In this case, state law gave Rohn the right to either accept or disclaim his inheritance. To determine what property may be reached by a federal tax lien, a federal court first evaluates the debtor's rights using state law. Supreme Court affirmed a favorable judgment for the IRS. Nevertheless, the Internal Revenue Service (IRS) sought to attach a tax lien to the trust. Under Arkansas law, disclaimed inheritance cannot be reached by creditors. The estate passed to his daughter who created a trust that included the insolvent Rohn as a beneficiary. Because Rohn had $325,000 in unpaid tax assessments, he exercised his right under Arkansas law to disclaim his inheritance, creating the legal fiction that he had died before his mother. In Drye, Irma Drye died intestate under Arkansas law, her entire $233,000 estate passed to her son, Rohn Drye. This article first explains the rule illustrated in Dryeand then applies it to several scenarios involving Illinois state law.
Then, based on that state law evaluation, the court will use federal law to determine if those rights constitute a property interest that can be reached by a federal tax lien. First, a court will evaluate a person's rights under state law. What constitutes a person's property creates a choice of law dilemma. Under the Internal Revenue Code, if a person fails to pay taxes owed to the federal government, the government gains a lien on all of that person's property and interests in property.