The IRS has the statutory right to record a Notice of Federal Tax Lien against a taxpayer’s home, other real estate, and personal property. See 26 U.S.C. §6323. Such a lien provides the IRS with the right to a taxpayer’s assets superior to any later recorded junior liens. In the event of liquidation, the IRS would be paid in full prior to any junior lienholders receiving any money.
A taxpayer attempted to eliminate/void the IRS’ lien by filing Chapter 13 bankruptcy in Ryan v. United States, 725 F.3d 623 (7th Cir. 2013). In Ryan, taxpayer failed to file taxes for the years 2006 thru 2010. The IRS responded by filing a Notice of Federal Tax Lien against taxpayer’s real property and personal property. Subsequently, taxpayer lost his home for delinquent real estate taxes and did not own a bank account or vehicle when he filed bankruptcy. In fact, debtor’s total assets were worth only $1,625 as of the bankruptcy filing date.
Taxpayer attempted to reduce the tax lien to the asset value of $1,625. Taxpayer alleged that §506(a) allows a taxpayer to bifurcate the IRS’ claim between a secured claim component to the extent of any assets and an unsecured claim component for the remaining debt. Then, taxpayer asserted that §506(d) of the Bankruptcy Code allowed a taxpayer to “stripdown” the lien to the value of the property, citing 11 U.S.C. §506(d). The IRS agreed with the bifurcation, but objected to the lien being voided and argued that §506(d) does not authorize the bankruptcy court to void the federal tax lien to the extend it exceeded the value of the assets.
The Ryan court looked for guidance in the U.S. Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992). In Dewsnup, the Supreme Court considered the proper interpretation of §506, and held that §§506(a) and 506(d) did not have to be read together, and that the term “allowed secured claim” in §506(d) was not defined by reference to §506(a). Instead, the Court determined that, consistent with preCode rules that liens pass through bankruptcy unaffected, the term “allowed secured claim” in §506(d) means a claim that is, first, allowed under §502 and, second, secured by a lien enforceable under state law, without regard to whether that claim would have been deemed secured or unsecured under §506(a).
Therefore, the Ryan court found that the IRS’ claim was secured by a lien enforceable under state law, and then held that the IRS’ claim could NOT be stripped down pursuant to §506(d). However, the Ryan court noted in dicta that the IRS’ claim could be stripped down pursuant to other sections of the Bankruptcy Code, including 11 U.S.C. §1325.
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