Drye Family 1995 Trust v. U.S.

• Decision Date: 17 August 1998
• Docket Number: No. 97-3249,97-3249
• Citation: 152 F.3d 892
• Parties: -5821, 98-2 USTC P 50,651 DRYE FAMILY 1995 TRUST; Daniel M. Traylor, Trustee, Appellants, v. UNITED STATES of America, Appellee. UNITED STATES of America, Appellee, v. DRYE FAMILY 1995 TRUST; Daniel M. Traylor; Rohn F. Drye; Sue C. Drye, Theresa K. Drye, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 892

152 F.3d 892

82 A.F.T.R.2d 98-5821, 98-2 USTC P 50,651

DRYE FAMILY 1995 TRUST; Daniel M. Traylor, Trustee, Appellants, v. UNITED STATES of America, Appellee.

UNITED STATES of America, Appellee, v. DRYE FAMILY 1995 TRUST; Daniel M. Traylor; Rohn F. Drye;

Sue C. Drye, Theresa K. Drye, Appellants.

No. 97-3249.

United States Court of Appeals Eighth Circuit.

Submitted April 15, 1998.

Decided Aug. 17, 1998.

Daniel M. Traylor, Little Rock, AR, argued, for Appellants

Anthony T. Sheehan, Dept. of Justice, Washington, DC, argued (David I Pincus, Loretta C. Argrett, on the brief), for Appellee.

Before BOWMAN ¹, Chief Judge, and McMILLIAN and MURPHY, Circuit Judges.

McMILLIAN, Circuit Judge.

The Drye Family 1995 Trust, Daniel M. Traylor, Rohn F. Drye, Jr., Sue C. Drye, and Theresa K. Drye (collectively, appellants) appeal from a final judgment entered in the United States District Court ² for the Eastern District of Arkansas in favor of the United States of America (hereinafter, the government) on its counterclaim to reduce certain tax assessments to judgment. Drye Family 1995 Trust v. United States, No. LR-C-96-346 (E.D.Ark. July 14, 1997) (judgment). For reversal, appellants contend that the district court erred in failing to hold that a taxpayer's disclaimer under Arkansas law has the legal effect of voiding interests created under Arkansas law such that federal tax liens are incapable of attachment. For the reasons discussed herein, we affirm.

Jurisdiction

The district court had jurisdiction over the underlying wrongful levy action pursuant to 26 U.S.C. § 7426, which waives sovereign immunity to allow such suits, and 28 U.S.C. § 1346(e), which grants subject matter jurisdiction over such suits. The district court also had jurisdiction over the government's counterclaim pursuant to 26 U.S.C. § 7402(a) and 28 U.S.C. §§ 1340, 1346(c). Jurisdiction on appeal is proper under 28 U.S.C. § 1291. The notice of appeal was timely filed pursuant to Rule 4(a) of the Federal Rules of Appellate Procedure.

Facts

The relevant facts are undisputed. On August 3, 1994, Irma Deliah Drye died intestate at her home in Pulaski County, Arkansas, leaving an estate worth approximately $236,000.00, of which $158,000.00 was personalty and $75,000.00 was realty located in Pulaski County, Arkansas. Ms. Drye was survived by her son and sole heir-at-law, Rohn F. Drye, Jr. (Drye), and his daughter, Theresa K. Drye. On the date of his mother's death, Drye was insolvent and owed the government approximately $325,000.00 representing assessments for tax years 1988, 1989, and 1990. The Internal Revenue Service (IRS) had made assessments against Drye in November 1990 and May 1991 and had valid tax liens against all of Drye's property or rights to property pursuant to 26 U.S.C. §§ 6321 and 6322 of the Internal Revenue Code (the Code).

On August 17, 1994, Drye was appointed the Personal Representative and Administrator of his mother's estate in Pulaski County Probate No. 94-1440. Drye resigned from that position on February 6, 1995. Before resigning, Drye filed in the probate court and the land records of Pulaski County an instrument dated February 4, 1995, entitled "Disclaimer and Consent" to disclaim all interests in his mother's estate. ³ Also, on or about February 4, 1995, Theresa Drye created The Drye Family 1995 Trust (the Trust). Theresa Drye was appointed Successor Personal Representative and Administratrix of Irma Deliah Drye's estate on February 8, 1995.

On March 10, 1995, the Probate Court found that Drye had effected a valid disclaimer of his mother's estate under Arkansas law and ordered final distribution of the estate to Theresa Drye. Theresa Drye then funded the Trust with her interest in the estate. The Trust's beneficiaries are Theresa Drye and, during their lifetimes, Drye and his wife, Sue C. Drye. Pursuant to the terms of the Trust, distributions are at the discretion of the trustee, Daniel M. Traylor, and may be made only for the health, maintenance, and support of the beneficiaries. The Trust is spendthrift and, therefore, its assets cannot be attached by state law creditors to satisfy the debts of its beneficiaries.

On April 18, 1995, the Trust opened an investment account at Stephens, Inc., an investment banking organization which managed the account in the name of the Trust. Also in 1995, Drye began negotiations with the IRS regarding his tax liabilities during the course of which he revealed his beneficial interest in the Trust. On April 11, 1996, the IRS filed in the office of the Pulaski County, Arkansas, Circuit Clerk and Recorder a Form 668 Notice of Federal Tax Lien against the Trust as Drye's nominee and, subsequently, served a Notice of Levy on Stephens, Inc. and notified the Trust of the levy.

The Trust brought the underlying wrongful levy action on May 1, 1996, alleging that the IRS had unlawfully levied its property to satisfy Drye's federal tax liabilities and seeking, among other things, injunctive relief. On May 2, 1996, Stephens, Inc. paid over to the IRS $134,004.33 representing the account's proceeds. On June 28, 1996, the government filed a counterclaim against the Trust, the trustee, and the trust beneficiaries seeking, among other things, to reduce to judgment the tax assessments against Drye, confirm its right to seize the Trust's assets in collection of those debts, foreclose on its liens and sell the Trust property. The Trust and the government filed cross-motions for summary judgment. ⁴ The district court granted the government's motion for summary judgment, id. at 6 (Feb. 25, 1997), and thereafter denied Drye's motion to reconsider its order. Id. at 2 (April 4, 1997).

On July 14, 1997, the district court entered final judgment in favor of the government and against the Trust and the counterclaim defendants. In addition, that judgment (1) dismissed with prejudice the complaint of the Trust and the trustee; (2) reduced to judgment assessments against Drye for $220,980.00, plus statutory interest, for the last quarters of 1988 and 1989 and the first quarter of 1990, and assessments against Drye for $91,952.00, plus statutory additions to tax, for 1988; (3) determined that the government had valid tax liens against all of Drye's property and rights to property including the personalty and realty conveyed in the estate (particularly the funds seized by levy from Stephen's, Inc., and the real property in Pulaski County); (4) determined that Drye's disclaimer was invalid, null, and void, and fraudulent against the United States, and that the Trust was merely Drye's nominee or alter ego; and (5) ordered the foreclosure of the federal tax liens, the sale of the real property, and the application of the sale proceeds and of the funds seized by levy in satisfaction of the assessments against Drye. Id. at 1-3 (July 14, 1997) (judgment). This appeal followed.

Discussion

This appeal presents a narrow, but not uncomplicated, legal issue that conjoins state laws of inheritance and federal tax law, and one that has fomented a split among three federal courts of appeal. ⁵ The issue is whether a taxpayer's disclaimer under state law has the legal effect of voiding state law interests in property such that federal tax liens are incapable of attachment. The law of Arkansas is the applicable state law in the instant case. We review de novo the district court's interpretation and application of both federal and state law. Norwest Bank North Dakota, N.A. v. Doth, No. 97-3113, 1998 WL 432471, at * 4 (8th Cir. July 31, 1998) (federal law); Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991) (state law); Lindsay Mfg. Co. v. Hartford Accident & Indem. Co., 118 F.3d 1263, 1267 (8th Cir.1997) (same).

Section 6321 of the Internal Revenue Code creates a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to any person who has neglected or refused to pay any tax (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) after demand has been made. 26 U.S.C. § 6321. " '[S]tate 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, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960) (Aquilino ) (quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 84 L.Ed. 585 (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, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (Bank of Commerce ) (citing United States v. Bess, 357 U.S. 51, 56-57, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958) (Bess )). " '[O]nce 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, 105 S.Ct. 2919 (quoting Bess, 357 U.S. at 56-57, 78 S.Ct. 1054); see also United States v. Mitchell, 403 U.S. 190, 197, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971) (Mitchell ) ("[S]tate 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, 80 S.Ct. 1277). This bifurcated application of state and federal law derives from the fact that the federal statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Bess, 357 U.S. at 55, 78 S.Ct. 1054 (holding in bankruptcy context that state law that "[an] insured's property right...