Howard v. United States

*529 BROCK, Justice,

concurring in part, dissenting in part.

I concur in the opinion of the Court in all respects, except its determination that income from a Tennessee spendthrift trust is subject to a federal tax lien.

The United States Supreme Court has made it clear, I think, that federal law does not create any property rights or determine the nature, attributes, or quality of property rights of a taxpayer; instead, it has left that determination to the several states. Aquilino v. United States, 363 U.S. 509 , 80 S.Ct. 1277 , 4 L.Ed.2d 1365 (1960); United States v. Bess, 357 U.S. 51 , 78 S.Ct. 1054 , 2 L.Ed.2d 1135 (1958); Morgan v. Commissioner of Internal Revenue, 309 U.S. 78 , 60 S.Ct. 424 , 84 L.Ed. 585 (1940).

I also think it clear, as stated in the majority opinion, that under Tennessee law the interest of a beneficiary of a spendthrift trust is of such a nature and quality that it may not be alienated either voluntarily by the beneficiary-debtor or involuntarily by his creditors; inalienability is an attribute of such an interest. State v. Caldwell, 181 Tenn. 74 , 178 S.W.2d 624 (1944). Therefore, such a beneficiary, as a debtor for taxes owed to the United States, does not, insofar as his trust interest is concerned, own any property or rights to property within the terms of 26 U.S.C. § 6321 . It is not. a matter of such a beneficiary having property which is exempt from the claims of creditors; rather, he simply has never received from the settlor of the trust any right which he may alienate or which may be taken from him.

The question here presented is not answered merely by finding, as does the majority, that the debtor-taxpayer owns property or rights to property; it is necessary to go further and ascertain the nature of such property or rights, i. e., whether it is alienable by the taxpayer. In my view, the Aquilino decision clearly shows that this determination is one to be made by state courts based upon state law; it is not determined by federal statutes and the supremacy clause of the Constitution has no application.

In Aquilino, supra, the taxpayer was a general contractor. The government asserted its tax lien against an indebtedness allegedly owed by a property owner to the general contractor. A dispute concerning the nature and extent of the interest of the taxpayer-contractor ensued. Certain subcontractors, who had performed work on the job, asserted that the money actually received by the contractor-taxpayer and his right to collect amounts still due under the construction contract constituted a direct trust for the benefit of sub-contractors, and that the only property rights which the contractor-taxpayer had in the trust were to bare legal title to any money actually received and a beneficial interest in so much of the trust proceeds as remain after the claims of sub-contractors should be settled. The Federal Government, on the other hand, claimed that the New York State Lien Law merely gave sub-contractors an ordinary lien, and that the contractor-taxpayer’s property rights encompassed the entire indebtedness of the owner under the construction contract. In dealing with this problem, the Supreme Court said:

“The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had ‘property’ or ‘rights to property’ to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that ‘in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . sought to be reached by the statute.’ Morgan v. Commissioner [of Internal Revenue], (citation omitted). Thus, as we held two Terms ago, Section 3670 ‘creates no property rights but merely attaches consequences, federally defined, to rights created under state law . ’ United States v. Bess, (citation omitted). However, once the tax lien has attached to the taxpayer’s state-created interest, we enter the province of federal law, which we have consistently held de *530 termines the priority of competing liens asserted against the taxpayer’s ‘property’ or ‘rights to property.’ (Citations omitted.) The application of state law in ascertaining the taxpayer’s property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interests of its citizens, and the necessity for a uniform administration of the federal revenue statutes.” (Emphasis added.) The Supreme Court continued:

“This conflict [regarding the nature of the contractor-taxpayer’s interest] should not be resolved by this Court, but by the highest court of the State of New York. We cannot say from the opinion of the Court of Appeals that it has been satisfactorily resolved. We find no discussion in the court’s opinion to indicate the nature of the property rights possessed by the taxpayer under state law. Nor is the application to be made of federal law clearly defined. We believe that it is in the interests of all concerned to have these questions decided by the state courts of New York. We therefore vacate the judgment of the Court of Appeals, and remand the case to that court so that it may ascertain the property interests of the taxpayer under state law and then dispose of the case according to established principles of law.” (Emphasis added.) 80 S.Ct. at 1280, 1281 .

I therefore conclude that Tennessee is free to determine the nature and quality of the interest of a beneficiary under a Tennessee spendthrift trust; that for more than 150 years it has been the law of Tennessee as shown by State v. Caldwell, supra, and other decisions of this Court and by T.C.A., § 26-601, that such a beneficiary has no interest which may be alienated either voluntarily or involuntarily and thus is of a nature and quality which cannot be reached by creditors, even the United States government. Accordingly, I respectfully dissent from that portion of the majority opinion which is to the contrary.