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).

Several courts have relied on Section 6321 of the IRC to hold that a debtor's interest in an ERISA-qualified pension plan becomes property of the bankruptcy estate for the limited purpose of securing the IRS allowed claim under Section 506(a) of the Bankruptcy Code where an IRS tax lien has attached to the debtor's interest in the pension plan under federal tax law. This is, in effect, the holding of a decision by the United States District Court for the District of Maryland in In re McIver, 255 B.R. 281 (D. Md. 2000). ¹¹ In In re McIver, the United States District Court for the District of Maryland relied on Section 6321 of the IRC to hold that a debtor's rights in TIAA/CREF annuities were property of the bankruptcy estate and could be used to secure the allowed claim of the IRS under Section 506(a) of the Bankruptcy Code.

Here, the IRS relies on In re McIver and the unique treatment afforded to it under Section 6321 of the IRC to assert that because the anti-alienation provision of Mr. Richardson's retirement plan is not enforceable against the IRS under "applicable nonbankruptcy law," then Section 541(c)(2) does not exclude his interest in the retirement plan from the bankruptcy estate for the limited purpose of securing the Potential Unsecured Claim. This would allow the IRS to have an allowed secured claim up to the value of the Debtors' interest in the retirement plan. If the IRS is correct, the IRS will have an allowed secured claim of $111,224.00 versus an allowed secured claim of $21,224.00 as the Debtors assert. The result of having a higher allowed secured claim would be that once the Debtors' plan is confirmed by the bankruptcy court, the plan must provide for payment of the secured claim of the IRS in full, from monies paid into the plan during the life of the Chapter 13 plan. See 11 U.S.C. §1325(a)(5)(B)(ii). ¹²

In light of subsequent decisions in this Circuit and elsewhere, the Debtors have requested that the court revisit the issue addressed in In re McIver. Specifically, the Debtors urge the court to follow those decisions finding that a qualified pension plan is excluded from the bankruptcy estate despite being subject to an IRS lien outside of bankruptcy. See In re Wingfield [ 2003-1 USTC ¶50,209], 2002 WL 1869398 (E.D. Va. 2002); In re Keyes [ 2000-2 USTC ¶50,747], 255 B.R. 819 (Bankr. E.D. Va. 2000). ¹³ Included among the more recent decisions relied upon by the Debtors is a decision by the United States Court of Appeals for the Ninth Circuit entitled United States Internal Revenue Code [sic] v. Snyder [ 2003-2 USTC ¶50,664], 343 F.3d 1171 (9th Cir. 2003). For the following reasons, the court finds the reasoning adopted by the Ninth Circuit Court of Appeals persuasive and holds that the Potential Unsecured Claim of the IRS is not secured within the meaning of Section 506(a) by the Debtors' interest in an ERISA-qualified pension plan, notwithstanding that the debt is collateralized outside of bankruptcy by the pension plan.

As already mentioned, Section 541(c)(2) carves out an exception to what property is included in a bankruptcy estate. "[I]t provides that trust anti-alienation provisions otherwise enforceable under nonbankruptcy law will operate in a bankruptcy estate to prevent the transfer of the debtor's interest in the trust to the bankruptcy estate." United States Internal Revenue Code [sic] v. Snyder [ 2003-2 USTC ¶50,664], 343 F.3d. at 1178. Thus, under the plain language of Section 541(c)(2) and in accordance with the decision reached in Patterson v. Shumate, Mr. Richardson's interest in his ERISA-qualified pension fund was never transferred to the Debtors' bankruptcy estate. As previously stated, Section 506(a) requires that an allowed secured claim of a creditor be secured by a lien on property in which the estate has an interest. Property in which the estate has no interest cannot be the basis for bankruptcy treatment of a claim (funded by the bankruptcy estate) as an allowed secured claim.

The effect of the court's determination is that the IRS will not be able to use Section 1325 as a vehicle to collect taxes for the IRS. ¹⁴ Rather, the IRS will be able to share as an unsecured creditor in the pro rata distribution from estate property through the Chapter 13 Plan. Additionally, the IRS will continue to hold the right to pursue the ERISA fund directly under Section 6321 of the Internal Revenue Code; however, relief from the automatic stay must be sought while the Debtors remain in bankruptcy. Alternatively, the IRS can wait to pursue the pension plan until the conclusion of the bankruptcy case. As the United States Court of Appeals for the Ninth Circuit concluded, this is not an inequitable result, rather such a holding merely prevents the IRS from using the Debtors' bankruptcy to accelerate payment of the liens, or from using the liens to prevent confirmation of a Chapter 13 plan that could reduce or eliminate the IRS's non-lien debt. See United States Internal Revenue Service v. Snyder [ 2003-2 USTC ¶50,664], 343 F.3d at 1179.



IV. CONCLUSION

For these reasons, the Debtors' Objection to the proof of claim of the Internal Revenue Service is sustained. An order conforming to this Opinion will be entered.

ORDER SUSTAINING DEBTORS' OBJECTION TO CLAIM OF UNITED STATES INTERNAL REVENUE SERVICE

For the reasons set forth in the accompanying Memorandum of Decision, it is by the United States Bankruptcy Court for the District of Maryland,

ORDERED, that Debtors' Objection to the proof of claim of the United States Internal Revenue Service is sustained; and it is further

ORDERED, that the claim of the United States Internal Revenue Service is allowed as a secured claim in the amount of $21,224.00, and the balance of the claim is allowed as unsecured.

¹ The IRS filed Notices of Federal Tax Lien for the 1992 and 1993 tax years in Prince George's County, Maryland.

² Hereafter, all code sections refer to the United States Bankruptcy Code found at Title 11 of the United States Code unless otherwise noted.

³ The Debtors scheduled the value of Mr. Richardson's interest in his retirement plan at $90,000.00.

⁴ Black's Law Dictionary, Sixth Edition, defines "debt," in part, as: "A specified sum of money owing to one person from another, including not only obligation of debtor to pay but right of creditor to receive and enforce payment."

⁵ Section 502(a) provides: "A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects." In Chapter 11, an allowed claim may also arise under circumstances enunciated in Section 1111.

⁶ Section 506(a) provides, in part: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property."

⁷ Section 1325(a)(5) provides: "Except as provided in subsection (b), the court shall confirm a plan if with respect to each allowed secured claim provided for by the plan: (A) the holder of such claim has accepted the plan; (B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or (C) the debtor surrenders the property securing such claim to such holder."

⁸ Section 1322(a)(2) and (3) provide: "The Plan shall: (2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim; and (3) if the plan classifies claims, provide the same treatment for each claim within a particular class."

Section 1325(a)(4) provides: "Except as provided in subsection (b), the court shall confirm a plan if the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date."

⁹ See Footnote 6.

¹⁰ 26 U.S.C. §6321 provides: "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."

¹¹ It is also the holding of an unreported decision of this court in In re Hartso [ 98-1 USTC ¶50,430], 1998 WL 419578 (Bankr. D. Md. 1998) (Keir, Bankruptcy J.). The court now repudiates its conclusion in In re Hartso.

¹² A second possible result of having an allowed secured claim to the extent of the Debtors' interest in the retirement plan is that the Debtors may never achieve confirmation of a Chapter 13 plan since the IRS claim would have to be paid in full over the life of the plan. It appears unlikely that the Debtors can fund a plan at a level sufficient to achieve full payment of the IRS claim. As the Debtors may not have access to the retirement plan until it is in a payout status, which usually only occurs upon a person's retirement or disability (unlike an Individual Retirement Account), it is unlikely that the Debtors have the financial resources to otherwise fund a plan with such a high allowed secured claim. See United States Internal Revenue Code [sic] v. Snyder [ 2003-2 USTC ¶50,664], 343 F.3d 1171, 1174 (9th Cir. 2003). The IRS does not argue that a determination that its claim is secured to the extent of the Debtors' interest in the retirement plan would have the effect of overriding the ERISA-required distribution restrictions placed upon the pension plan. If the pension funds are not available to the Debtors to fund the plan for distribution to the IRS by the Chapter 13 Trustee, the plan would have to be funded by other financial resources.

¹³ In two recent opinions, the United States Bankruptcy Court for the Eastern District of Virginia held that a debtor's interest in an ERISA-qualified pension plan is not property of the bankruptcy estate for the limited purpose of securing a lien by the IRS for unpaid taxes. See In re Robinson, 301 B.R. 461 (Bankr. E.D. Va. 2003); See also In re Grant, 301 B.R. 464 (Bankr. E.D. Va. 2003).

¹⁴ For the reasons stated in Footnote 12, if the Potential Unsecured Claim was allowed as a secured claim, payment of such claim from a confirmed plan would likely be from non-pension plan funds, drastically reducing the estate assets available to pay those creditors having no right to collect from the pension funds outside of the bankruptcy case.

 

 

 

 

 

W. Richard Morgan and Janice J. Morgan, Petitioners v. Commissioner of Internal Revenue, Respondent.

U.S. Court of Appeals, 8th Circuit; 02-4138, 345 F3d 563, October 3, 2003.

Affirming the Tax Court, Dec. 54,850(M), TC Memo. 2002-210, 84 TCM 217.

[ Code Secs. 6321, 6325 and 6871]

Bankruptcy: Assessment and collection: Property subject to tax liens: Discharge of property from lien: Equitable estoppel. --

The Tax Court properly concluded that the IRS was not estopped from levying upon married debtors' pension plan to satisfy their delinquent tax liability, which was discharged in bankruptcy. Oral and written representations of an IRS employee indicating that the tax liability would be abated did not amount to negligence and bad faith and, as a result, were insufficient grounds for estoppel. Likewise, the IRS's failure to respond to a letter from the debtors' attorney clarifying the terms of an installment agreement in effect for additional tax years, which also indicated that the IRS would not commence additional collection procedures for the tax year at issue, did not support the debtors' claim that equitable estoppel applied.


Before: Smith, Lay and Bright, Circuit Judges.



I. BACKGROUND

LAY, Circuit Judge: This case arises out of tax assessments made against W. Richard Morgan and Janice J. Morgan (collectively "Morgan") for federal income tax deficiencies for the years 1981, 1982, and 1983 resulting from investments in a tax shelter later invalidated by the Internal Revenue Service. As a result of these deficiencies, Morgan filed for bankruptcy. On December 22, 1994, the bankruptcy court issued an order in which it refused to discharge Morgan's tax liabilities for 1981 and 1982, but granted a discharge as to Morgan's 1983 tax liability. The bankruptcy court also ruled, however, that the IRS retained the right to collect the 1983 liability from any assets that were exempt from the bankruptcy estate, which were limited to a pension plan held in the name of W. Richard Morgan.

In March of 1995, Morgan submitted an offer-in-compromise to the IRS, which was later rejected. Some time in 1997, Morgan's account was assigned to Revenue Officer Elizabeth Cooper, who sought on several occasions to convince Morgan to begin repaying his delinquent taxes. In May of 1998, the IRS issued a wage levy to Morgan's employer. On May 19, 1998, Cooper wrote a letter to Morgan's attorney, expressing the need for Morgan to submit another offer-in-compromise and to attempt to negotiate an installment agreement for the payment of all unpaid taxes. In this letter, Cooper also wrote: "regarding the 1983 [tax liability], Special Procedures Branch is in the process of getting it abated." Cooper wrote this based upon her conversations with the Special Procedures Branch of the IRS.

The wage levy provided an impetus for Morgan to enter into negotiations for an installment agreement. On June 4, 1998, Morgan and the IRS finalized an agreement covering only Morgan's 1981 and 1982 tax liabilities. Morgan's 1983 tax liability was not included in the installment agreement because at the time of its execution, both Morgan and Cooper believed that it would be abated. Shortly after the execution of this agreement, however, the Special Procedures Branch decided not to abate Morgan's 1983 liability. On September 11, 1998, Morgan's attorney sent a letter to Cooper explaining his understanding of the effect of the installment agreement, which was that the IRS would not commence additional collection procedures (including any pertaining to the 1983 liability) so long as Morgan remained current on payments. Morgan's attorney asked Cooper to verify or, if necessary, correct his understanding of the agreement. Although Cooper was aware at the time she received this letter that the IRS had decided not to grant an abatement of the 1983 liability, she did not respond to this letter. ¹

On December 27, 1999, the IRS notified Morgan of its intent to levy to recover all unpaid taxes and penalties for the 1981, 1982, and 1983 tax years. Following a Collection Due Process hearing, the IRS Office of Appeals ruled that the IRS could not enforce by levy the 1981 and 1982 liabilities so long as Morgan complied with the terms of the installment agreement. The Office of Appeals also ruled, however, that the IRS could enforce by levy the 1983 tax liability against assets exempt from the bankruptcy.

Morgan filed an appeal in United States Tax Court, arguing that the IRS was estopped from enforcing by levy the 1983 tax liability based on its previous representations that the 1983 liability would be abated, and further that there would be no attempts at collection while the installment agreement remained in effect. Morgan argued that as a result of these representations, he suffered a detriment by entering into an installment agreement that failed to include his 1983 liability. The tax court affirmed the decision of the Commissioner. It held that it was not reasonable for Morgan to rely on Cooper's statements that his 1983 liability would be abated for two reasons. First, Morgan knew that the IRS could levy on his exempt assets to recover his 1983 liability. ² Second, Morgan was represented by attorneys in the bankruptcy proceeding and in his dealings with the IRS. The tax court also held that Morgan had not relied on Cooper's statements to his detriment, but had instead gained a benefit insofar as the payment of his 1983 liability had been delayed, and that he also received a favorable installment agreement for his 1981 and 1982 liabilities. ³ Morgan now appeals.



II. DISCUSSION

The IRS argues, as an initial matter, that Morgan failed to raise his estoppel claim before the Office of Appeals, and that he should therefore be precluded from raising it on appeal. The tax court considered this argument, and determined that Morgan had adequately raised the factual circumstances underlying a claim of estoppel. ⁴ Although this is a close question, we assume, as did the tax court, that the facts underlying Morgan's claim of estoppel were sufficiently presented to the Office of Appeals to preserve the issue for our review. See Ohio v. EPA, 838 F.2d 1325, 1329 (D.C. Cir. 1988) (finding exhaustion doctrine satisfied where agency had the "opportunity to consider the very argument pressed" on judicial review) (internal quotations and citations omitted). We therefore turn to consider the merits of Morgan's claim of equitable estoppel.

Morgan argues that the tax court erred by refusing to apply estoppel against the IRS. Although the Supreme Court has explicitly left undecided the question of whether a private party can ever estop the government, "it is well settled that the Government may not be estopped on the same terms as any other litigant." Heckler v. Cmty. Health Servs. of Crawford County, Inc., 467 U.S. 51, 60 (1984) (footnote omitted). In addition to establishing the traditional elements of estoppel, a party seeking to estop the government must first establish that it engaged in affirmative misconduct. See INS v. Miranda, 459 U.S. 14, 19 (1982) ( per curiam) (when evaluating estoppel claim asserted against government, courts should inquire "whether, as an initial matter, there was a showing of affirmative misconduct"); see also Rutten v. United States , 299 F.3d 993, 995-96 (8th Cir. 2002). This is a heavy burden to carry. See Office of Personnel Mgmt v. Richmond, 496 U.S. 414, 422 (1990) (noting that "we have reversed every finding of estoppel [against the government] that we have reviewed").

Morgan claims that affirmative misconduct on the part of the IRS is demonstrated by the "totality of the circumstances." Morgan notes that Cooper's representations regarding the abatement of the 1983 liability were made both orally and in writing. See Heckler, 467 U.S. at 65 (expressing concern over estoppel claims against government based solely on alleged oral misrepresentations). Morgan also notes that the actions of the IRS violated its own internal policies. Specifically, Internal Revenue Manual §5.14.1.5(1)(b) provides that no levy may be made on taxpayer accounts while installment agreements are in effect.

Morgan directs a majority of his affirmative misconduct argument, however, to the fact that Cooper failed to respond to his attorney's letter of September 11, 1998. He argues that she knew at the time that the 1983 liability would not be abated and that collection attempts were forthcoming. In this regard, Morgan principally relies upon Fredericks v. Comm'r [ 97-2 USTC ¶50,692], 126 F.3d 433 (3d Cir. 1997). Fredericks involved a tax assessment made by the IRS against a taxpayer some time after the three year statute of limitations to file such assessments had expired. The taxpayer agreed to file Form 872-A (Special Consent to Extend Time to Assess Taxes), thereby permitting the IRS to extend the statute of limitations indefinitely unless the taxpayer revoked his consent. The IRS represented to the taxpayer that it never received Form 872-A, and successfully sought on three separate occasions to extend the statute of limitations for an additional year, the last of which expired on June 30, 1984. Sometime prior to this date, however, the IRS located Form 872-A, yet failed to inform the taxpayer of this fact. On July 9, 1992, eleven years after informing the taxpayer that Form 872-A did not exist, and eight years after the final one-year extension of the statute of limitations expired, the IRS mailed a notice of deficiency to the taxpayer. Based upon these facts, the Third Circuit concluded that the taxpayer had "mounted the high hurdle" of establishing equitable estoppel against the government. Id. at 435.

We hold the present case to be distinguishable from Fredericks . Between the date on which Cooper failed to correct Morgan's misunderstanding of the effect of the installment agreement, and the date the IRS notified Morgan of its intent to levy, nearly seventeen months had passed. While not insubstantial, this is a far shout from the eight-year period involved in Fredericks . See id. at 442 ("The IRS' decision to lie doggo, and induce the taxpayer into thinking all was well, coupled with its additional eight-year delay in producing a document it previously represented as non-existent, compels us to conclude that the IRS was guilty of affirmative misconduct....") (emphasis added); see also In re Charter Behavioral Health Sys., LLC, 292 B.R. 36, 44 (Bankr. D. Del. 2003).

However, in Mancini v. Redland Ins. Co., 248 F.3d 729 (8th Cir. 2001), this court encountered a claim made by homeowners for flood insurance benefits pursuant to the National Flood Insurance Act, 42 U.S.C. §4001 et seq. The proof of loss form submitted by the homeowners did not contain their signatures, as was required under the terms of the policy. After their claim was denied, the homeowners' attorney wrote to the insurance company, specifically asking whether they intended to take the position that the homeowners had failed to submit a proper proof of loss. Although the insurance company responded to this letter, it did not address the proof of loss issue. Id. at 733. Thereafter, the homeowners filed suit for benefits under the policy, arguing that the insurance company, by virtue of its failure to respond to their attorney's letter, should be estopped from arguing that the proof of loss was defective. This court disagreed, ruling that the government could not be estopped on the facts of the case. Id. at 735. We see no reason why a different result should obtain under the facts of the present case. In fact, both at trial and on appeal Morgan conceded that Cooper's conduct was not intended to purposely mislead him. The "negligence and possible bad faith" of the IRS in this case is insufficient grounds for estoppel. Wang v. Att'y Gen., 823 F.2d 1273, 1277 (8th Cir. 1987).



III. CONCLUSION

To be sure, the conduct of the IRS in this case falls short of that which should be expected of an agency of the government, especially one touching on the financial affairs of its citizens. But as the Supreme Court has instructed, "not even the temptations of a hard case," Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 386 (1947), can justify the application of estoppel against the government.

For the foregoing reasons, the judgment of the tax court is AFFIRMED.

¹ In the tax court, Cooper testified that she called Morgan's attorney on September 16, 1998, but that she did not recall mentioning anything about the effect of the installment agreement.

² During the course of the bankruptcy proceeding, Morgan acknowledged that a federal tax lien encumbered all of his property, including any exempt property, to the extent it existed.

³ The installment required Morgan to make monthly payments in the amount of $1,000, an amount which, given the magnitude of Morgan's total tax liability, failed even to cover the interest accruing on the debt.

⁴ In particular, the tax court concluded:

Well, I think I agree with [Morgan] that if the matter of the effect of the installment agreement on collections for 1983 was discussed [during the Collection Due Process hearing], the failure to put a legal label on it is not fatal so that we're going to have to consider that estoppel issue.

 

 

 

 

 

United States of America , Plaintiff v. S. Byrne Doyle, et al., Defendants.

U.S. District Court, West. Dist. Pa. ; 99-321, 276 FSupp2d 415, August 4, 2003.

[ Code Secs. 6321, 6871 and 7206]

Action to enforce lien: Bankruptcy: Discharge of debt: Crimes: Fraud: Estoppel: Willfulness defined. --

The government established that married taxpayers willfully attempted to evade or defeat federal tax assessments, including income tax, interest and penalties. The taxpayers were collaterally estopped from litigating whether they willfully sought to evade their tax liability due to prior litigation in which the Tax Court held that the taxpayers' involvement in a horse breeding venture lacked economic substance. Moreover, the taxpayers' actions in conveying their property to their children for a nominal amount, and discontinuing the use of their bank account in response to a possible IRS levy, further established their intent to willfully evade the payment of their taxes. Finally, the court rejected the taxpayers' argument that they could not voluntarily and intentionally violate their duty to pay tax because they were unable to satisfy their delinquent taxes. As such, the taxpayers' tax liability was not dischargeable in bankruptcy pursuant to Bankruptcy Code section 523(a)(1)(C


[ Code Secs. 6321 and 7403]

Action to enforce lien: Lien for taxes: Property subject to lien: Real property: Fraudulent conveyance. --

Married taxpayers' conveyance of real property to their children, and a subsequent conveyance to a third party, were deemed fraudulent conveyances under state ( Pennsylvania ) law and, as a result, were set aside. The Tax Court's judgment imposing a tax lien preceded the taxpayers' initial conveyance of the home to their children for one dollar and "natural love and affection." The son was aware at the time of the conveyance that his parents, the taxpayers, were having difficulties with IRS. As such, the court determined that no genuine issues of material fact remained; therefore, the government was entitled to summary judgment.


[ Code Secs. 6321 and 7403]

Action to enforce lien: Lien for taxes: Foreclosure: Real property. --

The government was entitled to foreclose upon real property owned by married taxpayers resulting from their unpaid income taxes, interest and penalties. The government's secured claim was not limited to the extent of the taxpayers' equity in the property at the time the lien attached. As a result, the tax liens attached to the appreciated value of the residence.

OPINION

COHILL, JR., Senior District Judge: Currently pending before this Court is the Motion for Summary Judgment filed by the United States of America ("United States" or "Government") as against Defendants S. Byrne Doyle ("Mr. Doyle"), Barbara S. Doyle ("Mrs. Doyle"), Maureen Doyle, Brian Doyle, Kathleen Dorsch, Richard Dorsch and Bank of America. Hereinafter S. Byrne Doyle and Barbara S. Doyle will be referred to as the "Taxpayers." Only the Defendant Taxpayers opposed the United States 's Motion for Summary Judgment. ¹ In Counts I and II of the Second Amended Complaint, the United States alleges that the Taxpayers are each indebted to the United States in an amount in excess of $383,894.08 as a result of income tax, interest and penalty assessments imposed upon them. ² In Count III of the Second Amended Complaint, the United States alleges certain real property located at 1401 Sixth Street, Castle Shannon, Pennsylvania ("the Castle Shannon Property") was fraudulently conveyed by the Taxpayers to two of their children, and asks the Court to: (1) find that the conveyances were fraudulent and must be set aside; (2) find that federal tax liens are attached to the Castle Shannon Property; (3) order said tax liens be foreclosed on the Castle Shannon Property; (4) order the Castle Shannon Property sold; and (5) pay out the proceeds from the sale in a set order. In Count IV of the Second Amended Complaint, the United States alleges that federal tax liens are attached to certain real property owned by the Taxpayers and located at 501 Glen Shannon Avenue, Pittsburgh, Pennsylvania ("the Glen Shannon Property") and asks the Court to: (1) declare said tax liens to be valid and subsisting; (2) order said tax liens be foreclosed on the Glen Shannon Property; (3) order the Glen Shannon Property sold; and (4) pay out the proceeds from the sale in a set order.

For the reasons set forth below, the United States ' Motion for Summary Judgment is granted as to all counts in the Second Amended Complaint as against all of the Defendants.



I. Standard of Review.

Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, fail to demonstrate a genuine issue of material fact and that the moving party is thus entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). In other words, summary judgment may be granted only if there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986).

The moving party may meet its burden on summary judgment by showing that the nonmoving party's evidence is insufficient to carry the burden of persuasion at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The nonmoving party must then go beyond the pleadings and, by affidavits, depositions, answers to interrogatories, and admissions on file, designate facts showing that a genuine issue of material fact remains for trial. Id. at 324. In deciding a motion for summary judgment, the facts must be viewed in a light most favorable to the nonmoving party and all inferences must be drawn in that party's favor." Gray v. York Newspapers, Inc., 957 F.2d 1070,1078 (3d Cir. 1992).



II. Factual Background.

Viewing the facts in a light most favorable to the Taxpayers and other defendants as the non-moving parties, following are the facts of record that are relevant to the pending motion for summary judgment. The Taxpayers reside at 501 Glen Shannon Drive , Pittsburgh , Pennsylvania ("the Glen Shannon Property") and have done so for the past 30+ years. For the tax years 1980, 1981 and 1982, the Taxpayers filed a joint income tax return. On December 23, 1986, the Internal Revenue Service ("the IRS") issued a notice of deficiency to the Taxpayers as to tax years 1980, 1981 and 1982. This notice advised the Taxpayers that they owed additional tax and penalties for the three (3) years in question. The reasons for the additional tax and penalties levied on the Taxpayers was that the IRS had disallowed certain deductions that the Taxpayers had taken on their tax returns for tax years 1980, 1981 and 1982 with respect to a horse racing and breeding venture ("the Horse Venture"). On March 27, 1987, the Taxpayers, along with others involved in the Horse Venture, filed a petition with the United States Tax Court wherein they challenged the IRS' determination that they owed additional taxes and penalties for tax years 1980, 1981 and 1982; this case was captioned Brown v. C.I.R. [ CCH Dec. 48,328(M)], 1992 WL 155446 (U.S. Tax Ct. July 7, 1992), aff'd sub nom., Konenkamp v. C.I.R., 14 F.3d 47 (3d Cir. 1993) ("the Brown case").

Mrs. Doyle perceived the Horse Venture to be a lawful horse racing or breeding business or investment. Mrs. Doyle believed that the Horse Venture was lawfully designed to minimize their taxes. Daniel J. Farley, the Taxpayers' tax consultant, was the source of her belief.

On September 17, 1991, while the Tax Court case was pending, the Taxpayers purchased, at a cost of $34,000, certain real property located at 1401 6th Street , Castle Shannon, Pennsylvania ("the Castle Shannon Property"). The Castle Shannon Property was financed by a $41,000 loan which was obtained by the Taxpayers. The $41,000.00 loan was secured by a mortgage placed upon the Glen Shannon Property. Thereafter, the Taxpayers' oldest daughter, Kathleen Dorsch ("Ms. Dorsch"), and her daughter, resided at the Castle Shannon property and paid rent thereon to the Taxpayers.

On July 7, 1992, the United States Tax Court issued a 117 page Opinion in the Brown case. The Tax Court found in favor of the United States , including sustaining the penalties imposed upon the Taxpayers. In the Opinion, the Court stated that the issues for decision were: "(1) [w]hether petitioners are entitled to deductions and losses arising out of their investments in various standardbred horse programs; and (2) whether petitioners are liable for additions to tax noted above and the increased interest rate under section 6621(c) for underpayments of tax attributable to tax-motivated transactions." Brown, numbered pages 740 and 741 in Flesch's Declaration. The Brown court also stated that "[t]he principal issue for decision is whether the various transactions are so lacking in economic substance as to be considered economic shams." Id. at numbered page 847 in Flesch Declaration (footnote omitted). In answering these questions, the court examined the evidence in great detail and concluded, inter alia, that: (1) the Court does not believe petitioners reasonably had the objective to realize economic gain from their standardbred activities;" (2) "petitioners engaged in the transactions to obtain tax deductions and thereby reduce the taxes they would otherwise have been required to pay on their substantial income from other sources;" (3) "[i]t is apparent that the programs were ... entered into by petitioners for the tax benefits involved;" (4) "the transactions at issue were obvious tax shelter sham transactions, lacking in economic substance and the only purpose for the transactions was to reduce the petitioners' [including the Taxpayers] income tax liabilities;" and (5) "[a]fter entering into the programs, petitioners' conduct does not support their contention that they engaged in the activities with a profit objective." Id. at numbered pages 837, 840, 842, 843 and 853 in Flesch's Declaration.

On December 14, 1992, the Tax Court's Decision in the Taxpayers' case was issued. The Taxpayers were aware of the Tax Court decision after it was issued. In the Decision, the Tax Court concluded that the Taxpayers' income tax liabilities for 1980, 1981 and 1982 totaled $67,641.00 and that the Taxpayers also had to pay penalties that totaled $8,776.65. The Decision did not impose any civil penalties on the Taxpayers for fraud. It was the Taxpayers' understanding that once the Tax Court's Decision was issued, the IRS would make assessments based upon that Decision and the IRS would then take administrative collection action against the Taxpayers. It was also the Taxpayers' understanding, based upon what they were told by their attorney, that they did not have a legal obligation to pay the subsequently assessed 1980, 1981 and 1982 tax debts while the Tax Court case was pending.

In February 1993, the Taxpayers applied to refinance the mortgage on the Glen Shannon Property. Under the "Declarations" section of the Uniform Residential Loan Application, which was filled out by a representative of the mortgage company and signed by the Taxpayers as part of refinancing their mortgage, the Taxpayers responded "no" to the following statements: (1) "[a]re there any outstanding judgments against you?;" (2) "[a]re you a party to a lawsuit;" and (3) "[a]re you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee?". On the Mortgage Application completed by the Taxpayers, the Taxpayers totaled their assets at $248,986.00 and totaled their liabilities at $60,351.00. The mortgage company never asked the Taxpayers about existing Tax Court cases or pending tax assessments. The Taxpayers' personal property is listed in the Mortgage Application as valued at $100,000.00. The Taxpayers "disavow" this amount because "[w]e did not notice it when we signed that Application, which was prepared by a representative of the mortgage company." Barbara Doyle Declaration, ¶44.

In March, 1993, the Taxpayers sold the Castle Shannon Property to two of their children, Maureen and Brian Doyle, for $1 and "natural love and affection." At the time of the sale, Maureen Doyle resided with her parents at the Glen Shannon Property and was a dependent of her parents and Brian Doyle considered the Glen Shannon Property as his principal residence (during this general time period, Brian either was residing with his parents or was at away at school or was staying with friends). At the time of the transfer, Brian knew that his parents were having problems with the IRS and it was his understanding that the transfer was to protect the Castle Shannon Property from the IRS for his sister Kathleen who was residing at the Castle Shannon Property with her daughter. The reason stated by the Taxpayers for why they transferred the property was because "we started realizing our own mortality and believed that both of our [children] would outlive us." Byrne Doyle deposition, p. 76. Neither Brian nor Maureen Doyle ever received any rent money directly from Ms. Dorsch with respect to the Castle Shannon Property. Rather, after the transfer to Maureen and Brian Doyle, Mrs. Doyle collected the rent on the Castle Shannon Property from Ms. Dorsch and used the rent money to pay the property taxes on the Castle Shannon Property for Maureen and Brian Doyle.

The 1980, 1981 and 1982 tax debts were assessed on April 20, 1993. The Taxpayers were shocked at the dollar amount of the assessments. The total amount of the assessments, including penalties and interest, was $289,692.88. The federal tax liens for the income tax liabilities for 1980, 1981 and 1982 arose on April 20, 1993, the date of the assessments.

On August 3, 1993, the United States filed a notice of federal tax lien against the Taxpayers with the Allegheny County, Pennsylvania Prothonotary.

The Taxpayers appealed the decision of the Tax Court to the United States Court of Appeals for the Third Circuit. It was their belief that perhaps the amount due in the April 20, 1993 assessments would be reduced to an amount that they could afford to pay or make arrangements to pay. This appeal was unsuccessful, with the Third Circuit court rendering its decision affirming the Tax Court's decision in November 1993.

In January, 1994, the IRS levied Mr. Doyle's wages. The Taxpayers paid $4200 per month via the wage levy for one year. Mr. Doyle's wages were the Taxpayers' sole income source. The IRS also levied on the Taxpayers' checking accounts and seized the funds therein. After the checking accounts were levied upon, the Taxpayers stopped using the accounts and instead used cash and money orders to pay their bills.

As part of settlement negotiations with the IRS, in July 1994, the Taxpayers offered the Castle Shannon Property. Also as of July 1994, the IRS knew about the transfer of the Castle Shannon Property to Maureen and Brian Doyle.

In November, 1994, the Taxpayers offered to pay to the IRS $75,0000 in order to compromise their liabilities. At that time, the Taxpayers told the IRS that after the wage levy, they had spent the bulk of the $31,500 in mortgage proceeds from the refinancing of the Glen Shannon Property to pay their living expenses.

The Taxpayers filed for Chapter 7 bankruptcy on January 4, 1995. The Bankruptcy Petition listed the assessments for the 1980, 1981 and 1982 taxes as debts. The transfer of the Castle Shannon Property was also listed on the Taxpayers' Bankruptcy Petition, a copy of which was served on the IRS. The Taxpayers received a Bankruptcy Discharge on April 11, 1995. After they received the Bankruptcy Discharge, the Taxpayers "believed that the 1980, 1981 and 1982 taxes were discharged, because they were more than 3 years old, and our bankruptcy was filed more than 240 days after their assessment." Barbara Doyle Declaration, ¶49. Further, "as a practical matter, [the Taxpayers] did not fear any IRS levy or other action on the amount of the 1980, 1981 and 1982 tax liabilities that are at issue in this case at any time after December 1993. That was because 240 days had expired after their assessment and we could obtain a discharge by filing for bankruptcy." Id.

The Taxpayers believed well before 1993, because of news reports and other generally available information sources they had access to at the time, that the Tax Code had been changed to make their personal residence generally exempt from IRS levy.

From April 20, 1993 to December, 1993, the Taxpayers believed that it would be futile to make a payment on an old tax bill that they knew they could never pay in full, especially when it was their understanding that the bankruptcy law allowed them to receive a discharge in bankruptcy 240 days after the April 20, 1993 assessments.

The Taxpayers also believed that they could have stopped the wage levy via bankruptcy. After the wage levy was in effect for one year, the Taxpayers filed for bankruptcy because they were running out of the mortgage proceeds with which to live on.

Brain Doyle transferred his interest in the Castle Shannon Property to his sister Maureen on April 27, 1997 after being told that there was a transferee tax lien filed against him because of his ownership of the Castle Shannon Property and that if he wanted to qualify for a mortgage he was seeking to obtain, he had to transfer ownership of the Castle Shannon Property. On April 30, 1997, Maureen transferred ownership of the Castle Shannon Property to the Taxpayers; she did not receive any money from the Taxpayers for the conveyance. Shortly thereafter, the Taxpayers conveyed the Castle Shannon Property to the defendant Dorsches for $1.00. The Dorsches are the current owners of the Castle Shannon Property.

The Taxpayers did not know that the IRS was asserting an exception to discharge of the 1980, 1981 and 1982 tax debts until December 1999.

As of June 30, 2000, each taxpayer, S. Bryne [ sic] Doyle and Barbara Doyle, owed $501,570.85 to the United States , for income taxes and interest for calendar years 1980, 1981 and 1982.



III. Legal Analysis.

A. Counts I and II of the Second Amended Complaint.

As we explained above, in Counts I and II of the Second Amended Complaint, the United States alleges that the Taxpayers are each indebted to the United States in an amount in excess of $383,894.08 as a result of income tax, interest and penalty assessments imposed upon them. The legal theory upon which the allegation is based is that although the Taxpayers received a Chapter 7 discharge from the U.S. Bankruptcy Court, the bankruptcy discharge did not personally discharge the taxpayers from their liabilities for income tax and interest thereon for the years 1980 through and including 1982 because the Taxpayers willfully attempted to evade or defeat paying these taxes and under 11 U.S.C. §523(a)(1)(C), such conduct excepts discharge from tax liabilities.

The United States Court of Appeals for the Third Circuit explained in Fegeley v. United States [ 97-2 USTC ¶50,544], 118 F.3d 979 (3d Cir. 1997), that:

[w]hen a debtor files under Chapter 7 of the Bankruptcy Code, the debtor is generally granted a discharge from all debts arising prior to the filing of the bankruptcy petition. The remedial purpose is "to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy `a new opportunity in life [and] a clear field for future effort, unhampered by the pressure and discouragement of pre [-] existing debt."' However, this "fresh start" policy provided by the Bankruptcy Code applies only to the "honest but unfortunate debtor."

 

The [Bankruptcy] Code excepts certain liabilities from discharge. Section 523(a)(1)(C) provides:

 

(a) A discharge under 727 ... of this title does not discharge an individual debtor from any debt --

 

(1) for a tax or customs duty --

 

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

 

11 U.S.C. §523(a)(1)(C) (1994) (emphasis added). These exceptions to discharge are to be strictly construed in favor of the debtor. Moreover, "the burden of proving that the debtor's tax liabilities are nondischargeable under §523(a)(1)(C) is on the United States . The Government must prove by a preponderance of the evidence that the defendant made fraudulent returns or willfully attempted to evade his taxes.

Fegeley [ 97-2 USTC ¶50,544], 118 F.3d at 982-983.

In Fegeley, as in the case sub judice, "[t]he Government does not allege that [the defendant] filed fraudulent returns. The sole issue before us is whether [the defendant] "willfully attempted ... to evade or defeat" his income taxes for the tax years [in question] within the meaning of the second part of 523(a)(1)(C)." Id. at 983. In deciding this issue, the Fegeley court conducted the following legal analysis:

[o] ur analysis begins with an interpretation of the second prong of §523(a)(1)(C). We must interpret provisions of "the Bankruptcy Code according to the plain meaning of [the] individual provision as long as the provision's language is unambiguous." "Where statutory language is not expressly defined, that language should be given its common meaning." "The plain language of the second part of 523(a)(1)(C) comprises both a conduct requirement that the debtor sought `in any manner to evade or defeat' his tax liability) and a mental state requirement (that the debtor did so `willfully')."

 

Looking first to the conduct requirement, it is evident that "`Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation."' We must give weight to the fact that the Congress included the phrase "in any manner" in the statute. Nonetheless, we should abide by the limitation set out by the Court of Appeals for the Eleventh Circuit in In re Haas [ 95-1 USTC ¶50,200], 48 F.3d 1153, 1158 (11th Cir. 1995): "[A] debtor's failure to pay his taxes, alone, does not fall within the scope of section 523(a)(1)(C)'s exception to discharge in bankruptcy." Instead, we should look to nonpayment of taxes as "relevant evidence which [we] should consider in the totality of conduct to determine whether or not the debtor willfully attempted to evade or defeat taxes."

 

Although many of the published decisions excepting taxes from discharge under §523(a)(1)(C) involve debtors who actually did engage in some type of affirmative conduct calculated to evade or defeat payment of their taxes, we observe that the majority of courts have found that affirmative conduct by a debtor designed to evade or defeat a tax is not required. Rather, §523(a)(1)(C) encompasses acts of culpable omission as well as acts of commission....

 

We now turn to the required mental state....

 

The majority of courts to address this [mental state] issue have not required [a showing of fraud]. In doing so, they "have interpreted `willfully' for purposes of §523(a)(1)(C), to require that the debtor's attempts to avoid his tax liability were `voluntary, conscious, and intentional."' Thus, to prevail, the Government need only establish that:

 

(1) [the] debtor had a duty to file income tax returns;

 

(2) [the] debtor knew he had such a duty; and

 

(3) [the] debtor voluntarily and intentionally violated that duty.

Id. at 982-984 (internal citations omitted). Moreover, the In re Fegeley court concluded that in determining whether or not the debtor willfully attempted to evade or defeat taxes, "we should consider ... the totality of conduct." Id. at 983. Thus, to summarize, "[t]he willfulness exception of §523(a)(1)(C) consists of a conduct element, an attempt to evade, and a mens rea requirement, i.e., doing so willfully." United States v. Weiss, 2000 WL 1708802, *3 (E.D. Pa. Nov. 15, 2000), aff'd, 276 F.3d 582 (3d Cir. 2001), opinion amended and superceded, 2002 WL 397717 (3d Cir. Feb. 2, 2002), citing, In re Fegeley [ 97-2 USTC ¶50,544], 118 F.3d at 983.

Thus, the issue before this Court is whether the Taxpayers "willfully attempted in any manner to evade or defeat" income taxes for the tax years 1980, 1981 and 1982. As a preliminary matter, the Taxpayers argue that 11 U.S.C. §523(a)(1)(C) is only applicable in cases where the debtors had the financial means to pay off their tax debt and that there is a genuine issue of material fact as to whether they had the financial means to pay the money owed to the United States prior to the Bankruptcy discharge in April 1995. "The duty only arises if the Defendants could pay in full prior to the discharge in April, 1995." Taxpayers' Opposition Brief, p. 16. The first basis for their argument is that in the In re Fegeley decision, the appellate court repeatedly discussed that the debtor had or probably had the money to pay but did not do so, and ultimately stated: "Fegeley had a duty under the tax law, knew he had that duty, and voluntarily and intentionally violated that duty. He also had the financial ability to discharge that duty. " Fegeley [ 97-2 USTC ¶50,544], 118 F.3d at 984. In support of their "must be able to pay" position, the Taxpayers also argue that the Internal Revenue Code does not provide for partial payments of subsequent assessments, but rather, requires full payment. Taxpayers' Opposition Brief, p.15, citing, 26 U.S.C. §6155. "Since the duty with respect to subsequent assessments under Code Section 6155 is to pay in full, a debtor who cannot afford to pay such an assessment in full upon notice and demand cannot `voluntarily and intentionally' violate a duty to pay." Id.

After careful consideration of this argument by the Taxpayers, the Court finds that we disagree with the Taxpayers' "cannot pay" argument. To the contrary, even where a taxpayer does not have the financial means to pay all of the taxes owed, the taxpayer still can "willfully attempt[] in any manner to evade or defeat such tax." In so holding, the Court has examined the Third Circuit court's decision in In re Fegeley and finds that the In re Fegeley decision neither requires nor supports the position contended by the Taxpayers. In In re Fegeley, the financial ability of the debtor to have paid the taxes due was but one factor the court found, while conducting its totality of the evidence analysis of the facts, that supported the court's conclusion that the debtor had sought "in any manner to evade or defeat" his tax liability. Id. at 983. See also Krik v. U.S., 1999 WL 1001586, *3 (Bankr. E.D. Pa. September 29, 1999) (in conducting totality of the evidence analysis, court took into account that the debtor did not have the ability to pay the tax in concluding that the element of willfulness necessary to find nondischargeability under §523(a)(1)(C) had not been met). But see In re Frosch [ 2001-1 USTC ¶50,374], 261 B.R. 181, 188 (Bankr. W.D. Pa. 2001) (discussing generally that "Fegeley indicated that Debtor must have a duty, which he knows, to file a tax return, must voluntarily fail to file and must have the financial ability to pay the tax").

1. Collateral estoppel argument.

Returning to the question of whether or not the Taxpayers' debts for the tax years 1980, 1981 and 1982 are nondischargeable under §523(a)(1)(C), the United States first argues that the Taxpayers willfully attempted to defeat their tax liabilities at its inception by their involvement in the Horse Venture. Specifically, the United States contends that "the Tax Court found that the taxpayers engaged in a series of transactions (for years 1980-1982) which had no economic substance and were shams" and "[a]ccordingly, under the doctrine of collateral estoppel, the taxpayers may not litigate that they did not willfully seek to evade their tax liabilities." United States ' Supporting Brief, p. 30. In support of its collateral estoppel argument, the United States cites to In re Krumhorn, 249 B.R. 295 (Bankr. N.D. Ill. 2000), aff'd [ 2001-2 USTC ¶50,701], 2001 WL 1155258 (N.D. Ill. 2001) ("Krumhorn I ").

Krumhorn I is a decision which addressed whether a debtor in a bankruptcy case was collaterally estopped from litigating whether he had wilfully attempted to evade the payment of taxes based upon the findings of fact and rulings made by a tax court in an earlier case in which the debtor was a party. Ultimately, the court concluded that "because both parties were fully represented in the tax court cases and the issue of whether the Debtor willfully evaded his tax obligations was actually litigated and essential to the tax court's final judgment that the Debtor's trades lacked economic substance, the Debtor is barred from relitigating the wilful evasion issue here. ³ " Id. at 300. In reaching its decision, the court explained that in the earlier tax court case, the tax court had addressed two issues: "`(1) whether ... [the Debtor and his former wife] properly deducted capital losses from purported commodities transactions on their 1978 joint Federal income tax return, and (2) whether ... [the Debtor and his former wife we]re liable for the addition to tax as determined by' the IRS" and ultimately held, inter alia, "that petitioner's straddle transactions lacked economic substance" Id. at 298, 299 (citations omitted). Id. at 299 (citation omitted). The Krumhorn I court further stated:

[t]he tax court first explained that "[e]conomic shams or transactions lacking economic substance are transactions that have actually taken place, but which have no economic significance beyond expected tax benefits," ... and "`for transactions to be recognized for tax purposes they must have economic substance."' The tax court then examined the Debtor's trading activities and found that is [sic] was ... [the Debtor's] intent from the very beginning to systematically close straddle legs that, in every case, resulted in losses in year one and to move the offsetting gains to subsequent years. Stated differently, the realization of losses in year one was "preordained". This scheme was not necessary or helpful in making a profit. Hence, the tax court specifically found that the Debtor had intentionally developed a trading scheme for the sole purpose of avoiding his tax obligations. As such both the conduct and the mental state requirements [of §523(a)(1)(C)] ... have been met.

Id. at 299.

In response to the United States's collateral estoppel argument, the Taxpayers contend that their pre-assessment conduct does not collaterally estop them from litigating whether they willfully sought to evade their tax liabilities because the issue of fraud was not litigated in the underlying tax court case concerning the horse venture and cite in support of their position the case of In re Graham [ 92-2 USTC ¶50,447], 973 F.2d 1089 (3d Cir. 1992) and In re Kramer [ 97-2 USTC ¶50,654], 215 B.R. 87 (Bankr. S.D. Fl. 1997). Taxpayers' Opposition Brief, pp. 12-14.

Collateral estoppel principles apply in discharge exception proceedings. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11 (1991). In In re Graham, the Third Circuit court explained that:

[i]ssue preclusion applies when

 

(1) the issue sought to be precluded [is] the same as that involved in the prior action; (2) that issue [was] actually litigated; (3) it [was] determined by a final and valid judgment; and (4) the determination [was] essential to the prior judgment.

Id. at 1097.

As we explained above, the underlying Tax Court litigation with which the Taxpayers were involved was the Brown case. In the Brown case, the tax court explained in its Opinion that the issues for decision were: "(1) [w]hether petitioners are entitled to deductions and losses arising out of their investments in various standardbred horse programs; and (2) whether petitioners are liable for additions to tax noted above and the increased interest rate under section 6621(c) for underpayments of tax attributable to tax-motivated transactions." Brown, numbered pages 740 and 741 in Flesch's Declaration. The Brown court further stated that "[t]he principal issue for decision is whether the various transactions are so lacking in economic substance as to be considered economic shams. A transaction which is devoid of economic substance is not recognized for tax purposes." Id. at numbered page 847 in Flesch Declaration, citing Frank Lyon Co. v. United States [ 78-1 USTC ¶9370], 435 U.S. 561, 573 (1978). (footnote omitted).

Ultimately, the court concluded that "the transactions lacked economic substance, and, accordingly, the transactions have no effect for tax purposes." Id. at numbered page 842 in Flesch's Declaration. In so concluding, the Brown court stated, inter alia, that: (1) the Court does not believe petitioners reasonably had the objective to realize economic gain from their standardbred activities;" (2) "petitioners engaged in the transactions to obtain tax deductions and thereby reduce the taxes they would otherwise have been required to pay on their substantial income from other sources;" (3) "[i]t is apparent that the programs were ... entered into by petitioners for the tax benefits involved;" (4) "the transactions at issue were obvious tax shelter sham transactions, lacking in economic substance and the only purpose for the transactions was to reduce the petitioners' income tax liabilities;" and (5) "[a]fter entering into the programs, petitioners' conduct does not support their contention that they engaged in the activities with a profit objective." Id. at numbered pages 837, 840, 842, 843 and 853 in Flesch's Declaration.

Applying the doctrine of collateral estoppel to the facts of the case sub judice, the Court opines that the issue sought to be precluded, i.e. whether the Taxpayers wilfully attempted to evade or defeat their tax obligations by participating in the Horse Venture, was the same as that involved in the Brown action, this issue was actually litigated in the Brown action, the issue was determined by a final and valid judgment and the determination was essential to the prior judgment. In so holding, we emphasize that the In re Fegeley court expressly concluded that a taxpayer can violate the provisions of §523(a)(1)(C) without, as the Taxpayers contend, engaging in fraud; the conduct just must be voluntary, conscious and intentional. See In re Fegeley [ 97-2 USTC ¶50,544], 118 F.3d at 984. Accordingly, the Taxpayers are collaterally estopped from relitigating the issue of whether the Taxpayers wilfully attempted to evade or defeat their tax obligations by participating in the Horse Venture.

2. The Taxpayers' conduct post-bankruptcy discharge.

The United States also argues that even if the Taxpayers are not collaterally estopped from relitigating the issue of whether they willfully attempted to evade their tax obligations based upon their conduct with respect to the Horse Venture, summary judgment still should be granted to it as to Counts I and II of the Second Amended Complaint because the Taxpayers' conduct following the December 1992 Tax Court decision constitutes a willful attempt to evade payment of their income tax liabilities such that their tax debt is nondischargeable under §523(a)(1)(C). United States ' Supporting Brief, pp. 32-34. In particular, the United States argues that the Taxpayers engaged in the following conduct post-December 1992 and that this conduct, either separately or in toto evidences the Taxpayers' willful attempt to evade their tax obligations: (1) in February 1993, they refinanced their home mortgage to reduce the available equity that existed that was subject to collection by the IRS; (2) in March 1993, they fraudulently conveyed the Castle Shannon Property to their children Brian and Maureen Doyle; (3) they did not maintain any bank accounts for 5 years after January 1994 when the IRS levied on their accounts; (4) they paid their bills with money orders and used their daughter to pay bills as well; and (5) they did not make any voluntary payments to the IRS. United States ' Reply Brief, p. 20. "All of these acts show willful conduct to evade payment of their income tax liabilities, and any one of these acts was sufficient to trigger Section 523(a)(1)(C)." Id.

Upon applying the §523(a)(1)(C) analysis set forth above by the In re Fegeley court to the facts of our case, the Court finds that even examining only the Taxpayers' conduct post December 1992, the United States has proven by a preponderance of the evidence that the Taxpayers' tax liabilities are non-dischargeable under §523(a)(1)(c). Specifically, the Court concludes that even viewing the evidence of record in a light most favorable to the Taxpayers as the nonmoving parties, based upon the Taxpayers' actions of: (1) conveying the Castle Shannon Property in March 1993, where their eldest daughter was then residing, to their two other children, Brian and Maureen Doyle, for $1.00 and "natural love and affection" at a time when the Tax Court had already rendered its Decision finding that the Taxpayers owed the United States money for unpaid taxes and penalties and when Brian Doyle was aware that his parents were having problems with the IRS and opined that the conveyance was to protect the property from the IRS for his sister Kathleen; and (2) discontinuing the use the bank accounts for fear that the IRS would levy any additional funds deposited, and instead paying their bills primarily through money orders, the Taxpayers engaged in "willful conduct to evade payment of their income tax liabilities" such that their tax liabilities for 1980 through 1982 are not dischargeable under §523(a)(1)(C). ⁴ "An attempt to conceal, transfer, or otherwise assign assets in an effort to put them beyond the reach of the IRS for tax collection purposes is a `manner' of `attempt[ing] to evade or defeat such tax,' within the plain meaning of section 523(a)(1)(C)." In re Eleazar, 271 B.R. 766, 775 (Bankr. D. N.J. 2001), appeal dismissed, 2002 WL 471848 (D. N.J. Feb. 11, 2002) See also In re Sternberg [ 98-2 USTC ¶50,905], 229 B.R. 238 (Bankr. S.D. Fl. 1999) (court held transfer to family member post decision of tax court but prior to assessment of taxes in order to thwart collection or payment of taxes renders tax debts non-dischargeable under §523(a)(1)(C).

The United States is entitled to summary judgment as to Counts I and II of the Second Amended Complaint. Judgment will be entered in favor of the United States and against S. Bryne [ sic] Doyle and Barbara Doyle in the amount of $501,570.85 which represents the Taxpayers' tax liability for calendar years 1980, 1981 and 1982, plus interest from June 30, 2000, to the date that the judgment is satisfied.

B. Count III of the Second Amended Complaint-fraudulent conveyance claim as to the Castle Shannon Property.

The Court next addresses the fraudulent conveyance claim asserted by the United States in Count III of the Second Amended Complaint. Notably, although the Taxpayers concede that they are willing to part with the Castle Shannon Property if we find, as we do, that the United States has standing to bring its fraudulent conveyance claim, ⁵ the Court opines that given that title to the Castle Shannon Property currently lies with the Defendants Richard and Kathleen Dorsch, it is in the best interest of the parties and justice if we conduct a complete analysis of the Government's fraudulent conveyance claim.

1. Government's standing to assert fraudulent conveyance claim against Taxpayers.

As indicated above, in opposing the United States ' Motion for Summary Judgment on the fraudulent conveyance claim, the Taxpayers only contend that the United States does not have standing to prosecute its liens against the Castle Shannon property and therefore, cannot seek summary judgment on Count III. "Only a Bankruptcy Trustee has standing to recover a transfer of property such as the Castle Shannon property that is described in Count III, unless: (a) the Trustee abandons it; or (b) the Trustee is unable or unwilling to bring the claim, and a court finds that not bringing the claim is an abuse of discretion," neither of which occurred in the Taxpayers' bankruptcy case. Taxpayers' Opposition Brief, p. 28.

The United States responds to the Taxpayers' standing argument by contending that once a bankruptcy proceeding is over and the debtor has received a discharge, the Government has standing to bring a state law claim for fraudulent conveyance. Brief in Support of United States' Motion to Strike Barbara Doyle's Declaration, and in Reply to Taxpayers' Opposition to United States' Motion for Summary Judgment ("United States' Reply Brief"), pp. 20-21; Letter Brief dated June 10, 2003.

In Hatchett v. United States [ 2003-1 USTC ¶50,504], 330 F.3d 875 (6th Cir. 2003), the United States Court of Appeals for the Sixth Circuit recently held that "[t]hough the trustee has the exclusive right to bring an action for fraudulent conveyance during the pendency of the bankruptcy proceedings, the Bankruptcy Code does not extinguish the right of the Government to bring a state law action for fraudulent conveyance after the debtor receives a discharge in bankruptcy.... Accordingly, because the bankruptcy proceedings are over, the Government has standing to assert its fraudulent conveyance theory." Id. at 886. The Court agrees with the Hatchett court's analysis of the standing issue and adopts it as our own. See also Federal Deposit Insurance Corp. v. Davis, 733 F.2d 1083, 1085 (4th Cir. 1984) (where trustee during bankruptcy proceeding had not attempted to attack a fraudulent conveyance, court held that "[o]nce a bankruptcy case has been closed, creditors having unavoided liens on fraudulently conveyed property can pursue their state law remedies independently of the trustee in bankruptcy and thus, creditor with unavoided lien which was attached to certain property was free to attack a fraudulent conveyance of that property). Accordingly, in that the Taxpayers' bankruptcy proceeding is concluded, the United States has standing to assert its state law fraudulent conveyance theory against them.

2. Substantive Analysis of Government's fraudulent conveyance claim.

In Count III of the United States 's Second Amended Complaint, the United States seeks to set aside the Taxpayers' conveyance of the Castle Shannon property to Maureen and Brian Doyle and to order the foreclosure and sale of the Castle Shannon Property to satisfy its tax liens. Specifically, the United States contends that the Taxpayers conveyed the Castle Shannon Property to their children, Maureen and Brian Doyle, with the actual intent to hinder, delay or defraud the United States . "Once the conveyance is set aside, the tax lien attaches." United States' Brief in Support of Its Motion for Summary Judgment ("United States' Supporting Brief"), p. 40 n. 13. In support of its allegations, the United States cites to the admissions of the Taxpayers where in response to the question "[t]he conveyances referred to in paragraphs 28, 31, 32, and 33 of the United States Amended Complaint [these paragraphs refer to the Castle Shannon Property] were made with the actual intent to hinder, delay or defraud the United States of America, a creditor of the taxpayers," the Taxpayers both responded: "[a]lthough these are both conclusions of law, this Defendant does not contest these allegations. The government did not take the action that it was required to take in the bankruptcy and lacks standing now to contest the conveyances. Thus, upon discharge, the bankruptcy trustee and judge in effect determined as a matter of law that we had no fraudulent intent." Answer #5 of Barbara Doyle's Response to United States ' First Request for Admissions to Barbara Doyle; Answer #5 of S. Byrne Doyle's Response to United States ' First Request for Admissions to S. Byrne Doyle.

The applicable law is as follows. "Upon assessment, a federal tax lien attaches to all property and rights to that property belonging to a taxpayer. See 26 U.S.C. §§6321 and 6322. Generally, a tax lien does not attach to property that a taxpayer previously transferred and which ostensibly no longer belongs to the taxpayer. Id. However, if a taxpayer fraudulently disposes of property prior to the existence of tax liens, the Government may seek relief under the applicable fraudulent conveyance laws of the state in which the property is located." United States v. LaBine [ 99-1 USTC ¶50,448], 73 F.Supp.2d 853, 857 (N.D. Ohio 1999) (citations omitted in part).

Here the federal tax liens for the Taxpayers' income tax liabilities for 1980 through 1982 did not arise until April 20, 1993, the date of the assessment, and the Taxpayers had transferred the Castle Shannon Property to Maureen and Brian Doyle on March 3, 1993. Therefore, the United States must rely on the fraudulent conveyance laws of Pennsylvania , the state where the property was located, to set the conveyance aside. Because the transfer of the Castle Shannon Property occurred in March, 1993, the applicable fraudulent conveyance laws are those contained in the Pennsylvania Uniform Fraudulent Conveyance Act ("UFCA"). ⁶

Section 357 of the UFCA provides that: "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors." 39 P.S. §357. A creditor is defined in §351 of the UFCA as being a "person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." Id. at §351. Section 359(1)(a) of the UFCA further provides:

(1) [w]here a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any purchaser except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser:

 

(a) have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim.

Id. at §359(1)(a). Section 353 of the UFCA provides, in relevant part, that "fair consideration" for property is given when "in exchange for such property ..., as a fair equivalent therefor and in good faith, property is conveyed or an antecedent debt is satisfied." 39 P.S. §353(a).

Obviously a critical factor in the analysis of whether the Castle Shannon Property was fraudulently conveyed by the Taxpayers is that the transfer was an intrafamial transfer. The issue of alleged fraudulent conveyances to family members was addressed in United States v. Kudasik [ 98-2 USTC ¶50,535], 21 F.Supp.2d 501 (W.D. Pa. 1998) (Smith, J.). In Kudasik, the United States alleged that a taxpayer had fraudulently conveyed various pieces of property to his sister, including certain parcels of land in Central City, which he conveyed for a $1.00 consideration ("the Central City Properties"). The sister subsequently conveyed these properties to her daughter (the debtor's niece), with no consideration being exchanged. In applying the UFCA to the facts of the case, the Kudasik court explained as follows about interfamial [ sic] transfers when allegations of fraudulent conveyance are raised under the UFCA:

[i]n Iscovitz v. Filderman, 334 Pa. 585, 6 A.2d 270, 272 (1939), ⁷ the Pennsylvania Supreme Court recognized that the determination of whether there was an actual intent to hinder, delay or defraud under the Act must `be proved by facts and circumstances which taken together show the existence of fraud. Although the intent must exist at the time the transfer was made, it may be shown by conduct subsequent to the execution of the conveyance of such a nature as to show fraud in its inception." Id. (citations omitted). The court affirmed the decree that several conveyances from husband to wife, and then from parents to children, were made with the intention of defrauding the creditor plaintiff. The court reasoned

 

"[w]here the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction. Since family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of such cases must be clear and satisfactory."

Id. at 507. Ultimately, the Kudasik court found that because the transfer of the Central City Properties was an intrafamial transfer between brother and sister and there was no evidence of record which would support a finding of "fairness" with respect to the conveyance such that the "clear and satisfactory" burden was not met, the Central City Properties conveyances had to be set aside pursuant to 39 P.S. §359(1)(a). Id. at 508. The Kudasik court further concluded that the subsequent conveyance of the Central City Properties to the daughter did not affect the government's right to have the conveyance set aside because she was not a "purchaser for a fair consideration...." Id. (citations omitted).

Applying the above-stated law to the facts of this matter and using the Kudasik decision as a guide, the Court finds as follows. First, by virtue of the Tax Court's Decision in December 1992, the United States had a claim against the Taxpayers for unpaid taxes at the time of the conveyance of the Castle Shannon Property in March 1993 and therefore, the United States qualifies under the terms of the UFCA as a "creditor" of the Taxpayers. Second, we find that even viewing the Taxpayers' above-quoted admissions in a light most favorable to them as the non-moving party, there is no other way to interpret the Taxpayers' responses other than as admissions, as opposed to a concession, by the Taxpayers that the transfer of the Castle Shannon property was made with the actual intent to hinder, delay or defraud the United States of America, a creditor of the taxpayers. Third, even without considering these admissions, the Court finds that given the undisputed evidence of record that: (1) the March 1993 conveyance of the Castle Shannon Property, where their eldest daughter was then residing, was to their two other children for $1.00 and "natural love and affection;" (2) the conveyance was at a time when the Tax Court had already rendered its Decision finding that the Taxpayers owed the United States money for unpaid taxes and penalties; and (3) at the time of the conveyance, Brian Doyle was aware that his parents were having problems with the IRS and opined that the conveyance was to protect the property from the IRS for his sister Kathleen, there is no genuine issue of material fact with respect to whether the conveyance to Brian and Maureen Doyle was fair; i.e., the presumption that the intrafamial transfer by the Taxpayers for nominal consideration was made with the intent to defraud the United States is not rebutted. ⁸ Fourth and finally, under these same undisputed facts of record, the Court finds that there is no evidence in the record to raise a genuine issue of material fact as to whether Brian and Maureen Doyle and the subsequent transferees of the Castle Shannon Property were purchasers "for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser." See 39 P.S. §359(1). Thus, the Court finds that Taxpayers transferred the Castle Shannon Property to Maureen and Brian Doyle with the actual intent to hinder, delay or defraud the United States of America, a creditor of the taxpayers, thereby violating 39 P.S. §357, and Maureen and Brian Doyle and all of the other subsequent transferees were not purchasers "for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser." Accordingly, pursuant to §359(1)(a) of the UFCA, the conveyance of the Castle Shannon Property by the Taxpayers to Maureen and Brian Doyle and all the subsequent transfers of the Castle Shannon Property are set aside and the federal tax lien attaches to the Castle Shannon Property.

With respect to the Government's request that the Court order the sale of the Castle Shannon Property to satisfy the tax liens, 26 U.S.C. §7403 is entitled "[a]ction to enforce lien or to subject property to payment of tax," and states, in pertinent part, that:

[t]he court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court with respect to the interests of the parties and of the United States. If the property is sold to satisfy a first lien held by the United States, the United States shall bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs.

Id. at §7403(c). Having found that the tax lien is attached to the Castle Shannon Property and therefore, the United States has an interest in the Property, pursuant to §7403(c), the Court orders that the Castle Shannon Property be sold to satisfy the tax lien. ⁹ The Court will hold a hearing on September 10, 2003 at 9:30 a.m. to determine who is to conduct the sale and how the proceeds of the sale are to be distributed. ¹⁰

The Government's motion for summary judgment on Count III of the Second Amended Complaint is granted.



C. Count IV of Second Amended Complaint.

In Count IV of the Second Amended Complaint, the Government asks to foreclose its federal tax lien against the Glen Shannon Property and to have the Glen Shannon Property sold and the proceeds used to satisfy the tax lien. In response, the Taxpayers agree that the Glen Shannon Property is bound by the filing of the Notice of Federal Tax Lien in 1993 and concede that the Plaintiff has a secured claim in the Glen Shannon Property and that the secured claim survived the bankruptcy, but argue that "[t]he secured claim is limited to the value of the residence that was not encumbered by the mortgage on the date of our Bankruptcy." Taxpayers' Opposition Brief, p. 11, See also Id. at p. 24 (stating that the lien can be foreclosed, to the extent of the Taxpayers' equity in the residence when the lien attached in 1993).

Contrary to the Taxpayers' position, the Court concludes that the Government's secured claim on the Glen Shannon Property is not limited to the extent of the Taxpayers' equity in the residence when the lien attached. Rather, the tax lien attaches to any appreciated value of the Glen Shannon Property, said value to be determined when the property is sold. To hold otherwise would allow a debtor as opposed to a creditor to get the benefit of any appreciation in value and such a result would be unjust. See United States v. Avila [ 96-2 USTC ¶50,357], 88 F.3d 229, 234 (3d Cir. 1996) (where debtor had sold property subject to a tax lien and property subsequently increased in value, court reversed district court's finding that government's tax lien in realty was limited to debtor's equity when he conveyed the property and instead held that tax lien attached to the appreciated value of debtor's former interest in property).

Because the United States has requested that the Court order the sale of the Glen Shannon Property, the Court turns again 26 U.S.C. §7403. Pursuant to §7403(c), the Court orders that the Glen Shannon property be sold. ¹¹ The Court will hold a hearing on September 10, 2003 at 9:30 a.m. to determine who is to conduct the sale and how the proceeds of the sale are to be distributed. ¹²

The Government's motion for summary judgment on Count IV of the Second Amended Complaint is granted.



IV. Conclusion.

For the reasons set forth above, the United States' Motion for Summary Judgment is granted as to all counts in the Second Amended Complaint as against all of the Defendants. An appropriate order will follow.

ORDER

AND NOW, this 4th day of August, 2003, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the Motion for Summary Judgment filed by Plaintiff United States of America (Doc. #33) is GRANTED ON ALL COUNTS CONTAINED IN THE SECOND AMENDED COMPLAINT as to all of the Defendants (S. Bryne [ sic] Doyle, Barbara S. Doyle, Maureen Doyle, Brian Doyle, Kathleen Dorsch, Richard Dorsch and Bank of America).

IT IS FURTHER ORDERED, ADJUDGED, and DECREED that judgment is entered in favor of the United States and against Defendant S. Bryne [ sic] Doyle in the amount of $501,570.85 (the tax liabilities for tax years 1980, 1981 and 1982), plus interest from June 30, 2000 to the date that the judgment is satisfied.

IT IS FURTHER ORDERED, ADJUDGED, and DECREED that judgment is entered in favor of the United States and against Defendant Barbara Doyle in the amount of $501,570.85 (the tax liabilities for tax years 1980, 1981 and 1982), plus interest from June 30, 2000 to the date that the judgment is satisfied.

IT IS FURTHER ORDERED, ADJUDGED, and DECREED that the conveyance of the Castle Shannon Property from S. Bryne [ sic] and Barbara Doyle to Maureen Doyle and Brian Doyle and all subsequent conveyances thereof are set aside as fraudulent under 39 P.S. §357 and 359(1)(a) and declared null and void.

IT IS FURTHER ORDERED, ADJUDGED, and DECREED that the federal tax liens, arising from the assessments issued by the Internal Revenue Service to S. Bryne [ sic] Doyle and Barbara Doyle on April 20, 1993, attached to the Castle Shannon Property on April 20, 1994.

IT IS FURTHER ORDERED, ADJUDGED, and DECREED that a hearing shall be held in Courtroom 3 of the United States Post Office and Courthouse, 700 Grant Street, 8th Floor, Pittsburgh, Pennsylvania, 15219 on September 10, 2003 at 9:30 a.m. to determine: (1) what official is to conduct the sales of the Glen Shannon and Castle Shannon Properties and (2) how the proceeds of the sales are to be distributed unless the parties stipulate to the official to conduct the sale and the manner in which the proceeds are to be distributed.

¹ While neither Maureen Doyle, Brian Doyle, Kathleen Dorsch, Richard Dorsch nor Bank of America filed any opposition to the Plaintiff's Motion for Summary Judgment, in reviewing the merits of the pending motion for summary judgment and rendering our decision, the Court has taken into account the rights and interests of these parties.

² In it Brief in Support of Its Motion for Summary Judgment ( "United States' Supporting Brief"), the United States states that the amount of income tax and interest owed for tax years 1980, 1981 and 1982 is now $501,570.85 per individual and attaches in support thereof the Declaration of IRS Revenue Officer Patricia Skorupan, ¶ ¶11-12. United States' Supporting Brief, p. 16. The Taxpayers have not disputed the correctness of said figure.

³ Notably, the debtor appealed the bankruptcy court's decision. In In re Krumhorn [ 2001-2 USTC ¶50,701], 2001 WL 1155258 (N.D. Ill. September 28, 2001) ( "Krumhorn II"), the district court reviewed the bankruptcy court's finding of collateral estoppel under a de novo standard of review and affirmed the bankruptcy court's conclusion that collateral estoppel barred the debtor from re-litigating the issue of whether he wilfully evaded his tax obligation.

⁴ In so finding, the Court expressly disagrees with the position of the Taxpayers that unless the effect of the transfer of the Castle Shannon Property to the children was to mislead the IRS or the transfer was concealed from the IRS, the transfer cannot constitute conduct that triggers the application of §523(a)(1)(C). See Taxpayers' Opposition Brief, pp. 20-23. Additionally, for purposes of creating a complete Record, with respect to the Taxpayers' conduct in refinancing their mortgage on the Glen Shannon Property, upon reading Mrs. Doyle's Declaration and viewing the statements made therein concerning this refinancing in a light most favorable to the Taxpayers as the nonmoving parties, the Court concludes that at the time the Taxpayers refinanced the mortgage on their residence, they were of the mind set that the Glen Shannon property was generally exempt from levy by the United States and therefore, they legally could refinance the mortgage. Given such an opinion, there exists a genuine issue of material fact as to whether the Taxpayers were attempting to avoid their tax liability when they refinanced their property on Glen Shannon property. Further, the Court finds that to the extent the Taxpayers, in making their financial decisions, took into account that 240 days post-tax assessment they could file for bankruptcy and have their tax debt for the years in issue discharged, this mind set is not evidence of attempted tax evasion. See In re Schlesinger [ 2003-1 USTC ¶50,152], 290 B.R. 529, 539 (Bankr. E.D. Pa. 2002) (where debtor filed for bankruptcy soon after 240 days passed after being assessed taxes due, court disagreed with government's position that the timing of the petition supporting finding the debtor's tax debts were non-dischargeable under §523(a)(1)(C), explaining that there is a difference between tax avoidance and tax evasion and that "to the extent that a debtor employs legally permissible methods to avoid payment of taxes, such conduct does not constitute improper tax evasion."). Finally, in rendering our decision with respect to Counts I and II, the Court has not considered either Answer #5 of Barbara Doyle's Response to United States' First Request for Admissions to Barbara Doyle or Answer #5 of S. Byrne Doyle's Response to United States' First Request for Admissions to S. Byrne Doyle.

⁵ See Memorandum in Opposition to Plaintiff's Motion to Strike Barbara Doyle's Declaration, p. 3 ( "[we] do not concede what [our] intent in making the conveyance actually was, [we] just say that [we] are willing to part with the Castle Shannon property if the Plaintiff has standing to bring this action.")

⁶ While the UFCA was repealed in 1993, it is applicable to conveyances, such as the Castle Shannon Property transfer, which occurred before February 1, 1994, the effective date of the new Uniform Fraudulent Transfer Act, 12 Pa.C.S.A. §5101 et seq.

⁷ In Iscovitz, the defendant had conveyed realty to a straw man who then conveyed the realty to the defendant and his wife as tenants by the entireties. Id. at 586. A year later, the couple had transferred the realty to their children. Id. at 587.

⁸ In so holding, the Court acknowledges Byrne Doyle's explanation at his deposition that the Taxpayers transferred the Castle Shannon Property to their children because of their awareness of their mortality and that the two children would outlive them, but we find this explanation "inherently incredible" and "too incredible to be believed by reasonable minds." Armbruster v. Unisys Corporation, 32 F.3d 768, 784 n. 21 (3d Cir. 1994); Losch v. Borough of Parkesburg, Pennsylvania, 736 F.2d 903, 909 (3d Cir. 1984). Therefore, the Court concludes that this explanation does not create a genuine issue of material fact sufficient to defeat the Government's motion for summary judgment.

⁹ In so ordering, the Court understands that when deciding whether a forced sale of property under §7403(c) is warranted, the Court has some discretion under equity principles, see U.S. v. Rodgers [ 83-1 USTC ¶9374], 461 U.S. 677, 711, 103 S.Ct. 2132, 2152 (1982), but concludes that under the facts of this case, such discretion is not warranted.

¹⁰ Such a hearing will not be necessary if, consistent with this Opinion, the parties stipulate to who should conduct the sale and how the proceeds therefrom should be distributed.

¹¹ Again, the Court understands that when deciding whether a forced sale of property under §7403(c) is warranted, the Court has some discretion under equity principles, see U.S. v. Rodgers [ 83-1 USTC ¶9374], 461 U.S. 677, 711, 103 S.Ct. 2132, 2152 (1982), but concludes that under the facts of this case, such discretion is not warranted.

¹² Again, such a hearing will not be necessary if, consistent with this Opinion, the parties will stipulate to who should conduct the sale and how the proceeds therefrom should be distributed.

 

 

 

 

 

In re James K. Piper, Debtor. James K. Piper, Plaintiff v. United States of America, Defendant.

U.S. Bankruptcy Court, Dist. Mass.; 02-12096-CJK, 291 BR 20, March 31, 2003.

[ Code Secs. 6321 and 6871]

Tax liens: Bankruptcy: Assets, exempt: Avoidance. --

An individual-debtor could not avoid tax liens on exempt assets because the bankruptcy avoidance powers were not applicable to tax liens in existence and properly noticed at the time of his bankruptcy filing. The taxpayer contended that the exclusion of property secured by tax liens from assets liable for debts concerned only tax lies that had not been avoided. However, such reasoning was not supported by the language of section 522(c)(2) of the Bankruptcy Code, which provides that liens that can be avoided or voided are treated separately from tax liens. Thus, an exempt asset subject to a debt secured by a tax lien was liable for the debt, despite its exempt status.

MEMORANDUM OF DECISION

KENNER, Bankruptcy Judge: The issue presented here is whether, in view of §522(c)(2)(B), the Debtor may use §522(h) of the Bankruptcy Code to avoid a tax lien on his exempt property. The Plaintiff, James K. Piper, is a chapter 13 debtor in whose bankruptcy case the United States of America has asserted a secured claim, based on two tax liens, securing tax debt in the total amount of $218,236.51. The liens encumber assets that the Debtor has claimed as exempt in this bankruptcy case, including pension plan accounts with assets totaling $422,604.62. By his complaint in this adversary proceeding, the Debtor seeks through 11 U.S.C. §522(h) to avoid the liens against these exempt assets by exercise of the trustee's avoidance powers under 11 U.S.C. §§544(a)(1), 544(a)(2), and 545(2). The United States opposes the complaint. The parties submitted the matter for judgment on a statement of agreed facts. For the reasons set forth below, the Court holds that the United States is entitled to judgment as a matter of law because §522(c)(2)(B) prevents a Debtor from using §522(h) to avoid a tax lien.



Facts

The following facts are established by agreement of the parties, as set forth in the Joint Stipulation of Facts they filed on September 18, 2002. Debtor James Piper commenced this bankruptcy case by filing a petition for relief under Chapter 13 of the Bankruptcy Code on March 22, 2002. At the time, he was indebted to the United States for income taxes, plus interest thereon and penalties, in the total amount of $218,236.51. ¹ As of the date of the bankruptcy filing, the United States had duly filed notices of tax lien as to such liability. The liens encumbered the Debtor's interests in a tax refund of $2,249, in insurance policies valued at $11,535.14, and in "pension account assets" totaling $422,604.62. ² In the schedule of exempt assets he filed on April 19, 2002, the Debtor claimed each of these assets as exempt in this bankruptcy case, and no one has objected to the claims of exemption. ³ The Chapter 13 Trustee has not sought to exercise any avoidance rights she may have with respect to the liens.



Procedural History

The Debtor's complaint seeks to avoid the United States's lien on a tax refund, an insurance policy, and the pension plan accounts. The complaint states three counts, each corresponding to one of the three avoidance powers the Debtor invokes, §544(a)(1), §544(a)(2), and §545(2). In each count, the Debtor contends that the avoidance power invoked in that count would permit the chapter 13 trustee to avoid the IRS's lien on all of the assets that are the subject of this complaint. And in each of the three counts, the Debtor contends that §522(h) permits him, instead of the trustee, to exercise the avoidance power invoked in that count; §522(h) is integral to each of the three counts. In its answer, the United States denies that its liens are avoidable. ⁴ At the trial, held on January 24, 2003, the parties presented no evidence and instead submitted the matter for judgment on a statement of agreed facts, supplemented only by the affidavit of the Chapter 13 Trustee (with respect to her non-exercise of her avoidance powers).

The parties agree that, if the Debtor were successful in avoiding the United States's liens, the United States's claim would be a non-priority, unsecured claim. And it also appears that, if the United States's lien were avoided and rendered unsecured, the Debtor's noncontingent, liquidated, unsecured debts would still aggregate less than $290,525, the limit on eligibility for Chapter 13 relief, 11 U.S.C. §109(e), such that he would remain eligible for relief under Chapter 13. The Debtor states that, if he were to prevail in this proceeding, he would file an amended Chapter 13 plan that would pay a dividend of approximately sixty percent to unsecured creditors, including the United States.



Jurisdiction

This is a core proceeding, involving as it does an adjustment of the debtor-creditor relationship under central provisions of the Bankruptcy Code. 28 U.S.C. §157(b)(2)(O) (core proceedings include proceedings affecting the adjustment of the debtor-creditor relationship). Because the matter is a core proceeding, the bankruptcy court has jurisdiction to hear, determine, and enter judgment in the matter, 28 U.S.C. §157(b)(1).

The United States argues (for the first time in its post-trial memorandum) that the Court lacks subject matter jurisdiction over the adversary proceeding because the assets in question are excluded from the estate by operation of 11 U.S.C. §541(c)(2). I reject this argument for two reasons. First, bankruptcy in rem jurisdiction extends not only to assets of the estate but also to "all assets of the debtor ... as of the commencement of the case." 28 U.S.C. §1334(e). The United States does not dispute that the assets in question were assets of the debtor as of the commencement of the case. And, insofar as the assets in question have been claimed without objection as exempt, only the Debtor is a real party in interest; the estate has no stake in this proceeding. So jurisdiction over the Debtor's assets suffices to confer all the in rem jurisdiction needed in this matter.

Second, an asset of the debtor is excluded from the estate by §541(c)(2) only if the asset is (1) a beneficial interest in a trust (2) whose transfer is subject to a restriction that is enforceable under applicable nonbankruptcy law. I have no evidence that any of the assets at issue here meets either of these two requirements. Because the assets were undisputedly interests of the Debtor in property as of the commencement of the case, they are assets of the estate under §541(a)(1) unless excluded by §541(c)(2). 11 U.S.C. §541(a)(1). Although the ultimate burden of proof as to subject-matter jurisdiction is the party asking the court to exercise such jurisdiction, where the alleged lack of jurisdiction is based on an exclusion, the party alleging the lack bears at least the burden of coming forward with evidence of the facts on which the exclusion is predicated. The United States has submitted no evidence that the any of the assets at issue is either a beneficial interest in a trust or subject to an enforceable restriction on its transfer. Therefore, even if jurisdiction were contingent on the assets' belonging to the estate, jurisdiction would not be lacking. For all these reasons, the Court is satisfied that it has full subject-matter jurisdiction over this adversary proceeding.



§522(h) and §522(c)(2)(B)

The avoidance powers that the Debtor invokes in this proceeding are powers that belong in the first instance to the bankruptcy trustee; in both §544(a) and §545, the operative words are "the trustee may avoid." Section 522(h) of the Bankruptcy Code permits the debtor to exercise the trustee's avoidance powers under §§544(a) and 545 in certain circumstance: where, by exercise of the avoidance power, the debtor would recover an asset that he or she can claim as exempt. ⁵ But §522(c) of the Bankruptcy Code makes clear that even an exempt asset remains liable for certain debts, including "a debt secured by a lien that is a tax lien, notice of which is properly filed." 11 U.S.C. §522(c)(2)(B). ⁶ On the basis of this continuing liability provision, courts have consistently held that §522(c)(2)(B) overrides the §522(h) lien-avoidance power where the lien in question is a tax lien. In other words, it prevents the Debtor from using §522(h) to avoid tax liens.

The United States urges the court to adopt this position. The Debtor, on the other hand, argues that §522(c)(2)(B) applies only to tax liens that have not been avoided; if the lien has been avoided, the debt in question is no longer secured by a tax lien, and therefore §522(c)(2)(B) does not apply to the debt. So, in the Debtor's view, citation to §522(c)(2)(B) is irrelevant to whether the lien may be avoided. The Debtor has cited no cases in support of his position.

The Debtor's position is rebutted by a comparison of parts (A) and (B) of §522(c)(2). Both specify conditions under which an exempt asset remains liable for a debt secured by a lien on the asset. In part (A), an asset remains liable for the debt if the lien is neither avoided nor void under various sections of the Bankruptcy Code. 11 U.S.C. §522(c)(2)(A). In part (B), however, assets remain liable for the debt provided only that the lien is "a tax lien, notice of which is properly filed." 11 U.S.C. §522(c)(2)(A). In contrast to part (A), part (B) does not state that the lien in question must be neither avoided nor void under various sections of the Bankruptcy Code. If the Debtor's position were correct, it would have been unnecessary to specify in part (A) that the lien in question be neither avoided nor void; by the Debtor's proposed construction, a lien that existed on the date of the bankruptcy filing but that was later avoided by exercise of bankruptcy avoidance powers is no lien at all for purposes of §522(c)(2). Congress must have intended otherwise, else the qualification in part (A) --that the debt be neither avoided nor void --is mere surplusage. And, where Congress included the qualification in part (A) but not in part (B), that too must have been purposeful, and it can only mean that the assets in question remain liable for the debt regardless of the whether the lien is avoided by exercise of bankruptcy avoidance powers.

The conclusion is inescapable that, by virtue of §522(c)(2)(B), Congress intended to prevent a debtor from using the bankruptcy right of exemption and the related powers afforded by §522(h) to defeat a tax lien that was in existence and properly noticed at the time of the bankruptcy filing. ⁷ For this reason, the United States is entitled to judgment as a matter of law on each of the Debtor's three counts. A separate judgment will enter accordingly, without need of the Court's addressing the other issues briefed by the parties.

JUDGMENT

For the reasons set forth in the separate memorandum of decision issued today, the complaint herein is dismissed on its merits.

¹ The parties agree that no portion of this debt qualifies for priority treatment under 11 U.S.C. §507(a).

² The Joint Stipulation of Facts does not specify what is meant by "pension account assets." The Debtor's complaint identifies these assets as "pension plan accounts," and the United States' answer admits the allegations of the paragraph in which this characterization appears. The claims of exemption themselves, which are made on Debtor's Schedule C, the schedule of property claimed as exempt, identify the assets in question as follows:

IRA --Dreyfus Trust Company

IRA --Franklin Bank

IRA --Michigan National Bank

IRA --Paine Weber

Pension --Fidelity 401(K) and 403(b)

Pension --TIAA CREF

All are claimed as exempt under Massachusetts law, G.L. c. 235, §34A.

³ The time for filing objections to claims of exemption has expired. See FED.R.BANKR.P. 4003(b).

⁴ The answer also stated, as a separate defense, that the summons had not been properly served. At trial, the United States stated that it was waiving this defense.

⁵ Subsection (h) provides:

The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if --

(1) such transfer is avoidable by the trustee under sections 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and

(2) the trustee does not attempt to avoid such transfer.

11 U.S.C. §522(h). Subsection (g)(1) provides:

(g) Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under sections 510(c)(2), 542, 543, 550, 551 or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if --

(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and

(B) the debtor did not conceal such property[.]

⁶ Section 522(c)(2) provides:

(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except --

(2) a debt secured by a lien that is --

(A)(i) not avoided under subsection (f) or (g) of this section or under sections 544, 545, 547, 548, 549, or 724(a) of this title; and (ii) not void under section 506(d) of this title; or

(B) a tax lien, notice of which properly filed[.]

⁷ The cases on point are numerous and apparently all in agreement. See DeMarah v. United States (In re DeMarah),62 F.3d 1248, 1251-1252 (9th Cir.1995) ( "Congress has denied debtors the right to remove tax liens from their otherwise exempt property."); Straight v. First Interstate Bank of Commerce (In re Straight) [ 97-1 USTC ¶50,374], 207 B.R. 217, 228 (10th Cir. BAP 1997) ( §522(c)(2)(B) overrides the general exemption and avoidance powers granted in §522(g) and (h)); In re Mulligan [ 99-2 USTC ¶50,585], 234 B.R. 229, 235 (Bankr.D. N.H. 1999) ( §522(h) avoidance power does not apply to a tax lien because, by virtue of §522(c)(2)(B), the property encumbered by the lien is cannot be exempted from the debt the lien secures); Bearden v. United States (In re Bearden), [ 97-2 USTC ¶50,836], 216 B.R. 951, 955 (Bankr. W.D. Okla. 1997) (Congress intended in §522(c)(2)(B) to preserve the validity of a properly filed pre-petition tax liens against exempt property of a debtor.); In re O'Neil [ 95-1 USTC ¶50,168], 177 B.R. 809, 812-813 (Bankr. S.D. N.Y. 1995) ( §522(c)(2)(B) bestows added protection on perfected tax liens, which protection would be nullified if debtor were permitted to use the §545(2) avoidance power to avoid a perfected tax lien for exempt property); In re Robinson, 166 B.R. 812, 815-816 (Bankr. D. Vt. 1994) ( §522(c)(2)(B) requires that §522(h) not be construed as empowering a debtor to use §545(2) to avoid federal or state tax liens); In re Quillard [ 93-1 USTC ¶50,110], 150 B.R. 291, 295 (Bankr. D. R.I. 1993) (a debtor's avoiding powers with respect to IRS tax liens are limited by 11 U.S.C. §522(c)(2)(B); property claimed as exempt under §522 remains available after discharge to satisfy any pre-petition debt secured by a property-noticed tax lien; any other construction would render the plain language of §522(c)(2)(B) meaningless); In re Mattis, 93 B.R. 68, 69-70 (Bankr. E.D. Pa. 1988) (Congress did not intend to allow chapter 13 debtors to circumvent the effects of §522(c)(2)(B) by invoking the trustee's avoiding power under §545(2)."); In re Perry, 90 B.R. 565, 566 (Bankr. S.D. Fla. 1988) ( "In view of §522(c)(2)(B) there is no rational basis to ascribe to Congress an intent through §522(h) that all debtors may eliminate tax liens perfected against exempt property. Such an interpretation would nullify §522(c)(2)(B).").

 

 

In re Johnnie L. Brown, Debtor

U.S. Bankruptcy Court, East. Dist. Wis., 1998-31716, 7/2/2002, 280 BR 231, 280 BR 231, 2002 Bankr. LEXIS 702

[Code Secs. 6321 , 6323 and 6331 ]

Liens and levies: Enforcement of lien: Bankruptcy: Levy, property subject to.--

The IRS was entitled to uncollected funds that had been paid over to the bankruptcy court after a debtor's Chapter 13 case was dismissed for failure to submit a confirmation plan. A valid prepetition lien for the debtor's outstanding tax liabilities existed on all of his nonexempt property, including the funds in possession of the bankruptcy court, and the IRS's lien and levy superceded the debtor's right to return of the funds. F.W. Beam (CA-9), 99-2 USTC ¶50,917 , followed.

[Code Sec. 6331 ]

Liens and levies: Notice of levy, sufficiency of.--

No notice of levy needed to be served on a bankruptcy court holding the funds of a debtor whose Chapter 13 case had been dismissed because the government's challenge to the debtor's right to the funds was the functional equivalent of a levy. The debtor had the opportunity to challenge the claim and, thus, was not denied due process.

Larry Moses, Assignee of Debtor, pro se. Susan M. Knepel, Mark D. Petersen, for I.R.S.

MEMORANDUM DECISION ON PETITION FOR PAYMENT OF UNCLAIMED FUNDS

MCGARITY, Bankruptcy Judge:

This proceeding involves a dispute over unclaimed funds held by the Clerk of Bankruptcy Court after the debtor's chapter 13 case was dismissed without confirmation of a plan, and the trustee was unable to return the funds to the debtor. This court has jurisdiction under 28 U.S.C. §1334. Because the issues in this matter involve the administration of a case filed under Title 11 of the United States Code, and also a claim against the debtor, it is a core proceeding under 28 U.S.C. §157(b)(2)(A) and (B).

The debtor filed a chapter 13 petition on November 20, 1998, and after failing to file a feasible plan, his case was dismissed on June 23, 1999. After the case was dismissed, the trustee attempted to return the undistributed payments made to him by the debtor. The check to the debtor in the amount of $ 916.42 was returned to the trustee by the postal service as unclaimed. The trustee then paid the unclaimed funds to the Clerk of Bankruptcy Court. 11 U.S.C. §347(a); Fed. R. Bankr. P. 3011.

On December 4, 2001, The Financial Resources Group filed a petition for payment of unclaimed monies on behalf of the debtor. Notice of such request was given to the United States Attorney. 28 U.S.C. §2042. At the hearing on the Internal Revenue Service's request for additional time to review the request for unclaimed funds, the IRS asserted its position that it was entitled to receive the unclaimed funds from the estate because the debtor had outstanding tax liabilities, which were well in excess of the amount to be returned to the debtor. The court provided the parties with an opportunity to file briefs on their positions, and the court received a brief from the IRS only.

According to the IRS, the debtor owes federal income taxes for the years 1992, 1994 and 1995 in the amounts of $6,863.38, $1,559.67 and $3,956.20, respectively. Liens attached to all property of the debtor, pursuant to 28 U.S.C. §6321, when he did not pay those amounts after notice and demand. The liens arose on September 18, 1995, for the 1992 federal income tax liability, on September 25, 1995, for the 1994 federal income tax liability, and on February 23, 1998, for the 1995 federal income tax liability. Notices of Federal Tax Lien, giving the IRS priority as to third parties, were filed for those periods on August 17, 2000.

Resolution of this matter depends upon the interplay between two federal statutes, 11 U.S.C. §1326(a)(2) and 26 U.S.C. §6321. Section 1326(a)(2) of the Bankruptcy Code provides that

A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan.. . . If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.

11 U.S.C. §1326(a)(2). Section 6321 of the Tax Code provides:

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 cost 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.

26 U.S.C. §6321.

Thus, the court must determine whether the funds can only be turned over to the debtor pursuant to 11 U.S.C. §1326(a)(2), or whether the monies may be turned over to the IRS under 26 U.S.C. §6321 because of the federal tax liens that have attached to all property of the debtor. No notice of levy has been served on the Clerk because, as the IRS stated in its brief, levy was considered unnecessary for funds held by the court. See also Treas. Reg. §301.6331-1(a)(3) (taxes cannot be collected by levy upon assets in custody of court); Gulf Coast Galvanizing, Inc. v. Steel Sales Co. [93-2 USTC ¶50,398 ], 826 F.Supp. 197, 205 (S.D. Miss. 1993) (noting that levy is administrative).

The IRS cites In re Beam [99-2 USTC ¶50,917 ], 192 F.3d 941 (9th Cir. 1999), in support of its position that the funds do not have to be returned to the debtor. In Beam, the Ninth Circuit held the IRS could levy on funds paid to the trustee under the debtor's proposed chapter 13 plan and held by the trustee following dismissal of the case. The Beam court held that provisions of the Internal Revenue Code superseded §1326(a)(2) of the Bankruptcy Code.

The court noted that §6334(a) ¹ of the Internal Revenue Code provided 13 categories of property exempt from levy under a federal tax lien, and those categories did not include funds held by the chapter 13 trustee after dismissal of a bankruptcy case. Beam [99-2 USTC ¶50,917 ], 192 F.3d at 944. Because §6334(c) further specified that no other property or rights were exempt from IRS levy except as specifically set forth in §6334(a), and §1326(a)(2) of the Bankruptcy Code was not listed among the 13 items exempt from levy, the Ninth Circuit concluded that the Internal Revenue Code modified the operation of §1326(a)(2). Id.

Other cases have allowed a creditor to assert state law liens against funds in the possession of the chapter 13 trustee upon dismissal of the case; however, the majority of those cases require the creditor to pursue their rights against the property in state court. See, e.g., In re Oliver, 222 B.R. 272 (Bankr. E.D. Va. 1998); In re Walter, 199 B.R. 390 (Bankr. C.D. Ill. 1996); In re Clifford, 182 B.R. 229 (Bankr. N.D. Ill. 1995). In effect, the trustee does not make distributions to creditors when a plan has not been confirmed, notwithstanding the creditors' state law rights in the funds held by the trustee. As the IRS points out, these cases are distinguishable in that none of them involved the reach of a federal tax lien.

This view is not unanimous, however. One court determined that judicial economy favored resolving the disposition of the creditor's lien in bankruptcy court, even though no plan was confirmed. In re Doherty, 229 B.R. 461 (Bankr. E.D. Washington 1999). The court concluded that the chapter 13 trustee's costs primed both the debtors' claim to the funds as well as any state tax lien interest. Nevertheless, the state department of revenue had a lien on the funds that were not necessary to pay the administrative costs, i.e., the debtor's funds, and the trustee was required to comply with the levy. The Doherty court noted that leaving the lien creditor with the obligation to complete its pursuit of the funds in state court was not an attractive solution. Id. at 466. Requiring the IRS to chase its liened funds in the debtor's possession is similarly unattractive.

One treatise, Mertens Law of Federal Income Taxation, takes the position that the funds should be turned over to the IRS:

When a taxpayer files for bankruptcy, that action will operate as an automatic stay to prevent collection efforts until there is a court hearing. Although a bankrupt taxpayer may possess property not subject to a levy because of the automatic stay provision, a tax lien will extend to such property. When a bankruptcy petition is filed, the Service will also maintain whatever tax liens that it has against the bankrupt's non-exempt property. If a bankruptcy case is dismissed, the bankrupt [sic] trustee is then obligated to either honor a notice of levy related to the non-exempt property or be subject to a penalty.

14 Mertens Law of Fed. Income Tax'n §54A:10 (citing In re Beam [99-2 USTC ¶50,917 ], 192 F.3d 941 (9th Cir. 1999)).

This court is satisfied that the IRS' position is correct with respect to both substance and procedure. Cases dealing with state law created liens, which required return of assets to the debtor, seem to require state court procedure for enforcement of those liens, a result that is not necessary in the instant case involving a federal tax lien. The IRS had a valid prepetition lien on all nonexempt property of the debtor, including the debtor's funds in possession of the trustee, and the lien followed those funds when they were transferred to the Clerk of Bankruptcy Court. As the Beam court found, the IRS' lien and levy superceded the debtor's right to return of the funds under 11 U.S.C. §1326(a)(2). While the IRS has not served the Clerk with a notice of levy, an administrative act preliminary to seizing a particular asset or fund subject to a tax lien, the IRS has issued the functional equivalent of a levy by challenging the debtor's right to the funds held by the Clerk. The debtor has had the opportunity to challenge that claim and thus is in no way denied due process. Just as the trustee in Beam was required to honor the IRS levy, the Clerk of Bankruptcy Court is likewise required to honor the IRS' claim to the funds on which it has a lien.

This decision stands as the court's findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052. A separate order consistent with this decision will be entered.

ORDER DIRECTING PAYMENT OF UNCLAIMED FUNDS

For the reasons stated in the court's memorandum decision entered on this date, the Clerk of Bankruptcy Court for the Eastern District of Wisconsin is ordered to pay the unclaimed funds due the debtor in the above referenced case to the Internal Revenue Service.

¹ The specific exemptions include wearing apparel and school books, fuel, necessary personal expenses, books and tool, unemployment benefits, undelivered mail, certain annuity and pension payments, workers' compensation, judgments in support of minor children, minimum exemptions for wages and salary, certain service-connected disability payments, certain public assistance payments, assistance under the Job Training Partnership Act, residences exempt in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy. 26 U.S.C. §6334(a)(1)-(13).