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Valuing A Tax Lien In Chapter 13

When IRS or the Ga. Dept. of Revenue (“GDR”) file a fully secured claim in a Chapter 13 case based on a pre-petition filed tax lien, 11 U.S.C. Section 506(a) operates to limit the claim to the value that any Debtor (“D”) has in the property scheduled in Schedules A and B in the Chapter 13 case. Unfortunately, because of Section 522(c)(2)(B), we cannot reduce the D’s interest by the exemptions that would normally be available; however, the value of any interest with a debt can be reduced by the amount of the debt load. Also, there is support for the view that the Internal Revenue Code at 26 U.S.C. Section 6334(a) “constitutes the sole exemption which may be claimed against a valid federal tax lien”. These “exemptions” include wearing apparel necessary for the taxpayer and family members and up to $6250 for furniture and personal effects. See, Judge Brown et. al., at the  Bankruptcy Exemption Manual, 2014-2015 Edition, Section 5.56. If these “exemptions” are  available and are not contested by IRS, in many Chapter 13 cases these IRS exemptions  could be huge.!  In practice, it appears that IRS and GDR file secured claims as fully secured, so valuation under Section 506(a) becomes an option to attempt to reduce the secured claim.

What if, however, as seen in several cases, both IRS and GDR have filed tax liens and the federal and state claims both appear to compete for the value of the D’s interest in property. In that case, the issue becomes one of “priority” or which of the tax liens is “first in time”. Recently, our law firm had a case in which the GDR tax lien was filed on 5-14-09 and the federal tax lien (“FTL”) was filed on 1-18-11. On the face of the documents, it would appear that the GDR would be a slam dunk for “first in time”. To quote that famous sportscaster, Lee Corso: “Not so fast, my friend”.

It appears that the priority of a FTL is determined by a federal rule of “choateness” which, to no one’s surprise, appears to favor the FTL. Before the GDR lien can compete with the FTL, it appears that the GDR lien must be a “choate” lien, that is, it must be completed or “perfected” in the sense that nothing more remains to be done by the GDR.  If the GDR lien is “choate” before the FTL “arises”, the GDR lien is entitled to be “first in time”. The irony is that under the federal “choate” determination, as recited in Sections 6321 and 6322 of the Internal Revenue Code, the FTL arises on the date of assessment and not on the date the FTL was filed.  In that case, it appears that tax years 2003-2007 were assessed by the IRS and therefore arose prior to 5-14-09, the date the GDR lien was completed or perfected.

If you believe you have tax issues with a taxing authority, call JF&A. to discuss your concerns and to schedule a free consultation with an attorney to discuss how Chapter 13 or Chapter 7 can help you gain  control over your debt.

C. Wingate Mims, Attorney at Law
Jeff Field and Associates
342 North Clarendon Avenue
Scottdale, Georgia  30079

404.499-2700 Office
404-499-2728 Fax

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