Tax Liens and the IRS

      Tax liens create a problem because if the IRS has filed a lien, the lien survives the bankruptcy even if the underlying tax is dischargeable.  The situation can get extremely complex.  Generally if a debtor owns real property and a tax lien has been recorded, the tax is nondischargeable as too the extent of the equity on their property.  See In re Ridgley 81 B.R. 65 (1987) (Oregon).  If the tax upon which the lien is based is discharged in the bankruptcy, the lien may not attach to "after-acquired" assets.  Since the tax is discharged, the government cannot levy on after-acquired assets such as bank accounts, wages, vehicles or real property.

      A tax lien survives bankruptcy only if it is based on a nondischargeable tax claim, or if it is based on a dischargeable claim, it survives only on the equity in the debtor's property which existed on the date of bankruptcy.  See In re Leavel 124 B.R. 535 (Bkrtcy.S.D.Ill.1991). If the tax is dischargeable, and there is no property in existence for the lien to attach to, the claim is a general unsecured clam and the lien is of no effect.  See In re Payne Bankr. LEXIS 1325.

      If a debtor has a home with $20,000 of exempt equity, the tax would be discharged but the lien would remain on the exempt property.  If the debtor were to sell his home in the future, the IRS would receive the value of their lien at the sale.  This is because the tax lien attaches to the equity in real or personal property, whether or not the equity is protected by a bankruptcy exemption.  Please note that dischargeable taxes cannot be collected by exempt property.  (11 U.S.C. Section 522(c)(1) Section 522(c)(2)(C)).

      It may be necessary to file an adversary proceeding to determine the validity or extent of the federal tax lien.  In the tax case, Matter of Beard, 112 B.R. 951 (Ind. 1990), the court laid out various approaches to attacking a lien.  Said the court: "There are at least three different ways a secured claim may be challenged.  The amount of the claim can be questioned by objecting to its allowance.  The value of the lien can be put in issue by a request to determine secured status.  The lien itself can be directly attacked. Of these challenges, the first two are contested matters, while the third requires an adversary proceeding." The court continued, "Objections to the allowance of a claim and the determination of secured status are contested matters.  The issues they raise do not require an adversary proceeding."  And, "Among the disputes which are specifically identified as requiring an adversary proceeding is one which asks the court to determine the validity, priority, or extent of a lien...."

      It is important to attack tax liens that are invalid.  The trustee or the debtor has the power to avoid an invalid tax lien.  If the lien is expired, a lien against a different individual, a lien is on property which is not owned by the debtor, a lien filed during the automatic stay, a lien recorded in the wrong county, a lien for discharged taxes now being asserted on future-acquired assets.

      A tax lien is an unsecured claim until the IRS files the lien in the appropriate county.  The Supreme Court has stated that:

"On December 9, 1986, the United States assessed Mr. and Mrs. McDermott for unpaid federal taxes due for the tax years 1977 through 1981.  Upon that assessment, the law created a lien in favor of the United States on all real and personal property belonging to the McDermott's, including after-acquired property (cites omitted). Pursuant to 26 U.S.C. section 6323(a), howeer, that lien could "not be valid as against any purchaser, holder of a security interest, mechanics lien, or judgment lien creditor until notice thereof...has been filed."  U. S. v. McDermott, 113 S.C. 1526, 1528 (1993).

      There are various arguments that can be very effective for challenging the Federal Tax Lien.  Listed below are some good arguments that may be used to sek avoidance of a tax lien:

      1.    The lien was filed in the wrong office.  See, In re Aikin 128 B.R. 4 (D. Maine 1991).

      2.  There is an incorrect name on the Notice of Lien.  See Davis v. U.S. 705 F.,Supp. 446, also United States v. Clark 1981 WL 1790 (S.D. Fla. 1981).  In Matter of De La Vregne, 156 B.R. 773 (Bkrtcy.E.D.La 1993), the court avoided a lien because the taxpayer's name was spelled improperly.

      3.  In In re Barnett, 62 B. R., the lien was invalid because it was filed in the wrong county.

      4.  Liens have been declared invaid when there is a mistake in filing or perfecting.  See In re McLean 891 F.2d 474 (3rd Cir. 1989) (City improperly indexed tax lien for muni taxes); In re Hill 166 B.R. 444 (Bkrtcy.D.N.M. 1993) (state tax lien invalid because notice was mailed to the wrong address);  In re Southern Transfer and Storage Co. 157 B.R. 691 (Bkrtcy. M.D.Fla. 1993), IRS failed to perfect lien by failing to note the lien on the certificate of title of the motor vehicles in question.

      5.  If the government records the lien during the automatic stay, the lien is void.  In re Schwartz, 954 F.2d 569 (9th Cir. 1992), the court held that a debtor in a Chapter 13 can avoid an otherwise properly filed tax lien where the lien arose from an assessment which occurred during the automatic stay.

      6.  If the IRS fails to refile a lien that must be refiled to be perfected, the lien may be voided.  See U.S. v. LMS Holding Co. 161 B.R. 1020 (N.D.Okl. 1993)

      7.  The lien may be  void if it contains inadequate information.  The lien must include the identity of the lienor, the property subject to lien, and the amount of the lien.  See In re B and B Printing Co. 164 B.R. 273 (Bkrtcy.S.D.Ohio 1993).

      8.  If a tax lien is expired, it is not valid.  Currently a tax lien has an expiration date (IRC Section 6323(g)) which occurs ten years plus 30 days (increased from six years, effective No. 5, 1990) after the initial filing, this date is found on the notice of the tax lien.  If a bankruptcy petition is fled after the expiration, the tax claim would be unsecured.

      9.  A lien is invalid as to after-acquired assets.  A federal tax lien does not attach to property acquired after the bankruptcy petition is filed.  When the tax is dischargeable in all other respects, the lien is good only as to property owned by the debtor on the date of the filing, and is not valid as against after-acquired property.  See In re Baund, 289 F. Supp 604 (9th Cir. 1970).  Also see U.S. v. Sanabra, 414 F,2d 1121 (7th Cir. 1970).  The Court stated:  "...in our opinion...the dominant purpose of the change (in bankruptcy law) was to relieve a debtor of the burden of these older taxes after bankruptcy.  The government's interpretation would permit it to enforce (to the extent of assets acquired by the discharged debtor) collection of all its taxes, regardless of their age, if a lien had been filed. This would to so substantial a degree frustrate the real purpose of the amendment that Congress must not have intended the result."

      10.  A lien is invalid if it is based on an invalid assessment See U.S. v. Janis 96 S.Ct. 3021 (1976).

      11.  The lien is invalid if it is filed on non-levyable property.  See In re Voelker, 164 B.R. 308 (W.D. Wis 1993)

Prepare your Defense in Bankruptcy

     In the last few years a lot of individuals have bankrupted their back taxes.  The IRS is striking back and fighting very hard.  If you have been classified as a tax protestor or if you have a retirement account, the IRS may try to deny you a discharge in a Chapter 7.  The following is from a debtor's brief arguing against the IRS' position.  Hopefully the IRS will not prevail on these issues.

The government argues that the Ross Smith is a tax protestor and for that reason his taxes were not discharged in the Chapter 7 because he is a tax protestor.  However Smith filed tax returns. It is true that he sent a letter to the IRS with an attorney opinion letter attached in which he argued that he was not required to file a tax return.  However, he did file tax returns.  His taxes for the years 1985, 1986, 1987, 1988, 1989, 1990, and 1991 in the approximate amount of $100,000 were discharged in the Chapter 7 that he previously filed because the taxes were three years old, the returns were filed more than two years before the bankruptcy was filed and there had been 240 days from the date of assessment.

The U. S. Supreme Court rendered a ruling in 1991 in Cheek v. United States 111 S. Ct. 604 (1991) that overturned a tax evasion conviction for failing to file returns and for tax evasion on the basis that the jury should have been informed that a true belief that one has no lawful duty to pay taxes could negate the element of willfulness.  Said the Court, "In this case, if Cheek asserted that he truly believed that the Internal Revenue Code did not purport to treat wages as income, and the jury believed him, the Government would not have carried its burden to prove willfulness, however unreasonable a court might deem such a belief. We thus disagree with the Court of Appeals' requirement that a claimed good-faith belief must be objectively reasonable if it is to be considered as possibly negating the government's evidence purporting to show a defendant's awareness of the legal duty at issue."  This provides for a subjective standard in weighing the debtor's beliefs.  The Cheek rule has been applied in bankruptcy cases by a number of courts; for example, Smith v. United States of America 169 B.R. 55 (Bkrtcy. S.D. In 1994); Graham v. Internal Revenue Service 1994 Bankr. LEXIS 1256; Internal Revenue Service v. Peterson 152 B.R. 329 (D Wyo 1993).

            In this case, Smith did send a letter to the IRS stating that counsel advised him that he was not required to file returns.  However in spite of this fact, he did file normal returns two years before the filing of the Chapter 7 Bankruptcy.

            The government argues that its lien on the debtor's exempt property, viz., his retirement, secures the taxes.  The debtor's retirement is exempt from levy.  The government cannot levy the debtor's retirement.  The question arises, does the fact that certain property is exempt from levy render it immune from lien as well.  If the IRS is barred from levying (i.e. seizing) the property, then doesn't common sense lead to the conclusion that an interest in the property secured by a lien is a worthless fiction? 

            There is significant case law that has ruled in favor of the debtor on this issue. In In re Voelker, 164 B. R. 308 (W.D. Wis 1993), the Court quoted the original opinion in Barbier, 896 F.2d 377 (9^th Cir. 1990) supra (rev'd on appeal); "…it defies common sense to argue that the IRS is nevertheless secured by and entitled to payment for property that it cannot levy upon to satisfy its lien."  The Voelker opinion states "Section 6332(b) moreover, defines "levy" for purposes of this section as 'the power of distraint and seizure by any means."…Section 6334, therefore, exempts property from all forms of execution, not just levy. This includes tax liens."  And, this court cites the legislative history of 11 U.S.C. Section 522(c) to the effect that "…assets exempted from levy pursuant to 26 U.S.C. 6334 cannot be applied to satisfy tax lien claims. (S. Report No. 989, 95^th Cong. 2d Sess. 76 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5862.  See also, in favor of the debtor's lien avoidance rights on non-levyable assets, In re Ray, 48 B.R. 534 (Bankr.S.D. Ohio 1988); In re Riley, 88 B.R. 906 (Bankr. W.D. Wis 1987) In re Driscoll, 57 Bankr, 322 (Bankr. W.D. Wis. 1986).

            Wherefore it is prayed that this honorable Court will rule that the IRS' claim in this action is unsecured and not secured as the IRS claims and that the Court will deny the application to dismiss this bankruptcy.

The History of the Freedom Movement Continued

      In the early 70's, Mike Tecton of Virginia was one of the most outspoken critics of the Internal Revenue Service.  During the 1950s he became convinced that the federal tax system was unjust and unconstitutional.  He quit filing tax returns.  The IRS didn't bother him for years.  In 1973 he decided that it was his patriotic duty to tell the world about the income tax situation.  He started writing pamphlets, sent out news releases and went on a lecture tour.  The IRS then became interested in his case and attacked him criminally for not filing tax returns for the years 1971, 1972, and 1973.  He burned a 1040 Form on the steps of the courthouse.  The government took him to trial and the first trial resulted in a hung jury.  He went to trial again and he was convicted.  He received a mild sentence of $100 fine and 6 months supervised probation.  He could have received a sentence of three years and a $30,000 fine.  Then the IRS proceeded against him civilly.  They seized his bank accounts. and levied his wages.  He lost his job.  He then organized the Thomas Jefferson Equal Tax Society and distributed a newsletter called the Emancipator in which he exposed the unconstitutional attributes of the Federal Income Tax.  He did all this in the early and middle 1970s more than twenty years ago.  He was a brave and very early Freedom Fighter.

      George Kindred was another fellow from the late 60s who became interested in the income tax problem.  He and his friend James Freed filed Fifth Amendment tax returns in 1968 and they conducted rallies and distributed literature attacking the IRS and the Federal Reserve System. The State of Michigan attacked them, when they refused to give up records they were incarcerated for contempt.  They spent 148 days in jail.  After their release, they were arrested by the Feds for inducing individuals to file exempt W-4 Forms.  The indictment was eventually dropped because the government's witnesses changed their testimony.  In 1974, Kindred formed the Patriot's Committee.  He passed out a great deal of information on the Federal Tax System. 

      The government then proceeded civilly against Kindred and he continued to fight.  He raised very early on, many of the arguments that are still important today regarding the Fifth Amendment, the fact that Tax Court judges are retired IRS employees, BLS assessments, etc.

      George Kindred was an important early fighter in the Freedom Movement.

      Lucille Moran started fighting the IRS in the early 1960s. She published a book entitled:  How to Refuse Income Taxes Legally.  She argued that no one can be forced to file a 1040 because indictments against taxpayers are based on information supplied by the taxpayers themselves.  Her belief was that the only way to fight the IRS was to simply supply no information.  She did not believe in the filing of Fifth Amendment returns, an approach  that was used by many of the other freedom fighters of her era.  She raised the issue of the voluntary nature of filing returns and other arguments that we still use today.  Her basic tenant was that: No citizen should file any return at all; and there is no valid reason for executing a signed or unsigned return under protest.  She maintained that without voluntary cooperation from millions of taxpayers, the IRS is hopeless.  During the late seventies, she was very active in promoting her ideas about the tax system. 

            She was indicted in 1980 for "aiding an abetting in the filing of false income tax returns." The IRS eventually dropped their case against her.  She passed away in 1983