IRS tax lien did not apply to real estate - section 6321
In re Kirk G. Johnson, Debtor. Kirk G. Johnson, Plaintiff v. The Internal Revenue Service of the Department of the Treasury of the United States of America and the Commonwealth of Pennsylvania, Department of Labor and Industry, Defendants.

U.S. Bankruptcy Court, West. Dist. Pa.; 05-35220 TPA, April 16, 2008, 386 BR 171.

[ Code Secs. 6321 and 6871]


A federal tax lien did not attach to a debtor's real property because higher priority liens exceeded the fair market value of the property. The IRS's argument that its lien attached to all of the debtor's real and personal property and that the debtor could not determine to which property the lien attached was rejected. Debtors possess the authority under the Bankruptcy Code to limit secured claims to the value of the collateral. Moreover, lien stripping is engrained in the reorganization process of a Chapter 11 case and to find that lien stripping is not permitted would ignore the existence of this right. Further, there is nothing in Code Sec. 6321 that would protect the IRS from lien stripping. Under the regulations, the "single lien" created by Code Sec. 6321 can be treated as separate liens on separate properties and discharged as to those properties that are valueless because they are subject to liens with a higher priority. Back references: ¶38,136.34 and ¶40,630.107.





MEMORANDUM OPINION


AGRESTI, Bankruptcy Judge: Kirk G. Johnson ("Debtor "), who operates a business proprietorship known as "KJ Transit," filed a voluntary Chapter 11 petition on October 10, 2005 . Among the secured creditors listed on Schedule D accompanying the Debtor's Petition are the Internal Revenue Service ("IRS") and the Pennsylvania Department of Labor and Industry ("Labor") based on their statutory lien positions involving a federal tax lien and a lien for state unemployment compensation taxes, respectively.

The Debtor initiated this adversary proceeding on February 20, 2007 by filing a Complaint to Determine Validity, Priority, and Extent of Liens of the Internal Revenue Service and Pennsylvania Department of Labor and Industry Against the Debtor's Assets ("Complaint"), essentially alleging that two higher priority liens, one a purchase money mortgage and the other for county real estate tax, in combination, exceed the fair market value of the Debtor's residence such that there is no equity in the residence to which the IRS and Labor liens can attach. The Debtor seeks relief under 11 U.S.C. §506 to the effect that his residence is free and clear of the IRS and Labor liens. The IRS has filed an answer and the Parties have stipulated to all material factual issues, leaving the case ripe for decision as to the legal issue presented. 1 For the reasons that follow, the Court will grant the Debtor the relief he seeks. 2


FACTS


The following is gleaned from the Parties' stipulations of fact. The Debtor owns and resides at real property located at 4008 Turnwood Lane, Coraopolis, Pa. ( "the Real Property"). The Real Property possessed a fair market value of $279,000 as of the date the bankruptcy petition was filed. As of that same date, the Real Property was subject to a purchase money first mortgage lien in the amount of $279,440 held by Mortgage Electronic Registration Systems, Inc. ("the MERS Mortgage") and a county real estate tax lien in the amount of $215.61 ("the County Lien"). The MERS Mortgage and the County Lien therefore collectively exceed the fair market value of the Real Property and both of them predate any lien held by the IRS.

The Debtor also owns various items of personal property with a total fair market value of $53,595.83 ("the Personal Property"). Other than the lien of the IRS, the only item of the Personal Property subject to a lien is a 2002 Lincoln Navigator. As of the Petition date, the fair market value of that vehicle was $18,675. At that time the vehicle was subject to a security interest in favor of M.& T. Credit Services, LLC in the amount of $12,221 ("the M&T Lien") superior to the lien of the IRS. Again, leaving aside for the moment the lien of the IRS, the Parties agree that because of the $6,454 of Debtor's equity in this vehicle, as of the Petition date, the Debtor's total equity in all of the Personal Property was $41,374.88.

On February 17, 2006, the IRS filed an Amended Proof of Claim asserting a secured claim in the amount of $178,673.05 against the Debtor and an unsecured priority claim of $2,374.71, for a total claim of $181,047.76. On March 31, 2006, Labor filed a proof of claim asserting a secured claim against the Debtor in the amount of $1,035.59. The Debtor's Amended Chapter 11 Plan was confirmed on May 3, 2007.


Relief Sought by the Debtor


The Debtor seeks a determination that the IRS lien does not attach to the Real Property because there is no equity in that property. The Debtor also asks the Court to find that the IRS possesses a secured claim of only $41,374.88 in the Personal Property (the value of the Personal Property less the amount of the M&T Lien) and that the balance of the IRS claim is unsecured. With respect to the latter request, the matter has been partially resolved. In its portion of the Combined Pre-trial Narrative Statement, the IRS states:
The Internal Revenue Service acknowledges that the amount of its lien exceeds the value of debtor's assets. Accordingly, the Service is willing to stipulate that its claim be allowed as follows: a secured claim of $ 41,374.83, an unsecured priority claim of $ 30,592.52, and a general unsecured claim of $109,079.00.

Combined Pre-Trial Narrative Statement at 3, Document No. 14. The Debtor has accepted this proposed stipulation. See Plaintiff's Brief on Whether a Federal Tax Lien can be Avoided Under Section 506 of the Bankruptcy Code in a Chapter 11 Proceeding at 1, n. 1, Document No. 18. Thus, by voluntary action of the IRS, the IRS lien, and therefore the amount of its secured claim, has been "stripped-down" to $41,374.83 and the Court need not consider that issue further. The remaining question therefore is whether the IRS lien encumbers both the Personal and Real Property, or only the Personal Property.


DISCUSSION


In the bankruptcy setting, the phrase "lien stripping" refers to the process of reducing a secured claim to reflect the value of the underlying collateral. Variants of this phrase are a "stripdown" wherein an undersecured creditor's lien is reduced to the equity value held by the Debtor in the collateral (after the amount of any superior lien is deducted from the fair market value of the collateral), and, a "strip- off" wherein a wholly-unsecured creditor's lien is removed from collateral in which there is no equity value.

In this case, the Debtor was originally seeking a combination of both forms of lienstripping relief. He asked that the IRS tax lien be stripped off the Real Property because there is no equity in that property, and, that the IRS tax lien be stripped down on the Personal Property to the level of available equity in that property, i.e., $41,374.88. As indicated, the IRS has conceded that its secured claim is reduced to $41,374.88 and therefore the latter request is no longer at issue.

The statutory basis for "stripping off" a lien arises from the combination of 11 U.S.C. §§ 506(a) and (d). 3 First, by operation of Section 506(a) an undersecured creditor's allowed claim is bifurcated into secured and unsecured portions. Then, with certain exceptions not applicable here, pursuant to Section 506(d) the lien securing the claim is voided to the extent that it is not an allowed secured claim, effectively stripping the lien "off" to that extent. Although the lien stripping process seems straightforward based on the statutory language, there are two issues that must be considered in making the determination whether the Debtor should be granted relief. First, does Dewsnup v. Timm, 502 U.S. 410 (1992), preclude the Court from granting the requested relief in this Chapter 11 case? Second, if that hurdle is cleared, is there some reason why an IRS tax lien should be treated any differently than other liens?


Lien Stripping in Ch. 11-Dewsnup


The Court must first consider whether the decision in Dewsnup, the foremost Supreme Court decision on lien stripping, dictates the outcome in this case. 4 In Dewsnup the Court held that a lien on real property could not be stripped-down in a Chapter 7 case. The Dewsnup Court construed the statutory language of Sections 506(a) and (d) in such a manner as to give effect to the pre-Bankruptcy Code rule in liquidation cases that liens pass through a bankruptcy unaffected. The Court did so because it was not convinced that Congress had intended to depart from that rule when it adopted the Bankruptcy Code. See 502 U.S. at 417. Importantly, however, the Dewsnup Court was careful to limit the holding of the case to the situation squarely before it, i.e., an attempt to strip a lien in a Chapter 7 liquidation case. The Court stated:
Hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations. We therefore focus upon the case before us and allow other facts to await their legal resolution on another day.

Id.

As a result of this limiting language, it is clear that the Dewsnup Court left open the question as to whether the same result would be reached in different circumstances, for instance, in a case under a different chapter of the Bankruptcy Code. Based on this "opening," courts and commentators have examined whether Dewsnup also establishes the rule on the availability of lien stripping in Chapter 11 and 13 cases. A great majority of the courts that have considered the issue in reorganization cases have concluded that the holding in Dewsnup should be limited to Chapter 7 cases and should not prevent lien stripping in reorganization cases. See 4-506 Collier on Bankruptcy, 15 th ed. Rev. ¶506.06[1][c] (2007); Sapos v. Provident Inst. of Savs. in the Town of Boston, 967 F.2d 918, 925 (3 d Cir. 1992) ( Dewsnup Court's interpretation of Section 506 in a Chapter 7 liquidation does not apply in a Chapter 13 reorganization); Wade v. Bradford, 38 F.3d 1126 (10 th Cir. 1994) (Chapter 11 debtors could strip down lien on residence notwithstanding Dewsnup); Harmon v. U.S. Through Farmers Home Admin., 101 F.3d 574 (8 th Cir. 1996) (allowing lien stripping in Chapter 12); In re Jones, 152 B.R. 155, 173 (Bankr. E.D. Mich. 1998) (categorically prohibiting lien stripping in Chapter 11 would disrupt established pre-Code law).

Many of the courts so limiting the Dewsnup holding have noted that a general prohibition against lien stripping in reorganization cases would be inconsistent with pre-Bankruptcy Code law, and would conflict with key provisions and principles applicable in the reorganization chapters of the Bankruptcy Code. This Court agrees with the majority view and concludes that the holding in Dewsnup does not extend to cases filed under Chapter 11 of the Bankruptcy Code. 5

The Court reaches this conclusion for a number of reasons, all of them related to the significant differences between liquidations and reorganization proceedings. Quite simply, the possibility of lien stripping has been a long-standing aspect of reorganization cases, one that pre-dates the adoption of the current Bankruptcy Code in 1978. See Dewsnup, 502 U.S. at 418-19 (recognizing that pre-Code law permitted involuntary reduction of the amount of the creditor's lien in reorganization proceedings, and citing as examples former 11 U.S.C. §§616(1) and (10) (1976 ed.)) Thus, the Dewsnup Court's stated reluctance to interpret the Bankruptcy Code in such a manner as to effect a major change in pre-Code practice by permitting lien stripping in liquidation cases (without clear evidence of Congressional intent for such a change) is not implicated in a reorganization setting because permitting lien stripping in a reorganization is consistent with pre-Code practice.

Furthermore, the process of lien stripping is ingrained in the reorganization provisions of the Bankruptcy Code to such an extent that any attempt to extend the holding in Dewsnup to Chapter 11 cases would require that numerous provisions of the statute be ignored or construed in a very convoluted manner to achieve that result. For instance, Congress has provided a mechanism under 11 U.S.C. §1111(b) for undersecured creditors to opt out of the claim bifurcation process that would otherwise occur under Section 506(a) and instead be treated as fully secured to the extent of their allowed claims. 6 The very fact that this Section 1111(b) election exists at all presumes that debtors possess the authority under the Bankruptcy Code to limit secured claims to the value of the collateral. To find that lien stripping is not permitted in Chapter 11would thus be to ignore the existence of Section 1111(b) . See In re 680 5 th Ave Assocs., 156 B.R. 726, 731 (Bankr. S.D.N.Y. 1993), decision affirmed 169 B.R. 22 (S.D.N.Y. 1993), judgment affirmed 29 F.3d 95 (2d Cir.1994).

Another example of Congress specifically recognizing and approving the existence of lien stripping in Chapter 11 cases surfaced when it passed the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394. Section 206 of that Act amended the Code by adding current 11 U.S.C. §1123(b)(5) which permits a Chapter 11 plan to "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence." This brought Chapter 11 into conformity with Chapter 13, which includes a similar provision to permit the modification of secured claims generally while preventing the modification of home mortgages. 7 Clearly, Section 1123(b)(5) represents an explicit Congressional approval of lien stripping in Chapter 11 cases, subject only to the home mortgage exception. What is most significant for present purposes is the timing of the enactment of the Bankruptcy Reform Act of 1994 which included this provision when it was passed two years after Dewsnup was decided. To hold that Dewsnup prevents lien stripping in Chapter 11 cases would be to ignore this clear Congressional intent, something the Court cannot do.

It is also instructive to consider the particular feature of liquidations that seemed to cause the Court in Dewsnup to have concerns about whether lien stripping should be permitted in Chapter 7 cases. The Court noted that the "practical effect" of finding that lien stripping was allowed in Chapter 7 would be that a creditor's interest would be frozen at the judicially determined property valuation, leaving the creditor to lose the benefit of any increase in the value of the property that might occur between then and the time of a foreclosure sale. Instead, the debtor would enjoy the benefit of any such increase-a result some might view as a windfall. See 502 U.S. at 417. The Dewsnup case can thus be interpreted to stand for the proposition that there can be no lien stripping without payment of the debt secured by the lien, and upon failure to so provide, allowing the creditor to purchase the property by credit bid and enjoy any appreciation in value. See In re Dever, 164 B.R. 132, 135 (Bankr. C.D. Cal. 1994). By contrast, in reorganization cases any lien stripping is coupled with payments under the plan and ownership of the property being vested in the debtor. This has led courts and commentators to note that creditors in reorganization cases thus receive something in exchange for the voiding of their liens, i.e., payment obligations under a plan of reorganization, so that principle of Dewsnup is not violated. See In re Bowen, 174 B.R. 840, 855 (Bankr. S.D. Ga. 1994); Baxter Dunaway, Law of Distressed Real Estate §29.72 (2007).

To sum up, lien stripping is a fundamental aspect of reorganization proceedings. To bar lien stripping in cases under the reorganization chapters would:
... [I]n essence, gut the sum and substance of the reorganization and rehabilitation of debt concept under the Bankruptcy Code. In such cases, the Debtor would propose a plan for repayment of creditors to the extent of the value of the property securing the creditor's claim, but would still owe the unsecured portion of the claim, post-confirmation, in order to obtain a release of the lien on said property. This would require all plans filed under Chapters 11, 12 and 13 to pay all creditors one hundred percent of their claims in order for the debtor to emerge from bankruptcy with a true "fresh start." Clearly, this has never been the purpose contemplated for Section 506(d).

In re Butler, 139 B.R. 258, 259 (Bankr. E.D. Okl. 1992).

The Court therefore concludes that, in general, lien stripping is permitted in Chapter 11 cases, notwithstanding the decision in Dewsnup. That leads to a question of whether there is something special about an IRS tax lien that would prohibit lien stripping, creating an exception to this process in favor of the IRS. The Court now turns to that issue.


Lien Stripping and the Nature of the IRS Lien


Having concluded that Dewsnup does not preclude lien stripping in a Chapter 11 case, the Court must next consider whether the very nature of an IRS tax lien somehow precludes that from being done in these particular circumstances. In so doing, the Court will operate from the presumption that the IRS lien should be treated the same as any other lien unless there is some contrary statutory law or provision of decisional law requiring different treatment.

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

26 U.S.C. §6321 . There is nothing apparent from this statutory language which would protect an IRS lien from lien stripping treatment. Furthermore, the Debtor has pointed to a number of cases in which courts have permitted IRS liens to be avoided. For instance, in In re Dever, supra, after a long and thoughtful discussion on various aspects of lien stripping, the court noted that Section 506 does not distinguish between voluntary and involuntary liens. It held that if a voluntary lien is avoidable by a strip down in Chapter 11, then so too should an involuntary one, like an IRS lien. 164 B.R. at 144. The Dever court further stated:
Nothing in Sections 506 or 1129 suggests that IRS liens or claims are totally immune from avoidance or modification. Under the Bankruptcy Code, the IRS is the beneficiary of several specific provisions that reflect Congressional desire to protect the federal fisc. For example, Congress required that all tax obligations must be paid under a Chapter 11 plan within six years of assessment date. Section 1129(a)(9)(C). Certain tax obligations are entitled to priority under Section 507(a)(7). Section 523(a)(1) makes some tax debts nondischargeable. Although none of the obligations here are alleged to be nondischargeable, most debtors facing IRS liens would not be able to walk out of bankruptcy court in complete defiance of their tax obligations. The granting of IRS priorities and the nondischargeable nature of many such obligations are strong evidence that Congress provided an alternative method of realizing on such claims. Reading an IRS exception into Section 506 to prevent avoidance of the liens here is unnecessary and inappropriate.

164 B.R. at 145. See also In re Bowen, supra; In re Butler, supra.

The IRS offers precious little in response to convince the Court otherwise. It argues that the nature of its lien is such that it attaches to all of the Debtor's property, real and personal, and that there "is nothing in the Bankruptcy Code, the Internal Revenue Code, or case law which permits the debtor to determine which of his property is subject to the lien, once the value of that lien has been determined." Defendant Internal Revenue Service's Response to Plaintiff's Brief on Whether a Federal Tax Lien can be Avoided Under 11 U.S.C. §506 in a Chapter 11 Proceeding at 2-3, Document No. 21.

The only case cited by the IRS in support of its position is In re Hoekstra [ 2000-2 USTC ¶50,857], 255 B.R. 285 (E.D. Va. 2000). In that case, the debtors brought an adversary proceeding seeking to avoid junior tax and homeowners' association liens against their townhouse because the two superior liens against the property already exceeded its value. The bankruptcy court had found in favor of the debtors, distinguishing the case from Dewsnup because in that case the property at issue did have some equity, whereas in Hoekstra there was no equity in the townhouse. The bankruptcy court concluded that Dewsnup prohibited only a "strip-down" of an undersecured claim, not a "strip off" of a wholly-unsecured claim. On appeal, the District Court reversed, agreeing with the IRS that Dewsnup governed the outcome of the case, but concluding that the "indivisible" nature of the IRS federal tax lien made what the bankruptcy court had done more analogous to a prohibited strip-down rather than a permitted strip-off . As the Hoekstra court explained:
The bankruptcy court... [ treated] Creditor's federal tax lien as distinct and individual liens as to each component of property underlying the lien. The [bankruptcy] court concluded that "for the purpose of lien avoidance, each item of collateral must be viewed individually... The avoidance of the lien as to that particular parcel does not affect or impair the lien of Creditor as to any other property to which it may have attached." In re Hoekstra [ 2000-1 USTC ¶50,490] 253 B.R. 193, 195. However, the Internal Revenue Code and case law make clear that a federal tax lien is not divisible in this context.

...

Debtors here seek to avoid a portion of a lien where a component of the collateral has no value but other components of collateral have value. The Dewsnup Court's clear prohibition against "stripping down" liens leads this Court to reverse the bankruptcy court's judgment voiding Creditor's lien against the Townhouse.

[ 2000-2 USTC ¶50,857] 255 B.R. at 290, 292.

For a number of reasons, this Court does not find Hoekstra to be particularly relevant or persuasive on the issue presented in the case before it. Perhaps most significantly, Hoekstra was decided in the context of a Chapter 7 liquidation proceeding. As such, the court in Hoekstra was faced with the clearly applicable precedent of Dewsnup and was required to analyze what the debtors were seeking to accomplish in light of that compelling precedent. In sharp contrast, the present case is a reorganization under Chapter 11 and as noted above, the majority view which is now also adopted by this Court, is that Dewsnup does not apply to lien stripping occurring in a reorganization.

The Court is also left unpersuaded by the Hoekstra court's view of the "nature" of the IRS lien. The Hoekstra court stated that the language of 26 U.S.C. §6321 makes clear that there is but a single lien created; not separate liens upon a debtor's real and personal property. [ 2000-2 USTC ¶50,857] 255 B.R. at 290 - 91. It is from this aspect of the Hoekstra decision that the IRS draws its sole decisional support for the position it takes here, that is, because of its "unitary nature", the IRS lien cannot be stripped off the Real Property.

The IRS admits that, other than the Hoekstra decision and the language of Section 6321 itself, it has no other support for its view that the IRS lien is inviolable so long as there is equity value in any of the collateral subject to the lien. In its brief and again at the time of argument, the IRS provided no in depth public policy analysis or Dewsnup-extension argument to support its position under these facts. It simply steadfastly maintained that the language of 28 U.S.C. §6321 required such a result. If this lien inviolability were a consistently held view and practice of the IRS, it might cause the Court pause before ordering relief that runs contrary to such a settled norm. However, the admitted, normal customs of the IRS, carried out pursuant to an enabling statute and regulation, reveals that even the IRS does not treat federal tax liens in the monolithic and indivisible manner that it urges this Court to follow.

26 U.S.C. §6325(b) , which allows for the discharge of property subject to a federal tax lien, provides in relevant part:
(2) Part payment; interest of United States valueless. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to the lien if --...

(B) the Secretary determines at any time that the interest of the United States in the part to be so discharged has no value.

In determining the value of the interest of the United States in the part to be so discharged, the Secretary shall give consideration to the value of such part and to such liens thereon as have priority over the lien of the United States.

26 U.S.C. §6325(b)(2)(B) . The IRS has issued regulations which mirror this provision of the Internal Revenue Code. See 26 C.F.R. §301.6325-1(b)(2) . As admitted by the IRS at the time of argument, this statutory provision provides the mechanism for removal of an IRS lien from an affected property simply upon a showing by the taxpayer that no equity exists in the affected property. The Court understands that the weight of authority holds that this partial discharge provision is discretionary with the Secretary of the IRS, although perhaps a denial of discharge by the Secretary is subject to review under a deferential abuse of discretion standard. See, for example, United States v. Polk [ 87-2 USTC ¶9432] 822 F.2d 871, 874 (9 th Cir. 1987). However, the Court finds it highly significant that the statute and accompanying regulations contemplate that the alleged "single lien" created by 26 U.S.C. §6321 can, in effect, be treated as separate liens on separate items of property and discharged as to those items of property which are valueless to the United States because they are subject to other lien(s) with priority. Also at the oral argument, Counsel for the IRS represented that it was common practice for the IRS to actually discharge a federal tax lien as against an item of property that has no value. 8 Given this reality, it would make no sense to deny the Debtor relief in this case based solely on a fiction the IRS itself does not consistently follow, that is, that the IRS lien is so indivisible in nature that a Bankruptcy Court cannot strip it off real property that has no equity value while allowing it to remain on personalty that does have value.


CONCLUSION


It is axiomatic that a central purpose of the Bankruptcy Code is to provide a procedure by which the debtor can "reorder his affairs, make peace with his creditors, and enjoy 'a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt'." In re Alston, 297 B.R. 410, 417 (Bankr. E.D. Pa. 2003) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)). In reorganization cases that central purpose can often only be accomplished by lien stripping. As the court in Dever observed:
Modifying the rights and interests of secured creditors is at the heart of most reorganizations.... very few Chapter 11 plans seek merely to stretch out or reduce payments to unsecured creditors. Most debtors are currently entering Chapter 11 with their assets fully encumbered, which means that their plans must restructure the secured debt in order to make a meaningful difference in their financial well-being.

164 B.R. at 143. That is certainly the case with the Debtor in the present case. Unless the Court removes the IRS lien from his residence, that lien will remain an anchor dragging him down from achieving the fresh start envisioned by the Code.

For the foregoing reasons, the Court finds in favor of the Debtor on the matters set forth in his Complaint and will issue an appropriate order.


ORDER


AND NOW, this 16 th day of April, 2008, upon consideration of the Complaint to Determine Validity, Priority and Extent of Liens of the Internal Revenue Service and Pennsylvania Department of Labor and Industry Against the Debtor's Assets filed by Plaintiff, Kirk G. Johnson t/d/b/a "KJ Transit" at Document No. 1 ("Complaint") and the Answer filed by the Internal Revenue Service of the Department of the Treasury of the United States of America ("Internal Revenue Service") at Document No. 6, for the reasons stated in the foregoing Memorandum Opinion, pursuant to Fed.R.Bankr.P. 7052, after notice and hearing and consideration of the stipulations and argument of Counsel,

It is hereby ORDERED, ADJUDGED and DECREED that the relief requested by the Debtor in his Complaint is GRANTED.

It is FURTHER ORDERED that:

(1) All of the Internal Revenue Service's tax liens against the Debtor's real estate known as 408 Turnwood Lane, Coraopolis, PA 15108 are declared NULL, VOID and REMOVED , the legal description for said real property being found in the Deed recorded in the Office of Recorder of Deeds of Allegheny County at Deed Book Volume 11686, page 585, and more further described as follows:
ALL THAT CERTAIN lot or piece of ground situate in the Township of Moon, County of Allegheny and Commonwealth of Pennsylvania, being Lot No. 915 in the Whispering Woods Plan of Lots, Phase IX, as recorded in the Recorder's Office of Allegheny County, Pennsylvania, in Plan Book Volume 198, pages 63-66. BEING designated as Block 925-G, Lot No. 12 in the Deed Registry Office of Allegheny County, Pennsylvania. UNDER AND SUBJECT to easements, rights of way, oil and gas leases, restrictions, reservations, exceptions, agreements and coal and mining rights as set forth in prior instruments of record. ("Real Property")

(2) The Internal Revenue Service's tax liens against the Debtor's personal property are declared NULL, VOID and REMOVED from said personal property to the extent said liens exceed $41,374.88;

(3) Pursuant to Section 507(a)(8) of the Bankruptcy Code the Internal Revenue Service possesses an allowed unsecured, priority claim in the amount of $30,595.00;

(4) The Internal Revenue Service possesses a general unsecured, nonpriority claim in the amount of $109,079.88; and,

(5) The Commonwealth of Pennsylvania, Department of Labor and Industry's tax liens against the Debtor's assets, both the Real Property and the personal property, are declared NULL, VOID and REMOVED from said property.

1 Labor was properly served with the Complaint but it has not filed an answer or otherwise responded. Counsel for the Debtor has submitted a letter and e-mail from counsel for Labor indicating that Labor has consented to the relief being sought by the Debtor. Based on Labor's default and the further evidence of its consent, the Debtor will be granted the relief he seeks as against Labor and Labor's claim will be deemed wholly unsecured.

2 The Court's jurisdiction under 28 U.S.C. §§157 and 1334 was not at issue. This is a core proceeding pursuant to 28 U.S.C. §§157(b)(2)(K) and (O). This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052.

3 Section 506(a) provides:

(a)
(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.

Section 506(d) provides:

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless --
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or

(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under Section 501 of this title.

4 The willingness of the IRS to stipulate to a substantial reduction of its lien down to the amount of the Debtor's equity value in the Personal Property would seem to signal its acknowledgment that Dewsnup has no application here and does not restrict the Court's ability to act. Indeed, the IRS has not even made the argument that Dewsnup applies. Nevertheless, the Court does not wish to rest solely on that premise but will independently examine the issue.

5 The courts adopting this majority view have not all arrived at their conclusion by the same route. Some have concluded that the Dewsnup court's limiting construction of Sections 506(a) and (d) is applicable only in the Chapter 7 setting, leaving Section 506 available as a vehicle to permit lien stripping in the reorganization chapters. See, e.g., In re Dever, 164 B.R. 132 (Bankr. C.D. Cal. 1994). Other courts, however, conclude that the Dewsnup construction of Section 506 must apply in all bankruptcy settings. In this view, Dewsnup does not hold that Section 506(d) prohibits lien stripping in Chapter 7, it holds only that Section 506(d) does not itself provide the authority for a debtor to strip a lien. See, e.g., In re Virello [ 99-1 USTC ¶50,346], 236 B.R. 199, 204 (Bankr. D.S.C. 1999). Thus, in this view, Dewsnup does not prevent lien stripping in reorganization cases because, unlike Chapter 7, those chapters of the Bankruptcy Code do contain provisions that permit lien stripping. See, e.g., 11 U.S.C. §1123(b)(5) , discussed infra. at 9-11.

In the present case, the Debtor has invoked Section 506 as the basis for relief in his Complaint, which is consistent with the first judicial approach discussed above. (It should also be noted that the IRS has never objected that Section 506 is not a proper vehicle to bring the issue before the Court). However, even if this Court were to follow the second judicial approach it would not deny the Debtor the relief he seeks solely because the Complaint refers only to Section 506 because that would elevate form over substance. The Court would instead treat the matter as tried by consent pursuant to Fed.R.Bankr.P. 7015(b)(2) or grant the Debtor leave to file an amended Complaint pursuant to Fed.R.Bankr.P. 7015 (a)(2). Thus, either way, the Debtor should be granted the relief he seeks.

6 In the context of this case, the IRS never exercised that option. In determining whether an 1111(b) election had occurred in this matter, not only did the Court review the docket of the within Adversary Proceeding but also the main case filings as well. During the course of its review of the main case docket, the Court identified a "Stipulation and Agreement" between the Debtor and the IRS dated April 17, 2007 and filed at Document No. 112 ( "Stipulation") and approved by the Court by Order entered on April 23, 2007 at Document No. 115. Paragraph 3 of the Stipulation states in part:

To the extent that any federal tax liens attach to any property owned by the Debtor as of the date of the filing of the Petition in this case, such property shall remain subject to such federal tax liens until such time as the amount of such liens has been fully satisfied.

Neither of the Parties in the Adversary Proceeding has ever referenced the existence of the Stipulation as an impediment to this Court's ability to grant the relief sought by the Debtor. The Court can only conclude that the Parties agree the Stipulation was not intended to have any effect with respect to the pending Adversary Proceeding, and in particular, was not intended to be a defense available to the IRS. This conclusion is further supported by the language of the Confirmed, Amended Plan subsequently approved by the Court which contains language apparently allowing for the filing of the Complaint in this matter and its ultimate resolution by the Court. See Amended Chapter 11 Plan at ¶ 2.02, filed May 1, 2007 at Document No. 125. In the alternative, Fed.R.Bankr.P. 7012(b) requires every defense to a claim for relief in any pleading to be asserted in the responsive pleading if one is required, as was the case here. Affirmative defenses such as res judicata or waiver, must also be affirmatively pled. Fed.R.Bankr.P. 7008(b). The failure to plead a defense means it has been waived. Fed.R.Civ.P. 12(h) made applicable in this proceeding pursuant to Fed.R.Bankr.P. 7012(b); In re Hankerson, 133 B.R. 711, 713, n. 1 (Bankr. E.D. Pa. 1991). The IRS, having failed to raise any defense arising from the Stipulation in any of the pleadings (including its Pretrial Narrative Statement and Consolidated Pretrial Narrative Statement) or brief filed in the Adversary Proceeding, has therefore waived any such defense it may otherwise have had related to the Stipulation.

7 See 11 U.S.C. §1322(b)(2) . Note also that the home mortgage exception does not apply to the present case because a "security interest" does not include a statutory tax lien. See 11 U.S.C. §101(51) ; In re Marfin Ready Mix Corp., 220 B.R. 148, 158 n. 10 (Bankr. E.D.N.Y. 1998).

8 At the oral argument the Court inquired why the IRS would not be willing to voluntarily "discharge" the lien as against the Real Property in this case. Counsel for the IRS admitted it frequently does just that in other, non-bankruptcy contexts. The IRS could offer no compelling response to that rather straightforward question other than to note that it wished a legal ruling on the matter.

Legal obligations. --Tax Liens: Property Not Subject to Tax Liens: Legal obligations

Tax liens did not affect the following property.

A portion of the proceeds from a partition sale where the portion was used for the costs and expenses of the partition.

Pollyea, Mo. CA, 58-2 USTC ¶9729, 315 SW2d 460.

A portion of trust income where the income was used for the payment of trustees' attorneys' fees.

C.R. Aley, DC Ill., 56-1 USTC ¶9278.

Amounts that were due from a deceased taxpayer's estate to his surviving spouse and minor children as expenses of the estate.

V.M. Igoe, SCt. Mo., 86-2 USTC ¶9846.

Antecedent child support judgment.

Don King Productions, Inc., CA-2, 91-2 USTC ¶50,474.

A bank's security interest in contract payments arising from a delinquent taxpayer's performance of services to a hospital had priority over the IRS's competing tax lien. The contract between the taxpayer and the hospital qualified as a commercial financial security agreement and the agreement between the bank and the taxpayer was a commercial transactions financing agreement. The bank acquired the hospital contract rights within 45 days of the tax lien filing. Therefore, contract rights were qualified property covered by the bank's security interest and protected by the safe harbor provision regarding after-acquired property.

Plymouth Savings Bank, CA-1, 99-2 USTC ¶50,807, 187 F3d 203.

A bank's security interest in a delinquent subcontractor's accounts receivable from a construction contract had priority over a subsequently filed federal tax lien. The taxpayer had performed part of its contract duties before the tax lien was filed and, thus, had rights to at least a portion of the receivables to which the bank's security interest could attach. Accordingly, the receivables were "in existence" when the tax lien was filed, regardless of whether state (Georgia) law gave the taxpayer an interest in the accounts as soon as the contract arose, or federal law gave the taxpayer an interest in the accounts only after it performed its contract duties.

Whiting-Turner, DC Ga., 2000-1 USTC ¶50,342, 184 FSupp2d 1368.

A federal tax lien did not attach to a debtor's real property because higher priority liens exceeded the fair market value of the property. The IRS's argument that its lien attached to all of the debtor's real and personal property and that the debtor could not determine to which property the lien attached was rejected. There is nothing in Code Sec. 6321 that would protect the IRS from lien stripping. Under the regulations, the "single lien" created by Code Sec. 6321 can be treated as separate liens on separate properties and discharged as to those properties that are valueless because they are subject to liens with a higher priority.

In re Kirk G. Johnson, BC-DC Pa., 2008-1 USTC ¶50,300.


Claims for Income, Estate, and Gift Taxes in Bankruptcy and Receivership Proceedings: Avoidance of liens

An individual lacked the standing to challenge the attachment of a federal tax lien to his disability payments. Except for the per-month exempted amount determined to constitute reasonable living expenses, the payments were the property of the bankruptcy estate.

D.A. Stinnett, CA-7, 2006-2 USTC ¶50,587, 465 F3d 309.

Jurisdiction was lacking over a delinquent lawyer's appeal from a district court's denial of his request for a stay of collection proceedings during the pendency of his bankruptcy petition. The district court had not entered a final decision and the taxpayer could not appeal without posting a bond. The taxpayer's contention that denial of a stay of collection could result in a forced sale of his residence by the IRS and cause irreparable damage to him, provided that he was subsequently absolved from his tax liability, was rejected because there was no evidence that his home was exempt from an IRS tax lien.

H.P. Carlson, CA-7, 2000-2 USTC ¶50,704.

A debtor's claim that the IRS lacked authority to levy her community interest in her husband's and co-debtor's pension fund in order to satisfy outstanding federal income taxes incurred by her husband was properly denied. Her contention that state (California) law gave her an "exclusive" half-interest in the husband's pension benefits was rejected because that law refers to equal interests in the whole of the community property rather than exclusive interests in only half of the community property. Further, by granting creditors recourse against the whole community estate on the debts of only one spouse, California law implicitly establishes that spouse's interest in the whole of the community property, at least to a degree sufficient for the IRS to impose tax liens under the Code.

J.W. McIntyre, CA-9, 2000-2 USTC ¶50,613.

A debtor's completion of the payments due under his Chapter 13 plan did not extinguish IRS tax liens against his property because he failed to take a sufficient affirmative step to modify or extinguish the IRS's liens. The taxpayer failed to effectively challenge the validity or existence of the IRS's liens because he sought no preconfirmation advisory hearing to challenge the liens' validity; requested no valuation hearing; filed no objection to the IRS's proof of claim, which designated a larger amount as secured debt than the figure appearing in the debtor's plan; and did not try to modify the liens in an affirmative way. Furthermore, the taxpayer's failure to provide specific notice to the IRS of his intent to afford its liens less than full protection was deemed fatal to his attempt to extinguish the liens. Because the lack of adequate notice denied the IRS due process, the confirmation order devaluing its claims could not be given preclusive effect.

M. Deutchman, CA-4, 99-2 USTC ¶50,852.

A trustee in bankruptcy could not avoid federal tax liens against a promissory note that was payable to the debtors. Although the trustee was afforded the status of a hypothetical bona fide purchaser, he did not acquire an interest in the note for adequate and full consideration. Thus, the trustee was not a purchaser for purposes of the Code Sec. 6323 exception from liens against securities.

J. Berg, CA-9, 97-2 USTC ¶50,665, 121 F3d 535.

Duplicative notices of tax lien filed by the IRS against life insurance proceeds received by a widow following her husband's death were valid even though the notices covered the same tax assessments. While a notice of tax lien affects the priority of the lien against the claims of third-party creditors, the filing of the notice does not affect the validity of the lien itself. Moreover, Reg. §301.6323(g)-1(a) implicitly authorizes the IRS to file a new notice of an existing lien at any time, regardless of whether the document is an original notice or a refiling. Thus, the IRS did not exceed its authority when it filed the duplicative notices.

H. Bourque, CA-2, 97-2 USTC ¶50,630.

Standard State Bank, CA-8, 90-2 USTC ¶50,485, 905 F2d 185.

Bankrupt married taxpayers' status as hypothetical bona fide purchasers under the Bankruptcy Code did not rise to the level of that of a purchaser under Code Sec. 6323(h)(6); therefore, the taxpayers could not avoid the IRS's tax lien on their money and stock in their corporation. However, the lien was prevented from reaching the assets that the taxpayers had transferred to the corporation. The IRS's alter ego claim was not an affirmative defense; instead, it was a separate claim against the corporation. As a result, the IRS could not obtain a judgment against the corporation because the corporation was not made a party to the instant proceeding. Even if the corporation had been found to be the taxpayers' alter ego, that finding, absent jurisdiction over the corporation, would have been binding only upon the taxpayers.

R.E. Janssen, BAP-8, 97-2 USTC ¶50,860, 213 BR 558.

Under state (Wyoming) law, the IRS properly filed its notice of tax lien in the office of the county clerk of the county where a bankrupt individual's business accounts receivable, cash, security deposit, and vehicles were located. The IRS did not have to comply with the Uniform Commercial Code (UCC) when filing the notice of tax lien since, by its terms, the UCC does not apply to statutory liens.

B.A. Straight, BAP-10, 97-1 USTC ¶50,374, 207 BR 217.

A bankruptcy trustee, who was in the position of a bona fide purchaser for value, could avoid a mortgage held by a finance company. The mortgage was defective because the certificate of acknowledgment did not identify the debtors as the mortgagors. However, although the position of the avoided mortgage was preserved for the benefit of the estate, the preservation of the mortgage did not improve the estate's position as it related to an IRS tax lien. The mortgage lien, which was not perfected, could not take precedence over a later, but perfected, tax lien. Therefore, the IRS's lien was superior to the preserved position of the trustee.

S.M. Hastings, BC-DC Ky., 2007-1 USTC ¶50,205.

The Bankruptcy Court upheld the trustee's motion for turnover of the debtor's home, and denied the debtor's motion to compel abandonment of the property, where the debtor claimed that the total tax liens against his home far exceed its value. The court held that the turnover order would facilitate an expeditious sale of the property and provide unsecured creditors with significant benefits.

D.M. Bolden, BC-DC Calif., 2005-2 USTC ¶50,443, 327 BR 657.

Debtors could not avoid a federal tax lien by claiming that the lien attached to an unsecured claim. As a matter of law, the debtors could not strip-down the government's lien. Any federal tax lien attached to the debtors' property and interests and would pass through bankruptcy unaffected.

T. Dippel, BC-DC Fla., 2005-1 USTC ¶50,431.

Debtors' motion to value a tax lien and determine lien extinguishment upon payment was denied. The debtors could not "strip down" an allowed secured claim in a Chapter 7 case. Further, the terms of a prior agreement between the IRS and the debtors as to the value of the secured claim, which reduced the total amount of the secured claim, could not be enforced because the debtors had converted their case to Chapter 7 prior to the entry of the order.

In re S.L. Phillips, BC-DC Fla., 2005-1 USTC ¶50,417.

A bankruptcy court did not err in finding that the notices of federal tax liens (NFTLs) filed by the IRS to secure tax claims against a delinquent debtor violated the automatic stay with respect to the debtor's first chapter 13 bankruptcy. However, the tax liens were rendered avoidable, rather than void. Following the dismissal of that proceeding, the bankruptcy estate's property revested in the taxpayer and the NFTLs "perfected" the liens against that property. Thus, when the debtor filed a second chapter 13 petition, the revested property entered the new bankruptcy estate subject to the government's secured claims for payment of the taxes owing.

G.V. Sanderfer, DC Tenn., 2004-1 USTC ¶50,150.

The bankruptcy court determined that an individual's malpractice settlement was a post-bankruptcy asset and, consequently, not subject to an IRS tax lien. The taxpayer established that the "redressable harm" giving rise to a malpractice claim against his bankruptcy attorney did not occur until after the bankruptcy petition date. Although the taxpayer hired the attorney prior to filing the bankruptcy petitions, his attorney's negligent conduct did not arise until a post-bankruptcy offer in compromise was proposed. The bankruptcy attorney was negligent in computing the correct date proposed in an offer in compromise as to the dischargability of certain tax liens. Because the taxpayer had no property interest in the malpractice claim on the date of his bankruptcy petition, the malpractice settlement was deemed a post-bankruptcy asset.

J. Saunders, DC Fla., 2004-1 USTC ¶50,140.

The IRS was entitled to levy upon funds held by a bankruptcy estate to satisfy a debtor's delinquent tax obligations. Because funds transferred into the bankruptcy estate by a third party as part of an investment plan were determined to be a loan, the debtor was deemed the owner of the transferred funds at the time of the levy. The third party's prior testimony and an examination of the agreement between the third party and the debtor indicated that the transaction constituted a loan. As such, the transferred funds were appropriately subject to an IRS levy.

D. Derrington, DC Wash., 2003-2 USTC ¶50,688, 302 BR 104.

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

J.K. Piper, BC-DC Mass., 2003-1 USTC ¶50,438, 291 BR 20.

Chapter 7 debtors were not entitled to reduce the value of IRS liens to the alleged value of their unencumbered personal assets at the time of the filing of their bankruptcy petition. A Chapter 7 debtor may not use the bankruptcy provisions to "strip down" a nonconsensual federal tax lien to the judicially determined value of the property. Such liens on real property pass through bankruptcy unaffected.

G.H. Carpenter, BC-DC Fla., 2003-1 USTC ¶50,380.

Federal tax liens issued against the property of married debtors applied to property that was exempt from levy. The taxpayers unsuccessfully contended that the terms "lien" and "levy" had the same meaning under Code Sec. 6331 and, thus, the liens did not reach their exempt property. Although the Fourth Circuit had not addressed the issue, the court noted that the issue had arisen before courts within the Fourth Circuit, and those courts issued findings consistent with Seventh and Ninth Circuit opinions that liens and levy should be treated dissimilarly under the statute. Consequently, the tax liens attached to the debtors' exempt, as well as non-exempt, assets.

J.G. Goodykoontz, BC-DC W.Va., 2002-2 USTC ¶50,614, 284 BR 235.

The government carried its burden of proof under the preponderance of the evidence standard that a debtor knowingly and fraudulently failed to report to the court or surrender to the Chapter 7 trustee his remainder interest in a trust and the cash and other property distributions he received from the maturing of his remainder interest pursuant to section 727(d)(2) of the Bankruptcy Code. Accordingly, the taxpayer's Chapter 7 discharge was revoked. The taxpayer's contention that his interest in the trust was nonassignable and not reachable by his creditors and, thus, should not be included in the property of the estate was rejected. Federal tax liens attached to the remainder interest in the trust at the time of the creation of the liens, which predated the bankruptcy.

J.S. Colish, BC-DC N.Y., 2003-1 USTC ¶50,119, 289 BR 523.

A notice of federal tax lien filed by the IRS in Washington, D.C., based on the belief that the taxpayer, who was a debtor in bankruptcy, was out of the country, was invalid because he had returned to the United States and was residing in Florida on the date when the lien was filed. The taxpayer was not required to notify the IRS that he had changed his residence to Florida, and Code Sec. 6323(f)(2)(B) does not permit the IRS to file a notice of federal tax lien in the taxpayer's "last known residence." Instead, the notice had to be filed in the taxpayer's residence. Further, a second notice of tax lien filed in Florida shortly after the bankruptcy court entered its order of dismissal, but prior to the docketing of that order, did not violate the automatic bankruptcy stay. Resolving an issue of first impression, the district court properly determined that the order took effect at the time the judge signed it, not when it was actually docketed.

J.D. Saunders, DC Fla., 99-1 USTC ¶50,445. Aff'd, per curiam, CA-11 (unpublished opinion), 2002-1 USTC ¶50,241. Cert. denied, 3/18/2002.

Married debtors who were equitable owners, but not owners of record, of a residence at the time they filed a bankruptcy petition could not avoid a federal tax lien against the property even though their personal liability for the underlying tax had been discharged. Pursuant to state (Florida) law, the debtors acquired a beneficial or equitable interest in the residence when they entered into a purchase agreement. Their equitable ownership of the residence was evidenced by their possession of the property and their payment of all related expenses. Despite the fact that they did not become owners of the residence until after filing their bankruptcy case, the lien remained attached to their equitable interest and was enforceable following the discharge of their personal liability.

T.G. Ready, BC-DC Fla., 2001-2 USTC ¶50,637.

A debtor corporation's bankruptcy trustee recovered an involuntary transfer of funds from its bank account to the IRS because the IRS failed to show that the levied funds were trust fund taxes and not property of the debtor; a sufficient nexus did not exist between the debtor's tax obligations and the funds transferred. The trust account was used as a general operating account to pay business expenses, including wages. As a result, the transfer of funds was an avoidable preference.

TCB Carpet Services, Inc., DC Ill. (unpublished opinion), 2000-2 USTC ¶50,820, aff'g an unreported Bankruptcy Court decision.

Pro se debtors' postdischarge complaint challenging the imposition of tax liens against their property in connection with five years' worth of unpaid taxes was dismissed. The tax debts were not dischargeable in bankruptcy because the debtors willfully failed to file returns for any of the tax years at issue.

D. Bailey, BC-DC Colo., 2000-2 USTC ¶50,813.

Married debtors could not avoid IRS tax liens because their tax liability was not dischargeable. The taxes were due before the filing of their bankruptcy petition. Moreover, the tax liability would have been assessable after the filing of the bankruptcy petition because the three-year limitations period had not yet expired when they filed the petition.

J. Khoe, DC Calif., 2000-2 USTC ¶50,746.

The government was not entitled to confirmation of the foreclosure sale of a debtor's interest in real property based on the voluntary bankruptcy petition she filed on the morning of the foreclosure sale. Under state (Texas) a valid foreclosure sale, not just an order of foreclosure, was required prior to divesting the taxpayer of her property interests. Since the taxpayer filed the bankruptcy petition before the foreclosure sale took place, she retained her interest in the property.

J.W. Bishop, DC Tex., 2000-2 USTC ¶50,740.

State (Tennessee) law restraints on alienation of a debtor's beneficial interest in a qualified retirement trust did not prevent an IRS tax lien from attaching to the beneficial interest. The Tennessee trust provisions did not affect the status of the beneficial interest as property or rights to which a tax lien could attach. The lien attached to both alienable and inalienable property. Accordingly, the state's restrictions on alienation were not enforceable under nonbankruptcy law, rendering the IRS's claim against the pension rights of the trust valid.

J.L. Berry, dba J&D Enterprises, BC-DC Tenn., 2001-2 USTC ¶50,466.

Federal tax liens attached to, and the IRS had a secured interest in, a debtor's personal property. The debtor unsuccessfully argued that, because her personal property was exempt from levy under Code Sec. 6334, the IRS's tax liens were unsecured. A tax lien may be secured by property of a debtor that is exempt from levy. While certain specified property is exempt from IRS levy, tax liens generally can attach to all of the property of a delinquent taxpayer. A levy involves the immediate seizure of property, while a lien is merely a security interest in property. Thus, the limitation on the IRS's ability to seize the taxpayer's property did not bar the IRS from asserting a security interest in such property.

V.L. Jeffrey, BC-DC Pa., 2001-1 USTC ¶50,387, 261 BR 396.

Married debtors' motion to avoid two federal tax liens pursuant to section 522(f)(1) of the Bankruptcy Code was denied. That provision allows debtors to avoid judicial liens to the extent that they impair exemptions to which the debtors would otherwise be entitled; however, exempt property remains encumbered by perfected prepetition tax liens. Bankruptcy Code section 522 cannot be used to avoid federal tax liens, which do not qualify as judicial liens because they arise by operation of law and not by virtue of any judgment. Moreover, the applicable state (North Carolina) exemptions statute does not apply to claims of the federal government or its agencies; instead, tax liens are governed by exemptions from levy set forth in Code Sec. 6334.

R.R. Morgan, BC-DC N.C., 2000-2 USTC ¶50,596.

A federal tax lien against a townhouse owned by married debtors that was already subject to multiple liens was not void due to lack of value pursuant to section 506 of the Bankruptcy Code; it was merely undersecured. The tax lien on the townhouse was third in priority, and the value of the first two liens exhausted the value of the townhouse, with no remainder left onto which the IRS lien could attach. However, the lien could not be bifurcated into a secured and an unsecured claim. It attached to all of the debtors' personal property and was partially secured by the debtors' personal property. Only one component of the collateral had no value; other components of collateral still had value.

R. Hoekstra, DC Va., 2000-2 USTC ¶50,857, 255 BR 285.

A valid IRS tax lien attached to two parcels of property that a debtor fraudulently conveyed to family members prior to filing for bankruptcy protection. The lien arose at the time of assessment, which preceded both the recording of the deed for the first parcel and the fraudulent transfer and recording of the deed for the second parcel. Following the bankruptcy trustee's recovery of the two properties and his sale of one of the parcels, the tax lien transferred to the debtor's interest in the sale proceeds. The automatic stay did not prevent the creation, perfection, or enforcement of the tax lien against the properties after their return to the bankruptcy estate because the lien attached to the parcels before the fraudulent transfers, the bankruptcy filing, and the trustee's recovery of the properties.

J. McGhee, BC-DC Ky., 2000-1 USTC ¶50,275.

A federal tax lien on a delinquent individual's real and personal property survived the discharge of his underlying tax deficiencies in Chapter 7 bankruptcy. Because section 545 of the Bankruptcy Code gave the bankruptcy trustee the power to avoid liens against the property of the bankruptcy estate, the debtor generally lacked standing to request such relief. Although section 522 gave him limited standing to avoid liens against property that was exempt from his bankruptcy estate, it also provided that tax liens remained valid against exempt property.

J.F. Mulligan, BC-DC N.H., 99-1 USTC ¶50,585.

An ex-wife's residence in a community property state was subject to valid liens to satisfy tax debts of her ex-husband incurred during their marriage. Neither the subsequent transfer of the residence to her as a result of their divorce nor the tortious conduct by the husband affected the validity of the lien on the property, nor was it avoided by her Chapter 13 bankruptcy plan. In addition, liens on her personal property appeared to be fully secured, based on bankruptcy schedules listing the values placed on the property.

M.C. Hegg, BC-DC Ida., 99-1 USTC ¶50,523.

A notice of federal tax lien against a debtor's IRA account filed prior to the filing of his bankruptcy petition survived the bankruptcy court's discharge despite the discharge of the debtor's personal liability for the underlying tax assessment. The federal tax lien notice was properly filed pursuant to state (Ohio) law in the office of the county recorder of the county in which the property was situated. Furthermore, although the debtor claimed that the IRA funds were exempt, that fact alone did not alter the enforcement of the prepetition federal tax lien on those funds after discharge.

J.O. Deppisch, BC-DC Ohio, 99-1 USTC ¶50,429, 227 BR 806.

Married debtors were not entitled to avoid a tax lien that they had stipulated was valid. Because they stipulated that the lien amount did not include interest and penalties, they could not argue that the lien was invalid because it included interest and penalties.

E.L. Polston, BC-DC Pa., 99-1 USTC ¶50,377.

Prepetition levies that were made against bankrupt taxpayers less than 90 days before they filed their Chapter 11 bankruptcy petition could not be avoided as preferential transfers. The levies did not allow the government to receive more than it would have under a Chapter 7 bankruptcy because the government's fully secured and perfected claim exceeded the amounts that were collected. Also, the taxpayer's status as debtors in possession did not allow them to avoid the lien because it was recorded before they filed their bankruptcy petition. However, they could avoid post-petition garnishments that were issued in violation of the automatic stay.

J.M. Kohout, BC-DC Ohio, 99-1 USTC ¶50,322.

The IRS could levy upon funds held by a bankruptcy trustee that were due the debtor. The trustee was not required to return the funds to the debtor in accordance with 11 USC 1326(a)(2) because the plan was confirmed and, accordingly, that provision of the Bankruptcy Code was inapplicable. The plan was not analogous to an unconfirmed plan merely because the IRS appealed from an order overruling its objection to the debtor's plan.

J.D. Mishler, Jr., BC-DC Fla., 98-2 USTC ¶50,652, 223 BR 17.

The IRS was entitled to levy against a residence held by married debtors as trustees for their son in order to satisfy their tax liabilities. Although under state (Pennsylvania) law, title to the residence may have vested in the son when his parents created the trust, the parents were the true equitable owners of the house, and the trust held the property merely as their nominee. The trust was originally created to safeguard the residence from future creditors. The debtors paid the mortgage and all other related expenses and took advantage of federal tax deductions as if they owned the home.

E.T. Richards, Jr., DC Pa., 99-1 USTC ¶50,317.

Summary judgment was denied to married debtors and the IRS regarding attachment of an IRS lien to the debtors' residence. Their transfer of the deed to themselves as trustees for their son created a passive trust under state (Pennsylvania) law. The IRS could not characterize the transfer as fraudulently executed to avoid tax liability, since the debtors had paid a tax debt prior to the transfer. However, material facts remained in dispute with respect to the IRS's contention that the trust was a nominee/alter ego of the debtors.

E.T. Richards, Jr., BC-DC Pa., 98-1 USTC ¶50,367.

A transfer to the IRS of a debtor's interest in compensation owed to him was not avoidable by him as a preferential transfer of exempt property avoidable by a trustee. Although the notices of levy were served within the 90 days preceding the filing of the taxpayer's bankruptcy petition, at a time when the taxpayer was presumed insolvent, section 522(c)(2)(B) of the bankruptcy code prohibits a debtor from avoiding a properly filed prepetition tax lien on property claimed exempt, even in circumstances where the lien is subject to avoidance by a trustee.

J.C. Forrest, BC-DC Okla., 98-1 USTC ¶50,187. Aff'd, BAP-10 (unpublished opinion), 98-1 USTC ¶50,391.

An IRS tax lien on an individual's property claimed as exempt in a Chapter 7 bankruptcy proceeding included tax penalties and statutory additions and was not avoidable. Since the Bankruptcy Code does not distinguish between taxes, interest and penalties, the lien was comprised of the total amount. Further, the Bankruptcy Code specifically excepts tax liens from the effects of the exemption and avoidance provisions.

R.E. Savage, BC-DC Ga., 97-2 USTC ¶50,997.

Amounts obtained by the IRS through a levy on a bankrupt individual's social security benefits did not constitute a preferential transfer that was avoidable by the debtor because the transfer occurred more than 90 days prior to the filing of the bankruptcy petition. The IRS was deemed to have been secured with respect to the benefits on the effective date of the tax lien, which was more than two years prior to the petition date, not at the time of the actual levy.

F. Roberts, BC-DC Ore., 97-2 USTC ¶50,843.

A prepetition federal tax lien against a debtor's homestead property was not avoidable in bankruptcy because Section 522(c)(2)(B) of the Bankruptcy Code prohibits the avoidance of properly filed tax liens on exempt property. That provision overrides the general exemption and avoidance powers granted in Section 522(h) of the Bankruptcy Code.

J.K. Bearden, BC-DC Okla., 97-2 USTC ¶50,836.

Although debtors' personal liability for taxes had been discharged in a Chapter 7 bankruptcy proceeding, the IRS's tax liens survived and attached to the debtors' prepetition property and rights to property. Even though bankruptcy is defined as a fresh start for debtors, Congress intended that valid tax liens would survive bankruptcy. The debtors could not employ the expansive powers under Chapter 11 of the Bankruptcy Code to avoid the tax liens in their Chapter 7 case.

M. Avola, BC-DC N.J., 97-2 USTC ¶50,813.

Similarly.

N.A. Alfano, DC N.Y., 99-1 USTC ¶50,303, 34 FSupp 827.

Since the IRS filed a timely proof of claim in bankruptcy and a lien against the debtor's individual retirement account was perfected at the time of the debtor's bankruptcy filing, it was enforceable against a bona fide purchaser and, thus, could not be avoided by the bankruptcy trustee. The reasoning of In re Carrens ( 96-1 USTC ¶50,294) was adopted. The debtor failed to establish that the IRS proof of claim was not entitled to a presumption of correctness.

T.D. Aylward, BC-DC Fla., 97-2 USTC ¶50,796.

A bankruptcy trustee could not avoid a perfected IRS tax lien against a debtor's real and personal property. Although the trustee held the status of a hypothetical bona fide purchaser of the property subject to the lien for purposes of the Bankruptcy Code, she did not qualify as a purchaser under Code Sec. 6323.

D.L. Linn, BC-DC Fla., 97-2 USTC ¶50,791.

A debtor's motion for an order directing the IRS to release a lien against property that had a value of zero was denied. An IRS stipulation that its claim was unsecured, in response to the debtor's objections to its proof of claim, did not constitute an agreement to remove the lien; rather it reflected the fact that the IRS would be treated as an unsecured creditor in bankruptcy because there was no equity in the collateral to which its lien attached. Similarly, the IRS's amended proof of claim, which listed only unsecured debts, did not mandate that the IRS release the lien. The debtor's Chapter 13 confirmation plan, which identified the IRS's claim as unsecured, did not provide a basis for avoiding the lien because it did not specifically direct such action.

S.O. Pearson, BC-DC Ohio, 97-2 USTC ¶50,757.

A debtor unsuccessfully sought to avoid IRS tax liens against his property. The liens were accorded priority because they were imposed with respect to delinquent taxes and interest in connection with a return filed by the debtor within the three-year period preceding his bankruptcy filing. The debtor had been granted an extension of time for filing his return, and the extended due date was less than three years before the bankruptcy petition was filed.

G.D. Bishop, BC-DC Ga., 97-2 USTC ¶50,664.

An IRS tax lien attached to a debtor's Thrift Savings Plan (TSP) account. Although the TSP statute (5 U.S.C. §8431, et seq.) contains anti-alienation provisions, it cannot be interpreted as proscribing a tax levy on a TSP account. Since a lien is a less invasive collection measure than, and operates in conjunction with, a levy, Congress probably did not intend to allow a TSP account to be subject to a levy but not to a lien. Thus, the TSP statute was construed as not preventing the attachment of a tax lien. The lien did not transfer the debtor's title, possession, or interest in the account and, therefore, did not result in alienation of the debtor's property. Even though the IRS had not perfected the lien by levy or judgment, it was still enforceable.

C. Jones, BC-DC D.C., 97-1 USTC ¶50,408.

A bankruptcy trustee could not avoid valid and enforceable federal tax liens against a debtor's intangible personal property interest in his vested right to receive annuity payments under Code Sec. 6323(b) because the debtor's right to receive the payments did not fall within any of the statutorily protected categories of property.

T.H. Stringer, Jr., BC-DC Okla., 97-1 USTC ¶50,206.

A tax lien on the proceeds of a debtor's account receivable was avoidable by the trustee of the debtor's bankruptcy estate because the IRS failed to record and perfect its lien by filing a notice of federal tax lien. A notice of levy served upon a corporation that owed the account receivable to the debtor was not sufficient to perfect the IRS's interest in the proceeds. The trustee could also avoid the IRS's unperfected lien in his capacity as lien creditor under section 544 of the Bankruptcy Code.

HDI Partners, BC-DC Fla., 97-1 USTC ¶50,102, 215 BR 543.

A church in bankruptcy was determined under state (Texas) law to be the alter ego of individuals; therefore, the IRS properly levied church funds to satisfy the individuals' tax liabilities. First Amendment protection did not automatically shield assets held in the name of the church from satisfying the tax liability of the individuals. Further, the IRS did not have to articulate a reasonable belief in the need for an inquiry concerning the church because it was investigating the individuals' tax liability, not that of the church. Funds seized under a pre-petition levy from the church's bank account and from an oil company that made deposits into the account never became property of the church's bankruptcy estate; therefore, the church had no interest in the funds. Also, funds seized under a post-petition levy from the company were not property of the bankruptcy estate because the placing of title to the assets in the name of the church was a sham. Therefore, the seized funds were not turned over to the church but were released to the IRS.

Faith Missionary Baptist, BC-DC Tex., 95-1 USTC ¶50,075, 174 BR 454.

After a discharge in a bankruptcy proceeding was entered, property claimed as exempt under Sec. 522 of the Bankruptcy Code and Rhode Island state law remained available to satisfy the debt to the IRS, since notice of the tax lien had been properly filed.

F. Quillard, BC-DC R.I., 93-1 USTC ¶50,110, 150 BR 291.

Debtor-taxpayers were unable to avoid IRS tax liens as to assessed tax penalties attached to exempt property (the debtor's homestead) in a Chapter 7 bankruptcy proceeding. In so holding, the bankruptcy court disagreed with a district court's reasoning in J.W. Carlton, DC, 82-1 USTC ¶9400, 19 BR 73, by noting that the language of §724(a) of the Bankruptcy Code does not preclude the use of the tax avoidance rule by the debtor himself to avoid tax liens on exempt property merely because the property is not part of the bankruptcy estate. However, the court did agree with the district court's interpretation of the purpose of the tax avoidance rule. Moreover, the court pointed out that even though §724 would have permitted debtors to avoid tax liens, §522(c)(2)(B) of the Bankruptcy Code, which governs the dischargeability of tax penalty liens on exempt property, does not. Pursuant to that provision, if notice was properly filed a lien cannot be avoided. As a result, the court concluded that since notice was properly filed by the IRS and the provision did not distinguish between taxes, interest, and penalties, the lien was still in force as to those portions of the tax debt.

G.L. Gerulis, BC-DC Minn., 85-2 USTC ¶9753, 56 BR 283.

A bankruptcy trustee could not avoid liens that secured payment from property (the debtors' homestead) that was not part of the bankruptcy estate. The purpose of the "lien avoidance" rule is to protect unsecured creditors from the debtor's wrongdoing and avoidance of liens on property that is not part of the estate would not aid those creditors.

J.W. Carlton, DC N.M., 82-1 USTC ¶9400, 19 BR 73.

A federal tax lien did not attach to a debtor's real property because higher priority liens exceeded the fair market value of the property. The IRS's argument that its lien attached to all of the debtor's real and personal property and that the debtor could not determine to which property the lien attached was rejected. Debtors possess the authority under the Bankruptcy Code to limit secured claims to the value of the collateral. Moreover, lien stripping is engrained in the reorganization process of a Chapter 11 case and to find that lien stripping is not permitted would ignore the existence of this right.

In re Kirk G. Johnson, BC-DC Pa., 2008-1 USTC ¶50,300.