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Filing the Notice of Federal Tax Lien during the Automatic Stay

Posted on July 18, 2018

Once the IRS makes an assessment, it sends the taxpayer a notice and demand letter as required by IRC 6303. If the taxpayer fails to pay the full amount in the notice and demand letter within time period set out in the letter, usually 10 days, then a federal tax lien arises and relates back to the moment of assessment. This lien sometimes goes by the name of assessment lien or secret lien but whatever name it may receive, this lien is the federal tax lien and it exists in essentially every case in which the taxpayer has an outstanding liability even if few taxpayers appreciate that a lien exists and has attached to all of their property and rights to property. The existence of the federal tax lien allows the IRS to file a notice of that lien alerting the world to the person’s tax debt. Filing the notice of lien serves as a disclosure of a person’s tax situation which IRC 6103 normally prevents but Congress permits the disclosure in this circumstance in order to allow the IRS to perfect its lien vis à vis the four parties listed in IRC 6323(a).

The IRS normally has total control over the decision to file the notice and the timing of the filing of the notice; however, the filing of a bankruptcy petition by the taxpayer limits that unfettered ability to decide when to file the notice. The automatic stay found in BC 362(a) prohibits creditors from, inter alia, filing liens and taking other actions to collect. I cannot recall seeing a case in which the IRS filed a motion to lift the stay to allow it to file a notice of federal tax lien after the filing of a bankruptcy petition; however, in In re Gorokhovsky, No. 17-28901 (Bankr. E.D. Wis. 2018) the IRS did exactly that and the court granted the IRS request. For that reason the case deserves some attention.

The debtor owned three separate pieces of property at the time of filing the bankruptcy petition, none titled in his name:

  • A house in Ozaukee County, Wisconsin titled in the name of his ex-wife but awarded to him in a 2011 divorce;
  • A condo in Cook County, Illinois titled in the name of his ex-wife but awarded to him in the divorce; and
  • A condo in Milwaukee County, Wisconsin titled in the name of a defunct LLC owned by the debtor.

At the time of the filing of his bankruptcy chapter 7 proceeding he owed the IRS over $450,000. The IRS filed a notice of federal tax lien in Ozaukee County, Wisconsin but not in Cook County, Illinois or Milwaukee County, Wisconsin. In his bankruptcy schedules, Mr. Gorokhovsky acknowledged ownership of all the properties and acknowledged the tax debt. The chapter 7 trustee abandoned the three properties after determining that they had inconsequential value to the bankruptcy estate. Chapter 7 trustees routinely abandon property after researching the value of the property and outstanding liens attached to it since the job of the chapter 7 trustee involves recovering value for the unsecured creditors of the bankruptcy estate. Property that the trustee cannot turn into value for unsecured creditors has no benefit to the estate since all of the value will go to the secured creditors.

The IRS wanted to pursue collection against the properties. It asked the court to lift the stay so it could do so. The abandonment of the property removed it from the estate; however, the opinion did not say whether the stay was lifted against the debtor by the granting of the discharge or some other means of lifting the stay. The debtor opposed the lifting of the stay. The IRS first showed that the debtor had no equity in the property. The IRS could show that the debtor did not need the property in order to reorganize since the debtor filed a liquidating bankruptcy case. The IRS argued that its interests were not adequately protected and it could be harmed by maintaining the stay. The court concluded that lifting the stay would not interfere with the bankruptcy case and that the harm the IRS might suffer outweighs any harm to the debtor.

Because the bankruptcy case is a no asset chapter 7 case and because the trustee had already determined that the property had no value for the bankruptcy estate, the result here naturally flows from the facts. In most no asset chapter 7 cases, the debtor will already have received a discharge as an individual by the time the trustee abandons the property. The stay applies to actions regarding individuals and actions regarding property of the estate. Here, it appears the IRS needs the stay lifted because the stay on the individual remained in effect. The granting of the stay relief requests now clears the deck for the IRS to file the notice of federal tax lien it should have filed previously in order to perfect its interest in two of the properties and to bring suit. If it brings suit quickly enough, it can avoid the need to file the notice. While the case seemed odd to me at first glance, the timing of the request to lift the stay makes sense if the stay regarding the individual remained in effect.

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