In re Floyd W. Beam, Elaine M. Beam, Debtors. Floyd
W. Beam, Elaine M. Beam, Appellants v. Internal Revenue Service,
U.S. Court of Appeals, 9th Circuit, 98-35576, 10/15/99, 192 F3d 941,
Affirming a District Court decision, 98-1
Sec. 6301 ]
Liens and levies: Enforcement of lien: Bankruptcy: Levy, property
subject to.--Payments made by married debtors into their unconfirmed
bankruptcy plan were subject to an IRS levy since the funds were not
specifically exempted from levy under Code
Sec. 6334 . The provision of the Bankruptcy Code requiring
the trustee to return the payments to the debtors did not take
precedence over the provisions of the Internal Revenue Code authorizing
the IRS, via its broad levy powers, to seize the encumbered funds by any
means since it ultimately held superior rights of possession.
Sec. 6331 ]
Liens and levies: Enforcement of lien: Bankruptcy: Notice of levy,
sufficiency of: Authority of IRS agent.--The IRS properly served a
notice of levy on a bankruptcy trustee since the trustee was in
possession of the funds deposited in the bankruptcy plan. Furthermore,
the IRS agent who served the notice of levy on the trustee did not act
outside the scope of his authority since he had authority to levy under Code
Floyd W. Beam, Elaine Marie
Beam, pro per,
, for the appellants. Charles F. Marshall, Department of Justice,
, for the appellee.
Before: ALDISERT, *
KLEINFELD and FLETCHER, Circuit Judges. **
ALDISERT, Circuit Judge:
Appellants Floyd W. Beam
and Elaine M. Beam filed a petition for bankruptcy reorganization under
Chapter 13 and deposited $24,000 towards a proposed plan with the
trustee in bankruptcy. They subsequently filed a motion to withdraw
their bankruptcy petition and demanded return of the money they had
deposited into their unconfirmed Chapter 13 plan. Upon dismissal of
their petition, the Internal Revenue Service served a notice of levy on
the trustee in bankruptcy, directing him to distribute the deposited
funds directly to the IRS in partial satisfaction of the Beams' federal
tax liability. We are to decide whether a Chapter 13 trustee in
bankruptcy is required to honor an IRS notice of levy under 26 U.S.C. §6331
on these funds, notwithstanding 11 U.S.C. §1326(a)(2), which instructs
the trustee to return the debtor's payments where a debtor's plan is not
confirmed. The district court concluded that the IRS's power to levy is
not compromised by the bankruptcy distribution provision. We affirm the
judgment of the district court.
The bankruptcy court had
subject-matter jurisdiction under 11 U.S.C. §157. The district court
had jurisdiction under 28 U.S.C. §158(a). We have jurisdiction under 28
U.S.C. §1291. The appeals were timely filed. Rule 4(a), Federal Rules
of Appellate Procedure.
Appellants contend that the
district court erred because (1) distribution of the deposited funds
directly to the IRS conflicts with the bankruptcy distribution provision
in 11 U.S.C. §1326(a)(2); and (2) the IRS levy is invalid, because the
IRS impermissibly served a "notice of levy" on the trustee in
This court reviews the
bankruptcy court's interpretation of statutory language de novo.
In re Claremont Acquisition Corp., 113 F.3d 1029, 1031 (9th Cir. 1997);
In re Maya Constr. Co., 78 F.3d 1395, 1398 (9th Cir. 1996).
In January 1993, the Beams
sought relief from their outstanding debts by filing a petition for
Chapter 13 bankruptcy in the Bankruptcy Court for the District of
Oregon. Over the next four years, the Beams deposited approximately
$24,000 towards their proposed Chapter 13 plan with the trustee in
In April 1993, the IRS
filed a proof of claim against the Beams for $137,821.50--the amount of
their federal tax liabilities since 1981. In November 1995, after
several years of litigation regarding the Beams' tax liability, the IRS
filed its final amendment to its proof of claim.
In June 1997, the
bankruptcy court denied confirmation of the Beams' Chapter 13 plan, but
allowed them to pay all creditors and administrative expenses in full by
August 11, 1997 or, alternatively, to file a modified plan providing for
full payment, plus interest, of all outstanding debts. Instead of paying
their debts or filing a modified plan, the Beams filed a motion to
withdraw their bankruptcy petition in August 1997 and demanded the
return of the $24,000 which they had deposited into the unconfirmed
plan. The bankruptcy court granted Appellants' motion and issued a
notice of dismissal on August 21, 1997. At that time the IRS served a
notice of levy on the Chapter 13 trustee, directing him to pay the
deposited funds directly to the IRS in partial satisfaction of the
Beams' federal tax liability.
In response to the IRS's
notice of levy, the Chapter 13 trustee filed a Motion for Order
Directing Disbursement of Funds with the bankruptcy court and requested
an emergency hearing to determine whether the Beams were entitled to the
funds despite the IRS's notice of levy. On August 27, 1997, the
bankruptcy court directed distribution to the Beams pursuant to the
bankruptcy distribution provision for unconfirmed plans, 11 U.S.C. §1326(a)(2).
The IRS appealed from the
bankruptcy court's distribution order. The district court reversed the
bankruptcy court's order and directed the trustee to disburse the held
funds directly to the IRS. In the district court's view, regardless of
which statute controlled the distribution, the IRS ultimately held
superior rights to the funds via its broad levy powers.
On May 26, 1998, the Beams
filed a timely notice of appeal to this court and a motion to stay
disbursement of the funds pending appeal. On July 2, 1998, the district
court denied the Beams' motion to stay.
The provisions of 26 U.S.C.
§6331, when read in conjunction with §6334, authorize the IRS to
collect unpaid taxes via a levy on the taxpayer's property, so long as
the property is not specifically exempt from levy. In tension with the
Internal Revenue statutes, §1326(a)(2) of the Bankruptcy Code mandates,
if a plan is not confirmed, the trustee in bankruptcy shall return to
the debtors any payment made pursuant to the proposed plan.
The payment distribution
clause of section 1326(a)(2) provides:
[If a debtor's] plan is not
confirmed, the trustee shall return any such payment to the debtor,
after deducting any unpaid claim allowed under section 503(b) of this
Section 6334(a) identifies 13 categories of property exempt from an IRS
Section 6334(c) further provides:
Notwithstanding any other
law of the
. . ., no property or rights shall be exempt from levy other than the
property specifically made exempt by subsection (a).
Resolution of this
statutory conflict directly impacts upon collection and enforcement
policies of the IRS regarding unpaid taxes from debtors who have
deposited funds into unconfirmed bankruptcy plans. If funds deposited
into unconfirmed bankruptcy plans are returned to debtors who are also
delinquent taxpayers, then the IRS would be required to pursue
additional legal action to collect these outstanding taxes.
We are persuaded that
Congress clearly intended to exclude from IRS levy only those 13
categories of property specifically-exempted in section 6334(a). In
drafting the levy authority of the Internal Revenue Service, Congress
set forth in unambiguous language that "no property or rights shall
be exempt from levy other than property specifically made exempt by [§6334](a)."
26 U.S.C. §6334(c). Section 1326(a)(2) of the Bankruptcy Code is not
listed among the 13 items exempt from levy under §6334(a).
Moreover, courts have
construed the plain language of §6334 literally and have refused to
exempt property from IRS levy which is not specifically exempted by the
statute. See, e.g., United States v. Mitchell [71-1 USTC ¶9451],
403 U.S. 190, 204-205 (1971) ("[Section 6334(c)] is specific and it
is clear and there is no room in it for automatic exemption of property
that happens to be exempt from state levy. . . ."); Sea-Land
Serv., Inc. v. United States [85-2 USTC ¶9833], 622 F. Supp. 769,
772-773 (D. N.J. 1985) (holding that the IRS could levy on the wages of
seamen even though the wages were not subject to attachment under 46
U.S.C. §11109); In re Jones, 206 B.R. 614 (Bankr. D.C. 1997)
(allowing the IRS to levy a Chapter 13 debtor's Thrift Savings Plan,
even though 5 U.S.C. §8437(e)(2) specifically prohibited such a levy).
Accordingly, we reject
Appellants' argument that the specific construct of §1326(a)(2) trumps
the general language of §6334(c). While specific statutes normally
trump conflicting, general statutes, see Green v. Bock Laundry Mach.
Co., 490 U.S. 504, 524 (1989), such an argument ignores the
specifically stated intent of Congress to limit the instances where an
IRS levy may not attach.
Appellants contend also
that the IRS's service of a notice of levy on the trustee was improper
and that the IRS agent exceeded his statutory levying powers under 26
U.S.C. §6301. These arguments also fail. A notice of levy served on a
third-party custodian of property is tantamount to a levy under 26
U.S.C. §6331. See, e.g., United States v. Donahue Industries, Inc.
[90-2 USTC ¶50,343], 905 F.2d 1325, 1330 (9th Cir. 1990). Furthermore,
the IRS agent had authority to levy upon Appellants' property, because
the agent's levy power is derived directly from the Treasury Secretary's
statutorily prescribed power to collect taxes.
We reject Appellants'
contention that the IRS's "notice of levy," which was served
on the Chapter 13 trustee, was invalid. Service of a notice of levy on a
third-party is proper, indeed customary, when the third-party is in
possession of the debtor's property, or where the third-party is
obligated to the debtor. See United States v. National Bank of
Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). Furthermore,
the Treasury Regulations expressly provide that a "[l]evy may be
made by serving a notice of levy on any person in possession of, or
obligated with respect to, property or rights of property subject to
levy." 26 C.F.R. §301.6331-1(a)(1); see also 26 U.S.C. §6332(a)
("[A]ny person in possession of (or obligated with respect to)
property or rights to property subject to levy upon which a levy has
been made shall, upon demand . . ., surrender such property or rights. .
. ."). Because a trustee in bankruptcy represents the bankruptcy
estate, see 11 U.S.C. §323, the trustee is therefore obligated
to the estate. Accordingly, service of a notice of levy upon the trustee
in bankruptcy for any obligations owed by the estate is proper. See
United States v. Hemmen [95-1 USTC ¶50,210], 51 F.3d 883, 890 n.6
(9th Cir. 1995).
Here, the IRS served a
notice of levy on the Chapter 13 trustee, because the trustee held the
deposited funds and was obligated to the Beams as their representative
in bankruptcy. Consequently, the IRS properly levied the funds by
serving a notice of levy on the trustee.
Appellants contend also
that the IRS agent who served the notice of levy on the trustee acted
outside the scope of his authority, because 26 U.S.C. §7608 does not
provide for the use of levies to secure payment of unpaid taxes.
Appellants' reliance on §7608 is misplaced because this provision
applies only to criminal enforcement officers performing certain
functions relating to undercover operations, subtitle E of the Internal
Revenue Code and other laws relating to alcohol, firearms and tobacco.
These matters are not implicated here. We conclude, therefore, that the
IRS agent had authority to levy pursuant to 26 U.S.C. §6301. See
Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 536 (9th
Cir. 1992) (concluding that Secretary's assignment of authority to local
IRS employees constituted valid delegation of power).
Ruggero J. Aldisert, Senior
Court of Appeals for the Third Circuit, sitting by designation.
The panel unanimously finds this case suitable for decision without oral
argument. Rule 34(a), Federal Rules of Appellate Procedure; 9th Cir. R.
The specific exemptions include wearing apparel and school books, fuel,
necessary personal expenses up to $6250, books and tools up to $3125,
unemployment benefits, undelivered mail, certain annuity and pension
payments, workmen's compensation, judgments in support of minor
children, minimum exemptions for wages and salary, certain
service-connected disability payments, certain public assistance
payments, assistance under the Job Training Partnership Act, residences
exempt in small deficiency cases and principal residences and certain
business assets exempt in absence of certain approval or jeopardy. 26
In re J. Greg Goodykoontz and Toni B. Goodykoontz,
Debtors. J. Greg Goodykoontz and Toni B. Goodykoontz, Plaintiffs v.
United States of America on behalf of its agency, the Internal Revenue
Service, and The State of West Virginia on behalf of its agency, The WV
Dept. of Tax and Revenue, Defendants
Bankruptcy Court, No.
, 00-10902, 5/30/2001
Secs. 6321 , 6331
Tax liens: Property subject to tax liens: Bankruptcy: Levy and
distraint: Property exempt from levy: Lien v. levy.--
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.
MEMORANDUM OPINION AND ORDER
FRIEND II, Bankruptcy
This matter is before the
Court pursuant to the Plaintiffs' motion for summary judgment. The
Plaintiffs, who are debtors in possession, filed this adversary
proceeding to establish the validity of tax liens and to value property
subject thereto. The Court has jurisdiction by virtue of 28 U.S.C. §1334
and the standing order of reference in this District. The matter before
the Court is a core proceeding pursuant to 28 U.S.C. §157(b).
The plaintiffs, J. Greg
Goodykoontz and Tori B. Goodykoontz, ("debtors") filed for
relief under Chapter 11 of the Bankruptcy Code on April 6, 2000 and were
authorized to continue operating as debtors in possession. The parties
have stipulated to the value of property owned by the debtors at the
time of filing. Neither the prior consensual liens on this property nor
the claimed exemptions are in dispute.
Property Value Claimed Exemption Prior Consensual Liens
Residence ................ 175,000 0 150,713.36
Cash ..................... 50 50 0
Checking, City Nat'l ..... 1,000 1,000 0
..... 75 75 0
Household Goods .......... 7,420 7,420 0
Pictures ................. 3,000 3,000 0
Jewelry .................. 24,160 1,000 24,000
Tea Set .................. 1,500 0 7,500
Wearing apparel .......... 2,500 2,500 0
Firearms ................. 250 250 0
401(k) ................... 20,000 20,000 39,548
IRA ...................... 15,000 15,000 9,295
Partnership .............. 17,000 15,000 0
Miata .................... 3,500 3,500 0
Honda .................... 18,000 0 18,120.94
Audi ..................... 13,000 0 14,000
Prior to the bankruptcy
filing, tax liens were filed by the
United States of America
on behalf of the Internal Revenue Service ("IRS"), and by the
on behalf of the Department of Tax and Revenue ("State Tax
Department"). On August 21, 2000, the debtors filed an adversary
proceeding against the IRS and the State Tax Department seeking to
determine the validity of the tax liens. By agreed order entered
November 8, 2000, the debtors and the West Virginia State Tax Department
stipulated that the value of the assets involved was such that after the
satisfaction of the consensual secured debt and the tax liens of the
the state tax liens would be unsecured. The Court ordered that all tax
liens filed pre-petition by the State Tax Department against the
plaintiffs are of no further effect. The adversary proceeding continued
with the IRS as the sole defendant.
The tax liens of the IRS
are as follows:
Lien Amount Period Ending Assessed Filed
$49,388.20 12/31/90 5/20/91 7/24/91
49,762.17 12/31/91 5/25/92 7/23/92
65,100.78 12/31/92 5/31/93 7/9/93
92,281.29 12/21/93 5/30/94 2/15/95
97,769.79 12/31/94 6/15/95 8/18/95
68,296.08 12/31/96 2/2/99 6/21/99
Following a pretrial
hearing on October 12, 2000, the plaintiffs and the IRS stipulated to
the property values and were to submit briefs setting forth whether the
liens of the IRS are limited to the value of the property subject to
levy, or whether the value of property which may not be levied against
should support the tax lien. The debtors filed a motion for summary
judgment, and the IRS filed an objection to the motion and a cross
motion for summary judgment. The Court then took this matter under
The Internal Revenue Code
("I.R.C.") provides that
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
The Code further provides
that the lien imposed by §6321 "shall arise at the time the
assessment is made and shall continue until the liability for the amount
so assessed . . . is satisfied or becomes unenforceable by reason of
lapse of time." 26 U.S.C. §6322. The United States Supreme Court
has stated that "[t]he statutory language 'all property and rights
to property,' appearing in §6321 . . . is broad and reveals on its face
that Congress meant to reach every interest in property that a taxpayer
might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985), cited by In
re Voelker [95-1
USTC ¶50,028 ], 42 F.3d 1050 (7th Cir. 1994) ("The
language of the statute unambiguously shows that the federal tax lien
attaches to all of a debtor's property, without exception.").
The debtors argue that
under 26 U.S.C. §6331, the tax lien does not apply to exempt property.
Section §6331 provides that
(a) . . . If any person
liable to pay any tax neglects or refuses to pay the same within 10 days
after notice and demand, it shall be lawful for the Secretary to collect
such tax . . . by levy upon all property and rights to property (except
such property as is exempt under section 6334) belonging to such
person or on which there is a lien provided in this chapter for the
payment of such tax.
(b) The term
"levy" as used in this title includes the power of distraint
and seizure by any means.
The debtors' position is
based upon the equation of the terms "lien" and
"levy." However, the Seventh and the Ninth Circuits have found
that the two terms have distinctly different meanings, and should be
treated dissimilarly under the statute. The Seventh Circuit Court of
Appeals stated that
This dissimilarity in
treatment makes sense, for as the Ninth Circuit discussed in Barbier,
a lien and levy are different things. "A levy forces debtors to
relinquish their property. It operates as a seizure by the IRS to
collect delinquent incomes taxes." [citation omitted]. On the other
hand, "a lien . . . is merely a security interest and does not
involve the immediate seizure of property. A lien enables the tax payer
to maintain possession of protected property while allowing the
government to preserve its claim should the status of [the] property
later change." [citation omitted]. Thus, if a debtor later sells
the exempt property, the IRS could move to collect the proceeds from the
USTC ¶50,028 ], 42 F.3d at 1052, quoting United States v.
USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990).
The court followed this analysis to the conclusion that a federal tax
lien attached to all of a Chapter 13 debtor-taxpayer's property, without
exception, even to personal property exempt from levy.
The Ninth Circuit Court of Appeals had previously reached a similar
conclusion in United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.2d 377, holding that the IRS' priority
tax claim could be secured by Chapter 13 debtors' household effects and
other property which were otherwise exempt from administrative levy.
The Fourth Circuit Court of
Appeals has not addressed this issue. The issue has, however, arisen
before several courts within the Fourth Circuit. The findings of these
courts are consistent with the Seventh and Ninth Circuit opinions on the
matter. See In re O'Gorman-Sykes [2000-1
USTC ¶50,174 ], 245 B.R. 815 (Bankr. E.D. Va. 1999) (tax
refunds claimed exempt by debtor nevertheless subject to IRS' secured
claim); In re Evans, Bankruptcy 94-00785-5-ATS, WL 760821 (Bankr.
Nov. 7, 1999) (summary non-judicial seizure of property available to the
IRS under the levy provision of §6331 is separate and discrete from the
IRS power to create a lien on property of the debtor); In re Dinatale,
235 B.R. 569 (Bankr. D.
1999) (federal tax liens can properly attach to exempt assets); In re
Deel, No. 7-93-02602-HPB-13, WL 571997 (W.D. Va. June 20, 1995)
(debtors could not avoid federal tax lien on exempt property, but IRS
could not levy on property).
The Court finds, therefore,
that the liens of the IRS attach to the debtors' exempt assets, as well
as their non-exempt assets. The motion for summary judgment of the
debtors is DENIED and the cross motion for summary judgment of
the IRS is GRANTED.
It is accordingly SO
The IRS tax liens were undisputedly prior in time to those of the State
re Jerrie S. Colish, Debtor. Jerrie S. Colish, Plaintiff v.
United States of America
, Department of Treasury, Internal Revenue Service, Defendants.
United States of America
, Third-Party Plaintiff v. Jerrie S. Colish, Third-Party Defendant.
Bankruptcy Court, East.
; 197-14664-608, 289 BR 523, October 23, 2002.
Bankruptcy: Discharge of debt: Willful evasion of tax: Trust
interest: Tax liens. --
A bankrupt tax attorney's
tax, interest and penalty liabilities were not dischargeable in
bankruptcy because he willfully attempted to evade the payment of taxes.
The taxpayer failed to file timely returns for six tax years and did not
pay his federal income taxes for 13 years, except to the extent tax was
withheld by employers. Moreover, the attorney, who was familiar with
offers-in-compromise, succeeded in delaying the government's collection
efforts for more than five years by submitting offers that were clearly
too low in relation to the tax obligations. Finally, although he was
aware of his remainder interest in a trust at the time of filing the
bankruptcy petition, the taxpayer failed to disclose his interest to the
court, despite the fact Schedule B explicitly asked whether he had any
contingent or future interests at the commencement of the case.
Secs. 6321 and 6871]
Bankruptcy: Discharge of debt: Willful evasion of tax: Trust
interest: Tax liens. --
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.
Gary C. Fischoff, Fischoff
and Associates, for debtor, plaintiff, third-party defendant. Wendy J.
Kisch, Bartholomew Cirenza, Department of Justice, Washington, D.C.
20044, for defendants, third-party plaintiff.
CRAIG, Bankruptcy Judge: This matter comes before the Court on the
complaint of Jerrie S. Colish ("Colish" or "Debtor")
to have his debt to the Internal Revenue Service
("Government") for his assessed federal income tax liabilities
for years 1987 through 1992 declared dischargeable under 11 U.S.C. §523(a)(1)
and, additionally, on the complaint of Government seeking a
determination that Debtor's Chapter 7 discharge should be revoked
pursuant to 11 U.S.C. §727(d)(2).
On April 29, 1997, Debtor filed a voluntary petition under Chapter 7 of
Bankruptcy Code (11 U.S.C.) and was granted a discharge of all
dischargeable debts on August 19, 1997.
On August 8, 1997, Colish filed a complaint (Govt. Ex. R1.) to commence
an adversary proceeding, wherein he requested that the Court issue an
order declaring his assessed federal income tax liabilities for years
1986 through 1993 dischargeable under 11 U.S.C. §523(a)(1). On
September 30, 1999, the Honorable Laura Taylor Swain, to whom this case
was then assigned, determined that Debtor's 1993 assessed federal income
tax liabilities were non-dischargeable priority liabilities pursuant to
11 U.S.C. §507(a)(8)(A)(ii). In the Matter of Jerrie S. Colish [
USTC ¶50,906], 239 B.R. 670 (Bankr.
1999). Hence, the only years for which dischargeability is still in
dispute are tax years 1987 through 1992.
Subsequently, on October 26, 2000, the Government commenced an adversary
proceeding seeking the revocation of Debtor's Chapter 7 discharge
pursuant to 11 U.S.C. §727(d)(2) on the grounds that Debtor failed to
disclose on Schedule B of the bankruptcy petition his remainder interest
in a trust established by his father and that Debtor, additionally,
failed to disclose and surrender to the Chapter 7 Trustee cash and other
property distributions he received from the trust upon the maturing of
his remainder interest. (Govt. Ex. S1.) On January 17, 2001, the Court
denied the Government's motion to consolidate both adversary
proceedings, but ordered that the two adversary proceedings be tried
jointly. Consequently, on September 4 and 5 of 2001 and November 20,
2001, the above-entitled adversary proceedings were tried
simultaneously. At the conclusion of the trial, the Court directed the
parties to file post-trial briefs.
This Court has considered thoroughly all submissions, evidence, and
arguments relating to this matter, and the decision rendered herein
reflects such consideration.
This Court has jurisdiction over these proceedings pursuant to 28 U.S.C.
§§151, 157 and 1334, and both these adversary proceedings are core
proceedings pursuant to 28 U.S.C. §157(b)(2)(I) and (b)(2)(J).
Debtor's Work Experience and Education
Debtor is an attorney who holds a Juris Doctor (J.D.) degree from the
University of Miami Law School and Masters of Law (LL.M.) degree in
taxation from the University of Miami Law School. (T1 63.) 1
In addition to his legal education, Debtor has a "Series 7"
license to sell variable securities and a license to sell life insurance
products. (JPTO 2
Debtor has substantial work experience in both private legal practice
and in the sale of securities. From 1979 through October of 1985, Debtor
practiced law, advising clients on federal tax issues and corporate and
partnership formations. (JPTO ¶7.) Later, from 1985 to 1987, Debtor was
hired by Equityline Securities as its vice president and general
counsel, and worked in sales, marketing, analysis, due diligence and
wholesaling. (JPTO ¶9.)
After an extensive period of time working as an independent wholesaler
of securities, from October of 1987 through November 1994 (JPTO ¶10.),
Debtor was employed by a Wall Street securities firm, D.H. Blair, as a
retail sales broker, from late 1994 to late 1996. (JPTO ¶10.)
Subsequently, starting in late 1996 and through the time of trial,
Debtor has worked with a venture capital firm, Spencer Trask. (T1 at
At the time of trial, Debtor resided in a rented 4-bedroom apartment in
and had resided there since June 1993. (JPTO ¶32) From 1988 to 1993,
Debtor resided in a rented apartment in
. Debtor leased a 1986 Buick Skylark from 1986 to 1991. (JPTO ¶31.)
Debtor's Expenses and Lifestyle
From 1986 to 1998, other than normal living expenses, Debtor's expenses
mainly consisted of: 1) child support payments pursuant to a marriage
settlement agreement, 2) tuition payments for private school education
for his four children, and 3) charitable contributions and gifts made to
his ex-wife and friends.
Pursuant to a marriage settlement agreement ("Agreement"),
dated March 28, 1988, Debtor and his wife became legally separated.
Debtor has four children. Under the terms of the Agreement, Debtor
agreed to pay $375 per month, per child as support. (Debtor's Ex. 2 ¶7.)
The Agreement further provides increases in the amount of support
annually in the amount of "one-half of the excess of his net income
from all sources over Sixty-Thousand ($60,000) Dollars" and that
child support in no instance shall exceed $600 per month per child.
(Debtor's Ex. 2 ¶7.) However, the $600 maximum allowance per month per
child apparently could be modified "provided that the needs of the
children ... require more." Furthermore, pursuant to ¶8 of the
Agreement, Debtor was to pay for his children's college expenses
provided that he was financially able to do so. 3
Nothing in the Agreement required the Debtor to fund the cost of private
elementary or secondary school education.
Nevertheless, beginning in 1986 and continuing on through 1999, Debtor
paid for his children's private school education. (T1 at 113, 124.)
Although all four children graduated from Abrams Hebrew Academy in
Yardley, Pennsylvania, one daughter attended boarding school (T2 at 45,
76) and one son went to public high school for two years. (T1 at 124.)
The tuition at the private schools amounted to $16,000 in 1986, and
steadily rose throughout the period at issue, reaching $33,000 in 1992.
The tuition remained relatively constant from 1992 to 1997 at $33,000,
before increasing substantially in 1998 to $48,500 due to one of
Debtor's children attending college. 4
Furthermore, commencing in 1989 and continuing through 1998, Debtor made
charitable contributions. (T2 at 20-21.) The contributions varied
significantly from year to year, ranging from a low of $1,774 in 1997 to
a high of $15,962 in 1993. (Govt. Ex. D3 through D12.)
In addition, Debtor gave substantial sums of money to close friends and
his ex-wife. In 1998, Debtor gave his ex-wife $12,500. (Govt. Ex. PP; T2
93.) It was initially given as a loan, but later the Debtor forgave the
loan, and it became a gift. (T2 at 93.) Debtor also felt responsible for
the losses incurred by three friends who had invested and lost money on
Debtor's advice. (T1 at 182-183.) As a result, Debtor gave three $20,000
nonrecourse loans each to the three friends. 5
Repayment was solely conditioned on the successful investment of the
loans. (T1 at 182-183.)
Tax Return Filings: 1987-1998
On October 12, 1988, Debtor filed late his federal income tax return for
the 1987 tax year in which he made a payment of $2,302 through employer
withholding. (Govt. Ex. A1-A2.) His return reflected that he owed tax in
the amount of $11,675, inclusive of interest and penalties, thus leaving
a deficiency of $9,373.
On April 15, 1989, Debtor timely filed his federal income tax return for
the 1988 tax year in which he failed to make any payment. His return
reflected that he owed tax in the amount of $6,579, inclusive of
interest and penalties, thus leaving a deficiency in such amount.
On March 18, 1991, Debtor filed late his federal income tax return for
the 1989 tax year in which he made estimated payments of $3,250. His
return reflected that he owed tax in the amount of $27,315, inclusive of
penalties and interest, leaving a deficiency of $24,065.
On June 3, 1991, Debtor timely filed his federal income tax return for
the preceding year in which he made estimated payment of $100. His
return reflected that he owed tax in the amount of $25,050, inclusive of
interest and penalties, leaving a deficiency of $24,950.
On April 10, 1992, Debtor timely filed his federal income tax return for
the preceding year in which he did not make any payments. His return
reflected that he owed tax in the amount of $16,207, inclusive of
interest and penalties, leaving a deficiency in such amount.
On April 15, 1993, Debtor timely filed his federal income tax return for
the preceding year in which he made an estimated payment of $11,310. His
return reflected that he owed tax in the amount of $27,042, leaving a
deficiency of $15,732.
On April 15, 1994, Debtor timely filed his federal income tax return for
the preceding year in which he failed to make any payment. His return
reflected that he owed tax in the amount of $38,913.
On April 15, 1995, Debtor timely filed his federal income tax return for
the preceding year in which he made an estimated payment of $9,250. His
return reflected that he owed tax in the amount of $25,462, inclusive of
interest and penalties, leaving a deficiency of $16,212.
On April 15, 1996, Debtor timely filed his federal income tax return for
the preceding year, and made a payment of $28,936 through employer
withholding. His return reflected that he owed tax in the amount of
$26,611, inclusive of interest and penalties, leaving an overpayment of
$2,770, which was credited to his 1986 tax liability.
On April 27, 1997, Debtor timely filed his federal income tax return for
the preceding year, and made a payment of $27,009 through employer
withholding. His return reflected tax in the amount of $12,516,
inclusive of interest and penalties, leaving an overpayment of $14,493,
which was credited to his 1986 tax liability.
On June 25, 1998, Debtor filed late his federal income tax return for
the preceding year, and made a payment of $20,826, through employer
withholding. His return reflected tax in the amount of $12,324,
inclusive of interest and penalties, leaving an overpayment of $8,502.
On October 19, 1999, Debtor filed late his federal income tax return for
the preceding year reporting no tax liability. On February 1, 2000,
Debtor filed an Amended Return and made a $8,671 estimated payment as
well as a $573 payment through employer withholding. His return
reflected that he owed tax in the amount of $88,028, leaving a
deficiency of $84,744.
Serial Offers in Compromise
On April 30, 1992, Debtor submitted his first offer-in-compromise to the
Government wherein he sought to compromise his tax liabilities for years
1986 through 1991, totaling $78,319, plus interest and penalties based
on "doubt as to collectability" by offering to make future
estimated tax payments and by paying $12,500. (Govt. Ex. F1.) The offer
was amended on June 10, 1992 and again on April 5, 1993. (Govt. Ex. F2.)
Under the revised offer, Debtor offered to pay $12,916 to compromise
total reported tax liabilities of $85,241 for tax years 1987 through
1992. (Govt. Ex. F2.) On December 2, 1993, the Government rejected
Debtor's first offer, as amended, based on Debtor's statement to the
Government that the funds were no longer available. (Govt. Ex. F4.)
On April 20, 1994, Debtor submitted his second offer-in-compromise,
seeking to pay only $12,500 for his total reported unpaid liabilities of
$123,464 for tax years 1987 through 1993. (Govt. Ex. C.) The Debtor was,
in effect, submitting the same amount as previously offered but
attempting to satisfy an additional tax year as well. The Government
determined that the Debtor actually had over $119,447 in net equity from
which to collect outstanding tax liabilities of $130,780. ( See
attachment to Govt. Ex. G3.) As a result, the Government formally
rejected that offer on August 19, 1994, after determining that a much
larger amount was collectible by the it. (Govt. Ex. G2.)
On September 15, 1994, Debtor submitted his third offer-in-compromise,
which was amended on May 18, 1995. (Govt. Ex. H1.) As amended, Debtor
offered to pay $20,000 to compromise total reported liabilities of
$147,64. (Govt. Ex. H2.) The Government rejected Debtor's offer by
letter dated June 22, 1995, and afforded him the opportunity to protest
the decision. Debtor's final offer was rejected by letter on May 14,
1997 because a larger amount was deemed collectible. (Govt. Ex. H6.)
The Mannie S. Colish Trust
Mannie S. Colish, Debtor's father, established the Mannie S. Colish
Trust ("Trust") on October 25, 1979. (Govt. Ex. W, X1, X2, Y.)
The Trust provided a life estate interest to Lorraine S. Colish,
Debtor's mother, and equal vested remainder interests to Debtor and his
sister, Julie Colish. Mannie Colish died on January 11, 1981. (T1 at
140.) Upon his father's death, Debtor learned that he was a beneficiary
of the Trust (Govt. Ex. W, X1, X2, Y.) The Trust provided that Lorraine
Colish had a testamentary power of appointment, which permitted her, by
her last Will and Testament, to divest either remainder interest in the
Trust. (Govt. Ex. W, X1, X2, Y.)
At the time of filing the bankruptcy petition, Debtor failed to disclose
his remainder interest in the Trust in schedules filed with this Court.
(Govt. Ex. P, Sch. "B", lines 18, 19; T1 at 145.) The
Government contends that it only became aware of Debtor's interest in
the Trust during settlement negotiations with the Debtor for adversary
proceeding no. 97-1399, after which it commenced an adversary proceeding
to revoke Debtor's discharge pursuant to 11 U.S.C. §727(d)(2). (T4 at
On December 20, 1997, Lorraine Colish died and the Debtor became
entitled to collect his remainder interest. (T1 at 140-141; Ex. AA.)
Subsequently, from January 1998 through June 1998, Debtor received cash
and other property distributions from the Trust, totaling $718,000. (T1
at 142.) As part of the distributions, Debtor received $479,631 from a
land contract held by the Trust. (T1 at 165-1661; Govt. Ex. OO.) On
January 13, 1998, Debtor wire-transferred his share of these proceeds
from his Citizens Bank account in Flint, Michigan to an account he
maintained with Chase Bank in New York. (T1 at 169.) Next, Debtor
transferred $450,000 from the Chase account to a savings account opened
at Citibank. (
) On January 27, 1998 Debtor transferred $200,000 from the Citibank
savings account into Citibank checking account and $245,335 into a 7-day
CD. (T1 at 170.) Debtor then transferred $100,000 of the $200,000 in the
Citibank checking account to a personal account at Spencer Trask (held
by Schroeder Bank). (T1 at 184.)
On March 23, 1998, Debtor created a Nevada Limited Partnership, Phoenix
Samson Associates, L.P. in which Debtor was named a general partner and
limited partner, holding a 96% interest of the partnership and the
Jerrie Saul Colish Irrevocable Children's Trust ("Irrevocable
Trust"), a limited partner, holding the other 4% interest. (Govt.
Ex. J; T1 at 180.) Debtor funded the partnership with cash and property
valued at $740,625, including his Spencer Trask account, his newly
opened Citibank accounts, numerous stock warrants, various general and
limited partnership interests acquired from the Trust and extensive
personal property. 6
Of the contributed funds, Debtor treated $711,000 (96% interest in
partnership) as coming from himself and the other $29,625 coming from
the Irrevocable Trust. However, the entire amount clearly came from
Debtor's interest in the Trust. (T1 at 160-161.)
Pursuant to 11 U.S.C. §523(a)(1)(C), Debtor's 1987 through 1992
Assessed Federal Income Tax Liabilities Are Non-Dischargeable
A discharge in bankruptcy does not discharge debtor of all debts.
§523(a)(1)(C) provides in relevant part:
Section 523. Exceptions
(a) A discharge under §§727,
1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an
individual Debtor from any debt --
(1) for a tax or customs
(C) with respect to which
Debtor made a fraudulent return or willfully attempted in any manner
[italics to highlight] to evade or defeat such tax.
The two exceptions to dischargeability in §523(a)(1)(C) are to be read
in the disjunctive. "Nondischargeability under [§523(a)(1)(C) is
not limited to finding a fraudulent return." In re Fernandez,
112 B.R. 888, 891 (Bankr. N.D. Ohio 1990); In re Tudisco [ 99-2
USTC ¶50,669], 183 F.3d 133 (2d Cir. 1999). Therefore, in
order to prevail, the Government must prove that the Debtor either
made a fraudulent return or the Debtor willfully attempted to
evade or defeat payment of taxes. In re Lilley [ 93-2
USTC ¶50,427], 152 B.R. 715, 720 (Bankr. E.D. Pa. 1993); In
, 161 B.R. 727 (Bankr. S.D.
At issue in Adversary Proceeding No. 197-1399 is whether Debtor
willfully attempted in any manner to evade or defeat payment of
taxes for tax years 1987 through 1992. The Second Circuit has recently
held that the "willfulness exception consists of a conduct element
(an attempt to evade or defeat taxes) and a mens rea
requirement (willfulness)." In re Tudisco [ 99-2
USTC ¶50,669], 183 F.3d 133, 136 (2d Cir. 1999).
The burden of proof is the ordinary civil standard; the government must
show by a preponderance of the evidence that the claim should be
excepted from discharge. Grogan v. Garner, 498 U.S. 279 (1991); Langlois
v. United States [ 93-2
USTC ¶50,364], 155 B.R. 818, 820 (N.D. N.Y. 1993). We also
bear in mind that exceptions to discharge are construed in favor of the
Debtor. In re Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996).
The Second Circuit has recently declined to decide whether more than a
simple nonpayment of taxes is required to satisfy §523(a)(1)(C)'s
conduct requirement or whether §523(a)(1)(C) "encompasses both
acts of commission as well as culpable omissions." In re Tudisco
USTC ¶50,669], 183 F.3d at 137 (quoting Bruner v.
(In re Bruner) [ 95-2
USTC ¶50,356], 55 F.3d 195, 200 (5th Cir. 1995) (holding
that §523(a)(1)(C) "encompasses both acts of commission as well as
culpable omissions")). However, the Second Circuit, in Tudisco,
has joined the majority of the courts in holding that a failure to pay a
known tax duty is, at a minimum, "relevant evidence which a court
should consider in the totality of conduct to determine whether ... the
debtor willfully attempted to evade or defeat taxes."
v. IRS, 77 F.3d 1297, 1301 (10th Cir. 1996). Nonpayment of tax
coupled with concealment of assets or income, or a pattern of failure to
file returns is sufficient to establish conduct aimed at "evading
or defeating taxes." See, e.g., In re Tudisco [ 99-2
USTC ¶50,669], 183 F.3d 133 (nonpayment of tax, failure to
file and submission of false affidavit to employer intended to establish
exemption from withholding), In re Birkenstock, 87 F.3d 947
(nonpayment of tax, failure to file, creation of shell trust); Dalton
v. Internal Revenue Service, 77 F.3d 1297 (concealing assets and
underestimating ownership interest in property on bankruptcy schedule).
The Second Circuit has interpreted "willfully" for purposes of
§523(a)(1)(C) to require that debtor's attempts to avoid his tax
liability be undertaken "voluntarily, consciously or knowingly, and
intentionally." In re Tudisco [ 99-2
USTC ¶50,669], 183 F.3d 133, 137 (2d Cir. 1999) (quoting
, 77 F.3d at 1302).
Because direct proof of intent is rarely found, courts look to
circumstantial evidence to determine debtor's intent. Such evidence may
include evidence outside the tax years in question, "if
sufficiently related in time and character to be probative." In
re Birkenstock, 87 F.3d at 951 (quoting United States v.
Birkenstock [ 87-2
USTC ¶9416], 823 F.2d 1026, 1028 (7th Cir. 1987).
In the case at bar, there are a number of facts which, when taken
together, show that the Debtor intended to evade or defeat taxes.
Debtor, an attorney with an LL.M. in tax, despite the knowledge that he
was required to pay estimated taxes and to fully pay his tax liabilities
by April 15th of each year (T1 at 137), did not pay his federal income
taxes for thirteen years, except to the extent tax was withheld by his
employers, and his tax obligation has accumulated over this period,
resulting in total tax liabilities to date of $228,277.60. (Govt. Ex.
A1-A2.) Debtor failed to fully pay his tax liabilities for tax years
1986 through 1998, with the exception of tax years 1995 through 1997
when his employer was withholding taxes from his wages. (Govt. Ex. C,
D9-D11; T1 at 131-32.)
Second, Debtor failed to timely file returns for tax years 1986, 1987,
1989, 1996, 1997 and 1998. It was only from tax years 1990 through 1995
that Debtor timely filed his tax returns. However, during this period,
Debtor was negotiating three separate offers-in-compromise with the IRS
and was required to comply with Internal Revenue Service Regulations,
which included timely filing returns as a condition of acceptance of the
offers-in-compromise. Moreover, Debtor attempted to thwart or at the
very least delay the collection of his tax liabilities by filing serial
offers-in-compromise from 1990 to 1995. In re Meyeres [Myers] [ 98-1
USTC ¶50,195], 216 B.R. 402 (6th Cir. 1998) (finding that §523(a)(1)(C)'s
modifying phrase "in any manner" is "broad enough to
encompass attempts to thwart the payment of taxes"). The undisputed
evidence shows that Debtor, an intelligent, highly educated tax attorney
who was familiar with the offer-in-compromise process, succeeded in
delaying the Government's collection efforts for more than five years by
submitting offers which were clearly too low in relation to the tax
obligations owed. 7
In addition, Debtor knew that, while the offers were pending, he could
forestall collection of all tax liabilities under consideration, which
permitted him to delay filing bankruptcy and seeking discharge of his
taxes. (Govt. Ex. F1-G1 (¶4), H1, H2 (¶7(d).)
Third, Debtor, aware of his remainder interest at the time of filing the
bankruptcy petition, failed to disclose this interest to this Court
despite the fact that Schedule B explicitly asked whether Debtor had any
contingent or future interests at the commencement of the case. Debtor's
failure to list his remainder interest in the Trust prevented the
Government from asserting a secured claim position based on tax liens
that had attached to all of Debtor's property.
As the Government pointed out at trial, had the Debtor reported his
remainder interest in the bankruptcy schedules, even if he had reported
the value as zero, the Trustee and the Government would have had an
opportunity to inquire as to its value and the Government would have
asserted a secured claim on this interest, permitting the Government to
receive the value of the remainder interest at the time the interest
matured post-petition. (T3 at 47-54.) As a general matter, federal tax
liens survive bankruptcy and, to the extent that they are secured by the
liened property, they remain enforceable against the liened property,
despite the fact that the underlying obligations are dischargeable. See,
e.g., In re Isom [ 90-1
USTC ¶50,216], 901 F.2d 744 (9th Cir. 1990); In re
Dillard, 118 B.R. 89 (Bankr. N.D. Ill. 1990); U.S. v. Alfano
USTC ¶50,303], 34 F.Supp.2d 827 (
1999). The omission further enabled the Debtor to receive $718,000 in
distributions, which he channeled to various accounts and ultimately a
limited partnership in
in an attempt to conceal his assets from the Government and thwart the
collection of his tax obligations.
Fourth, Debtor did not even fully pay his $88,000 tax liability for the
1998 tax year when he received over $718,000 in distributions from the
Trust, nor did he even make any effort to pay his tax obligations owed
for prior years.
Debtor argues that an inference of intent to evade or defeat taxes
should not be drawn from these facts, for the following reasons.
First, Debtor contends that he did not pay his 1998 tax obligations
because he had future obligations, and because he was attempting to
reach a settlement with the Government on prior taxes. (T1 at 114-115,
and at 118-119.) The existence of future obligations is no excuse not to
pay current tax obligations, In re Haesloop [ 2000-2
USTC ¶50,757], 2000 WL 1607316 (Bankr.
2000), and it is not clear how a desire to reach a settlement on prior
taxes would preclude payment of current taxes. Additionally, Debtor
argues that the reason he did not pay his prior tax obligations when he
received the Trust distributions was that he thought these prior taxes
were discharged already. However, this is a weak argument, as Debtor
knew that his 1994 tax liability was a priority tax liability and did
not attempt to challenge it in his complaint for Adversary Proceeding
No. 197-1399. (Govt. Ex. R1.)
Second, Debtor argues that the reason he did not pay his taxes each year
was because, by the time April 15 came around each year, he did not have
enough money on hand to pay his taxes. (T1 at 9, 102, 109-110.) This
argument fails to convince this Court. Debtor did have the funds to pay
his tax liabilities. The evidence shows that Debtor could have easily
paid his tax obligations had he spent less money on tuition payments,
gifts, charitable contributions and child support payments in excess of
his obligations under the court-ordered arrangement with his ex-wife.
From 1986 to 1999, Debtor spent $420,000 on tuition payments, spent
approximately $62,725 on excess child support payments, made charitable
contributions in the amount of $68,389, gave gifts to his ex-wife and
close friends totaling $72,500 and made highly speculative investments
in which he lost $269,000. In comparison, Debtor accumulated total tax
liabilities of $288,277.60 of which a significant portion, if not all,
could have been paid within a reasonable amount of time had Debtor
refrained from spending all his money on the above-listed discretionary
expenses. In a recent case, under a similar set of facts, the Debtor, an
attorney, channeled money that could have been used for his tax
liabilities to personal expenses, such as paying his daughter's
"Ivy League" education, maintaining a country house and paying
his wife's tax liabilities. In re Haesloop [ 2000-2
USTC ¶50,757], 2000 WL 1607316 (Bankr.
2000). In that case, the court found that had debtor made reasonable
adjustments to his standard of living he could have easily paid his tax
debt in full and held that the debtor willfully attempted to evade or
defeat his tax obligations within the meaning of §523(a)(1)(C). The
fact that the debtor's income, in Haesloop, was $275,000 per year
and Debtor's income, on average during the relevant period, was $67,000
per year, makes no difference. Had Debtor refrained from spending more
than half his income on discretionary expenses such as private education
and excess child support payments, he would have easily been able to pay
his tax obligations within a reasonable period of time.
Furthermore, this Court rejects Debtor's related argument that he led a
frugal modest lifestyle and that he was faced with "Hobson's
Choice" between payments of his tax obligations on the one hand,
and financial contributions and support to his family on the other.
(Debtor's Post-Trial Memorandum of Law, at 5.) Courts have held that a
debtor has willfully evaded his taxes under §523(a)(1)(C) where he had
the wherewithal to pay his tax obligations but chose to apply his income
to discretionary expenses such as private education for his children and
financial support to his family members. In re Haesloop [ 2000-2
USTC ¶50,757], 2000 WL 1607316, In re Wright, 191
B.R. 291, 295 (S.D. N.Y. 1995) (debtor spent "thousands of
dollars" on tuition payment for Ivy League education for his
children, paid substantial credit card charges of wife and daughter, and
helped support his brother and mother); In re Eleazar, 271 B.R.
766 (Bankr. D. N.J. 2001) (debtor paid substantial credit card debt of
his family member). Debtors do not owe a duty to supply their children
with nonessential luxuries such as private education absent some
evidence that the debtor's children would not be served by a public
school education. In Re
, 209 B.R. 823, 828 (Bankr. N.D. N.Y. 1996).
Debtor claims that as an Orthodox Jew he has an obligation to send his
children to Jewish day schools. (T1 at 113.) While there is no case
directly addressing whether a debtor has a constitutional right to send
his children to religious school, courts have held that a debtor does
not have a constitutional right to make charitable contributions under
the free exercise clause of the First Amendment. In re
, 209 B.R. 823, 828 (Bankr. N.D. N.Y. 1996), Church of Lukumi
Babalu Aye., Inc. v.
520 (1993). This Court sees no basis for finding a right, constitutional
or otherwise, to pay religious school tuition in preference to tax
If this Court were to permit every debtor to receive a discharge of his
or her tax liabilities every time a debtor decided to spend income on
discretionary personal expenses at the expense of tax obligations,
claiming that he or she was faced with conflicting monetary obligations,
then §523(a)(1)(C) would be meaningless. In this case, Debtor had the
wherewithal to pay his taxes had he not spent most of his income on
discretionary expenses and taken affirmative steps, after receipt of
distributions from his father's trust, to place his assets beyond the
reach of creditors.
This is not a case where Debtor was ignorant of his tax obligations.
Indeed, like the debtors in Haesloop and Wright, Debtor,
an intelligent attorney with an LL.M. in tax, clearly knew he had a duty
to pay his tax obligations and voluntarily and consciously chose to
ignore these obligations. At trial, the Debtor testified that "the
IRS came at the bottom of his list along with three or four hundred
thousand worth of other creditors" (T3 at 24) because they didn't
"scream loud enough" (T3 at 24) and that he would pay
"whichever creditors were yelling the loudest" (T2 at 16) and
that his "landlord, car payments and child support payments"
were timely made so that his "ex-wife wouldn't yell at me."
(T2 at 16.)
Section 523(a)(1)(C) renders nondischargeable attempts in any manner to
evade or defeat a tax. The totality of the Debtor's conduct here
constitutes a scheme of willful evasion and conduct to defeat the
payment of his tax liabilities.
In conclusion, the Court, having considered the totality of Debtor's
conduct, finds that Plaintiff willfully attempted to evade or defeat his
tax obligations within the meaning of §523(a)(1)(C) of the U.S.
Bankruptcy Code. Accordingly, the principal amount of Debtor's
outstanding tax debt and the interest and penalties hereon, for each of
the tax years in dispute, 1987 through 1992, are non-dischargeable.
Pursuant to 11 U.S.C. §727(d)(2), Debtor's Discharge Should Be
Section 727(d)(2) of the United States Bankruptcy Code (11 U.S.C.)
provides in pertinent part:
(d) On request of the
trustee, a creditor, or the
trustee, and after notice and hearing, the court shall revoke a
discharge granted under subsection (a) of this section if --
(2) the debtor acquired
property that is property of the estate, or became entitled to acquire
property of the estate, and knowingly and fraudulently failed to report
the acquisition of or entitlement to such property, or to deliver or
surrender such property to the trustee.
The burden of proof under §727(d)(2) is preponderance of the evidence,
and not, as Debtor's counsel argues, the clear and convincing standard.
Although this Court, in In re Kirschner, 46 B.R. 583 (Bankr. E.D.
N.Y. 1985), held that the appropriate standard in a §727(d)(1) case was
clear and convincing evidence, the U.S. Supreme Court in Grogan v.
Garner, 498 U.S. 279 (1991), applied the preponderance of evidence
standard to dischargeability issues under 11 U.S.C. §523. Several other
courts have subsequently applied the preponderance of evidence standard
to discharge revocation proceedings under 11 U.S.C. §727 because
similar considerations of intent are involved in both provisions. See,
e.g., In re Serafini, 938 F.2d 1156 (10th Cir. 1991); In
re Bowman, 173 B.R. 922 (9th Cir. BAP 1994); In re Sylvia,
214 B.R. 437, 440 (Bankr. D.
1997); In re Barr, 207 B.R. 168 (Bankr. N.D.
1997); In re Frost, 164 B.R. 740 (W.D. Bankr.
1994); In re Wolfson, 139 B.R. 279 (Bankr. S.D. N.Y. 1992).
The Government contends that Debtor's remainder interest in the Trust
was property of the estate at the time of the filing of the petition,
and should have been disclosed on Schedule "B". (Plaintiff's
Post-Trial Brief, at 40.) In addition, the Government asserts that
Debtor failed to report acquisitions of cash from and maturing of
Debtor's remainder interest to the Court or the Trustee. (Plaintiff's
Post-Trial Brief, at 40.) In response, Debtor advances two arguments.
First, he contends that his interest in the Trust was both subject to a
discretionary power of appointment by the income beneficiary, Lorraine
Colish, and also non-assignable and thus was not property of the estate.
(Debtor's Post-Trial Memorandum of Law, at 10-14.) Second, he argues
that he relied on his attorney's advice in not listing his remainder
interest in the Trust in the schedules of his bankruptcy petition, and
therefore that his failure to disclose the interest in his bankruptcy
filing was not "knowing and fraudulent". (Debtor's Post-Trial
Memorandum of Law, at 10-14.)
Both Debtor's counsel and the Government agree that the scope of
property of the estate under §541 of the U.S. Bankruptcy Code includes
"all legal or equitable interests of the debtor in property as of
the commencement of the case". 11 U.S.C. §541. This provision has
been broadly construed. In re Yonikus, 996 F.2d 866, 869 (7th
Cir. 1993) ("every conceivable interest of the debtor, future,
nonpossessory, contingent, speculative, and derivative, is within the
reach of §541"). Although §541 defines the scope of the property
of the estate, applicable state law determines the issue of whether
debtor has a legal or equitable interest in property. Butner v.
48, 54 (1979).
Both parties also agree that since the Trust was established in
law applies. Under
law, the trustee holds legal title to the corpus and the beneficiaries
hold the equitable interest. In re Page, 239 B.R. 755, 763
(Bankr. W.D. Mich. 1999). In the case at bar, the Trust provided that
testator's wife, Lorraine Colish, would be the income beneficiary of the
Trust assets during her life, and Debtor and his sister, Julie Colish,
had remainder interests in the trust assets which would mature on the
death of Lorraine Colish. The Trust contained two provisions which are
of particular importance in this case. First, Section 5B.3(d) of the
Trust provides that Lorraine Colish had a special power to appoint, only
by specific reference in her Will, the trust assets to any of testator's
children or their descendants as she would determine in her sole
. Second, Section 7.4 of the Trust contains a clause which essentially
prevents the assignment or transfer of the beneficiary's interest in the
trust's principal and income to his beneficiaries unless the trustee
determines that such transfer is in the best interest of the
Debtor relies on two cases, In re Knight, 164 B.R. 372 (Bankr.
1994), and In re Hicks, 22 B.R. 243 (Bankr. N.D. Ga. 1982), for
the proposition that where an interest is subject to a testamentary
special power of appointment, the potential beneficiary does not have an
interest that would be property of the estate. (Debtor's Post-Trial
Memorandum of Law, at 10-13.) In Knight, the debtor scheduled
certain property as contingent unvested interests in trusts and the
issue was whether these trust interests were included as property of the
estate. Debtor's parents established two separate trusts, the Dorothy
Trust and the Charles Trust, which was later divided into Charles A
trust and Charles B Trust. The Dorothy Trust provided that upon the
death of Dorothy, the life beneficiary, the trust principal would be
distributed equally to debtor and his sister, if they were alive. The
Charles A Trust provided that Dorothy would receive all her income from
this trust during her life and also permitted Dorothy, by power of
appointment exercisable by Dorothy alone and in her sole discretion, to
name debtor or his sister as beneficiaries. The court held that debtor's
interest in the Charles A Trust was too remote to have value and did not
constitute property of the estate. In re Knight, 164 B.R. at 376.
However, the debtor's interest in the Dorothy Trust was held to be
property of the debtor's estate, despite the existence of contingencies,
which the court acknowledged reduced the actual value of the interest.
In Hicks, the debtor alleged that he had a vested remainder
interest in his father's trust. Debtor's father died ten years prior to
debtor's filing of his bankruptcy petition and debtor's mother was given
a life estate in the residuary trust as well as a power of appointment,
which enabled her to direct the trustee to turn over the trust assets to
any descendant of her late husband. As of the bankruptcy filing date,
the mother had not exercised her power of appointment and was still
alive. The court held that debtor's interest would only vest upon the
occurrence of two contingencies: 1) the mother's exercise of the power
of appointment naming debtor as beneficiary and 2) the debtor surviving
his mother. The court reasoned that it could not compel debtor's mother
to exercise her power of appointment naming him as beneficiary and
further that under
law, the debtor's interest would only vest on the death of the mother,
the life tenant. In re Hicks, 22 B.R. at 245.
The case at bar is distinguishable from the above cases. First, unlike Knight,
the debtor in this case was actually named as a beneficiary under the
Trust and was to receive 50% of the trust assets upon the death of the
life beneficiary, Lorraine Colish. (Govt. Ex. W, X1, X2, Z1 and Z2.) In
contrast, in Knight, the Charles A Trust did not provide that
debtor was to receive the principal or income upon the death of the life
beneficiary (unlike the Charles Part B Trust and the Dorothy Trust,
which were held to be property of the estate), but merely permitted the
life beneficiary to name any descendant of the testator upon her death,
pursuant to the power of appointment. Second, Lorraine Colish, unlike
the life beneficiaries in both Knight and Hicks, actually
did exercise her power of appointment in her Last Will, prior to the
filing of the bankruptcy petition. On January 8, 1985, Lorraine Colish
executed a Last Will and Testament under ITEM XVII in which she
refrained from exercising any power of appointment that she may have had
at the time of her death. (Govt. Ex. CC1.) Further, on October 29, 1997,
she executed a First Codicil to her Last Will and Testament in which she
did not change ITEM XVII in the Last Will. (Govt. Ex. CC2.)
Consequently, the Debtor's argument that the Court could not compel the
life tenant to refrain from divesting Debtor of his interest in the
Trust or to name him as beneficiary is unavailing: in this case there
was no need to do so. Third, the court in Hicks placed emphasis
on the fact that under
law, the debtor's interest would only vest on the death of the life
tenant, who happened to be still alive at the time of the filing of the
bankruptcy petition. Here, in contrast, although the life beneficiary
was still alive at the time of the bankruptcy filing, the Debtor's
interest had already vested, because under
law, as the Government properly notes, a remainderman's interest vests
at the time of the death of the testator, not the life tenant. (
Post-Trial Brief, at 43.) In re Hurd's Estate, 6 N.W.2d 758, 760
1942) (listing cases in support of the long-standing preference for
vested estates); In re Childress Trust, 486 N.W.2d 141, 143 (
For these reasons, this Court concludes that Debtor's interest in the
Trust was not too remote or speculative to not be included in the
property of the estate. Furthermore, although subject to possible
divestment by the life beneficiary, Debtor's interest was a vested
remainder interest. Even if Debtor's interest was found to be a
contingent remainder interest, this alone would not preclude it from
being property of the estate, provided the interest was not
circumscribed by a spendthrift provision. See, e.g., In re
Neuton, 922 F.2d 1379 (9th Cir. 1990) (fact that debtor's interest
in trust was contingent on surviving life tenant did not preclude it
from being property of estate); In re Dias, 37 B.R. 584, 586-587
1984) (a beneficial interest is an equitable interest under §541(a)(1)
despite the fact that at the time of filing petition it was contingent).
Debtor further argues that pursuant to both Section 7.4 of the Trust and
§541(c)(2) of the U.S. Bankruptcy Code, his interest in the Trust was
non-assignable and not reachable by his creditors and thus should not be
included in the property of the estate. 9
law recognizes the validity of restrictions on the transfer of
beneficial interests in spendthrift trusts. In re Edgan Estate,
App. 419, 357 N.W.2d 867 (1984). The United States Supreme Court has
ruled that in accordance with the plain meaning of §541(c)(2), property
is excluded from the estate when 1) debtor has a beneficial interest in
a trust, 2) there is restriction on the transfer of such interest, and
3) the restriction is enforceable under applicable nonbankruptcy law. Patterson
v. Shumate, 504
753, 757-758, 1992).
This Court finds that the spendthrift provision in the Trust constitutes
a valid spendthrift provision. Under
law, the provisions of the trust instrument must demonstrate grantor's
intent to "provide a fund for the maintenance of the beneficiary
and at the same time to secure the fund against his improvidence or
incapacity." In re Barnes, 2001 WL 815360 (Bankr. E.D. Mich.
2001) (quoting Black's Law Dictionary). In the case at bar, the
main purpose of the spendthrift clause was to provide a source of income
for the testator's wife,
, and secure the fund against any improvidence or incapacity of the wife
or other beneficiaries by delegating complete control over the
distribution of the funds to the trustee. 10
As a result, in the case at bar, Debtor's vested remainder interest in
the spendthrift trust would be excluded from the estate pursuant to §541(c)(2),
were it not for the effect of federal tax law.
The Bankruptcy Code recognizes federal tax law as "applicable
nonbankruptcy law" for purposes of enforcing a §541(c)(2)
exemption. Patterson, 504
at 758-759 ("Plainly read, the provision encompasses any relevant
nonbankruptcy law, including federal law"); United States v.
Dallas National Bank [ 46-1
USTC ¶9117], 152 F.2d 582, 585 (5th Cir. 1945) (holding that
Internal Revenue statutes are federal laws). It is well-settled that
courts draw from "Federal tax lien law as a source of `applicable
nonbankruptcy' law that overrides any state law restriction on the
Government's reaching the debtor's rights." In re
, 148 B.R. 88, 93 (Bankr. D. D.C. 1992); see, e.g., Bank
One v. United States [ 96-1
USTC ¶50,188], 80 F.3d 173, 176 (6th Cir. 1996) ("Under
the great weight of federal authority, however, such restraints on
alienation [referring to spendthrift provisions in a trust] are not
effective to prevent a federal tax lien from attaching under 26 U.S.C.
§6321.") Section 6321 of the Internal Revenue Code (26U.S.C.)
provides that "if any person liable to pay a tax neglects or
refuses to pay the same after demand, the amount shall be a lien in
favor of the
upon all property and rights to property, whether real or
personal, belonging to such person." 26 U.S.C. §6321; United
States v. National Bank of Commerce [ 85-2
USTC ¶9482], 472 U.S. 713, 719-20 (1985) (the language of §6321
is broad and is reflective of a congressional intent to "reach
every interest in property that a taxpayer may have"). Thus,
although the spendthrift clause prevented creditors of the Debtor from
reaching his remainder interest in the Trust, the United States' federal
tax lien can be satisfied against any income distributions of the Trust
provided that the liens attached to Debtor's property prior to the
Debtor's bankruptcy filing, the liens were properly filed federal tax
liens and Debtor's remainder interest constitutes a legal or equitable
right defined as "property" or "rights to property"
subject to attachment under federal law. Jones v. Internal Revenue
Service [ 97-1
USTC ¶50,408], 206 B.R. 614, 621 (Bankr. D. D.C. 1997)
(observing that certain property has "a split personality by
remaining property of the estate for purposes of federal tax claims even
though it is not property of the estate for purposes of other creditors'
claims"); In the Matter of Orr [ 99-2
USTC ¶50,668], 180 F.3d 656 (5th Cir. 1999) (holding that
federal tax liens attached to future distributions from the spendthrift
trust at the time of the creation of the lien, which predated and
survived the bankruptcy, and not at the time that each distribution was
In this case, the
filed Notices of Federal Tax Liens for each of the years 1987 through
1993, thereby making each of those liabilities secured claims in the
Chapter 7 case. (Govt. Ex. A1, A2.); 11 U.S.C. §506(a). Generally, the
federal tax lien arises at the time the assessment is made and continues
until the liability is satisfied or becomes unenforceable by reason of
lapse of time. 26 U.S.C. §6332; United States v. City of New Britain
USTC ¶9191], 347 U.S. 81 (1954) (describing federal tax lien
as general lien when attached at the time of assessment to all of the
taxpayer's property, was thus perfected). Furthermore, under Michigan
law, a debtor's interest in a spendthrift trust, be it contingent or
remainder, is "property" or "rights to property"
under 26 U.S.C. §6321. Bank One v. United States [ 96-1
USTC ¶50,188], 80 F.3d at 175. In addition, the Government's
lien on the property of the taxpayer, when taxpayer fails to pay taxes
after assessment, notice and demand, attaches to all property and rights
to taxpayer's property, including property subsequently acquired by
taxpayer. 26 U.S.C.A. §§6321, 6322.
As a result, the federal tax liens attached to Debtor's vested remainder
interest in the Trust at the time of the creation of the liens, which
predated the bankruptcy, and the liens attached to Debtor's
after-acquired property, namely the maturing of Debtor's remainder
interest and the resulting distributions from the Trust post-discharge.
The only question remaining before this Court is whether Debtor
knowingly and fraudulently failed to report to the Court or surrender to
the Chapter 7 Trustee his remainder interest in the Trust and the cash
and other property distributions he received from the maturing of his
remainder interest pursuant to §727(d)(2) of the U.S. Bankruptcy Code. 11
To find the requisite degree of fraudulent intent under §727(d)(2), the
court must find the debtor knowingly intended to defraud, or engaged in
such reckless behavior as to justify the finding of fraud. In re
Puente, 49 B.R. 966, 969 (Bankr.
1985). The requisite fraudulent intent or recklessness may be proven by
evidence of the debtor's awareness of the omitted asset and by showing
that the debtor knew that failure to list the asset could seriously
mislead the trustee or creditors or that the debtor acted so recklessly
in not reporting the asset that fraud is implied. 4 Collier on
Bankruptcy ¶727.15 (1992). As direct evidence of the debtor's
intent can rarely be found, the courts have relied on the inferences
drawn from a course of conduct and all surrounding circumstances in
finding fraudulent intent. Matter of Reed, 700 F.2d 986, 991 (5th
Cir. 1983) (debtor's whole pattern of conduct supports the court's
finding of fraudulent intent); In re Kindorf, 105 B.R. 685, 689
(Bankr. M.D. Fla. 1989) (in determining debtor's actual intent, court
considered all circumstances, including debtor's systematic transfer of
excess of $143,000 to his wife, comprising his salary, income from
partnership interest and gifts from parents, as well as debtor's failure
to disclose the existence of a Swiss bank account in his schedules in
which he held a substantial sum), In re Yonikus, 974 F.2d 901,
905 (7th Cir. 1992).
In the case at bar, Debtor became aware of his remainder interest in his
father's estate soon after his father's death on January 11, 1981. (T1
at 140.) On December 20, 1997, Debtor's mother, Lorraine Colish, died.
Despite knowledge of his remainder interest in the trust, debtor failed
to disclose his interest in the schedules filed with this Court. Rather,
Debtor, on Schedule "B" of the bankruptcy petition, expressly
denied possessing any "future" interest or any
"contingent and non contingent interests in estate of a decedent
... or trust." (Gov. Ex. P. Declaration Concerning Debtor's
Schedules.) Debtor testified that he "didn't read the particular
item[s] concerning future interest, life estates, contingent and
noncontingent interest in estates" and that "had [he] read
that, [he] would have never signed this petition." (T1 at 147.)
Furthermore, Debtor claims that he told his attorney, William Bryk,
about his interest in the Trust and that he decided not to disclose such
interest on Schedule B of the bankruptcy petition upon advice of
counsel. (T1 at 148.) These explanations are not credible and, in
addition, lack merit.
It is well established that the advice of counsel is a complete defense
to a charge of fraud where a full and fair disclosure of the facts is
made. Jones v. Gertz, 121 F.2d 782, 784 (10th Cir. 1941); In
re Topper, 229 F.2d 691 (3rd Cir. 1956); In re Stone, 52 F.2d
639 (D. N.H. 1931). However, the reliance must be in good faith and any
protection based on reliance on debtor's counsel will only act as a
protection to the extent the reliance was reasonable. In re Weber,
99 B.R. 1001, 1018 (Bankr. D.
In Jones, the debtor was to provide architectural services on
certain public construction contracts but later filed bankruptcy because
he did not have sufficient funds to pay his necessary travel expenses to
supervise the work. Debtor was owed a small sum from
and the City of
($461 and $95 respectively), which he assigned to a bank and a finance
corporation. Debtor relied on his attorney who did not list the sums on
his schedules because he thought the "assignments conclusive"
and the debtor had no interest in the fund. The court held that debtor
failed to list the fund because he honestly believed that there was
nothing "coming to him from the assignments" rather than
because he wanted to defraud the creditors. Jones v. Gertz, 121
F.2d at 784. In Topper, the debtor had no assets at the time he
filed bankruptcy or after his discharge was denied. In re Topper,
229 F.2d at 692. Although debtor owed money to a few retail accounts,
and two small loan companies, he only listed the debt owed to his
landlord. As explanation, debtor said he only wished to discharge the
debt to the landlord but that he intended to pay his other creditors.
The court found that debtor had little to gain from the omission because
debtor did not have any assets, and held that there was an absence of
fraudulent intent necessary for denial of discharge due to false oath
under Title 18 U.S.C.A. Section 152. In a more recent case, the debtor's
attorney failed to list certain debts on the bankruptcy petition because
he was either confused about the questions, or because he considered the
debts to be family-related and of no value. In re Ellingson, 63
B.R. 271, 275-276 (Bankr. N.D.
1986). However, debtor and his attorney promptly amended the schedules
after they learned of their errors at the first creditors meeting.
at 276. The court held that creditors had failed to show that material
omissions from the schedules were made with fraudulent intent pursuant
to 11 U.S.C. Section 727.
The case at bar is clearly distinguishable from the above cases. Unlike
the debtor in Topper, who had no assets before and after the
discharge, Colish concealed his interest in the Trust despite the near
certainty that he would eventually come into possession of large
monetary distributions. Similarly, the sums owed to the debtor in Jones
pale in comparison to the distributions from the Trust, and, in
addition, the debtor in Jones had actually assigned his interest
in these funds to other entities, unlike Colish. Had the Debtor taken a
similar approach to the debtor in Ellingson and voluntarily
divulged his remainder interest in the Trust subsequent to his
discharge, and prior to dissipating the Trust proceeds, this Court might
have been more sympathetic to Debtor's pleas of mistake and reliance on
counsel. However, the Government only became aware of Debtor's interest
in the Trust during settlement negotiations with the Debtor for
Adversary Proceeding No. 97-1399. (T4 at 18-19.) At trial, Debtor and
his attorney, Mr. Bryk, submitted conflicting testimony concerning
whether Debtor's trust interest was divulged to Mr. Bryk. Debtor
testified that he disclosed his remainder interest to Mr. Bryk and Mr.
Bryk told him he did not need to report such interest. (T1 at 148.) In
contrast, Debtor's attorney, Mr. Bryk, testified that he never discussed
a family trust nor did he remember the debtor informing him about any
interest in a trust (T2 at 99-101 and T2 at 102, 103.) Attorney Bryk
further testified that he typically made inquiries concerning items 18
and 19 of Schedule "B" (concerning future interests and
interests in trusts). (T2 at 100.) It is unlikely that an attorney who
considers himself a specialist in consumer bankruptcy law, and who has
represented debtors in over one hundred cases (some involving
substantial tax liabilities) would expose himself to malpractice
liability by not listing Debtor's interest in a trust in the petition.
(T2 at 103.) Given the conflicting testimony, this Court chooses to give
credence to Mr. Bryk's testimony, especially in light of Debtor's
conduct subsequent to receiving distributions from the Trust in January.
On January 13, 1998, Debtor received nearly $500,000 from the sale of
land pertaining to the Trust and immediately thereafter engaged in a
series of unexplained transfers and reallocation of these funds to
several banks and accounts. (T1 at 169.) From January 1998 through
December 1998, Debtor received distributions from the Trust totaling
approximately $713,000. In addition, in March, 1998, Debtor created a
Nevada Limited Partnership which he named Phoenix Samson Associates,
L.P. and into which he transferred his Spencer Trask account, his newly
opened Citibank accounts, various partnership interests in his father's
Trust as well as practically all his personal property, all totaling
(Govt. Ex. J.) When asked at trial why he created this partnership in
and why he transferred virtually all his property into it, Debtor
replied that he was concerned about potential suits from clients. (T1 at
155.) This explanation is dubious at best. The Debtor's testimony in
this regard was glib and lacking in credibility. Moreover, given the
Debtor's history with the Internal Revenue Service, detailed above, any
assertion that this convoluted series of transfers was not motivated in
substantial measure by an intent to frustrate the Government's
collection efforts defies credulity. In addition, the fact that Debtor
did not pay his pending taxes for prior years nor even fully pay his
1998 taxes, when he received the distributions from the Colish Trust,
provide additional support for an inference of fraudulent intent.
Debtor's claims that he did not read the schedules carefully, and relied
on his attorney's advice are ultimately not credible in light of
Debtor's conduct and the fact that Debtor is an attorney, with an LL.M.
in tax, and a sophisticated businessman.
Based on all the circumstances described above, this Court finds that
the Government has carried its burden of proof under the preponderance
of evidence standard enunciated in Grogan v. Garner and that
Debtor knowingly and fraudulently failed to report to the Court or
surrender the Chapter 7 Trustee his remainder interest in the Trust and
the cash and other property distributions he received from the maturing
of his remainder interest pursuant to §727(d)(2) of the U.S. Bankruptcy
For all of the foregoing reasons, the
has sustained its objection to the Debtor's discharge pursuant to §727(d)(2).
Accordingly, Debtor's discharge is REVOKED. Furthermore, the United
States has sustained its objection to the dischargeability of Debtor's
outstanding tax debt for each of the tax years in dispute, 1987 through
1992, pursuant to §523(a)(1)(C). Accordingly, Debtor's outstanding tax
debt, and interest and penalties thereon, for the tax years 1987 through
1992, are non-dischargeable.
IT IS SO ORDERED.
References to T1 refer to the September 4, 2001 transcript. References
to T2 refer to the September 5, 2001 transcript. References to T3 and T4
refer to the morning and afternoon transcripts from November 30, 2001.
References to "JPTO" are to the Joint Pre-Trial Order approved
by the Court on September 4, 2001.
Debtor and his former wife agreed:
to contribute to the reasonable cost of undergraduate college education
... debtor's obligation is conditioned on: 1) his being consulted with
respect to the choice of educational institutions..., and 2) upon the
children making application for any financial aid [Debtor] deems
appropriate, and 3) upon [debtor's] financial ability to pay.
Paragraph 8, Marriage Settlement Agreement, Debtor's Exhibit 2, at 6.
In 1998, Debtor's oldest daughter began attending Philadelphia College
of Science and Textiles, a private school in
. See Trial Transcript (9/5/01) at 42.
One $20,000 check was returned.
The debtor contributed several items of personal property, including
furniture, household items, clothing, furs, jewelry, musical
instruments, silverware, china, crystal, paintings, books, collectibles,
electronic audio and video equipment, computers, appliances and other
property. (T1 at 157-180, Ex. J.)
Under Debtor's offer, as revised, he was to pay only $12,916 to
compromise total reported unpaid liabilities of $85,241 for the tax
years 1987 through 1992 (Govt. Ex. C). Based on Debtor's reported
income, this was not a legitimate offer.
Section 5B.3(d) of the trust states: "Spouse's Special Power.
My spouse shall have a special testamentary power of appointment to
appoint outright, in a trust or otherwise, with such estates, powers,
limitations or conditions as she shall determine, to any one or more of
my children or to their descendants (..,) such amounts as my spouse, in
my spouse's sole discretion shall determine, provided this power shall
not be exercised for the purpose of discharging my spouse's legal
obligations. (...) This power shall only be exercisable only by specific
reference thereto in my spouse's will."
§541(c)(2) states in relevant part:
(c)(1) Except as provided in paragraph (2) of thus subsection, an
interest of the debtor in property becomes property of the estate ...
notwithstanding any provision in any agreement, transfer instrument, or
applicable nonbankruptcy law
(c)(2) A restriction on the transfer of a beneficial interest of the
debtor in a trust that is enforceable under applicable nonbankruptcy law
is enforceable in a case under this title.
The spendthrift clause clearly states that the principal and income of
the trust are to be free from interference of the creditors of any
beneficiary and not subject to assignment or anticipation by any
beneficiary unless the trustee determines this to be in the best
interest of the beneficiary. See Section 7.4 of the Trust
Although there is disagreement whether Section 727(d)(2) applies only to
post-petition entitlement or receipt of property or whether it applies
to both pre-petition property and post-petition property, this issue
does not affect this Court's analysis because the debtor's pre-petition
remainder interest in the Mannie S. Colish Trust actually matured, and
the proceeds of the trust were distributed to him, after his discharge
in bankruptcy. Compare In re Argiannis, 183 B.R. 307 (Bankr. M.D.
Fla. 1995), In re Puente, 49 B.R. 966, 968 (Bankr.
1985) (holding that Section 727(d)(2) applies only to entitlement or
acquisition of post-petition property) with In re Barr, 207 B.R.
168 (Bankr. N.D. Ill. 1997) (holding that §727(d)(2), by its plain
reading, is not limited to property acquired post-petition, but extends
to property acquired pre-petition).
His personal property included: "All furniture, household items,
clothing, furs jewelry, musical instruments, silverware, china, crystal,
paintings, antiques, books, collectibles, electronic audio and video
equipment, computers, telephones, appliances, and all other personal
property..." (T1 157-180, Govt. Ex. J.)
In re Thomas Gene Ready and Barbara M. Ready,
Bankruptcy Court, Mid. Dist. Fla., Tampa Div., 99-7964-8G7, 9/7/2001
Secs. 6321 and 6871
Bankruptcy: Federal tax liens: Property subject to tax liens: Real
property: Equitable interest: Discharge of personal tax liability.--
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
) 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
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OPINION
GLENN, Bankruptcy Judge:
THE CASE came before
the Court for final evidentiary hearing to consider the Motion for Order
to Show Cause filed by the Debtors, Thomas Gene Ready and Barbara M.
The Debtors filed a
petition under chapter 7 of the Bankruptcy Code on May 14, 1999, and
received their Discharge on August 26, 1999. In the Motion under
consideration, the Debtors assert that the Internal Revenue Service
(IRS) willfully violated the permanent injunction contained in the
Discharge by virtue of its failure to release a tax lien on property
acquired by the Debtors after the entry of the Discharge. Consequently,
the Debtors request that the Court determine whether the IRS should be
sanctioned as a result of such willful violation.
In response, the IRS
contends that it is entitled to enforce its tax lien against the
Debtors' property because the Debtors had acquired a right or interest
in the property prior to the filing of the chapter 7 petition. According
to the IRS, such right or interest is subject to the lien pursuant to §6321
and §6322 of the Internal Revenue Code and §522(c)(2)(B) of the
Prior to July of 1984, the
Debtors owned and lived in a home located at
4728 Luce Road
Also prior to July of 1984,
David and Joy Lively (collectively, the Livelys) owned and lived in a
home located at
514 Laurel Lane
On July 31, 1984, the
Debtors and the Livelys entered an Agreement. The Agreement provided:
both parties are owners of certain real property located in Polk County
Florida. Each property has an existing Mortgage attached to it and
further these Mortgages cannot be assumed until both parties have
qualified and both parties wish to obtain occupancy of the other parties
property prior to qualifying (sic).
mutually agreed by and between both parties on this date to execute
Warranty Deeds, each party conveying their respective property to the
other party. Until such time as both parties qualify for the assumption
of the respective mortgages these Deeds will not be recorded but will be
held in escrow.
such time as the parties qualify for the respective Mortgages READY will
pay to LIVELY the sum of $1,150.00 per month which will be in turn paid
by LIVELY to his mortgage company as payment of the monthly installment.
LIVELY will pay to READY the sum of $440.95 per month which will be in
turn paid by READY to his mortgage company as payment of the monthly
that each party agrees that this agreement constitutes an escrow closing
and that the above referenced Deeds will be recorded at the expense of
READY at the time of the Mortgage assumptions. . . .
has provided LIVELY with a check in the amount of $10,000.00 and the
above referenced Warranty Deed as payment in full for LIVELY property.
LIVELY has provided the above referenced Warranty Deed as payment in
full for READY property.
Exhibit 2; Debtors' Exhibit 1). The Debtor, Mr. Ready, testified that he
paid the Livelys the sum of $10,000 at the time of the transaction, as
set forth in the Agreement.
Also on July 31, 1984,
apparently in connection with the Agreement, the Livelys signed a
Warranty Deed related to the
property. (IRS Exhibit 9; Debtors' Exhibit 2). The Warranty Deed states
that the Livelys "granted, bargained and sold" the
property to the Debtors for good and valuable consideration. The
disposition of the original Warranty Deed is unclear from the record,
although it appears that the Deed may have been delivered to an escrow
agent and subsequently lost. In any event, the Warranty Deed was never
The following year, on May
13, 1985, the Debtors signed a Warranty Deed related to the
property. (IRS Exhibit 12). According to this Warranty Deed, which was
also signed in connection with the Agreement, the Debtors transferred
property to an individual identified as Tom A. Benefield. After the
Debtors had agreed to convey the
property to the Livelys pursuant to the Agreement, the Livelys had
assigned their interest in the property to Mr. Benefield. The Warranty
Deed from the Debtors directly to Mr. Benefield was recorded on May 21,
The Debtors obtained
possession of the
home in August of 1984, shortly after the Agreement with the Livelys was
executed. Since that time, a period of more than sixteen years, the
Debtors have lived in the property as their home, and have paid the
mortgage payments, property taxes, and insurance premiums on the
property. The mortgage obligation, property tax records, and insurance
policies remained in the name of the Livelys for the entire sixteen-year
period, however, notwithstanding such payment by the Debtors. In
addition to the mortgage, taxes, and insurance, the Debtors also paid
all maintenance expenses with respect to the property, and deducted the
mortgage interest payments on their federal income tax returns.
The IRS contends that the
Debtors failed to pay income taxes for the 1990 tax year in the
approximate amount of $42,003.66. The taxes were assessed on February 3,
1992, and a Notice of Federal Tax Lien was filed on June 12, 1992. (IRS
On August 4, 1992, the
Debtor, Mr. Ready, signed a letter addressed to the Livelys. The letter
your request I hereby acknowledge that all financial responsibility
regarding the property located at
514 Laurel Lane
are solely that of mine, Thomas Gene Ready and my wife, Barbara M.
On January 9, 1995, a
second Notice of Federal Tax Lien was filed by the IRS. (IRS Exhibit 6).
The second Notice relates to income taxes assessed for the 1991 tax year
in the amount of $25,543.55.
On May 14, 1999, the
Debtors filed a petition under chapter 7 of the Bankruptcy Code. The
property was not listed as an asset either on the Debtors' Schedule of
Real Property, or on the Debtors' "Schedule C--Property Claimed as
Exempt." The property is identified on the Statement of Financial
Affairs, however, as "property held for another person," and
514 Laurel Lane
is listed as the Debtors' residential address.
On June 24, 1999, the
Debtors filed a Complaint against the IRS in the Bankruptcy Court to
determine the dischargeability of their tax liability for 1990 and 1991.
On October 27, 1999, a Final Judgment was entered in the adversary
proceeding. The Final Judgment provided that the Debtors' income tax
liabilities for the 1990 and 1991 tax years were not excepted from the
Debtors' discharge, and therefore were dischargeable in their chapter 7
case. The Final Judgment further provided:
federal tax liens with respect to the plaintiffs' assessed federal
income tax liabilities for the years 1990 and 1991, notices of which
have been properly filed, shall remain in full force and effect as to
any property, and any rights to property, belonging to the plaintiffs as
of the filing of plaintiffs' bankruptcy petition.
judgment on Complaint to Determine Dischargeability, Adv. No. 99-380,
The Debtors received their
Discharge on August 26, 1999.
In November of 1999, the
Debtors employed Stephen H. Artman, Esquire, to represent them in
connection with the
On December 30, 1999, the
Livelys signed a Quitclaim Deed that had been prepared by attorney
Artman. Pursuant to the Quitclaim Deed, the Livelys transferred the
property to the Debtors. The Quitclaim Deed was recorded on March 6,
2000. (IRS Exhibit 1; Debtors' Exhibit 5).
On January 25, 2000, the
Debtor, Gene Ready, signed a letter addressed to David Lively. In the
letter, the Debtor stated as follows:
David Lively and I entered
into a contract to purchase his home at 514 Laural [sic] Lane in
I was unable to qualify for a mortgage. David allowed me to make the
payments until I could qualify. It was my responsibility to make the
monthly payments, not Davids. . . .
Exhibit 4). Mr. Ready testified that he intended to purchase the
home at the time that the Agreement was originally executed in July of
1984. At that time, he was a member of the State House of
Representatives, and was confident that he would be able to refinance
the property. Mr. Ready was defeated in his bid for re-election shortly
after the Agreement was signed, however, and experienced financial
setbacks as a result of the loss. Consequently, the Debtors were unable
to qualify for refinancing or assumption of the mortgage, as
contemplated by the Agreement.
The issue in this case is
whether the IRS is entitled to enforce its tax lien on the
property, after the Debtors' personal liability for the underlying tax
has been discharged, even though the Debtors did not have record
ownership of the property at the time that they filed their chapter 7
petition. If the Debtors had acquired a right or interest in the
property prior to the filing of the bankruptcy case, however, and such
right or interest is sufficient to entitle the IRS to enforce the lien,
the IRS has not violated the permanent injunction contained in the
Debtors' discharge, and the Debtors' request for sanctions should be
Section 6321 of the
Internal Revenue Code provides:
Subchapter C--Lien for Taxes
§6321. Lien for taxes
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 right to property, whether real or personal, belonging
to such person.
supplied). The lien imposed by §6321 arises at the time that the tax is
assessed. 26 U.S.C. §6322.
Where a Notice of Federal
Tax Lien has been filed, the lien attaches to "all property and
rights to property" belonging to the taxpayer. If the taxpayer
subsequently commences a bankruptcy case, the lien remains attached to
all property owned by the taxpayer at the time that the bankruptcy
petition was filed. It is well-established that any such existing lien
survives the bankruptcy case with respect to the prepetition property,
even if the debtor's personal liability for the underlying tax is
in the bankruptcy case.
[T]he Supreme Court ruled
that a pre-existing lien on property remains enforceable against that
property even after an individual's personal liability has been
discharged. Dewsnup v. Timm, 502
410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). Although the IRS cannot
proceed to collect from the Debtor personally, it may satisfy the lien
by levying against the Debtor's property.
[99-1 USTC ¶50,429], 227 B.R. 806, 808 (Bankr. S.D.
1998). See also In re Dinatale, 235 B.R. 569, 573-74 (Bankr.
Pursuant to the terms of
the statute, the lien applies to "all property and rights to
property" of the taxpayer. The language of §6321 "is broad
and reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have." Drye v. United States
[99-2 USTC ¶51,006], 528 U.S. 49, 56 (1999) (quoting United States
v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713,
719-20 (1985)). "Stronger language could hardly have been selected
to reveal a purpose to assure the collection of taxes." Glass
City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267
"Property and rights to property" under
The nature and extent of a
taxpayer's property and nights to property are determined in accordance
with state law. "The United States Supreme Court ruled that the
extent to which a taxpayer has 'property' or 'rights to property' to
which a tax lien can attach is determined by state law." In re
Jeffrey [2001-1 USTC ¶50,387], 261 B.R. 396, 398 (Bankr. W.D. Pa.
2001) (citing Aquilino v. U.S. [60-2 USTC ¶9538], 363 U.S. 509,
512-13 (1960)). "Thus, in order to determine whether property is
subject to a federal tax lien, 'state law controls in determining the
nature of the legal interest which the taxpayer had in the property.'
" Craft v. The United States [98-1 USTC ¶50,305], 140 F.3d
638, 641 (6th Cir. 1998) (citing Aquilano, supra, and Morgan
v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78 (1940)).
In this case, the Debtors
and the Livelys entered into a written Agreement dated July 31, 1984.
The Agreement provided that it was "mutually agreed by and between
both parties on this date to execute Warranty Deeds, each party
conveying their respective property to the other party." The
Agreement further provided that the Debtors had provided the Livelys
with the sum of $10,000 and a Warranty Deed to their former home
"as payment in full for the Lively property." Finally, the
Agreement provided that the Warranty Deeds that were to be exchanged
would be held in escrow until the properties were refinanced. There are
two subscribing witnesses to the Agreement.
The Agreement constitutes a
contract pursuant to which the Debtors agreed to purchase the
property from the Livelys in exchange for their former home located on
plus the sum of $10,000. The Debtors took possession of the property,
and have paid all expenses associated with the home, since shortly after
the Agreement was entered. The Deed to the home was not recorded,
however, due to the Debtors' inability to obtain refinancing.
Nevertheless, the Debtors continued to occupy the
property, and were paying all expenses related to the home, in May of
1999 when they filed their bankruptcy case.
The Court finds that the
Debtors were the equitable owners of the property at the time that they
filed their chapter 7 petition. The Agreement constitutes a contract by
the Debtors to purchase the
law, a contract for the purchase and sale of real property creates an
equitable interest in the purchaser, and the purchasers become the
beneficial owners of the property. Waldorff Insurance and Bonding,
Inc. v. Eglin National Bank, 453 So.2d 1383, 1385 (Fla. 1st DCA
1984). A purchaser under an agreement to convey real property acquires
equitable title to the property. Department of Revenue v. Mesmer,
345 So.2d 384, 386 (Fla. 1st DCA 1977).
When a seller executes a
contract to convey property, the purchaser becomes the "real
beneficial owner" of the property. Arko Enterprises, Inc. v.
Wood, 185 So.2d 734, 737-38 (Fla. 1st DCA 1966). Such real,
beneficial ownership carries with it certain rights generally incident
to property ownership. The beneficial interest acquired by a purchaser,
for example, would be subject to sale on execution, could be made the
subject of a trust, would pass to the purchaser's heirs upon his death,
and would entitle the purchaser to recover damages for any trespass to
the property. Arko Enterprises, Inc. v. Wood, 185 So.2d at 737-38
(Fla. 1st DCA 1966).
The Debtors acquired a
beneficial or equitable interest in the
property as a result of the Agreement dated July 31, 1984.
Application of federal tax lien.
As set forth above, §6321
is purposefully broad and designed to reach every interest in property
that a taxpayer might have. Drye v. United States [99-2 USTC ¶51,006],
The lien imposed pursuant
to §6321 of the Internal Revenue Code attaches to equitable interests
acquired by taxpayers.
In Crough v. Scheets
[94-2 USTC ¶50,426], 1994 WL 409628, at 2 (D.Kan.), for example, the
taxpayer had contracted to purchase certain real property from a seller.
The taxpayer took possession of the property, although the seller
retained legal title. The Court found that the taxpayer acquired an
equitable interest in the property at the time of the contract with the
seller. The Court further found that tax liens "attach to the
equitable interest in real property." Crough v. Scheets
[94-2 USTC ¶50,426], 1994 WL 409628, at 2. The primary issue in that
case involved the relative priorities as between the tax lien and other
interests in the property.
Similarly, in Cardinal
v. United States [93-1 USTC ¶50,263], 817 F.Supp. 647 (E.D. Mich.
1993), the taxpayer had entered a contract to purchase certain real
property, and the IRS subsequently filed a Notice of Federal Tax Lien.
The Court found that the taxpayer was "vested with equitable
title" to the property at the time that the Notice of Federal Tax
Lien was filed as a result of the purchase contract previously entered.
The Court further found that a creditor of the taxpayer could
"attach a lien to the vendee's [taxpayer's] equity interest"
in the property. Consequently, the Court concluded that "the
federal tax lien attached to whatever equity interest [the taxpayer] had
built up in the property." Cardinal v. United States [93-1
USTC ¶50,263], 817 F.Supp. at 652.
See also United States
v. Big Value Supermarkets, Inc. [90-1 USTC ¶50,160], 898 F.2d 493
(6th Cir. 1990) (Tax lien attached to interest acquired by a taxpayer
pursuant to a purchase contract).
The tax lien asserted by
the IRS applies to the Debtors' equitable interest in the
The Debtors entered an
Agreement on July 31, 1984, pursuant to which they agreed to purchase a
home located on
. As a result of the Agreement, the Debtors became the beneficial or
equitable owners of the property in 1984. Their equitable interest is
further evidenced by the Debtors' possession of the property, and by the
fact that they paid all of the expenses attendant to the property for
more than sixteen years.
The IRS filed a Notice of
Federal Tax Lien in 1992. The IRS subsequently filed a second Notice of
Federal Tax Lien in 1995.
The Debtors filed their
petition under chapter 7 on May 14, 1999.
The Court concludes that
the Debtors held a beneficial or equitable interest in the
property at the time that they filed the bankruptcy petition. The Court
further concludes that the tax liens of the IRS had attached to the
Debtors' equitable interest in the property at the time that the
bankruptcy case was filed. Finally, the Court concludes that the liens
remain attached to the equitable interest even though the Debtors'
personal liability for the underlying tax has been discharged, and even
though the Debtors did not acquire record ownership of the property
until after the bankruptcy case was filed.
Since the IRS should be
entitled to enforce its tax lien on the Laurel Lane property, the IRS
has not violated the permanent injunction contained in the Debtors'
discharge by declining to release the liens, and the Debtors' request
for sanctions should be denied.
IT IS ORDERED that
the Motion for Order to Show Cause filed by the Debtors, Thomas Gene
Ready and Barbara M. Ready, is denied.
Of course, the discharge of the Debtors does not extinguish the debt;
the discharge operates as an injunction against the recovery of the debt
as a personal liability of the Debtors. 11 U.S.C. §524(a)(2).
In re Virginia L. Jeffrey, Debtor. Virginia L.
Jeffrey, Plaintiff v.
United States of America
, Internal Revenue Service, Defendants
Bankruptcy Court, West.
, 99-26533-JFK, 4/12/2001, 2001 Bankr. LEXIS 337.
Secs. 6321 , 6334
Bankruptcy: Collection of taxes: Levy v. lien: Exempt property:
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.
Sec. 6321 ]
Tax liens: Bankruptcy: Tort claims: Future proceeds: State (
A federal tax lien attached to a debtor's unliquidated medical
malpractice claim and would also attach to the proceeds ultimately
realized with respect to the claim. Pursuant to state (
) law, a tax lien can attach to the proceeds of a personal injury action
where the IRS has filed liens against a debtor's property for unpaid
taxes. Moreover, the Bankruptcy Code provides an extremely broad
definition of "property" that includes debtors' interests in
causes of action.
Sec. 6321 ]
Tax liens: Bankruptcy: Pension plans.--
A federal tax lien attached to all of a debtor's rights in her pension
benefits, including the right to future payments. Her right to receive
future payments qualified as a "right to property." Thus, the
government was secured to the extent of the present value of the
debtor's retirement benefits.
Robert R. Druzisky, for
debtor. Richard Bedford, for Ronda J. Winnecour, Pittsburgh, Pa.,
Chapter 13 Trustee., D. Brian Simpson, Julia L. Wahl, Special Assistant
to the United States Attorney, Paul Skirtich, Assistant United State
Attorney, Pittsburgh, Pa., for I.R.S.
Before the Court are
Cross-Motions for Summary Judgment on Debtor's Amended Adversary
Complaint to Determine the Secured Status of the Internal Revenue
Service ("IRS") in Virginia L. Jeffrey's ("Debtor")
property. Debtor asserts that the IRS' federal tax lien cannot attach to
various items because the items are not "property" B or
because she has no equity in the property. The Debtor filed a voluntary
petition under Chapter 13 of the Bankruptcy Code on September 2, 1999.
The IRS filed its original proof of claim on October 8, 1999, and an
amended proof of claim on November 3, 1999. The amended proof of claim
was for two tax liens totaling $37,988.65 for taxes, penalties, and
interest resulting from unpaid taxes for 1991, 1992, 1993, and 1995. The
IRS filed Notice of Tax Lien on November 6, 1995, for the 1991--1993
deficiencies ($29,619.97) in Beaver,
, and on February 27, 1998, for the 1995 deficiency ($8,368.68) in
. The Amended Complaint seeks to determine the secured status of the IRS
tax liens on Debtor's residence, automobile, household goods,
unliquidated medical malpractice claim and pension.
The parties stipulated to
the existence and present value of the Debtor's assets on July 31, 2000:
residence, $38,000 2;
1997 Dodge Neon, $5,560; 401(k) pension plan, $6,291.09; personal
property, $2,630.00; and a medical malpractice claim no value
stipulated. On her Schedule B, the Debtor listed the approximate value
of her medical malpractice claim as $10,000 and the IRS did not dispute
this figure. However, the parties agreed that if the IRS is secured in
the medical malpractice asset, its lien would attach to whatever Debtor
collects on that claim During oral arguments on November 3, 2000, the
IRS conceded that there is no equity in Debtor's residence or vehicle to
support its lien, but continued to assert its secured position through a
lien attached to her personal property, medical malpractice claim and
pension. There was no dispute between the parties as to whether the
liens were perfected.
In her Complaint, the
Debtor states that she has no equity in the household goods to which the
IRS lien can attach. Additionally, the Debtor argues that her medical
malpractice claim is contingent and unliquidated and, therefore, under
law is not property to which the IRS lien can attach. Furthermore, the
Debtor claims that the terms of her ERISA-qualified pension do not
subject it to attachment by creditors, including the IRS.
In order to determine the
secured status of the IRS in Debtor's property the court must first
determine to what property the IRS lien can attach. Section 6321 of
the Internal Revenue Code states that one who fails to pay taxes
shall have a lien placed "in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person." 26 U.S.C.A. §6321. The United States Supreme Court
ruled that the extent to which a taxpayer has "property" or
"rights to property" to which a tax lien can attach is
determined by state law. Aquilino v. U.S. [60-2 USTC ¶9538], 363
U.S. 509, 512-513, 4 L.Ed.2d 1365, 80 S.Ct. 1277 (1960), citing Morgan
v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82, 84 L.Ed. 585,
60 S.Ct. 424 (1940). Upon assessment, the lien survives until it is
"satisfied or becomes unenforceable by reason of lapse of
time," 26 U.S.C. §6322, and may attach "to all the property
that the tax debtor subsequently acquired." Glass City Bank v.
U.S. [45-2 USTC ¶9449], 326 U.S. 265, 268, 90 L.Ed. 56, 66 S.Ct.
108 (1945), quoting Graves v. Commissioner [CCH Dec. 4001], 12
B.T.A. 124, 133, 1928 WL 482 (1928).
The Bankruptcy Code defines
a "lien" as a "charge against or interest in property to
secure payment of a debt or performance of an obligation." 11
U.S.C. §101(37). Additionally, in determining the secured status of a
lien the Bankruptcy Code provides that "an allowed claim of a
creditor secured by a lien on property in which the estate has an
interest . . . is a secured claim to the extent of the value of such
creditor's interest in the estate's interest in such property . .
." 11 U.S.C. §506(a). In order for Debtor to have her Chapter 13
plan confirmed by the court the plan must provide that "with
respect to each allowed secured claim provided for by the plan . . . the
value, as of the effective date of the plan, of property to be
distributed under the plan on account of such claim is not less than the
allowed amount of such claim . . ." 11 U.S.C. §1325(a)(5)(B)(ii).
The IRS is secured to the extent of the present value of the property
and Debtor must pay the entire amount through her Chapter 13 Plan. 3
Debtor argues that the IRS
is unsecured in her personal property. The parties stipulated that
Debtor's personal property has a value of $2,630.00. Debtor asserts that
her personal property includes: household goods, 5
furniture, books, clothes, jewelry, pets, and a swimming pool. She
acknowledges in her Brief in Support of Motion for Summary Judgment that
exemptions provided in the Bankruptcy Code are irrelevant to the secured
status of the IRS' tax lien in her personal property, but argues that
the property is protected by the exemptions from levy provided in the
Internal Revenue Code. Section 6334 of the Internal Revenue Code
details property that is exempt from levy by the IRS. Specifically,
subparts (a)(1) and (a)(2) exempt "Wearing apparel and school
books" and "Fuel, provisions, furniture, and personal
effects" from levy.
The Court of Appeals for
the Ninth Circuit explained:
The difference between a
levy and a lien also suggests why a lien should still attach to property
exempt from levy. A levy forces debtors to relinquish their property. It
operates as a seizure by the IRS to collect delinquent income taxes. . .
. The IRS's levying power is limited because a levy is an immediate
seizure not requiring judicial intervention. . . . A levy connotes
compulsion or a forcible means of extracting taxes from a recalcitrant
taxpayer.' . . . A taxpayer subject to an IRS levy is provided certain
protections such as notice and an opportunity to pay the taxes due
before the seizure. . . .
A lien, however, is merely
a security interest and does not involve the immediate seizure of
property. A lien enables the taxpayer to maintain possession of
protected property while allowing the government to preserve its claim
should the status of property later change. If, for instance, the debtor
later sells his exempt personal property for cash, the IRS would be
entitled to obtain such proceeds.
[90-1 USTC ¶50,107], 896 F.2d 377, 379 (9th Cir. 1990) (citations
omitted). See also In re Blackerby, 208 B.R. 136, 141 (Bankr.
E.D. Pa. 1997) (prepetition liens remain enforceable against property
after personal liability is discharged). While Debtor is correct that §6334
exempts certain property from levy, it does not preclude attachment of a
valid tax lien, nor does it preclude payment of the claim through the
bankruptcy. The only way Debtor's property will be released from the
lien is through Debtor's payment to the IRS of the value of the
II. Medical Malpractice Claim
Debtor listed an
unliquidated medical malpractice claim valued at approximately $10,000
on her Schedule B. She argues that it is exempt under 11 U.S.C. §522(d)(11)(D)
or, in the alternative, that Debtor's medical malpractice claim is not
property under applicable Pennsylvania law and, therefore, the IRS
cannot attach a tax lien.
The argument that the
medical malpractice claim is exempt from attachment by a tax lien has no
merit under federal bankruptcy law. Section 522(c)(2)(B) of the
Bankruptcy Code states, in part:
(c) Unless the case is
dismissed, property exempted under this section is not liable during or
after the case for any debt of the debt or that arose, . . . before the
commencement of the case, except B (2) a debt secured by a lien that is
B . . . (B) a tax lien, notice of which is properly filed . . .
of the tax liens were filed in the Beaver County Prothonotary's Office
for the 1991, 1992, and 1993 tax deficiencies on November 6, 1995, and
in the Office of the Recorder of Cuyahoga County for the 1995 tax
deficiency on February 27, 1998, and Debtor does not assert that these
filings are improper.
The Debtor relies on
case law dealing with divorces to support her argument that the medical
malpractice claim is not property to which the IRS lien can attach. The
Debtor asserts the Pennsylvania Superior Court ruled on this issue in DeMasi
v. DeMasi, 366
Super. 19, 530 A.2d 871 (Pa. Super. 1987), appeal denied, 539
A.2d 811 (
1988), and in Hurley v. Hurley, 342
Super. 156, 492 A.2d 439 (
Super. 1985). 7
These cases stand for the proposition that, under the Pennsylvania
Divorce Code as it existed at the time, property acquired after
separation is not marital property. In Hurley, the wife's
personal injury cause of action arose before the parties separated, but
the action was tried and the claim liquidated after separation. Under
the Pennsylvania Divorce Code, then in effect, only property acquired
before separation constituted marital property. 23 P.S. §401(e)
law generally provides that "[a] right of action strictly personal
is not assignable" and the right is "not . . . a property
right, capable of assignment, prior to liquidation", the court
found the proceeds of the action not to be marital property. Hurley
at 441, quoting Sensenig v Pa. Railroad Co., 229
168, 78 A. 91, 92 (
1910). In DeMasi, also a divorce case, the wife sought a
determination that insurance proceeds acquired after separation were
marital property because they were paid pursuant to a contract. The wife
distinguished Hurley, arguing that it applied only to tort causes
of action. The Superior Court agreed with the wife. Debtor's reliance on
these cases is misapplied.
In 1988, §401 of the
Divorce Code was replaced by 23 Pa.C.S. §3501(a)(8) and now provides
that the relevant time for determining whether a cause of action is
marital property is when the cause of action accrues. Nuhfer v.
Super. 380, 599 A.2d 1348, 1349 (
Super. 1991). Thus, the cases upon which Debtor relies do not reflect
the current state of
Furthermore, although state
law governs the nature of the interest which a taxpayer has in property,
whether the right or interest created under state law constitutes
"property" or a "right to property" subject to a §6321
tax lien is a matter of federal law. Drye Family 1995 Trust v. U.S.
[98-2 USTC ¶50,651], 152 F.3d 892, 894 (8th Cir. 1998), aff'd.
[99-2 USTC ¶51,006], 528 U.S. 49, 145 L.Ed.2d 466, 120 S.Ct. 474
(1999). In Simon v. Playboy Elsinore Associates, 1991 U.S. Dist.
LEXIS 5729, 1991 WL 71119 (E.D. Pa. 1991), an IRS lien was held to have
attached to the proceeds of a personal injury action where the IRS had
filed liens against the debtor's property for unpaid taxes. "State
and federal courts outside of Pennsylvania have recognized that, for
federal tax purposes, the right to assert a tort claim is a chose in
action,' constituting intangible personal property subject to the
federal tax lien."
at *2. Furthermore, §541 of the Bankruptcy Code provides an extremely
broad definition of property which includes Debtor's interests in causes
of action. We find that the unliquidated medical malpractice cause of
action is property in which the Debtor has an interest under
law and under the Bankruptcy Code. Thus, the tax lien attaches to the
cause of action and will attach to its proceeds.
Debtor relies on U.S. v.
Dallas Nat. Bank [46-1 USTC ¶9117], 152 F.2d 582 (5th Cir. 1945),
in support of her assertion that the IRS lien does not attach to her
pension because she cannot sell her interest in it nor does she have the
right to receive a distribution from it at this time. She argues in her
brief that the pension is "never fully her property" until it
becomes payable to her. In Dallas Nat. Bank the IRS sought to lien the
taxpayer's interest in a testamentary trust. Under the terms of the will
the taxpayer did not have legal title to the trust corpus, she had only
an income therefrom The court held that even though the testator's
intent was to create an estate immune from seizure, the IRS' lien still
attached to the income to which the taxpayer was entitled at the time
the income became payable to her.
This court recognized in In
re Fuller, 204 B.R. 894, 900 (Bankr. WD. Pa. 1997), "that a
federal tax lien attaches to the Debtor's right to receive future
pension plan payments from an ERISA qualified plan at the time such
payments are distributed or become due." The court further held:
"The IRS is a secured creditor to the extent of the present value
of the Debtor's right to lifetime pension benefits."
In In re Wesche
[96-1 USTC ¶50,265], 193 B.R. 76 (Bankr. MD.
1996), the debtor did not dispute that the tax lien attached to the
right to receive pension benefits, but questioned the extent of the
liens on those payments. The court held that the lien attached to all
post-petition future payments. "The IRS claim is valued as the
present value of the future payments over Debtor's lifetime."
[Debtor] has a present
right to receive payments in the future, which is a 'right to property'
to which the tax lien attaches. . .. The right to future benefits exists
in the present, and, most importantly, existed on the date of the filing
of the petition in bankruptcy. Accordingly, the federal tax lien
attached to all of [Debtor's] rights in the pension benefits, including
the right to future payments. The
, thus, is secured to the extent of the present value of [Debtor's]
The parties have stipulated
that the present value of the Debtor's pension is $6,291.09. Therefore,
the IRS lien attaches to this value for purposes of this Chapter 13.
This court finds the IRS
liens attach to Debtor's personal property to the extent of her equity
in same, to the value of the medical malpractice claim and to the
present value of her right to receive future payments from her pension.
The IRS liens are secured to the extent of Debtor's equity in her
personal property, valued at $2,630.00 and $6,291.09 in the Debtor's
pension. Because the parties have stipulated as to the value of
household goods as $2,630.00, this opinion assumes the IRS' lien in
those assets is secured to that extent. The court will adjust the
calculation, however, as explained in note 5, supra, if this
assumption is in error. The Debtor must pay these amounts to the IRS
through the plan in order to terminate the lien in those assets.
Additionally, the IRS is secured in the Debtor's medical malpractice
claim to the extent that she receives a damage award from the action,
but not to exceed $28,437.56. 8
By agreement of the parties, the IRS' lien shall remain attached to the
cause of action and shall not be paid through the Chapter 13 Plan, since
its exact value cannot be determined until the Debtor's claim is
An appropriate order will
AND NOW to-wit, this 12th
day of April, 2001, for the reasons expressed in the foregoing
It is ORDERED, ADJUDGED,
and DECREED that plaintiff's Motion for Summary Judgment is DENIED and
the Internal Revenue Service's Cross-Motion for Summary Judgment is
It is FURTHER ORDERED that
the Internal Revenue Service's claim is secured to the extent of
$6,291.09 in the Debtor's pension.
It is FURTHER ORDERED that
the IRS's claim is secured to the extent of $2,630 in Debtor's household
goods. However, within 20 days hereof the Debtor and/or the Internal
Revenue Service shall file a stipulation as to the value of the IRS'
secured claim in the Debtor's personal property and the value of the
IRS' lien in the medical malpractice cause of action in accordance with
this court's memorandum opinion. See notes 5 and 8 of the
memorandum opinion and accompanying text therein.
It is FURTHER ORDERED that
the Internal Revenue Service is secured in the Debtor's medical
malpractice claim to the extent that she receives a damage award from
the action, but not to exceed $28,437.56. This amount will be adjusted
upward by any decrease in the IRS' secured claim on household goods.
It is FURTHER ORDERED that
Debtor shall amend her Chapter 13 plan on or before May 21, 2001, and
serve the U.S. Trustee, the Internal Revenue Service, and any other
creditor affected thereby. Objections to the amended plan shall be filed
and served on or before June 11, 2001. A conciliation conference is
scheduled for June 19, 2001, at 9:00 a.m in Courtroom A, 54th
600 Grant Street
15219. If the parties are not able to resolve the confirmation dispute,
a contested hearing will be held on June 26, 2001, at 1:30 p.m in
Courtroom A, 54th
600 Grant Street
The court's jurisdiction was not at issue. This Memorandum Opinion
constitutes our findings of fact and conclusions of law.
This value was determined in an appraisal obtained by the Debtor on
March 8, 2000, by order of this Court.
If Debtor completes all plan payments and receives a discharge, her
personal liability for the remaining tax debt will be discharged.
However the lien remains viable until the obligation is paid in full. In
re Blackerby 208 B.R. 136, 141 (Bankr. E.D. Pa. 1997).
During oral argument on November 3, 1999, the court granted the IRS'
request to file a supplemental brief concerning household goods. The IRS
filed a supplemental brief within the two weeks granted by the court,
but the Debtor did not file a response to the IRS' brief.
In an answer to the IRS' Interrogatory #8, Debtor disclosed that some of
her household goods are encumbered by a purchase money security interest
to Heilig-Meyers, leaving no equity to the extent of that loan. She also
conceded in her answer to the IRS' Interrogatory that the lien attaches
to property not encumbered by the purchase money security interest. This
statement was not discussed in the briefs of either party or in any
other proceeding before the court. Debtor separately itemized certain
household goods (mattress, bed, lamps, and shelves) with a claimed value
of $860.00 in her Schedule B. These items are over-encumbered by
Heilig-Meyers' purchase money security on a total claim of $1542.00.
Thus, Heilig-Meyers has an unsecured claim of $682.00. As we understand
the parties' stipulations, the IRS' lien attaches to different household
goods as also separately itemized in Schedule B worth $2,630.00. If the
$2,630.00 actually includes the $860 value of goods subject to the
secured claim by Heilig-Meyers, then the IRS' lien attaches only to the
value of $1,768.00. See note 3, supra.
11 U.S.C. §522(d)(11)(D) states, in part: "The following property
may be exempted under subsection (b)(1): . . . (11) The debtor's right
to receive, or property that is traceable to B (D) a payment, not to
exceed $16,150, on account of personal bodily injury, not including pain
and suffering or compensation for actual pecuniary loss, of the debtor
or an individual of whom the debtor is a dependent . . ." Effective
April 1, 2001, that amount increases to $17,425.00. 11 U.S.C. §104(b).
However, the lesser amount was in effect when Debtor filed this case.
The above cases did not determine 'what is property,' but determined
'what is marital property' under the Pennsylvania Divorce Code. Hurley,
which DeMasi used as a basis for its decision on this point, began its
analysis by asking the question: "Did the legislature intend to
require that a spouse's unliquidated claim for personal injuries in tort
be deemed marital property?" Hurley at 442.
This figure was calculated by subtracting the IRS' security interest in
Debtor's household goods ($2,630.00) and pension ($6,291.09) from the
total amount of the IRS' liens ($37,988.65). This figure will be
adjusted upward if the assumption as to the extent of the IRS' lien in
household goods is in error. See, note 5, supra.
In re William A. Herreras, Debtor.
(Internal Revenue Service), Appellant v. Michael S. Kogan, Chapter 7
District Court, Cent.
Dist. Calif., CV 00-05959 CAS, 11/7/2000, Reversing an unreported
Bankruptcy Court decision
Sec. 6321 ]
Tax liens: Bankruptcy: Proceeds of property: Work in progress: State
(California) law: Attorney.--Proceeds from the sale of a bankrupt
attorney's prepetition work in progress were proceeds of property and,
thus, subject to a preexisting tax lien. State (
) law treated an attorney's work in progress as a valuable asset. Thus,
work that the debtor was performing on a contingent basis was part of
his present estate and subject to the IRS lien.
SNYDER, District Judge:
This matter is an appeal
from an order of the bankruptcy court. The question presented is whether
proceeds, which are held by the trustee, of the sale of an attorney's
pre-petition work in progress, are proceeds of "property"
subject to a federal tax lien under I.R.C. §6321. The debtor attorney
surrendered the assets of his law practice, including the work in
progress, to the trustee after filing his Chapter 7 petition.
Subsequently, the debtor repurchased the law practice from the trustee
pursuant to a settlement agreement. The Internal Revenue Service
("IRS") then filed a proof of claim, seeking to enforce a
preexisting tax lien against the proceeds in the hands of the trustee.
The trustee objected to the application to the tax lien of that part of
the proceeds which was attributable to the work in progress. The
bankruptcy court sustained the objection, holding that the tax lien did
not attach to those proceeds, on the ground that the debtor did not have
an unqualified right to receive fees from the in-progress cases at the
time the petition was filed. The IRS filed this appeal. For the reasons
stated in this order, the Court reverses the order of the bankruptcy
Standard of Appellate Review
The district court reviews
decisions of the bankruptcy court in the same manner as would the Court
of Appeals. See In re George, 177 F3d 885, 887 (9th Cir. 1999).
Thus, the Court reviews the bankruptcy court's conclusions of law de
novo, and reviews its factual findings for clear error.
Mixed questions of law and fact are also reviewed de novo. In re
Chang, 163 F3d 1138, 1140 (9th Cir. 1998).
There is no dispute
regarding the essential facts of the case. On February 21, 1997, debtor
William A. Herreras filed for protection under chapter 7 of the
Bankruptcy Code. See Docket, Appellant's Excerpts of Record
("E.R.") Ex. 16. The bankruptcy estate included the debtor's
pre-petition business assets, consisting of his law library, business
equipment, bank accounts, life insurance, accounts receivable, appellate
accounts receivable, goodwill, and work in progress. See
Settlement Agreement, E.R. Ex. 12 ¶1. The debtor was a workers'
compensation lawyer who generally handled cases on a contingent fee
basis. See Letter of Sandra K. Fahey, Debtor's Attorney,
Proposing Settlement Terms, May 29, 1997. E.R. Ex. 8, Bates Stamp No.
The debtor agreed to pay $113,852.00 to recover these assets from the
estate, pursuant to a settlement agreement reached by the parties and
approved by the bankruptcy court on September 17, 1997. See
Settlement Agreement, E.R. Ex. 12 ¶2; Order Approving Compromise of
Controversy, E.R. Ex. 13. Of the total amount, the parties attributed
$66,232.00 to the work in progress. See Fahey Letter, E.R. Ex. 8,
Bates Stamp No. 108.
The IRS filed a proof of
claim in bankruptcy court on August 20, 1997. The proof of claim listed
secured claims totaling $707,469.61 in assessed taxes, penalties and
interest, based on five tax liens filed on December 22, 1992, and July
6, 1993. The claim also listed an unsecured priority claim of $15,373.00
for unassessed taxes. Thus the IRS, total claim was for $722,942.61. See
Proof of Claim, E.R. Ex. 1, Bates Stamp No. 15. On January 24, 2000, the
trustee filed a motion objecting to the secured portion of the IRS'
claim. See Motion Objecting to Claims, E.R. Ex. 1, Bates Stamp
No. 1. The trustee apparently believed that the lien could not attach to
money the estate obtained pursuant to the settlement agreement, but only
to the law practice assets themselves, which had been transferred back
to the debtor:
[T]he tax lien obtained by
the IRS was for a security interest in all property and rights to
property of the Debtor, however, the assets of the estate resulted from
the sale of the Debtor's law practice back to the Debtor. The Trustee is
not in possession of any assets or proceeds of assets from which the
claimant may satisfy its claim. Any property with which the IRS may
satisfy its claim is in the possession of the Debtor.
at Bates Stamp No. 6-7.
On March 29, 2000, the
bankruptcy court held a hearing on the trustee's motion. After hearing
argument, the court continued the hearing to allow the parties to submit
supplemental briefing on the question of which assets' proceeds the tax
lien attached to. See Transcript of Proceedings, March 29, 2000,
E.R. Ex. 14 at Bates Stamp No. 137-41. At a subsequent hearing on May
16, 2000, the bankruptcy court ruled from the bench that the tax lien
attached to the debtor's bank accounts, life insurance, accounts
receivable, and appellate accounts receivable, with a total value of
$47,620.00, and did not attach to work in progress, valued at $66,232.00
See Transcript of Proceedings, May 16, 2000, E.R. Ex. 15, at
Bates Stamp No. 150. The court relied on In re Connor [94-2 USTC
¶50,296], 27 F3d 365 (9th Cir. 1994). See id. at Bates Stamp No.
150. In Connor, the Ninth Circuit held that post-petition
payments of a state judge's pension were property to which a
pre-petition tax lien attached because the pension had vested before the
debtor filed his Chapter 7 petition; as a result the debtor had an
unqualified pre-petition right to collect the pension payments. See
id. at Bates Stamp 148. The court interpreted Connor to mean
that the existence of an unqualified right to be paid is "the test
. . . for what future monies are subject to the tax lien in
The court concluded that the debtor Herreras did not have an unqualified
right to collect any money in his pending cases; therefore, the tax lien
could not attach to the proceeds of the work in progress held by the
trustee. See id. at Bates Stamp No. 150.
On June 1, 2000, the
bankruptcy court entered an order stating that the tax lien is limited
to assets collected by the trustee in the amount of $47,620.00, and does
not attach to the additional $66,232.00 collected by the trustee
representing work in progress. The government's appeal followed. 2
The Amount to Which the Tax Lien Attaches
The IRS argues in this
appeal that the tax lien should attach to the proceeds of the work in
progress. The trustee argues that it should not.
The failure to pay taxes
owing to the federal government after demand creates a lien in favor of
the United States, in an amount including the taxes owed, penalties,
interests and costs, "upon all property and rights to property,
whether real or personal, belonging to" the taxpayer. I.R.C. §6321.
In general, a federal tax lien attaches not only to property owned by
the taxpayer at the time the lien is created, but to all after-acquired
property as well, until the lien's expiration. Glass City Bank of
Jeanette v. United States [45-2 USTC ¶9449], 326 US 265 (1945). An
exception to this rule, however, is that the lien does not attach to
property acquired by the taxpayer after the taxpayer files a bankruptcy
petition. In re Connor [94-2 USTC ¶50,296], supra, 27 F3d
at 366; In re Braund [70-1 USTC ¶9237], 423 F2d 718, 719 (9th
Cir. 1970). The only question before the Court is whether Herreras' work
in progress was "property" or "rights to property"
within the meaning of I.R.C. §6321 before Herreras' bankruptcy filing.
law supports the IRS' view that the work in progress was property for
purposes of I.R.C. §6321 before filing of the bankruptcy petition. A
lawyer's work in progress is treated as a valuable asset under
law in other contexts, primarily the context of division of marital
property. See In re Marriage of Morrison, 20 Cal.3d 437, 453
(1978) (holding that in determining the value of a law practice for
purposes of marital property division, the assets considered should
include work in progress partially completed but not billed as a
receivable, work completed but not billed, and goodwill); Kilbourne
v. Kilbourne, 232 Cal.App.3d 1518, 1522 (1991) (same). California
courts recognize that "[a]t any given moment the major assets of
most law firms are not capital assets, but those related to the direct
rendering of professional services, most particularly accounts
receivable and work in process." In re Marriage of Green,
213 Cal.App.3d 14, 21 (1989).
The proposition that a
lawyer's work in progress is property under
law is insufficient on its own, however, to show that it is property for
purposes of §6321. The Supreme Court has stated:
As restated in [
v.] National Bank of Commerce [85-2 USTC ¶9482], [472
713, 727 (1985)]: "The question whether a state-law right
constitutes 'property' or 'rights to property' is a matter of federal
law," [85-2 USTC ¶9482], 472
, at 727, 105 SCt 2919. We look initially to state law to determine what
rights the taxpayer has in the property the Government seeks to reach,
then to federal law to determine whether the taxpayer's state-delineated
rights qualify as "property" or "rights to property"
within the compass of the federal tax lien legislation. Cf. Morgan v.
Commissioner [40-1 USTC ¶9210], 309 US 78, 80, 60 SCt 424, 84 L.Ed
1035 (1940) ("State law creates legal interests and rights. The
federal revenue acts designate what interests or rights, so created,
shall be taxed.").
v. United States
[99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 SCt 474, 481 (1999). In
some instances, federal law treats as "property" for purposes
of §6321 rights that do not constitute property under state law. See,
e.g., West Lancaster v. Main Line Restaurant, Inc. [86-2 USTC ¶9516],
790 F2d 354, 357-58 (3d Cir. 1986) (holding that although a liquor
license was not regarded as property under state law, it was property
for purposes of §6321, and was subject to a federal tax lien). In
other, apparently rarer instances, federal law declines to treat as
"property" for tax lien purposes rights treated as property
rights under state law. See, e.g., Aquilino v. United States
[60-2 USTC ¶9538], 363 US 509, 513-16 (1960) (remanding case for
determination whether a contractor's rights to the funds at issue
constituted a "beneficial interest" as opposed to "bare
legal title" under state law; if they were only bare legal title,
they would not constitute "property" under §6321).
In determining whether a
state-law right constitutes "property" under §6321, the Court
bears in mind that the language of §6321 "is broad and reveals on
its face that Congress meant to reach every interest in property that a
taxpayer might have." National Bank of Commerce [85-2 USTC
¶9482], supra, 472
at 719-20. Furthermore, "[w]hen Congress so broadly uses the term
'property,' we recognize . . . that the Legislature aims to reach every
species of right or interest protected by law and having an exchangeable
value." Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra,
120 SCt at 480 (citations and internal quotation marks omitted).
It is on the basis of these
principles that interests of uncertain status have often been held to be
"property" for purposes of a §6321 tax lien. See, e.g.,
Plymouth Saving Bank v. United States [99-2 USTC ¶50,807], 187 F3d
203 (1st Cir. 1999) (holding that federal tax lien attached to contract
rights at the time the contract was made, even though the right to
receive money under the contract would not become unconditional until
the contract was subsequently performed); Atlantic National Bank v.
United States [76-2 USTC ¶9483], 536 F2d 1354 (CtCl 1976) (holding
that tax lien presently attached to monies due or to become due in the
future under contract); United States v. Hubbell [63-2 USTC ¶9724],
323 F2d 197 (5th Cir. 1963) (holding that a subcontractor's claim
against a building owner for duress was not contingent merely because it
would take a lawsuit to reduce it to judgment or to collect it, and was
not subject to any infirmity that would prevent attachment of a federal
tax lien); In re Weninger [90-2 USTC ¶50,510], 119 B.R. 238 (D.
Colo. 1990) (holding that a chose in action is property for purposes of
tax lien); In re Nevada Environmental Landfill, 81 B.R. 55 (D.
Nev. 1987) (holding that the fact that a taxpayer's right to proceeds of
a contract may be dependent on performance of the contract does not mean
that the proceeds are not property or rights to property of taxpayer
subject to federal tax lien).
The attorney's work in
progress at issue in this case is similar to the interests at stake in
the cases cited above. As noted above, there is some dispute as to
whether all or only some of Herreras' cases in progress were contingent
fee cases. If any were hourly fee cases, Herreras was entitled
pre-petition to be paid for hours already worked. But even if all were
contingent fee cases, Herreras had a right to be paid contingent on a
future event, and this is sufficient under Plymouth Savings Bank
Environmental Landfill, supra. Moreover, Herreras' conditional
rights were "protected by law and [had] an exchangeable
value," Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra,
at 480. Such rights are protected by law in that they are enforceable
upon the happening of the condition and are treated as valuable assets
in such contexts as that of marital property division; and it is clear
that they had an exchangeable value because Herreras purchased them from
the trustee. The trustee argues that Herreras' pending files could not
have commanded a price on the market because purchasers would have known
that Herreras intended to remain in the same market and the clients
could return to him notwithstanding the sale; but if this were really a
reason why the work in progress had no value, Herreras himself would
have had no reason to buy the work in progress from the estate.
The trustee points out that
the Supreme Court has stated that "[i]n recognizing that state-law
rights that have' pecuniary value and are transferrable fall within §6321,
we do not mean to suggest that . . . . an expectancy that has pecuniary
value and is transferable under state law would fall within §6321 prior
to the time it ripens into a present estate." Drye [99-2
USTC ¶51,006; 99-2 USTC ¶60,363], supra 120 SCt at 482 n.7.
law, however, treats a lawyer's work in progress as a valuable asset.
Herreras' work in progress was thus a present estate, and not a mere
expectancy, before he filed his bankruptcy petition.
The trustee also argues
that Connor, supra, and Fuller v. United States [92-1 USTC
¶50,119], 134 B.R. 945 (9th Cir. BAP 1992) show that the work in
progress is not property under §6321. The trustee is incorrect. In Connor,
the lien attached to the future pension payments because the debtor had
an unconditional pre-petition right to receive the payments.
[94-2 USTC ¶50,296], 27 F3d at 366. The fact that an unconditional
pre-petition right to receive payments is a property right for purposes
of §6321, however, does not imply that a conditional pre-petition right
is not a property right for purposes of §6321. The cases cited above,
concerning the status under §6321 of conditional contract rights,
indicate that conditional rights can be subject to a §6321 lien as well
as unconditional rights.
In Fuller, the court
held that a pre-petition federal tax lien could not attach to an
inheritance the debtor received pursuant to a will, where the testator
died after the bankruptcy filing. The inheritance was not property
within the meaning of 9 6321 because at the time the petition was filed,
the testator was alive, and the debtor had no interest in the
inheritance at all, conditional or unconditional. See [92-1 USTC
¶50,119], 134 B.R. at 947-48. The fact that a right having no
pre-petition existence at all is not subject to a §6321 lien does not
imply that a right that is conditional before filing of the petition is
not subject to such a lien. Herreras had a conditional contractual right
to receive fees from his contingent fee clients, and would have retained
a contingent right to recover in quantum meruit even if the
clients had discharged him, see Fracasse v. Brent, 6 Cal.3d 784,
The Form of the Proceeding
The government makes an
alternative argument that the proceedings below regarding the tax lien
ought not to have gone forward as a motion objecting to a claim;
instead, the government argues, the trustee should have been required to
bring an adversary proceeding. Because the Court has held for the
government on other grounds, it is unnecessary to reach this issue.
The order of the Bankruptcy
Court for the Central District of California entered June 1, 2000,
limiting the Internal Revenue Service's tax lien to $47,620.00 of the
assets collected by the trustee, is reversed. The Court hereby orders
that the Internal Revenue Service shall have a tax lien attaching to
$113,852.00 of assets collected by the trustee, constituting all the
proceeds of the sale of the assets of debtor's law practice to debtor.
IT IS SO ORDERED.
The IRS disputes the contention that all the debtor's cases were handled
on a contingency basis, stating that "at least some" were not.
See Appellant's Reply Brief at 3-4. The question whether some or
all of the debtor's cases were contingent fee cases is immaterial. The
IRS prevails even if all the cases were contingent fee cases.
It should be noted that far less than $66,232.00 is actually at stake in
this appeal. The effect of the Court's decision about the tax lien
depends on the priority of the other creditors' claims. The government
concedes that even if 100% of the proceeds of the sale of the debtor's
law practice were exempted from the lien, the other creditors would
still receive only $3,416.00. See Appellant's Reply Brief at 1.
Richard R. Morgan, Sandra S. Morgan, Debtors
Bankruptcy Court, East.
Dist., N.C., Wilson Div., 00-02529-8-JRL, 6/20/2000
220 F3d 353.
Secs. 6321 , 6334
Bankruptcy: Tax liens: Avoidance of: State exemption laws:
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
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
) 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 .
LEONARD, Bankruptcy Judge:
This chapter 13 case is
before the court on the debtors' motion to avoid two federal tax liens
pursuant to §522(f)(1) of the Bankruptcy Code. This motion is
appropriate for decision without a hearing.
The two tax liens at issue
have an aggregate value of $35,323 and are identified in paragraph 2 of
the motion as "judicial tax liens." The liens are subsequently
described in more detail as: 1) a "filed . . . tax lien" in
the approximate amount of $6,851, recorded in Book 79, Page 252 in the
Wayne County Courthouse, and 2) a "judgment" in the
approximate amount of $28,472, recorded in Book 77, Page 126 in the
Wayne County Courthouse. Because the debtors' motion is brought under §522(f)(1),
the court assumes for purposes of this motion that both liens have been
reduced to judgment. 1
A federal tax lien arises
by operation of law if the taxpayer fails to pay a tax liability after
the Internal Revenue Service ("Service") makes a demand for
payment. 26 U.S.C. §6321. The lien arises in favor of the
and attaches to "all property and rights to property"
belonging to the taxpayer. Because it is created by operation of law, a
federal tax lien is not valid as to third parties "until notice
thereof" has been filed in the manner provided by state law. 26
U.S.C. §§6321(a) and (f). Thus, tax liens are created and perfected
through a two step process. The assessment of taxes by the Service
creates a tax lien that is valid as between the taxpayer and the
. The Service then perfects this lien as to the rest of the world by
properly filing a Notice of Federal Tax Lien.
Like most states,
has adopted the Uniform Federal Lien Registration Act. See N.C.
Gen. Stat. §44-68.10 and following. Under this statute, the Service
perfects a federal tax lien as to real property by filing a Notice of
Lien in the office of the clerk of superior court of the county in which
the real property is located. N.C. Gen. Stat. §44-68.12(b). After the
Notice of Lien is filed, the Service's lien rights in the taxpayer's
property are fixed, without need for the entry and docketing of any
subsequent judgment. It follows that a federal tax lien is a statutory
lien, as opposed to a judicial lien--even if the underlying tax debt is
subsequently reduced to judgment. See, e.g., Rench v.
(In re Rench), 129 B.R. 649 (Bankr. D.
Section 522 of the
Bankruptcy Code recognizes the special nature of tax liens, specifically
providing that the debtor's exempt property remains encumbered by a
pre-petition "tax lien, notice of which is properly filed. . .
." 11 U.S.C. §522(c)(2)(B).
's exemptions statute, N.C. Gen. Stat. §1C-1601, expresses this concept
as well. Section 1C-1601(e)(1) provides that "[t]he exemptions
provided . . . are inapplicable to claims . . . [o]f the
or its agencies as provided by federal law." As a result of this
exemptions statute has no application to federal tax liens, which are
instead governed by the separate set of exemptions from levy contained
in the Internal Revenue Code. See 26 U.S.C. §6334.
Section 522(f)(1)(A) allows
a bankruptcy debtor to avoid a judicial lien to the extent that lien
impairs an exemption to which the debtor would otherwise be entitled.
There are two distinct reasons why this section cannot be used to avoid
a federal tax lien. First, tax liens--which arise by operation of law
and not by virtue of any judgment--are not judicial liens. See also
11 U.S.C. §101(36). Second, because §522 and
's exemptions statute have no application to tax liens, it is impossible
for a tax lien to impair an exemption to which the debtor would
otherwise be entitled.
Based on the foregoing, the
debtors' motion to avoid tax liens is denied.
Taxes are not normally collected by judgment. Instead, §6331 of the
Internal Revenue Code gives the Service the right to collect taxes by
levy if notice is given in the manner provided by statute. 26 U.S.C. §6331.