6321 Bankruptcy page1

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In re Jerry Gallivan and Jeannette Gallivan, Debtors.

U.S. Bankruptcy Court, West. Dist. Mo. ; 03-60525, July 23, 2004.

[ Code Sec. 6321]

Bankruptcy: Tax liens: Value of property. --

The IRS's secured claim against a debtor for unpaid FICA taxes for which he was solely liable, attached to 50 percent of real and personal property held by the debtor and his spouse as tenants by the entirety. The debtor and his spouse had an equal interest in the property. The debtor's argument that the value of the property should have been based on life expectancy was rejected.

MEMORANDUM OPINION

FEDERMAN, Bankruptcy Judge: Debtors Jerry and Jeannette Gallivan filed an objection to the proof of claim filed by the United States of America/Internal Revenue Service (the IRS). After the parties reached agreement as to the value of the IRS' collateral and the amount of its claim, the IRS asked this Court to overrule the objection. The Gallivans responded that an issue remained as to how to value Mr. Gallivan's interest in the Gallivans' property, which they hold as tenants by the entirety (TBE). This is purely a legal issue, which can be decided on the pleadings. This is a core proceeding under 28 U.S.C. §157(b)(2)(B) over which the Court has jurisdiction pursuant to 28 U.S.C. §1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below I will overrule the Gallivans' objection to the IRS's proof of claim.

FACTUAL BACKGROUND

On March 7, 2003, Jerry and Jeannette Gallivan filed a Chapter 11 bankruptcy petition. Prior to that time, Jerry Gallivan owned and operated a sole proprietorship known as Gallivan Trucking. The IRS had filed prepetition notices of tax liens for unpaid FICA and FUTA taxes, penalties, and interest as to Gallivan Trucking. Ms. Gallivan is not obligated to the IRS for any of the tax debt associated with Gallivan Trucking.

On July 17, 2003, the IRS filed a proof of claim, which it amended on October 16, 2003, and on April 9, 2004. The second amended proof of claim is for the amount of $1,098,403.00. including a secured component of $897,976, an unsecured priority component of $146,979.00 (with reference to unassessed liability for FUTA for December 31, 2003, in an unknown amount), and an unsecured component of $53,448.00. The debtors no longer dispute the total amount of this second amended claim. They do, however, argue that the value of Mr. Gallivan's interest in the TBE property --and, therefore, the amount to be treated as secured --should be calculated based on life expectancy. The IRS contends that 50 percent of the value should be attributed to each spouse. This is the sole legal issue to be decided by this Court.

DISCUSSION

Section 6321 of the Internal Revenue Code (the IRC) provides that unpaid taxes become a lien on any real or personal property of the taxpayer:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. ¹

Moreover, the tax lien arises at the time of assessment:

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. ²

When a taxpayer files for Chapter 11 bankruptcy relief, any proposed Plan of Reorganization must provide for the payment of said tax liens to be confirmable:

(A) With respect to a class of secured claims, the plan provides --

...

 

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims. ³

Since only Mr. Gallivan is liable for the unpaid taxes, the tax liens can only attach to his interest in the real and personal property held as TBE.

"Tenancy by the entirety is a form of ownership in property created by marriage in which each spouse owns the entire property rather than a share or divisible part, and thus at the death of one spouse, the surviving spouse continues to hold title to the property." ⁴ In other words, the husband and wife have unity of interest, unity of entirety, unity of time, and unity of possession, and both are seized of the entirety. ⁵ This form of title derives from ancient common law, and serves the purpose of making it difficult, if not impossible, for a creditor of one spouse to reach that spouse's interest in property held by both spouses as tenants by the entirety. ⁶ Tenancy by the entirety is distinguishable from joint tenancy by one singular characteristic. The tenancy cannot be destroyed involuntarily by an individual creditor. ⁷ And one spouse cannot destroy the entirety without the express consent of the other spouse. ⁸ The exception to this common law doctrine is section 6321 of the IRC, which gives the IRS the authority to attach otherwise exempt property. ⁹ As the United States Supreme Court stated in United States v. Craft, ¹⁰ a spouse's rights in entireties property falls within the broad statutory language of section 6321 of the IRC and the IRS's lien attaches to those rights. ¹¹ It is not clear from the opinion, however, if the attachment of the lien severs the entirety. The IRS, therefore, addressed that issue in Notice 2003-60, which followed Craft. In the Notice the IRS stated its position as follows:

As is the case with joint tenancy with the right of survivorship, if a taxpayer's interest in entireties property is extinguished by operation of law at the death of the taxpayer, then there is no longer an interest of the taxpayer to which the federal tax lien attached. When a taxpayer dies, the surviving non-liable spouse takes the property unencumbered by the federal tax lien.

 

When a non-liable spouse predeceases the taxpayer, the property ceases to be held in a tenancy by the entirety, the taxpayer takes the entire property in fee simple, and the federal tax lien attaches to the entire property. ¹²

This policy is not entirely applicable in the bankruptcy context, however, since the extent of the IRS's lien must be determined prior to confirmation of a plan. If the proposed Plan of Reorganization is confirmed, and the Gallivans comply with its provisions, the IRS's lien would be limited to the extent determined during the confirmation process, even if Ms. Gallivan were to later predecease Mr. Gallivan.

The IRS stated in Notice 2003-60 that it would attempt to execute on the liable spouse's interest in entireties property on a case-by-case basis, recognizing that such an execution would be prejudicial to the nonliable spouse. ¹³ Thus, the IRS appears to interpret Craft to say that it may, if it chooses to do so, sever the entireties property by executing on its lien. That may be correct, but in this case no such action was taken prior to the filing of this Chapter 11 case by both Mr. Gallivan, the liable spouse, and Ms. Gallivan, the non-liable spouse. The filing of the case prevents the IRS from executing on its lien, which brings us back to the issue of the valuation of such lien.

The IRS operates under the presumption that each spouse's interest in entireties property should be valued at 50 percent of the total value of the property. ¹⁴ The Gallivans argue, however, that the Court should look to each spouse's life expectancy in valuing the interest. In Popky v. United States of America, ¹⁵ the court rejected that argument in a case concerning the division of sales proceeds of TBE property, where the interest of one spouse was subject to a tax lien. The court stated that "equal division of assets between spouses seems equitable and parallels the distribution of entireties property when an entireties estate is severed because of a sale with consent of both tenants, divorce or other reasons." ¹⁶ Likewise, in the bankruptcy context, the Eighth Circuit Court of Appeals ordered a bankruptcy trustee to return to a non-debtor spouse half the proceeds he received from the sale of common stock held as tenants by the entirety. ¹⁷ I, therefore, find that each tenant's interest in property held as TBE is equal. This also comports with the common law definition of entireties property. If a husband and wife have unity of interest, unity of entirety, unity of time, and unity of possession, ¹⁸ then each spouse must hold an equal interest. Thus, Mr. Gallivan's interest in both the real and personal property he holds with Ms. Gallivan as TBE is 50 percent of the value of said property. Accordingly, the objection of the debtors to the second amended proof of claim filed by the IRS must be overruled.

An Order in accordance with this Memorandum Opinion will be entered this date.

¹ 26 U.S.C. §6321.

² 26 U.S.C. §6322.

³ 11 U.S.C. §1129(b)(2)(A)(i)(I).

⁴ Rinehart v. Anderson, 985 S.W.2d 363, 367 (Mo. Ct. App. 1998).

⁵ Murawski v. Murawski, 209 S.W.2d 262, 264 (Mo. Ct. App. 1948).

⁶ Harris v. Crowder, 322 S.E.2d 854, 858 (W. Va. 1984).

⁷ Id. at 858.

⁸ Sutorius v. Mayor, 170 S.W.2d 387, 392 (Mo. 1943).

⁹ United States v. Craft [ 2002-1 USTC ¶50,361], 535 U.S. 281, 283, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002) quoting United States v. Nat'l Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 719-20, 105 S.Ct. 2919, 86 L Ed.2d 565 (1985) (holding that the statutory language authorizing the tax lien is "broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have")).

¹⁰ [ 2002-1 USTC ¶50,361], 535 U.S. 281, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002).

¹¹ Id. [ 2002-1 USTC ¶50,361], 535 U.S. at 283.

¹² I.R.S.

¹³ Id.

¹⁴ Id.

¹⁵ 2004 WL 1469281 (E.D. Pa. June 15, 2004).

¹⁶ Id. At * 11.

¹⁷ Garner v. Strauss (In re Garner), 952 F.2d 232, 236 (8 ^th Cir. 1991) (emphasis added).

¹⁸ Murawski v. Murawski, 209 S.W.2d 262, 264 (Mo. Ct. App. 1948).

 

 

 

 

 

In re Herbert Alonzo Stone, Jr., Debtor.

U.S. Bankruptcy Court, So. Dist. Ala. ; 02-15968-WSS, May 11, 2004.

[ Code Sec. 6321]

Bankruptcy: Tax lien: Property of estate. --

The IRS's secured claim against a debtor attached only to his real and personal property available at the time the bankruptcy petition was filed, and excluded the debtor's future military retirement pay. The IRS argued for a broad interpretation of the scope of a federal tax lien which, under Code Sec. 6321, attaches to all property of the debtor. Under sections 506(a) and 541(a)(6) of the U.S. Bankruptcy Code, the bankruptcy estate included all property and interests of the debtor at the commencement of the bankruptcy. This included deferred compensation for services rendered prior to the bankruptcy filing, but not compensation for services during or after the commencement of the bankruptcy. This put the taxpayer's future military pension beyond the reach of the federal tax lien after the bankruptcy. The court's decision followed the Supreme Court decision in McCarty v. McCarty (453 U.S. 210, 1981) that found that a military pension was reduced compensation for reduced services. Baker v. Kansas (503 U.S. 594, 1992) was distinguished as dealing with only state taxation.

Lawrence B. Voit, W. Alexander Gray, Jr., Silver, Voit & Thompson, for debtor. Charles Baer , United States Attorney's Office, for U.S.

ORDER SUSTAINING DEBTOR'S OBJECTION TO CLAIM OF THE UNITED STATES AND DENYING THE UNITED STATES' MOTION FOR PARTIAL SUMMARY JUDGMENT

SHULMAN, Chief Bankruptcy Judge: This matter came before the court on the Debtor's objection to the United States ' claim and the United States ' motion for partial summary judgment. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§157 and 1334 and the Order of Reference of the District Court. This matter is a core proceeding pursuant to 28 U.S.C. §157(b)(2). The Court made findings of fact and conclusions of law on the record which are incorporated herein by reference. Therefore, it is hereby

ORDERED that the United States' motion for partial summary judgment is DENIED; and it is further

ORDERED that the Debtor's objection to claim #9 of the Department of Treasury-Internal Revenue Service is SUSTAINED, and the claim shall be allowed as secured only to the extent that the lien of the IRS attaches to the Debtor's real and personal property in existence on the petition date, up to the value of said property, and specifically excluding the Debtor's future military retirement pay; and it is further

ORDERED that the balance of the tax claims shall be treated as general, unsecured, non-priority claims.

HEARING PROCEEDINGS

BEFORE: The Honorable William S. Shulman, United States Bankruptcy Court Judge, Southern District, Southern Division, Mobile, Alabama, on the 11th day of May, 2004.

MR. VOIT: Judge, we are ready on Stone.

THE COURT: Okay. This is the case of Herbert Alonzo Stone, Jr. This is an order of the Court.

This matter came before the Court on the Debtor's objection to the United States ' claim and the United States --to the Debtor's objection to the United States ' claim and the United States ' motion for a partial summary judgment under Bankruptcy Rule 9014 and Rule 7056.

The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. Section 157 and Section 1334 and the Order of Reference of the District Court. This matter is a core proceeding pursuant to 28 U.S.C. Section 157(B)(2).

After considering the pleadings, evidence, briefs and arguments of counsel, the Court makes the following findings of fact and conclusions of law: The Debtor, Herbert Stone, filed a Chapter 11 petition on October 18, 2002. He is a member of the United States Army Retired Reserve, serving for twenty years in the Reserve. Stone retired as colonial, officer classification 06. He received a notice of eligibility for retired pay at age sixty from the U.S. Army. The notice states that Stone has completed the required years of qualifying reserve service and is eligible for retired pay on application at age sixty.

As of the date of the hearing on this matter, Stone was fifty-eight years old. He was not receiving or eligible to receive military retirement benefits when the Chapter 11 petition was filed. Stone will not be eligible to receive any military retirement benefits until he turns sixty years old on March 3, 2005.

Stone brought an adversary proceeding, case number 02-01172, to determine the dischargeability of his tax debt. In the consent order submitted by the parties, the Court ruled that, quote, the federal tax liens of the United States pass through this case and survive discharge but do not attach to any property acquired by the Debtor after the filing of the petition in this case, other than proceeds of prepetition property, close quote.

Stone filed a plan of reorganization and a disclosure statement. The IRS has objected to this Chapter 11 plan on the grounds that the tax lien attaches to the Debtor's military retirement pay.

The United States --sometimes I'm going to refer to them as the IRS --filed a claim for two hundred eighty-nine thousand one hundred fifty-six dollars ninety-eight cents, claiming a secured status for two hundred twenty-two thousand six hundred seven dollars eighty-five cents of the claim. The two hundred twenty-two thousand six hundred seven dollars ninety-eight cents amount consists of income tax, interest and penalties for tax years 1997 and 1998.

Tax liens were filed for these taxes due. The tax liens secure income taxes --the tax liens secure income tax liabilities that are dischargeable.

Stone objected to the secured status of the IRS's amended claim. Stone asserts that the tax liens only attach to Stone's real and personal property in existence on the petition date and therefore the secured part of the claim should be limited to the value of the Debtor's property as of the date of the petition.

Now for the conclusions of law.

The issue before the Court is whether Stone's military retirement benefits which he will not begin receiving until he reaches age sixty can secure the IRS's claim for unpaid taxes. In order to resolve this, one must first look to 11 U.S.C. Section 541(a), which deals with the property of the bankruptcy estate, and Section 506(a), which determines the secured status of a claim.

Section 541(a) states that, quote, the estate is comprised of all of the following property, wherever located and by whomever held: Number one: Except subsections (b) and (c)(2) of this section, all legal or equitable interests the Debtor in property as of the commencement of the case, close quote. That's 11 U.S.C. Section 541(a)(1).

The other pertinent subsection states, this is (6), proceeds, offspring --proceeds, products, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual Debtor after the commencement of the case, close quote. 11 U.S.C. Section 541(a)(6).

Section 506(a) provides that an allowed claim is secured only to the extent and value that the estate has an interest in the particular property. That's 11 U.S.C. Section 506(a).

In order for the IRS to be secured by the military retirement pay, such retired pay must first be construed as property of the estate. Even if the retirement pay is not deemed property of the estate, the Court must determine whether the bankruptcy estate has an interest in the retired pay, and if so, the value of the IRS's secured claim. See in re Perkins, 134 BR 408. That's Bankruptcy, Eastern District , California , 1991, close paren.

The IRS has urged the Court to focus on the broad scope of the federal tax lien. A federal tax lien attaches to all of the tax Debtor's property and rights to property, both real and personal, on assessment of the tax. 26 U.S.C. Section 6321. This language is, quote, broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have, close quote. United States vs. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713 at 720 and 721, 1985.

In its brief, counsel for the United States correctly anticipated the issue as to whether military retirement pension is reduced present pay for reduced services or deferred pay for past services as with the usual type of pension. Under various federal statutes, members of the military, including the reserve, may be eligible for retired pay. The Debtor's potential reserve retirement pay is governed by federal statute. See 10 U.S.C. Section 12 731 et. seq.

Pursuant to the statutory framework for military retirement, the Debtor is not eligible to receive military retirement pay until he reaches the age of sixty. The military retirement system differs from private pensions, 401(k) plans and other retirement plans. As explained by the United States Supreme Court, quote, under current law, there are three basic forms of military retirement: Nondisability retirement, disability retirement, and reserve retirement. Since each of the military services has substantially the same nondisability retirement system, the Army system may be taken as typical. An Army officer who has twenty years of services, at least ten of which have been active service as an officer, may request that the Secretary of the Army retire him. An officer who requests such retirement is entitled to retired pay. This is calculated on the basis of the number of years served and the rank achieved. An officer who serves for less than twenty years is not entitled to retired pay.

Under the Internal Revenue Code of 1954, retired pay is taxable as ordinary income when received. The nondisability retirement system is noncontributory in that neither the service member nor the Federal Government make periodic contributions to any fund during the period of active service. Instead, retired pay is funded by annual appropriations. Military retired pay terminates with the retired service member's death and does not pass to the member's heirs. That case is McCarty vs. McCarty, 553 [453] U.S. 210, 1981. Also see 10 U.S.C. Section 1461, Section 1462(2). That's the Department of Defense Military Retirement Fund Finances Retirement Pay Programs and it's funded in part by annual appropriations.

In McCarty, the Supreme Court noted additional differences between military retirement pay and other forms of pensions. Appellant correctly notes that military retired pay differs in some significant respects from a typical pension or retirement plan. The retired officer remains a member of the Army and continues to be subject to the uniform code of military justice. In addition, he may forfeit all or part of his retired pay if he engaged in certain activities. Finally, the retired officer remains subject to recall to active duty by the Secretary of the Army at any time.

These factors have led several courts, including this one, to conclude that military retired pay is reduced compensation for reduced current services. That's the McCarty case, 453 U.S. at 221, 222.

The case of in re Moorhaus stated that, and I'm quoting from the case, that the Supreme Court in McCarty observed that numerous cases had held that military retired pay was in the nature of reduced compensation for reduced current services rather than deferred pay for past services. This analysis, however, was not the basis for the Court's, and they are referring to the Supreme Court, ultimate holding and is substantially undercut by the Court's subsequent opinion in Barker vs. Kansas, 503 U.S. 594, 1992, in which it held that for state tax purposes, military retired pay should be considered deferred pay for past services rather than compensation for reduced current services. That's in re Moorhaus, 180 BR 138, Bankruptcy, Eastern District, Virginia , 1995. In that case --that case was in determining whether a right to military pay might be voluntarily assigned in holding that Section --I mean holding that Title 31 U.S.C. Section 701 blocked such assignments.

The 7th Circuit in the case of in re Haynes, 679 Fed. 2nd 718, 7th Circuit, 1982, relying largely on United States vs. Tyler, 105 U.S. 244, that's an 1881 case, held that military retirement pay is not a property of a Debtor's bankruptcy estate and concluded that because a military retiree has continuing duties, military retirement is more like wages than it is a pension. The Court stated that military retirement pay is actually reduced compensation for reduced current services, and that since the retirement pay is proceeds for services performed after the filing of the bankruptcy petition, it is not property of the estate under 11 U.S.C. Section 541(a)(6). That's in re Haynes, 679 Fed. 2nd at 719.

Other courts holding that military retired pay is not property of the estate in Chapter 7 cases are as follows: In re Greimer, 49 BR 393, Bankruptcy, the District of Northern Dakota --of North Dakota, 1985; in re Siverling, that's S-I-V-E-R-L-I-N-G, 72 BR 78, that's Bankruptcy, Western District of Missouri, 1987; in re Kotz, that's K-O-T-Z, 146 BR 669, Bankruptcy, Eastern District, Virginia, 1992; Walston vs. Walston, 190 BR 66, Eastern District, North Carolina, 1995.

The Barker vs. Kansas case relied on by the United States may be distinguished from the instant case. In Barker, there was an equal protection challenge to the State of Kansas taxing military retired pay differently from other state retirement. The state rationalized this disparate treatment by relying in part on the idea that military retired pay was pay for current services while the state retirement was deferred compensation. The United States Supreme Court found Kansas ' disparate treatment a violation of the equal protection clause and found the alleged distinction to be an insufficient basis for that treatment.

In doing so, the Court did find, but only for the purpose of this state taxation issue, that military retirement should be considered deferred pay for past services. However, the Supreme Court reaffirmed the fundamental distinction between military retired pay and other forms of retirement, stating, quote, military retirees unquestionably remain in the service and are subject to restrictions and recall. In these respects, they are different from other retirees, close quote, at 503 U.S. at 599.

The Barker holding is limited to the tax issue before it and does not overrule McCarty and the cases following McCarty with regard to the present issue in the bankruptcy context.

The United States has argued that whether the military retired pay is vested or is unqualified should make no difference whether its tax lien can attach to the Debtor's military retired pay. The federal tax lien attaches to even a contingent interest. That's Randall vs. H. Nakashima & Company, Limited [ 76-2 USTC ¶9770], 542 Fed.2nd 270 (5th Circuit, 1976); United States v. Phillips [ 89-2 USTC ¶9407], 715 Fed.Supp. 81, 83 (Southern District, New York, 1989); Big Heart Pineline vs. United States [ 84-2 USTC ¶9961], 600 Fed.Supp. 50, 53 (Northern District, Oklahoma, 1984).

While this court recognizes the broad scope of the federal tax lien, these cases and others cited by the United States may be distinguished as dealing with property or rights to property. More importantly, those cases are distinguished from the unvested and qualified nature of military retired pay, which is at issue in this case. See for example Goodley vs. United States, 441 Fed.2nd, 1175, 1178 (Court of Claims, 1971); in re Donahue, 16 BR 335 ( Bankruptcy District Massachusetts , 982).

Many of the cases cited by the United States relating to tax liens attaching to pensions and retirement recognize the, quote, fully vested, close quote, and the quote, unqualified, close quote, nature of benefits to which the lien may attach.

The United States has been unable to cite to the Court and the Court has been unable to find any bankruptcy cases dealing with military retired pay where the IRS attained secured creditor status on military retirement and where the Debtor would not begin receiving the retired military pay until sometime after the petition date.

In cases the United States provided, for example, in re Perkins, 134 BR 408, and in re Evans, 155 BR 234, a 1993 case, the facts dealt --in those cases dealt with pension benefits that had vested in the Debtor. In this case, the IRS seeks to receive a stream of payments on a secured claim based on military retirement pay that will begin, if the Debtor lives long enough, at some future date when he turns sixty.

If there was no bankruptcy, the IRS could not levy on the retirement pay until the payments actually started being paid. Thus, if the tax debt is allowed as a secured claim, the IRS would receive payments long before they could if there were no bankruptcy at all. The Debtor would be required to pay two hundred and twenty-two thousand six hundred seven dollars eighty-five cents on prepetition tax liens which are otherwise dischargeable.

This Court is of the opinion that based on the case law as set forth in this opinion, and as distinguished from the Barker vs. Kansas case that I referred to earlier, the Debtor has no vested right in the military retirement pay as of the filing date of his petition, nor does he have a vested right to receive retired pay in the future. In re Donahue 16 BR 335, Bankruptcy District Massachusetts , 1972.

Further, as stated in in re Haynes, 679 Fed. 2nd 718 (7th Circuit, 1982), the Debtor's retirement pay is actually proceeds for services performed after the filing of the bankruptcy petition and it is not property of the estate, 11 U.S.C. Section 541(a)(6).

Now, therefore, it is ordered that the motion of the United States for partial summary judgment is hereby denied and it is further ordered that the objection of the Debtor to claim number 9 of the Department of Treasury, Internal Revenue Service, be and hereby is sustained and that the claim shall be allowed as secured only to the extent that the lien of the IRS attaches to the Debtor's real and personal property in existence on the petition date up to the value of said property and specifically excluding the Debtor's future military retirement pay. And it is further ordered that the balance of the tax claims will be treated as general unsecured, nonpriority claims.

I have made these findings of fact and conclusions of law on the record and they are hereby incorporated herewith. That's the ruling of the Court.

MR. VOIT: Thank you, Judge.

MR. BAER: Your Honor, just as a point of clarification, there will still be some issues on the secured claim in terms of the value of Debtor's property, which was why it was filed as a motion for partial summary judgment.

THE COURT: Okay. Well, the next question that I have for both of you is this. Having ruled as I have ruled, how long is it going to take to resolve that other issue? Because I would like to get this case set for confirmation, its having been delayed, you know, by the Court having taken it under submission for such a lengthy period of time.

MR. BAER: Your Honor, I believe the matter is set for status in a week or two. I will have to consult with the Department of Justice because they would be handling the major factual issue there. Also, I believe we have ten days to decide whether or not to appeal this ruling.

THE COURT: Well, you can appeal, but that doesn't stop it from going --

MR. BAER: I understand.

MR. VOIT: Judge, as in any Chapter 11, we certainly want to continue our dialogue with the IRS and it's possible the matter --the issues that remain can be resolved, and, you know, we just need to explore that. So, that --

THE COURT: You don't want to go forward on confirmation when it's set for status, I take it?

MR. VOIT: Well --

COURTROOM DEPUTY: It's next week.

MR. VOIT: --no, I don't think either one of us want to do that.

MR. BAER: No.

THE COURT: Okay.

MR. VOIT: I thought that was --

THE COURT: Why don't y'all just supply me a date when you think you can get it? I will let y'all talk. You contact Angie and let's get notices sent out and make sure everybody understands it's set for confirmation hearing. Since it's been passed so many times for status, I don't want any confusion among the other creditors as to when the actual confirmation hearing will take place.

MR. VOIT: We can do that.

THE COURT: Okay. So, I am just going to leave it up to you.

MR. VOIT: I don't think it's going to require any renoticing to the entire creditor body because they have already been --they have already received notice of the original confirmation hearing date and those creditors who have been active in the case have been aware of exactly what's been going on and the matter being set for status several times. So, but we --we do need to talk and we can get back to the Court about those matters.

THE COURT: Well, hopefully y'all can resolve whatever differences remain.

MR. VOIT: Right.

THE COURT: Do you have anything, Mr. Bedsole?

MR. BEDSOLE: No, sir. I think when it comes up in a week or so, we will --

THE COURT: Okay. Yeah. Why don't y'all show up at status and let me know where we are at that point in time?

COURTROOM DEPUTY: The status is set for next week, Judge, just to let you know.

THE COURT: Next week. Okay. Thank y'all very much.

MR. BAER: Thank you, Your Honor.

END OF PROCEEDINGS

 

 

 

 

 

In re Jerome C. Richardson, Vernell Richardson, Debtors.

U.S. Bankruptcy Court, Dist. Md. , at Greenbelt ; 02-16678, March 30, 2004.

[ Code Secs. 6321 and 6871]

Bankruptcy: Pension plan: ERISA. --

A claim by the IRS against a debtor was denied the status of "allowed secured claim" by the Bankruptcy Court with respect to assets in the debtor's ERISA pension plan. The IRS argued that under Code Sec. 6321 its claim was secured because its lien against the debtor's property, including the plan, was enforceable outside of bankruptcy. However, under section 541(c)(2) of the Bankruptcy Code, the anti-alienation provisions of ERISA are applicable in bankruptcy cases, and the plan is excluded from the debtor's estate. Since the estate had no interest in the debtor's plan, an allowed claim could not be secured with plan assets, and the IRS claim above the amount of the estate's other assets was unsecured.
.

Leslie Auerbach, for debtors. Dara Oliphant, Chapter 13 Trustee.

MEMORANDUM OF DECISION

KEIR, Bankruptcy Judge: A hearing was held on November 5, 2003 to consider the Debtors' Objection to the Proof of Claim filed by the United States Internal Revenue Service (the "IRS"). Upon consideration of the arguments presented, the court made an oral ruling at the hearing and informed the parties that the court was going to reduce its findings and conclusions to a written opinion. In accordance with its oral ruling, the court finds that the claim of the IRS for unpaid income taxes is not an allowed secured claim in the bankruptcy case to the extent of the Debtors' interest in an ERISA-qualified pension fund. Accordingly, the Debtors' objection is sustained.



I. BACKGROUND

The Debtors filed a voluntary bankruptcy petition on June 4, 2002 under Chapter 13 of the United States Bankruptcy Code. The IRS filed a Proof of Claim in Debtors' case in the amount of $156,879.94, with $120,070.00 categorized as secured. ¹ The Proof of Claim is based on tax assessments for unpaid income taxes for the 1992, 1993, 2000 and 2001 tax years.

On October 30, 2002, Debtors filed an Objection to the IRS Proof of Claim stating that the current fair market value of the Debtors' property, after deducting the balance due upon debts secured by liens having priority above the tax lien, is $21,224.00. Accordingly, the Debtors assert that the secured claim of the IRS should be allowed in the amount of $21,224.00 pursuant to 11 U.S.C. §506(a) ² and the remaining portion (hereinafter the "Potential Unsecured Claim") should be treated as an unsecured claim.

The IRS filed a Response to Debtors' Objection. In its response, the IRS concedes that the value of the Debtors' interest in real property alone is insufficient to secure the Potential Unsecured Claim. However, Mr. Richardson has sufficient interest in a retirement plan to secure such claim. ³ Consequently, the IRS maintains that its Potential Unsecured Claim is entitled to treatment as a secured claim.



II. ISSUE

There are no disputes of fact in this case. The parties agree that Mr. Richardson has an interest in an ERISA-qualified retirement plan and that such plans are normally excluded from the bankruptcy estate under the United States Supreme Court decision entitled Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992). The parties further agree that outside of bankruptcy, Mr. Richardson's retirement plan is subject to the lien of the IRS despite the anti-alienation provision in the retirement plan that protects Mr. Richardson's interest from attachment by other creditors. See 26 U.S.C. §6321. The parties disagree, however, on whether the Potential Unsecured Claim is entitled to treatment as an allowed secured claim in the Debtors' bankruptcy case.



III. ANALYSIS

In addressing this issue, the court finds it useful to differentiate between a debt or a claim and an allowed claim. A debt is what one party owes another party under applicable nonbankruptcy law. ⁴ Similarly, a claim is defined in Section 101(5) as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. §105(5). An allowed claim, on the other hand, is an entitlement to the holder of the right to receive a distribution from the bankruptcy estate and/or the right to specific treatment under either a Chapter 11 or Chapter 13 plan. In order to hold an allowed claim in a Chapter 7 or Chapter 13 bankruptcy case, a creditor must hold a claim and must comply with Section 502. ⁵ Additionally, to have an allowed secured claim, the allowed claim must be collateralized in the manner set forth in Section 506(a). ⁶

There is a distinction under the provisions of Chapters 11 and 13 of the Bankruptcy Code as to the type of minimum non-consensual required treatment in a confirmable plan for an allowed secured claim, as opposed to an allowed unsecured claim. The issue in this case is which standard of treatment applies to the Potential Unsecured Claim of the IRS. If the Potential Unsecured Claim is an allowed secured claim, as argued by the IRS, then a confirmable plan must treat the claim in a manner consistent with Section 1325(a)(5). ⁷ If the Potential Unsecured Claim of the IRS is an unsecured claim, then the plan need only treat the claim as required by Sections 1322(a)(2) and (3), as applicable, and Section 1325(a)(4). ⁸ However, this court's determination as to whether the Potential Unsecured Claim of the IRS is an allowed secured claim or an allowed unsecured claim will have no effect on the right of the IRS to collect the tax debt directly from the pension plan pursuant to the remedies available to the IRS under the Internal Revenue Code.

The plain meaning of Section 506(a) ⁹ is that a secured claim exists only when an allowed claim is secured by property in which the estate has an interest. Section 541 of the Bankruptcy Code provides that property of the bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case," except as provided in subsections (b) and (c)(2). 11 U.S.C. §541. Generally, restrictions on the transfer of a debtor's interest in property do not operate to prevent the inclusion of the property interest in the bankruptcy estate. See 11 U.S.C. §541(c)(1). An exception to this exists, however, in Section 541(c)(2), which states that a "restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." In Patterson v. Shumate, 504 U.S. 753 (1992), the United States Supreme Court concluded that this reference to "nonbankruptcy law" found in Section 541(c)(2) includes federal as well as state law, including ERISA. Accordingly, the Supreme Court determined that a debtor's interests in an ERISA-qualified retirement plan, which plan contains restrictions on assignment or alienation, are excluded from the bankruptcy estate pursuant to Section 541(c)(2). See id. See also Employment Retirement Income Security Act of 1974, 29 U.S.C. §1001 et seq.

Consequently, in this case, the lien of the IRS in the Debtors' interest in Mr. Richardson's pension plan is not "a lien on property in which the estate has an interest." Therefore, such lien does not result in the Potential Unsecured Claim of the IRS being a secured claim since a secured claim is limited by the express words of Section 506(a) --"to the extent of the value of such creditors' interest in the estates' interest in such property." (Emphasis added.) It is important to note, however, that such a conclusion does not eviscerate the lien of the Internal Revenue Service on the Debtors' interest in the pension plan.

Section 6321 of the Internal Revenue Code ("IRC") allows a federal tax lien to attach "upon all property and rights to property, whether real or personal," belonging to a delinquent taxpayer. 26 U.S.C. §6321. ¹⁰ This provision allows federal tax liens to attach to a taxpayer's interest in his/her retirement plan, regardless of any anti-alienation provisions contained in the retirement plan. See Bank One Ohio Trust Co., N.A. v. United States [ 96-1 USTC ¶50,188], 80 F.3d 173, 176 (6th Cir. 1996). Stated differently, "outside of bankruptcy, the IRS stands in a different position from ordinary creditors in that the anti-alienation provisions in ERISA-qualified pension plans are not enforceable against it." United States Internal Revenue Code [sic] v. Snyder [ 2003-2 USTC ¶50,664], 343 F.3d 1171, 1174 (9th Cir. 2003).

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