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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
U.S.
Bankruptcy
Court, No. Dist. Tex., Dallas Div.,
385 3245
7-A-7,
8/4/87
[Code Sec.
6325 --Result unchanged by the Tax Reform Act of 1986]
Lien for taxes: Release of lien: Bankruptcy.--
A bankrupt taxpayer could not force the
IRS
to apply proceeds from the sale of property to tax debts for 1983
and 1984 when the parties had agreed to apply the proceeds to tax
debts for other years. The understanding of the parties was for
the release of liens on homestead property in exchange for
application of the proceeds of the sale to unpaid taxes for the
years 1978 through 1981. Although the debtor attempted to
unilaterally alter that agreement and have the proceeds applied to
more recent tax debts that were excepted from discharge, such
attempt was ineffective. The
IRS
had applied the proceeds as originally directed, but the debtor
attempted to change the agreement after he learned of the
assessments for the later years, well after the
IRS
had committed itself to release its tax lien covering the tax
years 1978 through 1981.
Hytken,
Harlan, Nye, 1710
One
Galleria
Tower
,
Dallas
,
Tex.
75240
, for plaintiff. Steven A. Maurer, Department of Justice,
Dallas
,
Tex.
75242-1-10599, for defendant.
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
June 22, 1987
after which the Court took the matter under advisement. The Debtor
has requested in its prayer that the Court declare the tax liens
filed against the Debtor's property to be void and that the
Debtor's tax liability be discharged. The
United States
asks that the Court declare taxes due for the years 1978 to 1981
discharged, taxes due for years 1983 and after non-dischargeable,
and that the Court abstain from determining the taxes due for the
year 1982.
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
September 24, 1985
. Thus, in this case, federal income taxes due for 1983 and
subsequent years are excepted from discharge under Section
523(a)(1)(A). In re Verran [80-2
USTC ¶9606 ], 623 F.2d 477 (6th Cir. 1980); In re Resnick
[85-2
USTC ¶9457 ], 52 B.R. 90 (Bankr. D.
Mass.
1985).
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
June 17, 1987
, which the Court accepts. At the time this case was commenced,
the Internal Revenue Service ("
IRS
") had assessed taxes for the years 1978 through 1984. Prior
to the filing, the
IRS
had filed two notices of federal tax lien for the years 1978
through 1981. 1
A third tax lien notice, for the tax years 1983 and 1984, was
filed on
August 26, 1985
.
The
Debtor had been negotiating with the
IRS
over a method of payment of this tax liability. The Debtor had
agreed to sell his interest in a homestead property located in
Denton County
,
Texas
and assign to the
IRS
the proceeds received beyond payment of costs and prior liens.
Subsequent to this agreement but prior to closing the homestead
sale, the
IRS
filed the notice of tax lien for the years 1983 and 1984. The sale
was closed as planned and proceeds of $15,077.29 were sent to the
IRS
. A certificate of discharge of the federal tax lien as to the
homestead was issued by the
IRS
, listing the value of the lien at $15,077.29 and the debt to
which the proceeds would be applied as the unpaid taxes from 1978
through 1981. When the Debtor endorsed the check for $15,077.29
over to the
IRS
, he wrote "applied to years 1985, 1984, 1983, remainder to
be applied to previous years . . . ." The Debtor also sent a
note to the
IRS
requesting that the proceeds of the homestead sale be applied to
taxes from 1984 first, 1983 second, and the balance to prior
years. 2
Thus
we come to the crux of this adversary proceeding. The
IRS
applied the $15,077.29 homestead proceeds to tax debts that would
be discharged under Section 523(a)(1) 3
instead of applying the proceeds to the more recent tax debts that
are excepted from discharge, as was requested by the Debtor. The
Debtor contends that because the payment of the homestead proceeds
was voluntary, he has a right to direct the application to the
most recent taxes and the
IRS
should have applied the $15,077.29 according to the endorsement on
the check and the accompanying note. See Muntwyler v. United
States [83-1
USTC ¶9275 ], 703 F.2d 1030 (7th Cir. 1983); O'Dell v.
United States, 326 F.2d 451 (10th Cir. 1964). The
IRS
argues that it did apply the homestead sale proceeds as directed,
only the Debtor attempted to change the agreement after he learned
of the assessments for 1984 and 1983, well after the
IRS
had committed itself to release its tax lien covering the tax
years 1978 to 1981. The Court agrees with the
IRS
.
The
IRS
may discharge any part of a taxpayer's property subject to a lien
for unpaid taxes when an application for such is made and, inter
alia, the
IRS
receives payment equal to the value of the interest of the
United States
in the property to be released. The record shows, by citation in
the certificate of discharge, that the
IRS
released the homestead from its lien pursuant to 26 U.S.C. §6325(b)(2)(A)
, which provides for such release upon the payment to the
IRS
of the value of its interest in the subject property. This
procedure is detailed in Treasury Regulations found at 26
CFR
§301.6325-1 (4-1-86
ed.) and 26
CFR
§401.6325-1 (4-1-86
ed.), which, to the Court's reading, 4
appear to be aptly described in the opinion in the case of Brittle
v. United States [62-2
USTC ¶9652 ], 209 F.Supp. 409, 411 (S.D.
Cal.
1962):
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
IRS
and by freeing the property from an encumbrance that could impede
its transfer by the taxpayer. The procedure also may make possible
realization of a greater recovery to the
IRS
and reduction of taxpayer liability. The benefits of the procedure
authorized by 26 U.S.C. §6325(b)(2)(A)
are reciprocal and voluntary as to both parties. Brittle v.
United States
, supra.
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
IRS
usually treated as a contract).
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
IRS
is to prepare an appropriate form of order.
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
1-04-82
6-22-82
1979 ... 5,760.68
2-15-82
6-22-82
1980 ... 5,925.55
1-04-82
6-22-82
1981 ... 1,806.37
8-30-82
4-25-83
1983 ... 1,077.54
5-06-85
8-26-85
1984 ... 3,391.86
6-17-85
8-26-85
2 The Debtor also complains of collection letters received
from the
IRS
regarding taxes owed for 1978 to 1981, the
IRS
contention that he owes taxes for 1982, and the application of
excess taxes withheld from 1986 to the tax debt for 1978. The
Court is informed by counsel for the United States that the excess
taxes withheld will be re-applied to non-discharged taxes, if any,
or refunded. The Debtor's tax liability for the year 1982 will not
be determined by this Court.
3 The
IRS
has conceded that the Debtor will be discharged from his tax debts
for the years 1978 through 1981 under Section 523(a)(1). The Court
notes, however, that even after application of the $15,077.29
payment there remains a balance due on the taxes for 1978. In the
main bankruptcy case the Debtor received his discharge on
February 24, 1986
. Neither the Debtor nor the
IRS
has filed a proof of claim nor has the Debtor requested a
determination of secured status concerning the tax debts. See In
re Brager, 28 B.R. 966 (Bankr. E.D. Pa. 1983). Thus, the Court
finds that the
IRS
lien, to the extent unsatisfied, survives despite his bankruptcy
being a "no asset" chapter 7 proceeding. See 11 U.S.C.
§506(d); In re Simmons, 765 F.2d 547 (5th Cir. 1985); Matter
of Brown, 73 B.R. 740 (Bankr. W.D. Wis. 1987); 3 Collier on
Bankruptcy, ¶506.07 (15th ed. 1987).
4 26
CFR
§301.6325-1(b)
(4-1-86 ed.), provides in part:
(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.
Affirming the Tax Court, Dec.
54,850(M), TC Memo. 2002-210, 84
TCM
217.
[ Code
Secs. 6321, 6325
and 6871]
Bankruptcy: Assessment and collection: Property subject to tax
liens: Discharge of property from lien: Equitable estoppel. --
The
Tax Court properly concluded that the
IRS
was not estopped from levying upon married debtors' pension plan
to satisfy their delinquent tax liability, which was discharged in
bankruptcy. Oral and written representations of an
IRS
employee indicating that the tax liability would be abated did not
amount to negligence and bad faith and, as a result, were
insufficient grounds for estoppel. Likewise, the
IRS
's failure to respond to a letter from the debtors' attorney
clarifying the terms of an installment agreement in effect for
additional tax years, which also indicated that the
IRS
would not commence additional collection procedures for the tax
year at issue, did not support the debtors' claim that equitable
estoppel applied..
Before: Smith, Lay and Bright, Circuit Judges.
I. BACKGROUND
LAY, Circuit Judge: This case arises out of tax assessments made
against W. Richard Morgan and Janice J. Morgan (collectively
"Morgan") for federal income tax deficiencies for the
years 1981, 1982, and 1983 resulting from investments in a tax
shelter later invalidated by the Internal Revenue Service. As a
result of these deficiencies, Morgan filed for bankruptcy. On
December 22, 1994, the bankruptcy court issued an order in which
it refused to discharge Morgan's tax liabilities for 1981 and
1982, but granted a discharge as to Morgan's 1983 tax liability.
The bankruptcy court also ruled, however, that the
IRS
retained the right to collect the 1983 liability from any assets
that were exempt from the bankruptcy estate, which were limited to
a pension plan held in the name of W. Richard Morgan.
In March of 1995, Morgan submitted an offer-in-compromise to the
IRS
, which was later rejected. Some time in 1997, Morgan's account
was assigned to Revenue Officer Elizabeth Cooper, who sought on
several occasions to convince Morgan to begin repaying his
delinquent taxes. In May of 1998, the
IRS
issued a wage levy to Morgan's employer. On May 19, 1998, Cooper
wrote a letter to Morgan's attorney, expressing the need for
Morgan to submit another offer-in-compromise and to attempt to
negotiate an installment agreement for the payment of all unpaid
taxes. In this letter, Cooper also wrote: "regarding the 1983
[tax liability], Special Procedures Branch is in the process of
getting it abated." Cooper wrote this based upon her
conversations with the Special Procedures Branch of the
IRS
.
The wage levy provided an impetus for Morgan to enter into
negotiations for an installment agreement. On June 4, 1998, Morgan
and the
IRS
finalized an agreement covering only Morgan's 1981 and 1982 tax
liabilities. Morgan's 1983 tax liability was not included in the
installment agreement because at the time of its execution, both
Morgan and Cooper believed that it would be abated. Shortly after
the execution of this agreement, however, the Special Procedures
Branch decided not to abate Morgan's 1983 liability. On September
11, 1998, Morgan's attorney sent a letter to Cooper explaining his
understanding of the effect of the installment agreement, which
was that the
IRS
would not commence additional collection procedures (including any
pertaining to the 1983 liability) so long as Morgan remained
current on payments. Morgan's attorney asked Cooper to verify or,
if necessary, correct his understanding of the agreement. Although
Cooper was aware at the time she received this letter that the
IRS
had decided not to grant an abatement of the 1983 liability, she
did not respond to this letter. 1
On December 27, 1999, the
IRS
notified Morgan of its intent to levy to recover all unpaid taxes
and penalties for the 1981, 1982, and 1983 tax years. Following a
Collection Due Process hearing, the
IRS
Office of Appeals ruled that the
IRS
could not enforce by levy the 1981 and 1982 liabilities so long as
Morgan complied with the terms of the installment agreement. The
Office of Appeals also ruled, however, that the
IRS
could enforce by levy the 1983 tax liability against assets exempt
from the bankruptcy.
Morgan filed an appeal in United States Tax Court, arguing that
the
IRS
was estopped from enforcing by levy the 1983 tax liability based
on its previous representations that the 1983 liability would be
abated, and further that there would be no attempts at collection
while the installment agreement remained in effect. Morgan argued
that as a result of these representations, he suffered a detriment
by entering into an installment agreement that failed to include
his 1983 liability. The tax court affirmed the decision of the
Commissioner. It held that it was not reasonable for Morgan to
rely on Cooper's statements that his 1983 liability would be
abated for two reasons. First, Morgan knew that the
IRS
could levy on his exempt assets to recover his 1983 liability. 2
Second, Morgan was represented by attorneys in the bankruptcy
proceeding and in his dealings with the
IRS
. The tax court also held that Morgan had not relied on Cooper's
statements to his detriment, but had instead gained a benefit
insofar as the payment of his 1983 liability had been delayed, and
that he also received a favorable installment agreement for his
1981 and 1982 liabilities. 3
Morgan now appeals.
II. DISCUSSION
The
IRS
argues, as an initial matter, that Morgan failed to raise his
estoppel claim before the Office of Appeals, and that he should
therefore be precluded from raising it on appeal. The tax court
considered this argument, and determined that Morgan had
adequately raised the factual circumstances underlying a claim of
estoppel. 4
Although this is a close question, we assume, as did the tax
court, that the facts underlying Morgan's claim of estoppel were
sufficiently presented to the Office of Appeals to preserve the
issue for our review. See Ohio v. EPA, 838 F.2d 1325, 1329 (D.C.
Cir. 1988) (finding exhaustion doctrine satisfied where agency had
the "opportunity to consider the very argument pressed"
on judicial review) (internal quotations and citations omitted).
We therefore turn to consider the merits of Morgan's claim of
equitable estoppel.
Morgan argues that the tax court erred by refusing to apply
estoppel against the
IRS
. Although the Supreme Court has explicitly left undecided the
question of whether a private party can ever estop the government,
"it is well settled that the Government may not be estopped
on the same terms as any other litigant." Heckler v. Cmty.
Health Servs. of Crawford County, Inc., 467 U.S. 51, 60 (1984)
(footnote omitted). In addition to establishing the traditional
elements of estoppel, a party seeking to estop the government must
first establish that it engaged in affirmative misconduct. See
INS
v. Miranda, 459 U.S. 14, 19 (1982) ( per curiam)
(when evaluating estoppel claim asserted against government,
courts should inquire "whether, as an initial matter, there
was a showing of affirmative misconduct"); see also Rutten
v. United States, 299 F.3d 993, 995-96 (8th Cir. 2002). This
is a heavy burden to carry. See Office of Personnel Mgmt
v. Richmond, 496 U.S. 414, 422 (1990) (noting that "we
have reversed every finding of estoppel [against the government]
that we have reviewed").
Morgan claims that affirmative misconduct on the part of the
IRS
is demonstrated by the "totality of the circumstances."
Morgan notes that Cooper's representations regarding the abatement
of the 1983 liability were made both orally and in writing. See
Heckler, 467 U.S. at 65 (expressing concern over estoppel
claims against government based solely on alleged oral
misrepresentations). Morgan also notes that the actions of the
IRS
violated its own internal policies. Specifically, Internal Revenue
Manual §5.14.1.5(1)(b) provides that no levy may be made on
taxpayer accounts while installment agreements are in effect.
Morgan directs a majority of his affirmative misconduct argument,
however, to the fact that Cooper failed to respond to his
attorney's letter of September 11, 1998. He argues that she knew
at the time that the 1983 liability would not be abated and that
collection attempts were forthcoming. In this regard, Morgan
principally relies upon Fredericks v. Comm'r [ 97-2
USTC ¶50,692], 126 F.3d 433 (3d Cir. 1997). Fredericks
involved a tax assessment made by the
IRS
against a taxpayer some time after the three year statute of
limitations to file such assessments had expired. The taxpayer
agreed to file Form 872-A (Special Consent to Extend Time to
Assess Taxes), thereby permitting the
IRS
to extend the statute of limitations indefinitely unless the
taxpayer revoked his consent. The
IRS
represented to the taxpayer that it never received Form 872-A, and
successfully sought on three separate occasions to extend the
statute of limitations for an additional year, the last of which
expired on June 30, 1984. Sometime prior to this date, however,
the
IRS
located Form 872-A, yet failed to inform the taxpayer of this
fact. On July 9, 1992, eleven years after informing the taxpayer
that Form 872-A did not exist, and eight years after the final
one-year extension of the statute of limitations expired, the
IRS
mailed a notice of deficiency to the taxpayer. Based upon these
facts, the Third Circuit concluded that the taxpayer had
"mounted the high hurdle" of establishing equitable
estoppel against the government. Id. at 435.
We hold the present case to be distinguishable from Fredericks.
Between the date on which Cooper failed to correct Morgan's
misunderstanding of the effect of the installment agreement, and
the date the
IRS
notified Morgan of its intent to levy, nearly seventeen months had
passed. While not insubstantial, this is a far shout from the
eight-year period involved in Fredericks. See id.
at 442 ("The
IRS
' decision to lie doggo, and induce the taxpayer into thinking all
was well, coupled with its additional eight-year delay in
producing a document it previously represented as non-existent,
compels us to conclude that the
IRS
was guilty of affirmative misconduct....") (emphasis added); see
also In re Charter Behavioral Health Sys., LLC, 292 B.R.
36, 44 (Bankr. D. Del. 2003).
However, in Mancini v. Redland Ins. Co., 248 F.3d 729 (8th
Cir. 2001), this court encountered a claim made by homeowners for
flood insurance benefits pursuant to the National Flood Insurance
Act, 42 U.S.C. §4001 et seq. The proof of loss form
submitted by the homeowners did not contain their signatures, as
was required under the terms of the policy. After their claim was
denied, the homeowners' attorney wrote to the insurance company,
specifically asking whether they intended to take the position
that the homeowners had failed to submit a proper proof of loss.
Although the insurance company responded to this letter, it did
not address the proof of loss issue. Id. at 733.
Thereafter, the homeowners filed suit for benefits under the
policy, arguing that the insurance company, by virtue of its
failure to respond to their attorney's letter, should be estopped
from arguing that the proof of loss was defective. This court
disagreed, ruling that the government could not be estopped on the
facts of the case. Id. at 735. We see no reason why a
different result should obtain under the facts of the present
case. In fact, both at trial and on appeal Morgan conceded that
Cooper's conduct was not intended to purposely mislead him. The
"negligence and possible bad faith" of the
IRS
in this case is insufficient grounds for estoppel. Wang v.
Att'y Gen., 823 F.2d 1273, 1277 (8th Cir. 1987).
III
. CONCLUSION
To be sure, the conduct of the
IRS
in this case falls short of that which should be expected of an
agency of the government, especially one touching on the financial
affairs of its citizens. But as the Supreme Court has instructed,
"not even the temptations of a hard case," Federal
Crop Ins. Corp. v. Merrill, 332 U.S. 380, 386 (1947), can
justify the application of estoppel against the government.
For the foregoing reasons, the judgment of the tax court is
AFFIRMED.
1
In the tax court, Cooper testified that she called Morgan's
attorney on September 16, 1998, but that she did not recall
mentioning anything about the effect of the installment agreement.
2
During the course of the bankruptcy proceeding, Morgan
acknowledged that a federal tax lien encumbered all of his
property, including any exempt property, to the extent it existed.
3
The installment required Morgan to make monthly payments in the
amount of $1,000, an amount which, given the magnitude of Morgan's
total tax liability, failed even to cover the interest accruing on
the debt.
4
In particular, the tax court concluded:
Well, I think I agree with [Morgan] that if the matter of the
effect of the installment agreement on collections for 1983 was
discussed [during the Collection Due Process hearing], the failure
to put a legal label on it is not fatal so that we're going to
have to consider that estoppel issue.
Chief
Counsel Advice 200150007,
September 5, 2001
CCH
IRS
Letter Rulings Report No. 1294, 12-19-01
IRS
REF
: Symbol: CC:PA:CBS:Br1-GL-805109-00
Uniform Issue List Information:
UIL
No. 6330.00-00
Notice
and opportunity for hearing before levy
[Code Secs.
6325 and 6330 ]
MEMORANDUM
FOR ASSOCIATE
AREA
COUNSEL
SBSE
-
SAN
FRANCISCO, CC:SB:7:SF:1
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
IRM
5.9.12.5 (describing procedures for evaluating and processing
discharge). However, sometimes, the abatement is performed in
error because, for example, there exists pre-petition property
against which a notice of federal tax lien was filed, from which
all or a portion of the liability can be satisfied. In order to
collect from these sources, the Service may reverse the discharge
abatement under I.R.C. §See Notice CC-2001-014; United
States v. Langrehr, 2001 U.S. Dist. LEXIS 2374 (D. Neb. Jan.
29, 2001) [2000-1 USTC ¶50,253]. The Service may reverse the
abatement because, as described in Notice CC-2001-014, a tax debt
exists as long as it has not been satisfied and the period for
collection has not expired. In a similar manner, because release
of a lien under section
6325(a) does not extinguish the liability, the tax lien may be
reinstated by mailing and filing notice of the revocation under section
6325(f)(2) , even though the taxpayer has received a
discharge.
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.
Apr. 14, 1993
). Discharge in bankruptcy affects only the Service's ability to
effect certain methods of collection. In this case, the Service's
ability to collect from the pre-petition property of the debtor
was unaffected by the discharge. The self-release and subsequent
refiling of the notices of federal tax lien does not alter this
ability.
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