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defining "Intangible property" as "such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock, promissory notes, copyrights, and franchises."
Summary of this case from In re BoutilierOpinion
No. LAX 90-52768 VZ
July 5, 1991
Property of the Estate — Tax Levy — Intangible Property. — A prepetition levy transfers the ownership of intangible property to the levying party, such that it cannot become property of the estate when the one levied upon later files for bankruptcy. The levying party here was the IRS, and the property levied upon was an IRA held in the taxpayer-debtor's bank. The IRS filed a tax lien prior to the debtor filing a Chapter 7 petition. Pursuant to Section 522(c), that lien survived the case, which was closed after the debtor's receiving her discharge. The IRS then sent a notice of levy to the bank where the debtor kept her IRA. Shortly afterward, the debtor filed for Chapter 13 relief.
The major issue in this opinion flowing from the Chapter 13 was the control of the IRA. Using United States v. Whiting Pools, Inc., CCH Bankr. Dec. ¶ 69,207 (U.S. Sup. Ct., 1983), as a starting point, the court here (CD Cal.) adopted the position of the IRS that a prepetition levy upon intangible property immediately transfers ownership to the levying party. It distinguished Whiting Pools. The property here was not tangible. It was not needed to reorganize, as were the tools and equipment in Whiting Pools. The Internal Revenue Code's notice and sale provisions were inapplicable since the property levied here was cash or a cash equivalent. There were no redemption rights nor surplus rights attached to the IRA here. Thus, since ownership had been transferred, the IRA did not become property of the debtor's Chapter 13 estate.
See Sec. 541(a) at ¶ 9501. Cf. Sec. 363 at ¶ 8609 and Sec. 542(a) at ¶ 9513.
I. INTRODUCTION
On February 3, 1989, the United States of America, by and through the Internal Revenue Service ("I.R.S.") recorded a Notice of Federal Tax Lien (the "Lien") with respect to property of Barbara Crosier ("Debtor"). On June 1, 1990 the I.R.S. served (the "Service") Home Savings and Loan of Studio City, California, with a Notice of Levy ("Notice of Levy") which purported to attach to an Individual Retirement Account ("IRA") owned by ("Debtor") and Stewart Crosier. At the time of the Service the value of the IRA was $38,000. The Notice of Levy was in the amount of $74,915.35, which included taxes, interest and late payment penalties through June 30, 1990. The tax years for which payment is allegedly still owed are 1980, 1983, 1984, 1985, 1986 and 1987. The dispute here involves two issues. First, to determine the amount and nature of the I.R.S.' claim. Second, whether the I.R.S. may execute on its Notice of Levy as if the IRA was not property of the estate.
II. PROCEDURAL HISTORY
A. Debtor's Chapter 7 Case
On April 20, 1989, Debtor filed a petition under Chapter 7 of the Bankruptcy Code (the "Prior Case"). On August 16, 1989, Debtor was granted a discharge (the "Discharge").
B. Debtor's Chapter 13 Case
On July 3, 1990 Debtor filed a petition under Chapter 13 of the Bankruptcy Code. On July 17, 1990 Debtor filed a statement ("Statement") and plan ("Plan"). In the Statement, Debtor scheduled the I.R.S. as a creditor in the amount of $38,000 secured by the IRA. Debtor did not schedule any creditors as being unsecured. In the Plan, Debtor proposed a plan of 60 months duration. Debtor proposed to pay the I.R.S. $633.33 per month for 60 months, a total of $38,000. Debtor proposed a 100% payout to unsecured creditors. However, as a consequence of not scheduling any creditors as unsecured, this meant a payout of zero dollars.
A hearing on confirmation of Debtor's Plan ("Hearing #1") was held on August 8, 1990. Hearing #1 was continued to September 5, 1990 ("Hearing #2"). At Hearing #2, Debtor's Plan was confirmed. An order confirming the Plan ("Order #1") was entered September 10, 1990. Subsequently, an Order on Motion to Avoid Liens and Order Confirming Plan ("Order #2) was entered October 1, 1990.
On November 28, 1990, Nancy Curry, the Chapter 13 Trustee ("Trustee") in this case filed a "Notice and Motion by Standing Trustee to Dismiss Chapter 13 Case Because the Plan is Not Fleasible in That it Will Not Pay Out Within 60 Months of Its Confirmation At Its Present Plan Payment as Required By Section 1322(c)" (the "Motion to Dismiss"). The Motion to Dismiss was instigated by a proof of claim filed by the I.R.S. on August 22, 1990 (the "Proof of Claim").
The August 22, 1990 claim was a priority claim for $69,449.55. On December 26, 1990, the I.R.S. filed an Amended Proof of Claim (the "Amendment") in the amount of $74,384.11, portions of which are secured, priority unsecured, and general unsecured claims. On April 11, 1991, the I.R.S. filed a second amended proof of claim (the "Second Amendment") in the amount of $73,497.30, portions of which are secured, priority unsecured, and general unsecured claims. Collectively, the amount of the debts stated in the Proof of Claim, Amendment, and the Second Amendment will be collectively referred to as the "Claim."
On December 5, 1990, Debtor filed a "Notice of Objective to Motion by Standing Trustee to Dismiss Chapter 13 Case" ("Opposition"). On January 14, 1991, Debtor filed an "Objection by Debtor to Claim of I.R.S." ("Objection"). A hearing ("Hearing #3") on the Motion to Dismiss and the Objection was scheduled for February 20, 1991.
On February 15, 1991, the I.R.S. filed its "Response of the United States to the Debtor's Objection to Claim of I.R.S." ("Response #1") in which the I.R.S. alleged that it had not been properly served with the Objection to Claim as required under Bankruptcy Rule 7004(b)(4). As a result of the alleged service defect, Hearing #3 was continued to April 17, 1991 ("Hearing #4"). On April 12, 1991 the I.R.S. filed a Response of the United States of America to The Debtor's Objection To Claim of I.R.S. ("Response #2").
At Hearing #4, I took this matter under submission. Also at Hearing #4, I ordered the I.R.S. to file a post-hearing brief by May 8, 1991, and I ordered the Debtor to file a post-hearing brief by May 24, 1991. The I.R.S. filed its brief ("I.R.S.' Brief") on May 8, 1991. Debtor filed her brief ("Debtor's Brief") on May 24, 1991.
III. SUMMARY OF ARGUMENTS
A. Debtor's Position
1. The Discharge included debt for tax years 1980 through 1986;
2. Based upon the Discharge, Debtor alleges that the Claim should be $38,000;
3. Because the Plan provided for full payment of the $38,000, Debtor argues that the Motion to Dismiss should be denied;
4. Debtor has an equitable interest in the IRA; and
5. The IRA is property of the estate.
One of the reasons asserted by Debtor is that if the I.R.S. executes on its Notice of Levy, that Debtor will be asserted a penalty for early distribution of the IRA proceeds. This argument is irrelevant. Potential tax consequences resulting from using particular sources of funds to satisfy a claim are not determinative in ruling on an objection to claim. 11 U.S.C. § 502(b).
B. I.R.S.' Position
1. Only the debt for tax years 1980 and 1983 was subject to the Discharge;
2. Pursuant to 11 U.S.C. § 523(a)(1)(B)(ii), the debt for tax years 1984, 1985, 1986 and 1987 was not discharged in the Prior case because tax returns were not timely filed;
3. Pursuant to the Discharge, Debtor is no longer personally liable for the debt from tax years 1980 and 1983. Nevertheless, Debtor's property can be used to satisfy her entire tax debt, including the debt for which she received a personal discharge. The property which is subject to the Lien includes the property claimed as exempt;
4. The correct amount of the Claim is $73,497.30;
5. Of this amount, at least $45,000 and up to $57,776 is secured, depending upon the extent to which property listed as exempt in the Statement still exists;
These figures result from totalling the value of the IRA ($38,000), property listed as exempt on the Statement ($7,000), and property listed on Debtor's Chapter 7 schedules, but not listed in the Statement ($12,776).
6. The amount of the Claim which cannot be satisfied by property of the Debtor and which represents debt for tax year 1987 should be allowed as a priority unsecured claim;
7. The amount of the Claim which cannot be satisfied by property of the Debtor and which is not allowed as a priority unsecured claim should be allowed as a general unsecured claim; and
8. The IRA is not property of the estate.
IV. ISSUES PRESENTED
The issues are:
1. Whether the debt from tax years 1984, 1985 and 1986 was discharged in the Prior Case;
2. Whether, despite the Discharge, Debtor's property is subject to the Lien.
3. What is the total amount of the Claim;
4. What is the amount of the Claim which the I.R.S. may only look to Debtor's property to collect payment;
5. Whether exempt property is subject to the Lien;
6. Whether the Notice of Levy divested Debtor's title to the IRA and transferred title to the I.R.S.;
7. What portion of the Claim, if any, should be allowed as a secured claim;
8. What portion of the Claim, if any, should be allowed as a priority unsecured claim;
9. What portion of the Claim, if any, should be allowed as a general unsecured claim; and
10. Whether the I.R.S. is entitled to adequate protection.
V. DISCUSSION
A. Determining the Amount of the I.R.S.' Claim
1. Under 11 U.S.C. § 523(a)(1)(B)(ii), an individual debtor seeking a discharge under 11 U.S.C. § 727 is not discharged from a debt if the tax return was filed late, and if the tax return was filed within two years of the date on which the Chapter 7 petition was filed.
With regard to tax years 1980 and 1983, the I.R.S. admits that the Discharge covered these years.
With regard to tax years 1984, 1985 and 1986, the I.R.S. submitted evidence establishing that Debtor did not timely file tax returns for those tax years. Debtor filed tax returns for these tax years on March 28, 1988. The tax returns were to be filed on April 15th of 1985, 1986 and 1987. Therefore, these returns were each filed late. The Prior Case was filed on April 20, 1989. Therefore, because these returns were filed within two years of the date the Prior Case was filed, I find and conclude that the Discharge did not cover these tax years.
With regard to tax year 1987, Debtor does not dispute either the validity or amount of the debt. Even if Debtor has disputed her liability for tax year 1987, I would have found pursuant to 11 U.S.C. § 523(a)(1)(A) that the Discharge did not cover the debt arising from tax year 1987.
11 U.S.C. § 523(a)(1)(A) states that a Chapter 7 Debtor does not receive a discharge of a tax debt specified in 11 U.S.C. § 507(a)(7). A tax debt specified in 11 U.S.C. § 507(a)(7) includes income taxes for a tax year in which the tax return was due within three years of the date the petition was filed [ 11 U.S.C. § 507(a)(7)(A)(i)]. The income tax return for tax year 1987 was due on April 15, 1988. This date is less than three years before the date Debtor filed her Prior Case.
2. The Ninth Circuit has held that when the I.R.S. has a valid pre-petition tax lien, the lien remains despite a tax debt being discharged in a Chapter 7 case. Isom v. United States of America, Internal Revenue Service (In re Isom), 901 F.2d 744, 745 (9th Cir. 1990). See also; Johnson v. Home State Bank, 1991 U.S. Lexis 3323, 59 U.S.L.W. 4609 (1991). In the present case the Lien was recorded on February 3, 1989, more than two months before Debtor filed her Prior Case. Therefore, the Lien survived the Prior Case, and any debt covered by the Lien remains. The Lien covered tax years 1980, 1983, 1984, 1985, 1986 and 1987. Therefore, despite Debtor being discharged from personal liability for taxes owed for tax years 1980 and 1983, I find and conclude that Debtor's property is subject to the entire amount covered by the Lien. Therefore, Debtor's property is liable for the entire amount of the Claim.
3. In neither the Opposition nor the Objection to Claim did Debtor set forth the legal or factual grounds supporting her argument that the debt for tax years 1980 through 1986 was in fact discharged. Additionally, Debtor did not explain how she arrived at the $38,000 outstanding debt. Rather, Debtor merely argued that because she scheduled the I.R.S.' debt in the Statement as a $38,000 secured debt, then $38,000 was the amount of the Claim.
Debtor did not submit declarations supporting its arguments. The I.R.S. sumbitted one declaration which established only that Debtor filed her 1984, 1985 and 1986 tax returns on March 28, 1988 and that the taxes due upon those returns were assessed on May 9, 1988. Both parties attached documents to the papers that each filed through-out this matter. Under Bankruptcy Rule 9014, Local Rule 111(1)(k), Fed. Rule Civ. Proc. 56(e), and Fed. Rule of Evid. 802, the information found in these documents does not qualify for admission into evidence. However, neither side has objected to admitting these documents into evidence. Therefore, I will allow the documents to be admitted for the limited purpose of ruling on Debtor's Objection to Claim.
In Chapter 9 and Chapter 11 cases, schedules can constitute prima facie evidence of the validity and amount of claims. Bankruptcy Rule 3003(a)(b)(1). No such provision applies in Chapter 13 cases.
4. Debtor relies upon In re Moseley, 74 B.R. 791 (Bankr. C.D. Cal. 1987) to support her argument. In re Moseley dealt with a priority unsecured claim filed by the I.R.S. post-confirmation. The I.R.S.' claim exceeded the amount of the priority unsecured claim scheduled in the plan. The court held that because the I.R.S. had notice of the confirmation hearing, under Section 1327(a) the I.R.S. was bound by the confirmation order and its claim was therefore determined by the amount confirmed in the plan. In re Moseley, 74 B.R. 791.
I do not agree with the holding in In re Moseley. Rather, it is the proof of claims filing and objection process which determines the amount and nature of claims.
Under 11 U.S.C. § 502(a), a timely filed claim is deemed allowed unless objected to by a party in interest. Under Bankruptcy Rule 3002(c), a proof of claim in a Chapter 13 case is timely filed if it is filed within 90 days of the first Section 341(a) meeting of creditors. The first meeting of creditors scheduled under 11 U.S.C. § 341(a) was held on August 8, 1990. The I.R.S. filed the Proof of Claim on August 22, 1990, only 14 days later. Therefore, the Proof of Claim was timely filed.
In form, Debtor is properly objecting to the Claim. However, Debtor has not put forth any evidence to contradict the amount and nature of the Claim. Under Bankruptcy Rule 3001(f), a properly executed, timely filed proof of claim constitutes prima facie evidence of the validity and amount of a claim. Therefore, absent evidence to the contrary, I find and conclude that the Claim is valid. I find and conclude that the amount of the Claim is $73,497.30.
5. Due to the Discharge, I find and conclude that the debt for tax years 1980 and 1983 can only be collected by levying upon property of the Debtor. Therefore, $45,425.57 of the Claim can be collected only from property of Debtor.
B. Ability of Debtor to Exempt Property from the Notice of Levy
The Ninth Circuit has held that pursuant to 11 U.S.C. § 522(c)(2)(B), property scheduled as exempt is still subject to tax liens. In re Isom, 901 F.2d 744, 745. I therefore find and conclude that property scheduled by Debtor as exempt is available to secure the Claim.
C. Effect of the Notice of Levy
1. Debtor first relies upon United States v. Whiting Pools, Inc. (In re Whiting Pools, Inc.), 462 U.S. 198 (1983) to support her assertion that the IRA is not property of the estate. In Whiting Pools, the debtor conducted a pool cleaning business. The debtor was delinquent in the sum of $92,000 for unpaid taxes. Pursuant to a federal tax lien, the I.R.S. levied upon property of the debtor, including equipment, vehicles, inventory and office supplies. The estimated liquidation value of the property levied upon was approximately $35,000, while the going concern value was $162,876. The Court held that pursuant to 11 U.S.C. § 542(a) the I.R.S. was required to turn over the seized property to the debtor. In re Whiting Pools, Inc., 462 U.S. 198.
The Court reasoned that the levy and seizure provisions of 26 U.S.C. § 6331 and 6332 do not determine the I.R.S. rights to the seized property, but merely bring the property into the legal custody of the I.R.S., In re Whiting Pools, Inc., 462 U.S. at 211. The Court further reasoned that under 26 U.S.C. § 6339(a) and 6342(b), ownership of property is transferred only when the property is sold to a bona fide purchaser at a tax sale, and until the sale takes place, the property remains the debtor's. In re Whiting Pools, Inc. at 211. The purpose is to protect the debtor's redemption and surplus rights. Professional Technical Services, Inc., v. Internal Revenue Service (In re Professional Technical Services), 71 B.R. 946 (Bankr. E.D. Mo. 1987) (interpreting 26 U.S.C. § 6335(a), 6335(b), 6337 and 6342(b)).
The I.R.S. asserts that case law distinguishes between a levy upon intangible versus tangible property. The I.R.S. argues that the property levied upon in Whiting Pools was tangible property, whereas the IRA is intangible property, and therefore the Court's holding in Whiting Pools is inapplicable.
Instead, the I.R.S. argues that when intangible property such as the IRA, is levied upon prepetition, title in the account transfers immediately to the levying party. Therefore, the I.R.S. argues that the IRA is not property of the estate. As support for this proposition, the I.R.S. cites several cases. Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728 (1975); Cross Electric Company, Inc. v. United States (In re Cross Electric Company, Inc.), 664 F.2d 1218 (4th Cir. 1981); Am. Acceptance Corp. v. Glendora Better Builders, Inc., 550 F.2d 1220 (9th Cir. 1977): United States v. Pittman, 449 F.2d 623 (7th Cir. 1971); United States v. Sullivan, 333 F.2d 100 (3rd Cir. 1964); United States v. Eiland, 223 F.2d 118 (4th Cir. 1955); DiFlorio v. United States, 30 B.R. 815 (N.D.N.Y. 1983); Sanwa Bank of California v. Caldwell (In re Caldwell), 111 B.R. 836 (Bankr. C.D. Cal. 1990); Paul v. State Board of Equalization (In re Paul), 85 B.R. 850 (Bankr. E.D. Cal. 1988).
I find and conclude that the correct position on this issue is the one asserted by the I.R.S., While the holding in In re Whiting Pools requires the I.R.S. to turn over property in some situations, Debtor's case is not one of those situations. First, unlike the debtor in Whiting Pools, Debtor is not using the IRA to reorganize. In fact, Debtor admits that she does not intend to use the IRA as a means of completing her Plan, stating that she wants to avoid any penalty for premature distribution.
Second, the notice and sale provisions of 26 U.S.C. § 6335 do not apply when the property levied upon is cash or cash equivalent. In re Professional Technical Services, Inc., 71 B.R. 946, 949.
Third, because this is a bank account, the redemption rights of 26 U.S.C. § 6337(b) and surplus rights of 26 U.S.C. § 6342(b) do not apply. In re Paul, 85 B.R. 850, 853; In re Professional Technical Services, Inc., 71 B.R. 946.
Therefore, Debtor's reliance on In re Professional Technical Services for the proposition that Debtor has an equitable interest in the IRA, and therefore that the IRA is property of the estate fails for two reasons. First, Debtor's allegation that the I.R.S. debt is $38,000 is erroneous. I found earlier that the amount of the Claim is $73,497.30.
11 U.S.C. § 541(a)(1) states that:
"The commencement of a case . . . creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) . . . all legal and equitable interests of the debtor in property as of the commencement of the case."
Second, there is no evidence that the value of the IRA exceeds the amount covered by the Notice of Levy. Debtor alleges that due to the accrual of interest, the value of the IRA now exceeds $38,000. Debtor has not provided any evidence that the amount in the IRA exceeds either the amount covered by the Notice of Levy or the amount of the Claim.
Finally, in In re Whiting Pools, the Court held that "[o]f course, if a tax levy or seizure transfers to the I.R.S. ownership of the property seized, [Section] 542(a) may not apply." In Re Whiting Pools, Inc. at 209. While the present proceeding is not a proceeding to compel turnover under 11 U.S.C. § 542(a), nevertheless the same principles apply. For, under Section 542(a), the I.R.S. must turn over property that Debtor may use, sell or lease under 11 U.S.C. § 363, or property that is exempt under 11 U.SC. Section 522. The IRA is not exempt under Section 522, and Debtor has not characterized the IRA as an exemption in the Statement and Plan. Further, Section 363(b) gives Debtor the right to use, sell or lease property of the estate (emphasis added). The dispute here is whether or not the IRA is property of the estate. Therefore, the conditional holding of the Court in Whiting Pools applies here.
11 U.S.C. § 363(b) outlines use, sale and lease rights of the trustee. However, under 11 U.S.C. § 1303, Debtor is specifically given rights under Section 363(b).
I find and conclude that the IRA is intangible property, and that the tangible/intangible distinction is dispositive here. I agree with the holdings of the cases cited by the I.R.S. that levy upon intangible property transfers title to the levying party. Therefore, I find and conclude that title in the IRA transferred to the I.R.S. upon the Service. Therefore, I find and conclude that the IRA is not property of the estate.
2. Based upon the discussion in paragraph IV.A and IV.B. above, to the extent that the Claim is not satisfied by the IRA, I find and conclude that the amount remaining (the "Remainder") should be allowed as a secured claim to the extent that property of the Debtor exists.
3. Based upon the discussion in paragraph IV.A and IV.B above, and pursuant to 11 U.S.C. § 507(a)(7)(A)(i) , to the extent that the Remainder is not secured, and to the extent that the Remainder represents debt from tax year 1987, I find and conclude that this amount should be allowed as a priority unsecured claim.
An unsecured claim for a tax specified in 11 U.S.C. § 507(a)(7)(A)(i) is entitled to priority treatment. See also footnote 3 above.
4. Based upon the discussion in paragraph IV.A and IV.B above, to the extent that property of the Debtor does not fully secure the Claim, and to the extent that the Remainder is not a priority unsecured claim, the Remainder is allowed as a general unsecured claim.
5. The I.R.S. Brief concludes by stating that in the event that the IRA is found to be property of the estate, that the I.R.S. is entitled to adequate protection under 11 U.S.C. § 363(e). The subject of Hearing #4 is the Objection to Claim and Motion to Dismiss, not a motion for order of adequate protection. Under Bankruptcy Rule 9013, Bankruptcy Rule 9014, and Local Bankruptcy Rule 111(1), a motion for order of adequate protection must be properly filed, served and noticed, and a hearing scheduled. No such motion has been filed, served and noticed, and no hearing has been scheduled.
Further, to the extent that the I.R.S.'s Brief seeks an order of adequate protection, no hearing has been scheduled to entertain oral argument on the I.R.S.'s Brief. No cause has been shown as to why such a request should be granted without a hearing. Therefore, I find and conclude that I cannot grant adequate protection at this time.
VI. CONCLUSION AND ORDER
Based upon the foregoing,
I ORDER that the Objection be denied.
I FURTHER ORDER that the IRA is not property of the estate.
I FURTHER ORDER that the Claim be reduced in the amount of the IRA.
I FURTHER ORDER that the Remainder is secured by all property of Debtor, including property listed as exempt.
I FURTHER ORDER that the Remainder not secured by property of Debtor is allowed as a general unsecured claim, except that the Remainder attributable to 1987 debt is allowed as an unsecured priority claim.
I FURTHER ORDER that the request for adequate protection be denied.