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[87-2 USTC ¶9570] In re Phillip Gene Mills, Debtor. Phillip Gene Mills,
Plaintiff v. Commissioner of Internal Revenue Service, Defendant
Hytken,
Harlan, Nye, 1710 MEMORANDUM OPINION ABRAMSON,
Bankruptcy Judge: This
proceeding appears to be but one chapter in a long saga of one
citizen's travails with the Internal Revenue Service. The case
comes before the Court on the complaint of the Debtor, Phillip
Gene Mills, to determine dischargeability. This is a core
proceeding in bankruptcy. This memorandum shall constitute
findings of fact and conclusions of law. The
matter comes before the Court on the cross motions for summary
judgment filed by the parties. A hearing was held on Under
Section 523(a)(1)(A) of the Bankruptcy Code, 11 U.S.C., taxes
which are entitled to priority of distribution under Sections
507(a)(2) and 507(a)(7) are excepted from discharge. The
concern here is with Section 507(a)(7)(A)(i) which specifies that
income taxes due for a pre-petition taxable year for which the
return was due within three years prior to the bankruptcy petition
are entitled to priority payment. This bankruptcy was initiated by
the Debtor's voluntary petition on The
significance of this analysis is made clear by a brief review of
the factual background. Most of the facts are set out in the
affidavit of the Debtor filed on The
Debtor had been negotiating with the Thus
we come to the crux of this adversary proceeding. The The
Briefly
stated, under 26 U.S.C.A. §6325
, the person desiring the certificate discharging the
Government liens submits to the District Director to whom the
assessment is charged a written application requesting that a
certificate be issued discharging the property from the federal
liens. Petitioner submits detailed statements including the
property description, reason for which the discharge is sought,
description of all senior encumbrances, proof of the fair market
value of the property, and any other information which the
applicant believes may have a bearing on the Director's
determination of value. The Director then makes a thorough
analysis of the law and facts of the case, checks all material
submitted for accuracy, and reaches a determination and informs
the applicant of the result. If the applicant is satisfied with
the Director's determination, he pays the amount specified. This administrative procedure benefits the taxpayer by
obviating the need for levy and sale by the Because
the record clearly shows the understanding of the parties was for
release of the homestead property in exchange for application of
the proceeds of the sale to the unpaid taxes for the years 1978 to
1981, 5
the Bankruptcy Court finds that the Debtor's unilateral attempt to
alter that understanding was ineffective. Cf., United States v.
Lane [62-1
USTC ¶9467 ], 303 F.2d 1 (5th Cir. 1962) (compromise with Thus,
the Bankruptcy Court denies the relief prayed for in the Debtor's
motion for summary judgment on his complaint to determine
dischargeability and declares that taxes due for years prior to
1983 are discharged. The Court abstains from determining the
Debtor's tax liability for the year 1982 because the issue is moot
as to any further proceedings before this Court. Counsel for 1 Excluding application of the homestead sale proceeds, the
Debtor's unpaid tax liability is set out in the following table: Taxable Assessment
Year Amount Date Lien Date
1978 .. $11,015.47
1979 ... 5,760.68
1980 ... 5,925.55
1981 ... 1,806.37
1983 ... 1,077.54
1984 ... 3,391.86
2 The Debtor also complains of collection letters received
from the 3 The 4 26 (2)
Part payment; interest of United States valueless--(i) Part
payment. The district director may, in his discretion, issue a
certificate of discharge of any property subject to a lien imposed
under chapter 64 of the Code if there is paid over to him in
partial satisfaction of the liability secured by the lien an
amount determined by him to be not less than the value of the
interest of the United States in the property to be so discharged.
In determining the amount to be paid, the district director will
take into consideration all the facts and circumstances of the
case, including the expenses to which the Government has been put
in the matter. In no case shall the amount to be paid be less than
the interest of the United States in the property with respect to
which the certificate of discharge is to be issued. * * * (4)
Application for certificate of discharge. Any person
desiring a certificate of discharge under this paragraph shall
submit an application in writing to the district director
responsible for collection of the tax. The application shall
contain such information as the district director may require. * * * 5 The Debtor's application for the certificate of discharge of
the homestead property from the tax lien specifically refers to
the tax lien filings which list unpaid taxes for the years 1978 to
1981. No reference is made to taxes for any other years. U.S.
Court of Appeals, 8th Circuit; 02-4138, 345 F3d 563, October 3,
2003. The
Tax Court properly concluded that the
Chief
Counsel Advice 200150007, Notice
and opportunity for hearing before levy [Code Secs.
6325 and 6330 ] MEMORANDUM
FOR ASSOCIATE FROM:
Alan C. Levine, Chief, Branch 1 (Collection, Bankruptcy &
Summonses), CC:PA:CBS:Br1 SUBJECT:
***** ATTN:
TRMackinson This
memorandum responds to your request for advice dated June 7, 2001.
This document is not to be cited as precedent. I.R.C. §6110(k)(3)
. QUESTION PRESENTED Can
a federal tax lien that self-releases, after the debtor receives a
bankruptcy discharge of the related tax liabilities, be reinstated
against pre-petition property in accordance with the procedures
under I.R.C. §6325(f)(2)
? CONCLUSION The
lien can be reinstated. Reinstatement of an erroneously
self-released federal tax lien under I.R.C. §6325(f)(2)
against a debtor's pre-petition property does not violate the
discharge injunction of B.C. §524(a)(2), since the tax liability
underlying the notice of federal tax lien is unaffected. BACKGROUND The
debtor, *****, had unpaid federal income tax liabilities for tax
years 1982, 1983, 1984, 1988 and 1989. In 1995, she received a
discharge of these liabilities in a Chapter 7 bankruptcy case. The
bankruptcy court determined that the federal tax liens, however,
still attached to pre-petition property (her residence and an
adjacent, undeveloped parcel), and this holding was upheld on
appeal to the district court. *****. On *****, the debtor filed an
administrative claim for innocent spouse relief with the Internal
Revenue Service (Service). After her claim was rejected, she filed
an action in Tax Court under I.R.C. §6015(e)
. This
action is still pending, and has suspended the expiration of the
collection statute of limitations, under I.R.C. §6015(e)(2)
. The
United States brought a suit to foreclose the tax liens against
the pre-petition property on ***** After the initiation of the
suit, the notices of federal tax lien for three tax periods, 1982,
1983, and 1984, erroneously self-released. When the mistake was
discovered, the Service issued a revocation of the certificate of
release, in order to reinstate the assessment liens imposed by
I.R.C. §6321 .
A new notice of federal tax lien was filed in place of the
erroneously-released notices of federal tax liens relating to the
three tax years. The Service estimates the current value of the
real estate to be $1,200,000.00. The total amount of the
encumbrances against the property, including the tax liens, is
about $600,000.00. ANALYSIS A
discharge order in bankruptcy discharges the debtor from a
personal obligation to pay, and creates an injunction barring
creditors from attempting to collect discharged debts from the
debtor personally. B.C. §524(a)(1), (2). The discharge, however,
does not destroy the pre-petition liability. Johnson v. Home
State Bank, 501 U.S. 78, 111 S. Ct. 2150 (1991) ("a
bankruptcy discharge extinguishes only one mode of enforcing a
claim-namely, an action against the debtor in personam"); see
also In re Conston, 181 B.R. 769, 773 (D. Del. 1995)
(collecting cases). Consequently, although the Service generally
may not collect the discharged tax debts from the debtor's
pre-petition property, it is not prohibited from collection from
exempt, abandoned or excluded property. B.C. §522(c)(2). In
addition, in this case, as with other Chapter 7 cases, the federal
tax liens pass through bankruptcy unaffected, in spite of the
discharge given to the debtor. See Dewsnup v. Timm,
502 U.S. 410, 417 (1992); United States v. Alfano, 34
F.Supp.2d 827, 837 (E.D.N.Y. 1999) [40-2
USTC ¶9659 ]; In re Deppisch, 227 B.R. 806, 808 (S.D.
Ohio 1998) [99-1
USTC ¶50,429 ]. The liens continue to attach to the debtor's
pre-petition property, including parcels of real estate. Following
the close of the case, the automatic stay is lifted, and the
United States may proceed to take action to enforce the liens. See
B.C. §362(c)(2)(A)
; In re Isom, 901 F.2d 744 (9th Cir. 1990) [90-1
USTC ¶50,216 ]. In
1999, the United States filed a suit to foreclose the tax liens,
but the liens self- released, during the pendency of the suit.
While a self-release may operate to extinguish a federal tax lien
under I.R.C. §6325(f)
, the release does not extinguish the underlying liability. We
have found no authority for the position that the release of a
lien has any impact on the liability. To the contrary, there is
specific authority for the position that a certificate of release,
while conclusive that the lien is extinguished, does not
conclusively establish that the underlying tax liability is not
owed or has been paid. See Urwyler v. United States,
95-1 U.S.T.C. ¶50, 238 at 87,862 (E.D. Cal. 1995); Miller v.
Commissioner, 23 T.C. 565 (1954) [CCH
Dec. 20,792 ], aff'd, 231 F.2d 8 (5th Cir. 1956) [56-1
USTC ¶9398 ]; Commissioner v. Angier Corporation, 50
F.2d 887, 892 (1st Cir. 1931) [2
USTC ¶749 ], cert. denied, 284 U.S. 673 (1931).
See also In re Goldston, 104 F.3d 1198 (10th
Cir. 1997) [97-1
USTC ¶50,149 ] (distinguishing the liability for tax from the
assessment); Rev.
Rul. 85-67 , 1985-1 C.B. 364 (same); In re Doerge, 181
B.R. 358, 362 (Bankr. S.D. III. 1995) (distinguishes determination
of tax liability and collection of the tax as two distinct steps
in the taxation process). The
argument that the release of a lien extinguishes the tax liability
is also inconsistent other aspects of section
6325 . Section
6325(a)(2) provides that, in addition to when the liability is
satisfied or unenforceable, the Service is authorized to release
the lien upon acceptance of a bond. Clearly, in this circumstance,
the lien may be released, but the liability remains until paid or
unenforceable. It would be incongruous to assert that a release of
a lien under section
6325(a)(1) extinguishes the underlying liability, but a
release of a lien under section
6325(a)(2) does not. In addition, section
6325(f)(2) provides the Service with the authority to revoke a
certificate of release and reinstate the lien in certain
circumstances by mailing and filing notice of the revocation.
Conceptually, the argument that the liability is extinguished upon
issuance of a certificate of release seems inconsistent with the
Service's authority to make such a revocation without having to
reassess the liability. See also William D. Elliot,
Federal Tax Collection, Liens and Levies at 6-13 (Prentice Hall
1988) (citing Treas. Reg.
§301.6325-1(a)(1) for the statement that "when a lien is
released, however, the underlying tax liability is not
extinguished until (1) the tax has been paid in full or (2) the
statutory period for collection of the tax expires").
Accordingly, because neither the release of the lien nor the
discharge extinguishes the pre-petition liability, we conclude
that a discharge in bankruptcy does not affect the Service's
ability to revoke an erroneous lien release. See, e.g.,
United States v. Peterson, 71 A.F.T.R.2d 1136, 93-1
U.S.T.C. ¶50,230 (1993) (in lien foreclosure suit, district
court did not identify as an issue the Service's erroneous release
of liens based on the taxpayer's bankruptcy discharge, because
release was properly revoked). In
an analogous context, we have previously concluded that a
taxpayer's bankruptcy discharge does not affect the Service's
ability to reverse an abatement of an assessment and proceed with
collection against certain pre-petition assets. See Notice
CC-2001-014. Following bankruptcy, it is the Service's normal
policy to abate such discharged taxes, to prevent inadvertent
collection. See generally Although
the released federal tax lien can be reinstated, the released
notice of federal tax lien, and the priority status the notice
provides, cannot. Treas. Reg.
§301.6325-1(f)(2) (iii)(b). See United States v.
Winchell, 793 F.Supp. 994 (D. Colo. 1992) [92-2
USTC ¶50,394 ]; United States v. Reid, 2000-1 U.S.T.C.
¶50,340; 2000 U.S. Dist. LEXIS 5106. Thus, after revocation, the
Service must refile the erroneously self- released notices of
federal tax lien to establish a new priority date. Although
refiling is required to reestablish priority, the reinstated tax
lien nevertheless attaches to the pre-petition property. Treas. Reg.
§301.6325-1(f)(2) (iii)(b). The United States could foreclose
on the property, even without refiling the notices, by relying on
the assessment liens. Refiling does not create a new liability,
nor is it an effort to collect directly from the debtor. See
In the Matter of Hansen, 1993 U.S. Dist. LEXIS 5593 (W.D.
Tex. If
you have any questions, please call [2000-1 USTC ¶50,161] In re Phyllis Cohen, Debtor U.S. Bankruptcy Court, So. Dist. Fla., 92-16014- CRISTOL,
Chief Judge: THIS
CAUSE came on to be heard on FINDINGS OF 1.
On 2.
On 3.
During the pendency of the bankruptcy proceeding, the 4.
On 5.
On 6.
On 7.
On 9.
On or about 10.
On 11.
The 12.
The 13.
The DISCUSSION: The
The
effects of the discharge injunction invoked by the confirmation of
a plan, pursuant to 11 U.S.C. Section 524(a) are as follows: (a)(1)
voids any judgment . . . to the extent that such judgment is a
determination of the personal liability of the debtor with respect
to any debt discharged under section 727, 944, 1141, 1228, or
1328. . . (a)(2)
operates as an injunction against the commencement or continuation
of an action, the employment of process, or an act, to collect,
recover or offset any such debt as a personal liability of the
debtor, . . . ; and (a)(3)
operates as an injunction against the commencement or continuation
of an action, the employment of process, or an act, to collect, or
recover from, or offset against, property of the debtor of the
kind specified in section 541(a)(2) . . . that is acquired after
the commencement of the case. . . The
consequences of a willful violation of the injunction are
essentially the same as the consequences for willful violation of
the automatic stay. They are actual damages, costs and attorney's
fees. Sovereign immunity is waived pursuant to Section 106(a)(3).
Sanctions for violation of the injunction are also provided for in
Section 105(a). The Eleventh Circuit recently reversed the
District Court's decision in Jove Engineering, Inc. v. United
States [96-2 USTC ¶50,469], 92 F. 3d 1539 (11th Cir. 1996)
and held that if the The
However,
in this case, the Debtor, Phyllis Cohen, retained no pre-petition
assets. She is not committed to making any Plan payments. And the
Plan and Confirmation Order require either immediate payment or
assignment of all estate assets to the Furthermore,
this Court has entered Orders determining the unenforceability of
the tax liens for 1983, (July 1, 1996), and requiring the release
of the 1980 tax liens upon confirmation of a Plan, (March 27,
1996), and the confirmation Order (May 15, 1997). With
respect to 1983, I.R.C. Section 6325(a)(1) requires that the 1983
tax lien should have been released no later than August 1996. Yet,
the With
respect to 1980, I.R.C. 6325(a)(1) requires that the 1980 tax
liens in Florida, California and New York should have been
released no later than June 1997. Yet, the CONCLUSION: Based
on the foregoing, it is ORDERED: 1.
The 2.
As a penalty for the civil contempt of the 3.
The Court will conduct a further hearing on damages. This hearing
will determine: the amount of legal expenses and related costs
incurred by the Debtor in connection with any and all disputes
concerning' tax matters set forth in the 4.
Counsel for the parties are directed to schedule a hearing at a
mutually agreeable time for the determination of the amount of
damages to the Movant. ORDERED. 1 On On
On
On
On
On
The
levy on Nationsbank Account 3706369710 was an account holding Mrs.
Cohen's funds in the amount of $896.77, which the bank advised
would be remitted to the On
November 28, 1994, without seeking relief from the stay, the On
April 21, 1995, Revenue Officer W. Schechter, 2 The District Court entered an order granting preliminary and
permanent injunction and closing the case entitled Smith Barney
Inc., Shearson Lehman et.al. v. Arthur Weitzner, Trustee, Number
98-841- [99-2 USTC ¶50,852] In re Murray L. Deutchman, Debtor. Murray L.
Deutchman, Debtor-Appellant v. Internal Revenue, Defendant-Appellee
(CA-4), U.S. Court of Appeals, 4th Circuit, 98-2029, Andrew
Martin Croll, Robert B. Scarlett, Scarlett & Croll, Baltimore,
Md., for debtor-appellant. Lynne A. Battaglia, United States
Attorney, Baltimore, Md. 21201, Loretta C. Argrett, Assistant
Attorney General, Gary D. Gray, Thomas James Sawyer, Department of
Justice, Washington, D.C. 20530, for defendant-appellee. Before:
LUTTIG, MOTZ and TRAXLER, Circuit Judges. OPINION TRAXLER,
Circuit Judge: This
case involves the effect of a confirmed Chapter 13 plan on liens
securing a creditor's claim. Specifically, a debtor appeals from
an order of the district court affirming the bankruptcy court's
determination that the completion of the payments due under his
Chapter 13 plan would not extinguish liens on his property held by
the Internal Revenue Service (" I. Murray
L. Deutchman ("Deutchman") filed a voluntary petition
for Chapter 13 bankruptcy on On
Additionally,
although initially seeming to require payment "in full"
of $172,000 of the Two
weeks after Deutchman filed the plan, the Pursuant
to a notice sent to all creditors, including the Following
confirmation, Deutchman began making payments to the Deutchman
then brought this action, seeking a declaratory judgment that the II. We
review the district court's decision by applying the same standard
of review that it applied to the bankruptcy court's decision. See
Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel
Properties Ltd. Partnership), 99 F.3d 151, 154 (4th Cir.
1996). That is, we review findings of fact for clear error and
conclusions of law de novo. See id.; Canal Corp. v.
Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir. 1992). A. We
begin with an overview of the Chapter 13 bankruptcy process as it
relates to the events underlying this matter. Section 501 of the
Bankruptcy Code governs the filing of proofs of claims or
interests by creditors. See 11 U.S.C.A. §501 (West 1993).
If proof of a claim or interest is filed by a creditor and is not
objected to, the claim or interest is "deemed allowed." See
11 U.S.C.A. §502(a) (West 1993) ("A claim or interest, proof
of which is filed under section 501 of this title, is deemed
allowed, unless a party in interest . . . objects."). Because
Deutchman did not object to the The
Chapter 13 debtor must file a plan, see 11 U.S.C.A. §1321
(West 1993), the contents of which are specified under 11 U.S.C.A.
§1322 (West 1993 & Supp. 1999). All interested parties must
be notified of the requisite court hearing to confirm the plan, at
which time any "party in interest may object to confirmation
of the plan." See 11 U.S.C.A. §1324 (West 1993). In
the instant case, the The
impact of a confirmed plan on the parties involved in the Chapter
13 reorganization is governed by 11 U.S.C.A.§1327 (West 1993),
which provides: (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 . Id. (emphasis added). Relying on this section of the Bankruptcy Code,
Deutchman contends that, despite the fact that the As
a general rule, liens pass through the bankruptcy process
unaffected. See Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92
(4th Cir. 1995). This is because "[a] bankruptcy discharge
extinguishes only in personam claims against the debtor(s),
but generally has no effect on an in rem claim against the
debtor's property." Id. In order to extinguish or
modify a lien, the debtor must take some affirmative step toward
that end. As we have observed in the past,"[u]nless the
debtor takes appropriate affirmative action to avoid a security
interest in property of the estate, that property will remain
subject to the security interest following confirmation." Id. In
the instant case, Deutchman did not take a sufficient affirmative
step to modify or extinguish the C. In
so holding, we necessarily reject Deutchman's claim that, upon
payment of the partial amount due the We
adhere to this interpretation today. Although acknowledging that
the In
Cen-Pen, we discouraged efforts by debtors to misrepresent
the nature of their debts, and we made clear that such efforts
could not provide a basis for avoiding liens. See id. at
94. We therefore hold that, in order to "provide for" a
creditor for purposes of §1327(c), the plan must, at a minimum,
clearly and accurately characterize the creditor's claim
throughout the plan. Accordingly, Deutchman's plan did not
"provide for" the allowed secured claim of the D. Another
fatal consequence of Deutchman's plan was its failure to give
specific notice to the Accordingly,
the judgment of the district court holding that completion of the
payments called for under the terms of the confirmed plan could
not extinguish the liens is affirmed. AFFIRMED 1 The plan itself referred to 11 U.S.C.A. §507(a)(7) (West
1993), which was subsequently recodified at §507(a)(8). 2 Deutchman has not satisfactorily explained the basis for
reducing the 99-1 USTC ¶50,585] In re James F. and Maureen Mulligan, Debtors. James
F. Mulligan, Plaintiff v. United States of America, Internal
Revenue Service, Defendants U.S. Bankruptcy Court, Dist. N.H., 98-11536-MWV, 5/14/99, 234
BR 229 Grenville
Clark, MEMORANDUM OPINION VAUGHN,
Chief Judge: The
Court has before it both the United States of America, Internal
Revenue Service's ("Defendant") motion and James F.
Mulligan's ("Plaintiff" or "Debtor")
cross-motion for summary judgment. In its motion, the Defendant
alleges that its lien on the Debtor's real and personal property
for unpaid taxes may not be avoided or stripped down to a
judicially determined value. The Plaintiff objects, and
cross-moves alleging that the Court should: (1) release the
Defendant's lien on his condominium because it has no equity; (2)
avoid the Defendant's lien on his interest in personal property
under 26 U.S.C. §6323(b) and (c); and (3) declare the value of
each article of personal property to which the Defendant's lien
attaches so that the Plaintiff may redeem his property by paying
the amount of the lien on each item. On
This
Court has jurisdiction of the subject matter and the parties
pursuant to 28 U.S.C. §§1334 and 157(a) and the "Standing
Order of Referral of Title 11 Proceedings to the United States
Bankruptcy Court for the District of New Hampshire," dated FACTS There
are no material facts in dispute. The Plaintiff filed a joint
Chapter 7 bankruptcy petition with his wife on April 20, 1998. On
Schedule A of their petition, the Debtors listed the value of
their condominium as $75,000. Schedule B lists total personal
assets of $36,025.92, $16,153.69 of which is owned either jointly
or by the Plaintiff alone; however, the [Plaintiff's] 1
Memorandum on Cross Motions for Summary Judgment states that the
value of the Plaintiff's personal property has diminished to
$6,652.19. 2([Pl.'s]
Mem. at 2, ¶2.) On Schedule C, the Debtors claimed their
homestead exemption and certain other exemptions under N.H. Rev.
Stat. Ann. §511:2 and 26 U.S.C. §6334(a)(1) and (a)(3) for
office furniture, a computer, checking accounts, clothes,
household goods, cars, jewelry and other personal items. Schedule
D lists a total of $85,567.30 in first and second mortgages on the
Debtors' condominium, and Internal Revenue Service liens for
unpaid 1991, 1993 and 1994 taxes on the Plaintiff's real and
personal property totaling $15,342.04. 3 The
Defendant filed a proof of claim on DISCUSSION Under
Rule 56(c) of the Federal Rules of Civil Procedure, made
applicable to this proceeding by Federal Rule of Bankruptcy
Procedure 7056, a summary judgment motion should be granted only
when "the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of
law." "Genuine," in the context of Rule 56(c),
"means that the evidence is such that a reasonable jury could
resolve the point in favor of the nonmoving party." Rodriguez-Pinto
v. Tirado-Delgado, 982 F.2d 34, 38 (1st Cir. 1993)
(quoting United States v. One Parcel of Real Property, 960
F.2d 200, 204 (1st Cir. 1992)). "Material,"
in the context of Rule 56(c), means that the fact has "the
potential to affect the outcome of the suit under applicable
law." Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d
701, 703 (1st Cir. 1993). Courts faced with a motion
for summary judgment should read the record "in the light
most flattering to the nonmovant and indulg[e] all reasonable
inferences in that party's favor." Maldonado-Denis v.
Castillo-Rodriguez, 23 F.2d 576, 581 (1st Cir.
1994). II. The Secured Status of Defendant Internal Revenue
Service's Claim. Section
6321 states that "[i]f 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.A. §6321 (1982 & Supp. 1998); see
also United States v. National Bank of Commerce [85-2 USTC ¶9482],
472 U.S. 713, 719-20 (1985) ("The 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. . . . Stronger
language could hardly have been selected. . . .") (internal
citations omitted). When the Plaintiff failed to pay his 1991,
1993 and 1994 taxes, the Defendant obtained a statutory lien under
section 6321 on all the Plaintiff's property. §6321. Further, the
Defendant obtained a perfected security interest upon all of the
Plaintiff's property on Although
the Plaintiff's underlying tax debt may have been discharged,
"the liability for the amount assessed remains legally
enforceable even where the underlying tax debt is discharged in
the bankruptcy proceeding." Isom v. United States (In re
Isom) [90-1 USTC ¶50,216], 901 F.2d 744, 745 (9th
Cir. 1990) (citing Long v. Bullard, 117 U.S. 617 (1886)). See
also Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)
("[A] bankruptcy discharge extinguishes only one mode of
enforcing a claim--namely, an action against the debtor in
personam--while leaving intact another--namely, an action against
the debtor in rem."); Dillard v. United States (In re
Dillard), 118 B.R. 89, 92 (Bankr. N.D. Ill. 1990) (stating
that section 6325(a) does "not violate the fresh start policy
because Congress intended for valid tax liens to survive
bankruptcy") (internal citations and quotations omitted). The
Plaintiff has not disputed that the lien was properly recorded
and, at hearing, could not dispute that the Defendant's secured
status persists on his real property, although his personal
liability with respect to the lien has been discharged. In
his cross-motion for summary judgment, however, the Plaintiff
asserts that the Court should order the Defendant to release its
lien under 26 U.S.C. §6325 since there is no equity in his
condominium. Section 6325(a)(1) states: (a)
Release of lien.--Subject to such regulations as the
Secretary may prescribe, the Secretary shall issue a certificate
of release of any lien imposed with respect to any internal
revenue tax not later than 30 days after the day on which-- (1)
Liability satisfied or unenforceable.--The Secretary finds
that the liability for the amount assessed, together with all
interest in respect thereof, has been fully satisfied or has
become legally unenforceable . . . 26 U.S.C.A. §6325(a)(1) (1982 & Supp. 1998). As stated
above, however, it is irrelevant that there is no equity in the
property. The lien survives and continues to be secured by the
Plaintiff's real property. At any rate, under section 6325, the
tax lien is not released until the certificate of release is
issued by the Secretary, see United States v. Waite, Inc.
[80-1 USTC ¶9128], 480 F. Supp. 1235 (D.C. Pa. 1979), but whether
a certificate of discharge should be issued is discretionary, 26
U.S.C. §6325(b) ("Subject to such regulations as the
Secretary may prescribe, the Secretary may issue a certificate of
discharge. . . ."). No release has been issued by the
Secretary relative to this matter. Thus, the Defendant's lien
remains secured by the Plaintiff's pre-petition real property, and
may not be avoided, even though the Plaintiff's personal liability
has been discharged. Isom [90-1 USTC ¶50,216], 901 F.2d at
745 ("We hold that 26 U.S.C. §6325(a)(1) does not require
the I.R.S. to release valid tax liens when the underlying tax debt
is discharged in bankruptcy."); 11 U.S.C.A. §524(a)(2). The
complaint in this adversary proceeding alleges essentially two
causes of action: (1) under section 724(a), 5
which implicates 726(a)(4), upon which neither the Plaintiff nor
the Defendant have focused their motions, memoranda and arguments
at hearing; 6
and (2) under section 6323(b) of the Internal Revenue Code in
conjunction with sections 545(2) and 522(h) of the Bankruptcy
Code. (Pl.'s Compl. 2-4.) At hearing, counsel for the Defendant
asserted, as a threshold issue, that the Plaintiff does not have
standing to avoid its liens under section 545(2) of the Bankruptcy
Code. Counsel for the Plaintiff countered that some case law
supports a debtor's power to avoid liens under section 545(2),
and, additionally, that the Plaintiff may avoid the lien against
his personal property to the extent section 522(h) grants debtors
certain avoidance powers. Section
545 states, in pertinent part: The
trustee may avoid the fixing of a statutory lien on
property of the debtor to the extent that such lien-- .
. . . (2)
is not perfected or enforceable at the time of the commencement of
the case against a bona fide purchaser that purchases such
property at the time of the commencement of the case; whether or
not such a purchaser exists. . . . 11 U.S.C.A. §545(2) (1986) (emphasis added). A
divergence of opinion has formed around this issue, with the
result that a majority of courts have found that debtors have no
standing under section 545(2) to avoid liens. See Aikens v.
Philadelphia, Water Revenue Bureau (In re Aikens), 94 B.R.
869, 872 (Bankr. E.D. Pa.) ("While §545(2) vests avoidance
powers solely in the trustee, . . . the Debtor is empowered to
stand in the shoes of the trustee if he satisfies the criteria of
11 U.S.C. §§522(h), 522(g)(1), and (g)(2). . . .")
(internal citations omitted), aff'd, 100 B.R. 729 (E.D.
Pa.), aff'd, McLean v. Philadelphia, Water Revenue Bureau,
891 F.2d 474 (3d Cir. 1989); see also Cardillo v. Andover Bank
(an re Cardillo), 169 B.R. 8 (Bankr. D.N.H. 1994) (except to
enhance the debtor's exemptions under section 522, the chapter 5
avoiding powers of a trustee are not available to a chapter 13
debtor). Compare Stangel v. United States (In re Stangel),
222 B.R. 289 (Bankr. N.D. Tex. 1998) (without the joinder of the
trustee under section 545(2), a debtor has no standing to avoid
liens); Wethington v. United States (In re Wethington), 219
B.R. 529, 530 (Bankr. D. Minn. 1997) ("The Plaintiff, as a
debtor in a case under Chapter 13 before this Court, lacks
standing to exercise the lien avoidance remedies of 11 U.S.C. §545(2)
as against the Defendant."); O'Neil v. United States (In
re O'Neil), 177 B.R. 809, 812 (Bankr. S.D.N.Y. 1995)
("Most courts have held that a chapter 13 or chapter 7 debtor
lacks standing to avoid tax liens pursuant to section 545 of the
Bankruptcy Code. . . ."); In re Robinson, 166 B.R.
812, 812 (Bankr. D. Vt. 1994) ("We deny Debtors' motion and
hold that a Chapter 7 debtor does not have standing to bring an
action to avoid such liens under §545(2) by way of §§522(f) or
(h)."); Goebel v. United States (In re Goebel), 153
B.R. 593, 594 (Bankr. M.D. Fla. 1993) ("Under the specific
language of this section [545(2)], only the trustee has standing
to avoid a statutory lien. . . ."); Matter of Coan, 72
B.R. 483, 485 (Bankr. N.D. Fla. 1987) ("It is without dispute
that Chapter 13 debtors are empowered and have the ability to
exercise the Trustee's lien avoidance powers under Chapter
5."), vacated, In re Coan, 134 B.R. 670 (Bankr. M.D.
Fla. 1991); In re Henderson, 133 B.R. 813, 817 (Bankr. W.D.
Tex. 1991) ("Nowhere in the Code, including Chapter 5, is the
debtor granted standing to avoid tax liens on non-exempt
property."); Perry v. United States (In re Perry), 90
B.R. 565, 566 (Bankr. S.D. Fla. 1988) ("The debtor's only
standing with respect to any of the trustee's avoidance powers is
provided by §522(h). . . ."); In re Mattis, 93 B.R.
68 (Bankr. E.D. Pa. 1988) (finding that debtor lacked standing
under section 545(2) to avoid the Internal Revenue Service's
lien). Cf. Cleary v. United States (In re Cleary), 210 B.R.
741, 744 (Bankr. N.D. Ill. 1997) ("This section [545(2)]
permits a trustee or debtor to take the position of a hypothetical
bona fide purchaser and claim the same defenses to the statutory
liens on the debtor's property as such a purchaser could
claim.") (internal citations omitted). In
an interesting twist on the issue, as counsel for the Plaintiff
noted at hearing, one Bankruptcy Court granted the debtors an
assumed platform on which to stand and held that they could invoke
the power to avoid under 545(2). 7
Straight v. First Interstate Bank (In re Straight) [96-2
USTC ¶50,423], 200 B.R. 923, 929 (Bankr. D. Wyo. 1996). However,
on appeal, the Bankruptcy Appellate Panel for the Tenth Circuit
held that the standing issue was moot because, in the interim, a
trustee was joined as a party. Straight v. First Interstate
Bank (In re Straight) [97-1 USTC ¶50,374], 207 B.R. 217 (B.A.P.
10th Cir. 1997), appeal dismissed, First Interstate
Bank v. Straight (In re Straight), No. 97-8037 (10th
Cir. Mar. 13, 1998); see also Internal Revenue Serv. v. Diperna
[96-1 USTC ¶50,171], 195 B.R. 358, 361 (E.D.N.C. 1996)
(Responding to the Internal Revenue Service's contention that the
debtor did not have standing to avoid its lien, the bankruptcy
court stated, after a long discussion regarding section 545(2) of
the Bankruptcy Code and 6323(b) of the Internal Revenue Code, that
"[a]ssuming without deciding that the debtor has standing,
the above analysis applies with equal force to the debtor.");
Carrens v. United States (In re Carrens) [96-1 USTC ¶50,294],
198 B.R. 999 (Bankr. M.D. Fla. 1996) (Chapter 13 debtors sought to
avoid liens under section 545(2); however, the issue of standing
was never discussed by the bankruptcy court, which focused instead
on whether a trustee is a "purchaser" under section
6323(b) of the Internal Revenue Code). With
all the above case law on this issue in mind, the Court holds that
the Plaintiff does not have standing under section 545(2) of the
Bankruptcy Code to avoid the Defendant's liens. Therefore, despite
the parties' arguments outlined in their memoranda to the
contrary, it follows that a discussion comparing a "bona fide
purchaser" under section 545(2) of the Bankruptcy Code to a
"purchaser" under section 6323(b) of the Internal
Revenue Code is superfluous and unnecessary. Going
back to the remaining part of the Plaintiff's argument, however, a
number of other courts have held that a debtor has limited power
under section 522(h) to avoid liens on non-exempt personal
property. DeMarah v. United States (In re Demarah), 62 F.3d
1248, 1251 (9th Cir. 1995) ("The fact that DeMarah
may be able to exempt the property [under section 522(h)] that is
subject to the tax lien from the bankruptcy estate does not mean
that he can remove the lien itself, or that portion of it which
secures the penalty."); United States v. Hunter (In re
Walter) [95-1 USTC ¶50,072], 45 F.3d 1023, 1034 (6th
Cir. 1995) ("Bankruptcy Code §545(2) makes clear that the
trustee may only avoid a statutory lien that a bona fide purchaser
could."); Goebel, 153 B.R. at 594 ("11 U.S.C. §522(h)
confers standing upon a debtor to invoke the trustee's §545
powers to the extent that the debtor could exempt the property
involved."). Section
522(h) states that: The
debtor may avoid a transfer of property of the debtor or recover a
setoff to the extent that the debtor could have exempted such
property under subsection (g)(1) of this section if the trustee
had avoided such transfer, if-- (1)
such transfer is avoidable by the trustee under section 544, 545,
547, 548, 549 of 724(a) of this title or recoverable by the
trustee under section 553 of this title: and (2)
the trustee does not attempt to avoid such transfer. 11 U.S.C.A. §522(h) (1988). Thus, section 522(h) grants a
debtor power to avoid if certain conditions are met, the first of
which is whether the "debtor could have exempted such
property under subsection (g)(1) of this section if the trustee
had avoided such transfer. . . ." §522(h). Since section
522(g)(1) states, in pertinent part, that "the debtor may
exempt under subsection (b) of this section property that the
trustee recovers under section 510(c)(2), 542, 543, 550, 551, or
553 of this title, to the extent that the debtor could have
exempted such property[,]" 11 U.S.C. §522(g)(1) (1988)
(emphasis added), the Court must address whether the Plaintiff's
personal property could be exempted under section 522(b) at all. Quillard
v. United States (In re Quillard) [93-1 USTC ¶50,110], 150
B.R. 291, 295 (Bankr. D.R.I. 1993) ("However, the Debtors'
avoiding powers with respect to Section
522(c)(2)(B) states that: Unless
the case is dismissed, property exempted under this section is not
liable during or after the case for any debt of the debtor that
arose, or that is determined under section 502 of this title as if
such debt had arisen, before the commencement of the case except-- .
. . . (2)
a debt secured by a lien that is-- .
. . . (B)
a tax lien, notice of which is properly filed. . . . 11 U.S.C.A. §522(c)(2)(B) (1986). Section 522(c)(2)(B) is
clear. The Plaintiff's property, even that claimed as exempt under
Schedule C, continues to secure the Defendant's lien. See
generally DeMarah v. United States (In re DeMarah), 62 F.3d
1248, 1251 (9th Cir. 1995) ("In short, it is
pellucid that property exempted from the estate remains subject to
tax liens. Congress could hardly have been more direct in
declaring that result."); O'Neil, 177 B.R. at 812
("[S]ection 522(c)(2)(B) clearly prevents the avoidance of
tax liens for exempt property. . . . The language of section
522(c)(2)(B) is unambiguous."); Quillard [93-1 USTC ¶50,110],
150 B.R. at 295("[E]ven after discharge has entered, property
claimed as exempt under §522 remains available to satisfy any
pre-petition debt secured by a valid tax lien, when notice of the
lien has been property filed. . . . Any other construction would
render the plain language of §522(c)(2)(B) meaningless.")
(internal citations omitted). Finally,
the Plaintiff requests that the Court declare the value of each
article of personal property in which the Defendant's lien
subsists so that the Plaintiff can redeem his personal property by
paying the amount of the lien on each item. The Plaintiff states
that he should be entitled to "tender to the V. Conclusion. Thus,
for these aforementioned reasons, the Court hereby grants the
Defendant's motion for summary judgment and denies the Plaintiff's
cross-motion for summary judgment. The Court finds that the
Defendant continues to hold its lien on the Plaintiff's real and
personal property, and the Court also declines to effectively
"strip down" the Defendant's lien by judicially
determining the value of the Plaintiff's personal property. This
opinion and order constitutes the Court's findings of facts and
conclusions of law in accordance with Federal Rule of Procedure
7052. 1 The memorandum was submitted by the Plaintiff, although it
is entitled "Defendant's Memorandum." 2 The Plaintiff's complaint states that Schedule D of his
petition lists the Internal Revenue Service as "a secured
creditor holding 3 The Debtors' Schedule D lists and describes the Internal
Revenue Service's lien as secured only by James F. Mulligan's
"all non-exempt real and personal property[,]" which is
a legal conclusion. (Pet. Sch. D.) 4 Paragraph 7 of the Plaintiff's complaint states that "[a]s
indicated by the 5 Section 724(a) of the Bankruptcy Code also states that
"the trustee may avoid a lien that secures a claim. .
. ." 11 U.S.C.A. §724(a) (1988). Section 726(a) governs the
order of distribution of claims. See 11 U.S.C.A. §726(a)
(1988). 6 Since neither party has addressed the merits pertaining to
sections 724 and 726(a)(4), the Court will refrain from a
discussion of these sections. At any rate, the matter may be
decided under other sections alleged in the Plaintiff's complaint. 7 To more fully explain it, the Bankruptcy Court held that the
Chapter 13 debtors had standing to commence avoidance actions
under sections 544(a), 545(2) and 547(b), so long as they turned
over all money to the trustee for the unsecured creditors. Straight
[96-2 USTC ¶50,423], 200 B.R. at 933. 8 This does not mean that the Plaintiff couldn't settle this
claim with the Defendant by paying the value of the collateral
through an offer to compromise or otherwise. 98-2 USTC ¶50,852] In the Matter of George R. Nunez and Jeanette S.
Nunez, Debtors U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa Div.,
95-423-8B3, Caryl
E. DeLano, 601 S. Fremont Ave., Tampa, Fla. 33606, for debtors.
Patricia Kerwin, Assistant United States Attorney, Tampa, Fla.
33601, Karen Davis Miller, Department of Justice, Washington, D.C.
20530, for I.R.S. Terry E. Smith, Bradenton, Fla. 34206, trustee. ORDER ON DEBTORS' RENEWED MOTION TO COMPEL THE INTERNAL
REVENUE SERVICE TO RELEASE TAX LIENS BAYNES,
JR., Bankruptcy Judge: THIS
CAUSE came on for consideration following a hearing on the
Debtors' Motion to Compel the Internal Revenue Service to Release
Tax Liens in this confirmed Chapter 13 case. The Court has
considered the Motion together with the record and makes the
following findings. The
Debtors filed for bankruptcy protection under Chapter 11 on
January 17, 1995. Several years prior, the The
Debtors base their current request on the fact that the Although
conceding the Debtors have paid the above allowed secured claim
through their Plan, the In
attempting to unearth any case authority to bolster the [b]y
requiring release of a federal tax lien upon payment of the
allowed amount of the secured claim, the effect of the Campbell
decision is to prevent enforcement of the lien against exempt,
abandoned or excluded property and would effectively alter the
rights of the Id. at 113 - 15. Such a position is admittedly contrary to Campbell,
and should not be applied to these facts. In sum, it appears the
results decried by the Accordingly,
it is ORDERED, ADJUDGED DONE 95-1 USTC ¶50,234] In the Matter of Robert Cooper, Deborah Cooper,
Debtors. Robert Cooper, Deborah Cooper, Plaintiffs v. United
States of America, et al., Defendants U.S. Bankruptcy Court, So. Dist. Ohio, West. Div., 93-14986, [Code
Sec. 6325 ]
AUG,
Jr., Bankruptcy Judge: In
this adversary proceeding ruled by the Debtors, the Internal
Revenue Service moves for summary judgment on the only regaining
issue before the Court. That issue is whether the Internal Revenue
Service may apply the proceeds received from the sale of certain
residential property to the Debtors' 1989 joint income tax
liability. The
parties agree that the 1989 tax liability is secured by an The
Court has jurisdiction over this matter pursuant to 28 U.S.C. §§157
and 1334 and the General Order of Reference entered in this
District on On
the basis or the arguments presented, this Court finds there are
no disputes between the parties as to any material fact in this
case, and that the United States on behalf of the Background The
Debtors filed a Chapter 7 bankruptcy petition on The
parties subsequently agreed that the Debtors' joint federal income
tax liabilities for taxable year 1989 are dischargeable under §727
of the Bankruptcy Code. On
The
Debtors scheduled, inter alia, a certain piece of real
property which, on approximately Subsequent
to the abandonment, the property was sold for a "contract
sales price" of $1,248,000.00. The Discussion As
a general rule the The
parties agree the payment received from the closing on the sale of
real estate was not designated in any meaningful manner. If one
infers a designation from the notation that the monies were being
paid on account of unspecified tax liens, this attempted
designation is ineffective unless the payment is
"voluntary". We
are persuaded by the ample authority cited by the We
also note that, had a foreclosure by the private creditor not been
completed, the This
Court has recently decided in In re Joseph G. Trendler,
Case No. 1-88-02357 (Bankr. S.D. Ohio, June 17, 1994), Aff'd.,
November 3, 1994, Case No. 1-94-589 (D.C. S.D. Ohio) that a United
States tax lien securing a claim passes through bankruptcy
unaffected. To hold otherwise would be to fail to recognize that a
discharge constitutes relief from personal liability and not
relief from valid liens attaching to property. A
discharge in bankruptcy prevents the The
On
the basis of the above analysis, we hold that the The
motion for summary judgment ruled by the Internal Revenue Service
(Docs. 17, 18, 19) is hereby GRANTED. IT
IS SO ORDERED. 40-2 USTC ¶9831]James K. Bowen, Complainant, v. Henry Baker and Robert
E. Haas, Trustee in Bankruptcy for James K. Bowen, Respondents District Court of the United States for the Eastern District
of Pennsylvania, Civil Action. No. 985, Charles
M. Bolich, 33 No. 5th St., Allentown, Pa., for complainant. Herman
H. Krekstein, 1502 [The Facts] KALODNER,
J.: This
is a civil action, seeking equitable relief. The defendant Baker
filed two motions: (1) to dismiss the complaint, and (2) for a
more specific statement of claim. It
is clear that the motion to dismiss must be granted, making it
unnecessary, of course, to consider the motion for a more specific
statement. The
situation presented by the complaint is novel and without
precedent. Briefly stated, the plaintiff Bowen, a discharged
bankrupt, brought this action against Baker, one of his creditors,
and Haas, trustee in bankruptcy for Bowen. In
his complaint, Bowen averred that when he filed his voluntary
petition in bankruptcy (November, 1939) he owned a property on
Hamilton street in Allentown, Penna., subject to mortgages of
$294,600; that on The
complaint further averred that prior to the entry of the first
government lien in 1933, there was a judgment of record against
the plaintiff, as of September Term, 1932, in the sum of $20,000,
and that subsequent to the entry of the first government lien,
three further judgments were recorded against Bowen in favor of
divers creditors as follows: No. 680, September Term, 1933 .... $10,000
No. 447, January Term, 1934 ...... $20,000
No. 268, January Term, 1935 ...... $20,000
The
second government lien of $13,108.92 was entered subsequent to the
last-mentioned $20,000 judgment. [Discharge of Tax Liens] The
complaint further averred that the defendant Baker, prior to the
plaintiff's bankruptcy, acquired the four judgments above set
forth for "nominal considerations" and that subsequent
to such acquisition Baker filed an application for certificate of
discharge of the Hamilton street property with the Collector of
Internal Revenue for the First Collection District of
Pennsylvania, seeking discharge of the two government tax liens,
and that in pursuance of such application a certificate of
discharge against the Hamilton street property was executed by the
Collector of Internal Revenue on The
complaint also averred that while the two government tax liens
remained a lien against other real estate owned by the plaintiff,
that there was no equity in the other real estate, and that the
only real estate equity which the plaintiff enjoyed at the time of
his bankruptcy was in the Hamilton street property, which the
plaintiff valued "in excess of $500,000" compared to the
$294,600 mortgages held against that property by the Lehigh Valley
Trust Company. The
complaint further averred that the certificate of discharge of the
two Federal tax liens on the Hamilton street property was
"induced * * * by error, mistake or by misrepresentations
made to the Federal government as to the value of said property
and as to the correct amount of obligations or liens against said
property at the time said application was made and the original
certificate of discharge obtained." (Par. 15 of the
complaint.) It
also averred that the acquisition of the four judgments before
described by defendant Baker for "nominal
considerations" and Baker's efforts to collect the judgments
caused Bowen to become insolvent and to file his voluntary
bankruptcy petition. Additionally, it averred that Bowen had made
a formal demand on Haas, the trustee in bankruptcy, to act to set
aside the release of the Federal tax claims, and that Haas had
"failed and refused to give such request any
consideration". [Relief Claimed] On
the basis of the contentions above set forth, the plaintiff in his
complaint asserted violation of "a legal right to have his
property apply to the discharge of his debts * * * without the
interference of the respondent Baker" in securing a release
of the Federal tax liens, and that plaintiff, by the action of the
defendant Baker, was "deprived" of a valuable property
right, which deprivation constituted "a legal fraud"
upon the complainant. In
his complaint the plaintiff asked three-fold relief: (1) That this court "order a restoration of the lien for
taxes due the United States of America * * * (2) That the defendant Baker "be compelled to prove the
value of the deficiency judgments" above referred to "so
that the extent to which these judgments shall share in any
distribution may be determined and the monies otherwise available
be applied to the payment and discharge of the tax claims of the
United States of America. (3) That the defendant Haas, the trustee in bankruptcy,
"be restrained from making any distribution of the proceeds
realized from the sale of the Hamilton street property pending the
disposition of the request raised in the within bill. The
motion to dismiss is based on two grounds: (1) the court's lack of
jurisdiction, and (2) failure of the complaint to state a claim
upon which relief can be granted. It
is apparent that the plaintiff's purpose in filing the complaint
is to obtain satisfaction of the two waived Federal tax liens
(which, of course, continue in existence against him generally
despite his discharge in bankruptcy) out of the proceeds of the
sale of the Hamilton street property. [Opinion] However
understandable the plaintiff's position may be, it is clear beyond
doubt that the present suit cannot be maintained. The
motion to dismiss must be granted for failure to join the United
States of America as a necessary and indispensable party: see Leather
v. White, 296 Fed. 477; Electric Steel Foundry v. Huntley,
32 F. (2d) 892 [1 USTC ¶404]; Stafford Mills v. White, 41
F. (2d) 58 [1930 Secondly,
this court, sitting in equity, has no jurisdiction to determine
claims contested and pending in a bankruptcy proceeding: Taylor
v. Sternberg, 293 U. S. 470; Heffron v. Western Loan &
Building Co., 84 F. (2d) 301. [United States a Necessary Party] The
dismissal for failure to join the United States of America as a
necessary and indispensable party relates to that phase of the
action which seeks the "restoration of the liens for taxes
due the United States of America"; the ruling that this court
sitting in equity has no jurisdiction to determine claims
contested and pending in a bankruptcy proceeding relates to that
phase of the plaintiff's action in which he prays that the
defendant Baker "be compelled to prove the value of the
deficiency judgments, etc.," and the prayer that the
defendant Haas, the trustee in bankruptcy, "be restrained
from making any distribution, etc." As
to the point just mentioned, the Federal Bankruptcy Act as amended
created courts of bankruptcy and fixed their jurisdiction: U. S.
C. A., Title 11, Chapter 1, Section 1, and Chapter 2, Section 11. "Upon adjudication of bankruptcy, all the property of
the bankrupt vests in the trustee as of the date of the filing of
the petition. Upon such filing the jurisdiction of the bankruptcy
court becomes paramount and exclusive; and thereafter that court's
possession and control of the estate cannot be affected by
proceedings in other courts, whether state or federal * * *" Taylor
v. Sternberg, ibid. p. 472. As
to that phase of the plaintiff's action seeking cancellation of
the waiver of the two Federal tax liens and their restoration
against the Hamilton street property: The
Internal Revenue Act, Section 3674(b), 26 U. S. C. A. 1--expressly
empowers the Collector of Internal Revenue to "issue a
certificate of discharge of any part of the property subject to
the lien," and Section 3675 provides that "A certificate
of release or of partial discharge issued under this subchapter
shall be held conclusive that the lien upon the property covered
by the certificate is extinguished. 53 Stat. 450." The
certificates of discharge against the Hamilton street property
were issued by the Collector under the authority of Section 3674
and under Section 3675. It is clear that the certificates of
release are "conclusive" that the liens upon the
Hamilton street property covered by the certificates of release
were extinguished. Congress
has not provided for the "cancellation" of such
certificates of discharge or "restoration" of the
discharged or released liens by a complaining taxpayer or
individual. It
may be noted at this point that the motion to dismiss was argued
on Since
the crux of the plaintiff's action is the cancellation of the
certificates of discharge and the restoration of the Federal lines
against the Hamilton street property, it is clear that the United
States of America is a necessary and indispensable party. Since
the United States of America has not intervened as a party
defendant, and consequently is not now a party defendant, the
action must be dismissed for failure to join the United States of
America as a necessary and indispensable party. "The United States of America is an indispensable party
and, as it cannot be brought in, the suit must be dismissed."
Czieslik v. Burnet, ibid. page 717. "* * * it is also settled by the decisions of the
Supreme Court that 'the United States are not bound by a judgment
to which they are not parties * * *'" Electric Steel
Foundry v. Huntley, ibid. page 893. "And since the United States cannot be sued without its
consent, there appears to be no alternative other than to dismiss
the proceedings." Stafford Mills v. White, ibid. page
59. In
the Stafford Mills and Czieslik cases the suit was
to remove tax liens, and in the Electric Steel Foundry case
the suit was to cancel a tax waiver. In each instance the United
States was held to be a necessary and indispensable party. [This Collateral Attack Cannot Be Made] It
is well established that the defendant cannot be required to
litigate those questions which primarily and directly involve
issues with third parties not before the court. The
rule was well stated by the Supreme Court in Minnesota v.
Northern Securities Co., 184 U. S. 199: The general rule in equity is that all persons materially
interested, either legally or beneficially, in the subject matter
of a suit, are to be made parties to it, so that there may be a
complete decree, which shall bind them all. By this means the
court is enabled to make a complete decree between the parties to
prevent future litigation, by taking away the necessity of a
multiplicity of suits, and to make it perfectly certain that no
injustice is done, either to the parties before it, or to others
who are interested in the subject matter, by a decree which might
otherwise be granted upon a partial view only of the real merits.
When all the parties are before the court, the whole case may be
seen but it may not where all the conflicting interests are not
brought out upon the pleadings by the original parties thereto.
Story, Eq. Pl. Sec. 72. The established practice of courts of equity to dismiss the
plaintiff's bill if it appears that to grant the relief prayed for
would injuriously affect persons materially interested in the
subject matter who are not made parties to the suit is founded
upon clear reasons and may be enforced by the court, sua spoute,
though not raised by the pleadings or suggested by the counsel.
(Page 235) When it appears to a court of equity that a case otherwise
presenting ground for its action, cannot be dealt with because of
the absence of essential parties, it is usual for the court while
sustaining the objection, to grant leave to the complainant to
amend by bringing in such parties. But when it likewise appears
that necessary and indispensable parties are beyond the reach of
the jurisdiction of the court, or that, when made parties, the
jurisdiction of the court will thereby be defeated, for the court
to grant leave to amend would be useless. (Pages 246-7.) As
was stated at the outset of this opinion, the situation presented
by the complaint is novel and without precedent. Chaos in the
administration of the Federal tax laws would inevitably result if
taxpayers and complaining individuals were to be permitted to
collaterally attack, in suits of this nature, Federal tax liens or
their discharge or release by properly authorized public
officials. For
the reasons above stated, the complaint is dismissed. 1 "(b) Part payment. Subject to such regulations as the
Commissioner, with the approval of the Secretary, may prescribe,
the collector charged with an assessment in respect of any tax may
issue a certificate of discharge of any part of the property
subject to the lien if there is paid over to the collector in part
satisfaction of the liability in respect of such tax an amount
determined by the Commissioner, which shall not be less than the
value, as determined by him, of the interest of the United States
in the part to be so discharged. In determining such value the
Commissioner shall give consideration to the fair market value of
the part to be so discharged and to such liens thereon as have
priority to the lien of the United States 53 Stat. 449." [90-1 USTC ¶50,216] In re Robert H. Isom, Mary E. Isom, Debtors. Robert
H. Isom, Mary E. Isom, Appellants v. United States of America,
Internal Revenue Service, Appellee (CA-9), U.S. Court of Appeals, 9th Circuit, 89-35032, [Code
Secs. 6321 ,
6322 and 6325
]
W.
Jeff Davis, Hawley, Troxell, Ennis & Hawley, Seattle, Wash.,
for appellants. Joel A. Rabinovitz, Department of Justice,
Washington, D.C. 20530, for appellee. Before
WRIGHT, REINHARDT and O'SCANNLAIN, Circuit Judges. OPINION WRIGHT,
Circuit Judge: The
question presented is whether the I.R.S. must release tax liens,
pursuant to 26 U.S.C. §6325(a)(1)
, when the underlying tax debt has been discharged in
bankruptcy. BACKGROUND There
are no material facts in dispute. Robert and Mary Isom filed for
chapter 7 bankruptcy in March 1987. At that time, the I.R.S. had
valid tax liens against the debtors' property for unpaid taxes
from 1974 through 1982. The taxes were dischargeable under 11
U.S.C. §§523(a)(1), 507(a)(7), and 727. The
debtors sought an order in the bankruptcy proceeding to compel the
I.R.S. to release the liens under 26 U.S.C. §6325(a)(1)
. The bankruptcy court granted that relief by summary judgment
in favor of the debtors. The Bankruptcy Appellate Panel reversed
with one judge dissenting. In re Isom, 95 Bankr. 148 (Bankr.
9th Cir. 1988). We have jurisdiction under 28 U.S.C. §158(d), and
we affirm the judgment of the Bankruptcy Appellate Panel. ANALYSIS We
review de novo the appellate panel's decision. Romley v. Sun
Nat'l Bank (In Re Two S. Corp.), 875 F.2d 240, 242 (9th Cir.
1989). We review de novo the bankruptcy court's decision granting
summary judgment. Id. The
Internal Revenue Code, at 26 U.S.C. §6325(a)(1)
, provides that a lien shall be released when: The
Secretary finds that the liability for the amount assessed
. . . has been fully satisfied or has become legally
unenforceable. (Emphasis added) The debtors argue that the liability becomes legally
unenforceable upon the discharge of taxes in bankruptcy, 1
so the liens must be released. We disagree. The
liability for the amount assessed remains legally enforceable even
where the underlying tax debt is discharged in the bankruptcy
proceeding. A discharge in bankruptcy prevents the I.R.S. from
taking any action to collect the debt as a personal liability of
the debtor. The debtors concede, however, that their property
remains liable for a debt secured by a valid lien, including a tax
lien. See Long v. Bullard, 117 U.S. 617 (1886); see also
Southtrust Bank v. Thomas (In re Thomas), 883 F.2d 991, 997
(11th Cir. 1989) (discussing Congressional intent to codify the
rule of Long v. Bullard); H.R. Rep. No. 95-595, 95th Cong.,
1st Sess. 361, reprinted in 1978 U.S. Code Cong. &
Admin. News 5787, 5862; S. Rep. No. 95-989, 95th Cong., 2d Sess.
76, reprinted in 1978 U.S. Code Cong. & Admin. News
5787, 5862 (indicating Congressional intent that the rule of Long
v. Bullard survive). We
hold that 26 U.S.C. §6325(a)(1)
does not require the I.R.S. to release valid tax liens when
the underlying tax debt is discharged in bankruptcy. The
debtors argue that although liability is not defined in the
tax code, "liability for the amount assessed" refers
only to personal liability. 2
We reject that strained reading of §6325
. That provision is designed to protect taxpayers by requiring
the I.R.S. to release liens when the tax debt has become satisfied
or is no longer legally enforceable. Allowing these liens to
remain alive does not defeat the purpose of §6325
because Congress intended for valid tax liens to survive
bankruptcy. 3 Finally,
the debtors argue, and the AFFIRMED. 1 11 U.S.C. §524(a)(2) provides that a discharge: operates
as an injunction against the commencement or continuation of an
action, the employment of process, or an act, to collect, recover
or offset any such debt as a personal liability of the debtor,
whether or not discharge of such debt is waived . . . Prior to 1984, this provision also prohibited proceedings
against the property of the debtor. The provision was amended and
now only prohibits actions to recover debt as a personal liability
of the debtor. 2 Debtors argue that if liability, as used in §6325
, means only personal liability, then the discharge of taxes
in bankruptcy would require the I.R.S. to release the liens
because the "liability for the amount assessed" would be
"legally unenforceable." Yet, the bankruptcy code
provides that valid tax liens survive. The debtors' argument
concentrates on resolving this apparent conflict between the tax
and bankruptcy codes. Because we reject their premise that
liability under §6325
means only personal liability, and in doing so find that the
codes are not in conflict, we need not address their proposed
resolutions. 3 The [90-1 USTC ¶50,216] In re Robert H. Isom, Mary E. Isom, Debtors. Robert
H. Isom, Mary E. Isom, Appellants v. United States of America,
Internal Revenue Service, Appellee (CA-9), U.S. Court of Appeals, 9th Circuit, 89-35032, [Code
Secs. 6321 ,
6322 and 6325
]
W.
Jeff Davis, Hawley, Troxell, Ennis & Hawley, Seattle, Wash.,
for appellants. Joel A. Rabinovitz, Department of Justice,
Washington, D.C. 20530, for appellee. Before
WRIGHT, REINHARDT and O'SCANNLAIN, Circuit Judges. OPINION WRIGHT,
Circuit Judge: The
question presented is whether the I.R.S. must release tax liens,
pursuant to 26 U.S.C. §6325(a)(1)
, when the underlying tax debt has been discharged in
bankruptcy. BACKGROUND There
are no material facts in dispute. Robert and Mary Isom filed for
chapter 7 bankruptcy in March 1987. At that time, the I.R.S. had
valid tax liens against the debtors' property for unpaid taxes
from 1974 through 1982. The taxes were dischargeable under 11
U.S.C. §§523(a)(1), 507(a)(7), and 727. The
debtors sought an order in the bankruptcy proceeding to compel the
I.R.S. to release the liens under 26 U.S.C. §6325(a)(1)
. The bankruptcy court granted that relief by summary judgment
in favor of the debtors. The Bankruptcy Appellate Panel reversed
with one judge dissenting. In re Isom, 95 Bankr. 148 (Bankr.
9th Cir. 1988). We have jurisdiction under 28 U.S.C. §158(d), and
we affirm the judgment of the Bankruptcy Appellate Panel. ANALYSIS We
review de novo the appellate panel's decision. Romley v. Sun
Nat'l Bank (In Re Two S. Corp.), 875 F.2d 240, 242 (9th Cir.
1989). We review de novo the bankruptcy court's decision granting
summary judgment. Id. The
Internal Revenue Code, at 26 U.S.C. §6325(a)(1)
, provides that a lien shall be released when: The
Secretary finds that the liability for the amount assessed
. . . has been fully satisfied or has become legally
unenforceable. (Emphasis added) The debtors argue that the liability becomes legally
unenforceable upon the discharge of taxes in bankruptcy, 1
so the liens must be released. We disagree. The
liability for the amount assessed remains legally enforceable even
where the underlying tax debt is discharged in the bankruptcy
proceeding. A discharge in bankruptcy prevents the I.R.S. from
taking any action to collect the debt as a personal liability of
the debtor. The debtors concede, however, that their property
remains liable for a debt secured by a valid lien, including a tax
lien. See Long v. Bullard, 117 U.S. 617 (1886); see also
Southtrust Bank v. Thomas (In re Thomas), 883 F.2d 991, 997
(11th Cir. 1989) (discussing Congressional intent to codify the
rule of Long v. Bullard); H.R. Rep. No. 95-595, 95th Cong.,
1st Sess. 361, reprinted in 1978 U.S. Code Cong. &
Admin. News 5787, 5862; S. Rep. No. 95-989, 95th Cong., 2d Sess.
76, reprinted in 1978 U.S. Code Cong. & Admin. News
5787, 5862 (indicating Congressional intent that the rule of Long
v. Bullard survive). We
hold that 26 U.S.C. §6325(a)(1)
does not require the I.R.S. to release valid tax liens when
the underlying tax debt is discharged in bankruptcy. The
debtors argue that although liability is not defined in the
tax code, "liability for the amount assessed" refers
only to personal liability. 2
We reject that strained reading of §6325
. That provision is designed to protect taxpayers by requiring
the I.R.S. to release liens when the tax debt has become satisfied
or is no longer legally enforceable. Allowing these liens to
remain alive does not defeat the purpose of §6325
because Congress intended for valid tax liens to survive
bankruptcy. 3 Finally,
the debtors argue, and the AFFIRMED. 1 11 U.S.C. §524(a)(2) provides that a discharge: operates
as an injunction against the commencement or continuation of an
action, the employment of process, or an act, to collect, recover
or offset any such debt as a personal liability of the debtor,
whether or not discharge of such debt is waived . . . Prior to 1984, this provision also prohibited proceedings
against the property of the debtor. The provision was amended and
now only prohibits actions to recover debt as a personal liability
of the debtor. 2 Debtors argue that if liability, as used in §6325
, means only personal liability, then the discharge of taxes
in bankruptcy would require the I.R.S. to release the liens
because the "liability for the amount assessed" would be
"legally unenforceable." Yet, the bankruptcy code
provides that valid tax liens survive. The debtors' argument
concentrates on resolving this apparent conflict between the tax
and bankruptcy codes. Because we reject their premise that
liability under §6325
means only personal liability, and in doing so find that the
codes are not in conflict, we need not address their proposed
resolutions. 3 The [89-2 USTC ¶9424] In re Academy Answering Service, Inc. United States of
America, Appellant v. Academy Answering Service, Inc., Appellee U.S. District Court, No. Dist. Ohio, East. Div.: C88-3470, Robin L. Greenhouse, Department of Justice, Washington, D.C.
20530, for appellant. Katryn L. Roseen, Sindell, Rubenstein,
Einbund, Pavlik & Novak, Natl. City East, Cleveland, Ohio
44114, for appellee. MEMORANDUM ALDRICH,
District Judge: Appellant
United States of America appeals that portion of the bankruptcy
court's I. Academy
filed a petition under Chapter 11 of the Bankruptcy Code on II. The
government argues that its admitted violations of §362(a)
's stay provisions were not willful, and deploys several
arguments which it believes show both (1) that attorney's fees may
not in any event be imposed against it, and (2) that Academy is
ineligible for the relief awarded by the bankruptcy court. The
government, indeed, furnishes four independent reasons for
reversing the bankruptcy court's decision, any one of which, if
persuasive, warrants that result. Without any guidance on these
issues from Academy, the Court proceeds to evaluate the merits of
the government's position. The
government's first argument is that Academy, as a corporation, is
not entitled to the relief contemplated by §362(h), relief which,
the government suggests, is available only to
"individuals." Section 362(h) provides that: An
individual injured by any willful violation of a stay provided by
this section shall recover actual damages, including costs and
attorneys' fees, and, in appropriate circumstances, may recover
punitive damages. In view of the cases cited by the government that reach a
contrary conclusion, 1
and the lack of a persuasive rationale for distinguishing
individuals and corporations as candidates for the contemplated
relief, this Court is not satisfied that §362(h) protection is
unavailable to corporations. The failure of this argument,
however, is not fatal to the government's position. Any one of its
other, independent arguments secures the conclusions urged. The
government's second argument is that the doctrine of sovereign
immunity precludes an award of attorney's fees against the United
States absent express statutory authorization, which is lacking in
the present case. Contrary to what the government indicates, the
bankruptcy court appears not even to have considered that
sovereign immunity may be a bar to the imposition of §362(h)
attorney's fees against the United States. The doctrine, however,
does act as such a bar in the present case. It is well
established, not only that a statutory waiver of immunity is
required before fees can be assessed against the government, see Alyeska
Pipeline Service Co. v. Wilderness Society, 421 U.S. 240
(1975), but also that a statute merely permitting recovery of
attorney's fees generally cannot automatically be read as an
implicit waiver of immunity, see N.A.A.C.P. v. Civiletti,
609 F.2d 514, 518-521 (D.C. Cir. 1979), cert. denied, 447
U.S. 922 (1980). The government is correct in noting that no
indication is provided, either in §362(h) itself or in §106
, the Bankruptcy Code's general sovereign immunity waiver
provision (or in the legislative history of either provision),
that Congress intended to expose the United States to §362(h)
attorney's fee awards. Section
106 provides such exposure only where a claim against the
government relates to "property of the estate" and
arises "out of the same transaction or occurrence out of
which [the government's] claim arose." The attorney's fees
awarded by the bankruptcy court were not "property of
[Academy's] estate." Nor did Academy's claim for attorney's
fees arise out of the same "transaction or occurrence"
out of which the government's claim arose. The doctrine of
sovereign immunity thus provides a complete shield against
liability for attorney's fees, and requires reversal of the
bankruptcy court's award. The
government's third argument, which supports the same conclusion
begins with the observation that, on those few occasions where
Congress has enacted legislation waiving governmental immunity
from fee awards, the statutes are carefully drafted and attach
stringent conditions to the recovery of such awards. Importantly,
fees are generally allowed only upon a showing that the
government's position was not substantially justified and thus
resulted in wasteful litigation. See the Equal Access to
Justice Act, 28 U.S.C. §2412. The government is correct in
concluding, in accordance with accepted rules of construction,
that the absence from §362(h) of conditions Congress expressly
incorporated in other statutes is strong evidence that Congress
did not intend that the government be held liable for fees under
§362(h). The
protection afforded by §362(h), finally, is available only to
individuals "injured by any willful violation
of a stay . . . ." (emphasis supplied). The government argues
that its violation was not willful and that Academy was in any
case not injured thereby. This Court agrees that the inadvertence
involved in failing timely to modify one's computer software to
accommodate changes in the law does not rise to the level of
"willfulness" as this term has been defined in, e.g.,
In re Crispell, 73 B.R. 375, 379 (Bkruptcy. E.D. Mo. 1987). It
is also undisputed that the For
the reasons set forth above, the bankruptcy court's finding of a
willful violation of §362(a)
and its consequent imposition of a $1,000 attorney's fee award
are hereby reversed. IT
IS SO ORDERED. ORDER The
Court has filed its memorandum and order in this case. Therefore, IT
IS ORDERED that the bankruptcy court's finding of a willful
violation of §362(a)
and its consequent imposition of a $1,000.00 attorney's fee
are hereby reversed. IT
IS FURTHER ORDERED that this action is dismissed with prejudice. 1 Budget Service Co. v. Better Homes of Virginia, 804
F.2d 289, 292 (4th Cir. 1986); In re Inslaw, 76 B.R. 224,
241 (Bkrptcy. D.C. 1987). 67-2 USTC ¶9479]In the Matter of William Levine, Bankrupt U. S. District Court, Dist. Conn., No. H. 4564, 5/1/67 Michael
Susman, 207 Orange St., New Haven, Conn., for petitioner. Joseph
Neiman, 245 Wethersfield Ave., Hartford, Conn., Myron R.
Bernstein, Plains Rd., Moodus, Conn., for trustee. Memo Re: Petition of United States of America to Intervene SEIDMAN,
Referee: The
bankrupt owned an undivided fractional share in a remainder
interest in certain real property in which the bankrupt's mother
was the life tenant. The bankrupt was indebted to the United
States of America and prior to his adjudication, United States tax
liens were properly filed against the bankrupt. The
United States of America did not file a proof of claim, but filed
a petition to intervene in these proceedings. Several months
later, a stipulation was filed whereby the United States of
America discharged its lien as to the real estate in which the
bankrupt had a fractional remainder interest, and that interest
was sold to a brother of the bankrupt for $500.00. The stipulation
was signed by the trustee, the brother and the United States of
America. The discharge executed by the United States of America
discharged: . . . the property heretofore described from the aforesaid
tax lien, saving and reserving however the force and effect of
said tax lien against and upon all other property and/or right to
property to which said lien is attached, wherever situated. The
State of Connecticut having filed claims for taxes entitled to
priority, objects to the granting of the petition to intervene for
the following reasons (a) no proof of claim was filed as required
by section 57n and (b) the discharge of tax liens had the
effect of releasing the lien of the United States of
America. Having
filed liens, the United States of America became a secured
creditor. As such it was under no duty to file a proof of claim. A creditor may rely entirely upon his security. The filing of
a proof of claim is not essential to the preservation of a lien.
The failure to file a proof of claim does not affect the
creditor's right to the security . . . if no claim to share in the
general assets is asserted the better practice is to file an
intervening petition rather than a proof of secured claim. Collier
on Bankruptcy 14th Ed. Vol. 3 Par. 57.07 (3.3) p. 169, 170. Clem
v. Johnson, 185 F. 2d 1011 (8 Cir. 1950) cert. den. 241 U. S.
909, 71 S. Ct. 622, 95 L. Ed. 1346. See also Fish v. East,
114 F. 2d 177 (10 Cir. 1940) 44 Am. B. R. (NS) 206. The
United States of America could have followed one of three
procedures: (1) file a proof of claim entitled to priority (section
64a(4)); (2) file a secured claim, crediting the value of the
security, and proving for the balance, or (3) note file a claim at all, in which event a petition to
intervene is appropriate to protect the security in the event the
property is sold. Collier on Bankruptcy 14th Ed. Vol. 6 Section
25.95 Remington on Bankruptcy Vol. 5 section 2522.16, 2522.17. As
stated in DeLaney v. City and County of Denver, 185 F. 2d
246 (10 Cir. 1950): .
. . the better practice therefore is to set up a claim of lien
upon security in the possession of the trustee by an intervening
petition filed in the bankruptcy proceeding. 185 F. 2d at 251,
252. The
fact that the property was sold does not extinguish the lien
rights of the United States of America. The court may order the
payment of a valid lien out of the proceeds of a sale of
encumbered property where no proof of claim is filed. In the
Matter of Winner-Franck Baking Co., 58 F. (2d) 409 (D. C. Pa.
1932) aff'd 61 F. 2d 1039, cert. den. 228 U. S. 609, 53 S. Ct.
401, 77 L. Ed. 983. There
remains the second claim of the State of Connecticut that the
discharge of the lien as to the real estate extinguished the lien.
The discharge of lien was intended only to clear the record title
of the real estate so that the trustee could dispose of his
interest. By its terms it saved and reserved all of its lien
rights as to all other property and that would by operation of law
include the cash proceeds of the sale by the trustee. This
discharge took place after the petition to intervene was
filed and was in furtherance of the agreement of all parties
contained in the stipulation on file. Had there been a release
of lien, a different question might have been presented. However,
under the present facts it cannot be found that the United States
of America intended to or did release the proceeds of the sale of
the bankrupt's interest in the real estate from the security of
its liens. The
petition to intervene is granted and it is ORDERED
that the lien of the United States of America be transferred to
the proceeds of the sale of the property to which the lien applied
as of the date of adjudication. [86-1 USTC ¶9315] In Re: Nathan D. Harris, Jr., Debtor U.S. Bankruptcy Court, West. Dist. Va. Charlottesville Div., W.
Stephen Scott, for debtor. John P. Alderman, United States
Attorney, Roanoke, Va. 24009, Edward J. Snyder, John S. Miles,
Martin Teel, Department of Justice, Washington, D.C. 20530, for
U.S. MEMORANDUM OPINION ANDERSON,
Bankruptcy Judge: This
matter is before the court on the motion of the Internal Revenue
Service (" The
court finds this is a core proceeding. 28 U.S.C. §157(b)(2)(B). FACTUAL BACKGROUND. The facts of this case are not in dispute and are reviewed here for
purposes of resolution of the The
debtor objected to the On
In
a Based
upon these findings, the court determined that the portion of the
debt owed to the On
The
THE APPLICATION OF 11 U.S.C. §523(a)(1)(C).
The The
gravamen of this argument is the proper interpretation of the
language of 11 U.S.C. §523(a)(1)(C). In pertinent part §523(a)(1)(C)
provides: (a)
A discharge under section 727 . . . of this title does not
discharge an individual debtor from any debt-- (1)
for a tax or customs duty-- * * * (C)
with respect to which the debtor made a fraudulent return
or willfully attempted in any manner to evade or defeat such
tax[.] 11 U.S.C. §523(A)(1)(C) (Emphasis added). As in all cases
involving statutory construction, the ordinary meaning of the
language of the statute must initially control its interpretation.
American Tobacco Co. v. Patterson, 456 U.S. 63, 102 S.Ct.
1534, 71 L.Ed. 748 (1982). On its face §523(a)(1)(C) provides two
alternative grounds upon which a tax debt may be declared
nondischargeable: first, where the "debt is for a tax with
respect to which the debtor made a fraudulent return," or,
second, where the debt is for a tax with respect to which the
debtor "willfully attempted in any manner to evade or defeat
such tax." It is under the first of the two grounds that The
plain meaning of the statutory text of §523(a)(1)(C) supports the
Moreover,
the construction of the statute followed by the court in its
original decision fails to give effect and independent
significance to the phrase following the disjunction
"or" in §523(a)(1)(C). This language, which bars the
discharge of "any debt for a tax . . . with respect to which
the debtor . . . willfully attempted in any manner to evade or
defeat such tax," plainly contemplates the situation where
the debt directly arises out of any "willful" attempt by
a debtor to evade payment of the tax. The court's original
application of the statutory language at issue in the present case
(the language preceding the disjunctive "or"), however,
is inconsistent with that part of the statutory text following the
disjunctive. As noted, the court in its original decision
determined that the debtor's tax liability for his non-fraudulent
failure to report the embezzled funds on his tax return was
dischargeable, despite a finding by the court that the debtor
included two fraudulent items on his tax return. The court's
original application of U.S.C. §523(a)(1)(C) therefore implicitly
conditioned the discharge of a tax debt on the determination that
the debt arose out of a fraudulent act of the debtor. This
construction of the statute does not give effect to that language
of §523(a)(1)(C) following the disjunctive "or", which
denies the discharge of any tax debt that the debtor
"willfully attempted to evade in any manner." However,
in construing a statute a court is obliged to give effect, if
possible, to every word Congress used. Reiter v. Sonotone
Corp., 442 U.S. 330, 339, 99 S.Ct. 2326, 60 L.Ed. 931 (1979).
The construction of §523(a)(1)(C) implicitly followed by the
court in its original opinion fails to comply with this principle. Accordingly,
proper application of the plain meaning of §523(a)(1)(C) in the
present case requires the court to modify its original opinion and
order. As noted above, the court determined in its original
opinion that the debtor included two fraudulent items on his 1975
federal tax return: the fictitious exemption and related child
care expenses. The debtor's tax return was therefore fraudulent.
Thus, under the plain meaning of 11 U.S.C. §523(a)(1)(C) the
debtor's entire tax debt based on that return, including that
portion of the tax debt based on the debtor's non-fraudulent
failure to report the embezzled funds, was not discharged in his
previous bankruptcy proceeding. Consequently, the court should not
have disallowed that portion of the THE TAX PENALTY. In the original opinion and order the court also disallowed a portion of
the The
question of whether this portion of the Section
6653(b) of the Internal Revenue Code provides that "[i]f any
part of any underpayment . . . of tax required to be shown on a
return is due to fraud, there shall be added to the tax an amount
equal to 50 percent of the underpayment." 26 U.S.C. §6653(b)(1)
(1982). In order to assess this fraud penalty on a tax deficiency,
the As
noted, the court determined in its original opinion that the
debtor reported two fraudulent items on his 1975 tax return: the
fictitious exemption and the related child care expenses.
Consequently, under 26 U.S.C. §6653(b) the Allowance
of the CONCLUSION.
Based upon the foregoing, the court finds that the debtor's
liability for the tax deficiency owed for his non-fraudulent
failure to report embezzled funds and that his liability for the
fraud penalty attributable to such deficiency were both not
discharged pursuant to 11 U.S.C. §523(a)(1)(C) and (a)(7) in his
previous bankruptcy proceeding. Consequently, the court's original
opinion and order incorrectly disallowed that portion of the Upon
the filing of a motion by the Internal Revenue Service for
reconsideration of the court's memorandum opinion and order
entered Upon
a hearing having been held at which time arguments of counsel were
heard, and Upon
a consideration of the memoranda of authority filed by counsel and
the applicable authority, for the reasons stated in the memorandum
opinion entered this date, it is hereby ORDERED That
the court's May 3, 1985 opinion and order be, and hereby is,
amended to overrule the debtor's objection to the [62-1 USTC ¶9194]United State of America, Plaintiff v. Ernest O. Piper,
Luella Piper, Lena A. Piper, Defendants U. S. District Court, Last. Dist. Ill., Civil Action No.
3751, 202 FSupp 657, 12/26/61 Carl
W. Feickert, United States Attorney, Room 327, Post Office Bldg.,
East St. Louis, Ill., for plaintiff. Ernest O. Piper, pro se,
for defendants. JUERGENS,
District Judge: The
United States of America filed its complaint to effect collection
of certain sums allegedly due to the United States by the
defendants for income taxes and withholding taxes together with
interest and penalties. The
complaint alleges that there is due to the United States from
Ernest O. Piper and Luella Piper certain income taxes for the
calendar years 1951-1954, inclusive, plus interest and penalties,
amounting to $1,468.51; that there is due to the United States
from defendant Lena A. Piper for income taxes for the calendar
years 1951 to 1954, inclusive, plus interest, the sum of $541.61;
and that there is due to the United States from defendants Ernest
O. Piper and Lena A. Piper, d/b/a Piper's Ritz Cafe, withholding
taxes and penalties and interest totaling $3,125.51 and from the
same defendants for Federal unemployment taxes, plus penalties and
interest, the amount of $2,257.76 for which the Government seeks
to obtain judgment against the defendants. [Compromise Offer] The
defendants sent a letter to this Court on [Motion for Summary Judgment] The
Court has for consideration at this time the motion of the United
States for summary judgment. With
the motion for summary judgment appears certificate of assessments
and payments for individual income taxes of the taxpayers Ernest
O. and Luella Piper covering the years 1951, 1952, 1953 and 1954,
wherein the amount of liability is shown and the payments made
thereon and the balance due from the taxpayers for the years in
question. An examination of this certificate shows that there is
in fact the sum of $1,468.51 plus interest due to the United
States by Ernest O. Piper and Luella Piper for individual income
taxes for the years 1951, 1952, 1953 and 1954. There
also appears certificate of assessments and payments of individual
income taxes for the taxpayer Lena A. Piper, wherein is shown the
liability, the payments and the balance due for the years 1951,
1952, 1953 and 1954. This certificate shows that there is due to
the United States from Lena A. Piper the sum of $350.63 plus
interest for unpaid income taxes for the years 1952, 1953 and
1954. There
is also a certificate of assessments and payments for withholding
taxes for the taxpayers Ernest O. and Lena A. Piper, d/b/a Piper's
Ritz Cafe, for the 4th quarter of the year 1950, the 1st and 2nd
quarters of the year 1951, the 1st and 3rd quarters of the year
1953, the 2nd quarter of the year 1954, and the 2nd quarter for
the year 1955, wherein it appears that there is due and owing to
the United States for taxes withheld the amount of $3,125.51. There
is also a certificate of assessments and payments for F.U.T.A.
taxes in the name of taxpayers Ernest O. Piper and Lena A. Piper,
d/b/a Piper's Ritz Cafe, for the tax years 1950, 1951, 1952 and
1953, which shows a balance due in the amount of $2,257.76. An
affidavit also accompanies the motion for summary judgment. In the
affidavit it is averred that the affiant is employed by the United
States of America as trial attorney assigned to the Tax Division
of the Department of Justice; that in the course of his employment
he was assigned to the instant proceedings and is responsible for
the conduct of the Government's case; that pursuant to the
performance of his duties he has examined the files of the
Department of Justice and ascertained that the files of the
Department of Justice do not indicate that the taxpayers, Ernest
O. Piper, Luella Piper and Lena A. Piper, have entered into a
compromise settlement with the Department of Justice concerning
the outstanding tax liability involved in the instant proceedings. [Taxes Not Discharged By Bankruptcy] It
should first be pointed out that taxes levied by the United States
are not discharged in a bankruptcy proceedings. Section 35 of
Title 11, U. S. C. A., provides in pertinent parts as follows: "(a) A discharge in bankruptcy shall release a bankrupt
from all of his provable debts, whether allowable in full or in
part, except such as (1) are due as a tax levied by the United
States, . . ." Thus,
it appears that the bankrupt proceeding has no effect whatever on
the taxes due by the defendants to the United States. Compromise
of tax due to the United States is provided by Section 7122 of the
Internal Revenue Code, 1954. Section
7122 of the Internal Revenue Code of 1954 provides in pertinent
parts as follows: ". . . Whenever a compromise is made by the Secretary or
his delegate in any case, there shall be placed on file in the
office of the Secretary or his delegate the opinion of the General
Counsel for the Department of the Treasury or his delegate, with
his reasons therefor, with a statement of-- (1) The amount of tax assessed, (2) The amount of interest, additional amount, addition to
the tax, or assessable penalty, imposed by law on the person
against whom the tax is assessed, and (3) The amount actually paid in accordance with the terms of
the compromise." [No Tax Compromise Made] The
affidavit filed with the motion for summary judgment clearly
establishes that there was in fact no compromise entered into
between the United States and these defendants which would in any
way affect the taxes due by the defendants to the United States. The
Court finds that there is due to the United States from the
defendants Ernest O. Piper and Luella Piper the sum of $1,468.51
for unpaid income taxes assessed them, together with interest
thereon; that there is due to the United States from the defendant
Lena A. Piper the sum of $350.63 for unpaid income taxes; and that
there is due to the United States from Ernest O. Piper and Lena A.
Piper, jointly and severally, the sum of $5,383.27 for unpaid
withholding taxes and unemployment taxes. Judgment
should be entered for the United States and against the defendants
Ernest O. Piper and Luella Piper in the amount of $1,468.51 for
unpaid income taxes assessed against them for the years 1951
through 1954, together with interest; and in favor of the United
States and against the defendant Lena A. Piper in the amount of
$350.63 for unpaid income taxes for the years 1952 through 1954;
and in favor of the United States and against the defendants
Ernest O. Piper and Lena A. Piper, jointly and severally, in the
sum of $5,383.27 for unpaid withholding taxes for the last quarter
of 1950, 1st and 2nd quarters of 1951, the 1st and 3rd quarters of
1953, the 2nd quarter of 1954 and the 2nd quarter of 1955, and for
unemployment taxes for the years 1950 through 1954 together with
interest. The
above and foregoing shall be considered findings of fact and
conclusions of law. Order The
Court, having read the plaintiff's motion for summary judgment and
the documents in support thereof and being fully advised in the
premises, finds that the motion for summary judgment should be
allowed. IT
IS, THEREFORE, THE ORDER of this Court that judgment should be
entered in favor of the United States and against the defendants
Ernest O. Piper and Luella Piper, jointly and severally, in the
sum of $1,468.51 plus interest for income taxes for the years 1951
through 1954 and against the defendant Lena A. Piper in the sum of
$350.63 plus interest for unpaid income taxes for the years 1952
through 1954 and against the defendants Ernest O. Piper and Lena
A. Piper, jointly and severally, in the sum of $5,383.27 plus
interest for unpaid withholding taxes for the last quarter of
1950, the 1st and 2nd quarters of 1951, and 1st and 3rd quarters
of 1953, and 2nd quarter of 1954 and the 2nd quarter of 1955, and
for unemployment taxes for the years 1950 through 1954, and that
the United States have and recover of and from the several
defendants as named above the several amounts there designated. [60-1 USTC ¶9107]In the Matter of Merchants Distilling Corporation,
Debtor. Terre Haute First National Bank, Trustee,
Petitioner-Appellant v. United States of America, Respondent-Appellee
(CA-7), U. S. Court of Appeals, 7th Circuit, No. 12692, 272
F2d 80, 12/2/59, Reversing District Court, Inc., 59-1 USTC ¶9352 C.
Severin Buschmann, John R. Carr, Jr., Donald A. Schabel, for
appellant. Charles K. Rice, Lee A. Jackson, Washington, D. C.,
Don. A. Tabbert, John C. Vandivier, Indianapolis, Ind., for
appellee. Before
DUFFY, PARKINSON 1
and CASTLE, Circuit Judges. CASTLE,
Circuit Judge. The
petitioner-appellant, Terre Haute First National Bank, Trustee of
Merchants Distilling Corporation in proceedings for reorganization
under Chap. X of the Bankruptcy Act filed a petition in the
District Court [59-1 USTC ¶9352] for an order clarifying the
provisions of the plan of reorganization of the debtor
corporation, and of the Court's order approving consummation of
the plan. The Trustee requested clarification so as to show that
the lien of the United States of America, respondent-appellee, for
excess profits taxes was discharged by the plan, and that the
claim of the United States for the balance of excess profits taxes
is contractual in nature and to be paid as provided in the plan. Trustee's
petition was heard by a special master on the record in the
reorganization proceeding. No additional evidence was offered by
either party. The special master in his report concluded that the
provisions of the amended reorganization plan, which the court had
approved, did not release the government's lien and that the
trustee's petition should be dismissed. The District Court
overruled the trustee's exceptions to the report, concluded that
the provisions of the amended plan did not release the lien and
entered an order dismissing the petition. The trustee appealed. Prior
to the filing of the petition for reorganization by Merchants the
Commissioner of Internal Revenue had assessed against it excess
profits taxes for the years 1945 and 1946 in the sum of
$779,253.84, plus interest of $486,411.34. In addition, the United
States had a claim for withholding taxes, interest and penalties
in the sum of $56,740.86 and excise taxes in the sum of $7,323.70.
The United States had duly filed notice of tax liens against all
of Merchants' properties and rights to properties. [Assets to Be Sold Free of Liens] The
Trustee's amended plan of reorganization was based upon a
commitment which the Trustee had obtained from Schenley Industry,
Inc. The Schenley commitment set forth the conditions upon which
it would purchase the common stock of Merchants upon its
reorganization. It required that as of the date of closing the
assets and property of Merchants be: "subject to no liens, encumbrances or title retention or
similar agreements which will not be released or discharged in the
pending reorganization proceeding, except the lien for real and
personal property taxes assessed in Vigo and Knox Counties,
Indiana for the year 1957 due and payable in 1958". The
Schenley proposal and commitment, including the condition with
respect to the release and discharge of liens, was by an amendment
proposed by the trustee, included as a part of the amended plan of
reorganization and incorporated therein. The
District Court in its order approving the amended plan of
reorganization specifically approved the amended plan "as
amended by the amendments proposed by the trustee." The
amended plan of reorganization as approved provided that Schenley
would pay over to the trustee approximately $1,000,000 out of
which certain payments would be made pursuant to the plan and that
upon consummation thereof Merchants and its property shall be free
and clear of all claims "except as otherwise provided in the
plan." [No Provision Continuing Tax Liens] The
amended plan contained the following provisions altering and
modifying the tax claims of the United States: "1. The United States of America shall receive payment
in cash in full of the unpaid balance of the withholding F. I. C.
A. and excise taxes, together with interest at the rate of 6% per
annum to date of payment and with penalties thereon as set forth
in the proof of claim, and, in addition, shall receive the amount
of principal and interest to date of payment due under the
conditional sales contract covering the dry house, within ninety
days after the date of the confirmation of the plan. "2. The claims of the United States for excess profits
taxes (including interest and penalties, if any), shall be allowed
in the amount of $779,253.84 and shall be fully satisfied by
payment in accordance with the following provisions: '(a) The sum of $300,000.00 in cash will be paid to the
District Director of Internal Revenue, Indianapolis, Indiana,
within ninety days after the date of the confirmation of the plan. '(b) The balance of the claim for excess profits taxes then
outstanding will be liquidated by payments that may become due as
the results of the carrying forward of net operating losses for
years prior to the date of confirmation of the plan, in the
following manner, to-wit: If by the carrying forward of the net
operating losses for such prior years, the debtor becomes entitled
to a reduction in taxes it would otherwise be required to pay in
any particular year, the debtor is to pay to the District Director
of Internal Revenue, Indianapolis, Indiana, an amount equal to the
savings of taxes so brought about, such payments to be made upon
the audit and allowance as deduction of such carryforward losses
by the Internal Revenue Service. Such payments shall not exceed
the total amount of $479,253.84. The obligation to make payments
on account of said $479,253.84 is conditioned solely upon
realization of tax savings from the carryover of prior losses, as
described above, and such obligation shall terminate and be deemed
satisfied in full, (whether paid in full or not) upon expiration
of the time provided by law for the carryover of such prior
losses. Notwithstanding any provision herein to the contrary the
United States shall have the right, with respect to any amount
accruing to the United States out of tax savings under the formula
hereinabove described and remaining unpaid, to take appropriate
legal steps for the collection thereof at any time within six
years after allowance of the loss as a carryover deduction by the
Internal Revenue Service.'" The
District Court's order approving consummation of the amended plan
of reorganization provided: "* * * that as of "(a) The real and personal property taxes assessed in
Vigo and Knox Counties, Indiana, for the year 1957, due and
payable in 1958. "(b) Claim of the United States of America in the amount
of $479,253.84, which represents the balance of principal of
excess profits taxes to be satisfied in accordance with the terms
of the Plan of Reorganization. "(c) All claims of Schenley Industries, Inc. or Schenley
Distillers, Inc. against the debtor." Prior
to the entry of the order approving consummation of the amended
plan of reorganization the Secretary of the Treasury of the United
States issued a certificate that by virtue of and pursuant to
provisions of Section 199 of Chap. X of the Bankruptcy Act he
"accepts said amended plan of reorganization" with
respect to the tax claims of the United States, effective upon
entry of an order of the District Court in the proceeding
confirming such amended plan. It
is the Government's contention that the Secretary of the Treasury
approved and accepted the compromise of the tax "claims"
but did not approve a release or discharge of the existing tax
"liens". It further contends that the tax liens continue
until the liability is satisfied or becomes unenforceable 2
by reason of lapse of time, unless the same are released in whole
or in part pursuant to statutory provisions not pertinent to the
issue here involved. Sec.
199 of Chap. X of the Bankruptcy Act (11 U. S. C. A. §599)
pursuant to which the Secretary of Treasury accepted the amended
plan, provides: "If the United States is a secured or unsecured creditor
or stockholder of a debtor, the claims or stock thereof shall be
deemed to be affected by a plan under this chapter, and the
Secretary of the Treasury is hereby authorized to accept or reject
a plan in respect of the claims or stock of the United States. If,
in any proceeding under this chapter, the United States is a
secured or unsecured creditor on claims for taxes or customs
duties (whether or not the United States has any other interest
in, or claim against the debtor, as secured or unsecured creditor
or stockholder), no plan which does not provide for the payment
thereof shall be confirmed by the judge except upon the acceptance
of a lesser amount by the Secretary of the Treasury certified to
the court: Provided, That if the Secretary of the Treasury shall
fail to accept or reject a plan for more than ninety days after
receipt of written notice so to do from the court to which the
plan has been proposed, accompanied by a certified copy of the
plan, his consent shall be conclusively presumed." The
statute does not require that tax liens be retained and kept in
force to secure any compromise made thereunder. Section
226 of Chap. X of the Bankruptcy Act (11 U. S. C. A. §626)
provides that the property dealt with by a reorganization plan,
when transferred: "*
* * shall be free and clear of all claims and interests of
the debtor, creditors, and stockholders, except such claims and interests
as may otherwise be provided for in the plan or in the order
confirming the plan or in the order directing or authorizing the
transfer or retention of such property." (italics supplied) In
the instant case it is clear that neither the provisions of the
amended plan, nor of the orders confirming and approving
consummation of the amended plan provide for a continuation of the
tax liens of the United States. On the contrary the provisions of
the Schenley commitment, which constituted a part of the amended
plan of reorganization, clearly indicate that said tax liens were
to be discharged in the reorganization proceeding. The obligation
of Schenley to purchase the common stock of Merchants for
$1,000,000 and to advance additional working capital was expressly
conditioned on the discharge of the Federal Tax liens in the
reorganization proceedings. The consummation of the amended plan
was dependent upon such commitment and the conditions attached
thereto. By virtue of the acceptance by the Secretary of Treasury
of the provisions of the amended plan of reorganization with
respect to the tax claims of the United States the provisions of
that plan are valid and binding upon the United States in all
respects. The Government's contention that the Schenley proposal
and commitment was not a part of the amended plan and that its
express requirement for release and discharge of liens was
therefore not accepted by the Secretary of Treasury is not
supported by the record. It
is our opinion that the District Court erred in approving the
report of the special master insofar as it concluded that the
pre-existing tax liens of the United States continue in force and
effect. [Contractual Right to Payment] We
do not deem it necessary, however, to determine, at this time,
whether or not the claim of the United States for the balance of
excess profits taxes reserved to it under the amended
reorganization plan is solely contractual in nature. Unless there
is default in making a payment due under the provisions of the
plan relating to the discharge of the balance of the tax liability
there would appear no need to resolve that question. The
order of the District Court overruling the exceptions to the
report of the special master and dismissing trustee's petition is
therefore reversed and the cause is remanded with directions to
enter an order clarifying the provisions of the plan of
reorganization and the court's order approving consummation of
said plan insofar as the discharge of the pre-existing Federal Tax
liens are concerned. REVERSED 1 While Judge Parkinson participated in the hearing of oral
arguments and a conference of the division judges above-named, he
was not present at the time of, and did not participate in, the
adoption of this opinion. He concurred in the result reached in
this opinion. 2 26 U. S. C. A. §§ 6321, 6322 and 6323. |