Leggett v. U.S., 96-41103

• Decision Date: 04 September 1997
• Docket Number: No. 96-41103,96-41103
• Parties: -6238, 97-2 USTC P 50,635 Nelda Huebner LEGGETT, In the Matter of the Estate of Nelda Huebner Leggett, Deceased, et al., Plaintiffs, v. UNITED STATES of America, Defendant-Appellee, v. Patricia Huebner SCHUETTE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 592

120 F.3d 592

80 A.F.T.R.2d 97-6238, 97-2 USTC P 50,635

Nelda Huebner LEGGETT, In the Matter of the Estate of Nelda

Huebner Leggett, Deceased, et al., Plaintiffs, v. UNITED STATES of America, Defendant-Appellee, v. Patricia Huebner SCHUETTE, Defendant-Appellant.

No. 96-41103.

United States Court of Appeals Fifth Circuit.

Sept. 4, 1997.

Kenneth W. Rosenberg, U.S. Department of Justice, Tax Division Appellate Section, Washington, DC, David I. Pincus, U.S. Department of Justice, Tax Division, Washington, DC, for Defendant-Appellee.

Thomas C. Wheat, Zandra L. Narvaez, Kathryn F. Green, The Kleberg Law Firm, Corpus Christi, TX, Richard E. Flint, San Antonio, TX, for Defendant-Appellant.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

In this tax case, we review a judgment that Patricia Huebner Schuette had a state property interest in property bequeathed to her by her aunt, despite the fact that she had filed a timely disclaimer and never took possession of, or exercised control over, the property. The district court held that a federal tax lien had attached to the property and the disclaimer was ineffective. We reverse.

I.

The relevant facts are not in dispute. In 1995, Schuette owed the Internal Revenue Service ("IRS") nearly $20,000. In May 1995, Schuette's aunt, Nelda Leggett, died testate, leaving one-twentieth of her estate, or $19,500, to Schuette. In June 1995, executors were appointed for Leggett's estate. The executors have distributed all of the estate's assets to the beneficiaries, except for Schuette's share. ¹

In August 1995, Schuette filed a disclaimer of all rights and interests in Leggett's estate. She believes that her disclaimed share should go to her children, Melissa Ann Oakes and Donald Van Schuette II. In September 1995, the estate filed in county court a petition to quiet title and for declaratory judgment. Specifically, the estate requested that the court declare that the IRS has no lien against the estate's property.

The IRS removed the case to federal court. ² Because the facts were uncontested, all parties moved for summary judgment. The IRS asked the court to rule that its lien is valid, and Schuette asked the court to hold that the United States has no interest in the property. The estate expressed disinterest in this question but requested attorney's fees and costs under TEX. CIV. PRAC. & REM.CODE ANN. § 37.009 (Vernon 1986) (authorizing the award of fees and costs in a declaratory action case when "equitable and just").

In August 1996, the district court held in favor of the IRS. Instead of deciding the fees issue, the court sua sponte remanded it to the state court. This had the effect of disposing of all claims in the federal case.

II.

A.

The only issue before us is whether the district court correctly interpreted federal and state law in determining whether a federal lien attached to Schuette's share of Leggett's estate. Questions of law resolved on summary judgment are reviewed de novo. See BellSouth Telecomms., Inc. v. Johnson Bros. Corp., 106 F.3d 119, 122 (5th Cir.1997).

When a person fails to pay his taxes, all property rights that he has or acquires thereafter immediately and automatically are subject to a federal tax lien, see 26 U.S.C. § 6321, that is not subject to any state laws that govern ordinary liens or to any perfection requirements, see United States v. Security Trust & Sav. Bank, 340 U.S. 47, 51, 71 S.Ct. 111, 113-14, 95 L.Ed. 53 (1950). Section 6321 is intended to be broad in scope and applies to every interest the taxpayer has in property. See United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985). The section does not, however, create or define what constitutes a property interest. Instead, state law determines whether a taxpayer has a property interest to which a federal lien may attach. See id. at 722-23, 105 S.Ct. at 2925-26; United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Therefore, we must decide whether, under Texas law, Schuette ever had a property interest in Leggett's estate.

B.

1.

Texas probate law contains two provisions that bear on our determination. The Texas Probate Code provides that "when a person dies, leaving a lawful will, all of his estate devised or bequeathed by such will, and all powers of appointment granted in such will, shall vest immediately in the devisees or legatees of such estate and the donees of such powers...." TEX. PROB.CODE ANN. § 37 (Vernon Supp.1997). This rule prevents any lapse in title, insures that someone always is responsible for property taxes, allows family settlements agreements, see In re Estate of Hodges, 725 S.W.2d 265, 267 (Tex.App.--Amarillo 1986, writ ref'd n.r.e.), guarantees that the beneficiaries will receive any income generated by the estate, see Hurt v. Smith, 744 S.W.2d 1, 6 (Tex.1987), and prevents a beneficiary from criminal prosecution for using estate property, see Palmer v. Texas, 764 S.W.2d 332, 334 (Tex.App.--Houston [1st Dist.] 1988, no pet.).

Texas law also provides for the possibility of a disclaimer or renunciation of an inheritance:

Any person ... who may be entitled to receive any property as a beneficiary and who intends to effect disclaimer irrevocably ... shall evidence same as herein provided. A disclaimer evidenced as provided herein shall be effective as of the death of decedent and shall relate back for all purposes to the death of the decedent and is not subject to the claims of any creditor of the disclaimant. Unless the decedent's will provides otherwise, the property subject to the disclaimer shall pass as if the person disclaiming ... had predeceased the decedent....

TEX. PROB.CODE ANN. § 37A(flush) (Vernon Supp.1997). A disclaimer must follow a certain form, see id. § 37A(a), and is irrevocable, see id. § 37A(d). It must be made within nine months of death, see id. § 37A(a), and cannot be made if the disclaimant has used the property, see id. § 37A(g). A disclaimer is distinct from an assignment, which is a gift from an assignor to an assignee of inherited property. See id. § 37B(d).

These provisions are somewhat contradictory. Section 37 states that the intended beneficiary had a vested property right from the moment of death, while section 37A teaches that the intended beneficiary never had a property interest at all. Determining which provision is real and which is the fiction decides this issue.

2.

There are two plausible ways to view the statutory scheme. We could regard § 37 as the reality and § 37A as a legal fiction. Under this view, the intended beneficiaries own the estate's property at the moment of death. If one of them files a valid disclaimer, the property is transferred to other beneficiaries. The legislature, cognizant of the tax consequences of such a transfer, adopted the legal fiction that the intended beneficiary never owned the property. The IRS urges this view, which we will call the "Transfer Theory."

The second possibility is that § 37A is the reality and § 37 is the legal fiction. Under this theory, property at death goes to the estate of the decedent. The intended beneficiaries may accept or reject their inheritances. If one accepts, the law engages in the legal fiction that he owned the property from the moment of death, thus ensuring the continuity of title and responsibility to pay taxes. Schuette urges this theory, which we will call the "Acceptance-Rejection Theory."

The difference is vital to the outcome of the case. Under the Transfer Theory, Schuette had a property right in Leggett's estate, so the federal lien attached and prevented her from making a disclaimer. Under the Acceptance-Rejection Theory, Schuette never had a property right, as she never accepted the inheritance, so there was nothing to which a federal lien could attach.

C.

At common law, a beneficiary of a will had the power to accept or reject a legacy or devise. The reason was that no person could be made an owner against his consent. An heir at law, on the other hand, became the owner of the property, irrespective of whether he wanted it. Presumably, a contrary rule would allow an heir to defeat an entail.

This distinction had two negative effects. First, it forced heirs to take possession of property they did not want. ³ Second, it had unintended tax consequences. A disclaiming beneficiary of a will was not subject to gift tax liability, see, e.g., Brown v. Routzahn, 63 F.2d 914, 917 (6th Cir.1933), while a disclaiming heir was subject to tax liability, see, e.g., Hardenbergh v. Commissioner, 198 F.2d 63, 66 (8th Cir.1952), aff'g 17 T.C. 166, 1951 WL 326 (1951).

The purpose of the disclaimer law is to rectify this common-law anomaly by putting an heir in the same position as a beneficiary of a will. That is, the purpose is to state that no person, whether heir at law or intended beneficiary of a will, can be forced to take inherited property against his will. See UNIF. DISCLAIMER OF TRANSFER BY WILL, INTESTACY OR APPOINTMENT ACT § 1 comment, 8A U.L.A. 166, 166-68 (1993). This, of course, is the Acceptance-Rejection Theory.

The Texas courts have adopted this view of § 37A: "This 'relation back' doctrine is based on the principle that a bequest or gift is nothing more than an offer which can be accepted or rejected." Dyer v. Eckols, 808 S.W.2d 531, 533 (Tex.App.--Houston [14th Dist.] 1991, writ dism'd by agr.). In fact, "acceptance of the inheritance occurs 'only if the person making such disclaimer has previously taken possession or exercised dominion and control of such property in the capacity of beneficiary.' " Id. at 534 (quoting TEX. PROB.CODE ANN. § 37A(f) (Vernon Supp.1991)).

Because the Dyer court adopted the Acceptance-Rejection Theory, it discarded the notion that a disclaimer could be a...