In re Blackerby

• Decision Date: 24 April 1997
• Docket Number: Bankruptcy No. 96-13450 DAS.
• Citation: 208 BR 136
• Parties: In re Mercidene H. BLACKERBY, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

208 B.R. 136 (1997)

In re Mercidene H. BLACKERBY, Debtor.

Bankruptcy No. 96-13450 DAS.

United States Bankruptcy Court, E.D. Pennsylvania.

April 24, 1997.

Theodore Hoppe, Media, for debtor.

Kathleen Kernaghan, District Counsel, IRS, Philadelphia, PA, for I.R.S.

Edward Sparkman, Philadelphia, PA, Chapter 13 Trustee.

OPINION

DAVID A. SCHOLL, Chief Judge.

A. INTRODUCTION

MERCIDENE H. BLACKERBY ("the Debtor") faces, for the second time, a contention by the United States of America's Internal Revenue Service ("the IRS"), that a large portion of the IRS' claim of over $116,000 is secured and that, as a result, her Second Modified Chapter 13 Plan ("the Plan") cannot be confirmed pursuant to 11 U.S.C. § 1325(a)(5). The primary issue at hand at this juncture is whether certain "renewal commissions" ("the Commissions") that the Debtor has been receiving from State Farm Insurance Company ("State Farm") can be reached by the tax lien of the IRS.

Consistent with our recent prior decisions in this case, In re Blackerby, 1997 WL 30865 (Bankr.E.D.Pa. Jan. 21, 1997) ("Blackerby I") (tax lien on exempt property is not subject to avoidance); and in In re Marlin, 1997 WL 20454 (Bankr.E.D.Pa. Jan. 16, 1997) (a debtor's right to receive retirement benefits except in the case of a very limited contingency is subject to a tax lien), we hold that the Commissions are reachable by the IRS' tax lien. Since we ordered that dismissal was to follow if the Plan could not be confirmed for any reason, the Debtor's case is dismissed.

B. FACTUAL AND PROCEDURAL HISTORY

The Debtor filed her individual Chapter 13 bankruptcy case over a year ago, on April 17, 1996. The confirmation hearing was initially scheduled on October 31, 1996. In response to a motion of the Standing Chapter 13 Trustee, Edward Sparkman, Esquire ("the Trustee"), to dismiss this case because the initial plan was insufficient to pay all secured and priority claims, the Debtor filed, inter alia, on November 22, 1996, an Objection to the Proof of Claim of the IRS and a Motion to Avoid the Lien of the IRS and to Declare the then $10,012.00 Secured Portion of the IRS Claim Unsecured ("the Objection").

In Blackerby I, we denied the Objection insofar as it attempted to eliminate the $4,012.00 secured portion of an amended proof of claim filed by the IRS. The IRS' amended claim also included an uncontested priority portion of $36,309.13. In so concluding, we first held that the Debtor could not invoke 11 U.S.C. § 545(1)(D) because she was unable to contend that the lien attached as a result of her insolvency. Id. at *1-*3. Next, we held that the breadth and vitality of the federal tax lien, as provided by 26 U.S.C. § 6321, precluded avoidance of the tax lien merely because the property securing it was exempt from levy. Id. at *3. Finally, we held that the foregoing conclusion was codified in 11 U.S.C. § 522(c)(2)(B). Id.

Our Blackerby I order, id. at *1, allowed the Debtor to file an amended plan consistent with our order by January 24, 1997. It also scheduled what we warned could be a final confirmation hearing on February 20, 1997.

Although the Debtor filed an amended plan which appeared to be consistent with Blackerby I, the IRS raised a new issue, basically that presently before us, in objections to this plan filed on February 18, 1997. Therein, the IRS alleged that it retained a security interest in the Commissions. The IRS contended that the Debtor's failure to list the Commissions as part of her personal property on Schedule B (she had referenced same as $1,000 monthly "income from sale of business" on Schedule I) had caused it to overlook its lien in the Commissions until that time. An amended proof of claim, filed February 25, 1997, increased the secured portion of the IRS' claim from $4,012.00, as asserted in Blackerby I, to $55,544.40, in addition to its $36,309.23 priority portion.

On February 20, 1997, not having fully understood the significance of IRS' latest assertions, we allowed the Debtor until February 21, 1997, to file a further amended plan which would either be confirmed at a final confirmation hearing of March 20, 1997, or the case would be dismissed.

The Debtor filed the Plan on February 21, 1997, as directed. It provided that the Debtor would pay $381 for 10 months, $635 for 24 months, and $960 for 26 months. While these payments would total "no less than $43,991.10," per the Plan (the total appears to be $44,010), they would clearly be insufficient to pay the IRS' secured and priority claims totalling $91,853.53. The IRS therefore filed objections to the Plan based on 11 U.S.C. § 1325(a)(5). Additionally, the IRS raised objections based on 11 U.S.C. § 1325(a)(6), contending that the Debtor would be unable to make the $960 monthly payments, especially since payment of the Commissions will cease at the end of the year 2000, and the Debtor's payments will continue through April 2001; and 11 U.S.C. § 1325(b)(1)(B), contending that the Debtor's Schedules I and J indicated that $635 monthly excess disposable income was available during the first 10 plan months, when only $381 monthly was paid.

At the March 20, 1997, hearing, we initially expressed chagrin that the parties had not uncovered this dispute earlier, at least as of the time that the relatively insignificant differences resolved in Blackerby I were before the court. The Debtor contended that the IRS had sufficient information at its disposal to raise these issues sooner. The IRS claimed that the Debtor's failure to include the Commissions on Schedule B was responsible for its belated actions. Neither party attempted to press misconduct or waiver of the other as an issue in the discussion of the oversight of the issue. Instead, they presented to us a handwritten Stipulation of Facts and thereafter a testimonial record on the current objections, featuring the testimony of the Debtor and emphasizing the issue of whether the IRS had a lien on the Commissions. After the hearing, we allowed the parties until April 11, 1997, to brief the issue, warning the Debtor that

in light of the entry of past orders indicating that the Debtor would be restricted in further opportunities to amend her plan, the Debtor is advised that, if confirmation of the Plan is denied for any reason, this case will most probably be dismissed.

The Stipulation and testimony established that the Debtor was formerly an independent insurance agent who sold insurance policies for State Farm, as well as several other insurance companies. After the agency for which she worked closed, she obtained employment directly from State Farm in another capacity. Upon ceasing to be employed as an independent insurance agent, the Debtor became entitled to the Commissions from State Farm. The Commissions paid to her were based on the insurance policies that she had sold prior to ending her relationship with State Farm as an independent insurance agent. A letter was sent to the Debtor by State Farm on January 26, 1995, advised her that, effective January 31, 1995, she would begin to receive her "termination payments," i.e., the Commissions on insurance policies sold by her prior to January 1, 1995, when she joined State Farm as an employee, and that the payments would continue for the next five years. This letter does not indicate that the Debtor will have to provide any further services to State Farm in order to receive the Commissions.

The IRS had filed a Notice of Federal Tax Lien against Debtor prior to the date on which she filed her bankruptcy petition. It now claims that the tax lien embraces the Commissions. The only authority cited by the Debtor in favor of her position that the tax lien does not reach the Commissions is Rev.Rul. 90-72, 1990-2 C.B. 211, in which the IRS determined that renewal commissions paid to an insurance agent after his retirement were taxable under the Self Employment Contributions Act (SECA), and hence were comparable to wages, because they were derived from the retired agent's services as an insurance agent while he was still employed as such. Wages, the Debtor contends, are exempt from the federal tax lien, citing 26 U.S.C. § 6321. Actually, § 6321 sets forth the general rule that the tax lien attaches to "all" of a taxpayer's "property and rights to property, whether real or personal," while 26 U.S.C. §§ 6334(a)(9), (d) provide an exemption of wages from levy. The IRS responds that the Commissions are fixed without the Debtor's obligation to provide services, unlike wages, and that, in any event, wages are subject to the federal tax lien.

C. DISCUSSION

Other Revenue Rulings and numerous other authorities, including Blackerby I and Marlin, supra, establish that IRS' position that it has a lien on the Commissions is correct. In Rev.Rul. 54-312, 1954-2 C.B. 327, the IRS determined that renewal commissions received by a full time insurance agent for the sale of insurance policies "are deemed to be remuneration for services performed at the time the sales were consummated." Thus, it held that the renewal commissions were wages taxable under the Federal Insurance Contributions Act (FICA), but for which the consideration was past services rather than services to be performed. This Revenue Ruling was later distinguished in Rev.Rul. 59-103, 1959-1 C.B. 259 (when an insurance agent is engaged full time as the agent for one insurance company, he will be deemed to be an employee of that insurance company if his entire business activity is the solicitation of insurance policies for that one insurance company, and thus he must pay taxes under FICA; an agent who is not an employee of insurance company must pay taxes on the renewal commissions under SECA), and was further distinguished in Rev.Rul. 58-177, 1958-1 C.B. 351 (insurance agent engaged by two related insurance companies was deemed an employee of both companies for federal employment tax purposes under FICA; the IRS applied § 1426(d) of FICA, as amended by...