Did California violate the bankruptcy automatic stay by recording an FAA lien against an aircraft registered to a different name but owned by the debtor?

Plain-English summary

California legal staff concluded that the Board's FAA lien against an aircraft violated the bankruptcy automatic stay because the aircraft belonged to the debtor's bankruptcy estate.

The aircraft was registered in the name of a corporation that the bankruptcy court later found was only an unfiled business name of the Chapter 11 debtor. The Board had issued a determination and requested liens without knowing that ownership fact. Even so, the FAA lien attached to the aircraft and prevented a buyer from receiving clear title until it was paid or released.

The trustee paid the tax to sell the aircraft. Staff treated that payment as illegally collected under Revenue and Taxation Code section 6901 and recommended a refund. The memorandum separately recommended issuing the debtor a determination for tax, interest, and penalty and filing a proof of claim in the bankruptcy case.

Common questions

Did the Board's lack of knowledge prevent a stay violation?

No, according to the memorandum.

Why was a refund recommended?

The trustee paid the lien to clear title, and staff considered that amount illegally collected.

Did staff say no tax was owed on the aircraft purchase?

No. Staff recommended a new determination and bankruptcy proof of claim.

Citations and references

• California Revenue and Taxation Code section 6901 — refund of an illegally collected amount

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0001-151.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum
170.0001.151
To :

Mr. W. Brian Manuel, Supervising Tax Auditor,
Refunds and Local Allocation Service

From :

Thomas J. Cooke
Tax Counsel

Subject:

R--- & D--- Corporation
Permit No. SP -- XX-XXXXXX-001

Date:

Telephone:

October 31, 1996

(916) 445-6496
CalNet 485-6496

Gary Jugum has requested that I respond to your memorandum to him dated October 22, 1996 concerning the above taxpayer. In your memorandum, you state that the Centralized Collection Section has recommended denial of a claim for refund. You ask that the Legal Section advise if a lien filed by the Board was in violation of the bankruptcy automatic stay. On November 26, 1991, R--- D--- sold an aircraft to R--- & D--- Corporation. On June 30, 1995, the Consumer Use Tax Section mailed a tax return to the corporation. The return was never filed. On October 31, 1995, R--- I--- Corporation filed Chapter 11 bankruptcy. On November 22, 1995, the Board issued a Notice of Determination to R--- & D--- Corporation. On February 20, 1996, the Board requested that liens be recorded in San Diego County and with the FAA. On April 22, 1996, M--- A---, an attorney for R--- I--- Corporation’s bankruptcy trustee advised the Board that “R---” was the true owner of the aircraft and that R--- & D--- Corporation does not exist. On May 8, 1996, the FAA recorded the Board's lien against the aircraft. On June 12, 1996, the bankruptcy court found that R--- & D--- Corporation is an unfiled dba of R--I--- Corporation, that the aircraft although FAA-registered in the name of R--- & D--Corporation was in fact property of R--- I--- Corporation and upon commencement of R--- I--Corporation’s bankruptcy case, the aircraft became property of the debtor’s bankruptcy estate. The bankruptcy court authorized the trustee to sell the aircraft and authorized the payment of the Board’s lien on the aircraft “with a full reservation of rights for refund of amounts paid.” On or about June 14, 1996, the payment of the tax liability was made. The bankruptcy trustee has filed a claim for refund on two grounds: 1) R--- I--- Corporation purchased the aircraft for resale; and 2) the lien that the Board filed violated the bankruptcy automatic stay.

Mr. W. Brian Manuel

-2-

October 31, 1996
170.0001.151

When the Board requested that a lien be recorded with the FAA, the automatic stay was in effect. Although the aircraft was registered with the FAA under the R--- & D--- Corporation name, the Board’s lien would attach to the aircraft itself and any potential purchaser of the aircraft could not obtain clear title until the lien was paid or released. The bankruptcy court has found that at the time that R--- I--- Corporation filed bankruptcy, the aircraft became property of the bankruptcy estate. It is our opinion that the filing of the FAA lien by the Board violated the bankruptcy automatic stay even though the Board had no opportunity to discover that the true owner of the aircraft had filed for bankruptcy protection. The bankruptcy trustee paid the tax due on the aircraft so that the lien on the aircraft would be released and the aircraft could be sold to a third party. Revenue and Taxation Code section 6901 provides that a refund be granted for any amount “illegally collected.” It is our opinion that the Board should grant the refund on that basis issue a Notice of Determination to R--- I--- for the tax, interest and penalty due on its purchase of the aircraft and file a proof of claim for that amount in the bankruptcy proceeding. TJC/cmm