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Individual Tax

Homestead Exemption does not Allow Debtor to Avoid Tax Lien

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The bankruptcy court has held that a debtor cannot avoid an IRS tax lien—even though the lien attaches to real property and would impair the debtor’s entitlement to a state homestead exemption—because the lien is statutory, not judicial.

Background

11 USC § 522(f)(1)(A) allows, in general, a debtor in bankruptcy to avoid a judicial lien to the extent that the lien impairs an exemption to which a debtor is entitled.

One such exemption is a state homestead exemption. Some states, such as Oklahoma, allow a home owner to designate his house and land as his homestead. The homestead is then exempted from execution by his creditors for certain debts in bankruptcy. (Black’s Law Dictionary)

11 USC § 101(36) defines a judicial lien as a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.

11 USC § 101(53) defines a statutory lien, in part, as a lien arising solely by force of a statute on specified circumstances or conditions, but does not include a security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.

Tax liens are included in the definition of statutory lien. (HR Report No. 95-595, 95th Cong. 1st Sess. 314)

An IRS lien attaches to all property of the taxpayer, both real and personal. (Code Sec. 6321)

Facts

The taxpayer, who was a homeowner and resident of OK, had income tax liabilities for 2005 through 2010. The IRS filed a Notice of Federal Tax Lien regarding those liabilities in 2012. The taxpayer then filed for bankruptcy in 2019.

The taxpayer asked the bankruptcy court to avoid the IRS’s lien under 11 USC § 522(f)(1)(A), asserting that the lien on her residence, which she claimed as exempt in her bankruptcy filings, impaired her homestead exemption.

Decision

The bankruptcy court denied the motion and said that a tax lien cannot be avoided under 11 USC § 522(f)(1)(A) because it is not a judicial lien, but rather a statutory lien. The court said it was clear from Congress’s intent in defining what a statutory lien is, as well as from the HR Report, that a tax lien is statutory and not judicial.

To continue your research on effect of tax liens on homestead interests, see FTC 2d/FIN ¶ V-5942.

 

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