6321
Bankruptcy page6
In re Dick M. Divine and Tammy L. Divine, Debtors
U.S.
Bankruptcy Court, Dist. Minn., BKY 4-90-5443, 5-24-91, 127 BR 625
[Code Secs.
6321 and 6871
]
Lien for taxes: Bankruptcy: Application of proceeds.--
Debtors in bankruptcy, who did not have enough assets with which to meet
tax liens against their property for tax liabilities accumulated over
several tax years, did not have the right to determine how available
property could be used to satisfy their tax liabilities/tax liens. U.S.
v. Energy Resources Co., SCt, 90-1
USTC ¶50,281 , distinguished. There were not enough proceeds
from the sale of the debtors' real estate to pay all IRS tax liens
against their property, leading the debtors to determine which portions
of their tax liabilities had to be classified as secured or unsecured
tax claims and priority and nonpriority tax claims. In rejecting the
debtors' choices, the court used the proceeds to satisfy the earliest
tax assessments against the debtors and, rather than choosing between
satisfying taxes, interest, or penalties, required that each item be
satisfied for each of the early tax years chosen for the application of
proceeds. The court also determined which unsecured tax liabilities,
penalties, and interest were priority or nonpriority claims, ruling that
penalties were nonpriority claims of the IRS since they did not
compensate the government for pecuniary loss but were punitive in
nature. The court would not use the principle of equitable subordination
to subordinate secured penalty claims to all other secured and unsecured
claims against the debtors.
Kenneth E. Keate,
1102 Grand Ave.
,
St. Paul
,
Minn.
55105
, for debtors. Douglas W. Hinds, Special Assistant United States
Attorney, St. Paul, Minn. 55101, for I.R.S. Thomas K. Overton, Special
Assistant Attorney General, St. Paul, Minn. 55146-0600, for Minnesota
Department of Revenue.
ORDER
DENYING CONFIRMATION
KRESSEL, Chief Bankruptcy
Judge:
This case came on for
hearing on the objections of the Internal Revenue Service and the
Minnesota Department of Revenue to confirmation of the debtors' Chapter
13 plan. Kenneth E. Keate appeared on behalf of the debtors. Douglas
Hinds, Special Assistant United States Attorney, appeared on behalf of
the Internal Revenue Service and Thomas K. Overton, Special Assistant
Attorney General, appeared on behalf of the Minnesota Department of
Revenue. This court has jurisdiction pursuant to 28 U.S.C. §§157 and
1334 and Local Rule 103(b). This is a core proceeding under §157(b)(2)(L).
Based on the memoranda and arguments of counsel, and the file in this
case, I make the following memorandum order.
FACTUAL
BACKGROUND
In March of 1983, the
debtors had H & R Block prepare their federal and state income tax
returns for the years 1979, 1980, 1981, and 1982. The debtors did not
file these returns.
On August 23, 1989, the
debtors filed their federal income tax returns for the years 1985, 1986,
1987, and 1988 without payment of any tax. On various days in October
1989, the IRS assessed the tax on these returns and on April 13, 1990,
the IRS filed a Notice of Tax Lien for the 1985, 1986, 1987, and 1988
tax, interest and penalties.
On August 7, 1990, the
debtors filed their federal income tax returns for the years 1979, 1980,
1981, 1982, 1983, 1984, and 1989 without payment of any tax. On various
days in October and November of 1990 the IRS assessed tax, interest and
penalties. The debtors also filed their state income tax returns for the
years 1979-1989 without payment of any tax.
On September 27, 1990, the
debtors filed this Chapter 13 case. The debtors listed their home
mortgage, a 1989 truck loan and the tax lien as secured debts. The only
unsecured debts listed were their federal and state income tax
liabilities.
The IRS and the Minnesota
Department of Revenue filed claims for the tax, interest and penalties
for the years 1979-1989. The debtors have not objected to their claims.
DEBTORS'
PROPOSED TREATMENT OF THE CLAIMS
Secured Claims The
debtors propose to sell their home within four years and pay off their
home mortgage and the IRS's secured claim. The debtors' anticipate that
approximately $28,550.00 will be available to apply to the IRS tax lien
once they sell their home. 1
Priority Claims
Paragraph 2 of the debtors' plan provides monthly payments of $400 to
pay all priority claims in full. Paragraph 6 sets up an artificial
procedure to determine the amount of the priority claims.
Non-Priority Unsecured
Claims The plan separately classifies the non-priority unsecured
claims into 2 classes, class 5 and class 6. Class 5, as proposed,
consists of the non-priority unsecured tax and interest on the tax
claims except to the extent it amounts to interest on penalties. The
plan proposes to pay class 5, 10% on the dollar. Class 6 consists of
unsecured penalties and interest on penalties. Based on principles of
subordination, the plan proposes to pay nothing to class 6.
The IRS and Department of
Revenue both objected to confirmation of the debtors' plan.
DISCUSSION
The dispute in this case
revolves around whether the debtors' plan properly treats the secured,
priority unsecured and non-priority unsecured claims of the IRS and the
Department of Revenue.
IRS
SECURED CLAIM
The IRS filed a proof of
claim on December 4, 1990 and amended that claim on December 17, 1990.
The IRS's claim for tax, interest and penalties totalled $94,547.49.
Below is a summary of the IRS's claim.
Date Date
Tax Interest Penalty Filed Assessed
1979 ........................ 513.00 1,279.13 -- 2 8/7/90 10/15/90
1980 ........................ 789.00 1,745.02 -- 2 8/7/90 10/15/90
1981 ........................ 1,528.00 2,890.77 -- 2 8/7/90 10/15/90
1982 ........................ 2,914.00 4,230.62 -- 2 8/7/90 10/8/90
1983 ........................ 3,809.00 4,559.71 -- 2 8/7/90 10/8/90
1984 ........................ 6,212.00 5,863.78 -- 2 8/13/90 11/5/90
1985 ........................ 5,681.00 4,194.44 2,718.48 8/23/89 10/30/89
1986 ........................ 7,583.00 4,259.33 3,564.01 8/23/89 10/9/89
1987 ........................ 4,341.00 1,344.93 -- 3 8/23/89 10/16/89
1988 ........................ 5,028.00 897.85 -- 3 8/23/89 10/2/89
1989 ........................ 4,720.00 283.91 -- 3 8/7/90 10/1/90
The IRS's claim is deemed
allowed because the debtors did not object to the claim as filed. 11
U.S.C. §502(a)
. Instead, the debtors chose to deal with their tax
liabilities under the plan.
As a matter of tax law, the
IRS's tax lien consists of the total claims filed by the IRS for tax,
interest and penalties. The tax lien statute states:
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.
26
U.S.C. §6321
. Tax liens arise at the time taxes are assessed. 26 U.S.C. §6322
. Therefore, the lien for 1985-1988 tax, interest and penalty
arose in October of 1989. The lien for 1979-1983 and 1989 tax, interest
and penalty arose in October of 1990. Finally the lien for the 1984 tax,
interest and penalty arose in November of 1990. The IRS, by filing a
Notice of Tax Lien in
Hennepin
County
against the debtors' homestead, on April 13, 1990, perfected the lien
for the 1985-1988 tax, interest and penalties. Thus, the IRS has a
perfected lien for the tax, interest and penalties for the years
1985-1988 on the debtors' homestead.
In this case, the IRS's tax
lien exceeds the amount of the debtors' home equity. Therefore, the
IRS's claim is secured only to the extent of the amount of the home
equity, $28,550.00. 11 U.S.C. §506(a). The remainder of the tax lien
claim becomes an unsecured claim.
While it is clear what amount
of the IRS claim is secured, the debtors and the IRS dispute which years
and what elements (tax, interest and penalty) are secured.
The debtors argue that the
Supreme Court decision in, United States v. Energy Resources Co.
[90-1
USTC ¶50,281 ], __
U.S.
__ 110 S.Ct. 2139 (1990), permits them to determine the treatment of
different years' tax liability under the plan. Under this theory, the
debtors' plan classifies both the 1980-1984 4
tax and interest on tax and the 1980-1989 penalties as a non-priority
unsecured claim. The plan classifies a portion of the 1985-1988 tax and
interest on tax as a secured claim and a portion as priority and
non-priority unsecured claims. 5
The 1989 tax and interest on tax is classified as a priority unsecured
claim.
The IRS disagrees with the
debtors as to the right to determine the treatment of the IRS's claim.
The IRS's amended claim provides that the secured claim will consist of
the 1985 and 1986 tax, interest and penalties. The priority unsecured
claims will consist of the 1987-1989 tax and interest. The 1979-1984
tax, interest and penalties and the 1987-1989 penalties will make up the
non-priority unsecured claim.
Energy Resources Co.
involved a corporation that filed a Chapter 11 case. The issue in Energy
Resources Co. was whether the debtor could apply payments under a
confirmed plan toward "trust fund" taxes before other taxes.
The debtors wanted to ensure that if the reorganization was not
successful, the individuals responsible for collecting the taxes would
be relieved from liability. The Court found that the bankruptcy court,
through its equitable powers, could order that the plan payments be
applied to the trust fund taxes first when it is necessary for the
success of the reorganization. Energy Resources Co., at 2143. 6
In this case, the debtors
argue this holding should be broadly construed to allow them to
determine the amount of each tax year liability and how it will be dealt
with under the plan.
Energy Resources Co.,
is distinguishable from this case in that it deals with the type
of tax that will be paid first under the plan. The debtors in Energy
Resources Co., had to deal with both trust fund and non-trust fund
taxes. If the plan was not successful in satisfying the overdue trust
fund taxes, the IRS could look to the "responsible persons" to
satisfy that tax liability. The debtors in that case, wanted their plan
payments to be applied to the trust fund taxes first to guarantee that
the responsible persons would not later be held accountable for payment
of the trust fund taxes. Notably however, the plan provided for paying
all taxes in full. It was only the order of payment that was in dispute.
The debtors in this case
want to decide the treatment of the tax liability for each tax year. The
debtors propose to allocate portions of certain years' tax liability to
a secured status and allocate other portions to an unsecured status.
This method results in determining the total amount of the taxes,
interest and penalties the debtors will be required to pay under the
plan. The debtors' proposed plan minimizes the amount they would be
required to pay, thereby, essentially allowing most of their tax debt to
be discharged. In this case, the debtors are simply attempting to
rearrange the tax claims in order to avoid paying as much as possible.
This is not what Energy Resources Co., contemplated and I see no
reason to apply the debtors' broad interpretation of Energy Resources
Co., to the facts of this case.
Although neither the
debtors nor the IRS gave me any guidance as to how to best determine the
amount of the secured claim, 7
I have decided that using the date the taxes were assessed is the
appropriate method to determine what tax liability is secured and what
liability is left as unsecured. 26 U.S.C. §6322
states:
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.
Thus,
tax liens attach in the order of their assessment. Since the lien
attaches once the taxes are assessed, the statute determines the
priority among liens based on the date of assessment. The tax lien
filing only determines the tax lien's priority as against other secured
claims. 11 U.S.C. §6323
. The filing is the equivalent of perfection under the
Uniform Commercial Code. Therefore, I will rely on the date the taxes,
interest and penalties were assessed to determine what tax year
liability is secured.
Although the 1985-1988 tax
returns were all filed on August 23, 1989, the taxes were not assessed
chronologically. The returns were actually assessed as follows:
Date Assessed Tax Year
10/02/89 ....................................................... 1988
10/09/89 ....................................................... 1986
10/16/89 ....................................................... 1987
10/30/89 ....................................................... 1985
Using the IRS assessment
date as the basis to determine what tax liability is a secured claim and
what is left as an unsecured claim, I will begin with the first year
actually assessed, 1988. Since 26 U.S.C. §6321
includes the amounts for interest and penalties in
determining what constitutes a tax lien, I will subtract all of the tax,
interest and penalty assessed for 1988 from $28,550. The next step is to
subtract the 1986 tax, interest and penalty from the remaining amount
secured by the lien. Therefore, all of the 1988 and 1986 tax, interest
and penalties are secured claims. Additionally, approximately 71% of the
1987 tax, interest and penalty will be secured by the tax lien. The
remaining 29% of the 1987 tax and interest and penalty and all of the
1985 tax, interest and penalty become unsecured claims.
Tax Interest Penalty
1988 ............................. 1,759.80
5,028.00 897.85 8
secured secured secured
1986 ............................. 7,583.00 4,259.33 3,564.01
secured secured secured
1987 ............................. 3,076.96 953.31 1,427.74
secured secured secured
1264.04 391.62 586.52
unsecured unsecured unsecured
1985 ............................. 5,681.00 4,194.44 2,718.48
unsecured unsecured unsecured
Thus, the secured claim of
$28,550.00 will consist of the 1988, 1986 tax, interest and penalties
and approximately 71% of the 1987 tax, interest and penalty.
IRS
PRIORITY UNSECURED CLAIM
The IRS's unsecured claims
need to be classified as priority or non-priority. 9
Section
507 , dealing with priorities, states:
(a) The following expenses
and claims have priority in the following order:
(7)
Seventh, allowed unsecured claims of governmental units; only to the
extent that such claims are for--
(A) a
tax on or measured by income or gross receipts--
(i) for
a taxable year ending on or before the date of the filing of the
petition for which a return, if required, is last due, including
extensions, after three years before the date of the filing of the
petition; . . .
(G) a
penalty related to a claim of a kind specified in this paragraph and in
compensation for actual pecuniary loss.
11
U.S.C. §507(a)(7).
I will deal first with the
remaining 29% of the 1987 tax, interest and penalties. The tax due for
1987 falls under §507(a)(7)(A)(i), as tax due after three years before
the date the petition was filed. Therefore, the remaining 29% of the
1987 tax should be classified as a priority unsecured claim. The
remaining interest for 1987 is also entitled to priority status. Under
§507(a)(7)(G), the interest is considered to be a penalty to compensate
the government "for the money's nonavailability during the
nonpayment period." In re Craner, 110 B.R. 111, 119 (Bktcy.
N.D.N.Y. 1988) rev'd in part In re Craner, 110 B.R. 124 (N.D.N.Y.
1989). Thus, the remaining 29% of the 1987 tax and interest, totalling
$1,655.66, are to be classified as a priority unsecured claim.
The remaining 29% of the
penalty portion of the 1987 tax liability is not entitled to priority
under §507(a)(7)(G). The penalty assessed against the debtors was not
to compensate the government for actual pecuniary loss.
Id.
, at 120. The additional assessed penalty is punitive in nature and not
entitled to priority. In re Henderberg, 108 B.R. 407, 417 (Bktcy.
N.D.N.Y. 1989). Therefore, the remaining penalty claim of $586.52 is not
entitled to priority unsecured status.
The same analysis also
applies to the entire 1989 tax liability. The tax and interest totalling
$5,003.91, are entitled to priority status under §507(a)(7)(A) &
(G). Since the penalty claim is punitive in nature, the 1989 penalty
claim of $1,310.41 is not entitled to priority status.
IRS
NON-PRIORITY UNSECURED CLAIM
The remainder of the tax
claims are not entitled to priority under any subsection of §507(a)
. Therefore, the remainder of the tax claims are to be
classified as non-priority unsecured claims. The non-priority unsecured
claims will consist of the tax, interest and penalties for the tax years
of 1979-1985 totalling $57,440.99, and 1987 and 1989 penalties totalling
$1,896.93.
SUMMARY
OF THE IRS CLAIM
Therefore, I find:
The IRS secured claim
consists of:
1988
tax, interest and penalty of $7,685.65;
1986
tax, interest and penalty of $15,406.34;
1987 71%
of the tax, interest and penalty of $5,458.01;
Total $28,550.00
The priority unsecured
claim consists of:
1987 29%
of the tax and interest of $1,655.66;
1989 tax
and interest of $5,003.91;
Total $6,659.57
The non-priority unsecured
claim consists of:
1979-1985
tax, interest and penalty of $57,440.99;
1987
penalty of $586.52;
1989
penalty of $1,310.41.
Total $59,337.92
DEPARTMENT
OF REVENUE CLAIM
In August of 1990, the
debtors filed their state income tax returns for years 1979-1989 without
payment of any of the tax liability. The Minnesota Department of Revenue
assessed the tax for these 10 years on August 6, 1990. The Department of
Revenue filed a priority unsecured claim totaling $10,104.42 in tax and
interest and an unsecured claim for $1,795.37 in penalties.
As with the IRS claim, the
debtors did not object to the claim filed by the Department of Revenue
and instead chose to deal with their state tax liability through
payments under their plan.
The debtors' plan proposes
to treat the tax and interest on tax for the years 1987, 1988, and 1989
as a priority unsecured claim and the remainder of the claim as a
non-priority unsecured claim. The Department of Revenue objects to this
classification of the claim. The Department of Revenue claims that all
of the tax and interest should be treated as a priority unsecured claim
under 11 U.S.C. §507(a)(7)(A) and that the penalty should be treated as
a non-priority unsecured claim.
As discussed earlier with
respect to the IRS claim, under §507(a)(7)(A) & (G) the Department
of Revenue has a priority unsecured claim for the 1987-1989 tax and
interest amounting to $1,722.70. The remainder of the Department of
Revenue's claim, the 1979-1986 tax and interest and the 1979-1989
penalties totalling $10,177.09, is a non-priority unsecured claim.
EQUITABLE
SUBORDINATION
Section 510 allows for
subordination of certain agreements and claims. Section 510(c) deals
with the principle of equitable subordination. Specifically §510(c)
states:
(c)
Notwithstanding subsections (a) and (b) of this section, after notice
and a hearing, the court may--
(1)
under principles of equitable subordination, subordinate for purposes of
distribution all or part of an allowed claim to all or part of another
allowed claim or all or part of an allowed interest to all or part of
another allowed interest; . . . .
11
U.S.C. §510(c).
The debtors propose two
different kinds of equitable subordination under their plan.
1. The debtors want the
IRS's secured penalty claim subordinated to all other secured and
unsecured claims.
2. The debtors want the
IRS's and the Department of Revenue's unsecured penalty claims
subordinated to all other unsecured claims. 10
In the past, subordination
was only available when a creditor engaged in some form of inequitable
conduct. Wegner v. Grunewaldt, 821 F.2d 1317, 1323 (8th Cir.
1987) (citing Pepper v. Litton, 308 U.S. 295 (1939); Farmers
Bank of Clinton v. Julian, 383 F.2d 314, 322-23 (8th Cir.), cert.
denied, 389
U.S.
1021 (1967); In re Kansas City Journal-Post Co., 144 F.2d 791
(8th Cir. 1944)).
In In re Mobile Steel
Co., the Fifth Circuit described conditions when application of
equitable subordination is appropriate:
(i) The claimant must have
engaged in some type of inequitable conduct.
(ii) The misconduct must
have resulted in injury to the creditors of the bankrupt or conferred an
unfair advantage on the claimant.
(iii) Equitable
subordination of the claim must not be inconsistent with the provisions
of the Bankruptcy Act.
In
re Mobile Steel Co.,
563 F.2d 692, 700 (5th Cir. 1977) (citations omitted).
Recently, when dealing with
subordination of tax claims, courts have allowed subordination of the
tax penalty out of fairness to the other creditors, rather than looking
for inequitable conduct on the part of a creditor. Schultz Broadway
Inn v. U.S. [90-2
USTC ¶50,594 ], 912 F.2d 230, 234 (8th Cir. 1990).
In In re Merwede,
the court addressed the issue of equitable subordination in a Chapter 13
case and concluded:
Although
earlier decisions did not permit the equitable subordination of claims
unless the claiming creditor was guilty of some misconduct, courts now
recognize that the subordination of penalty claims is necessary to avoid
the inequity of requiring innocent creditors to share the cost of a
debtor's misconduct.
In
re Merwede, 84
B.R. 11, 14 (Bktcy. D.Conn. 1988); see also In re Virtual Networks
Services Corp., 902 F.2d 1246 (7th Cir. 1990); In re Vitreous
Steel Products Co., 911 F.2d 1223 (7th Cir. 1990). This rationale
developed in part after courts looked to see how Chapter 7 cases dealt
with penalty claims. Schultz Broadway Inn, at 233-34. Under
Chapter 7, payments for penalty claims are fourth on the list for
priority distribution. 11 U.S.C. §726(a)(4). This means that penalty
claims will not be paid unless all other unsecured claims get paid in
full. Although this generally does not happen, the rationale that some
unsecured creditors should not reap the benefit of payment of penalty
claims to the detriment of the other unsecured creditors, has carried
over to Chapter 11 and Chapter 13 cases. In this case, I do not have to
decide if this rational is correct, for even if the analysis is correct,
it does not help the debtors.
Secured Penalty Claims.
The courts which have accepted this rationale have not dealt with the
question of whether secured penalty claims can be subordinated to the
claims of general unsecured creditors. I see no basis to extend the
subordination rationale to secured penalty claims. Equitable
subordination is allowed to ensure fairness among the unsecured
creditors. In the absence of inequitable conduct, subordination has no
applicability to secured penalty claims.
Unsecured Penalty
Claims. Subordination of unsecured penalty claims is allowed to
ensure fairness to other unsecured creditors. In this case, there are no
other unsecured creditors. Ultimately, under the debtors' plan the same
amount of money would go to the same creditors (the IRS and the
Department of Revenue) whether or not subordination of the unsecured
penalty claims occurs. Therefore, equitable subordination is not
available in this case.
BAD
FAITH
Both the IRS and the
Minnesota Department of Revenue object to confirmation of the debtors'
plan on the basis that the plan was proposed in bad faith. Because the
plan's treatment of secured, priority and unsecured claims is
inconsistent with this opinion, the plan is unconfirmable and I do not
have to reach the issue of whether the plan was proposed in bad faith.
CONCLUSION
The debtors' plan cannot be
confirmed because it does not comply with 11 U.S.C. §1322.
THEREFORE, IT IS ORDERED:
Confirmation of the
debtors' plan dated September 20, 1990 and filed September 27, 1990, is
denied.
1
Although the plan itself is ambiguous, it is clear that the equity from
the sale of the home is to pay only the IRS's secured claim. GMAC's
secured claim will not be paid out of proceeds from the sale of the
debtors' home.
2
The total pre-petition penalty claimed for the non-priority unsecured
tax liability for the years 1979-1984 is $8,513.04.
3
The total pre-petition penalty claimed for the priority unsecured tax
liability for the years 1987-1989 is $5,084.47.
4
The debtors' plan omits any treatment of the tax liability for the year
1979.
5
The debtors indicate that the tax and interest on tax for 1985-1988
totals $31,471.95 of which $28,550 is secured and $1,074.83
(representing the 1987 and 1988 unsecured portion) is priority and
$1,847.12 (representing the 1985 and 1986 unsecured portion) is
non-priority unsecured.
6
The Supreme Court posed the issue as a question of the bankruptcy
court's power. More properly, the issue is whether the debtor's plan was
confirmable.
7
The IRS simply argues that it is the 1985 and 1986 taxes, interest and
penalty that are secured without stating any reason. Perhaps it simply
chose its earliest two years.
8
Based on the numbers specified in the IRS's original and amended claims,
it is possible to determine the amount of penalty assessed for each of
the 1987, 1988, and 1989 tax years.
9
This is important since a Chapter 13 plan must provide full payment for
priority claims. 11 U.S.C. §1322(a)(2).
10
Since there are no other unsecured creditors, it is not clear why the
debtor did not put all the unsecured claims in one class.
In re Lewis Akmakjian, Debtor. Steven E. Smith, as
Trustee, Plaintiff v. United States Internal Revenue Service, Gayle
Akmakjian, Hugh Lawson, Henry Friedman and Irwin Butler, Defendants
United States of America, Counterclaimant v. Lewis Akmakjian, Hugh
Lawson, Henry Friedman, Irwin Butler, Steven E. Smith and Gayle
Akmakjian, Counterclaim Defendants
U.S.
Bankruptcy Court, Cent. Dist. Calif., LA 85-09888-KL, 7/19/90
[Code Secs.
6321 and 6323
and Rev. Stat. Sec. 3466 (U.S. Rev. Stat. 31 USC 191) ]
Liens for tax: Priority of claims: Bankruptcy.--
A federal tax lien against a debtor in bankruptcy was unaffected by the
debtor's assignment of certain property interests by deed of trust. The
tax lien arose automatically at the time of assessment and had priority
over the interests of the debtor's assignees and other creditors,
interests which were perfected, if at all, after the notices of federal
tax lien were filed. Further, the federal tax lien was unaffected by the
debtor's bankruptcy since no steps were taken, and none were available
under the Bankruptcy Code, to avoid the perfected tax liens.
Robert L. Brosio, United
States Attorney, Mason C. Lewis, Edward M. Robbins, Jr., Assistant
United States Attorneys, Los Angeles, Calif. 90012, for U.S.
STATEMENT
OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW
LAX, Bankruptcy Judge:
This matter is before the
Court on the motion of defendant and counterclaimant, United States of
America, for summary judgment on plaintiff's complaint and the
government's counterclaim on the grounds that there exists no genuine
issue of material fact and the government is entitled to judgment as a
matter of law. (Rule 7056, Bankruptcy Rules). Gayle Akmakjian has filed
a cross-motion for summary judgment. No other party opposed the
government's motion. The facts are stipulated. The Court grants the
government's motion and denies the motion of Gayle Akmakjian.
STATEMENT
OF UNCONTROVERTED FACTS
1. This is an action
brought by the Trustee and United States of America for the purpose of
determining the validity, extent and priority of competing claims of the
United States of America and the named defendants to certain funds and
to compel distribution of the funds. The named defendants are
individuals residing and doing business in the Central Judicial District
of California.
2. This Court has
jurisdiction of this action under 28 U.S.C. Sections 157(b), 1334, 1340
and 1345 and 26
U.S.C. Section
7402 .
3. Venue lies in the
Central District of California under 28 U.S.C. Sections 1408 and 1409.
4. The Commissioner of
Internal Revenue has entered against the debtor, Lewis Akmakjian,
assessments for unpaid federal income taxes as follows:
TAX PERIOD ASSESSMENT DATE TAX DUE
1968 July 12, 1982 $10,319.00
1969 July 12, 1982 $50,088.00
1971 July 12, 1982 $ 6,456.00
1973 July 12, 1982 $ 3,333.00
1975 July 12, 1982 $17,984.00
TOTAL $88,180.00
5. Proper notice and demand
for payment of the identified assessments has been made upon the debtor,
Lewis Akmakjian.
6. On November 29, 1982,
the Commissioner of Internal Revenue filed a Notice of Federal Tax Lien
regarding the identified assessments against the debtor, Lewis
Akmakjian, with the Office of the County Recorder at Los Angeles,
California.
7. On July 17, 1985, the
debtor, Lewis Akmakjian, filed the above-captioned voluntary petition
under Chapter 7 of Title 11 of the United States Code in this Court.
8. On April 16, 1986, the
Commissioner of Internal Revenue timely filed in this Chapter 7 case a
proof of claim regarding the identified assessments against the debtor,
Lewis Akmakjian, showing that the debtor is indebted to the United
States of America in the sum of $265,675.28 as of the petition date.
9. The Commissioner of
Internal Revenue has entered against Gayle Akmakjian, assessments for
unpaid federal income taxes as follows:
TAX PERIOD ASSESSMENT DATE TAX DUE
1968 July 12, 1982 $10,319.00
1969 July 12, 1982 $50,088.00
1971 July 12, 1982 $ 6,456.00
1973 July 12, 1982 $ 3,333.00
1975 July 12, 1982 $17,984.00
TOTAL $88,180.00
10. Proper notice and
demand for payment of the identified assessments has been made upon
Gayle Akmakjian.
11. On November 29, 1982,
the Commissioner of Internal Revenue filed a Notice of Federal Tax Lien
regarding the identified assessments against Gayle Akmakjian, with the
Office of the County Recorder at Los Angeles, California.
12. As of June 26, 1987,
the government claims that Gayle Akmakjian is indebted to the United
States of America in the amount of $329,553.27, in respect of the
identified assessments.
13. Steven E. Smith is the
duly appointed, qualified and acting Chapter 7 trustee herein
(hereinafter "the Trustee").
14. Debtor Lewis Akmakjian
was a 50% general partner in L&M Ltd., a limited partnership
transformed in the pre-petition period to a general partnership. The
other pre-petition 50% general partner was Max Saddle, now deceased and
represented by Philip Berkowitz, executor. L&M Ltd. held title to
the land and commercial building at 129 Golden Mall, Burbank,
California, which was then subject to a first deed of trust for Gayle
Akmakjian. Gayle Akmakjian is debtor's former wife. Shortly after the
Trustee was appointed, the Court directed him to take possession of the
L&M Ltd. property from debtor's hands, to temporarily manage and
operate the same, and to receive, expend and be accountable for rents,
profits, and expenses thereof, all preparatory to the Court's
determining if the property should be sold.
15. Martin Akmakjian,
debtor's brother, claimed to be a secured creditor as to debtor's
interest in L&M Ltd. The Trustee brought adversary action No. LA
85-4390 in part to adjudicate that claim. On August 18, 1986, this Court
entered an order authorizing and directing the sale by the Trustee and
Berkowitz of said real property, free and clear of all liens (pursuant
to 11 U.S.C. §363(f)). Net proceeds from said sale were to be paid over
one half to Berkowitz for the Saddle estate and one half to the Trustee
for debtor's estate (pending adjudication of Martin's claim).
Subsequently, this Court entered amended orders substituting in turn the
names of new buyers, the original and one succeeding buyer having
withdrawn. None of those amended orders modified the essential terms of
the original August 18, 1986 order that the sale was to be free and
clear of all liens.
16. By written instruments
after the filing of the Notices of Federal Tax Lien, Gayle Akmakjian
assigned all her beneficial rights in the aforesaid trust deed (see
paragraph 15, above) to Hugh Lawson, Henry Friedman and/or Irwin Butler.
On the eve of closing, the Internal Revenue Service levied against all
monies in the escrow due to Gayle Akmakjian. When informed of the
Internal Revenue Service levy, the assignees of Gayle Akmakjian refused
to reconvey and permit the closing of this sale.
17. Thereafter, the Trustee
sought and obtained from the Court a SUPPLEMENTAL ORDER DIRECTING SALE
OF REAL PROPERTY FREE AND CLEAR OF LIENS, entered July 17, 1987.
Paragraph 1 of that order directed escrow to pay the real estate
commission and closing costs, "and all encumbrances of record
except the Internal Revenue Service levy and the first deed of trust of
Gayle Akmakjian (or her assignees)." Paragraph 2 of that order
further provided: "All remaining proceeds of the sale are to be
paid over to Steven E. Smith, Trustee, who will fully bond said funds,
to be held by him in a separate interest bearing account, pending an
adjudication and order by this Court as to who is entitled to those
funds."
18. Escrow closed. The
Trustee received from escrow the full sum of $299,718.97, consisting of
$163,998.73 from the escrow and $135,720.24 from the trustee of Gayle
Akmakjian's trust deed, which the Court ordered turned over to and held
by the Trustee. The Trustee secured a bond more than sufficient for that
amount, and opened an interest bearing account for the $299,718.97 at
Metrobank, Los Angeles.
19. The liens of all
persons attached to the $299,718.97 fund with the same force, effect and
priority that they attached to the real property sold.
20. On October 29, 1987,
the Court entered its ORDER ON TRUSTEE'S APPLICATION FOR ORDER (1)
ADJUDICATION OF LIEN RIGHTS, AND (2) ASSESSING COSTS AND DIRECTING
PAYMENT OF INTERIM TRUSTEE FEES, which provided in pertinent part that:
(1). The Trustee would hold
the $135,720.24 (plus interest earned while the funds were in the
Trustee's hands) pending the determination of an adversary proceeding in
which Gayle Akmakjian and her assignees, the United States of America
and the Trustee are all named adversary parties. It was the
understanding of the Court that such an action will be brought and that
the Trustee intends to take a limited role therein as a
"stakeholder."
(2). The trustee would
disburse the sum of $81,999.37 (plus the proportionate share of interest
earned by the funds while in the trustee's hands) as the 50% share of
the net process of the sale, to Philip Berkowitz as executor of the
estate of Max Saddle, deceased, after allowing for a deduction for
stipulated trustee fees.
(3). The remaining sum of
$81,999.36 would remain in this bankruptcy estate until judgment is
rendered in the adversary action seeking to determine the existence of a
security interest therein by Martin Akmakjian. If that judgment does not
expressly direct the manner of payment of said fund and identify the
payee, the Trustee may apply to the Court for an ex parte order
for such distribution if warranted.
21. This Court determined
in the adversary action that Martin Akmakjian had no security interest
in the $81,999.37.
22. The United States of
America has a first priority position on the $135,720.24 (plus interest)
fund identified above.
23. The United States of
America has a first priority position in the remaining sum of $81,999.36
(plus interest) identified above.
24. The United States of
America is entitled to have the $135,720.24 (plus interest) fund
identified above.
25. The United States of
America is entitled to have the $81,999.36 (plus interest) fund
identified above.
26. To the extent any
Conclusion of Law is deemed a Statement of Uncontroverted Fact, it is
incorporated herein.
CONCLUSIONS
OF LAW
1. Section
6321 of the Internal Revenue Code of 1986, provides for the
imposition of a federal tax lien encompassing "all property and
rights to property whether real or personal, belonging to" a
delinquent taxpayer. Pursuant to Section
6322 of the Code, such tax lien arises automatically at the
time of the assessment, continues thereafter until the underlying tax
liability is satisfied or the statute of limitations intervenes (see Sec. 6502 , Internal Revenue Code 1986 (26 U.S.C.)) and
attaches to after-acquired property of the taxpayer. Glass City Bank
v. United States [45-2
USTC ¶9449 ], 326 U.S. 265 (1945); J.D. Court, Inc. v.
United States [83-2 USTC ¶9454 ], 712 F.2d 258, 260-261 (7th Cir. 1983). In
the present case, federal tax liens in the amount of $88,180 arose
against all property and rights to property of the debtor, Lewis
Akmakjian and Gayle Akmakjian on July 12, 1982, upon assessments of
their joint income tax liabilities for 1968, 1969, 1971, 1973 and 1975.
2. Once it is determined
that a federal tax lien attaches to property, "we enter the
province of federal law * * *: (Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 514 (1960)) and the question
whether there is a security interest that has priority is exclusively
within that province. The priority of federal tax liens vis-a-vis other
liens is essentially based upon "first in time is the first in
right." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). This general
lien of the government prevails against all unperfected liens against a
taxpayer's property or rights to property with the exceptions outlined
in Section
6323(a) , which, in relevant part, provides for priority over
the unfiled tax lien to the claims of any "purchaser, holder
of a security interest, mechanic's lienor, or judgment lien
creditor." J.D. Court, Inc., supra, at 261. 1
Here, notices of federal tax liens for both assessments were filed
November 29, 1982. The interests of the assignees of Gayle Akmakjian
were perfected, if at all, after the filing of the notices of federal
tax lien. Hence, the assignees of Gayle Akmakjian (Hugh Lawson, Henry
Friedman and Irvin Butler) cannot compete with the filed federal tax
liens.
3. The tax liens against
Gayle Akmakjian are unaffected by Gayle Akmakjian's assignment of her
interest in the trust deed. As recently explained by the Ninth Circuit
Court of Appeals:
We
cannot accept the bank's interpretation of the statute and regulations.
Under 26 U.S.C. §6332(a)
, "any person in possession of . . . property or rights
to property subject to levy upon which a levy had been made shall, upon
demand surrender such property or rights." Levy may be made
"upon all property and rights to property . . . belonging to [a
taxpayer] or on which there is a [federal tax] lien." 26
U.S.C. §6331(a)
. (emphasis added). A federal tax lien attaches to a
taxpayer's property when unpaid taxes are assessed, and continues to
attach until either the tax is paid or the lien becomes unenforceable
because of lapse of time. 26 U.S.C. §§6321
, 6322
. The lien continues to attach to a taxpayer's property
regardless of any subsequent transfer of the property. United States
v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 57 (1958); United States v.
Oil Resources, Inc. [87-2 USTC ¶9461 ], 817 F.2d 1429, 1433 n.3 (9th Cir. 1987); Omnibus
Fin. Corp. v. United States [78-1 USTC ¶9209 ], 566 F.2d 1097, 1103 (9th Cir. 1977). Thus,
under the Treasury Regulations, [p]roperty subject to a Federal tax lien
which has been sold or otherwise transferred by the taxpayer may be
seized while in the hands of the transferee or any subsequent
transferee. . . . Levy may be made by serving a notice of levy on any
person in possession of . . . property or rights to property subject
to levy. . . . [A] levy only reaches property in the possession of the
person levied upon at the time a levy is made.
26 C.F.R. §301.6331-1(a)(1)
(emphasis added).
United
States v. Donahue Industries, Inc.
[90-2
USTC ¶50,343 ], 905 F.2d 1325 (9th Cir., June 18, 1990)
(emphasis in the original). Accordingly, the assignees of Gayle
Akmakjian took their assignments subject to the federal tax liens
against Gayle Akmakjian.
4. It is too well settled
for discussion that a lien, mortgage or security interest against the
debtor's property is unaffected by the intervention of bankruptcy in the
absence of some affirmative act sufficient to avoid the encumbrance,
even though the underlying debt is extinguished. Long v. Bullard,
117 U.S. 617, 620-21 (1986); Isom v. United States [90-1
USTC ¶50,216 ], 901 F.2d 744 (9th Cir. 1990). This is true
regardless of whether the secured creditor files a proof of claim. Simmons
v. Savell (In Re Simmons), 765 F.2d 547, 556 (5th Cir. 1985). The
burden of avoiding an encumbrance on property of the estate lies with
the debtor or the trustee. In re Simmons, supra. Here, neither
the debtor nor the trustee has taken any steps to avoid the perfected
tax liens. Indeed, the Bankruptcy Code makes no provision for avoiding
such liens. See 11 U.S.C. §§544
--549 and 724(a). As a result, any discharge of the debtor's
tax liabilities has no impact on the government's perfected tax liens.
Accordingly, the federal tax liens take priority over any claim of the
debtor or Gayle Akmakjian. 2
5. No material issues of
fact exist and the government is entitled to judgment as a matter of
law.
6. None of the parties can
compete with the government's tax liens. Therefore, this Court orders
the Trustee to pay the Internal Revenue Service the amount of
$135,720.24 (plus interest) and $81,999.36 (plus interest) presently
held by the Trustee.
7. To the extent any
Statement of Uncontroverted Fact is deemed a Conclusion of Law, it is
incorporated herein.
IT IS SO ORDERED
1
Section 6323(b) providing for protection of certain interests even
though the notice of tax lien was filed has no application here.
2
At oral argument counsel for Gayle Akmakjian represented that Ms.
Akmakjian received a discharge of her tax obligations in another
bankruptcy case.
In re Kenneth William Bolin and Brenda Joyce Bolin,
Debtors
U.S.
Bankruptcy Court, West. Dist. Ark., El Dorado Div., 89-11041M, 3/15/91
[Code
Secs.
6321 and 6334
]
Bankruptcy and reorganization: Lien for taxes.--
The IRS's objection to confirmation of a bankruptcy plan of
reorganization was sustained, where the debtors attempted to avoid the
IRS's lien on property covered by a state law exemption. The
government's lien could not be avoided because a state law that
otherwise exempts certain property from levy has no effect on a federal
tax lien. In addition, the IRS was entitled to allocate its lien to the
oldest taxes owed by the debtors in order to maximize its total
recovery.
ORDER
MIXON, Bankruptcy Judge:
On March 8, 1989, Kenneth
William Bolin and Brenda Joyce Bolin filed a voluntary petition for
relief under the provisions of chapter 13 of the United States
Bankruptcy Code. The debtors filed a proposed plan of reorganization on
March 24, 1989, and filed a first and second modification to their plan
on June 30, 1989. The Internal Revenue Service (IRS) filed an objection
to confirmation of the plan, and the parties submitted the matter to the
Court on written stipulations and briefs.
The proceeding before the
Court is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(B) and (L),
and the Court has jurisdiction to enter a final judgment in this case.
The relevant facts are
summarized from the petition and stipulations as follows. The scheduled
assets, including assets claimed as exempt, were valued at $25,035.00,
and the exempt assets were valued at $16,535.00. The IRS did not file an
objection to the debtors' claim of exemption.
On May 31, 1988, the IRS
filed a notice of federal tax lien with the Circuit Clerk of Ashley
County, Arkansas, for the following:
Date of
Tax Period Assessment
1040 12-31-82 7-06-87 3,809.73
1040 12-31-83 7-06-87 10,076.80
1040 12-31-84 7-06-87 5,372.59
1040 12-31-85 7-06-87 3,837.35
1040 12-31-86 4-27-88 1,116.89
----------
$24,183.36
On June 1, 1989, the IRS
filed a proof of claim for taxes, penalties, and interest in the sum of
$27,820.40 calculated as follows:
Interest to
Tax Period Tax Amount Penalty Petition Date
1040 12-31-82 -0- 679.21 1,790.54
1040 12-31-83 5,067.00 3,268.95 4,391.24
1040 12-31-84 3,914.00 1,163.02 1,988.07
1040 12-31-85 3,180.00 835.96 1,097.54
1040 12-31-86 -0- 148.44 296.43
---------- -------- -------------
Subtotals
........ 12,161.00 6,095.58 9,563.82
Total Tax, Penalty and
Interest ..................... $ 27,820.40
The debtors' plan stated
that the claim of the IRS was the sum of $24,947.93. The plan treated
the claim of IRS as follows:
Class
III--Internal Revenue Service should be treated as a secured claimant as
to the taxes due for the years 1982 through 1986, which are not
hereinafter treated in CLASS IV. They shall retain their lien securing
their claim and they shall be paid not less than the allowed amount of
their claim over the life of the Plan. The maximum amount of their
secured claim shall be limited to the value of the security on which
they hold a valid and unavoided lien, with interest being allowed on
that claim only to the extent that the security exceeds the amount of
the claim, and the amount of their claim shall exclude penalties. In
accordance with 11 U.S.C. §522(f), the Order of Confirmation shall
avoid any liens of the Internal Revenue Service as to the exempt
property of the Debtors which comes within the categories of 11 U.S.C.
§522(f)(2)(A), (B) and (C).
Class
IV--IRS shall be treated as a general, unsecured claimant, without
priority, as to:
(a) That
portion of the 1984 income tax which they concede in their Objection to
Confirmation to be unsecured and nonpriority;
(b) That
portion of their claim which exceeds the value of the security;
(c) That
portion of their claim as to which their lien is avoided pursuant to 11
U.S.C. §522(f)(2); and
(d)
Penalties, all of which are deemed punitive in nature.
The plan
of the debtors is further modified to increase the amount of the monthly
payments to the Plan from $402.98 to $452.98 per month, and to provide
that the Plan shall extend over a period of five (5) years rather than
three (3) years as initially proposed, in order to pay the claim of
Internal Revenue Service in full.
The IRS alleges that it
holds a secured claim on the property which the debtor claims as exempt
in the sum of $16,535.00 for taxes, interest and penalties as follows:
1982 ......................................................... $2,469.75
1983 ......................................................... 12,727.19
1984 ......................................................... 1,338.06
The parties do not dispute that the value of the debtors' property to
which the tax lien attached is the sum of $16,535.00. The IRS claims a
priority unsecured claim for the balance of its claim in the total sum
of $11,285.40.
The issues as stated by the
parties are as follows:
a.
Whether the lien of the IRS can be avoided under 11 U.S.C. §522(f)(1)
as a "judicial lien" impairing the exemptions of the Debtors;
b.
Whether the lien of the IRS can be avoided under 11 U.S.C. §522(f)(2)
as a nonpossessory, nonpurchase money security interest in household
furnishings and implements or tools of the trade of Kenneth Bolin;
c.
Whether the IRS may allocate its claim between secured and unsecured in
order to maximize its recovery and the specific years to which the IRS
secured claim should be applied and, within each of such years, the
specific portions (taxes, penalties and/or interest) of the claim to be
given secured status;
d.
Whether any portion of the unsecured IRS claim should be accorded
priority status, and the amount thereof;
e.
Whether the statutory additions (penalties) are entitled to payment
under the Plan in the same manner as, and with the same classification
as, the underlying tax liabilities; and
f.
Whether the Debtors' second modification of Plan should be confirmed by
the Court.
AVOIDANCE
OF TAX LIEN
Unless the holder of a
secured claim accepts the debtor's chapter 13 plan or the debtor
surrenders the property securing the claim, a chapter 13 plan must meet
the requirements of 11 U.S.C. §1325(a)(5)(B) regarding secured claims.
Section 1325(a)(5)(B) provides that:
(B)(i) .
. . 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[.]
In this case, the debtors'
plan proposes to use the avoiding powers provided in 11 U.S.C. §522(f)
to avoid the IRS tax lien as a judicial lien that impairs an exemption
claimed under state law. 1
Both parties presented arguments on whether a tax lien is a judicial
lien or a statutory lien; however, such a determination is unnecessary.
A federal tax lien, arising under 26 U.S.C. §6321
, gives the United States a lien on all property and rights
to property of the taxpayer, including property acquired by the taxpayer
after the lien arises. Shawnee State Bank v. United States [84-1 USTC ¶9513 ], 735 F.2d 308, 310 (8th Cir. 1984). The
lien attaches to the debtor's property that is otherwise exempt from
levy under state law. No provision of state law may exempt property from
a federal tax lien. United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990); Herndon v.
United States [74-1
USTC ¶16,127 ], 501 F.2d 1219, 1222-23 (8th Cir. 1974). See
26 U.S.C. §6334
. 2
The IRS federal tax lien cannot be avoided under 11 U.S.C. §522(f)
because the debtors' state law exemption has no effect on the federal
tax lien.
In addition, even if the
IRS federal tax lien could be avoided under 11 U.S.C §522(f), this
cannot properly be effected by a mere statement in the debtors' plan
that the lien is avoided. See In re Beard [90-1
USTC ¶50,260 ], 112 Bankr. 951 (Bankr. N.D. Ind. 1990). A
debtor is required to file the appropriate pleading required by the
Bankruptcy Rules, which is either a motion or complaint, and the
creditor is entitled to notice and a hearing to determine whether a
creditor's lien is avoided. See In re Beard [90-1
USTC ¶50,260 ], 112 Bankr. 951, 954-55 (Bankr. N.D. Ind.
1990); Bankruptcy Rules 4003(d), 7001, and 9014. Therefore, the IRS
objection to confirmation as to the avoidance of its tax lien is
sustained.
ALLOCATION
OF LIEN
Under the Internal Revenue
Code, tax returns are due on April 15 of the year following the calendar
year for which the tax is due. 26 U.S.C. §6072(a)
. Since this case was filed March 8, 1989, the taxes due for
the years 1982, 1983, and 1984 were due more than three years before the
date the petition was filed and are not entitled to priority status
under 11 U.S.C. §507(a)(7)(A). However, the IRS argues that it may
allocate its lien to the oldest taxes in order to maximize its recovery,
and this position is well supported by the authorities. See Liddon v.
United States [71-2
USTC ¶9591 ], 448 F.2d 509 (5th Cir. 1971), cert. denied,
406 U.S. 918 (1972); Pacific Nat'l Ins. Co. v. United States [70-1
USTC ¶9238 ], 422 F.2d 26 (9th Cir.), cert. denied,
398 U.S. 937 (1970); In re Buzek, 116 Bankr. 82, 83 (Bankr. N.D.
Ohio 1990); In re Mikrut [87-2 USTC ¶9661 ], 79 Bankr. 404, 407 (Bankr. W.D. Wis.
1987); In re Junes, 76 Bankr. 795 (Bankr. D. Or. 1987), aff'd
[89-1 USTC ¶9383 ], 99 Bankr. 978 (Bankr. 9th Cir. 1989). The
objection to confirmation as to the allocation of the IRS lien is
sustained.
PRIORITY
UNSECURED CLAIM
To be confirmed, a chapter
13 plan must propose to pay, in full, any unsecured claim that is a
priority claim pursuant to 11 U.S.C. §507
, unless the creditor consents to a different treatment. 11
U.S.C. §1322(a)(2). See In re Carter, 74 Bankr. 613, 615-16
(Bankr. E.D. Pa. 1987); In re Driscoll, 57 Bankr. 322, 327-28
(Bankr. W.D. Wis. 1986); 5 Collier on Bankruptcy ¶1322.03 (15th
ed. 1990).
Treatment of prepetition
tax liabilities is provided for in 11 U.S.C. §507
, which provides, in relevant part, as follows:
(a) The
following expenses and claims have priority in the following order:
(7)
seventh, allowed unsecured claims of governmental units, only to the
extent that such claims are for--
(A) a
tax on . . . income . . .
(i) for
a taxable year ending on or before the date of the filing of the
petition for which a return, if required, is last due, including
extensions after three years before the date of the filing of the
petition[.]
.
. .
(G) a
penalty related to a claim of a kind specified in this paragraph and in
compensation for actual pecuniary loss.
A
claim entitled to priority under section 507(a)(7) is not dischargeable.
See 11 U.S.C. §523(a)(1)(A).
The IRS asserts that, if
the Court determines that its unsecured claim is entitled to priority
status under section 507(a)(7), the statutory additions of interest and
penalties should be accorded the same priority status as the underlying
taxes.
Prepetition interest on a
tax liability is considered to be part of the IRS's priority claim. In
re Larson [88-2 USTC ¶9590 ], 862 F.2d 112, 119 (7th Cir. 1988); United
States v. Stowe [90-2
USTC ¶50,559 ], 121 Bankr. 549, 552 (N.D. Ind. 1990); In
re Stonecipher Distribs., Inc., 80 Bankr. 949, 950 (Bankr. W.D. Ark.
1987); In re Mikrut [87-2 USTC ¶9661 ], 79 Bankr. 404, 407-09 (Bankr. W.D. Wis.
1987); In re Healis, 49 Bankr. 939, 942 (Bankr. M.D. Pa. 1985).
However, when the IRS assesses penalties in addition to the interest,
the penalties are considered to be punitive in nature, rather than as
compensation for actual pecuniary loss to the government and do not have
the same priority status as the underlying tax. In a chapter 7 case, a
tax penalty claim is subordinate to claims of general unsecured
creditors. 11 U.S.C. 507(a)(7)(G); 3 Collier on Bankruptcy ¶507.04
(15th ed. 1990). Tax penalty claims 3
may be subordinated in a chapter 11 or a chapter 13 case if warranted by
the equities of the case pursuant to 11 U.S.C. §510, even if the IRS is
not guilty of misconduct. See Schultz Broadway Inn v. United States
[90-2
USTC ¶50,594 ], 912 F.2d 230 (8th Cir. 1990); In re Buzek,
116 Bankr. 82, 84 (Bankr. N.D. Ohio 1990); Mikrut [87-2
USTC ¶9661 ], 79 Bankr. at 407; Healis, 49 Bankr. at
942; In re Hernando Appliances, Inc., 41 Bankr. 24, 25 (Bankr.
N.D. Miss. 1983).
Subordination may also be
applicable to a secured claim for tax penalty. See Schultz Broadway
Inn. v. United States [90-2
USTC ¶50,594 ], 912 F.2d 230 (8th Cir. 1990); In re
Virtual Network Servs. Corp., 902 F.2d 1246 (7th Cir. 1990). But see
Burden v. United States [90-2
USTC ¶50,598 ], 917 F.2d 115 (3d Cir. 1990).
Although the issue of
subordination may be raised under the terms of a chapter 13 plan 4
the bankruptcy court must determine the equities of the case to
determine if subordination is warranted. See Schultz Broadway Inn. v.
United States [90-2
USTC ¶50,594 ], 912 F.2d 230 (8th Cir. 1990). This issue
cannot be decided because the parties did not address this issue in
their stipulation.
The debtors are granted
twenty days to file a modified plan consistent with this opinion.
IT IS SO ORDERED.
1
The state exemptions are provided for in Ark. Code Ann. §16
-66-218 (Supp. 1987); Ark. Const. art. 9, §§2
and 3
.
2
Although certain personal property of the taxpayer is exempted from
administrative levy or seizure by the IRS, "all property and rights
to property, whether real or personal, belonging to the [taxpayer]"
remain subject to the IRS's federal tax lien. 26 U.S.C. §§6321
, 6334(a)
, 6334(c)
. Federal tax liens may be secured by property exempt from
levy under section
6334(a) . See, e.g., United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.2d 377, 378-79 (9th Cir. 1990).
3
Subordination may also apply to the portion of IRS' claim that
represents interest on the penalty assessment.
4
Bankruptcy Rule 7001(8).
In re Thomas J. Taylor, Hattie M. Taylor, Debtors
U.S.
Bankruptcy Court, Dist. Md., Rockville, 90-4-3273-PM, 5/14/91
[Code Secs.
401 , 6321
and 6334
]
Liens: Validity: Exemption: Qualified retirement account:
Bankruptcy.--
The bar against assignment or alienation of a qualified retirement
account does not preclude a tax levy or a judgment in favor of the
government resulting from unpaid taxes. Because the IRS obtained neither
a pre-bankruptcy petition levy nor a judgment as provided in Reg.
§1.401(a)-13(b)(2) , its lien is inchoate regarding such
asset. The federal tax lien on the remaining property became choate
before the bankruptcy petition was filed and constitutes a valid
prebankruptcy petition lien on such property. After deducting from the
debtor's assets the value attributable to the retirement account and the
value of a secured claim on an automobile, the remaining value of the
debtor's property was determined and was considered the extent of the
IRS's secured claim on the prepetition tax lien. The balance of the IRS
claim was considered an unsecured priority claim.
Alfred Lawrence Toombs,
Murray & Price, 1915 I St., N.W., Washington, D.C. 20006-2107, for
debtors. Lawrence Blaskopf, Department of Justice, Washington, D.C.
20530, for IRS.
MEMORANDUM
OF DECISION
MANNES, Chief Judge:
Before the court is
debtors' objection to the allowance of certain claims by the Internal
Revenue Service ("IRS") and for valuation of security. The IRS
on November 14, 1990, filed a timely proof of claim in the amount of
$64,154.52 claiming all but $7,462.65 as secured. Certain facts, as
summarized below, are undisputed.
THE
FACTS
Acting pursuant to 26 U.S.C
§6323(f)(1)(A)
, the IRS filed a tax lien against the debtors in the Circuit
Court for Montgomery County, Maryland, on April 19, 1989. The debtors
filed this case under Chapter 13 of the Bankruptcy Code on October 2,
1990. Debtors' Chapter 13 statement shows ownership of personal property
valued at $30,740.16 and no real property. Prior to debtors' Chapter 13
filing, the IRS had done nothing further after filing the tax lien to
obtain payment such as levy, obtain a judgment or do any other act, with
respect to any property of the debtor.
The issue before this court
is the validity and extent of IRS liens with respect to certain
property, namely (1) multiple retirement accounts that debtors claim are
qualified pursuant to the Internal Revenue Code, 26 U.S.C. §401
; (2) A 1986 Toyota Cressida automobile, the $975.06 equity
of which is claimed exempt by the debtor; (3) $200.00 in bank deposits
which are similarly claimed by the debtor as exempt; and (4) various
items of tangible personal property said to aggregate $4572.25 in value 1.
THE
LAW
The starting point for
analysis is the Federal Tax Lien Act of 1966 (the "Tax Lien
Act"). 26 U.S.C.S. §§6321
et seq. 2
The statute sets forth the three requirements for the creation of a
Federal tax lien: (1) an assessment by the IRS of the tax liability; (2)
demand by the IRS for payment of the tax liability; and (3) failure on
the part of the taxpayer to pay. A valid tax lien arises as to all
property without the federal government filing notice thereof in a
public recordation system. The procedure for filing and effect of such
notice of the lien is set out in 26 U.S.C. §6323
.
Under 26 U.S.C. §6331
, if any person liable to pay any tax fails to pay the same
within ten days after notice and demand, the Secretary of the Treasury
or a delegate may proceed to collect such taxes by levy upon all
property and rights to property belonging to the taxpayer.
The broad pervasive
language of the nature of the lien contained in §6321
may be contrasted with the narrow limits of §6334
providing specific exemptions from levy, none of these being
applicable to this case.
Given the filed tax lien by
the IRS, the United States has a lien on all of the property of the
debtors, including the property that is the subject of this action
unless exceptions exist. We shall now deal with each item of property in
turn.
DEBTORS'
RETIREMENT AND SAVINGS ACCOUNTS
3
There is no dispute that
the retirement and savings accounts (jointly the "accounts")
are qualified accounts pursuant to 26 U.S.C.S. §401(a)
. Under the plan, assignment or alienation of these accounts
are prohibited.
However, Treas. Reg.
§1.401(a)-13(b)(2) (as amended in 1990) provides as follows:
(2) Federal tax levies and
judgments. A plan provision satisfying the requirements of subparagraph
(1) of this paragraph shall not preclude the following:
(i) The
enforcement of Federal tax levy made pursuant to section
6331 .
(ii) The
Collection by the United States on a judgment resulting from an unpaid
tax assessment.
Treas.
Reg.
§1.401(a)-13(b)(2) (as amended in 1990).
Regulations such as these
have the power of statutes and "must be sustained unless
unreasonable and plainly inconsistent with the revenue statutes". Bingler
v. Johnson [69-1 USTC ¶9348 ], 394 U.S. 741, 704 (1969), citing Commissioner
v. South Texas Lumber Co.[48-1 USTC ¶5922 ], 333 U.S. 496, 501 (1948).
No part of the list of
property exempt from levy of 26 U.S.C. §6334
provides a safe harbor for qualified plans from tax levy
however regulations circumscribe how the IRS may pursue qualified plans.
Treas. Reg.
§1.401(a)-13(b)(2) (as amended in 1990). Therefore, accounts
such as these may properly be subject to either a tax levy or a judgment
in favor of the United States resulting from unpaid taxes. Here the IRS
neither obtained a pre-petition levy or judgment on these accounts. It
has only obtained a filed tax lien. Under the above regulation, the mere
filing of tax liens effected no transfer of interest in a qualified
plan.
Inasmuch as the IRS
obtained neither a pre-petition levy nor judgment with respect to these
accounts, its lien is inchoate, vis a vis the accounts.
REMAINING
PROPERTY
In that the validity and
extent of the Federal tax liens on the remaining property presents
common issues of law and fact, the court will dispose of these items
collectively.
Debtors assert that in
order for the IRS to have a valid interest in the remaining property, it
must have complied with the applicable state law requirements.
Specifically, the debtors assert that the IRS would be required;
1. with respect to the
automobile, to perfect their interest by filing a form with the state
department of transportation;
2. with respect to the bank
accounts, to serve legal process upon the banks;
3. with respect to the
remaining assets, to take possession of the assets or obtain a security
interest in the property under applicable state law. 4
This assertion is clearly
contradictory to the provisions of §6321
that provides, as we have stated above, that the tax lien, in
this instance a filed tax lien, is a lien on all of the property of the
debtor, whether real or personal, unless exceptions exist. The court has
found, and debtors have cited, no exception in either the Internal
Revenue Code or the Bankruptcy Code or IRS regulations that would
provide for unique treatment of the remaining property.
Inasmuch as the federal tax
lien on the remaining property became choate prior to the filing of the
bankruptcy petition, the IRS was not required to take any other action
and therefore the court finds there exists a valid pre-petition lien on
the remaining property.
EXTENT
OF LIENS
Having determined the
validity of the federal tax liens, the court now turns to the extent of
these liens given the debtors Chapter 13 bankruptcy. It is a fundamental
principle of bankruptcy law that a creditor is only secured to the
extent of the value of such creditor's interest in the estate's interest
in such property. 11 U.S.C. §506(a). The IRS asserts that all but
$7,462.65 of its $64,154.52 is secured. The debtors' schedules of assets
show personal property in the amount of $30,740.16 and no real property.
After deducting from the debtors' assets the value attributable to the
retirement accounts and the sum of $5,749.94 attributable to the value
of the secured claim on the automobile, the remaining value of the
debtors' property is $4,572.25. Therefore, the IRS's prepetition tax
lien results in a secured claim to the extent of the value of the
debtors' remaining property or $4,572.25. The remaining claim of the IRS
is an unsecured priority claim.
Counsel for the debtors
shall submit an order on notice in accordance with the foregoing.
1
This value excludes a $5,749.94 secured claim with respect to the
automobile that has undisputed superior priority to the claims of the
IRS.
2
26 U.S.C.S. §§6321
-6322 provide as follows:
§6321
. Lien for taxes.
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.
§6322
. Period of lien.
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.
3
College Retirement Equities Fund--Retirement Unit-Annuity Certificate
Number Q-677375-1; Teachers Insurance And Annuity Association of
America--Retirement Annuity Contract Number B-677375-4; Teachers
Insurance And Annuity Association of America--Supplemental Retirement
Annuity Contract Number K-302507-5; College Retirement Equities
Fund--Supplemental Retirement Unit-Annuity Certificate Number
J-302507-7; United States Government Thrift Savings Plan.
Only the last plan is the
property of the debtor, Hattie M. Taylor.
4
Md. Com. Law Code Ann. §§9-101 through 9-507 (1975 & Supp. 1990).
In re Margo M. Hartso, Debtor
U.S.
Bankruptcy Court, Dist. Md., at Greenbelt, 97-2-0815-DK, 4/15/98
[Code
Secs. 6321 , 6323
, 6334
and 6871
]
Bankruptcy: Lien for taxes: Security: Priority of claims: Retirement
accounts: Levy, requirement of.--
Federal tax liens attached to, and were secured by, the personal
property of a bankruptcy debtor, including her retirement plan funds.
The debtor's argument in reliance on the reasoning in T.J. Taylor
(BC-DC, 91-2
USTC ¶50,354 ) that an IRS tax lien does not attach to a
retirement plan unless the IRS levied on it before the bankruptcy
petition was filed was rejected in favor of the contrary holding of C.
Jones (BC-DC, 97-1
USTC ¶50,408 ) which did not require a prepetition levy.
Since the federal tax liens were fully secured by the retirement plan
funds, it was unnecessary to determine whether the IRS's claim qualified
for unsecured priority status.
ORDER DENYING DEBTOR'S OBJECTION TO PROOF OF CLAIM FILED BY
INTERNAL REVENUE SERVICE
KEIR, Bankruptcy Judge:
The United States of
America, on behalf of its agency the Internal Revenue Service
("IRS"), has filed a Proof of Claim in this Chapter 13 case
asserting a secured claim in the amount of $17,960.28. The secured
interest is based upon tax liens filed December 29, 1992, April 14,
1993, and March 8, 1994. Debtor has objected to the allowance of claim
as to the assertion of secured and/or priority status for said claim.
As to Debtor's objection to
the assertion of secured status for said claim, Debtor maintains that it
has no equity in its real property, nor in its automobile. Debtor
asserts that its remaining assets are valued at $31,260.00. Debtor
argues that, because $30,500.00 of such personal property is in a
retirement plan, the IRS only has a secured interest in the amount of
$760.00. Debtor relies on the unreported decision of In re Taylor
[91-2 USTC ¶50,354], 1991 WL 185110 (Bankr.D.Md. 1991), for the
proposition that a retirement plan is an asset to which an IRS lien does
not attach, unless the IRS levied upon the plan, pre-petition.
The IRS, however, argues that federal tax liens attach to all property
interests of the debtor upon assessment of the tax pursuant to 26 U.S.C.
§6321, whether real or personal, including pension plans.
This court finds that
reliance by Debtor on the unreported Taylor decision is
misplaced. This court is instead persuaded by the recent published
opinion by Judge Teel, In re Jones [97-1 USTC ¶50,408], 206 B.R.
614, 621-22 (Bankr.D.D.C. 1997), holding that pre-petition levy or
judgment is not required before retirement plans are subject to lien
attachment by the IRS. To the extent that the Taylor decision
dictates a contrary result, this court adopts the reasoning set forth in
In re Jones, and finds that the IRS is secured to the extent of
the value of Debtor's personal property, including Debtor's retirement
plan.
As to Debtor's objection to
the assertion of priority status for said claim, Debtor asserts that,
pursuant to 11 U.S.C. §507(a)(8)(A)(ii), a tax claim is entitled to
priority status only to the extent that such claim is for a "tax on
or measured by income" and "assessed within 240 days, plus any
time plus 30 days during which an offer in compromise with respect to
such tax that was made within 240 days after such assessment was
pending, before the date of the filing of the petition." Since all
taxes were assessed by the IRS in 1992, 1993, and 1994, Debtor argues
that the balance of the IRS' claim should be allowed only as an
unsecured claim, without priority.
The amount of the IRS'
secured claim is $17,960.28. The IRS, therefore, argues that, because
the amount of Debtor's unencumbered property, including the retirement
plan, is $31,260.00, the IRS's claim is fully secured. This court
agrees.
Accordingly, for the
reasons set forth herein, it is this 15th day of April, 1998, by the
United States Bankruptcy Court for the District of Maryland.
ORDERED, that Debtor's
Objection to Proof of Claim filed by Internal Revenue Service shall be
DENIED; and it is further
ORDERED, that the IRS shall
be entitled to a secured claim in the amount of $17,960.28.
In the Matter of Mary Francis Beard, Debtor
U.S.
Bankruptcy Court, No. Dist. Ind., Fort Wayne Div., 87-11501, 4/6/90, 112
BR 951, 112 BR 951
[Code Secs.
6321 , 6323
, and 6334
]
Bankruptcy and receivership: Tax liens: Levy and distraint: Exempt
property.--
Claims filed by the IRS against a debtor who filed for relief under
Chapter 13 of the Bankruptcy Code were allowed over the debtor's
objection. A tax lien was not limited to property that was not subject
to the levy exemption of Code Sec.
6334 . Although Code Sec.
6334 might prohibit the involuntary seizure of certain
property by the IRS, it does not prevent a federal tax lien from
attaching to all of a debtor's property. The tax lien also was not
destroyed by confirmation of the Chapter 13 plan.
DECISION
GRANT, Bankruptcy Judge:
This matter is before the
court on the debtor's objection to the proof of claim filed by the
Internal Revenue Service. The objection originally raised questions
concerning both the amounts due the IRS and its lien for unpaid taxes.
Pursuant to a stipulation filed by the parties, all issues, except those
pertaining to the tax lien, have been resolved.
Debtor, Mary Francis Beard,
filed for relief under Chapter 13 of the United States Bankruptcy Code
on November 6, 1987. As of that date, she owed the IRS the total sum of
$2,694.26. Of this amount, $781.20 represented an unsecured priority
claim and $59.20 represented a general unsecured claim, as a result of
the tax year ending December 31, 1986. The remaining $1,853.86,
representing taxes due for the years 1981, 1982, and 1985, was filed as
a secured claim due to notices of tax liens which had been filed prior
to the petition. The IRS filed its claim reflecting these amounts and
its recorded liens on December 9, 1987.
In debtor's schedules, the
IRS is listed as being owed $1,300.00 on account of which it holds a
"disputed tax lien." The value of its security is placed at
$5.21. The plan provided:
2. (A) The Internal Revenue
Service claim shall be deemed secured to the limited extent of $5.21, said
amount constituting the cash deposit reflected in Debtor's schedule
of property which is not subject to exemption pursuant to 26 U.S.C. §6334(a)
. Said amount shall be paid with a deferred value factor
at the fixed rate of 9% per annum. Provided that the entire balance of
the Internal Revenue Service claim shall be deemed unsecured for
purposes of distribution herein.
*
* *
5. Upon payment as provided
herein, the statutory lien of the Internal Revenue Service . . . shall
be deemed satisfied and extinguished.
*
* *
7. Title to the Debtor's
property shall revest in the Debtor upon confirmation of the Plan
(emphasis supplied).
The IRS did not appear at
the meeting of creditors, held on December 28, 1987, or at the
confirmation hearing of January 20, 1988. The Chapter 13 plan was
confirmed, without objection, by an order entered on January 25, 1988.
In response to the
Trustee's recommendation for allowance, the debtor filed an objection to
the IRS' claim. The debtor asserts that the property actually subject to
the tax lien does not have sufficient value to support an allowed
secured claim for the full amount designated as secured and that the
value of the IRS' allowed secured claim is now limited, through res
judicata, by confirmation of the plan. Accordingly, we must determine
whether a tax lien is limited to the property which is not subject to
the levy exemption of 26 U.S.C. §6334(a)
. If not, we must determine whether confirmation had any
effect upon this lien.
The first issue before us
concerns the scope of a federal tax lien. The origin and existence of a
lien for unpaid taxes is purely a statutory creation. In this instance,
these issues are governed by the Internal Revenue Code, which is Title
26 of the United States Code.
Should any taxpayer neglect
or refuse to pay taxes due the United States after demand has been made,
the amount of that liability, which includes not only the underlying tax
but also interest and penalties, becomes "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
. This lien arises at the time the assessment is made and
continues until the entire obligation is satisfied or becomes
unenforceable. 26 U.S.C. §6322
. It may then be perfected--in the sense that it becomes
valid against third parties who subsequently acquire an interest in the
taxpayer's property by filing a proper notice concerning it. 26 U.S.C. §6323
.
Section
6334 of the Internal Revenue Code exempts certain property
from levy by the IRS. In relevant part the section states:
(a) Enumeration--There
shall be exempt from levy--
(1)
Wearing apparel and school books.--Such items of wearing apparel and
such school books as are necessary for the taxpayer or for the member of
his family;
(2)
Fuel, provisions, furniture, and personal effects.--If the taxpayer is
the head of a family, so much of the fuel, provisions, furniture, and
personal effects in his household, and of arms for personal use,
livestock, and poultry of the taxpayer, as does not exceed $1,500.00 in
value. . . . 26 U.S.C. §6334(a)
.
Debtor takes the position
that these exemptions exclude the enumerated property from the scope of
the lien itself. In other words, because of the exemptions of §6334
, the tax lien did not attach to the exempt property. The IRS
contends that, although the lien attached, because of the exemptions it
may not be enforced, through levy, as to the exempt property. It argues
that if the IRS chose to utilize judicial foreclosure proceedings,
however, the lien could be enforced against the property that is exempt
from levy.
The federal tax lien
attached to all property of the debtor. This is clear from the plain
language of the statute, which extends the lien to "all property
and rights to property" of the taxpayer. 26 U.S.C. §6321
. In the same fashion, the plain language of the exemption
statute protects exempt property only from levy. 26 U.S.C. §6334
. It does not shield property from the lien itself. The fact
that some of the taxpayer's property may subsequently be exempt from
levy, in order to satisfy the tax lien, does not alter the fact that the
property is subject to the lien.
This conclusion is
supported by the recent 9th Circuit decision, IRS v. Barbier [90-1
USTC ¶50,107 ], 1990 WL 11054 (9th Cir. 1990) (to be
reported at 896 F.2d 377), which reversed In re Barbier, 84 B.R.
190 (D. Nev. 1988). The circuit court held that claims against a debtor
for "income tax deficiencies, including interest and penalties, may
be secured by a lien on property exempt from levy under section
6334(a) ." IRS v. Barbier, supra, slip op. at 1.
The court recognized that federal tax liens are very broad and
"attach to an extremely wide range of property." Id.
See also United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-21 (1985).
The circuit court noted
another reason why a tax lien should attach to exempt property, which
stems from the difference between a levy and a lien. Its discussion of
this point merits restatement in full:
A levy
forces debtors to relinquish their property. It operates as a seizure by
the IRS to collect delinquent income taxes. . . . The IRS's levying
power is limited because a levy is an immediate seizure not requiring
judicial intervention. . . . A levy connotes compulsion or a forcible
means of extracting taxes from a recalcitrant taxpayer . . . A taxpayer
subject to an IRS levy is provided certain protections such as notice
and an opportunity to pay the taxes due before the seizure. . . .
A lien,
however, is merely a security interest and does not involve the
immediate seizure of property. A lien enables the taxpayer to maintain
possession of protected property while allowing the government to
preserve its claim should the status of the property later change. If,
for instance, the debtor later sells his exempt personal property for
cash, the IRS would be entitled to obtain such proceeds.
Reading section
6334 and 6321
together leads to the conclusion that the former section is a
limitation on the government's ability forcibly to seize the taxpayer's
property but not a bar to the government's ability to assert a security
interest in such property. The plain words of section
6321 allow a tax lien to be attached to all of the taxpayer's
property, including property exempt from IRS levy. IRS v. Barbier,
supra, slip op. at 2 (citation omitted).
Thus,
while "26 U.S.C. §6334
may prohibit involuntary seizure of certain property by the
IRS, it does not destroy the property interest, or lien, granted by 26
U.S.C. §6321
." In re Jackson, 80 B.R. 213, 215 (Bankr. D.
Colo. 1987). Therefore, we hold that 26 U.S.C. §6334
does not prevent a federal tax lien from attaching to all of
a debtor's property, even the property which is exempt from levy. See
also In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63 (Bankr. D. Or. 1987); In re
Ridgley, 81 B.R. 65 (Bankr. D. Or. 1987); In re Driscoll, 57
B.R. 322, 327 (Bankr. W.D. Wis. 1986).
The next issue that
confronts us is whether the tax lien was destroyed by confirmation of
the Chapter 13 plan. The Bankruptcy Code gives confirmation a binding
effect, through 11 U.S.C. §1327.
(a) The
provisions of a confirmed plan bind the debtor and each creditor,
whether or not the claim of such creditor is provided for by the plan,
and whether or not such creditor has objected to, has accepted, or has
rejected the plan.
(b)
Except as otherwise provided in the plan or the order confirming the
plan, the confirmation of a plan vests all of the property of the estate
in the debtor.
(c)
Except as otherwise provided in the plan or in the order confirming the
plan, the property vesting in the debtor under subsection (b) of this
section is free and clear of any claim or interest of any creditor
provided for by the plan. 11 U.S.C. §1327.
Through
the operation of this section, confirmation of a plan is res judicata as
to all issues that were or could have been resolved during the
confirmation process. In re Randall, 98 B.R. 916, 918 (Bankr.
N.D. Ill. 1989); In re Zimble, 47 B.R. 639, 640 (Bankr. D. R.I.
1985). Debtor maintains that, pursuant to §1327, the IRS is bound by
the provisions of the confirmed plan limiting its secured claim to the
property exempt from levy.
Addressing debtor's
arguments requires the court to draw careful distinctions between what a
plan may and may not accomplish when it designates the treatment of
secured claims. The debtor clearly has the opportunity to modify secured
claims. This ability is specifically recognized by §1322(b)(2). Yet
modification has its limits. Even where confirmed without objection, a
plan will not eliminate a lien simply by failing or refusing to
acknowledge it or by calling the creditor unsecured. In re Simmons,
765 F.2d 547, 554-59 (5th Cir. 1985).
The bankruptcy rules create
two different types of proceedings for resolving disputes before the
bankruptcy court--adversary proceedings and contested matters. See
Bankruptcy Rule 7001 and 9014. Of the two, adversary proceedings are the
more formal. They are initiated by a summons and complaint, to which the
defendant is expected to respond. For contested matters, relief is
generally sought through a motion and a response is not necessary unless
the court requires one. If an adversary proceeding is required to
resolve the disputed rights of third parties, the potential defendant
has the right to expect that the proper procedures will be followed. See
In re Commercial Western Finance Corp., 761 F.2d 1329, 1336-38
(9th Cir. 1985).
The distinction between
adversary proceedings and contested matters becomes especially
significant where secured claims are concerned. There are at least three
different ways a secured claim may be challenged. The amount of the
claim can be questioned, by objecting to its allowance. The value of the
lien can be put in issue, by a request to determine secured status.
Third, the lien itself can be directly attacked. Of these challenges,
the first two are contested matters, while the third requires an
adversary proceeding.
Objections to the allowance
of a claim and the determination of secured status are contested
matters. The issues they raise do not require an adversary proceeding.
See Bankruptcy Rules 3007 and 3012. Both issues, however, will have a
decided impact upon the creditor's lien. See 11 U.S.C. §506(d). A valid
secured claim cannot exist for more than the lesser of the amount due
the creditor or the value of the creditor's lien. 11 U.S.C. §506(a). To
the extent the amount due a creditor exceeds the value of the lien
securing payment, the claim is unsecured. Thus, with few exceptions,
where a claim is neither allowed nor secured by a valuable lien, the
lien is void. 11 U.S.C. §506(d). Yet neither an objection to the
allowance of a claim nor the determination of secured status question
the existence of the underlying lien securing the claim. Rather, they
both assume that the lien is otherwise valid and enforceable. The
resulting impact upon the lien is purely incidental to the issues
concerning the amount due the creditor and the value of the creditor's
interest in property of the estate.
Among the disputes which
are specifically identified as requiring an adversary proceeding is one
which asks the court "to determine the validity, priority, or
extent of a lien. . . ." Bankruptcy Rule 7001(2). See also In re
Commercial Western Finance Corp., supra, 761 F.2d at 1336-37; In
re Jablonski, 70 B.R. 381, 385 (Bankr. E.D. Pa. 1987); In re
Breaux, 55 B.R. 613 (Bankr. M.D. Ala. 1985); In re Palombo Farms
of Colorado, Inc., 43 B.R. 709 (Bankr. D. Colo. 1984). This type of
dispute is distinguishable from questions concerning claim allowance and
lien valuation in that "the basis of the lien itself" is
placed in issue. Bankruptcy Rule 3012 advisory committee's note. Thus,
if a secured claim is challenged due to questions concerning the
validity of a lien (the existence or legitimacy of the lien itself), its
priority (the lien's relationship to other claims to or interests in the
collateral), or its extent (the scope of the property encompassed by or
subject to the lien) an adversary proceeding is required. Questions of
this kind are not resolved by the less formal procedures applicable to
contested matters.
By itself, the question of
confirmation is neither an adversary proceeding nor a contested matter.
It becomes a contested matter only if an objection is made. Bankruptcy
Rule 3020(b)(1). See also Matter of Dues, 98 B.R. 434, 440
(Bankr. N.D. Ind. 1989).
While many of the issues
concerning a secured claim can be and are "subsumed in the
confirmation process," In re Rogers, 57 B.R. 170, 173 n.2
(Bankr. M.D. Tenn. 1986), that process does not encompass all possible
issues. Since it is at best a contested matter, the only questions which
are properly before the court in the context of confirmation are those
which can be raised as contested matters. Only as to issues of this kind
will confirmation operate as res judicata. 1
If an issue must be raised through an adversary proceeding it is not
part of the confirmation process and, unless it is actually litigated,
confirmation will not have a preclusive effect. This unifying principle
harmonizes many of the seemingly conflicting decisions on the issue of
confirmation and res judicata. Compare In re Randall, supra, 98
B.R. at 918; In re Stage, 79 B.R. 487, 488 (Bankr. S.D. Cal.
1987); In re Zimble, supra, 47 B.R. at 640; Waterfield Mort.
Co., Inc. v. Clark, 31 B.R. 502, 505-506 (Bankr. S.D. Ohio 1983); In
re Lewis, 8 B.R. 132, 137 (Bankr. D. Idaho 1981) with In re
Simmons, supra, 765 F.2d at 554-59; Matter of Riley, 88 B.R.
906 (Bankr. W.D. Wis. 1987); Matter of Mikrut [87-2
USTC ¶9661 ], 79 B.R. 404 (Bankr. W.D. Wis. 1987); In re
Spohn, 61 B.R. 264 (Bankr. W.D. Wis. 1986).
The determination of the
amount due on account of a creditor's claim and the value of a lien
securing a claim are contested matters and, thus, may properly be dealt
with during the confirmation process. A challenge which questions the
validity or existence of a lien, its extent or the scope of the property
encompassed by it, or the lien's priority in relation to other
interests, however, requires an adversary proceeding. Disputes of this
nature are not resolved by the confirmation process. Therefore, when a
plan is confirmed without objection, although the value of an
acknowledged lien securing a claim will be binding upon a creditor, a
secured creditor is not bound by the terms of the confirmed plan with
respect to limitations upon the scope or validity of the lien securing
its claim. See Matter of Riley, supra, 88 B.R. 911. See also Matter
of Mikrut, supra 79 B.R. at 406.
Debtor's challenge to the
tax lien involves its validity or extent--in terms of whether or not the
lien attached to the property in question. The plan did not attempt to
limit the value of the lien based upon the value of the property
legitimately subject to it. Instead, it sought to limit the scope of the
lien by excluding property from it. Since the IRS did not object to
confirmation, the issues concerning the validity or extent of its lien
were not litigated. As a result, confirmation does not have a preclusive
effect. The tax lien survives undiminished--notwithstanding the contrary
terms of the confirmed plan.
The information before the
court indicates the value of the property subject to the tax lien
exceeded the amounts due. As a result, as of the date of the petition,
the IRS' claim for the tax years 1981, 1982 and 1985 was fully secured.
The claim will be allowed accordingly.
ORDER
This matter, having come
before the court, the issues having been determined, and a decision
rendered,
IT IS ORDERED, ADJUDGED,
AND DECREED that the secured claim filed by the Internal Revenue Service
for the income taxes covering the years 1981, 1982 and 1985, is allowed
in the sum of $1,853.86.
The Internal Revenue
Service's claim for income taxes for the year 1986, is allowed in the
sum of $781.20, as a priority claim.
The remaining amounts due
the Internal Revenue Service, in the sum of $59.20, are allowed as a
general unsecured claim.
1
This assumes, of course, that the plan is sufficiently specific in
revealing why the claim is not allowable and why, acknowledging the
asserted validity, priority, and extent of a creditor's lien, the value
of that lien is not sufficient to secure the debt. In re Rogers, supra,
57 B.R. at 172.
In re Otto's Tap, Inc., Debtor
U.S.
Bankruptcy Court, No. Dist. Ill., West. Div., 87 B 30796, 2/28/90
[Code Secs.
6321 and 6323
]
Tax liens: Bankruptcy and receivership: Priority: Security interest
holders.--
A debtor was not entitled to treat the penalty portion of the IRS claim
as a general unsecured claim, that was to be paid at the same percentage
as other unsecured claims. A recorded IRS lien had priority over a
bank's security interest on the debtor's beer and liquor inventory,
which was valued on a going-concern basis rather than a liquidation
basis. The IRS's secured claim, which included penalties, arose prior to
the debtor's filing of a Bankruptcy Court petition. The penalty portion
of the IRS's claim was secured to the extent of the value of the
property encumbered by the lien.
MEMORANDUM OPINION AND ORDER
DEGUNTHER, Bankruptcy
Judge:
This matter comes before
the Court on the Debtor's Objection to Secured Status of the IRS and the
United States' Rule 3020(b)(1) Objection to Confirmation of Debtor's
Plan. The Debtor Otto's Tap, Inc., is represented by Attorney Richard S.
Larson. The United States, for the Internal Revenue Service (IRS) is
represented by Attorney Benjamin R. Norris.
This Memorandum Opinion and
Order shall represent findings of fact and conclusions of law pursuant
to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The facts are not in
dispute. The Debtor has two secured creditors: a bank, with a senior
security interest in all of the Debtor's property; and the IRS, with a
junior lien on all of the Debtor's assets pursuant to a notice of
federal tax lien which was filed on April 23, 1987, in the DeKalb County
Recorder's Office. The IRS filed a Proof of Claim in the Debtor's
bankruptcy case, which indicated that $22,777.73 in taxes were due,
$4,324.28 in interest was due and $10,493.81 in penalties were due on
pre-petition tax obligations.
The IRS lien has priority
on the Debtor's beer and liquor inventory, pursuant to Internal Revenue
Code Section
6323 , 26 U.S.C. 6323, and will be treated as such here. The
parties have agreed, for purposes of analysis, that the going concern
value of the beer and liquor inventory is $10,000. They also agree that
its liquidation value is almost zero because the inventory cannot be
liquidated by the IRS. 1
The Debtor has proposed, in its Plan of Reorganization, to pay the taxes
and interest owed, in the amount of $27,102.01, in full, with interest,
over a six year period. The Debtor has treated the penalty portion of
the IRS claim as a general unsecured claim, which is to be paid the same
percentage as other unsecured claims.
The Objection filed by the
IRS raises two issues to be decided by the Court. The first is whether
the beer and liquor inventory should be valued on a going concern basis
or a liquidation basis. The second is whether the penalty portion of the
IRS claim should be treated as secured and the priority portion treated
as unsecured, or whether the penalty portion should be treated as a
general unsecured claim and the priority portion treated as secured.
The valuation of the beer
and liquor inventory turns on the language of Section 506 of the Code,
which provides that the value of the creditor's interest in the estate's
interest in property should be determined in light of the purpose of the
valuation and of the proposed disposition or use of such property. 11
U.S.C. 506(a); In re Smith, 92 B.R. 287 (Bankr. S.D. Ohio 1988).
In making this determination, the Court must take into account the facts
and competing interests in each case, as Congress did not contemplate a
fixed formula for valuing all collateral. Barash v. Public Finance
Corp. 658 F.2d 504, 512 (7th Cir. 1981).
The standards applied by
courts in valuing property are almost as varied as the types of property
which a court is requested to value, including the liquidation value,
fair market value, wholesale value and retail value. Many courts have
adopted the commercially reasonable disposition standard which
represents the amount that would be obtained from the most commercially
reasonable disposition practicable under the circumstances. See, In
re Schaumberg Hotel Owner Ltd. Partnership, 97 B.R. 943 (Bankr. N.D.
Ill. 1989); In re Bank Hopoalim B.M., Chicago Branch, 42 B.R. 376
(N.D. Ill. 1984).
This Court is persuaded by
the reasoning of In re American Kitchen Foods, Inc., 2 B.C.D.
715, (Bankr. N.D. Me. 1976), in valuing inventory. In American
Kitchen, the court observed that the use of a liquidation value is
unsuitable in circumstances where the debtor continues to operate and
generate and collect accounts receivable from the sale of inventory in
the ordinary course, because a liquidation would not be commercially
reasonable under Section 9-504 of the Uniform Commercial Code. Only
where there is no practicable alternative should a forced sale value be
used. The court went on to discuss the appropriate standard as follows:
"Where
collateral is used or produced under Chapter XI by a going concern
business which offers reasonable prospects that it can continue, the
value of the collateral is equatable with the net recovery realizable
from its disposition as near as may be in the ordinary course of
business."
2
BCD at 721. Hence, under American Kitchen, inventory should be
valued in light of its use in the ordinary course of business because
that is what a creditor would accept if acting in a commercially
reasonable manner.
The Debtor argues that the
commercially reasonable disposition standard must be applied from the
view that the IRS would liquidate the inventory and without
consideration of the Debtor's intended use of the inventory, impliedly
disagreeing with American Kitchen. However, the Debtor's position
begs the question. The most commercially reasonable disposition of the
collateral is to allow the Debtor to use it and to turn it into a more
liquid form, such as cash or accounts receivable, at a profit. In
effect, the disposition would be the Debtor's purchase of the interest
of the IRS because the Debtor intended to stay in business and would
have to buy similar inventory anyway.
Although the Debtor appears
correct in arguing that the IRS could not sell the inventory legally
under Illinois law, this does not require the abandonment of the American
Kitchen approach. The value established by considering the recovery
realizable from a disposition in the ordinary course may be adjusted to
take into account such unique factors. Indeed, section 506 requires such
a case by case approach. And it cannot be said that the inventory is
worth nothing to the Debtor, assuming the Debtor is acting rationally in
the economic sense. Hence, American Kitchen, as applied here,
complies with Section 506 and the economic realities mentioned by the
Debtor.
The Debtor and the IRS have
agreed for purposes of analysis that the "liquidation" value
of the beer and liquor inventory is virtually zero and the value
obtained from considering the Debtor's use of the inventory is $10,000.
The Court assumes the $10,000 figure is not based upon retail value or a
going concern value, but a somewhat lesser value which considers the
value attainable from use by the Debtor as well as the particular
limitations imposed under Illinois law. Based upon these assumptions,
and the foregoing principles, this Court finds that the value of the
beer and liquor inventory is $10,000.
*
* *
The second issue raised in
the briefs has not been addressed widely by the courts in the context of
Chapter 11. The Debtor has cited In re Hernando Appliances, Inc.,
41 B.R. 24 (Bankr. N.D. Miss. 1983) as support for its position that the
penalty portion of the IRS claim should be treated as unsecured. In Hernando
Appliances, the taxing entity had a lien on taxes and interest,
which were entitled to priority, and penalties on the taxes, which were
not entitled to priority. The court held that the taxes and interest
should be considered secured, but that the parties should be considered
unsecured, because the value of the encumbered property was insufficient
to cover the entire debt. The court did not cite any authority for its
decision and did not state the specific rationale for such an
allocation. 2
Other areas of the Code
treat tax penalty claims unfavorably. Section 507(a)(7) excludes
non-pecuniary penalty tax claims from priority treatment. In addition, Section
724(a) allows the trustee to avoid liens securing tax
penalties for the benefit of the estate. See, 11 U.S.C. §724(a)
. The rationale for this section is that unsecured creditors
should not have to bear the burden for non-compensatory debts which
result from the debtor's refusal to act.
However, several courts
have addressed Section
724 in the context of a Chapter 11 and have declined to apply
it by analogy. See, In re Russo, 63 B.R. 335 (Bankr. D. Mass.
1986); In re Stack Steel & Supply Co., 28 B.R. 151 (Bankr.
W.D. Wash. 1983); In re Churchfield, 62 B.R. 399 (Bankr. E.D.
Mich. 1986). These courts reasoned that in Chapter 7, the unsecured
creditors bear the burden of the tax penalty whereas in Chapter 11, the
debtor continues in business and, therefore, bears the burden of the
penalty. See also, In re Allied Mechanical Services, Inc., 38
B.R. 959 (Bankr. N.D. Ga. 1984). 3
The legislative history of section
724 supports such a conclusion. See, H.R. Rep. No. 595, 95th
Cong., 1st Sess. 382 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 96
(1978).
The Court is persuaded that
a lien creditor, such as the IRS, ought to be able to determine whether
penalties are to be included as part of its secured claim which arose
pre-petition. The lien of the IRS equally applies to the penalty portion
of the claim. 26 U.S.C. §6321
. The encumbrance of the Debtor's assets gave rise to a
property interest. This interest may be pared down in bankruptcy
pursuant to Section 506, including the voidance of the interest to the
extent it exceeds the value of the collateral. See, 11 U.S.C. 506(d).
But where Section 506 does not specifically apply, the property interest
remains. See, In re Lindsey, 823 F.2d 189 (7th Cir. 1984).
The Debtor has not
identified any interpretation of Section 506 which grants the Debtor or
the Court the authority to decide the manner of disposition of the
amount paid, under a plan of reorganization, for a creditor's lien. The
case cited by the Debtor, In re Hernando Appliance, Inc., did not
specifically address Section 506 or an objection to the debtor's
treatment of the taxing body's claim, so it is of little guidance here.
Indeed, Section 506
addresses the extent of an encumbrance property but does not address the
type of debt which is secured. The character of the debt, namely
pecuniary or non-pecuniary, may warrant priority treatment under the
Code but is irrelevant to the treatment of the lien securing it. A
creditor's property interest cannot be extinguished outside of Section
506 and under the guise of an "allocation by the Debtor."
The Debtor's argument that
unsecured creditors should not have to pay for the non-pecuniary debt
has some merit. However, it should be noted that the IRS was diligent in
filing a notice of tax lien, and unsecured creditors are usually
subordinated to the more diligent creditor. Moreover, although the Code
generally contemplates the subordination of non-pecuniary debt to
pecuniary debt, this general policy is superceded by the more specific
Section 506. Hence, although the Court is not entirely unsympathetic to
the Debtor's position, the result here is not so unfair as to warrant
the extinguishment of an otherwise valid property interest. The penalty
portion of the claim of the IRS is secured to the extent of the value of
the collateral encumbered by the Federal tax lien.
The "informal"
request by the IRS to amend its Proof of Claim to show the tax and
interest portions as unsecured priority debt appears unnecessary. The
penalty portion was identified on the original Proof of Claim as
secured, which has not changed, and the Debtor has proposed to treat the
tax and interest portion as a priority tax claim. The change in status
of a claim from secured to unsecured because of the valuation of
property should not require an amendment to the Proof of Claim. However,
because the parties will not be prejudiced, the IRS may do so to reflect
the findings here.
Therefore, based on the
foregoing, the Court concludes:
(1) The Objection to
Secured Status of the IRS, filed by the Debtor, should be denied.
(2) The Rule 3020(b)(1)
Objection to Confirmation of Debtor's Plan, filed by the United States,
for the Internal Revenue Service, should be granted.
IT IS SO ORDERED.
1
Under Illinois law, only an entity with a liquor license that has been
issued by the state of Illinois may sell open liquor. See, Illinois
Revised Statutes, Ch. 48, para. 93.9 (1988). Hence, liquidation value is
almost negligible.
2
The Court appears to have linked the issue of interest on priority tax
claims with the right to receive the present value of a secured claim.
3
The Court is somewhat unpersuaded by this reasoning as the unsecured
creditors in Chapter 11, who typically receive less than the full amount
of their claim, necessarily pay the penalties, not the debtor. However,
the result is accurate. See, 11 U.S.C. §103(b)
.
In re Robert J. Holland, Debtor. Robert J. Holland,
Plaintiff v. Commissioner of Internal Revenue, Defendant
U.S.
Bankruptcy Court, So. Dist. Calif., C87-0494-H7, 7/31/89, 102 BR 208
[Code Secs.
6321 and 6323
]
Bankruptcy: Federal tax liens: Funds obtained through pre-petition
collection: Preferential transfer.--
Funds obtained by the IRS during the 90-day preference period through a
pre-bankruptcy petition offset of the debtor's tax refund and a
pre-petition levy on the debtor's savings account were properly applied
to dischargeable tax year tax liabilities that were fully secured by a
federal tax lien rather than a nondischargeable tax year tax liability.
Federal tax liens survive a debtor's bankruptcy and are fully
enforceable against the debtor's exempt and nonexempt assets
notwithstanding the discharge of the underlying tax liabilities. A
debtor's discharge in bankruptcy operates as a discharge only of
personal liability and does not require a release of IRS pre-petition
tax liens, so that the tax lien remains in force and property liability
remains enforceable even against the debtor's exempt property. Absent
evidence of any other higher priority claims and considering that the
debtor would have classified such amounts as exempt assets, such funds
would not have been available for unsecured creditors. Thus, the
evidence did not show that the IRS received more through pre-petition
levies than it received through the distribution procedure of a Chapter
7 bankruptcy proceeding.
Frederick C. Phillips,
Phillips, Campbell, Haskett & Noone, 101 W. Broadway, San Diego,
Calif. 92101, for plaintiff. Greg Addington, Department of Justice,
Washington, D.C. 20530, for defendant.
MEMORANDUM
DECISION
HARGROVE, Bankruptcy Judge:
At issue is whether funds
obtained by the IRS through pre-petition collection activity can be
recovered by the debtor pursuant to 11 U.S.C. §§547(b)
and 522(h).
This court has jurisdiction
to hear this matter pursuant to 28 U.S.C. §1334 and §157(b)(1) and
General Order No. 312-D of the United States District Court, Southern
District of California. This is a core proceeding pursuant to 28 U.S.C.
§157(b)(2)(F).
The plaintiff/debtor Robert
J. Holland ("debtor") and defendant Commissioner of Internal
Revenue Service ("IRS") have filed cross-motions for summary
judgment on a complaint to avoid a preference and for a violation of the
automatic stay.
Debtor seeks summary
judgment on his complaint claiming that the payments received by the IRS
are a preference that have enabled the IRS to receive more than it would
have been entitled to had the levies and seizures not occurred. 11
U.S.C. §547(b)(5). Debtor further claims that his wages were garnished
after the filing of his bankruptcy petition in clear violation of the
automatic stay.
Defendant IRS contends that
the pre-petition payments are not recoverable by the bankruptcy estate
because the requirements for a preferential transfer have not been met.
With respect to the post-petition wage levy, the IRS contends that this
matter is moot. Instead, the IRS requests that this court grant summary
judgment in favor of the IRS.
FACTS
This court finds that the
following facts are undisputed by the evidence presented.
On August 27, 1985, the IRS
filed its notice of federal tax lien relative to the debtor's federal
income tax liabilities for the 1981, 1982, and 1983 taxable years.
On March 16, 1987, the IRS
offset the debtor's 1986 income tax refund and applied the refund to the
debtor's 1981 income tax liability. The amount offset was $1,176,
leaving a balance remaining of $2,716.09 for 1981 income tax liability.
On April 13, 1987, the IRS
served a notice of levy upon the debtor's account at the North Island
Federal Credit Union and received the sum of $2,301.83, which amount was
credited to the debtor's 1981 and 1982 income tax liabilities.
On April 24, 1987, the
debtor filed his petition for relief under Chapter 7 of Title 11 of the
United States Code.
On May 21, 1987, the
debtor's employer, Department of the Navy, responded to the wage levy
previously served upon it by the IRS. The wage levy was served on the
debtor's employer on April 13, 1987. However, the debtor's employer
deducted monies from the debtor's wages for a pay period which was
entirely post-petition. The amount obtained pursuant to the wage levy
was $760.63 and was originally applied to the debtor's 1982 income tax
liability. The amount of the wage levy proceeds was later credited to
the debtor's 1983 non-dischargeable income tax liability.
The IRS was the only
secured creditor listed in the debtor's schedules. The total amount owed
to the IRS was approximately $15,500. The debtor's income tax
liabilities for the 1981 and 1982 taxable years, to the extent they are
unsecured and unpaid, have been discharged. The debtor's income tax
liability for the 1983 taxable year is a non-dischargeable debt.
After a hearing on June 1,
1989, on the cross-motions for summary judgment, the court took this
matter under submission. The parties were allowed additional time to
submit supplemental points and authorities in support of their motions.
DISCUSSION
Summary judgment is proper
if the affidavits and other pleadings demonstrate that there is no
genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law. In re Zupancic, 38 B.R.
754, 757 (9th Cir. BAP 1984); See also, Bankruptcy Rule 7056; Federal
Rule of Civil Procedure 56(c); In re San Antonio Acres, 72 Plus,
37 B.R. 842, 844 (C.D. Cal. 1984); In re Sarner, 22 B.R. 63, 64
(9th Cir. BAP 1982). The movant has the burden of establishing the
absence of a triable issue of fact. If a movant's initial burden is
satisfied, the burden then shifts to the non-moving party to come
forward with specific facts showing that there remains a genuine factual
issue for trial. See, In re Dumas, 28 B.R. 1, 2 (9th Cir. BAP
1983).
The debtor concedes owing
the IRS $933.12 for 1981 taxes, $7,042.02 for 1982 taxes, and $7,474.50
in 1983 taxes. Debtor contends that the $3,477.83 seized by the IRS
within the ninety day preference period would have remained in the
debtor's possession absent the seizures, since he had claimed those
items as exempt in his schedules and the trustee had not objected to the
exemptions. The debtor then points out that had the $3,477.83 not been
seized by the IRS or if it is returned to him as a preference, then he
could have paid those funds to the IRS on his non-dischargeable 1983 tax
obligations, rather than having them applied by the IRS to the 1981 and
1982 dischargeable tax obligations.
The funds obtained by the
IRS through the pre-petition offset of the debtor's tax refund on March
16, 1987 and the pre-petition levy on April 13, 1987 at the debtor's
savings account at the North Island Federal Credit Union were applied to
the debtor's 1981 and 1982 income tax liabilities. These liabilities
were fully secured by the federal tax lien filed on August 27, 1985.
Federal tax liens survive the debtor's bankruptcy and are fully
enforceable against the debtor's exempt and non-exempt assets
notwithstanding the discharge of the underlying tax liabilities. 11
U.S.C. §522(c)(2)(B). In re Isom [89-1 USTC ¶9200 ], 95 B.R. 148, 151 (9th Cir. BAP 1988). The
debtor's discharge in bankruptcy operates as a discharge only of in
personam liability to the IRS and does not require a release of the
IRS pre-petition tax liens. Thus, even though the in personam
liability may be discharged in bankruptcy, the tax lien remains in
force. Thus, the in rem liability remains enforceable even
against the debtor's exempt property. In re Isom, supra.
Further, the debtor did not
present any evidence of any other claims of higher priority than the IRS
claim. Since the debtor claimed the tax refund and cash in the credit
union as exempt, those funds would have been unavailable for the
unsecured creditors. Therefore, the debtor has failed to prove that the
IRS would have received more through the pre-petition levies than it
would have through the distribution scheme of the Chapter 7 proceeding.
11 U.S.C. §547(b)(5).
The improper post-petition
wage levy by the IRS is now moot, since the IRS concedes its mistake and
has credited the wage levy to the debtor's non-dischargeable 1983 tax
liabilities. Accordingly, Debtor's motion for summary judgment is denied
and the IRS motion is granted.
CONCLUSION
This Memorandum Decision
constitutes findings of fact and conclusions of law pursuant to
Bankruptcy Rule 7052. Counsel for the IRS is directed to file with this
court a judgment in conformance with this Memorandum Decision within ten
(10) days from the date of entry hereof.
United States of America (Internal Revenue
Service), Creditor-Appellant v. Louis George Barbier, Ruth Dean Barbier,
Debtors-Appellees
(CA-9),
U.S. Court of Appeals, 9th Circuit, 88-2567, 2/13/90, 896 F2d 377, 896
F2d 377. Reversing and remanding an unreported District Court decision
[Code Secs.
6321 and 6334
]
Collection of taxes: Levy v. lien: Exempt property.--An IRS tax
lien may be secured by a bankrupt's property which is exempt from levy.
Certain specified property is exempt from IRS levy. A tax lien, however,
may generally attach to all of the property of a delinquent taxpayer. A
levy involves the immediate seizure of property, while a lien is merely
a security interest in property. Thus, the limitation on the IRS's
ability to seize the taxpayer's property is not a bar to the IRS's
ability to assert a security interest in such property.
John J. Boyle, Department
of Justice, Washington, D.C. 20530, for creditor-appellant. Geoffrey L.
Giles, 357 Clay St., Reno, Nev. for debtors-appellees.
Before POOLE, REINHARDT and
O'SCANNLAIN, Circuit Judges.
OPINION
O'SCANNLAIN, Circuit Judge: In this Chapter 13 bankruptcy proceeding,
the Internal Revenue Service, as a lien creditor, appeals the district
court's affirmance of the bankruptcy court's determination that the IRS
lien was unsecured.
I
In 1985, the Internal
Revenue Service ("IRS") assessed federal income tax
deficiencies against Louis George Barbier and Ruth Dean Barbier
("the Barbiers") for tax years 1980, 1981, 1982, and 1983. On
April 1, 1986, the IRS recorded a notice of federal tax lien based on
assessments totalling over $62,000. On August 15, 1986, the Barbiers
filed a joint petition under Chapter 13 of the Bankruptcy Code, 11
U.S.C. §§1321-1325. Their plan classified the IRS's assessment of
federal income tax deficiencies against them as an unsecured priority
claim and classified interest and assessable penalties due as a general
unsecured claim. The IRS filed an amended proof of claim reclassifying
these claims as secured and objected to the Barbiers' plan.
In the bankruptcy
proceedings, the Barbiers argued that 26 U.S.C. §6334
, 1
which exempts from an administrative levy household effects and a
limited amount of other property, also prohibits the attachment of a
federal tax lien on the exempted property. The bankruptcy court agreed
with this interpretation and the district court affirmed. The district
court held that a federal tax lien could not attach to property exempt
from an administrative levy. 2
The IRS timely appeals.
II
The IRS contends that for
purposes of the Barbiers' Chapter 13 plan, the IRS's claim against the
Barbiers for their income tax deficiencies, including interest and
penalties, may be secured by a lien on property exempt from levy under section
6334(a) . We agree.
Federal tax liens attach to
an extremely wide range of property. Section
6321 , relating to tax liens, states: "If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount . . . 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
(emphasis added). In applying this section, we examine the
plain words of the statute, Central Montana Elec. Power Coop. v.
Administrator of Bonneville Power, 840 F.2d 1472, 1477 (9th Cir.
1988), and interpret them consistently with other provisions of the
Code. See Racine v. United States, 858 F.2d 506, 509 (9th Cir.
1988).
The Supreme Court has
stated that "[t]he statutory language 'all property and rights to
property,' appearing in §6321
. . ., is broad and reveals on its face that Congress meant
to reach every interest in property that a taxpayer might have." United
States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-21 (1985).
"Stronger language could hardly have been selected to reveal a
purpose to assure the collection of taxes." Glass City Bank v.
United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945). See Saltzman, IRS
Practice and Procedure, ¶14.08 at 14-33 (1981). Holding that a lien
does not extend to property exempt from levy under section
6334 would be inconsistent both with Supreme Court precedent
and the statutory purpose of ensuring that the government is able to
secure collection of tax revenues.
The difference between a
levy and a lien also suggests why a lien should still attach to property
exempt from levy. A levy forces debtors to relinquish their property. It
operates as a seizure by the IRS to collect delinquent income taxes. See
American Acceptance Corp. v. Glendora Better Builders, Inc. [77-1 USTC ¶9348 ], 550 F.2d 1220, 1223 (9th Cir. 1977); see
also Interfirst Bank Dallas, N.A. v. United States [85-2 USTC ¶9635 ], 769 F.2d 299, 304-05 (5th Cir. 1985), cert.
denied, 475 U.S. 1081 (1986); Chevron, U.S.A., Inc. v. United
States, 705 F.2d 1487, 1489-90 (9th Cir. 1983) (levy operates as a
seizure). The IRS's levying power is limited because a levy is an
immediate seizure not requiring judicial intervention. See National
Bank of Commerce, 472 U.S. at 720-21. A levy connotes compulsion or
a forcible means of extracting taxes from "a recalcitrant
taxpayer." Interfirst Bank, 769 F.2d at 305. A taxpayer
subject to an IRS levy is provided certain protections such as notice
and an opportunity to pay the taxes due before the seizure. National
Bank of Commerce, 472 U.S. at 720-21; Interfirst Bank, 769
F.2d at 305; Martinez v. United States, 669 F.2d 568, 569 (9th
Cir. 1981).
A lien, however, is merely
a security interest and does not involve the immediate seizure of
property. A lien enables the taxpayer to maintain possession of
protected property while allowing the government to preserve its claim
should the status of property later change. If, for instance, the debtor
later sells his exempt personal property for cash, the IRS would be
entitled to obtain such proceeds.
Reading sections
6334 and 6321
together leads to the conclusion that the former section is a
limitation on the government's ability forcibly to seize the taxpayer's
property, but not a bar to the government's ability to assert a security
interest in such property. The plain words of section
6321 allow a tax lien to be attached to all of the taxpayer's
property, including property exempt from IRS levy.
The Barbiers argue that,
because under a Chapter 13 confirmed plan a debtor must provide for the
full satisfaction of all secured claims, a federal tax lien could extend
to all of their personal belongings, thereby undermining section
6334 's policy of allowing the taxpayer to retain a minimal
amount of property. This argument is unpersuasive.
Section
6334 's protection against an immediate seizure of a limited
amount of taxpayer's property is not frustrated by acknowledgment of the
government's tax lien in a Chapter 13 plan. A Chapter 13 plan allows the
debtor to make deferred payments, and claims may be satisfied out of
future income. See 11 U.S.C. §1322. Other protections of the bankruptcy
court are available to the debtor, as well. It is also significant here
that the IRS is making no attempt to enforce the tax lien by means of
levy or foreclosure. Thus, no matter what our holding, the Barbiers are
not being required to relinquish their exempt property. Rather, as the
government states the issue, "[a]ll that is involved here is a
determination of the extent to which the government is the holder of a
secured claim, and, thus, entitled to periodic payments under the
debtor's plan."
In short, Congress has
provided the IRS with at least two distinct procedural devices for
collecting taxes. We find no indication that Congress intended section
6334 exemption from summary collection proceedings to
frustrate the IRS's status, arising under section
6221 , as a secured creditor. 3
Accordingly, we hold that
for purposes of the Barbiers' Chapter 13 plan, the IRS's tax lien may be
secured by property that is exempt from levy under section
6334(a) .
REVERSED and REMANDED.
1
Section 6334 exempts from levy, inter alia, the following
personal property: Wearing apparel, school books, fuel, furniture, tools
of a trade, business, or profession, unemployment benefits, undelivered
mail, pension payments, workmen's compensation, and judgments for
support of minor children. 26 U.S.C. §6334(a)
.
2
The district court reached this conclusion through its interpretation of
the term "levy" as defined in 26 U.S.C. §6331
which states:
(a) If any person liable to
pay any tax neglects or refuses to pay the same within 10 days after
notice and demand, it shall be lawful for the Secretary to collect such
tax . . . by levy upon all property and rights to property (except such
property as is exempt under section
6334 ) belonging to such person or on which there is a lien
prodded in this chapter for the payment of such tax.
*
* *
(b) The term
"levy" as used in this title includes the power of distraint
and seizure by any means. A levy shall extend only to property
possessed and obligations existing at the time thereof. In any case in
which the Secretary may levy upon property or rights to property, he may
seize and sell such property or rights to property (whether real or
personal, tangible or intangible) 26 U.S.C. §6331
(emphasis added.)
3
We need not consider here whether exempt assets are subject to judicial
foreclosure and express no view on that question.
In the Matter of Mitchell W. Voelker,
Debtor-Appellant
(CA-7),
U.S. Court of Appeals, 7th Circuit, 94-2271, 12/12/94, 42 F3d 1050, 42
F3d 1050. Affirming and remanding a District Court decision, 94-2
USTC ¶50,299
[Code Secs.
6321 and 6334
]
Lien for taxes: Bankruptcy: Property exempt from levy--An IRS tax
lien extended to a Chapter 13 debtor's personal property even though
that property was exempt from levy under Code Sec.
6331 . The plain language of Code Sec.
6321 unambiguously states that a federal tax lien attaches to
all of a debtor's property, without exception. Further, the protection
that Code Sec.
6331 affords a debtor's personal property relates
specifically to levies, not liens. Finally, the attachment of an IRS
lien to the taxpayer's property did not undermine the goal of allowing
the debtor to retain some minimal, yet necessary, personal effects
because the IRS could not have summarily seized the property. The lien
simply determined the amount that the taxpayer had to pay the IRS, while
allowing the taxpayer to retain possession of the property.
Terrence J. Byrne, 115
Forest St., Wausau, Wis. 54402, George Goyke, P.O. Box 1566, Wausau,
Wis. 54402, for appellant. Gary R. Allen, Bruce R. Ellisen, William S.
Estabrook, Raymond R. Mulera, Alice L. Ronk, Department of Justice,
Washington, D.C. 20530, for appellee.
Before CUMMINGS, FLAUM, and
ROVNER, Circuit Judges.
FLAUM, Circuit Judge.
The debtor, Mitchell
Voelker, appealed from a decision of the District Court holding that the
Internal Revenue Service's ("IRS") tax lien extended to his
personal property exempt from levy under 26 U.S.C. sec.
6331 . We affirm.
I.
Mitchell Voelker filed a
voluntary Chapter 13 bankruptcy petition on July 29, 1992. On November
19, 1992, the IRS filed a proof of a secured claim for delinquent taxes
in the amount of $27,736, covering the years 1984 through 1989. Voelker
objected to this claim, contending that the IRS had a secured claim only
in the amount of $2,471, the value of his unencumbered assets less
$825.00 worth of personal property, including clothing, hand tools, a
lawnmower, a weedeater, and a bow and arrows, which were exempt from
levy under 26 U.S.C. sec.
6331 . Voelker argued that because this property was exempt
from levy, it was likewise exempt from the federal tax lien. The IRS
objected, claiming that under 26 U.S.C. sec.
6321 it had a lien on all of Voelker's property. Voelker then
amended his chapter 13 plan to provide that he would surrender the
property at issue to the IRS if a court determined that the lien
extended to the property.
The bankruptcy court held
that the IRS's lien did not attach to Voelker's exempt property. In
Re Voelker [94-1
USTC ¶50,122 ], 164 B.R. 308 (Bkrtcy. W.D. Wis. 1993). It
noted that "[p]ersonal property exemption statutes should be
liberally construed in order to carry out the legislature's purpose in
enacting them--to protect debtors." Id. at 312 (citations omitted).
It reasoned that sec.
6331 's definition of levy as including "the power of
distraint and seizure by any means" precluded the lien from
attaching to the exempt property. Id.
The district court,
however, reversed the bankruptcy court's decision. In an unpublished
opinion, the district court found that the plain language of sec.
6321 led to the conclusion that the federal tax lien did
attach to property exempt from levy.
II.
We review questions of law de
novo. Matter of West, 22 F.3d 775, 777 (7th Cir. 1994). When
interpreting a statute, "[i]f the statute is unambiguous, we must
enforce the plain meaning of the language enacted by Congress." Family
& Children's Center, Inc. v. School City of Mishawaka, 13 F.3d
1052, 1060 (7th Cir.), cert. denied, 115 S. Ct. 420 (1994). This
court "will look beyond the express language of a statute only
where that statutory language is ambiguous or where a literal
interpretation would lead to an absurd result or thwart the purpose of
the overall statutory scheme." United States v. Real Estate
Known as 916 Douglas Ave., 903 F.2d 490, 492 (7th Cir. 1990), cert.
denied sub nom. Born v. United States, 498 U.S. 1126 (1991).
Section
6321 states:
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.
26
U.S.C. sec.
6321 (emphasis added). The Supreme Court has noted that this
language "is broad and reveals on its face that Congress meant to
reach every interest in property that a taxpayer might have." United
States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-20 (1985).
"Stronger language could hardly have been selected to reveal a
purpose to assure the collection of taxes." Glass City Bank v.
United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945). The language of
the statute unambiguously shows that the federal tax lien attaches to
all of a debtor's property, without exception. Thus, we agree with the
district court, and the majority of other courts addressing the issue,
that the lien attached to Voelker's $825.00 worth of personal property. 1
See, e.g., United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990); Matter of
King [91-2
USTC ¶50,553 ],137 B.R. 43, 46 (D. Neb. 1991); United
States v. Stowe [90-2
USTC ¶50,559 ], 121 B.R. 549, 552-53 (N.D. Ind. 1990); In
Re Schreiber [94-1
USTC ¶50,202 ], 163 B.R. 327, 334 (Bkrtcy. N.D. Ill. 1994); In
Re Lyons, 148 B.R. 88, 92 (Bkrtcy. D. D.C. 1992); In Re Krahn,
124 B.R. 78, 82 (Bkrtcy. D. Minn. 1990); In Re Hall, 118 B.R.
671, 672 (Bkrtcy. S.D. Ind. 1990); Matter of Beard [90-1
USTC ¶50,260 ], 112 B.R. 951, 953-54 (Bkrtcy. N.D. Ind.
1990); In Re Bates [88-1 USTC ¶9124 ], 81 B.R. 63, 64 (Bkrcty. D. Ore. 1987); In
Re Ridgley, 81 B.R. 65, 69 (Bkrtcy. D. Ore. 1987); In Re Jackson
[88-1 USTC ¶9186 ], 80 B.R. 213, 214-15 (Bkrtcy. D. Colo.
1987). 2
Contrary to Voelker's
assertions, 26 U.S.C. sec.
6331 does not alter this result. That section provides:
(a)
Authority of Secretary--If any person liable to pay any tax neglects or
refuses to pay the same within 10 days after notice and demand, it shall
be lawful for the Secretary to collect such tax . . . by levy upon all
property and rights to property (except such property as is exempt under
section
6334 ) belonging to such person or on which there is a lien
provided in this chapter for the payment of such tax.
(b) The
term "levy" as used in this title includes the power of
distraint and seizure by any means. 3
Section
6331 says nothing about protecting this property from a lien,
but merely from levy. Congress exempted this property from levy and has
the capacity to do the same with the tax lien. It has chosen not to do
so.
This dissimilarity in
treatment makes sense, for as the Ninth Circuit discussed in Barbier,
a lien and levy are different things. "A levy forces debtors to
relinquish their property. It operates as a seizure by the IRS to
collect delinquent income taxes." [90-1
USTC ¶50,107 ], 896 F.2d at 379. On the other hand, "a
lien . . . is merely a security interest and does not involve the
immediate seizure of property. A lien enables the taxpayer to maintain
possession of protected property while allowing the government to
preserve its claim should the status of [the] property later
change." Id. Thus, if a debtor later sells the exempt
property, the IRS could move to collect the proceeds from the sale.
Having the IRS lien attach
to exempt property does not, as Voelker contends, undermine sec.
6334 's goal of allowing the debtor to "retain some
minimal personal effects necessary for living in our society,"
because the IRS cannot summarily seize the property. The debtor retains
possession and the lien simply determines the amount he has to pay the
IRS. 4
Thus, the effect of our holding that the IRS's lien attaches to
Voelker's personal property will require him to pay the IRS $825.00 more
than if the lien did not attach, either through larger monthly payments
or through payments over a longer time period. As noted previously,
however, Voelker has amended his plan to provide for the surrender of
this property to the IRS, should we hold, as we do today, that the lien
attaches. This action is not necessary, see 11 U.S.C. sec. 1325(a)(5),
and does not alter our conclusion.
Extending the IRS's lien to
property exempt from levy accomplishes both of Congress's goals: it
increases the payment of delinquent taxes and allows the debtor to
protect his property from summary, non-judicial seizure. Because it is
not absurd that Congress would extend the lien to personal property yet
preclude the levy of that property, we will not manufacture a different
understanding of the "all property and rights in property"
language in sec.
6321 and the exemption from levy in sec.
6331 .
For the foregoing reasons,
the decision of the district court is affirmed and the case remanded for
further action. AFFIRMED.
1
Voelker asserts that should we hold that the lien attaches, it must be
released under 26 U.S.C. sec.
6325 , which states that a lien must be released when
"the liability for the amount assessed, together with all interest,
has become unenforceable." We read this to mean that the underlying
liability, not the lien securing it, must have become unenforceable in
order to require releasing the lien. See MICHAEL L. SALTZMAN, IRS
PRACTICE AND PROCEDURE para. 15.04[2] (2d ed. 1991) (the question is
whether "the tax assessed is unenforceable as a matter of
law (e.g., by the expiration of the period of limitations).")
(emphasis added); WILLIAM T. PLUMB, JR., FEDERAL TAX LIENS 43 (3d ed.
1972) ("unenforceability as a matter of law (e.g., the
statute of limitations), not of fact" requires release) (emphasis
in original). In any event, we do not decide whether the lien is
unenforceable because we express no view as to whether the IRS can
enforce it through other procedures, such as judicial foreclosure under
26 U.S.C. sec. 7034.
2
Like the district court, we do not find the cases to the contrary, cited
by the appellant, persuasive. See Matter of Riley, 88 B.R. 906,
912 (Bkrtcy. W.D. Wis. 1987) (no analysis of issue); Matter of
Driscoll, 57 B.R. 322, 327 n.6 (Bkrtcy. W.D. Wis. 1986) (Analysis
consisting only of the sentence: "The debtor does receive a much
smaller personal property exemption under IRC sec.
6334 (26 U.S.C. sec.
6334 ) which constitutes the sole exemption which may be
claimed against a valid federal tax lien."); In Re Ray, 48
B.R. 534, 537-38 (Bkrtcy. S.D. Ohio 1985) (no analysis).
3
A lien does not itself act as a distraint and seizure so we do not, as
Voelker contends we should, equate a lien with levy. We express no view
as to whether this definition of levy prohibits other methods of
collection, such as judicial foreclosure under 26 U.S.C. sec. 7034.
4
A chapter 13 debtor must satisfy the full amount of secured claim, 11
U.S.C. 1325(a), which amount is determined by "the creditor's
interest in the estate's interest in such property." 11 U.S.C. sec.
506(a). The debtor pays for this secured claim in monthly installments
over three years. However, the bankruptcy court can, for cause, extend
the repayment period by an additional two years, 11 U.S.C. sec. 1322(c),
so that the debtor does not have to make larger monthly payments.
ROVNER, Circuit Judge
The court's opinion today
is a succinct and true application of the law and in that respect I join
it without hesitation. This case has led me to question whether the law
makes much sense, however. The problem is one for Congress to fix, of
course, and my view of the practicalities may matter little. Some cases
nonetheless cry out for comment, and I believe this is one of them.
Central to the framework of
personal bankruptcy is the notion of a "fresh start": the
opportunity for a debtor to pool his resources, pay what he can of his
debts, and move on. See, e.g., In re Smith, 848 F.2d 813, 816-17
(7th Cir. 1988); In re LeMaire, 898 F.2d 1346, 1357-58 n.16 (8th
Cir. 1990) (en banc) (dissenting op.). But a fresh start ought not be a
naked start. A debtor should not be made to surrender the clothes on his
back or the food in his cupboard in exchange for the protection of
bankruptcy. Common sense as well as compassion dictates as much: a
bankrupt deprived of life's necessities will merely have to reallocate a
portion of his future income to reacquire those items (in all likelihood
at a greater cost), defeating the purpose of the fresh start bankruptcy
purports to provide. It makes far more sense to leave these items in the
debtor's hands. Consistent with that notion, section
6334(a) exempts a category of personal property from the
power of administrative levy that the IRS otherwise enjoys.
But, as the IRS is quick to
point out, the statute says nothing about a lien. And because the
statutory exemption indeed refers only to levies, and the levy and the
lien are distinct legal concepts, the court correctly concludes that the
exemption does not deprive the IRS of the lien that it enjoys on all
property owned by the debtor.
Permitting the IRS to
retain a lien on personal property may make some sense given the
possibility that a debtor could decide to sell it. If Mr. Voelker
decides to give up his weed eater or his bow and arrows, it only seems
fair that the IRS lay claim to the cash he gains from the sale. And yet
it would seem unrealistic to expect that the government will realize
substantial remuneration from the sale of these second-hand items.
Notably, for example, the statute currently imposes a cap of $1,650 on
the value of "fuel, provisions, furniture, and personal
effects" which may be exempted from levy. sec.
6334(a)(2) . Moreover, many of these and other items falling
within the exemption can hardly be considered luxuries that a person can
do without--e.g., food, clothing, fuel, and school books. sec.
6334(a)(1) , (2)
. Thus, the likelihood that the debtor will (short of
desperation) convert these modest belongings to cash appears low, and
the prospect that the proceeds will be significant if he does even
lower. Perhaps there is a forgotten Armani original hanging in Mr.
Voelker's closet, but I doubt it.
Of far more concrete
benefit to the IRS in recognizing a lien on such property is the fact
that the value of the property must be included in the total amount the
debtor is obligated to repay the government. Ante at 5-6 & n.4.
Thus, in the event that the debtor "chooses" to keep the
property (and what real "choice" is there with respect to
items like food, clothing, and fuel?), he must either make higher
monthly payments over the life of his payment plan or make these
payments over a longer period of time, beyond the usual three-year
maximum if need be. See 11 U.S.C. sec. 1322; ante n.4. Neither of
these scenarios is consistent with the purpose of bankruptcy. A higher
monthly payment raises the probability that the debtor will default on
his obligations, particularly when he has a limited income. The latter
option postpones the fresh start that the debtor has sought to achieve
in filing for bankruptcy protection.
What will happen if Mr.
Voelker elects to keep his personal property but cannot make good on the
increased financial obligation that decision would impose on him? The
government reassured us at oral argument that it does not want Mr.
Voelker's clothing. I take that to mean that although the IRS enjoys a
lien on the $825 worth of personal property Mr. Voelker possesses, it
would never go so far as to seek to enforce that lien in foreclosure
proceedings. Thus, Mr. Voelker need not worry about having the clothes
taken from his back, literally. Yet, he ought not have to rely on a wink
and a nod in assessing his prospects, either. We assume that debtors,
like any other citizens, will take their financial obligations
seriously. So if Mr. Voelker wishes to keep his personal effects, he
will no doubt do his best to scrape among meager resources to pay for
them. Again, this seems to me to be contrary to the purpose of
bankruptcy protection. If the government either will not or cannot
enforce the lien on Mr. Voelker's personal property, then arguably it
should never be recognized in the first instance.
Mr. Voelker's amended
Chapter 13 plan provides that in the event the lien on his personal
property is upheld, he will surrender these goods to the government in
lieu of increased payment obligations. No one disputes that this is his
right, and by putting the government in the business of conducting a
rummage sale Mr. Voelker may be doing the one thing that best exposes
the folly in permitting the IRS a lien on this category of property.
Surely the cost of liquidating these items (if the government even
tries) far outmeasures any income that the IRS can hope to attain from
their sale. To say nothing of the cost to Mr. Voelker's dignity and, in
the final analysis, our own.
In re Alan K. Junes and Cynthia M. Junes,
Debtor(s). Alan K. Junes and Cynthia M. Junes, Appellant(s) v. United
States Government, Internal Revenue Service, Appellee(s)
U.S.
Bankruptcy Appellate Panel, 9th Circuit, BAP OR 87-1724-AsMoJ, 6/8/89,
99 BR 978, Affirming an unreported Bankruptcy Court decision
[Code Sec.
6321 ]
Lien for taxes: Bankruptcy: Effect of confirmed reorganization
plan.--
The taxpayers, a husband and wife, filed a petition under Chapter 13 of
the Bankruptcy Code. As debtors in bankruptcy, the taxpayers did not
schedule the IRS as a secured creditor and did not provide for the IRS's
secured claim in their reorganization plan. Inasmuch as no action was
taken to avoid the IRS's secured interest in the debtors' property
created by its tax lien, the lien survives the bankruptcy proceeding and
the IRS is entitled to enforce its claim against the debtors' property.
Leonard H. Beasley, 101
S.W. Main St., Portland, Ore. 97204, for appellant(s). David Hubbert,
Department of Justice, Washington, D.C. 20530, for appellee(s).
Before: ASHLAND, MOOREMAN,
and JONES, Bankruptcy Judges.
OPINION
FACTS
ASHLAND, Bankruptcy Judge:
On August 28, 1986, the
debtors Alan and Cynthia Junes filed a petition under Chapter 13 of the
Bankruptcy Code. The debtors listed the Internal Revenue Service as an
unsecured creditor in the amount of $36,529 for unpaid taxes accrued in
1980 and for penalties and interest on all the taxes due and as a
priority creditor for the years 1983 through 1985 in the amount of
$10,271. The debtors did not schedule the IRS as a secured creditor. The
debtors did not provide for the IRS's secured claim in the
reorganization plan confirmed on October 27, 1986. When the debtors
filed this petition, they had real and personal property amounting to
$8,405.
On September 29, 1986, the
IRS filed a proof of claim for income tax, penalties, and interest,
alleging that the debtors were indebted to the United States in the
amount of $46,882.50. The United States' claim stated that the amounts
owing were secured with the exception of $121.44 of tax and $43.22 of
interest.
On October 17, 1986, the
debtors filed an objection to the IRS's designation of its entire claim
as secured. The debtors' plan provided, as required under 11 U.S.C. §1322(a)(2)
and §507
, for the full payment of all priority claims, and nothing
for the unsecured creditors. The debtors proposed to allow the IRS's
claim as a priority claim in the amount of $9,160.91 and as a
non-priority claim in the amount of $37,721.59.
At the hearing on the
objection to the IRS's claim, the IRS asserted that it was entitled to
treat the 1980 taxes (non-priority) as secured claims to the extent of
available security ($8,405 of debtors' real and personal property).
However, the debtors, while acknowledging the IRS's tax lien in the
amount of $8,405 took the position that they were entitled to allocate
the payment of the priority claims to extinguish the tax lien against
the debtors' real and personal property.
The bankruptcy court held
that $8,405 of the IRS's claim was an allowed secured claim, and
$11,986.62 was an allowed priority claim. In the memorandum opinion, the
court stated that the priority payments to be made by the debtors
pursuant to the confirmed Chapter 13 plan, were involuntary payments,
and therefore the IRS could elect to apply those payments in any manner
it chose to maximize the collection of tax revenue from that estate. The
debtors appeal from this opinion.
ISSUES
1. Whether a debtor may
apply the post-confirmation payments on priority tax claims to
extinguish a federal tax lien in a Chapter 13 case, when the tax lien is
not provided for in the plan of reorganization.
2. Whether a federal tax
lien survives bankruptcy unaffected if it is neither avoided nor
provided for in the plan.
STANDARD
OF REVIEW
We review the bankruptcy
court's conclusions of law under a de novo standard. Ragsdale
v. Haller, 780 F.2d 1195, 1199-1204 (9th Cir. 1986).
DISCUSSION
A taxpayer who makes a
voluntary payment to the IRS may designate how the payment will be
allocated to satisfy the taxpayers' liabilities. In re Technical
Knockout Graphics, Inc. [87-2 USTC ¶9645 ], 833 F.2d 797, 801 (9th Cir. 1987); In
re Ribs-R-Us, Inc. [87-2 USTC ¶9528 ], 828 F.2d 199, 201 (3rd Cir. 1987). See
also Rev.
Rul. 79-284 , 1979-2 C.B. 83, modifying Rev.
Rul. 73-305 , 1973-2 C.B. 43, superceding Rev.
Rul. 58-239 , 1958-1 C.B. 94. However, when the payment is
involuntary, the IRS may designate which of the taxpayers' liabilities
will be satisfied by the payment. Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238, 252, n.15 (1978); Technical
Knockout, 833 F.2d at 801; Ribs-R-Us, 828 F.2d at 463. See
also IRS Policy Statement P-5-60, IRS Manual (May 30, 1984). "The
IRS is entitled to allocate tax payments from [a] . . . debtor in a
manner that maximizes its ability to fully recover taxes owed." Ribs-R-Us,
828 F.2d at 204.
The IRS relies heavily on Technical
Knockout [87-2
USTC ¶9645 ], 833 F.2d 797 (9th Cir. 1987). In Technical
Knockout, the Chapter 11 debtor defaulted on payment of corporate
income, social security and income withholding taxes. Prior to
confirmation of the plan, the debtor sought to make payments on the
IRS's claims in order to escape personal liability, which is imposed on
those responsible for collecting and forwarding the trust 1
funds to the IRS. Id. at 798-99. The court held that:
"payment made by a debtor in possession after filing a petition for
reorganization under Chapter 11, but prior to confirmation of a
reorganization plan, are involuntary and the bankruptcy court does not
have equitable jurisdiction to order otherwise." Id. at 802
(emphasis added).
The IRS also cites, Matter
of Ribs-R-Us, Inc. [87-2
USTC ¶9528 ], 828 F.2d 199 (3rd Cir. 1987), which was relied
on by the Technical Knockout court and applies the
voluntary--involuntary analysis to a Chapter 11 post-confirmation
payment. In Ribs-R-Us, the IRS's priority tax claims were to be
paid out over the maximum six-year period under the plan. The plan also
provided for the payments to be allocated first to decrease the secured
trust fund portion of the IRS's claim, then to the remaining claims. The
court concluded that "payment[s] to the IRS on pre-petition
priority tax liabilities by the debtor in reorganization under Chapter
11 of the Bankruptcy Code are involuntary and therefore cannot be
allocated by the debtor" to pay trust-fund liabilities. Id.
at 204.
In Technical Knockout,
the debtor sought to allocate pre-confirmation payments to extinguish
personal liability for trust fund claims. In Ribs-R-Us, the
debtor wished to make an allocation of post-confirmation payments of its
priority tax claim to reduce the debtor's non-priority tax liabilities
(trust fund personal liabilities). Ribs-R-Us, 828 F.2d at 200. In
this case, the debtors did not provide for the IRS's tax lien in the
plan, nor did the Chapter 13 plan provide any designation for the
allocation of payments. Further, under the debtor's plan, the debtors
did not have any other non-priority tax liabilities to which they could
allocate their post-confirmation payments of priority tax claims. The
debtors' plan provided for unsecured creditors to receive nothing on
their claims and did not provide for the IRS' secured claims. Therefore,
discussion of voluntary versus involuntary payments does not apply here.
The issue, simply stated is whether a federal tax lien that was not
avoided or provided for under the plan survives the bankruptcy
proceedings.
Under Section
6321 of the Internal Revenue Code, if a taxpayer neglects or
refuses to pay any federal tax after demand, a lien is created in favor
of the United States on "all property and rights to property,
whether real or personal, belonging to such person." I.R.C. §6321
(1986). The federal tax lien continues until there is payment
on the taxes it secures or the statute of limitations runs on the
collection of such lien. See also In re Isom [89-1
USTC ¶9200 ], 95 B.R. 148 (9th Cir. BAP 1988). See I.R.C. §§6322
, 6502(a) (1986). The federal tax lien extends over all
property or interests in property belonging to the taxpayer. In re
Walker, 77 B.R. 799, 802 (Bankr. D. Nev. 1987). See Duncan &
Lyons, Federal Tax Liens and the Secured Party, 21 U.C.C. L.J. 3, 4
(1988).
In United States v. Bess
[58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958), the Supreme Court
explained that the federal tax lien "creates no property rights,
but merely attaches consequences, federally defined, to rights created
under state law." "State law is determinative of the existence
and nature of the property rights against which a tax lien has been
assessed." In re Glad, 66 B.R. 115, 118 (9th Cir. BAP 1986)
(citing Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-13 (1960); Rodriguez v.
Escambron Devel. Corp. [84-2 USTC ¶9698 ], 740 F.2d 92, 97 (1st Cir. 1984).
"Once the tax lien attaches, then the effects of that lien are a
matter of federal law." In re Glad, 66 B.R. at 118 (citing
United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 683 (1983); Rodriguez,
740 F.2d at 97).
The debtors' failure to
provide for the IRS's tax lien in the Chapter 13 plan and to provide for
the allocation of payments allows the IRS's tax lien to survive the
bankruptcy process. "[A] Chapter 13 debtor with a confirmed plan
cannot force the cancellation of liens." In re Herbert, 61
B.R. 44, 47 (Bankr. W.D. La. 1986) (citing In re Simmons, 765
F.2d 547, 556 (5th Cir. 1985).
In In re Tarnow, 749
F.2d 464 (7th Cir. 1984), the Seventh Circuit held that even if a
secured creditor fails to file a timely proof of claim, and is therefore
not provided for in the Chapter 11 plan, the secured creditor's lien
survives the bankruptcy proceedings unaffected. The Tarnow court
acknowledged the long line of cases permitting "a creditor with a
loan secured by a lien on the assets of a debtor who becomes bankrupt
before the loan is repaid to ignore the bankruptcy proceeding and look
to the lien for satisfaction of the debt." Id. Similarly, in
In re Simmons, 765 F.2d at 556, the Fifth Circuit held that
"[i]t is clear under the Code that any statutory lien that is valid
under state law remains valid through the bankruptcy unless invalidated
by some provision of the Code."
Under Section 1327(c),
property of the estate is vested in the debtor free of a creditor's
interest as long as the creditor's interest is provided for in the plan.
11 U.S.C. §1327(c). See 5 L. King, Collier on Bankruptcy, ¶1327.01,
at 1327-9 (15th ed. 1988). The Fifth Circuit stated that:
'there appears to be no
sound reason for lifting liens by operation of law at confirmation under
Chapter 13.' (quoting Collier on Bankruptcy, ¶1327.01[3], at
1327-5). Nor are we able to discern any reason for such an effect.
Therefore, we agree with the In re Honaker court's conclusion
that '[t]he reading of section 1327 urged by [the debtor] would have the
Debtor materially improve his financial position, unencumbering
[secured] assets, through the simple expedient of passing his property
through the estate.' (quoting In re Honaker, 4 B.R. 415, 417
(Bankr. E.D. Mich. 1980).
Simmons,
765 F.2d at 555. In In re Work, 58 B.R. 868 (Bankr. D. Or. 1986),
the bankruptcy court held that when a Chapter 13 plan fails to provide
for a lien on the debtor's property held by another party, confirmation
does not vest the property in the debtor free of the lien.
Furthermore, the
legislative history under Section 506(d) provides that: [s]ubsection (d)
"permits liens to pass through the bankruptcy case
unaffected." H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 357
(1977); reprinted in U.S. Code Cong. & Admin. News 1978, pp.
5787, 6313. See also 5 L. King, Collier on Bankruptcy, ¶506.07
at 506-70 (15th ed. 1989). In Simmons, the court recognized that
the Code and the legislative history provide that "when a party in
interest has not requested that the court determine and allow or
disallow a claim under section
502 , a lien cannot be void." Simmons, 765 F.2d
at 557. "Simply put, under §506(d), liens pass through bankruptcy
unaffected unless challenged in some way." In re O'Leary, 75
B.R. 881, 885 (Bankr. D. Or. 1987).
This panel agrees with the O'Leary
court that in cases "involving no express provision of a Chapter 13
plan proposing to avoid the lien . . . [a] compelling case [can be made]
for upholding the clear congressional intent to permit liens to pass
through a bankruptcy case unaffected." Simmons, 765 F.2d at
558. In this case, the debtors did not take any steps in the plan or
otherwise, to avoid the tax lien; therefore, the tax lien survives the
bankruptcy proceeding unaffected. In accordance with the Congressional
intent that liens, unless avoided, survive bankruptcy unaffected, we
hold that the IRS's tax lien survives the bankruptcy proceeding
unimpaired. "The [debtor's personal] liability may be discharged in
bankruptcy . . . [but] the tax lien remains in force. Thus the . . .
liability [on the debtor's] property remains enforceable . . ." In
re Isom, 95 B.R. at 151. "The discharge of [the debtors']
personal liability . . . to [the IRS] does not effect the right of the
[IRS] to enforce its lien against the debtor's real [and personal]
property once the automatic stay provided by §362
[has] terminated." In re Work, 58 B.R. at 873.
CONCLUSION
The debtors may not fail to
provide for the IRS's tax lien in their Chapter 13 reorganization plan
and expect that lien to be extinguished by the bankruptcy process. The
judgment of the bankruptcy court is affirmed. The debtors are not
entitled in this case to decide how their payments of priority tax
claims are to be applied. The IRS's tax lien survives the bankruptcy
proceeding and may be enforced to satisfy the IRS's 1980 tax claim.
1
Congress imposed personal liability on any officer or employee of the
employer responsible for executing the collection and payment of the
trust fund taxes who "willfully fails to collect such tax, or
truthfully account for and pay over such tax, or willfully defeat any
such tax or the payment thereof." 26 U.S.C. §6671(a)
.
