"THE SHOES OF THE
HOW SHOULD A TAX LIEN ON AN ERISA RETIREMENT PLAN
BE TREATED IN CHAPTER 13?
Morgan D. King
Of The California Bar
An edited version of this essay appeared in the June 2001 edition of
Norton Bankruptcy Law Advisor
This article deals with several issues that may arise where an income tax claim is secured by a filed tax lien on the debtor's ERISA, or similar, retirement plan. The questions arise because the typical secured claim in Chapter 13 is a security interest on property that is property of the estate; in contrast a qualified plan under the Federal Employee Retirement Income Security Act ("ERISA") containing anti-alienation language that is " ... enforceable under applicable non bankruptcy law..." is not property of the estate by operation of 11 U.S.C. § 541(c)(2). This difference creates interesting problems.
The issues that may arise are; 1) Is a tax lien for a dischargeable tax that is secured on the debtor's ERISA retirement plan treated as a secured, or an unsecured claim in the Chapter 13 plan? 2) If the tax lien on the ERISA plan is treated as unsecured in the plan, is it treated as a secured, or unsecured claim for purposes of debt-limit eligibility under 11 U.S.C. § 109(e)? 3) Post-discharge issues with respect to the collection of interest and the survival of the lien are reserved for a future article.
This article will touch on each of those but will focus on tax liens on debtor's property that is not property of the estate, e.g., ERISA retirement plans. These remarks are not necessarily restricted to "qualified" ERISA plans but may arise in connection with any trust, annuity or other retirement plan containing the prescribed anti-alienation language of § 522. The focus here is further narrowed to non-priority tax claims, because it is well settled that the Chapter 13 plan must provide for full payment of priority taxes. 11 U.S.C. § 1322(a)(2); since priority taxes are by definition unsecured claims [11 U.S.C. § 507(a)(8)] we need not deal with them here.
The debtor ordinarily prefers that the tax lien be treated as unsecured in the Chapter 13. Treating it the opposite would require that the debtor pay off the entire tax lien through the plan, which in many cases would substantially increase the monthly payment, perhaps to the point of unfeasibility.
By virtue of its lien on a debtor's retirement plan the IRS has frequently argued that it is entitled to receive present payments through the Chapter 13 plan, even though the debtor is not entitled to receive benefits until he or she attains retirement eligibility, which may be many years in the future.
However, to agree with the IRS is to create an anomaly that gores the debtor's ox instead of the Government's; the debtor cannot receive payments from the ERISA plan until he or she retires, but treating the lien as secured in Chapter 13 would provide for immediate (i.e., accelerated) payments to the IRS. Thus it would place the IRS in a privileged position ahead of the debtor vis-a-vis the retirement benefits. It would also give the IRS an advantage over other unsecured creditors and probably reduce, if not totally extinguish in some cases, the payout to such creditors through the bankruptcy as the payments on the secured tax claim siphon off the disposable income. Not only that, treating the lien as secured in the Chapter 13 would require the debtor to make payments based on the fiction that he or she is actually receiving the income to fund the payment required by the Chapter 13 plan; i.e., monthly retirement benefits. This could easily be a budget-buster making the plan unfeasible, or at least a substantial hardship; arguably such a treatment would violate 11 U.S.C. § 1325(a)(6) requiring that the plan be feasible. Furthermore, it takes away the debtor's option, provided by § 1325(b)(5)(C), to satisfy a secured claim by surrendering the property securing it (since obviously the debtor cannot turn over the corpus of an ERISA plan).
1. HOW TREATED IN CHAPTER 13 PLAN?
In the typical situation non-tax liens on retirement plans are invalid or avoidable to the extent they impair an exemption, and most retirement plans are exempt; in contrast, a filed tax lien will survive even as to exempt property. 11 U.S.C. § 522(c)(2)(B); U.S. v. Barbier, 896 F.2d 377 (9th Cir. 1990); Crow v. Long, 107 B.R. 184 (E.D.Mo. 1989); Matter of Beard, 112 B.R. 951 (Bkrtcy.Ind. 1990).
Typically, any secured claim in a Chapter 13 case must be paid in full with interest. 11 U.S.C. § 1325(a)(5)(B). Where the claim is undersecured the majority rule is that the claim is bifurcated and paid in full to the extent of the value of the debtor's equity in the property to which the lien attaches, with the balance treated as a general unsecured claim. In re Morton, 747 F.2d 405 (7th Cir. 1984). These maxims apply to involuntary tax liens as well as voluntarily created secured interests. The extent of the value of the secured portion of a claim is the value of the creditor's interest in the estate's interest in the property [11 U.S.C. § 506(a)] and the "value" is generally understood to mean "present value," which typically requires interest to compensate for diminishment of the value of money over the life of the plan. Thus, the claim is secured to the present value of the estate's interest in the property.
SOME IMPORTANT DISTINCTIONS
Numerous cases pose the question, should a tax lien secured on the debtor's ERISA plan be treated as secured in the plan? But in the attempt to answer the question many of them fail to identify important distinctions in tax and bankruptcy law that have a bearing on this question.
A threshold question may be, does the debtor have any right, title or interest in his or her particular ERISA plan or trust? The statutory language of ERISA does not appear to require any particular language defining this issue, but some ERISA plans contain language specifically providing that the employee has "no right, title or interest" in the plan. And, it is settled that state law determines what constitutes an individual's property; federal statute " ... creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55 (1958). Thus if under state law a retirement plan excludes the employee from any interest in the plan, it would appear neither a lien nor a levy could attach. See, for example, Bank One Ohio Trust Company v. United States, 857 F.Supp. 592 (D.S.D.Ohio 1994) in which the IRS attempted to levy on a taxpayer's trust created under Ohio law. In ruling against the IRS the court held "This is not a case where some state law exempts or bars the attachment of the taxpayer's interest in property, but rather a situation where the levy does not attach because under state law, no recognized property interest exists (in the taxpayer) to which it can attach." Bank One, at 594. See similar ruling in the case of a trust created under Texas law, In re Wilson, 140 B.R. 400 (Bankr.N.D.Tex. 1992).
Another threshold question is, to what extent is the debtor's right or interest in the plan "vested." In other words, granted at some point the debtor may acquire, under state law and the language of the retirement plan, some kind of right, title or interest in the plan, at what point in time, or under what contingency, does the entitlement arise? "[where] the taxpayer has not paid into it long enough yet to qualify for any future payments ... A notice of levy attaches to nothing, because the taxpayer has no present property rights." IRM § 184.108.40.206. If the debtor has no present right, title or interest in the plan, arguably it is not the debtor's property. If it isn't the debtor's property, a tax levy could not attach to it; 26 U.S.C. § 6331(b) provides that a levy shall extend only to "property possessed and obligations existing at the time thereof."
The distinction between exempt property and property that was never part of the estate
The court in In re May, 194 B.R. 853 (Bkrtcy.D.SD 1996) ruled that a tax lien on exempt property (the nature of which was not identified) was a secured claim in Chapter 13. But the May opinion agreed that "Property that secured a claim against the debtor that was never a part of the bankruptcy estate, such as assets of a third party, will not, of course, be included in the creditor's secured claim for plan treatment." The distinction is that it is generally understood that exempt property starts out as property of the estate upon commencement of the case but is exempted at some subsequent point, while property that is never property of the estate (e.g., an ERISA plan) cannot be "exempt" property. In re Woodson, 839 F.2d 610, 616 n8 (9th Cir. 1988); In re Galvan, 110 B.R. 446 (9th Cir. BAP 1990). Thus, the May opinion does not deal directly with the question, should a lien on an ERISA plan be deemed secured, but suggests incidentally that it should not be.
The distinction between a tax lien on the debtor's property versus a lien on property that is not the debtor's property
A tax lien secured on property that is not the debtor's property is not a secured claim in Chapter 13. For example, where the debtor owns the stock in his closely-held corporation and there is a properly filed tax lien against the debtor personally for delinquent taxes, except for alter ego situations the assets of the corporation are not the debtor's property or property of the estate, and thus the estate has no interest in them. In re Loughnane, 28 B.R. 940 (Bankr.D.Colo. 1983); In re Calvert, 135 B.R. 398 (Bankr.S.D.Cal. 1991). Accordingly, such a lien would be an unsecured claim in the Chapter 13. While the stock in the corporation is the debtor's property, the corporate assets are not the debtor's property; by contrast an ERISA plan, though not property of the estate, is nonetheless the debtor's property.
A variation on this theme is In re Maxfield, 159 B.R. 587 (Bkrtcy.D.Idaho 1993) which held that even though the tax liability for trust fund taxes is owed personally by the debtor, where the tax lien is filed against the corporation only, the debt cannot be treated as a secured claim in the debtor's personal Chapter 13.
But this line of cases has no direct bearing on our question, because unlike the assets described above, a vested ERISA is the debtor's property.
Yet another distinction is property that is property of the estate but is exempt from levy by operation of law
In In re Barbier, 896 F.2d 377 (9th Cir. 1990) the property in question was the personal effects of the debtor, which, up to a certain value, are exempt from IRS levy pursuant to 26 U.S.C. § 6334. Notwithstanding that they were exempt from levy, the Ninth Circuit held that the IRS lien on such property must be treated as a secured claim in the Chapter 13. The courts are split on that issue. Opinions holding that a lien on nonleviable property is secured in Chapter 13 include In re King, 137 B.R. 43 (D.Neb 1991); In re Beard, 112 B.R. 951 (Bankr. N.D.Ind 1990); ; In re Bates, 81 B.R. 63 (Bankr.D. Ore. 1987); In re Ridgley, 81 B.R. 65 (Bankr. D. Ore. 1987); U.S. v. Stowe 121 B.R. 549 (N.D.Ind. 1990); Held, lien may not be avoided as to property protected from levy under IRC § 6334; In re Blackberry, 1997 Bankr. LEXIS 41 (Bkrtcy.E.D.Pa. 1997).
There are plenty of opinions to the contrary. The court in In re Voelker, 164 B.R. 308 (W.D. Wis. 1993) quoted the original opinion in Barbier, 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. § 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, 95th Cong. 2d Sess. 76 (1978).
See also, in favor of the debtor's lien avoidance rights on nonleviable 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).
But this line of cases, either pro or con, is not on point, because in these cases the property exempt from IRS levy was nevertheless either property of the estate, or started out as property of the estate and later exempted. ERISA plans appear to fall into neither category. An ERISA retirement plan, in order to be qualified under applicable federal rules, must include language that in effect brings the plan within the definition of a trust having a " ... restriction on the transfer of a beneficial interest of the debtor ..." under § 541(c)(2). 26 U.S.C. § 1056(d)(1). It is settled law that such language excludes an ERISA plan from property of the estate. Patterson v. Shumate, 112 S.Ct. 2242 (1992). In re Anderson, 149 B.R. 591 (9th Cir. BAP 1992); In re Yuhas, 104 F.3d 612, 614 (3d Cir. 1997).
DOES THE ESTATE HAVE AN "INTEREST" IN AN ERISA PLAN?
Section 506 of the Bankruptcy Code defines a secured claim for purposes of bankruptcy as property in which the creditor has an interest in the estate's interest in such property." The phrase "estate's interest in such property ..." in common usage is generally understood to mean "property of the estate." If so, the corollary is that the estate has no interest in property that is not property of the estate, and therefore a claim secured by a lien on such property is not treated as a secured claim in the bankruptcy.
If the fact that the property is excluded from the estate means the estate has no "interest" in it, it follows that, to the extent a tax lien is secured on the debtor's ERISA plan, it can not be treated as a secured claim through the Chapter 13 plan. This presents the anomalous situation of a tax claim that in reality may be fully secured on the debtor's property, i.e., his ERISA plan, but must be treated as a general unsecured claim in the bankruptcy.
However, it is not entirely settled that the estate has no interest in property merely because it is not property of the estate. In re May, 194 B.R. 853 (Bkrtcy.D.S.D. 1996) stands for the proposition that "property in which the estate has an interest" may be broader than "property of the estate."
More directly on point is In re Jones, 206 B.R. 614 (Bkrtcy.D.D.C 1997). Here the court held that, notwithstanding the debtor's federal thrift savings plan ("TSP") contained language similar to ERISA's anti-alienation clause excluding it from the estate, the estate had an "interest" in the property such that an IRS tax lien should be treated as a secured claim. A similar ruling is found in In re Perkins, 134 B.R. 408 (Bkrtcy.E.D.CA 1991). We will revisit Jones and Perkins below.
Distinction between the "corpus" of a retirement plan and the monthly benefits once in "pay-status"
Cases sometimes cited as authority that a lien on an ERISA plan requires that the claim be treated as secured in Chapter 13 are often cases involving retirement plans or other kinds of trusts that are in "pay status," meaning the debtor is receiving monthly benefits.
Held, since the IRS lien attaches to the debtor's present right to receive future pension benefits, it is entitled to be treated as a secured claim in Chapter 13. In re Cook, 150 B.R. 439 (Bkrtcy.E.D.Ark 1993). In Cook the plan was in "pay-status," meaning the debtor was receiving monthly payments out of the plan.
See also In re Lyons, 148 B.R. 88 (Bkrtcy.D.C. 1992). In Lyons the IRS and the Court agreed that the corpus of the debtors' Teachers Insurance and Annuity Association/College Retirement Equities Fund ("TIAA/CREF") annuities were not property of the estate. But in this case the debtors' retirement annuities were in pay status. Some of the payments were monthly, some were annual. The IRS position was that the debtor's present right to future payments was a property right distinct from the undistributed corpus of the pension plan, and that the right to receive future payments remained property of the estate (thus making the tax lien a secured claim in bankruptcy).
In ruling for the Government the Court held that under New York Law the spendthrift trusts' anti-alienation provisions were not enforceable under non-bankruptcy law as against a federal tax lien. Therefore, reasoned the Court, the payments did not satisfy the § 541(c)(2) requirement that the restriction on transfer be enforceable under non-bankruptcy law. Ergo, the IRS has a secured claim in the Chapter 13. However, the opinion fails to explore the distinction between the right to levy on the corpus, and the right to levy on the payments, and this may be fatal as we shall see.
On virtually identical reasoning and similar facts the court in In re McIver, 255 B.R. 281 (D.MD 2000) held that the IRS lien on the debtor's TIAA/CREF annuities was a secured claim in the Chapter 13. As in Lyons, the plan was in pay-out status and the debtor was receiving a regular stream of payments. In this case the Bankruptcy Court ruled in favor of the Debtor on the theory that since the fund was not property of the estate the IRS was not entitled to a secured claim. In doing so the court appeared to assume that if the fund itself is not property of the estate, then neither are the monthly payments, thus excluding the payments from securing the tax claim in the Chapter 13. On appeal the District Court reversed, adopting the same reasoning as that in Lyons to conclude that the IRS right to lien on the plan equated with a right to a secured claim in bankruptcy. As in Lyons and Cook, the court in McIver failed to draw a distinction between the plan itself, and the monthly payments once the plan goes into pay status.
See similar ruling in In re McIntyre, 1998 U.S. Dist. LEXIS 15032 (N.D.Cal. 1998) where the husband's pension plan was in pay status; the issue was whether the IRS levy could reach the community property portion of the monthly payments.
And an analogous ruling is found in In re Leuschner, 261 F.2d 705 (9th Cir. 1958) which found that the IRS could levy on the proceeds of a beneficiary trust containing anti-alienation language; "So long ... as Leuschner has a property interest in these payments, the government has the power to seize them"
Why may the distinction between a right to levy on the corpus as opposed to a right to levy on the payments be important?
THE SHOES OF THE TAXPAYER
It is settled law that the IRS may levy on the pension plan payments as they are paid out, and this is the position of the IRS; IRS Revenue Ruling 55-210 states in relevant part -
" ... it is the position of the Internal Revenue Service that where a taxpayer has an unqualified fixed right, under a trust or a contract, or through a chose in action, to receive periodic payments or distributions of property, a Federal lien for unpaid tax attaches to the taxpayer's entire right, and a notice of levy based on such lien is effective to reach, in addition to payments or distributions then due, any subsequent payments or distributions that will become due thereunder, at the time such payments or distributions become due."
But the situation may be different where the cannot be reached by the debtor and the plan is not in pay-out status. Until retirement or some other specified contingency the taxpayer has right of access neither to the corpus nor to the payments. Upon retirement the taxpayer is entitled to receive the payments.
The IRS cannot levy on the corpus of an ERISA or similar plan but only the payments or benefits once they start coming. The reason for this is the doctrine of "the shoes of the taxpayer." Under this doctrine a lien does not give the IRS any advantage vis-a-vis the taxpayer's rights. Federal case law holds that by creating a lien the IRS merely "steps into the shoes" of the taxpayer; what the debtor can get, the IRS can get; what the debtor can't get is equally denied to the Government. United States v. Rodgers , 461 U.S. 677 (1983); U.S. v. General Motors Corp. 929 F.2d 249, 252 (6th Cir. 1991); Markham v. Trustee and United States, 96-1 USTC Para. 50, 118; 77 AFTR2d Par. 96-415 (1st Cir. 1996); In re Cavanaugh, 153 B.R. 224, 228 (Bankr.N.D.Ill. 1993); U.S. v. National Bank of Commerce, 472 U.S. 713 (1985) (The taxpayers' right to withdraw is analogous in this sense to the IRS's right to levy on the property ..." Bank of Commerce, at 726); United States v. Bell Credit Union, 860 F.2d 365, 369 (10th Cir. 1988); Kane v. Capital Guardian Trust Company, 145 F.3d 1218 (10th Cir. 1998) ("Upon service of the notice of levy, the IRS 'steps into the shoes of the taxpayer' and acquires whatever rights to the property the taxpayer possessed.").
An example is United States v. Metropolitan Life Insurance, 874 F.2d 1497 (11th Cir. 1989) in which the IRS levied on the taxpayer's annuity contract purchased from Metropolitan Life Insurance Company. The insurance company refused to honor the levy on the ground that the funds were not the debtor's property. However, Metropolitan acknowledged that the taxpayer had the present right to withdraw the full value of the annuity. The court held that the IRS had the right by means of levy to extract the cash withdrawal value of the annuity.
This rule is acknowledged by the IRS in the Internal Revenue Manual which states, at [5.17] 220.127.116.11 (10-31-2000)
Limitations On Use Of Levy
1. One of the most obvious limitations in the use of a levy to enforce collection of taxes is that generally the rights of the Government are no greater than those of the taxpayer whose property is levied. United States v. Rodgers , 461 U.S. 677 (1983).
The IRM language cites United States v. Rodgers, which noted that " ... the tax collector not only steps into the taxpayer's shoes, but must go barefoot if the shoes wear out."
Thus any argument that the IRS has a right to levy on the ERISA, and therefore has a right to a secured claim in Chapter 13, must explain, in the case of a plan that is not in pay-status, why the IRS suddenly becomes entitled to more than the taxpayer is at the time the Chapter 13 commences. None of the opinions attempt to do so.
THE DISTINCTION BETWEEN RIGHT TO LIEN AND RIGHT TO LEVY
In order to fully appreciate the effect the "shoes of the taxpayer" doctrine may have on a tax lien in a Chapter 13 plan, a distinction must be made between an IRS right to lien and an IRS right to levy. They are two very different things. A lien does not act to transfer the property to the IRS, but is merely a security interest that preserves the Government's claim; by contrast a levy is a physical seizure of the property. In re King, 137 B.R. 43 (D.Neb. 1991). The levy process under the IRC is sometimes called an "administrative" levy.
Some of the cases often cited in favor of treating the tax lien as secured in the Chapter 13 plan actually stand merely for the proposition that a tax lien may attach to the debtor's ERISA or similar plan; this is a given, for outside of bankruptcy there is no question the tax lien attaches. But does it inevitably follow that it is a secured claim for bankruptcy purposes?
For example, the opinion in In re Anderson, 149 B.R. 591 (9th Cir. BAP) dedicates itself to establishing that, first, an ERISA plan is not property of the estate, and second, that the tax lien is a lien on the debtor's ERISA retirement plan, a proposition vigorously contested by the debtor. However, Anderson did not conclude that having a lien on the ERISA plan outside of bankruptcy equated with a secured claim in Chapter 13; it didn't even mention how it should be treated in the plan. (In fact, according to the debtor's attorney in that case, Gregory Oczkus (Anchorage, Alaska) the tax lien was treated as an unsecured claim in the plan.)
Likewise, the IRS sometimes cites In re Raihl, 152 B.R. 615 (9th Cir. BAP 1993), a Chapter 7 case, to support the secured claim theory. The plan was not in pay status. And, just as with Anderson, the only thing the Raihl opinion stands for is that the IRS has a valid lien on the debtor's retirement plan (a 401k savings and investment plan), but it does not conclude that such a lien makes the claim a secured claim in the bankruptcy. In Raihl the debtor, attempting to avoid the lien, argued that since the IRS could not levy on the plan the lien was avoidable. The court said, " ... execution is not the issue here, the attachment of a federal tax lien is."
Is the right to lien equivalent to a secured claim in Chapter 13?
The cases cited above should not be cited as authority in favor of treating the tax liens as secured in Chapter 13 where an ERISA plan is not in pay status In fact only a few cases stand for the proposition that the IRS mere right to lien equates with a right to a secured claim in Chapter 13. Let's look at those cases.
In a published opinion barely more than a page long the court in In re Carlson, 180 B.R. 593 (Bkrtcy.E.D.Cal. 1995), a Chapter 13 case, observed correctly that the IRS had a valid lien on the debtor's exempt retirement plan (a "PERS," or California Public Employee Retirement System plan). It stated correctly that " ... even where state law exempts a debtor's interest in a vested pension plan ... such exemption does not preclude a federal tax lien." "Therefore, in the instant action, Debtor's vested interest in the PERS pension plan is subject to federal tax liens." So far so good, but then it concludes from this that "Debtor's objection to the Service's secured status (in the chapter 13 plan) is without merit and must be overruled." But there is no analysis, theory or explanation as to why the conclusion follows from the premise. It does not explain how to get around the language of 11 U.S.C. § 541(c)(2) excluding the pension from the estate, and § 506 excluding from secured claim status property in which the estate has no interest. This case may be "precedent" but it is hardly "authority."
Similarly, the court in In re Reed, 127 B.R. 244 (Bkrtcy.D.Hawaii 1991) held correctly that notwithstanding a state-created exemption in the debtor's pension fund the IRS had a valid lien on the plan. It also observed that the anti-alienation provisions of the plan did not preclude the IRS right to levy. But it then concludes, with no connecting logic, that this equates with the right to have the lien treated as secured in the Chapter 13. Like Carlson, above, the Reed opinion does not mention the sticking points of §§ 541 and 506; this opinion predates the ruling in Patterson v. Shumate that such a plan is not property of the estate.
The court in In re Perkins, 134 B.R. 408 (Bkrtcy.E.D.Cal. 1991) acknowledged that "Although fully vested, Mr. Perkins was not, and is not presently, entitled to any rights to the plan payments." Notwithstanding, the Court held that the IRS lien on the debtor's ERISA plan not in pay-status made the tax claim a secured claim in Chapter 13, on primarily three theories.
One theory in Perkins was that the ERISA plan was property of the estate, and therefore not subject to the exclusion of § 541(c)(2); however, the Perkins opinion predated the Supreme Court ruling in Patterson v. Shumate, supra., which unequivocally settled the issue by holding that ERISA plans are not property of the estate.
The second ground asserted in Perkins is that the estate has an "interest" in the ERISA plan even if the plan is not property of the estate. However, it cites no authority for this theory, and does not attempt to define "interest" for purposes of its ruling. The court makes the somewhat bare assertion that " ... the bankruptcy estate has an interest in the pension which is, at the very least, sufficient to allow attachment and levy on Mr. Perkins' pension rights by the IRS." On that basis the court held that the claim would be a secured claim in the Chapter 13. Similar language is found in In re May and In re Jones, supra.
The third ground appears to be the notion that a right to a lien is equivalent to a right to a levy. This is where the failure to identify the difference between them causes trouble. Much of the opinion is devoted to exploring and establishing the IRS right to a lien on retirement plans, but the language frequently mixes the terms "lien" and "levy" together, as though they conferred equivalent rights on the IRS. But in view of the "shoes of the taxpayer" rule, this is a dubious position. Nowhere does the Perkins opinion explain why an IRS right to lien outside of bankruptcy equates with an IRS right to have its lien treated as a secured claim in the Chapter 13. The opinion states "The government's rights to levy on property subject to a tax lien are extremely broad and limited only by those property interests specifically enumerated by statute ... which do not include the type of pension benefit at issue in this case." In this the court is absolutely correct; the government had a right to levy on the retirement plan. There is no question about that. As the court stated in In re McIntyre, 1998 U.S. Dist. LEXIS 15032 (N.D.Cal. 1998), " ... ERISA's anti-alienation clause cannot prevent the IRS from undertaking what would otherwise by a valid exercise of its levy authority under 26 U.S.C. § 6631." And Treasury Regulation 1.401(13)(b)(2) explicitly provides that the inalienability of a retirement plan shall not preclude the enforcement of a Federal tax levy under 26 U.S.C. § 6331.
The unanswered question is, however, what constitutes a "valid exercise" of levy authority outside of bankruptcy? In view of the "shoes of the taxpayer" concept, does a mere right to lien the plan give the IRS an unqualified right to levy on it outside of the bankruptcy? It would appear not. And if it does not have a present right to levy outside of bankruptcy, why should it be entitled to accomplish inside of bankruptcy, through the Chapter 13 plan, what it is not empowered to accomplish outside of bankruptcy?
THE DISTINCTION BETWEEN THE RIGHT TO LEVY TODAY AS OPPOSED TO A RIGHT TO LEVY SOMETIME IN THE FUTURE
The court in In re Jones, 206 B.R. 614 (Bkrtcy.D.C. 1997) held that an IRS lien on the debtor's thrift savings plan, an ERISA retirement plan, provided for a secured claim in the Chapter 13. Unlike Perkins it skipped the futile argument that such a plan is not property of the estate. Instead, it appears to base its ruling on the right of the IRS to both lien and levy an ERISA or similar plan.
Like the Perkins opinion, the court in Jones pointed out, correctly, that IRC language exempting certain categories of property from levy do not include the typical ERISA plan. 26 U.S.C. §§ 6331(a), 6334(c). However, it incorrectly relies on Shanbaum v. United States, 32 F.3d 180 (5th Cir. 1994) for the proposition that this gives the IRS an unrestricted present right to levy; Shanbaum merely holds that the IRS could levy on the "benefits" of the debtor's ERISA retirement plan (the plan was in pay-status, but the payments were being levied by the IRS). The Shanbaum opinion cited as authority Treasury Regulation 1.401(a)(-13(b)(2) which provides that an ERISA plan "... shall not preclude ..." "The enforcement of a Federal tax levy made pursuant to section 6331." But merely because ERISA statutes do not prohibit IRS levy on the plan, it does not necessarily follow that the IRS may levy; as has been mentioned, the "shoes of the taxpayer" doctrine has a bearing on what and when the Government may levy.
The fundamental flaw in Jones is that it fails to make yet one more critical distinction; the difference between the IRS right to levy on an ERISA plan some day, and the right to levy on it today. In explaining the connection between the lien and the right to levy the court stated "... the TSP (retirement plan) account would in effect have 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 creditor's claims." The Jones opinion does not elaborate on or develop the "split personality" theory. It begs the question; why does it have a split personality?
But even if it did have a "split personality," does it make sense, when viewed in light of the "shoes of the taxpayer" rule, that a bare right to levy necessarily gives the IRS a right to levy today, indirectly, through the Chapter 13 plan?
Against the "shoes of the taxpayer" doctrine the Jones opinion would have to explain why the IRS is entitled to indirectly levy on the debtor's ERISA through the Chapter 13 plan, when it has no present right outside of bankruptcy to levy. The Jones opinion does not address the issue, but merely makes the unsupported statement that "It suffices to conclude that the tax lien attaches at least to the extent of preserving the right to levy and that the lien is enforceable as a secured claim ..." Jones, at 619. And, "The lien acts to hold the IRS's claims to the account in place until the levy itself can be made. When, as here, the lien itself is enforced, it is but in recognition of the rights the IRS would have upon a levy being served." Jones, at 621. But right there is where the opinion misses the turn in the road; a correct recognition of the rights the IRS has would have to acknowledge that those rights do not include a right to levy until the plan goes into pay status.
Cases holding that a tax lien on ERISA type plans are unsecured in Chapter 13
The arguments in favor of the secured claim status appear to attempt to bootstrap a well settled right to have a lien attach to an ERISA plan into a present right to collect payments through the Chapter 13 plan. But this confuses two separate mechanisms, lien rights versus levy rights, as well as present levy rights versus rights to levy in the future. By asserting that the IRS has the right to receive a present payout of the benefits through the Chapter 13 plan the IRS is essentially arguing that it has a right to levy indirectly on the corpus of the plan, or at least to accelerate the payout of the retirement plan indirectly by means of the Chapter 13. This position has been rejected by several courts.
Those cases holding that a tax lien on an ERISA or similar plan is not a secured claim in Chapter 13 tend to base their reasoning on simple statutory language. The syllogism goes like this: ERISA is not property of the estate pursuant to 11 U.S.C. § 541(c)(2); to be a secured claim in Chapter 13 the lien must attach to property in which the estate has an interest, pursuant to 11 U.S.C. 506; if the property is not property of the estate, the estate has no interest in it; ergo, it cannot be a secured claim in Chapter 13.
Held, the IRS lien on the debtor's Civil Service Retirement System plan did not create a secured claim against the estate; to have a secured claim payable through the Chapter 13 plan the creditor must be secured by a lien on property in which the estate has an interest. In re Wilson, 1996 WL 858493 (Bkrtcy.W.D.N.C. 1997).
Held, the debtor's retirement plan was not estate property and therefore the IRS did not have a secured claim against the estate beyond the value of any non retirement plan personal property. In re Wilson, Jr. 206 B.R. 808 (Bkrtcy.E.D.N.C. 1996).
A case previously mentioned above, In re Anderson, ruled that the ERISA plan was not property of the estate, that the IRS did have a lien on the ERISA, and did not treat the lien as a secured claim in the Chapter 13 plan.
See also In re Fink, 153 B.R. 883 (Bkrtcy.D.Neb. 1993); a non-ERISA retirement annuity containing the anti-alienation provisions prescribed by 11 U.S.C. § 541(c)(2) was, like an ERISA plan, not property of the estate and accordingly could not be deemed a secured claim in the Chapter 13.
Held, debtor's interest in ERISA-qualified stock bonus plan was not property of the estate and hence could not be a secured claim in Chapter 13. In re Keyes, 255 B.R. 819 (Bkrtcy.E.D. Va. 2000).
The court in Keyes, in holding that a tax lien secured on an ERISA plan cannot be treated as a secured claim in Chapter 13, dismissed the Jones "split-personality" theory has having no support in law. The Keyes opinion indirectly suggests that the issue is a jurisdictional one, stating that "The property pursued by the IRS is not property of the debtor's estate and never came under the control of this court ..."
The Keyes opinion cited In re Persky, 1998 WL 695311 (E.D.Pa. 1998), which also found the tax lien to be unsecured. The Persky opinion dismissed the Jones approach as having "... no rationale or analysis for its conclusion." The Persky opinion notes that the Jones case relied to some extent on the ruling in Lyons, supra., holding that the claim is secured in Chapter 13; but the property in Lyons was property of the estate and therefore does not support the Jones theory.
An analogous non-tax situation was In re Wilcox, 233 F.3d 899 (6th Cir. 2000) which held that a debtor's interest in a City of Detroit municipal employee's retirement plan is not property of the estate and the bankruptcy court's judgment for turnover in favor of the Chapter 7 trustee was reversed.
LIEN SHOULD BE TREATED AS UNSECURED
The principal arguments advanced for the proposition that an IRS tax lien for dischargeable income taxes attaching to an ERISA plan should be treated as a secured claim in Chapter 13 appear unpersuasive for two fundamental reasons. First, the notion that the estate can have an "interest" in property that was never property of the estate is virtually unsupported by authority or reason. Second, although the arguments point out correctly that the anti-alienation language of an ERISA plan cannot limit the right of the Government to lien or levy such a plan, they incorrectly draw from this that the present right to lien the ERISA means a present right to levy; in other words, those arguments gloss over the precise nature of the Government's rights to levy.
2. IS THE LIEN SECURED FOR PURPOSES OF 109(e)?
Ironically, the IRS sometimes argues that its lien is an unsecured claim when treating a lien on an ERISA plan as unsecured would put the debtor over the unsecured debt limit in § 109(e). Likewise, treating the claim as unsecured is a two-edged sword for debtors, as well, as it may knock the debtor our of Chapter 13 on eligibility grounds.
This was the debtor's predicament in In re Persky, supra. The debtors owed tax claims to the IRS exceeding $300,000. The IRS claimed that $295,837 was unsecured, asserting that its lien on the debtor's spendthrift trust was unsecured for purposes of the (then) $250,000 Chapter 13 eligibility limit. The value of the corpus in the trust was listed as $103,310. The debtors reasoned that the tax claim was secured to the value of $103,310, reducing the unsecured portion of the tax claim below the debt eligibility limit. The court held that the entire claim was unsecured for purposes of § 109(e), thus making the debtors ineligible for Chapter 13. In Persky, the IRS took a position directly contrary to its usual position on this issue.
But for purposes of 109(e) the issue may not be as straightforward as Persky would have it. The definition of a "claim" for plan purposes in Chapter 13 may not be the same as for eligibility purposes under 109(e).
The argument around how such a lien may be treated for plan purposes centers around the question of whether the claim should be "allowed" pursuant to § 506; however, it is not clear that the "debts" referred to in 109(e) are limited to "allowed claims." Section 109(e) sets limits for "debts," not "allowed claims." A debt is defined as a "Liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined at § 101(5), but nowhere in the language of § 101(5) is there a reference to "allowed" claims.
An argument can be made, therefore, that the tax lien on an ERISA plan should be treated according to the extent it is an "allowed" claim under § 506, whereas for purposes of eligibility under 109(e) the question should be simply, is the claim against the debtor secured or unsecured on the debtor's property?
Under this reasoning a debtor could have it both ways; the lien would be treated as unsecured for purposes of § 506, and thus unsecured in the plan, but treated as secured for eligibility purposes under 109(e). thus the "split personality" notion returns to us in a different context. But in this instance at least one can point to statutory language to defend the split personality theory.
The Court in In re Belknap, 174 B.R. 182 (Bkrtcy.W.D.N.Y. 1994) held that a loan for which the debtor was liable but which was secured by a lien on property owned by a third party (the debtor's corporation) would be treated as a secured claim in the Chapter 13. The debtor's ex-spouse, objecting to confirmation, had argued that the debt should be treated as unsecured, thus rendering the debtor ineligible under 109(e). The Court rejected the ex-spouse's argument that a secured claim under section 506(a) is identical to a secured debt under section 109(e), stating "A secured debt is simply a debt which is secured by property. The court finds no basis to infer a reaquirement that that property belong to the debtor." Belknap, at 182. Thus the debt was held secured, removing it from the unsecured count for eligibility.
See also In re Gorman, 58 B.R. 372 (Bkrtcy.E.D.N.Y. 1986) where each debtor, husband and wife, had transferred his or her respective one-half interest in real property to the other spouse. Thus the husband's liability was secured on the wife's interest in the property, and the wife's secured on the husband's interest. Based in part on state law, the court held that for purposes of eligibility each claim was secured as to each respective debtor, thus removing the liabilities from the unsecured limit for § 109(e).
But the court in In re Tomlinson, 116 B.R. 80 (Bkrtcy.E.D.MI 1990) took the opposite view, holding that "For purposes of determining how much of a claim in an estate is secured, one must look at the creditor's interest in the 'estate's interest' in the property in question." The Tomlinson court ruled that the debtor's claim secured against the debtor's non-filing ex-spouse's property was not a secured claim, thus bringing the debtor's unsecured debt level above the 109(e) limit. However, this opinion appears to assume that only debts secured on property in which the estate has an interest may be debts counted under 109(e), failing to explain why secured "debts" under 109(e) are restricted to liens against property in which the estate has an interest.
The easiest theory to defend in connection with the 109(e) issue is one based on the language of the Code itself, i.e., that a lien secured on an ERISA plan should be treated as secured for purposes of eligibility because secured and unsecured debts under § 109(e) are not restricted to "allowed" claims pursuant to § 506. Accordingly, a tax claim that is secured on the debtor's ERISA plan is a "secured" claim for purposes of eligibility under § 109(e), notwithstanding it is an "unsecured" claim under § 506 for purposes of treatment in the plan.
ADDITIONAL NOTES RE THE 109(e) ISSUE
One strategy that could possibly help debtors out of the 109(e) predicament be a Chapter 20. For example, assuming hypothetically that the tax claims in Persky were dischargeable, had they filed a chapter 7 first they could argue that their personal liability ("in personam" liability) had been extinguished as to the entire liability. All that would remain would be a tax lien secured on the trust; the discharged, unsecured portion would be unenforceable against the debtors personally, and arguably unenforceable against the trust, as well (distinguish this from the secured portion, which would be enforceable up to the value of the trust). Since a claim is a valid claim in bankruptcy only to the extent that it is "enforceable" against the debtor or property of the debtor. 11 U.S.C. § 502(b)(1), arguably the discharged unsecured portion should not be counted in a subsequent chapter 13.
This was the debtors' approach in In re Cavalier, 208 B.R. 784 (D.Conn. 1997). The court agreed with the debtors' theory that since the claim was unenforceable against them personally after the Chapter 7 discharge was entered, it should not be included in the unsecured count for 109(e).
The outcome was the same in In re Cushman, 217 B.R. 470 (Bkrtcy.E.D.Va. 1998). In that case the debtor filed a chapter 7 first, then filed a Chapter 13 taking the position that the lien only survived as to his automobile, and the unsecured balance had been discharged. The court agreed.
However, the Chapter 20 maneuver would not have worked for the debtor in In re Maxfield, supra. In Maxfield the debtor had been assessed what was formerly called the "100% penalty," now called the "trust fund recovery" penalty, i.e., payroll withholding, a priority claim not dischargeable in Chapter 7 and payable in full in Chapter 13. The debtor took the position that since the claim was secured by a lien against the debtor's corporation it had to be deemed a secured claim. If unsecured, it put the debtor's unsecured claims over the then-limit under 109(e) of $100,000. As in In re Loughnane and In re Calvert, supra., the court held that the tax lien was on property which was not the debtor's property (the corporation's assets) , and therefore the estate certainly had no interest in the property sufficient to create a secured claim in the Chapter 13.
The contrary result appeared in In re Martin, 78 B.R. 928 (Bkrtcy.S.D.Iowa 1987). See also In re Belknap, 174 B.R. 182 (Bankr.W.D.N.Y. 1994), holding that a loan for which the debtor was liable but which was secured by a lien on property owned by a third party (the debtor's corporation) would be treated as a secured claim in the Chapter 13. The debtor's ex-spouse, objecting to confirmation, had argued that the debt should be treated as unsecured, thus rendering the debtor ineligible under § 109(e). The court rejected the ex-spouse's argument that a secured claim under § 109(e) is identical to a secured debt under § 506(a), stating "A secured debt is simply a debt which is secured by property. The court finds no basis to infer a requirement that that property belong to the debtor." Belknap, at 182. Thus the debt was held secured, removing it from the unsecured count for eligibility.
But the court in In re Tomlinson, 116 B.R. 80 (Bankr.E.S.Mich. 1990), took the opposite view.