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Reinstated Federal Tax Liens On Property Owned Pre-Bankruptcy

Lesson. An erroneously-released federal tax lien can be reinstated, and the lien can reattach to a debtor’s pre-petition property, even in the wake of a bankruptcy discharge.

Case cite. United States v. Shadoan, 2021 U.S. Dist. LEXIS 219003 (S.D. Ind. Nov. 12 2021)

Legal issue. Whether Debtor’s bankruptcy discharge from tax liabilities prevented a reinstated federal tax lien from attaching to Debtor’s property.

Vital facts. A federal tax lien arose against Debtor, and the USA recorded the lien with the Hamilton County Recorder. Debtor subsequently sought Chapter 7 bankruptcy protection and received an order of discharge. The USA then released the lien by mistake, but later reinstated it (to the chagrin of Debtor).

Procedural history. The Shadoan opinion stems from litigation between the USA and Debtor related to, among other things, the validity of the tax lien reinstatement. Debtor filed a motion to dismiss the USA’s action.

Key rules. The opinion contains all sorts of citations to federal tax lien law. If interested or needed, dig in.

A BK discharge “does not disturb valid, pre-petition federal tax liens.” The USA may still enforce the lien in rem by proceeding against the property.

Under the US Code, the USA, through the IRS, can reinstate an erroneously-released lien by filing a revocation certificate. 26 U.S.C. § 6325(f)(2). Such a lien will reattach to a debtor’s pre-bankruptcy property.

Holding. The court denied Debtor’s motion to dismiss.

Policy/rationale. Debtor made two assertions. First, he claimed that the certificate of release of lien conclusively established that the federal tax lien was extinguished such that a reinstatement could not occur. Alternatively, Debtor argued that, once he obtained his BK discharge, the individual income tax liability ceased to exist such that there was no longer a federal tax lien to reinstate. The court rejected Debtor’s contentions and found that the USA followed the required procedure to appropriately reinstate the federal tax lien against Debtor’s property and Debtor’s corresponding rights to it. Remember that liens on real estate don’t disappear simply because the underlying debt disappears through BK.

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I represent 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 [email protected]. 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.