Wadleigh v. Comm'r of Internal Revenue

• Decision Date: 15 June 2010
• Docket Number: No. 10783–07L.,10783–07L.
• Citation: 134 T.C. 280,134 T.C. No. 14
• Parties: Vance L. WADLEIGH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

134 T.C. 280

134 T.C. No. 14

Vance L. WADLEIGH, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 10783–07L.

United States Tax Court.

June 15, 2010.

R issued a notice of intent to levy on P's pension income to collect P's unpaid Federal income tax for 2001. P timely requested a hearing under sec. 6330, I.R.C. At the hearing P argued: (1) His liability for the unpaid 2001 Federal income tax was discharged in his 2005 bankruptcy; (2) the notice of intent to levy was invalid because his pension was not yet in payout status; and (3) a prior notice of levy for a similar amount of unpaid tax was issued and later released. R's Office of Appeals determined that the proposed levy could proceed. P contends the Appeals Office abused its discretion.

Held: The sec. 6321, I.R.C., lien that attached to P's interest in his pension was not discharged by his 2005 bankruptcy because his interest in his pension was excluded from his bankruptcy estate pursuant to 11 U.S.C. sec. 541 (2006).

Held, further, although P's discharge in bankruptcy relieved him of personal liability for the unpaid 2001 Federal income tax, the discharge does not prevent R from collecting P's unpaid 2001 Federal income tax in rem by levy on P's pension income, notwithstanding R's failure to file a valid notice of Federal tax lien with respect to the 2001 Federal income tax liability.

Held, further, although R may not enforce a levy on P's interest in his pension until the pension enters payout status, R's notice of intent to levy is not invalid merely because it was mailed to P 9 months before P's pension entered payout status.

Held, further,

R's release of a prior levy does not release the sec. 6321, I.R.C., lien that R held with respect to P's interest in his pension.

Held, further, R's Office of Appeals verified that the requirements of any applicable law and administrative procedure had been satisfied and considered all of P's arguments. However, because the Appeals Office assumed that P's wage income would continue after P started receiving his pension without any support in the administrative record for the assumption, we shall exercise our discretion to remand this case to the Appeals Office for further proceedings.

John A. Strain, for petitioner.

Spencer T. Stowe, for respondent.

OPINION

MARVEL, Judge:

Pursuant to section 6330(d),¹ petitioner seeks review of respondent's determination to sustain a proposed levy on petitioner's interest in his pension. The levy relates to petitioner's unpaid 2001 Federal income tax liability. The issue for decision is whether respondent abused his discretion when he sustained the proposed levy. To resolve this issue, we must first decide whether a section 6321 lien that was not perfected by the filing of a valid notice of Federal tax lien (NFTL) may be enforced by a levy on petitioner's pension income after petitioner's personal liability for the unpaid tax has been discharged in bankruptcy.

Background

The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts is incorporated by this reference. On the date he filed his petition, petitioner resided in California.

On June 28, 2002, respondent recorded an NFTL purportedly relating to petitioner's 2001 tax liability. When the NFTL was recorded, petitioner had not yet filed his 2001 Federal income tax return. In fact, respondent intended to issue the NFTL with respect to petitioner's 2000 Federal income tax liability but identified the wrong year (2001) on the NFTL and recorded it in error. ² Respondent has since withdrawn the NFTL. The record contains no evidence that respondent recorded any other NFTL with respect to petitioner's 2001 tax liability.

On or about August 16, 2002, petitioner filed a 2001 Form 1040, U .S. Individual Income Tax Return. Petitioner reported a balance due on the return but did not pay the balance when he filed the return. On September 16, 2002, respondent assessed the tax shown on the return, an addition to tax for failure to pay timely, an addition to tax for failure to pay estimated tax, and interest. Petitioner has not paid the resulting liability (collectively, the 2001 tax liability).

On August 18, 2005, petitioner and his wife, Linda Wadleigh, filed a voluntary chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Central District of California. On Schedule B, Personal Property, of the bankruptcy petition, petitioner listed his interest in his Honeywell Pension Plan account (pension). However, on Schedule C, Property Claimed as Exempt (schedule C), of the bankruptcy petition, petitioner claimed the pension was exempt property. Petitioner included the following statement on schedule C:

The interest in the Honeywell Pension Plan is claimed as exempt to the extent, if any, that said Pension Plan is property of the estate, and the claims of exemption include any increases in the value of Debtors' interests therein. Debtors contend that their interest in the Honeywell Plan are [sic] excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2); Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992).

As reflected on schedule C, petitioner claimed his interest in the pension was excluded from the bankruptcy estate pursuant to 11 U .S.C. sec. 541(c)(2) (2006), which provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a [bankruptcy] case”, as interpreted in Patterson v. Shumate, 504 U.S. 753, 758–759, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992).³ Alternatively, petitioner claimed the pension was exempt property under 11 U.S.C. sec. 522(b)(2) (2006) and Cal.Civ.Proc.Code sec. 703. 140(b)(10)(E) (West 2009),⁴ if and to the extent the pension was properly includable in the bankruptcy estate.

When petitioner filed for bankruptcy, he was fully vested in his pension, but the pension was not yet in payout status and did not contain a lump-sum or similar option that would have permitted petitioner to withdraw funds from the pension before reaching retirement age. Petitioner's right to receive monthly payments of $1,242.13 under the pension matured on November 1, 2007.

On December 8, 2005, petitioner received a discharge in the bankruptcy case. Petitioner's 2001 Federal income tax liability was included in the discharge.

On August 31, 2006, respondent mailed petitioner a notice of intent to levy on petitioner's pension income to collect petitioner's unpaid 2000 Federal income tax liability. On November 16, 2006, however, respondent withdrew the notice of intent to levy.

On January 29, 2007, more than 9 months before petitioner's pension entered payout status, respondent mailed petitioner a Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy) with respect to petitioner's 2001 tax liability. The notice of intent to levy stated in pertinent part as follows:

You have received a discharge under Chapter 7 of the Bankruptcy Code. Thus, you are relieved from personal liability for the following tax liabilities:

+--------------------------------------------------------------+
                ¦Kind of Tax¦Period    ¦Amount Including Penalties and Interest¦
                +-----------+----------+---------------------------------------¦
                ¦1040–Income¦12/31/2001¦$57,805.33 (As of 08–30–2007)          ¦
                +--------------------------------------------------------------+
                

However, at least one Notice of Federal Tax Lien for the above tax liabilities was properly filed before your bankruptcy. Despite your relief from personal liability, the federal tax liens remain attached to your prepetition property, and the IRS is permitted to take collection action, based on these federal tax liens, against your prepetition property at any time within the period permitted by law for collection of the tax. Also, the Service can pursue administrative collection from property excluded from the Bankruptcy estate based solely on its statutory lien.

This letter is your notice of our intent to levy against prepetition property under Internal Revenue Code (IRC) section 6331 and your right to receive Appeals consideration under IRC section 6330.

Prepetition property is property that you held prior to your bankruptcy filing that was not sold or liquidated by the Chapter 7 trustee for the payment of your debts. Prepetition property includes three types of property: (1) property you exempted from the bankruptcy estate under section 522 of the Bankruptcy Code; (2) property abandoned by the bankruptcy trustee under section 554 of the Bankruptcy Code; and (3) property excluded from the bankruptcy estate under applicable law, as opposed to property you exempted from the bankruptcy estate. An example of excluded property is an interest in a section 401(k) plan or other employer-sponsored plan that meets the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). * * *

Although the notice of intent to levy does not expressly identify the pension, the parties have stipulated that the pension is the prepetition property on which respondent plans to enforce his levy. Neither party disputes that the pension is to be paid pursuant to a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, 88 Stat. 829, or that the plan is subject to the antialienation provision of ERISA sec. 206(d)(1), 88 Stat. 864 (current version at 29 U.S.C. sec. 1056(d)(1) (2006)).

On or about February 12, 2007, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing, objecting to the proposed levy. Petitioner did not challenge the existence or amount of the 2001 tax liability. Instead, petitioner raised five contentions relating to the appropriateness of respondent's proposed collection action: (1) Respondent had issued a levy notice for a similar amount on August 31, 2006, and released the levy on November 16, 2006; (...