In In re Toledo, the U.S. Bankruptcy Court for the Southern District of Florida filed a motion for summary judgment seeking a determination that certain federal tax liens remained valid, secured claims, regardless of whether notices thereof lapsed. The case involved the distinction between the legal effects of a federal tax lien and a notice of federal tax lien, as well as the effect of certain tolling statutes. The court held that certain federal tax liens against a debtor's property remained valid and secured, even though the notices of federal tax liens had lapsed, noting that the cessation of validity applies only to the notices and not to the underlying liens.
Facts and Background
On Oct. 3, 2007, the debtor, Ramon A. Toledo, filed a petition for relief pursuant to Chapter 13 of title 11 of the Bankruptcy Code, according to the opinion. On Oct. 31, 2007, the Internal Revenue Service filed a proof of claim, which it later amended, for federal taxes owed by Toledo. The proof of claim consisted of an unsecured non-priority claim, an unsecured priority claim and a secured claim. On July 18, 2008, Toledo filed an objection to the IRS's amended proofs of claim, and, on Aug. 8, 2008, the United States moved for summary judgment as to the objection.
Before commencement of Toledo's case in 2007, he failed to file federal income tax returns for 1990 and 1992, the opinion noted. In addition, he submitted his tax returns for 1991 and 1993 in 1994 and 1995, respectively. Because Toledo did not file federal returns for 1990 and 1992, the IRS later determined Toledo's tax liabilities, including penalties and interest, for those years. Under section 6321 of title 26 of the U.S. Code, following Toledo's failure to file his tax returns and pay his assessed taxes, a lien arose in favor of the United States upon all property and rights to property of Toledo in the amount of the monies owed.
Toledo made an offer in compromise to the IRS in connection with his liability for all four years, which the IRS later rejected, according to the opinion. He then made an offer in compromise in connection with his liability for 1992 and 1993, which the IRS also rejected. On Dec. 15, 2003, Toledo filed a voluntary petition for relief pursuant to Chapter 13 of the Bankruptcy Code. The case was converted to one under Chapter 7 of the Bankruptcy Code on Jan. 20, 2004, and an order of discharge was entered on Aug. 19, 2004. Though the opinion is silent as to the IRS's filing of a Certificate of Release of Federal Tax Lien pursuant to section 6325 of the Tax Code, the IRS presumably filed such a certificate some time after the date of discharge. On Aug. 4, 2005, the IRS filed a Revocation of Certificate of Release of Federal Tax Lien for Toledo's liabilities from 1990 through 1993 and then filed three liens covering the assessed taxes mentioned above.
On March 9, 2007, the United States filed a complaint against Toledo seeking to reduce his tax liabilities to judgment, to foreclose its tax liens and to sell Toledo's property as a means of satisfying his tax liabilities, according to the opinion. After Toledo filed an answer on Aug. 10, 2007, he filed a petition for relief in the instant case.
Summary Judgment Standard
The court recited the summary judgment standard as provided in Rule 56 of the Federal Rules of Civil Procedure — that the pleadings, deposition, answers to interrogatories and admissions on file, together with any supporting affidavits, must demonstrate that there is no genuine issue as to any material fact and, as a consequence, the moving party is entitled to judgment as a matter of law — and noted that the United States, as the moving party, bore the initial burden of making this showing. Looking to relevant caselaw, the court noted that it must view all evidence in the light most favorable to the party against which the motion is filed and resolve all reasonable doubts in favor of the non-moving party.
Toledo argued that tax liens are valid for 10 years and, therefore, that the IRS's proofs of claim should be re-classified as general unsecured claims. The court noted a material distinction between a tax lien and a Notice of Federal Tax Lien, or NOFTL, that while a tax lien is relevant to an individual with delinquent taxes, a NOFTL is chiefly relevant to the individual's other creditors. The court noted further that a NOFTL is akin to the recording requirement of ordinary security interests: while a secured obligation is always enforceable against the debtor, it is only enforceable against other creditors if and when it is properly perfected (i.e., when these creditors have been put on sufficient legal notice of the security interest). In this case, the court found that the tax liens are the underlying obligations and that the NOFTL is the appropriate way to provide proper notice to the world for purposes of maintaining priority relative to other creditors.
While the tax liens originated under section 6321 of the Tax Code, the NOFTL was subject to section 6323(a), which provides that such liens are not valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until proper notice thereof has been filed by the Secretary of Internal Revenue. Under subsection (g) of that statute, a NOFTL ceases to be valid 10 years and 30 days after the date of assessment; but such cessation of validity applies only to the NOFTL, and not to the underlying lien. If a NOFTL is not timely re-filed and the collection period for the lien has not yet expired, the IRS can issue a "Certificate of Revocation" of the certificate of release, though the U.S. Code tentatively caps the period of permissible collection of a tax debt at 10 years from the date of assessment.
The same statute provides for certain circumstances under which the 10-year time limit will be extended, such as when the automatic stay provisions of the Bankruptcy Code are in effect, in which case the limitations period is suspended and the lien will be extended by the length of such suspension period. Likewise, the running of the limitations period provided in section 6502 of the Tax Code is suspended for the period during which the IRS is prohibited from making an assessment or from collecting by levy, plus an additional 60 days. Section 6331(k)(1) of the Tax Code further provides that no levy may be made during the period in which an offer to compromise is pending, and if such offer is rejected, for 30 days thereafter.
The court noted that these tolling statutes had been subject to periodic congressional amendment during the time period at issue. The tolling period on the initial offer to compromise all liabilities was 476 days, while the tolling period on the second offer to compromise the 1992 and 1993 liabilities was 133 days. The court found that these offers collectively tolled the 1990 and 1991 liabilities for 476 days and the 1992 and 1993 liabilities for 609 days. Toledo's first bankruptcy petition tolled both periods for an additional 433 days. Thus, the earliest any of the liens would have lapsed was April 14, 2007, and because the IRS commenced its civil action against Toledo 35 days before that date, the liens remained valid.
The IRS did not dispute that the NOFTLs lapsed before Aug. 4, 2005, the date the IRS filed its Revocation of Certificate of Release of Federal Tax Lien, which had the effect of subordinating the IRS's liens to those of any security interest properly perfected during the period of the lapse before the IRS's re-filing of a NOFTL, of which there appeared to have been at least one. However, the lapse did not affect the validity of the IRS's liens as against Toledo. Accordingly, the court found that the 1990-1993 liens were properly secured liens, valid against all parties except those which may present evidence of a properly recorded security interest filed before Aug. 4, 2005, and granted the IRS's motion for summary judgment.
The Toledo opinion provided practitioners with an important distinction between a federal tax lien and a notice of federal tax lien. As highlighted by the court's opinion, this distinction is particularly important in the context of federal tax liens arising more than 10 years before a bankruptcy filing.
Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. He is a member of the American Bankruptcy Institute, the American Bar Association and its business law section, the Commercial Law League of America, the Pennsylvania Bar Association and the business law section of the Philadelphia Bar Association.
Matthew E. Hoffman practices in the area of business reorganization and financial restructuring. Hoffman is admitted to practice in Pennsylvania and New Jersey.
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