The IRS has announced [pdf] that it is acquiescing in the Ninth Circuit case of U.S. v. Snyder, 343 F3d 1171 (9th Cir. 2003) (via Findlaw.com). Not only is the case significant as it relates to tax liens, ERISA plans, and bankruptcy, but the case also illustrates how the term “flip-flopping” is not just reserved for politicians.
The case involved the following facts:
The debtor was a vested participant in an ERISA-qualified pension plan and the plan contained the usual anti-alienation provision. The debtor’s interest in the defined benefit pension plan was about $200,000, with pay-out to begin when the debtor reached normal retirement at age 60, early retirement at age 55 through 59, total disability, or death. The debtor was 49 years old and had unpaid tax liabilities for the years 1983-1986, 1989-1995, and 1997. The IRS had made assessments and had duly recorded notices of federal tax liens for the taxes due in each of those years, except 1997. Federal tax liens had therefore attached by operation of law to the debtor’s interest in his pension plan.
The debtor filed a Chapter 13 bankruptcy petition listing the IRS as an unsecured creditor in the amount of $158,228. The IRS filed a proof of claim for roughly that amount, but claimed $145,664 as secured by virtue of its liens on debtor’s interest in the plan. The debtor objected to the secured portion of the IRS’s claim, arguing that his interest in the plan was excluded from the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2), and that the IRS liens on that interest therefore could not secure the IRS’s claim in bankruptcy. The bankruptcy court overruled the debtor’s objection and allowed the IRS’s claim as secured. The district court affirmed. Both courts held that the debtor’s interest in the plan became property of the bankruptcy estate for the limited purpose of securing the IRS’s claim.
On appeal, the Ninth Circuit reversed. In reaching its decision, the court noted the IRS’s inconsistent positions on the issue, pointing out that in some instances the IRS was motivated in its inconsistencies by the result it sought to obtain. The court stated as follows:
During the past decade, the IRS has taken inconsistent positions on the question before us. In In re Lyons, 148 B.R.88 (Bankr. D.C. 1992), a bankruptcy court held that an IRS claim secured by a federal tax lien on the debtor’s pension was secured in bankruptcy, even though that pension otherwise qualified for exclusion from the bankruptcy estate pursuant to § 541(c)(2). In 1996, in reaction to Lyons, the IRS issued a litigation bulletin, in which it took the opposite position from the position it takes today:
The Lyons approach is not consistent with section 506(a) of the Bankruptcy Code. Under section 506(a), a creditor’s rights in property are dependent on the bankruptcy estate’s interest in property; the determination of the estate’s interest is separate from and must precede the determination of the creditor’s interest. If the estate has no interest in the property at issue, as was the case in both the Patterson and Lyons situations, it is not possible for the claim of any creditor, including the [IRS], to be secured by that property under section 506(a). Therefore, Lyons is inconsistent with the statute, in that the Lyons analysis essentially gives one particular creditor (the [IRS]) an interest in property where the estate has no interest in that property. Accordingly, Lyons [is] viewed as legally unsound. I.R.S. Litig. Bulletin No. 431, 1996 WL 33105615 (Aug. 1996).In 1998, in In re Persky, 1998 WL 695311 (E.D. Penn. Oct. 5, 1998), the IRS in litigation took the same position it took in the litigation bulletin in 1996. It was to the IRS’s advantage in Persky to increase the amount of the Perskys’ total unsecured debt so as to defeat their eligibility for Chapter 13 relief under 11 U.S.C. § 109(e). The IRS therefore argued that its lien on the debtors’ spendthrift trust was not a lien on property in which the estate had an interest under § 541(c)(2), and thus did not operate to secure the IRS’s claim in bankruptcy pursuant to § 506(a). See also Amy Madigan, Note, Using Unfiled Dischargeable Tax Liens to Attach to ERISA Qualified Pension Plan Interests After Patterson v. Shumate, 14 Bankr. Dev. J. 461, 490-93 (1998) (describing an unpublished case in which the IRS argued that an ERISA-qualified pension plan was excluded from the bankruptcy estate pursuant to § 541(c)(2), where exclusion was to the IRS’s advantage because it would permit the attachment of an unfiled dischargeable tax lien on the debtor’s pension plan).
Two years after Persky, the IRS took the opposite position. In April 2000, the Assistant Chief Counsel for the IRS wrote:
Not following Lyons leads to results that are straightforward: ERISA-qualified plans and similar interests are excluded from the bankruptcy estate with respect to the [IRS] and all other creditors. Because they are not property of the estate, they cannot be used in determining the value of the [IRS’s] secured claim. On the other hand, to the extent that the [IRS] has a lien that survives the bankruptcy, it can pursue collection outside bankruptcy. However, given the statutory framework of sections 541 and 506 and the Supreme Court’s reasoning in Patterson . . . , upon reconsideration we now believe that the holding in Lyons is correct. The wording of each section, on its face, supports the court’s reasoning. In addition, there is nothing in the legislative history that would call for a different result. I.R.S. Chief Couns. Advis. 200041029, 2000 WL 33120271 (Apr. 11, 2000).
Courts had split on the issue as well and the Snyder opinion gives a good run-down of all of the differing case law which had developed on the issue. In the end, the court adopts the view espoused in the group of cases which had aligned with the IRS’s position in its 1996 Litigation Bulletin, stating as follows:
We agree with the position taken in the first group of cases described above. That is, we agree with the position the IRS took in its 1996 litigation bulletin and in Persky, and disagree with the position it took in 2000.
The court goes on to state in dicta that, although exclusion of the debtor’s interest in the plan from the bankruptcy estate precludes the IRS from attaining secured status in the bankruptcy proceeding, the IRS’s liens against the debtor’s interest continue to exist, but outside of bankruptcy. This means that the IRS will be able to reach the assets in the plan upon the debtor’s retirement, when the debtor is entitled to payments from the plan. Since the life-span of a tax lien is only ten years from the date of assessment, potentially the lien might expire before the IRS is able to collect.
By the way, for those who aren’t familiar with the IRS’s “Action on Decision” procedure under which the Acquiescence was issued, the Tax Bulletin explains the procedure as follows:
It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.
The Bulletin goes on to state that, prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions and that the Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. The Bulletin explains that the “Service now may acquiesce or nonacquiescence in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal.”
What does this actually mean when the Service acquiesces with respect to an opinion? According to the Bulletin:
Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts.
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