An Offer You Can’t Refuse.


On August 3, 1994, Irma Drye died without a will, leaving her son and sole heir, Rohn, an estate worth $236,000. Rohn was insolvent and owed the IRS approximately $325,000. The IRS had valid tax liens against all of his property. So, Rohn disclaimed all interest in his mother’s estate, letting it pass to his daughter, Theresa.

Theresa subsequently established a trust naming her parents and herself as beneficiaries. She gave a third-party trustee the discretionary power to dispense funds to the family for health care and financial support.

The IRS served a notice of levy on the trust assets to satisfy Rohn’s federal tax debt. The trust countered with a suit for wrongful levy.

The district court, however, sided with the IRS and ruled the tax liens were valid and Rohn’s disclaimer was fraudulent. On appeal, the Eighth Circuit Court of Appeals affirmed the decision. It held that a federal tax lien attaches to property inherited by a taxpayer, even if that taxpayer later disclaims any interest in the property under state law. Since this result conflicted with other court decisions, the U.S. Supreme Court agreed to review the appellate court ruling.

According to IRC section 6321, if a taxpayer doesn’t pay his or her federal taxes, the IRS can attach a tax lien to any property a taxpayer owns or subsequently acquires. In its decision, the Supreme Court observed that the language in this section is broad and meant to encompass any interest in property that a taxpayer might have.

The Court also examined IRC section 6334(a), which contains an exclusive list of property exempt from levy. The list does not include inheritances disclaimed under state law.

Speaking for the Court, Justice Ruth Bader Ginsburg agreed with the Eighth Circuit and held Rohn’s right to inherit constituted a valuable and transferable property right. The Court upheld the earlier ruling that the tax lien against the trust was valid.

Observation: Often CPAs are the only ones who know of a client’s tax predicament. You should advise any client in a similar situation to consider disclosing the situation to his or her parents. Under circumstances of that kind, the parents could amend their wills to avoid having their estate go to the government to pay off a child’s debt.

  • Rohn F. Drye Jr., v. United States, Sup. Ct. 1999.

—Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.


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