Issue: If a bankruptcy court enters judgment in an adversarial proceeding that an Internal Revenue Service (IRS) debt is non-dischargeable so the tax lien is extinguished in favor of a judgment lien, does such a finding eliminate statutory penalties?
|Area of Law:||Bankruptcy & Creditors Rights, Tax Law|
|Keywords:||Tax lien; Statutory penalties; Judgment lien, non-dischargeable debt|
|Cited Cases:||386 U.S. 901; 823 F.2d 911; 355 F.2d 746|
Little authority appears to address the issue. In fact, in the only case remotely on point, In re Jones, 116 B.R. 810 (Bankr. D. Kan. 1990), the court found such a judgment would not eliminate penalties. After concluding that the government’s claim for taxes was non‑dischargeable, the bankruptcy court rejected the debtors’ argument that they could avoid the tax lien because it merged into the judgment lien:
As recently as 1986, the Sixth Circuit said the assertion was well settled that tax liens continue to exist independent of judgments based on the tax liability which gave rise to the liens. United States v. Bank of Celina, 823 F.2d 911, 914 (6th Cir. 1986). The court quoted a Second Circuit case which said:
“‘[T]ax assessment liens, unlike most liens under state law, continue to exist independently of the suit or judgment which has extended their existence…. The assessment lien does not merge into the judgment, as would an attachment lien, for example; the judgment is merely one way in which the underlying tax liability remains enforceable, and therefore the judgment serves merely as a measuring rod for the life of the lien.'”
823 F.2d at 914 (quoting United States v. Hodes, 355 F.2d 746, 749 (2d Cir. 1966), cert. dismissed, 386 U.S. 901, 87 S. Ct. 784, 17 L. Ed. 2d 779 (1967)). Thus, under this well-settled rule, debtors may not avoid the liens […]