UNITED STATES TAX COUR T

134 T .C . No . 14

UNITED STATES TAX COUR T

VANCE L . WADLEIGH, Petitioner v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No . 10783-07L .

Filed June 15, 2010 .

R issued a notice of intent to levy on P's pension

income to collect P's unpaid Federal income tax for 2001 . P

timely requested a hearing under sec . 6330, I .R .C . At the

hearing P argued : (1) His liability for the unpaid 2001

Federal income tax was discharged in his 2005 bankruptcy ;

(2) the notice of intent to levy was invalid because his

pension was not yet in payout status ; and (3) a prior notice

of levy for a similar amount of unpaid tax was issued and

later released . R's Office of Appeals determined that the

proposed levy could proceed . P contends the Appeals Office

abused its discretion .

Held : The sec . 6321, I .R .C ., lien that attached to P's

interest in his pension was not discharged by his 2005

bankruptcy because his interest in his pension was 'excluded

from his bankruptcy estate pursuant to 11 U .S .C . sec . 541

(2006) .

SERVED JUN 15 2910

- 2 Held , further , although P's discharge in bankruptcy

relieved him of personal liability for the unpaid 2001

Federal income tax, the discharge does not prevent R from

collecting P's-unpaid 2001 Federal income tax in rem by levy

on P's pension income, notwithstanding R's failure to file a

valid notice of Federal, tax lien with respect to the 2001

Federal income tax liability .

Held , further , although R may not enforce a levy on P's

interest in his pension until the pension enters payout

status, R's notice of intent to levy is not invalid merely

because it was mailed to P 9 months before P's pension

entered payout status .

Held , further , R's release of a prior levy does not

release the sec . 6321, I .R .C ., lien that R held with respect

to P's interest in his pension .

Held , further , R's Office of Appeals verified that the

requirements of any applicable law and administrative

procedure had been satisfied and considered all of P's

arguments . However, because the Appeals Office assumed that

P's wage income would continue after P started receiving his

pension without any support in the administrative record for

the assumption, we shall exercise our discretion to remand

this case to the Appeals Office for further proceedings .

John A . Strain , for petitioner .

Spencer T . Stowe , for respondent .

- 3 OPINION

MARVEL,

Judge : Pursuant to section 6330(d),' petitione r

seeks review of respondent's determination to sustain a proposed

levy on petitioner's interest in his pension . The levy relates

to petitioner's unpaid 2001 Federal income tax liability . The

issue for decision is whether respondent abused his discretion

when he sustained the proposed levy . To resolve this issue, we

must first decide whether a section 6321 lien that was not

perfected by the filing of a valid notice of Federal tax lien

(NFTL) may be enforced by a levy on petitioner's pension income

after petitioner's personal liability for the unpaid tax has been

discharged in bankruptcy .

Background

The parties submitted this case fully stipulated pursuant t o

Rule 122 . The stipulation of facts is incorporated by this

reference . On the date he filed his petition, petitioner resided

in California .

On June 28, 2002, respondent recorded an NFTL purportedly

.relating to petitioner's 2001-tax liability . When the NFTL was

recorded, petitioner had not`yet filed his 2001 Federal incom e

tax return . In fact, respondent intended to issue the NFTL wit h

'Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure .

4 -

respect to petitioner's 2000 Federal income tax liability but

identified the wrong year (2001) on the NFTL and recorded it in

error .2 Respondent has since withdrawn the NFTL . The record

contains no evidence that respondent recorded any other NFTL with

respect to petitioner's 2001 tax liability .

On or about August 16, 2002, petitioner filed a 2001 Form

1040, U .S . Individual Income Tax Return . Petitioner reported a

balance due on the return but did not pay the balance when he

filed the return . On September 16, 2002, respondent assessed the

tax shown on the return, an addition to tax for failure to pay

timely, an addition to tax for, failure to pay estimated tax, and

interest . Petitioner has not paid the resulting liability

(collectively, the 2001 tax liability) .

On August 18, 2005, petitioner and his wife, Linda Wadleigh,

filed a voluntary chapter 7 bankruptcy petition in the U .S .

Bankruptcy Court for the Central District of California . On

Schedule B, Personal Property, of the bankruptcy petition,

petitioner listed his interest in his Honeywell Pension Plan

account (pension) . However, on Schedule C, Property Claimed as

Exempt (schedule C), of the bankruptcy petition, petitione r

2Petitioner's 2000 Federal income tax liability is not at

issue .

5

claimed the pension was exempt property . Petitioner included the

following statement on schedule C :

The interest in the Honeywell Pension Plan is claimed

as exempt to the extent, if any, that said Pension Plan

is property of the estate, and the claims of exemptio n

.include any increases in the value of Debtors'

interests therein . Debtors contend that their interest

in the Honeywell Plan are [sic] excluded from the ,

.bankruptcy estate under 11 U .S .C . § 541(c)(2) ;

Patterson v . Shumate , 504 U .S . 753 (1992) .

As reflected on schedule C, petitioner claimed his interest

in the pension was excluded from the bankruptcy estate pursuant

to 11 U .S .C . sec . 541(c)(2) (2006), which provides : " A

restriction on the transfer of a beneficial interest of the

debtor in a trust that is enforceable under applicable

nonbankruptcy law is enforceable in a [bankruptcy] case", as

interpreted in

Patterson v . Shumate , 504 U .S . 753, 758-759

(1992) .3 Alternatively, petitioner claimed the pension wa s

3In Patterson v . Shumate , 504 U .S . 753, 758-759 (1992), the

Supreme Court held that a debtor's interest in a pension plan

which is subject to the antialienation provision of the Employee

Retirement Income Security Act of 1974 (ERISA), Pub . L . 93-406,

sec . 206(d)(1), 88 Stat . 864 (current version at 29 U .S .C . sec .

1056(d)(1) (2006)), is a beneficial interest in trust that is

subject to a restriction on transfer enforceable under applicable

nonbankruptcy law, and therefore a debtor may exclude his

interest in the ERISA-qualified pension plan from his bankruptcy

estate under 11 U .S .C . sec . . 541 (a) (1) and (c) (2) (2006) . For

purposes of this Opinion and consistent with the Supreme Court's

opinion in Patterson v . Shumate , supra, the phrase "ERISAqualified pension plan" means a qualified plan that contains the

antialienation clause required for qualification under ERISA sec .

206(d)(1), 29 U .S .C . sec . 1056(d)(1) . See In re Baker , 114 F .3 d

(continued . . .)

- 6 exempt property under 11 .U .S .C . sec . 522(b)(2) (2006) and Cal .

Civ . Proc . Code sec .

703 . 140 (b) (10) (E)

(West 2009),' if and t o

3( . . . continued)

636, 638 (7th Cir . 1997) .

'Both State and Federal law limit the amount a debtor may

exempt . In addition, States may opt out of the Federal exemption

scheme, thereby limiting debtors who file for bankruptcy in those

States to the exemptions provided under relevant State law . 11

U .S .C . sec . 522(b)(2) ; Greene v . Savage , 583 F .3d 614, 618 (9th

Cir . 2009) .

Pursuant to 11 U .S .C . sec . 522(b)(2), California has opted

out of the exemption scheme provided in the Bankruptcy Code .

Cal . Civ . Proc . Code sec . 703 .130 (West 2009) . However,

California has enacted an exemption scheme that mirrors 11 U .S .C .

sec . 522(d)(10)(E) with respect to pension and profit-sharing

plans . See Cal . Civ . Proc . Code sec . 703 .140(b)(10)(E) (West

2009), which provides :

The following exemptions may be elected as provided .in

subdivision (a) :

(10) The debtor's right to receive any of the

following :

(E) A payment under a stock bonus, pension,

profit-sharing, annuity, or similar plan or contract on

account of illness, disability, death, age, or length

of service, to the extent reasonably necessary for the

support of the debtor and any dependent of the debtor,

unless all of the following apply :

(i) That plan or contract was established by or

under the auspices of an insider that employed the,

debtor at the time the debtor's rights under the plan

or contract arose .

(continued . . .)

- 7 the extent the pension was properly includable in the bankruptcy

estate .

When petitioner filed for bankruptcy ,

he was fully vested in

his pension, but the pension was not yet in payout status and did

not contain a lump - sum or similar option that would hav e

permitted petitioner to withdraw funds from the pension before

reaching retirement age ., Petitioner ' s right to receive monthly

payments of $1,242 . 13 under the . pension matured on November 1,

2007 .

On December 8, 2005, petitioner received a discharge in the

bankruptcy case . Petitioner's 2001 Federal income tax liability

was included in .the discharge .

On August 31, 2006, respondent mailed petitioner a notice of

intent to levy on petitioner's pension income to collect

petitioner's unpaid 2000 Federalincome tax liability . On

November 16, 2006, however, respondent withdrew the notice of

intent to levy .

4( . . . continued )

(ii) The payment is on account of age or length of

service .

(iii) That plan or contract does not qualify under

Section 401("a), 403(a), 403(b), 408, or 408A of the

Internal Revenue Code of 1986 .

8 .n January 29, 2007, more than 9 months before petitioner's

O

pension entered payout status, respondent mailed petitioner a

Final Notice--Notice of Intent to Levy and Notice of Your Right

to a Hearing (notice of intent to levy) with respect to .

petitioner's 2001 tax liability . The notice of intent to levy

stated in pertinent part as follows :

You have received a discharge under Chapter 7 of the

Bankruptcy Code . Thus, you .are relieved from personal

liability for the following tax liabilities :

Kind

of

Tax

Period

Amount Including

Penalties and Interes t

1040-Income 12/31/2001 $57,805 .33 (As of

08-30-2007 )

However, at least one Notice of Federal Tax Lien for

the above tax liabilities was properly filed before

your bankruptcy . Despite your relief from personal

liability, the .federal tax liens remain attached to

your prepetition property, and the IRS is permitted to

take collection action, based on these federal tax

liens, against your prepetition property at any time

within the period permitted by law for collection of

the tax . Also, the Service can pursue administrative

collection from property excluded from the Bankruptcy

estate based solely on its statutory lien .

This letter is your notice of our intent to levy

against prepetition property under Internal Revenue

Code (IRC) section 6331 and your right to receive

Appeals consideration under IRC section 6330 .

Prepetition property is property that you held prior to

your bankruptcy filing that was not sold or liquidated

by the Chapter 7 trustee for the payment of your debts .

Prepetition property includes three types of property :

(1) property you exempted from the bankruptcy estate

under section 522 of the Bankruptcy Code ; (2) property

- 9 abandoned by the bankruptcy trustee under section 554

of the Bankruptcy Code ; and (3) property excluded from

the bankruptcy estate under applicable law, as opposed

to property you exempted from the bankruptcy estate .

An example of excluded property is an interest in a

.section 401(k) plan or other employer-sponsored plan

that meets the requirements of the Employee Retirement

Income Security Act of 1974 (ERISA) .

Although the notice of intent to levy does not expressly

.identify the pension, the parties have stipulated that the

pension is the prepetition property on .which respondent plans to

enforce his levy . Neither party disputes that the pension is to

be paid pursuant to a qualified plan under the Employee

Retirement Income Security Act of 1974 (ERISA), Pub . L . 93-406,

88 Stat . 829, or that the plan is subject to the antialienation

provision of ERISA sec . 206(d)(1), 88 Stat . 864 . (current version

at 29 U .S .C . sec . 1056(d)(1) (2006)) .

On or about February 12, 2007, petitioner timely filed a

Form 12153, Request for a Collection Due Process Hearing,

objecting to the proposed levy . Petitioner did not challenge the

existence or amount of the 2001 tax liability . Instead,

petitioner raised five contentions relating to the .

appropriateness of respondent's proposed collection action :„ (1)

Respondent had issued a levy notice for a similar amount on

August 31, 2006, and released the .levy on November 16, 2006 ; (2)

the notice of intent to levy referenced the same retirement

payments addressed in the November 16, 2006, release and was

R

- 10 inconsistent as to the tax year and amount dues (3) petitioner

had not received an analysis regarding what property, if any,

.secured respondent's claim on petitioner's discharged taxes ; (4 )

because petitioner's pension was not property to which petitioner

was entitled at the time of the bankruptcy filing, the pension

was not property to which respondent's lien could attach ; and (5)

petitioner's liability for the unpaid 2001 Federal income tax was

discharged in bankruptcy on December 8, 2005 .

Adlai Climan (Mr . Climan), a settlement officer in the

Internal Revenue Service (IRS) Office of Appeals, was assigned t o

handle petitioner's section 6330 hearing . During a conversation

with Mr . Climan that was part of the hearing process, petitioner

argued that respondent could not levy on petitioner's pension

income because his 2001 tax liability was discharged in

bankruptcy and respondent had released a similar levy on

petitioner's interest in his pension .6 Petitioner did not

propose any collection alternatives, such . as an offer-in-

'Page 1 of the notice of intent to levy states that the

amount due, including additions to tax and interest, was

$57,805 .33 as of Aug . 3.0, 2007, and page 3 states that the total

amount owed as of May 29, 2006, was $71,016 .86 . Petitioner

asserts the notice is inconsistent with transcripts respondent

mailed to him in December 2006 .

6The record does not disclose when the conversation

occurred, nor does it indicate whether the conversation was by

telephone or in person .

- 11 compromise or an installment agreement, or provide any .financial

information, such as a Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals . '

After his conversation with petitioner, Mr . Climan reviewed

Form 4340, Certificate of Assessments ; Payments, and-Other

Specified Matters, for petitioner's 2001 taxable year, reviewed

financial information contained in petitioner's 2003-2005 Federal

income tax returns, and consulted the applicable national and

local standards . From this information Mr . Climan calculated

petitioner's ability to pay the 2001 tax liability . In making

his calculations Mr . Climan assumed that petitioner would

continue to work for the same compensation . he had earned in 2005 .

Mr . Climan calculated petitioner's monthly income by dividing the

wage income reported on petitioner's 2005 return by 12 . From his

calculations Mr . Climan determined : (1) "[Petitioner] has more

than sufficient income to live on [and] attachment of the pension

income will not create a financial hardship" ; (2) the proposed

levy was necessary for payment of the subject liability ; and (3)

the proposed levy would balance the Government's need to collect

the tax with petitioner's legitimate concern that any collectio n

7Petitioner maintains he was never asked to provide

financial information . Respondent counters that petitioner was

asked for such information . Regardless, the parties do not

dispute that petitioner did not submit financial information

during the sec . 6330 hearing .

- 12 action be no more intrusive than necessary . Accordingly, Mr .

Climan determined that the proposed levy should be sustained .

On April 10, 2007, the Office of Appeals issued a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 (notice of determination) sustaining the proposed

levy . The notice of determination . was accompanied by an "Appeals

Case Memo" (memorandum) in which the Appeals Office briefly

explained its decision . With respect to the filing of an .NFTL,

the . memorandum stated as follows :

Notices of Federal Tax Lien'were filed as follows :

2000 :

2001 :

Date recorded

5/25/05

7/18/02 *

*

A severe error has been committed by Collection

as regards this NFTL .

This NFTL actually pertains

to the year 2000, but the employee filing the lien

* * * apparently entered the wrong year in th e

computerized request . The assessment date on'this

NFTL for 2001 shows as 11/26/2001 . This is the

assessment date for the 1040- 2000 (see above) .

This NFTL for 2001 shows a recording date

(7/18/02) prior to the assessment date (9/16/02)

of the return for 2001 .

This NFTL is to be

withdrawn , or corrected to properly show the year

2001 , as it was improperly filed .. This, however,

is not the subject of this CDP hearing .

In the section of the memorandum devoted to specific issues,

the Appeals Office provided the following explanation regarding

its conclusion that respondent may pursue

petitioner' s pension :

- 13 the government may not attach any of Wadleigh's

future earnings or assets he has retained after

the bankruptcy discharge for the years 2000 and

2001 .

The government, however, is not precluded from

attaching (or -levying) assets excluded from the

bankruptcy, in this case, Wadleigh's pension plan .

See 11 USC section 541 ; . certain retirement savings

accounts or pension plans may be excluded from the

bankruptcy estate .

This issue has been discussed-in 2006 TNT 167-19,

and IRM 5 .9 .2 .9 .1 .1 in that it is not even

required that a Notice of Federal Tax Lien be

filed for the government to be allowed to proceed

in this fashion (NFTLs were filed in Wadleigh's

case) . Thus, the government may proceed against

Wadleigh's pension income for both of the years

2000 and 2001, and the issuance of the Letter 4066

regarding 2001 is appropriate . .

Petitioner timely filed a petition with-this Court asking us

to review the Appeals Office's determination .

Discussio n

I .

Section 633 0

The Commissioner may not levy ona'taxpayer's property or

rights to property unless he-has first notified the taxpayer in

writing of his right. to request a hearing under section 6330 .

Sec . 6330(a) . If the taxpayer requests a hearing under sectio n

6330(a) (hereinafter hearing ),

the hearing shall be

conducted by

an impartial officer or employee of the IRS Office of Appeals .

Sec . 6330 (b)(1), (3) .

At the hearing the taxpayer may raise any

relevant issue relating to the Co mmissioner's proposed collection

14 activity, including (1) appropriate spousal defenses ,

(2) challenges to the appropriateness of collection action, . and

(3) offers of collection alternatives . Sec . 6330(c)(2)(A) ;

v . Commissioner , 114 T .C . 604, 609 (2000) ;

Sego

Goza v . Commissioner ,

114 T .C . 176, 180 (2000) . The taxpayer may . challenge th e

existence or amount of the underlying tax liability only if the

taxpayer did . not receive a notice of deficiency for such

liability or did not otherwise have an opportunity to dispute the

liability . Sec . 6330(c)(2)(B) .

Following a hearing, the Appeals Office must issue a notice

of determination regarding the validity of the proposed

collection action . In making the determination the Appeals

Office must take into consideration : (1) Verification presented

by the Secretary that the requirements of applicable law and

administrative procedure have been met ; (2) relevant issues

raised by the taxpayer ; and (3) whether the proposed collection

action appropriately balances the need for efficient . collection

of taxes with the taxpayer's legitimate concerns regarding the

intrusiveness of the proposed collection action . Sec .

6330(c)(3 )

II .

Standard of Revie w

We have . jurisdiction to review a notice of determination .

Sec . 6330 .(d)(1) . If the validity of the underlying tax liability

- 15 was properly at issue in the hearing, we review the determination

regarding liability de novo .

Goza v . Commissioner ,

Sedo v . Commissioner ,

supra at 181-182 . We review any othe r

determination for abuse of discretion .

supra at 610 ;

supra at 610 ;

Seao v . Commissioner ,

Goza v . Commissioner , supra at 182 . A

determination will not constitute an abuse of discretion unless

it is arbitrary, capricious, or without sound basis in fact or

law . See

Swanson v . Commissioner , 121 T .C . 111, 119 (2003) (if

Commissioner's determination based on erroneous legal

interpretation, determination may be set aside as abuse of

discretion) ;

Woodral v . Commissioner , 112 T .C . 19, 23 (1999) .

Petitioner did not challenge the existence or amount of his

2001 tax liability at his hearing or at trial . However, he does

challenge the determination to proceed with collection . In

challenging the determination petitioner has raised several

issues that-require us to decide the legal effect . of the section

6321 statutory lien during and . after a bankruptcy proceeding and

related legal questions . When we are faced with a question o f

law, the standard of review has no impact on our analysis because

under either standard an erroneous legal determination must be

rejected .

Kendricks v . Commissioner , 124 T .C . 69, 75 (2005) ;

Swanson v . Commissioner ,

supra at 119 . Even if we characterize

the applicable standard of review as abuse of discretion, we do

16 -

.

not uphold a discretionary determination that is infected by a

material error of law .

Swanson v . Commissioner ,

III .

Kendricks v . Commissioner ,

supra

supra at 75 ;

at 119 .

Scope of Revie w

When reviewing a notice of determination for abuse of

discretion under section 6330(d), we have held that in some

circumstances we may consider evidence that was presented at

trial but was not included in . the administrative record .

Robinette v . Commissioner , 123 T .C . 85, 101 (2004), revd . 439

F .3d .455, 460-462 (8th Cir . 2006) . Respondent invites us to

overrule our opinion in Robinette and limit our review to the

administrative record . We decline, respondent's invitation to

overrule our holding in Robinette because the scope of review

does not materially affect the outcome at this time, given our

conclusion to remand this case for further proceedings .

IV .

Bankruptcy, the Section 6321 Lien, and the Section 6331 Levy

Before turning to our review of respondent's notice of

determination, we must first examine .the scope of the section

6321 lien, the effect of a discharge in bankruptcy on .an

otherwise valid section 6321 lien where the Commissioner fails to

file a valid NFTL, and the . Commissioner's ability to levy

pursuant to section 6331 on property that is subject to .a section

6321 lien, in order to determine whether respondent may levy on

petitioner's interest in his pension .

- 17 A.

Section 632 1

If any person liable to pay any tax neglects or refuses to

pay the tax upon notice and demand, the amount of the tax

(together with any costs, . penalties, and interest) shall be a

lien in favor of the United States on all property and rights to

property belonging to the taxpayer . Sec .6321 ; sec . 301- .6321-1,

Proced . & Admin . Regs . A person's liability to pay a tax is

established by assessment, which is the formal recording of a

liability in the records of the Commissioner . Secs . 6201, 6203 .

The notice and demand requirement in section 6321 refers to the

action required by section 6303, which provides that the

Commissioner, as soon as practicable'and within 60 days of

assessment, must provide written notice, stating the amount of

the liability and demanding payment thereof, to each person

liable for the unpaid tax .

When a taxpayer fails to pay an assessed tax .liability after

receiving a notice and demand for payment, the section 6321 lien

arises by operation of law and continues until the liability is

satisfied or becomes unenforceable by lapse of time .e Sec . 6322 .

The section 6321 lien attaches to all property and rights to

property belonging to the taxpayer, including property acquire d

'The sec . 6321 lien is sometimes called a "secret lien"

because it arises by operation of law without any public filing

requirement .

Hult v . Commissioner , T .C . Memo . 2007-302 .

- 18 by the taxpayer after the lien arises . Sec . 6321 ;

Glass City

Bank v . United States , 326 U .S . 265, 268-269 (1945) . An

unqualified right to receive property in the future is itself a

property right to which the section 6321 lien attaches . See

United States v . Natl . Bank of Commerce , 472 U .S . 713, 725

(1985) ;

Connor v . United States , 27 F .3d 365, 366 (9th Cir .

1994) . However, the section 6321 lien is not valid against a

purchaser, holder of a security interest, mechanic's lienor, or

judgment lien .creditor until an NFTL has been filed . Sec .

6323(a) .

Petitioner filed a 2001 Federal income tax return on August

16, 2002, that showed a Federal income tax liability and a

balance due . Respondent

assessed the liability and issued a

timely notice and demand for payment on September 16, 2002 . By

reason of the above, a section 6321 lien attached to all of

petitioner's property, including his pension income,

notwithstanding that the pension had not yet entered payout

status .

See sec . 6321 . However, respondent never filed a valid

NFTL with respect to petitioner's 2001 Federal income tax

liability . Respondent concedes the 2001 NFTL was recorded in

error and withdrawn, and we infer from the record that respondent

did not subsequently file a valid NFTL with respect to the 2001

tax liability . We find, therefore, that respondent has only a

- 19 section 6321 lien with .respect to petitioner's 2001 tax

liability . '

B.

The Effect of Bankruptcy on a Section 6321 Lien

The purpose of bankruptcy is to give the debtor a fresh

start by discharging many of the debtor's liabilities .

Carlson

v . Commissioner , 116 T .C . 87,101 (2001) . When a bankruptcy

court enters a discharge order in a bankruptcy proceeding, the

debtor is discharged from personal liability for all

-dischargeable debts . 11 U .S .C . sec . 524-(a) (2006) . However,

liens and .other secured interests generally survive bankruptcy .

Farrey v . Sanderfoot , 500 U .S . 291 ; 297 (1991) . Thus, a

discharge in bankruptcy will not necessarily prevent the

postdischarge enforcement of a valid prepetition lien on any,

prepetition property of the debtor that survived the bankruptcy .

Isom v . United States , 901 F .2d 744, 745 (9th Cir . . 1990) . . "[A]

bankruptcy discharge extinguishes only one mode of enforcing a

claim--namely, an action against the debtor in per'sonam --while

leaving intact another-,-namely, an action against the debtor in

rem ."

Johnson v . Home State Bank , 501 U .S . 78, 84 (1991) ;°

Iannone v . Commissioner , 122 T .C . 287,

292-293

(2004) . We must

examine whether petitioner's•pension interest was prepetition

property that survived the . bankruptcy and whether the section

6321 lien that was not perfected by the filing ofa valid NFTL i s

a valid prepetition lien that survived the bankruptcy .

20 The filing of a petition in bankruptcy automatically creates

a bankruptcy estate consisting of "all legal or equitable

interests, of the debtor in property as of the commencement of the

case ." 11 U .S .C . sec . 541(a)(1) (2006) . The bankruptcy estate

includes .all of the debtor's prepetition property and rights to

property except property excluded from the estate under 11 U .S .C .

sec . 541 (2006) . Title 11 U .S .C . sec . 541(c),(2), as interpreted

in Patterson v . Shumate , 504 U .S . at 760,9 permits a debtor to

exclude an interest in an ERISA-qualified pension plan from-his

bankruptcy estate .1 0

91n Patterson v . Shumate , 504 U .S . at 762, the Supreme Court

held that "a debtor may exclude his interest in an ERISAqualified pension plan from the bankruptcy estate" . The

bankruptcy trustee in Patterson argued that the Court's holding

rendered .11 U .S .C . sec . 522(d)(10)(E) superfluous, but the Court

rejected the argument, observing that 11 U .S .C . sec .

522(d)(10)(E) "exempts from the bankruptcy estate a much broader

category of . interests than * * * [11 .U .S .C . sec .] 541(c) (2)

excludes .

1°We have located only one opinion by a Court of Appeals

that has addressed the issue of whether the exclusion of an

ERISA-qualified pension interest from a bankruptcy estate is

mandatory or permissive . In Rains v . Flinn , 428 F .3d 893, 905906 (9th Cir . 2005), the Court of Appeals for the Ninth Circuit

held that the exclusion of such a pension from a debtor's

bankruptcy estate was permissive-rather than mandatory . If

exclusion is permissive, then it is logical to assume that the

debtor must decide in a bankruptcy proceeding whether the debto r

.will exclude or exempt an ERISA-qualified pension interest .

Excluding or exempting such an interest may have substantially

different consequences, particularly with respect to unpaid

Federal tax liabilities . See, e .g ., Madigan, "Using Unfiled

Dischargeable Tax Liens to Attach to ERISA-Qualified Pension Plan

Interests After Patterson v . Shumate ", 14 Bankr . Dev . J . 461, 46 5

(continued . . .)

21

Title 11 U .S .C .'sec . 522 allows a debtor to .exempt from hi s

bankruptcy estate a personal residence, a car, certain property

used in a trade or business, retirement funds, and certain other

assets, to ensure that the debtor has at least some property with

which to make a fresh start .

Carlson v . Commissioner ,

supra at

102 . Exempt property initially is part of the debtor's

bankruptcy estate, see Taylor v . Freeland & Kronz , 503 U .S . 638,

642 (1992), but is removed from the bankruptcy estate (and is

therefore unavailable to satisfy creditors' claims) for the

benefit of the debtor as .a result of the debtor's exemption,

Pasauina v . Cunningham ,

.513 F .3d

318, 323

( .1st Cir . 2008) .

Property that is exempt from the bankruptcy-estate pursuant to 11

U .S .C . sec . 522 is not available to satisfy prepetition debts

during or after the bankruptcy, except debts secured by lien s

10( . . .continued)

(1998) . We note, however, that several courts have held that an

ERISA-qualified pension plan that is listed as exempt property on

schedule C of the debtor's bankruptcy petition is excluded from a

debtor's bankruptcy estate, notwithstanding the debtor's listing

of the pension as exempt property . See, e .g .,~ Ostrander v .

Lalchandani , 279 Bankr . 880, 886 (Bankr . 1st Cir . 2002) ; United

States v . Rogers , 558 F .-Supp . 2d 774, 787 (N .D . Ohio 2008) ; In

re Wilson , 206 Bankr . 808, 809 (Bankr . W .D .N .C . 1996) ; Rich v .

United States , 197 Bankr . 6 9 2, 695 (Bankr . .N .D . Okla . 1996) ("if

Debtor's * * * [retirement plan] is ERISA .qualified, it is

excluded from the bankruptcy estate ."), affd . per order (N .D .

Okla ., Jan . 9, 1998) ; In re Hanes , 162 Bankr . 733, 741 (Bankr .

E .D . Va . 1994) . We also note that there is no formal procedure

within the bankruptcy process to clarify what property is

excluded . At least one court has commented on the confusion that

results from this lack of clarity . See In re Stevens , 177 Bankr .

619, 620 n .2 (Bankr . E .D . Ark . 1995) .

- 22 that are not avoided in the bankruptcy and

section 6321 liens

with respect to which an NFTL has been filed . 11 U .S .C . sec .

522(c) .

Unlike exempt property, which is part of a debtor's

bankruptcy estate but is unavailable to satisfy creditors'

claims, excluded property never becomes part of the bankruptcy

estate and is therefore never subject to the bankruptcy trustee's

or the debtor's power to avoid the section 6321 lien . See

IRS v . Snyder , 343 :F .3d 1171, 1178-1179 (9th Cir . 2003) ;

U .S .

Traina

v . Sewell , 180 F .3d 707, 710 (5th Cir . 1999) . Thus, if a section

6321 lien on excluded property has not expired or become

unenforceable under section 6322, it survives the bankruptcy . "

Petitioner was granted a discharge in bankruptcy on December

8, 2005 . The discharge included petitioner's 2001 tax liability .

On schedule C of his bankruptcy petition, petitioner contended

that his pension was excluded from the bankruptcy estate pursuant

to 11 U .S .C . sec . 541(c)(2) and Patterson v . Shumate , 504 U .S .

753 (1992) . Alternatively petitioner claimed that his pension

was exempt property, but only if and to the extent that his

pension was includable in the bankruptcy estate . On the basis of

the record before us and our review of 11 U .S .C . sec . .541, w e

"The Commissioner has taken the position that "A Notice of

Federal Tax Lien need not be on file to pursue . collection against

assets excluded from the bankruptcy estate ." Internal Revenue

Manual (IRM) pt . 5 .9 .2 .9 .1 .1(2) (Mar . 1, 2007) .

- 23 conclude that petitioner's pension was properly excludable from

his bankruptcy estate under 11 U .S .C . sec . 541(c)(2) and

Patterson v . Shumate ,

supra at 765, and that petitioner excluded

the pension from his bankruptcy estate . As a result, the section

6321 lien that attached to the pension before bankruptcy

continued to attach to petitioner's interest in his pension even

after petitioner's personal liability for . his 200 .1 tax liability

was discharged in bankruptc y

C.

Section 633-1

Section 6331(a) provides :

SEC . 6331(a) . Authority of Secretary-.--If'any

person liable to pay any tax neglects or refuses to pay

the same . within 10 days after notice and demand, itshall be lawful for the Secretary to collect such ta x

* * * by levy upon all-property and rights to property

(except such property as is exempt under section-6334)

belonging to such person or on which there is a lie n

* * * [12 1

The notice and demand requirement in . section 6331(a) is satisfied

if the Commissioner issues a written notice of unpaid ta x

liability and demand for payment and the notice is given to the

taxpayer in person, left at the taxpayer's dwelling or usual

place of business, or sent via certified or registered mail to

the taxpayer's last known address . Sec . 6331(d) .

12None of the sec . 6334 exemptions is relevant to the

instant case .

24 Once the Commissioner has assessed a Federal tax liability

and given the requisite notice, he .may collect the unpaid tax by

levy on ."all property and rights to property" belonging to the

taxpayer .

See sec . 6331(a) . However, the Commissioner must

stand in the taxpayer's shoes ; he acquires through levy only

those property rights that the taxpayer himself possesses .

United States v . Novak , 476 F .3d 1041, 1062 (9th Cir . 2007) .

Thus, if the Commissioner levies on a taxpayer's pension, he will .

receive property from the levy only if the pension is already in

payout status or the taxpayer has the right to demand a lump-sum

distribution of his pension interest .

Snyder ,

Id . ; see also

U .S . IRS v .

supra at 1175 (IRS cannot, outside bankruptcy, enforce

its lien on debtor's interest in ERISA-qualified plan until plan

enters payout status) .

V.

Review of Appeals Office's Determinatio n

A.

Compliance With Law and Administrative Procedure

Section 6330(c) .(1) requires the hearing officer to obtain .

verification from the Secretary that the requirements of

applicable law and administrative procedure have been met . The

record shows that Mr . Climan verified the following : (1)

Petitioner had an unpaid Federal income tax liability for 2001 ;

(2) respondent properly assessed petitioner's 2001 tax liability

as required by section 6203 ; (3) respondent timely mailed

petitioner a notice and demand for payment as required by section

- 25 6303 ; (4) petitioner neglected or refused to pay his 2001

liability ; and (5) respondent mailed petitioner a notice of

intent to levy and a notice of his right to request a hearing as

required by sections 6330 and 6331(d) . Mr . Climan correctly

concluded that petitioner's 2001 tax liability had .been

discharged in bankruptcy and that respondent was barred from

attaching any of petitioner's future earnings or postpetition

assets to satisfy the 2001 liability . However, Mr . Climan also

determined that respondent was not precluded from levying on any

prepetition property that was excluded .from petitioner's

bankruptcy estate (in this case, petitioner's pension) .

Petitioner contends that . respondent failed to follow

applicable law and administrative procedure . Specifically,

petitioner argues that respondent failed to follow the step-bystep instructions provided in the Internal Revenue Manual befor e

levying on money accumulated in a pension or retirement plan .

See 1 Administration, Internal Revenue Manual,(IRM) (CCH), pt .

5 .11 .6 .2, at 16,798-16,801 (Mar . 15, 2005) . A review of relevan t

IRM provisions is instructs e in ascertaining the procedures the

IRS expects . its employees t~ follow in deciding whether to levy

26 on a taxpayer's interest in a pension plan or other retirement

account .1 s

The IRM "serves as the . single, official source of IRS

`instructions to staff' relating to the administration and

operation of the Service ." IRM pt . 1 .11 .2 .1 .1(1) (Apr . 1,

2007) .19 It "provides a central repository of uniform guideline s

1sAlthough this Court has held that procedures set forth in

the IRM "do not have the force or effect of law" and a failure to

adhere to IRM procedures does not rise to the level of a

constitutional violation, see, e .g ., Vallone v . Commissioner , 88

T .C . 794, 807-808 (1987) (checks obtained in violation of IRM not

a constitutional violation requiring suppression) ; Riland v .

Commissioner , 79 T .C . 185 (1982) (failure to abide by IRM

procedures not a violation of due process), and that the IRM does

not create enforceable rights for taxpayers, see Fargo v .

Commissioner , 447 F .3d 706, 713 (9th Cir . 2006), affg . T .C . Memo .

2004-13, sec . 6330(c)(1) specifically requires that the Appeals

officer at the sec . 6330 hearing shall obtain verification-from

the Secretary that the requirements of any applicable law or

administrative procedure have been met . Moreover, sec .

6330(c)(3) provides that the determination by an Appeals officer

under sec . 6330(c) shall take into consideration the verification

presented under . sec . 6330(c)(1) . Because petitioner has

questioned whether Mr . Climan followed applicable IRM procedures

in making his determination, we examine the IRM procedures .

However, because we conclude that the Appeals Office met the

verification requirement of sec . 6330(c)<(1), we need not and do

not decide whether the procedures described in the IRM are

administrative procedures that come within the verification

requirement of sec . 6330(c)(1) .

"Before its amendment in 2007, 1 Administration, IRM (CCH)

pt . 1 .11 .2 .1(2), at 5,027 (Oct . 10, 2003), stated in pertinent

part as follows :

The IRM outlines business rules and administrative

procedures and guidelines used by the agency to conduct

business .

It contains policy, direction and

delegations of authority that are necessary to carr y

(continued . . .)

27 on operating policies and procedures for use by all IRS offices ."

Id .

Several 'provisions ."of the IRM address the Commissioner's

ability to levy on retirement income and retirement accounts . 1

Administration, IRM (CCH), pt .-5 .11 .6 .-1(1), at 16,797 (June 29,

2001), which applies to levies on retirement

income , directs IRS

employees to "Use discretion before levying retirement income"

but provides no specific guidance regarding . how that discretion

is to be exercised . In contrast, IRM pt . 5 .11 .6 .2, which covers

,'money accumulated in apension or retirement plan, as well as

Individual Retirement Arrangements (IRAs)" and specifically does

not cover "levying retirement income", directs IRS-employees to

levy on assets .accumulated~in pension or `retirement accounts only

after-following detailed procedures .

Id .

pt .•5 .11 .6 .2(4)-(1.2),

at 16,799-16,801 (Mar .- .15, 2005) .1 5

continued) .

out IRS responsibilities to, administer tax law and

other legal provisions . The business rules, operating

guidelines and procedures and delegations guide

managers and employees in carrying .out day to day

responsibilities . [Emphasis added . ]

19 ( . .

_15 With respect to retirement accounts that are excluded from

the bankruptcy estate, 1 Administration, IRM (CCH) pt .

5 .11 .6 .2(12), at 16,801° (Mar . 15, 2005) .., states that the IRS may

levy on such accounts to collect taxes discharged in bankruptcy

if an NFTL was filed before the bankruptcy, and it instructs

employees to consider levying on retirement accounts "if there is

no other property that survived the bankruptcy ." . However, IRM

pt . 5 .11 .6 .2(12) also contains the following note : "Where no

Notice of Federal Tax Lien was filed before bankruptcy, it is not

settled whether the .IRS can levy-to-collect discharged taxes fro m

(continued . . .)

- 28 The record establishes, that Mr . Climan exercised discretion

as directed by IRM pt . 5 .11 .6 .1(1) . Although Mr . Climan did not

follow . the detailed procedures set forth in IRM pt .

5 .11 .6 .2(4)-(12), he was not required to do so . The procedures

set forth in IRM pt . 5 .11 .6 .2 apply only to situations in which

the Commissioner seeks to levy on money accumulated in pension or

retirement accounts ; they do not apply to a ,proposed levy on

payments from a pension plan that constitute retirement

income to

the recipient . The proposed levy is directed to petitioner's

retirement income . We therefore conclude that the Appeals Office

obtained verification that the requirements of all applicable law

and administrative procedure had been met in accordance with

section 6330(c)(1) and that it considered that verification in

making its determination as required by section 6330(c)(3) .

B.

Consideration of Petitioner's Argument s

Petitioner raised five contentions in his Form 12153, which

we can condense into three core arguments : (1) Respondent's

proposed levy was invalid because a previous levy on petitioner's

pension was released ; (2) petitioner's 2001 Federal income tax

liability was discharged in petitioner's 2005 bankruptcy ; and (3)

the proposed levy was invalid because it was made befor e

"( . . .continued)

excluded retirement accounts . Counsel should be consulted in

such situations ."

29 petitioner's pension entered payout status . All three .arguments

are unavailing .

1.

A Release of Levy Does Not Release the Underlying

Lien on Petitioner's Pension .

Petitioner's first argument confuses the lien that arises

under section 6321 with respondent's ability to levy pursuant to

section 6331 . The lien on petitioner's pension arose when

petitioner's 2001 Federal income tax liability was assessed and

petitioner failed to pay the liability upon notice and demand .

See sec . 6321 . The lien was not released when petitioner's 2001

tax liability was discharged in bankruptcy because the pension

was excluded from the bankruptcy estate, see

supra pp . 22-23, nor

was the lien released by respondent's withdrawal of any prior

levy notices . See sec . 6322 .

2 .

Petitioner's Discharge in Bankruptcy Did Not

Prevent Respondent'From Levying on Petitioner's

Prepetiti .on Assets That Remained Subject to ,

Respondent's Section 6321 Lien .

Petitioner's second argument fails because, as discussed

above, a discharge in bankruptcy shields a debtor from personal

liability with respect to discharged debts but does not prevent

the Commissioner from proceeding in rem against any prepetition

assets of the debtor that survived the bankruptcy and remain

subject to a valid section 6321 lien . See

supra pp . 19-23 . In

the case of exempt property, the section 6321 lien survives the

bankruptcy where, pursuant to section 6323(a), the Commissioner

30 filed an NFTL before the bankruptcy ; in the case of excluded

property, the lien survives the bankruptcy whether or not the

Commissioner filed an NFTL . See

supra pp . 21-23 . Because

petitioner's pension was excluded from his bankruptcy estate, the

section 6321 lien remains attached to the pension,

notwithstanding respondent's . failure to properly'record an NFTL .

Accordingly, respondent may collect petitioner's unpaid 2001 tax

liability in rem by levying on petitioner's pension income, even

though petitioner's personal liability for the unpaid 2001

Federal income tax was discharged in bankruptcy .

3 .

Respondent's Notice of Levy Was Vali d

We reject petitioner's final argument because respondent did

not levy prematurely . In fact, respondent has not yet levied on

petitioner's pension income ; the only thing respondent has done

is to issue a notice of intent to levy pursuant to section 6330 .

Petitioner's argument confuses the notice of intent to levy under

section 6330 with the levy itself . Petitioner is correct that

respondent could not have withdrawn funds from petitioner's

pension until it entered payout status on November 1, 2007 . But

we are unaware of any authority holding that a notice of intent

to levy on pension income that is mailed to a taxpayer pursuant

to section 6330 before the pension has entered payout status is

improper, let alone invalid, and we can discern no restriction in

section 6330 that prevents the Commissioner from issuing a notice

- .31 of intent to levy once the'Commissioner has identified an

appropriate levy source, even if the notice of intent to levy is

issued before the date when the actual levy may commence to reach

payments from the plan (in this case, the date when petitioner's

pension enters payout status) .

C.

Balancing the Need for Efficient Collection of Taxes

With the Taxpayer's Concern That Collection Be No More

Intrusive Than Necessar y

Section 6330,(c)(3)(C) requires a hearing officer to balanc e

the Commissioner's obligation to collect a validly assessed bu t

unpaid tax liability against a taxpayer's legitimate concern that

the collection action may be too intrusive . We review for abuse

of discretion the hearing officer's determination regarding the

appropriate balance .

As discussed above, the IRM states that a hearing officer

must exercise discretion in determining whether to levy on a

taxpayer's retirement income but does not tell the hearing

officer how to exercise that discretion . 1 Administration, IRM

(CCH), pt . 5 .11 .6 .1(1), at 16,797 (June 29, 2001) . Mr . Clima n

chose to exercise his discretion by examining whether a levy o n

petitioner's retirement income would cause economic hardship .

Our problem with that determination arises from the method Mr .

Climan used to analyze whether economic hardship would result

from the levy .

32

Mr . Climan calculated petitioner's income as if petitione r

would continue to have income from wages after he started to

receive his pension . . Specifically, Mr . Climan took petitioner's

reported income (including wage income) from, petitioner's 2005

Federal income tax return and divided the figure by 12 to .arrive

at an average monthly income figure . He then calculated

petitioner's allowable expenses by extracting information from

petitioner's 2003-2005 Federal income tax, returns and consulting

the applicable national and local standards . He then calculated

petitioner's net monthly income by subtracting petitioner's

average allowable monthly expenses from petitioner's average

monthly income .

The problem that is readily apparent from this methodology

is that Mr . Climan assumed petitioner would continue to work

after he started to receive his pension income in November 2007 .

Mr . Climan did not assume in making his income calculations that

petitioner would retire, and there is nothing in the

administrative record to explain why he made that assumption .

The administrative record contains no indication that petitioner

would continue to work for compensation after November 2007 .,

Without that information in the administrative record or, at a

minimum, without some evidence in the administrative record that

the information was requested and not provided, we simply cannot

evaluate whether the Appeals Office abused its discretion .

33 Petitioner suggests on brief that his $1,242 monthly pension

payment has become a "lifeline" and that he will face economic

hardship if he is denied this income stream . We are unwilling to

dismiss petitioner's concern without some information in the

administrative record-to confirm that the hearing officer asked

petitioner (1) whether he would continue to work for compensation

after he started to receive his pension and (2) to submit

financial information to show his financial situation as of

November 2007 when he became entitled to his pension income .

We may under certain circumstances remand a case to the

Commissioner's Appeals Office while retaining jurisdiction . See

Lunsford v . Commissioner , 117 T .C . 183, 189 (2001) . The,

resulting section

6330, hearing on remand provides the parties

with an opportunity . to complete the initial section 6330 hearing

while preserving the taxpayer's right to receive judicial review

of the ultimate administrative determination .

Drake v .

Commissioner , T .C . Memo . 2006-151, affd . 511 F .3d 65 (1st Cir .

2007) . Because the administrative record is insufficient to

enable us to properly evaluate whether the Appeals office abused

its discretion in determining that a levy on petitioner's pension

income could proceed, we shall remand this case to enable the

34 parties to clarify and supplement the administrative record as

appropriate .l 6

VI .,

Conclusio n

We have considered the parties' remaining arguments and, to

the extent not discussed above, conclude those arguments are

irrelevant, moot, or without merit . For the reasons identified

above, we will remand this case to the Appeals Office for further

proceedings consistent with this opinion .

To reflect the foregoing,

An appropriate order will b e

issued .

16Respondent reserved objections to pars . 33 and 34 of the

stipulation of facts, which relate to changes in petitioner's

health that have occurred since the Appeals Office issued the

notice of determination . On remand respondent should consider

information offered by petitioner regarding his financia l

condition, including any information regarding his medical

condition and costs that bear on his financial condition . We

shall reserve ruling on respondent's objections until the Appeals

Office's review on remand is completed and a supplemental notice

of determination is issued .