What is the Effect of an IRS Lien During Bankruptcy?

This issue was addressed in In re Nomellini, 534 B.R. 166 (Bankr. N.D.CA 2015).  In Nomellini, a taxpayer filed a chapter 13 bankruptcy and listed the value of his allegedly underwater real property at $950,000 with a mortgage lien of $980,000. Taxpayer also listed personal property of $10,000.  The IRS accepted the valuations and filed a proof of claim consisting of a $10,000 secured claim and a $204,000 unsecured claim.  The chapter 13 plan stated that the “valuations shown above will be binding unless a timely objection to confirmation is filed.”  No objections were filed and the plan was confirmed.  The IRS ultimately was paid $10,000 for the secured claim.

Later, but before the plan was completed and discharge entered, the taxpayer sold the home for $2,175,000, which resulted in a $1,000,000 surplus after the mortgage obligation was paid in full.  The taxpayer argued that the IRS was only entitled to the $10,000 provided in the plan and that the IRS was limited by the confirmed plan and did not enjoy the rights of its lien.

The court phrased the issue as whether, under the provisions of the confirmed plan, the IRS was entitled to any of the proceeds of the sale of taxpayer’s real property based on the federal tax lien recorded, when the IRS has already been paid the full amount of its allowed secured claim as set forth in the confirmed plan.

The Nomellini court rejected the taxpayer’s argument believing the confirmed plan only affected the IRS’ “claim” against taxpayer and did not affect the IRS’ in rem rights established by the tax lien.  The court held that the IRS’ lien was not affected by the plan confirmation and the IRS had a valid lien against the property at the time of the sale because taxpayer never stripped or modified the IRS lien.

Practice Pointers: Taxpayer should have been more strategic.  Taxpayer should have filed a Rule 3012 motion to value the real estate soon after filing bankruptcy.  The IRS apparently would have agreed with the taxpayer’s valuation of the real estate.  Alternatively, taxpayer could have filed an adversary proceeding against the IRS and sought a valuation within the adversary and an order declaring the lien void upon issuance of the discharge.  Then, taxpayer should have paid off the case and received the discharge prior to selling the property.  Upon discharge, the IRS’ lien would have been void because the underlying debt would have been discharged. Thereafter, taxpayer could have sold the real property and kept the $1,000,000 surplus and paid nothing more to the IRS.

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