2023-06-22
A bankruptcy discharge relieves a debtor of personal liability for a debt, but a creditor with a lien can collect in rem against the debtor’s property. If the Debtors successfully complete their Chapter 13 plan by making five years of payments, the taxes are arguably dischargeable. If the taxes are discharged, the IRS would be prevented from taking any action to collect the tax debt owed by the Debtors to the IRS as a personal liability of the Debtors. However, the IRS’s statutory lien on “all property and rights to property” would survive the bankruptcy discharge.
The timing of a debtor’s acquisition of “property” or “rights to property” is critically important to whether the IRS’s statutory lien on that property or right to property survives a bankruptcy discharge. After a debtor receives a discharge of his or her personal liability for unpaid taxes, the IRS retains a lien only on “all property and rights to property” that the debtor possessed pre-petition.
in In re Rios, No. Chapter 13, 2023 BL 208050, 2023 Bankr Lexis 1589 (Bankr. E.D. Wis. June 16, 2023), the IRS argued there was a lack of adequate protection of its federal tax lien on the Debtors’ Social Security benefits. The Court entered an order modifying the 11 U.S.C. § 362(a) automatic stay “to permit the Internal Revenue Service to enforce its federal tax liens securing tax liabilities for tax periods 2005 and 2008 through 2012 on the Debtors’ right to Social Security benefits in accordance with applicable nonbankruptcy law.”
The Debtors filed a motion for an “order to stay, or entry of injunction granting relief of the automatic stay to the Internal Revenue Service to levy the debtors’ Social Security benefits pending the outcome of the debtors’ appeal.
The Court noted that was unclear from the motion what the Court was being asked to enjoin and the authority under which that request is being made. The IRS argued that a Court order for the IRS to stop its levy or order the Social Security Administration to pay Social Security benefits to the Debtors could implicate the Anti-Injunction Act and/or the doctrine of sovereign immunity. The Debtors did not brief either issue. The Court speculated that Debtors wanted a Court order directing the Social Security Administration to pay Debtors their benefits while this appeal is pending so that they can pay their expenses and make payments towards a Chapter 13 plan that would pay creditors (other than the IRS). Debtors did not articulate this in their motion, but uch a request goes far beyond asking the Court for a stay pending appeal to maintain the status quo until the appeal is decided, and the Debtors did not offer any authority in support of such a request.
To determine whether to grant a stay pending appeal, the Court considers (1) the moving party’s likelihood of success on the merits; (2) the irreparable harm that will result to each side if the stay is either granted or denied in error; and (3) whether the public interest favors one side or the other (mirroring the standard for granting a preliminary injunction). If the movant can make these three threshold showings, the court then moves on to balance the relative harms using a “‘”sliding scale’ approach,” the more likely it is the movant will succeed on the merits, the less the balance of irreparable harms need weigh towards its side; the less likely it is the movant will succeed on the merits, the more the balance of irreparable harms need weigh towards its side.” If the movant fails to demonstrate that it has a “likelihood of success on the merits” or that it will suffer “irreparable harm” if the requested relief is denied, then the court’s inquiry into the balance of harms is unnecessary, and the stay should be denied without further analysis.
The Court found that Debtors would not suffer irreparable harm if the stay were not issued, because a stay pending appeal would not cause the Debtors to begin receiving their Social Security benefits. The IRS asserted it would renew the IRS’s request for the Social Security Administration to freeze Debtors’ benefits, so Debtors would not receive their Social Security benefits and would not be able to contribute their Social Security benefits towards their Chapter 13 plan payments even with a stay of this Court’s order. Thus, lack of receipt of Social Security benefits and any results stemming from that does not constitute irreparable harm that the Debtors would suffer absent a stay of this Court’s order.
The Court found Debtors’ pleadings were not fully developed, but that it appeared they intended to argue Debtors did not acquire a “right to property” in their Social Security benefits until they survive to the end of the month and actually receive funds, and that the IRS only had a lien on the Social Security benefits the Debtors had received pre-petition.
The Court held that Debtors did not demonstrate a likelihood of success on appeal on this issue. Debtors’ argument contained the erroneous assumption that the IRS’s tax lien does not attach to the Social Security benefits until the Debtors survive until the end of the month and those payments are made each month. The Court’s research did not discover any cases supporting Debtor’s argument, and the Court found that it is “firmly established in case law that a ‘federal tax lien attaches to a then existing right to receive property in the future'” and numerous cases find that the right to obtain funds or future payment is “property” or a “right to property” to which a federal tax lien attaches at the time of assessment.
Revenue Ruling 55-210 further supports a holding that the IRS’s federal tax lien in this case attached to the Debtors’ right to receive their Social Security benefits prior to filing this bankruptcy case. That ruling states: “Where a taxpayer has an unqualified fixed right, under a trust or a contract, or through a chose in action, to receive periodic payments or distributions of property, a Federal lien for unpaid tax attaches to the taxpayer’s entire right, and a notice of levy based on such lien is effective to reach, in addition to payments or deductions then due, any subsequent payments or distributions that will become due thereunder.”
Debtors’ final issue that they intended to raise on appeal is that the “IRS’s levying of the Social Security benefits contravenes the Social Security Act under 42 U.S.C. §407(a) .” The Court held that Debtors did not show a likelihood of success on appeal on this issue. Debtors argument was not made to this Court in opposition to the IRS’s motion for relief from stay, and parties are encouraged to resolve disputes at trial, rather than on appeal, so are required to lay their cards on the table sooner. The Court also held Debtors are incorrect arguing that the IRS is not permitted to levy under the Social Security Act. The Social Security Act states that no other provision of law can limit this restriction unless it does so by making an express reference to § 407(b). The Internal Revenue Code does just that; limiting the general restriction of the Social Security Act by making an express reference to §407 at 26 U.S.C. §6334(c).