Leggett v. USA ( 1997 )

  •                               REVISED
                       United States Court of Appeals,
                               Fifth Circuit.
                                No. 96-41103.
       Nelda Huebner LEGGETT, In the Matter of the Estate of Nelda
    Huebner Leggett, Deceased, et al., Plaintiffs,
                UNITED STATES of America, Defendant-Appellee,
               Patricia Huebner SCHUETTE, Defendant-Appellant.
                               Sept. 4, 1997.
    Appeal from the United States District Court for the Southern
    District of Texas.
    Before POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit
         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
         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
            In August 1995, the estate sold certain property.       In
    exchange for the IRS's release of its lien against that property,
    the estate paid the IRS 1/20 of the proceeds, or $2,515.95. The
    IRS credited this money against Schuette's debt and rejected the
    estate's request for a refund.     Although our opinion makes it
    evident that the IRS's position was incorrect, neither party
    challenges these actions on appeal. We leave the proper resolution
    of this issue to whatever further proceedings there may be among
    the parties.
          Under 28 U.S.C. § 2410(a)(1), federal district courts have
    jurisdiction over actions to quiet title to land on which the
    United States claims to have a lien. Under 28 U.S.C. § 1444, such
    actions are removable.
    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.
          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.
    340 U.S. 47
    , 51, 
    71 S. Ct. 111
    , 113-14, 
    95 L. Ed. 53
    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
    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
    2 L. Ed. 2d 1135
     (1958).         Therefore, we must decide whether,
    under Texas law, Schuette ever had a property interest in Leggett's
            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.
         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.
         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,
           There are many situations, in addition to Schuette's, in
    which a person rationally might prefer not to accept an
    inheritance. For example, a person might be offered a plot of real
    property with several troublesome tenants. The cost in time and
    aggravation of dealing with the tenants easily might outweigh the
    value of the property.
    it had unintended tax consequences.                      A disclaiming beneficiary of
    a will was not subject to gift tax liability, see, e.g., Brown v.
    63 F.2d 914
    , 917 (6th Cir.1933), while a disclaiming heir
    was   subject        to      tax     liability,          see,     e.g.,    Hardenbergh     v.
    198 F.2d 63
    , 66 (8th Cir.1952), aff'g 
    17 T.C. 166
    1951 WL 326
          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.
    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
    fraudulent transfer, reasoning that a transfer is impossible unless
    the "transferor" had rights in the thing "transferred."               Because a
    disclaimant "never possesses the property," he cannot transfer it.
    Id.;   accord Simpson v. Penner (In re Simpson ), 
    36 F.3d 450
    , 452-
    53 (5th Cir.1994) (per curiam) (stating that this is the law in
           This settles the instant dispute.           Under Texas law, Schuette
    had    the   right   to   accept   Leggett's      intended    gift   by   taking
    possession of it, by exercising control and dominion over it, or by
    taking no action within the set time.              She also had the right to
    reject Leggett's intended gift by filing a valid disclaimer within
    nine months.     This right of decision was not, itself, a property
    right under Texas law.         Because Schuette rejected the intended
    gift, she never had a property right.             Therefore, the federal lien
    had nothing to which to attach.
           Texas's disclaimer statute is based on a uniform act and,
    therefore, is similar to acts in other states.               We recognize that
    the Second and Ninth Circuits have come to different conclusions
    from    each   other,     interpreting      New    York   and   Arizona     law,
    respectively. Compare United States v. Comparato, 
    22 F.3d 455
    , 458
    (2d Cir.1994) (holding that a disclaimer was rendered ineffective
    by a federal tax lien) with Mapes v. United States, 
    15 F.3d 138
    141 (9th Cir.1994) (holding that, because of a timely disclaimer,
    the federal tax lien did not attach).               Because New York law is
    substantially different from Arizona's or Texas's, these cases are
          The Second Circuit, citing In re Estate of Scrivani, 
    116 Misc. 2d 204
    455 N.Y.S.2d 505
     (N.Y.Sup.Ct.1982), stated that the
    New York statute "creates a legal fiction that allows distributees
    to   avoid    attachment    by    creditors   or    the    payment   of   taxes."
    Comparato, 22 F.3d at 457.         The view that the disclaimer is a legal
    fiction is the Transfer Theory and supports the holding that a
    property right existed before the disclaimer.
          In     Scrivani,     the   conservator       of   Julia   Molinelli,     an
    incompetent person, sought to renounce Molinelli's inheritance.
    See 116 Misc.2d at 204-05, 
    455 N.Y.S.2d 505
    .               The problem was that
    a transfer of a "resource considered available" would have made
    Molinelli ineligible for Medicaid benefits.                N.Y. SOC. SERV. LAW §
    366(5)(a) (McKinney 1992 & Supp.1997).             The court, therefore, was
    forced to determine whether a renunciation of an inheritance
    constitutes the transfer of a resource.
          At first, the court appeared to follow the Texas view that
    "[t]he law forces no one to accept a gift."               Scrivani, 116 Misc.2d
    at 208, 
    455 N.Y.S.2d 505
    .         The court, however, then held that the
    Molinelli had "an inchoate property interest" in the right to
    accept the inheritance.          Id. at 209, 
    455 N.Y.S.2d 505
    ;        cf.    Adam
    J. Hirsch, The Problem of the Insolvent Heir, 74 CORNELL L.REV. 587,
    601-03 (1989) (arguing that Scrivani is internally contradictory).
    Therefore, the court reasoned, renouncing the inheritance would
    constitute the transfer, or rather the waste, of an available
          Because the Comparatos had a property interest in their right
    to accept the inheritance, the federal tax lien attached to it.
    Therefore,     the   Comparatos    could       not   destroy   that   asset    by
    disclaiming the underlying inheritance.                It should be evident,
    however, that this conclusion derives from the manner in which the
    New York courts have interpreted that state's disclaimer statute.
          As we have explained, Texas law follows the Acceptance-
    Rejection Theory and does not recognize a property interest in the
    right to accept a bequest.        Our decision today, therefore, is not
    in conflict with Comparato.
          Similarly, the Ninth Circuit's decision in Mapes does not
    actually conflict with Comparato.            There, the court was construing
    an   Arizona   statute   that     had    not    (and   still   has    not)    been
    interpreted by its courts.        Thus, the Ninth Circuit assumed that
    Arizona's view of its statutory scheme would follow the majority
    rule that Texas follows.5       Thus, it may be presumed that Arizona,
    unlike New York, follows the Acceptance-Rejection Theory and does
    not recognize a property interest in the right to accept a bequest.
         See Scrivani, 116 Misc.2d at 209, 
    455 N.Y.S.2d 505
    ; see also
    In re Molloy v. Bane, 
    214 A.D.2d 171
    , 175, 
    631 N.Y.S.2d 910
    (N.Y.App.Div.1995) (stating, under similar facts, that
    "petitioner's renunciation of a potentially available asset was the
    functional equivalent of a transfer of an asset").
           See Mapes, 15 F.3d at 141; see also Robert M. Hoffman &
    Aaron L. Mitchell, Deceptive Trade Practices and Commercial Torts,
    45 SW. L.J. 1667, 1710 (stating that Texas follows the majority
    rule); cf. Frances Slocum Bank & Trust Co. v. Estate of Martin,
    666 N.E.2d 411
    , 415 (Ind.Ct.App.1996) (adopting Dyer ).
         The fact that three states have adopted similar statutory
    schemes does not necessarily mean that the law functions the same
    way in each state.      New York law creates a property interest in an
    intended beneficiary's right to accept a gift and may follow the
    Transfer Theory.        Arizona and Texas do not.       It is one of the
    complexities (and, ultimately, one of the strengths) of the federal
    system that different states may interpret similar statutes in very
    different ways.
          We pause to address two of the IRS's arguments for ignoring
    the plain import of Texas law in determining the existence of a
    state property right.       In United States v. Irvine, 
    511 U.S. 224
    114 S. Ct. 1473
    128 L. Ed. 2d 168
     (1994), the Court held that the
    disclaimer of a remainder interest in a trust after a reasonable
    time had passed was a taxable gift, even though the interest was
    created before the passage of the gift tax.           See id. at 226, 114
    S.Ct. at 1475.    The Court's interpretation of the gift tax does not
    dictate this court's interpretation of § 6321.
         Section     6321   adopts   the    state's   definition   of    property
    interest.   Title 26 U.S.C. § 2511(a), which defines "transfer" and
    "property" for purposes of the gift tax, does not adopt state law.
    Instead, it aims to reach "every species of right or interest
    protected by law and having an exchangeable value."                 Jewett v.
    455 U.S. 305
    , 309, 
    102 S. Ct. 1082
    , 1086, 
    71 L. Ed. 2d 170
     (1982) (quoting S.REP. NO. 72-665, at 39 (1932);           H.R.REP. NO.
    72-708, at 27 (1932)).
         In dictum, the Court recognized the conundrum that we face
    today and the Second and Ninth Circuits have faced in the past:
         Although a state-law right to disclaim with such consequences
         might be thought to follow from the common-law principle that
         a gift is a bilateral transaction, requiring not only a
         donor's intent to give, but also a donee's acceptance,
         state-law tolerance for delay in disclaiming reflects a less
         theoretical concern. An important consequence of treating a
         disclaimer as an ab initio defeasance is that the
         disclaimant's creditors are barred from reaching the
         disclaimed property. The ab initio disclaimer thus operates
         as a legal fiction obviating a more straightforward rule
         defeating the claims of a disclaimant's creditors in the
         property disclaimed.
    Irvine, 511   U.S.   at   239-40,   114    S.Ct.   at   1481-82   (citations
    omitted).   The Court recognized that the right to disclaim might,
    under state law, be based on the Acceptance-Rejection Theory and,
    therefore, not be a legal fiction.        The Court then pointed out that
    allowing a late disclaimer,6 on the other hand, can be explained
    only as a rule aimed at frustrating creditors.
         Because the Texas statute does not allow late disclaimers, it
    is based solely on the Acceptance-Rejection Theory. Thus, treating
    this rule as a non-fiction, as Texas caselaw requires, is fully
    consistent with the principles laid down in Irvine.
          In United States v. Mitchell, 
    403 U.S. 190
    , 191, 
    91 S. Ct. 6
            In Irvine, the disclamation occurred 62 years after the
    trust's creation.    See 511 U.S. at 226-27, 114 S.Ct. at 1475.
    Texas law, by contrast, prohibits a disclaimer filed more than nine
    months after death.     See TEX. PROB.CODE. ANN. § 37A(a) (Vernon
    Supp.1997). It is worth noting that the disclaimer in Comparato
    was filed over seven years after the devisor's death. See 22 F.3d
    at 456.
    1763, 1765, 
    29 L. Ed. 2d 406
     (1971), Anne Goyne Mitchell, upon
    divorce, renounced          her   right    to    the   proceeds   of   the   marital
    community (and the corresponding obligation to pay the debts of
    that community).7       Mitchell argued that, because she had renounced
    the community income, she was not responsible for the corresponding
    tax liability.        See id. at 192, 91 S.Ct. at 1765-66.
            The Court noted that tax liability follows ownership and,
    therefore, if Mitchell ever had ownership of the income, she was
    liable for the tax.         See id. at 196-97, 91 S.Ct. at 1767-68.             The
    Court proceeded as we do today, examining the state law in great
    detail.      See id. at 197-203, 91 S.Ct. at 1768-71.                    The Court
    determined that, under Louisiana law, the wife had a property
    interest in the community's income from the moment of inception,
    rather than "a mere expectancy."                 Id. at 199, 91 S.Ct. at 1769
    (quoting Phillips v. Phillips, 
    160 La. 813
    107 So. 584
    , 588
    (1926), overruled by Creech v. Capitol Mack, Inc., 
    287 So. 2d 497
    510 (La.1973)).
            It   should    be   evident       that   we    have   followed   the   same
    methodology as did the Mitchell Court.                 Like that Court, we have
    examined state law to determine whether it creates a property
    interest.      Unlike the statutory scheme considered in Mitchell,
    Texas law did not create a property interest for Schuette in
    Leggett's estate.       Although the IRS correctly argues that Mitchell
         See LA. CIV.CODE art. 2410 (1870) ("Both the wife and her heirs
    or assigns have the privilege of being able to exonerate themselves
    from the debts contracted during the marriage, by renouncing the
    partnership or community of gains.").
    "underscored the supremacy of federal law with respect to the
    taxation of state created property interests," Mitchell does not
    disturb the principle that a federal tax lien cannot attach in the
    absence of a state-created property interest.
         In closing, we note that Congress easily can expand the IRS's
    lien power, if it so desires.   For example, Congress can follow
    what it did with § 2511(a), and define property more broadly than
    state law does.    Alternatively, Congress simply can prohibit
    persons subject to § 6321 from filing disclaimers.   We decline the
    IRS's invitation to rewrite the law ourselves, as that power lies
    exclusively in the legislative branch.   See Rodriguez v. INS, 
    9 F.3d 408
    , 414 (5th Cir.1993).