October, 2014 Newsletter
Provided by Leimberg Information Services
See other issues.
Chuck Rubin: on Deinlein v. US: No Disclaiming of Federal Tax Liability
“Christopher Deinlein owed taxes to the IRS, and liens were filed against him. Chris’ mother died, and Chris was a 1/3 beneficiary of her estate. Presumably to prevent the IRS from receiving the estate assets attributable to his 1/3 interest, Chris disclaimed his interest in the estate under Kentucky law. The IRS sought to seize his 1/3 interest, and the District Court held that the IRS’ lien attached to the beneficial interest notwithstanding Chris’ disclaimer.”
Chuck Rubin provides members with his analysis of Deinlein v. U.S., a recent federal district court case from Kentucky which held that the assets due to an estate beneficiary can still be reached by the IRS in payment of the beneficiary’s delinquent federal taxes, even if the beneficiary disclaims the estate interest.
Charles (Chuck) Rubin, a board certified tax attorney, is managing partner of Gutter Chaves Josepher Rubin Forman Fleisher Miller PA, a tax, trusts and estates boutique law firm situated in Boca Raton, Florida (www.floridatax.com). He is an ACTEC fellow, and a former adjunct professor at the University of Miami School of Law. Chuck has published numerous treatises, manuals, and articles, including two BNA Tax Management portfolios, and articles in Journal of Taxation, Estate Planning, Tax Management Estates, Gifts and Trusts Journal, and Tax Notes. He also authors a popular tax blog at www.RubinonTax.blogspot.com, and speaks regularly at professional meetings and conferences.
Here is his commentary:
The assets due to an estate beneficiary can still be reached by the IRS in payment of the beneficiary’s delinquent federal taxes, even if the beneficiary disclaims the estate interest.
Christopher Deinlein owed taxes to the IRS, and liens were filed against him. Chris’ mother died, and Chris was a 1/3 beneficiary of her estate. Presumably to prevent the IRS from receiving the estate assets attributable to his 1/3 interest, Chris disclaimed his interest in the estate under Kentucky law. The IRS sought to seize his 1/3 interest. Relying on the U.S. Supreme Court case of Drye v. U.S., 528 US 49 (1999), the District Court held that the IRS’ lien attached to the beneficial interest notwithstanding Chris’ disclaimer.
Typically, state disclaimer law creates the legal fiction that the disclaimant predeceased the decedent. On its face, this would appear to prevent a creditor of the disclaimant from reaching the disclaimed assets since the disclaimant is never treated as owning the disclaimed assets.
When the creditor is a nonfederal creditor, whether this holds up is a question under the law of each state. However, when the creditor is the IRS, this brings in an admixture of state and federal law and determination of property rights.
Based on Drye and as reaffirmed in this case, while state law technically could still vary and thus there could be a different result in some states, federal tax delinquents in most states with traditional or common law or statutory disclaimer law will likely obtain no protection through a disclaimer.
The District Court takes the analysis through six steps that illustrates the interaction of state and federal law to reach its final conclusion. Those steps are:
a. Code Section 6321 authorizes the IRS to satisfy a tax deficiency by imposing a lien on “all property and rights to property, whether real or personal, belonging to [the taxpayer].”
b. What constitutes “property and rights to property” is ultimately a question of federal law. U.S. v. Craft, 535 US 274 (2002).
c. However, Code Section 6321 creates no property rights but merely attaches consequences to rights under state law.
d. Thus, the court should look initially to state law to determine what rights the taxpayer has in the property the IRS seeks to reach, and then apply federal law to determine whether such state rights qualify as “property or rights to property” under federal law.
e. Since a potential disclaimant inevitably exercises dominion over the property simply by determining whether the subject property will remain with him or pass to a known other, the disclaimer statute gives the taxpayer the power to channel the estate's assets. Therefore, the taxpayer retained some rights in the property under state law, despite the disclaimer.
f. Such state law property rights are sufficient to create “property” or “rights to property” under federal law for the purposes of Code Section 6321.
As to f., is the mere power to channel the assets enough to be “property?” In Drye the Supreme Court expansively noted that “[w]hen 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…That right simply cannot be written off as a mere personal right to accept or reject a gift.”
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
LISI Estate Planning Newsletter #2241, (August 26, 2014) at http://www.leimbergservices.com Copyright 2014 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Written Permission.
Deinlein v. U.S., 114 AFTR 2d 2014-5390 (DC KY), 07/23/2014; Drye v. U.S., 528 US 49 (1999); U.S. v. Craft, 535 US 274 (2002); Code Section 6321.
All NAEPC-affiliated estate planning councils are eligible to receive a discounted subscription rate to the Leimberg LISI service. Please see more information about the offering. You may also contact your local council office / board member to find out whether they are offering the service as a member benefit.