In re Leslie, Bankruptcy No. 87-30016
| Decision Date | 14 March 1989 |
| Docket Number | Bankruptcy No. 87-30016,Adv. No. 87-0082. |
| Court | U.S. Bankruptcy Court — Southern District of West Virginia |
| Parties | In re James Carl LESLIE and Loretta Faye Leslie, Debtors. James Carl LESLIE and Loretta Faye Leslie, Plaintiffs, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Defendant. |
Helen M. Morris, Baer, Colburn & Morris, Huntington, W.Va., for debtors.
Gerald A. Role and William J. Dean, U.S. Dept. of Justice, Washington, D.C., Gary L. Call, U.S. Atty., Charleston, W.Va. for IRS.
The Debtors commenced the above-styled adversary proceeding on April 29, 1987, by filing a complaint to avoid a federal tax lien pursuant to 11 U.S.C. §§ 545(1)(D) and 522(h) and to limit enforcement of that tax lien under 11 U.S.C. § 105. The Internal Revenue Service IRS, the defendant in this action, timely filed an answer to the complaint and thereafter filed a motion to dismiss this action. At the September 28, 1987 trial, the Court took the matter under advisement to permit the parties to file additional legal memoranda. The Court has now reviewed the pleadings and memoranda filed and, for the reasons set forth below, will grant in part the relief requested by the Debtors and dismiss this adversary proceeding.
Facts relevant to this action are not in dispute. The Debtors filed their Chapter 7 bankruptcy petition in this district on January 23, 1987. At the time of that filing, the Debtors' Huntington, West Virginia real estate was subject to a federal tax lien recorded in the office of the Clerk of the County Commission of Cabell County, West Virginia in Judgment Book 21 at page 179. The IRS filed its Notice of Federal Tax Lien under Internal Revenue Laws on November 22, 1982, for $4,846.98 in federal income taxes for the tax years 1980 and 1981. The Notice stated expressly that the tax lien included the amount of the aforementioned taxes plus additional penalties, interest and costs that may accrue.
The Debtors do not dispute the validity or the amount of these taxes assessed against them. The real estate that is subject to the IRS tax lien is the principal residence of the Debtors and their dependents. According to the schedules filed with the Debtors' Chapter 7 bankruptcy petition in January, 1987, this real estate is subject to a deed of trust held by Citicorp. From reference to the schedules filed in the Debtors' Chapter 7 case, the Court takes judicial notice that the subject real property has value above the first lienholder's claim, so that the pre-petition tax lien claim of the IRS is fully secured.
In their complaint, the Debtors allege that the IRS lien against their property first became effective at a time when they became or were insolvent. They maintain that they were unable to borrow funds to pay their federal tax debt. The Debtors also assert that the trustee in their Chapter 7 bankruptcy case could avoid the IRS tax lien pursuant to 11 U.S.C. § 545(1)(D), but that the trustee has no interest in doing so. Therefore, the Debtors argue that they may avoid the tax lien under provisions of 11 U.S.C. § 522(h), on the ground that the lien impairs an exemption they are entitled to claim in their homestead.
The Debtors contend that their tax debt underlying the IRS lien is dischargeable, as the debt was more than three years old at the time they filed their bankruptcy petition. They also maintain that tax penalties assessed for the 1980 and 1981 tax years are likewise dischargeable, and that their federal income tax liability and penalties thereon were in fact discharged pursuant to the July 22, 1987 discharge order entered in their Chapter 7 case. They further assert that penalties and interest assessed against them for the two tax years in question are not included in the Notice of Federal Tax Lien recorded in Cabell County, West Virginia on November 22, 1982. The Debtors argue that to the extent that such tax penalties and interest might be considered to constitute a lien, they are avoidable by the Debtors under 11 U.S.C. § 724(a).
Alternatively, the Debtors maintain that if the federal tax lien against their property is not avoided and the IRS may enforce the same by selling their real estate, they and their dependents will be displaced from their home and caused to suffer undue hardship. They request that this Court invoke its equitable authority under 11 U.S.C. § 105 to enjoin the IRS from enforcing its lien until such time as the subject realty is sold or the survivor of the Debtors is deceased.
The IRS has stipulated that the Debtors were insolvent on November 22, 1982 when its tax lien against them was recorded, and that the lien for penalties that accrued prepetition on the Debtors' 1980 and 1981 taxes is avoidable under 11 U.S.C. § 724(a). However, the IRS argues that the complaint filed in this action fails to state a claim upon which relief can be granted and therefore must be dismissed pursuant to Bankruptcy Rule 7012. The IRS contends that the Debtors are incorrect as a matter of law in asserting that the federal tax lien against them can be avoided under 11 U.S.C. § 545(1)(D), on the basis that the lien first became effective against their property when the Debtors were insolvent. The IRS asserts that its tax lien was not designed to become effective due to the Debtors' insolvency. Rather, the Debtors' failure to pay their 1980 and 1981 federal income taxes after notice of assessment and demand for payment effectuated the IRS tax lien. Therefore, 11 U.S.C. § 545(1)(D) is inapposite.
As to pre-petition liens, the Court agrees with the IRS and adopts the reasoning followed in Reitmeyer v. Internal Revenue Service (In re Totten), 82 B.R. 402 (Bankr.W.D.Pa.1988), Wisconsin Dept. of Industry, Labor and Human Relations v. Ludwig (In the Matter of Napco Graphic Arts, Inc.), 51 B.R. 757 (Bankr.E.D.Wis. 1985), and Davis v. Internal Revenue Service (In re Davis), 22 B.R. 523 (Bankr.W.D. Pa.1981), regarding the inapplicability of 11 U.S.C. § 545(1)(D) to avoidance of federal tax liens.
The Court concurs that the Debtors' tax liability underlying the IRS tax lien and pre-petition interest and penalties on that tax liability are dischargeable. 11 U.S.C. §§ 507(a)(7), 523(a)(1) and (a)(7). That tax debt and...
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