 90 L. Ed. 56, 66 S. Ct. 108 (1945)] (other citations omitted).