In re Pansier, Bankruptcy No. 90-20906-JES

• Decision Date: 24 April 1997
• Docket Number: Bankruptcy No. 90-20906-JES,Adversary No. 90-2173.
• Citation: 208 BR 41
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin
• Parties: In re Gary L. PANSIER, Debtor. Gary L. PANSIER, Plaintiff, v. STATE OF WISCONSIN DEPARTMENT OF REVENUE and Internal Revenue Service, Defendants.

208 B.R. 41 (1997)

In re Gary L. PANSIER, Debtor Gary L. PANSIER, Plaintiff, v. STATE OF WISCONSIN DEPARTMENT OF REVENUE and Internal Revenue Service, Defendants.

Bankruptcy No. 90-20906-JES, Adversary No. 90-2173.

United States Bankruptcy Court, E.D. Wisconsin.

April 24, 1997.

Gary L. Pansier, Crivitz, WI, Pro se.

Mary E. Bielefeld, Trial Attorney, Tax Division, U.S. Department of Justice Washington, DC.

DECISION

JAMES E. SHAPIRO, Chief Judge.

Gary L. Pansier ("Pansier" or "debtor"), appearing pro se, has filed a motion for contempt against the Internal Revenue Service ("IRS").¹ The issue presented is whether the IRS' federal tax lien extends to post-petition disability payments received by a debtor after he has filed a bankruptcy petition and whose underlying personal liability has been discharged. The IRS acknowledges that the debtor's tax obligations for the years 1982 and 1983 were discharged and that it cannot seek recovery against the debtor personally. The question remains, however, whether the IRS can levy on its pre-petition federal tax lien to satisfy the discharged tax debt for 1982 and 1983 by levying upon the post-petition disability payments received by the debtor. This, in turn, requires a determination as to whether the post-petition disability payments are covered by the IRS' tax lien as "property" or "rights to property" within the meaning of 26 U.S.C. § 6321.²

Hearings on this matter were held on December 5, 1996; January 9, 1997; and March 13, 1997. The parties have submitted briefs, presented testimony, and made oral arguments.

This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(K) and (O).

FACTS

From 1975 until December of 1987, Pansier was a commercial airline pilot for Republic Airlines and its successor, Northwest Airlines, Inc. In 1987, Pansier began receiving disability payments under a disability insurance policy from the insurance carrier formerly known as AMEX Life Insurance Company and now known as G.E. Capital Assurance Co. The IRS assessed unpaid taxes against Pansier on January 23, 1989 and recorded its notice of federal tax lien on August 17, 1989 with the Register of Deeds for Marinette County, Wisconsin. The amount assessed for 1982 was $16,237.07 and for 1983 was $48,320.97.

On February 26, 1990, Pansier filed a petition in bankruptcy under chapter 7. On May 30, 1990, he received a discharge in bankruptcy. On May 24, 1990, Pansier initiated this adversary proceeding (Adversary No. 90-2173) against the IRS seeking a determination of dischargeability of his federal tax obligations for 1982 and 1983. On October 9, 1990, pursuant to a stipulation between the IRS and Pansier, this court entered an order declaring Pansier's federal income tax liabilities for 1982 and 1983 to the IRS discharged, but also stating that nothing contained within the order affected the IRS' lien rights as against Pansier's pre-petition property.

On August 26, 1996, the IRS proceeded to levy on the disability payments being received by Pansier. As a result of such levy, IRS received two payments totalling $5,328.66. $3,109.80 of this amount was applied by the IRS to satisfy income tax liabilities for years which are indisputably not dischargeable by Pansier's bankruptcy. However, the balance of these two payments ($2,218.86) was applied by the IRS to the 1983 tax year. Pansier contends that this action by the IRS in applying $2,218.86 to discharged liabilities was improper and constitutes contempt. The IRS responded by filing a motion for summary judgment and claiming that its pre-petition lien covered the post-petition disability payments, that Pansier, at the time he filed for bankruptcy, held a vested pre-petition right to receive these payments, and that the IRS should be permitted to keep the levied proceeds applied to the 1983 tax year.

ANALYSIS

Upon the IRS assessing unpaid taxes under 26 U.S.C. § 6321, a federal tax lien was created on all property or rights to property whether real or personal belonging to the taxpayer. This lien, however, does not attach to a property or a right to property acquired by the debtor after the petition in bankruptcy has been filed, where the underlying tax liability is discharged against the debtor personally. Anderson v. United States (In re Anderson), 149 B.R. 591, 595 (9th Cir. BAP 1992). A valid tax lien against a dischargeable debt can only be satisfied to the extent it is paid from pre-petition assets. Robert E. Ginsberg & Robert D. Martin, Ginsberg & Martin on Bankruptcy § 16.08(k) (1997). Tax liens securing dischargeable debts do not attach to a debtor's post-petition after acquired property. Leavell v. United States (In re Leavell), 124 B.R. 535, 540 (Bankr.S.D.Ill.1991). The threshold question here is: Did Pansier, when he filed his petition in bankruptcy, hold "property" or "rights to property" in the disability payments he received after the filing of his bankruptcy?

The IRS cannot have any rights in a debtor's property which are greater than the rights the debtor himself has in such property. Vulcan Materials Co. v. Jack Raus, Inc. (In re HLW Enterprises of Texas, Inc.), 157 B.R. 592, 596 (Bankr.W.D.Tex.1993). If Pansier had a property interest or rights to property in his future disability payments when he filed his petition in bankruptcy, the IRS tax lien would attach to these payments, and the IRS would not have violated the permanent injunction under § 524. However, if Pansier did not have any property interest or rights to property with respect to these post-petition disability payments, the actions by the IRS would have violated § 524.

In addressing this question, state law must be examined. The United States Supreme Court has stated that, "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property." United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985). That pronouncement was recently reiterated by the Seventh Circuit in United States v. Librizzi, 108 F.3d 136, 137 (7th Cir.1997). State law determines the nature of the interest, if any, which the debtor has in such property. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979).

Pansier now is and was, when he filed his bankruptcy petition, a resident of the Village of Crivitz, Marinette County, Wisconsin. He also resided there when the IRS assessed and recorded its tax lien against him. The IRS acknowledges that Wisconsin law is controlling on the issue of whether Pansier, when his bankruptcy petition was filed, held any property interest or rights to property with respect to the post-petition disability payments. Leighton v. Leighton, 81 Wis.2d 620, 261 N.W.2d 457 (1978), is the controlling case in Wisconsin on this issue. Leighton, which arose in the context of a divorce case, held that disability payments are a replacement for income and not marital property subject to a division between the parties. Leighton sharply distinguished disability payments on the one hand from retirement benefits or benefits under a testamentary or profit sharing trust on the other hand, concluding that disability payments were more akin to "income" while retirement benefits and the like are more in the nature of "property." See also Weberg v. Weberg, 158 Wis.2d 540, 544, 463 N.W.2d 382, 383 (Ct. App.1990).

Wisconsin courts look to certain factors in analyzing this issue. In DeWitt v. DeWitt, 98 Wis.2d 44, 296 N.W.2d 761 (1980), the court ruled that an educational degree is not "property" subject to a division between the parties. The court observed that an educational degree does not have any objective transferable value on the open market, cannot be assigned, and terminates upon the death of the holder. By the same token, in the case at bar, Pansier's interest in his disability payments lacks any objective transferable value on the open market, cannot be assigned, and terminates upon his death. Moreover, Pansier's right to receive disability payments is entirely dependent upon his remaining disabled and undergoing a planned program of observation and treatment by a physician in order to continue to qualify for these benefits. Disability payments are a form of compensation and not property of the estate where there are conditions imposed upon the recipient before the disability benefits are received. Cf. In re Haynes, 679 F.2d 718, 719 (7th Cir.), cert. denied, 459 U.S. 970, 103 S.Ct. 299, 74 L.Ed.2d 281 (1982) (retirement benefits). Also, the disability insurance policy does not provide any lump sum or fixed annuity option to Pansier and is subject to being terminated by the policy holder at any time. All of these factors are foreign to the concept of "property" or "rights to property" as interpreted under Wisconsin law.

The IRS has not directed this court's attention to any Wisconsin cases which hold that post-petition disability payments are property subject to a federal tax lien. The only cases cited by the IRS and dealing directly with this issue emanate outside of Wisconsin. Fried v. New York Life Ins. Co., 241 F.2d 504 (2d Cir.1957), involved New York law; and Tillery v. United States (In re Tillery), 204 B.R. 575 (Bankr.E.D.Okla. 1996), involved Oklahoma law. This court...