4.1 A Close Look at Drye and Craft

In Drye v. United States,^[1] a unanimous U.S. Supreme Court held that federal tax liens against an heir attached to the inheritance regardless of any disclaimer filed by the heir.   Drye later became the basis for United States v. Craft,^[2] where the Court breached an entireties interest to satisfy a federal tax lien levied against one of the spouses.

Drye resolved the question of whether disclaiming an inheritance under state law prevents federal tax liens from attaching to that interest.   In Drye, an insolvent heir validly disclaimed his inheritance under Arkansas state law.^[3]   The Government argued that, because a lien is imposed on any and all “property” or “rights to property” belonging to the taxpayer to satisfy tax debts owed, it was entitled to a lien on the heir’s inheritance, disclaimer notwithstanding.^[4]

In deciding the controversy, the Court looked “initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer’s state-delineated rights qualify as “property” or “rights to property” within the compass of the federal tax lien legislation.”^[5]   Justice Ginsburg expounded upon this “division of competence” between state and federal law: state law determines whether the taxpayer has a legally protected property right; federal law determines whether a lien can attach.^[6]   She used two telling examples, both dealing with insurance, to make her point.   In the first situation, the taxpayer’s right to the cash surrender value was exposed to the federal tax lien because the taxpayer (but not his ordinary creditors) could compel payment of the cash surrender value.^[7]   That right to the cash surrender value was “property” or a “right to property” created under state law.   For federal tax lien purposes, the taxpayer’s right to receive that value meant that the tax lien attached regardless of the state law that shielded the cash surrender value from creditors’ liens.   In the other situation (the death benefit), the tax lien did not attach because the taxpayer did not have access to those funds: “By contrast, we also concluded, again as a matter of federal law, that no federal tax lien could attached to policy proceeds unavailable to the insured in his lifetime.”^[8]

In Drye, the heir had a “valuable, transferable, legally protected” property right to the inheritance at the time of his mother’s death.^[9]   Rather than personally take this interest, the heir chose to channel his interest to close family members through the act of disclaiming.   The state law “relation back” which produces the creditor protection does not inhibit the federal taxing authority:

In sum, in determining whether a federal taxpayer’s state-law rights constitute “property” or “rights to property,” “the important consideration is the breadth of the control the taxpayer could exercise over the property.” Drye had the unqualified right to receive the entire value of his mother’s estate (less administrative expenses)… or to channel that value to his daughter. The control rein he held under state law, we hold, rendered the inheritance “property” or “rights to property” belonging to him within the meaning of [the IRC], and hence subject to the federal tax liens that sparked this controversy.^[10]

The pivotal factor was the heir’s control over effective enjoyment of the inheritance:

The disclaiming heir or devisee, in contrast [to someone merely declining an offered inter vivos gift], does not restore the status quo, for the decedent cannot be revived.   Thus the heir inevitably exercises dominion over the property.   He determines who will receive the property – himself if he does not disclaim, a known other if he does.   This power to channel the estate’s assets warrants the conclusion that Drye held “property” or a “right to property” subject to the Government’s liens.^[11]

Craft held that property held as tenants by the entirety is subject to a federal tax lien against one spouse.   Craft may be seen as an extension of Drye but, unlike Drye, it was a split decision with Justices Stevens, Scalia and Thomas dissenting.   According to Justice O’Connor’s opinion for the Court, whether the lien attaches to one spouse’s interest in an entireties tenancy is ultimately a question of federal law.   In analyzing this question, the Court followed the Drye approach: it looked first to state law to determine what rights a taxpayer had in the specific property the government sought; then it decided whether the taxpayer’s rights qualified as property or rights to property under federal law.^[12]   Justice O’Connor concluded that the debtor-taxpayer had a sufficient number of presently-existing “sticks” in the “bundle” comprising the tenants by the entirety property right to give rise to an attachable interest.^[13]   Among others, these rights included rights of possession, of income, and of sale proceeds if the non-debtor spouse agreed to the sale.^[14]   Blackstone’s legal fiction, ingrained by state law, that neither tenant had an interest separable from the other did not control the scope of the federal tax lien: “[I]f neither of them had a property interest in the entireties property, who did?   This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system.”^[15]

Justices Stevens, Scalia and Thomas dissented.   Justice Thomas objected to what he saw as a federalization of the law governing rights to property:

Before today, no one disputed that the IRS, by operation of § 6321, steps into the taxpayer’s shoes, and has the same rights as the taxpayer in property or rights to property subject to the lien. I would not expand the nature of the legal interest the taxpayer has in the property beyond those interests recognized under state law.^[16]

Justice Scalia added:

[A] State’s decision to treat the marital partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members, is no more novel and no more “artificial” than a State’s decision to treat the commercial partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members.^[17]

Drye turned on a determination of whether Mr. Drye could unilaterally elect to receive what would otherwise be a property right.   A single co-tenant by the entireties, of course, is not in an analogous position because one co-tenant does not unilaterally control the enjoyment of that property right.   Justice Thomas argued that federal tax liens should only be attachable to rights that a taxpayer actually personally possesses:

That the Grand Rapids property does not belong to Mr. Craft under Michigan law does not end the inquiry, however, since the federal tax lien attaches not only to “property” but also to any “rights to property” belonging to the taxpayer. While the Court concludes that a laundry list of “rights to property” belonged to Mr. Craft as a tenant by the entirety, it does not suggest that the tax lien attached to any of these particular rights.   Instead, the Court gathers these rights together and opines that there were sufficient sticks to form a bundle, so that “respondent’s husband’s interest in the entireties property constituted ‘property’ or ‘rights to property’ for the purposes of the federal tax lien statute.

But the Court’s “sticks in a bundle” metaphor collapses precisely because of the distinction expressly drawn by the statute, which distinguishes between “property” and “rights to property.” The Court refrains from ever stating whether this case involves “property” or “rights to property” even though § 6321 specifically provides that the federal tax lien attaches to “property” and “rights to property” “belonging to” the delinquent taxpayer, and not to an imprecise construct of individual rights in the estate sufficient to constitute “property” or “rights to property” for the purposes of the lien.

Rather than adopt the majority’s approach, I would ask specifically, as the statute does, whether Mr. Craft had any particular “rights to property” to which the federal tax lien could attach. He did not.   Such “rights to property” that have been subject to the § 6321 lien are valuable and “pecuniary,” i.e., they can be attached, and levied upon or sold by the Government.   With such rights subject to lien, the taxpayer’s interest has ripen into a present estate of some form and is more than a mere expectancy, and thus the taxpayer has an apparent right to channel that value to another.

In contrast, a tenant in a tenancy by the entirety not only lacks a present divisible vested interest in the property and control with respect to the sale, encumbrance, and transfer of the property, but also does not possess the ability to devise any portion of the property because it is subject to the other’s indestructible right of survivorship.   This latter fact makes the property significantly different from community property, where each spouse has a present one-half vested interest in the whole, which may be devised by will or otherwise to a person other than the spouse.^[18]