Disclaimers and federal tax liens' effect on inheritances

Real Property, Probate and Trust Journal, Summer 2001 by Bluestein, Brett A

Code section 6331(a),86 which specifies a time limit that must expire before the Service can impose a levy, provides the following:

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

Code section 6322,87 which discusses when a lien arises and how long a lien remains in effect, provides the following:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

Code section 6344(a)88 lists 13 categories of property that are exempt from levy under Code sections 6321 and 63 31 (a).89 Types of property that are exempt from levy include wearing apparel and school books; fuel, provisions, furniture; and household effects; books and tools of a trade, a business or profession; unemployment benefits; undelivered mail; certain annuity and pension payments; workmen's compensation benefits; judgments for support of minor children; minimum exemption for wages, salary, and other income; certain disability payments; certain public assistance payments; assistance under the Job Training Partnership Act; and certain residences.90 Code section 6334(c)91 states: "Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."

The Court noted that the language in Code sections 6321 and 6331 (a) "'is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have."'92 Further, the Court stated that when Congress uses the word property broadly, "the legislature aims to reach 'every species of right or interest protected by law and having an exchangeable value."'93

The Court pointed out that "inheritances or devises disclaimed under state law are not included in [Code section] 6334(a)'s catalog of property exempt from levy."94 The Court also noted that the non-recognition of disclaimers in sections 6321, 6322, 6331(a), and 6334(a) and (c) of the Internal Revenue Code is in conflict with section 2518(a) of the Code, which provides that qualifying state-law disclaimers concerning any interest in property are effective for federal wealth-transfer tax purposes only.95 For example, a qualifying state-law disclaimer under Code section 2518(a) would be effective when an heir or devisee wants to disclaim an inheritance as part of a post-mortem tax plan to reap the estate tax benefits of a disclaimer. However, qualifying state law disclaimers are not effective to override a federal tax lien, such as in Drye.