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Southern District Of Indiana Opinion Explains Why Federal Tax Liens Are Not Terminated In Bankruptcy

Lesson. A bankruptcy discharge can eliminate a tax payer’s personal liability for unpaid income taxes, but it will not extinguish a pre-existing tax lien on the tax payer’s real estate.

Case cite. United States v. Webb, 486 F. Supp. 3d 1238 (S.D. Ind. 2020) PDF

Legal issue. Whether federal income tax liens that attached to real estate belonging to bankruptcy debtors as of the date of the bankruptcy petition were unaffected by the bankruptcy.

Vital facts. The IRS filed notices of tax liens with the Hendricks County Recorder in 2010 against the Webbs related to certain tax assessments. The Webbs filed for bankruptcy in 2013, and one of the assets they scheduled was their residence. Later in 2013, the Webbs received a bankruptcy discharge. In 2014, the IRS mistakenly abated the tax assessments and mistakenly released the tax liens. The IRS corrected these mistakes in 2016 by reversing the abatement and filing revocations of the tax lien releases..

Procedural history. In this action before United States District Judge Hanlon, the USA, on behalf of the IRS, filed a motion for summary judgment to enforce its tax liens.

Key rules.

The Court noted that “a federal tax lien arises when ‘any person liable to pay any tax neglects or refuses to pay the same after demand.’” 26 U.S.C. § 6321.

Moreover, a “lien automatically ‘arise[s] at the time the assessment [of a tax] is made.’” 26 U.S.C. § 6322.

Such liens “attach to ‘all property and rights to property’ owned by the delinquent taxpayer during the life of the lien, 26 U.S.C. § 6321, and continue ‘until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.’” 26 U.S.C. § 6322.

Further, the Court in its opinion noted that prior federal courts have held that a taxing authority's existing lien upon property at the time of bankruptcy is not released or affected by the discharge. “Tax liens survive bankruptcy and may be enforced in rem even after the debtor has been discharged.”

Holding. The District Court granted the IRS’s summary judgment motion. The tax liens “remained intact.”

Policy/rationale. The Webbs asserted that the tax liens could not be reinstated because the tax assessments were discharged through bankruptcy. However, the discharge only extinguished one mode of enforcement, specifically an action against the Webbs for personal liability. The bankruptcy did not, however, disturb the in rem action against the Webbs’ real estate. In other words, the discharge terminated the underlying tax assessments against the Webbs individually but did not affect the right of the IRS to pursue relief for those assessment against the Webbs’ real estate. The Court emphasized the policy that federal tax liens have a “broad reach.”

The Court’s opinion discussed the Webbs’ other contentions concerning the mistaken releases and various bankruptcy-related matters. Please read the opinion if you have further interest in the Webb case.

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My practice includes representing lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.