This paper discusses federal tax liens and their effect on the bankruptcy debtor’s pension plan. The Internal Revenue Service has a secured claim in bankruptcy only if the claim is secured by a lien on “property in which the estate has an interest” and only “to the extent of the value of such creditor’s interest in the estate’s interest in such property.” 11 U.S.C. § 506(a). However, property of the estate has been broadly interpreted to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).
The Supreme Court examined the excludability of pension plans under § 541 in its famous decision Patterson v. Shumate, 504 U.S. 753 (1992). The Court held in that case that “applicable non-bankruptcy law” is not limited to state law and that an ERISA mandated anti-alienation provision satisfies the literal terms of § 541 (c)(2). Although heralded as a victory for debtors and a protection to their golden years’ investment, the decision actually created for many debtors the antitheses of the Court’s strong policy consideration, i.e., the uniform treatment of pension benefits without regard to the beneficiary’s bankruptcy status. In the years since the decision, debtors have been faced with a myriad of collection practices by the IRS based solely upon the particular practices of the district in which the debtor filed bankruptcy.
The Lyons case presented a question as to whether the claim of the IRS was secured by the debtor’s interest in certain retirement annuities. In re Lyons, 148 B.R. 99 (Bankr. D.D.C. 1992). In light of the Supreme Court’s holding that “applicable non-bankruptcy law” encompassed any relevant law, including federal law, the Lyons’ court applied a two-pronged analysis to determined whether the annuities were excluded from the estate (and thus from the value of the secured claim) under § 541(c)(2). The court first determined that the anti-alienation provisions of the annuity contracts were enforceable against ordinary creditors under State spendthrift trust law. The court then addressed whether these transfer restrictions were effective against the IRS. Just as ERISA was held to be a source of applicable non-bankruptcy law in Patterson, the court in Lyons found that “federal tax lien law is also applicable in non-bankruptcy law.” In re Lyons, 148 U.S. at 93. The court concluded that the anti-alienation provisions of the annuity contracts were not enforceable against the IRS under applicable non-bankruptcy law. Accordingly, under § 506(a), the IRS had a secured claim to the extent to the value of the debtor’s pension rights, i.e., the present value of the future cash flows. Id. At 94.
Adoption of the Lyons holding and rational should prove beneficial from the IRS’s standpoint, and often from the debtor’s standpoint. It is much preferable to allow the debtor to pay the value of his interest in the pension plan through monthly plan payments than to cause an invasion of the debtor’s retirement system with its attending tax ramifications and depletion of retirement benefits.
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