A chapter 13 debtor objected to a proof of claim filed by the IRS on the grounds that a previously issued Certificate of Release of Federal Tax Lien extinguished not only the tax lien but also the underlying tax debt. The IRS objected, and the bankruptcy court found in favor of the government. The debtor appealed to the district court.
The debtor owned and operated a sole proprietorship that installed water lines. At the end of 2004 one of his customers sent him a 1099-MISC reporting that it paid the debtor ~$430,000. The debtor failed to timely file a federal income tax return. The IRS investigated and concluded that he owed tax and sent a notice of deficiency for 2004. Since the debtor did not challenge the deficiency, the government assessed income tax for 2004 and later filed a notice of federal tax lien for that period.
Shortly before the IRS filed the tax lien, the debtor filed a Form 1040 income tax return for 2004. The return did not include any of the $430,000 reported by his customer. After receiving the return the IRS abated its assessment and issued a Certificate of Release of Federal Tax Lien (RFTL).
The RFTL stated:
I certify that the following-named taxpayer, under the requirements of section 6325(a) of the Internal Revenue Code has satisfied the taxes listed below and all statutory additions. Therefore, the lien provided by Code section 6321 for these taxes and additions has been released.
The IRS issued a tax refund of ~$4000 to the debtor and recorded a release of the RFTL. However, when it later examined the late filed income tax return, it discovered that the return omitted income. So it issued a tax deficiency of ~$160,000 plus penalties in excess of $30,000. Once again the debtor did not challenge the deficiency; the government assessed taxes against the debtor; and it filed another RFTL.
A couple of months later the debtor filed bankruptcy. The IRS filed a proof of claim asserting a secured claim of ~$425,000. The debtor objected, contending that the first RFTL was conclusive proof that the 2004 tax liability was extinguished. The bankruptcy court overruled the debtor’s objection, and he appealed. The district court focused on the plain text of the Internal Revenue Code.
Section 6321 provides:
(a) Release of Lien. Subject to such regulations as the Secretary may prescribe, the Secretary shall issue a certificate of release of any liens imposed with respect to any internal revenue tax not later than 30 days after the day on which –
(1) Liability Satisfied or Unenforceable. The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has becomes legally unenforceable…
Section 6325(a) provides:
(1) Conclusiveness … if a certificate is issued pursuant to this section by the Secretary and is filed in the same office as the notice of lien to which it relates … such certificate shall have the following effect:
(A) in the case of a certificate of release, such certificate shall be conclusive that the lien it referred to in such certificate is extinguished [.]
In the court’s view the statute was clear: a “mere reading” leads to the conclusion that the lien was extinguished, not the underlying tax liability.
The court rejected the debtor’s argument that the RTFL would not have been issued if the tax liability had not been fully satisfied. In addition to the plain language argument, the court noted that section 6325 is subject to regulations that may be issued. One of the regulations under section 6325 addresses release of the lien where there has been a finding that tax liability has been satisfied and goes on to state: “In all cases, the liability for the payment of the tax continues until satisfaction of the tax in full.”
The court noted that its interpretation was consistent with decisions from a number of other courts. The court also rejected arguments made by the debtor based on statements made in IRS publications, including the IRS Program Manager Technical Advice and two Chief Council Advice memoranda – both of which state that they should not be cited as precedent.
The result is not surprising given that the initial IRS determination was based on an incomplete false income tax filing. Presumably that fact alone would be sufficient to permit the IRS to reopen the 2004 taxes when it discovered the missing income. It is interesting that the courts reached their conclusions without relying on this issue.
Vicki R Harding, Esq.