CCA 200031030: Bankruptcy discharge limits levy notice to prepetition property

Plain-English summary

Chief Counsel reviewed a draft IRS levy notice for a taxpayer whose tax liability had been discharged in bankruptcy. The IRS had filed a federal tax lien before the bankruptcy petition and was considering levy on property encumbered by that lien. The memo advised that the notice should explain the discharge and limit its description of collection to property acquired before the bankruptcy filing. A surviving prepetition lien can still reach specified prepetition property, including exempt property, but does not attach to property acquired after the petition when the underlying liability has been discharged. The memo recommended deleting language suggesting a continuing personal liability or a new lien on later assets, and said the standard Letter 1058 was unsuitable for this situation.

Ruling snapshot

• Question: How should a levy notice describe a surviving federal tax lien after the taxpayer's underlying liability was discharged in bankruptcy?
• Outcome: Advice given. Revise the notice to clarify that the lien does not attach to post-petition property.
• Key authorities: IRC §§ 6330 and 6331; Bankruptcy Code §§ 522(c)(2)(B) and 524(a)(3).

Full text (IRS public release)

                          DEPARTMENT OF THE TREASURY
                             I N T E R N AL R E V E N U E S E R V I C E
                                  WASHINGTON, D.C. 20224
                                   April 14, 2000


Number: 200031030                                          GL-802352-00
Release Date: 8/4/2000                                     UIL: 09.26.00-00
                                                                9999.98-00

MEMORANDUM FOR CENTRAL CALIFORNIA DISTRICT COUNSEL
               Attn: John Chinnapongse

FROM:                  Alan C. Levine
                       Chief, Branch 1 (General Litigation) CC:EL:GL:Br1

SUBJECT:

This responds to your memorandum requesting our comments on your draft Notice
of Intent to Levy and Notice of Your Right to a Hearing and draft letter, which would
be sent to a taxpayer after he received a discharge in bankruptcy. This document
is not to be cited as precedent.

ISSUE:

Whether the draft notice and accompanying form letter need to be modified to
clarify that the federal tax lien does not attach to a taxpayer’s post-petition property
when the underlying tax liability is discharged in bankruptcy?

CONCLUSION:

The attached draft notice and accompanying letter should be modified to clarify that
the federal tax lien does not attach to a taxpayer’s post-petition property after the
underlying tax liability is discharged in bankruptcy.

FACTS:

The Internal Revenue Service (“Service”) filed a Notice of Federal Tax Lien prior to
the taxpayer’s petition in bankruptcy. Subsequently, the bankruptcy court
discharged the taxpayer’s tax liabilities. The Service is now considering levying on
the taxpayer’s prepetition property encumbered with the prepetition tax lien.

LAW AND ANALYSIS:

I.R.C. § 6330 provides the taxpayer with a collection due process hearing prior to
levy. Prepetition liens pass through bankruptcy on the debtor’s encumbered
property, unless provisions of the Bankruptcy Code explicitly strip a lien from the
property. Dewsnup v. Timm, 502 U.S. 410 (1992). If the Service files a Notice of
GL-802352-00                              -2-

Federal Tax Lien prior to the petition date, the federal tax lien remains on the
debtor’s exempt property. B.C. § 522(c)(2)(B). E.g., Demarah v. United States, 62
F.3d 1248 (9th Cir. 1995). B.C. § 524(a)(3) permanently enjoins any action by a
creditor to recover a discharged debt.

In the draft notice, the opening sentences are incorrect. These sentences provide
as follows: “Your federal tax is still not paid. We previously asked you to pay this,
but we still haven’t received your payment.” These sentences are problematic
because they suggest that the taxpayer still has a personal liability for the tax, and
the Service is trying to collect that liability. The taxpayer, however, has had his tax
liability discharged in bankruptcy. We recommend that the entire first paragraph be
deleted and the following paragraph be inserted in its place:

      The Internal Revenue Service perfected its tax liens by recording
      Notices of Federal Tax Lien prior to the filing of your bankruptcy
      petition. Even though you received a discharge in your bankruptcy
      proceeding, that discharge does not prohibit the Service from
      enforcing its tax lien against property excluded, exempt, or abandoned
      from the bankruptcy estate. This letter is your notice of our intent to
      levy against that property under Internal Revenue Code (“I.R.C.”) 6331
      and your right to receive a hearing with an Appeals Officer under
      I.R.C. § 6330. Your schedules list the following properties that are
      affected:

The second paragraph of the draft notice should also be deleted. That paragraph
provides as follows:

      We may file a Notice of Federal Tax Lien at any time to protect the
      government’s interest. A lien is a public notice to your creditors that
      the government has a right to current assets, including any assets you
      acquire after we file the lien.

The above paragraph is at best confusing. It begins by stating that “We may file” a
lien, but the facts are that a Notice of Federal Tax Lien was filed prepetition.
Indeed, the Service cannot now file a new tax lien for a discharged tax liability. The
paragraph goes on to state the “government has a right to current assets, including
any assets you acquire after we file the lien.” This is incorrect. At most, after the
tax liability has been discharged, the Service’s prepetition lien encumbers the
debtor’s prepetition property. The prepetition lien does not encumber the debtor’s
property acquired post-petition. E.g., Dinatale v. United States, 235 B.R. 569, 574
(Bankr. D. Md. 1999) (listing cases holding that federal tax lien does not attach to
post-petition property after tax liability discharged). This entire paragraph should be
deleted. The effect of the prepetition federal tax lien is adequately explained in the
first paragraph that we have rewritten.
GL-802352-00                               -3-

The third paragraph of the notice contains the same defect as the second
paragraph, i.e., it fails to clarify that the federal tax lien encumbers only the
taxpayer’s prepetition property. Thus, the statement that “we may take your
property, or rights to property, such as real estate, automobiles, business assets,
bank accounts, wages, commissions, and other income” is correct only if these
items were prepetition assets. This sentence should be rewritten to state “If you
don’t pay the amount you owe, make alternative arrangements to pay, or request
Appeals consideration within 30 days from the date of this letter, we may take your
property that you acquired prior to bankruptcy.” In light of the above changes,
Letter 1058 is not appropriate for this situation.

Finally, the draft letter notice does not explain that the federal tax lien remains on
exempt property. We recommend that you cite section 522(c)(2)(B) for this
principle and the Ninth Circuit's decision in Demarah. This should clarify the
situation for the debtor.

If you have any further questions, please let us know.



cc: Assistant Regional Counsel (GL) Western Region
    Chief of Procedural Branch, CC:DOM:FS:PROC