Tax liens add another layer of complexity toward the elimination of tax claims in bankruptcy. Therefore, it is important to view the ramifications of the tax lien as it relates to the tax claim in bankruptcy and how the tax lien affects the taxpayer’s property after bankruptcy.
Where the tax claim is protected by a tax lien, the general rule is that it survives the bankruptcy because although the individual debtor’s personal liability for the underlying tax claim may be discharged, the lien itself remains on whatever property existed on the date the bankruptcy case is filed (but only to the extent of the value of the equity in the property).
The impact the lien has on the taxpayer’s property after the bankruptcy depends upon whether the underlying tax is dischargeable or not in the bankruptcy. If dischargeable, then the lien continues to attach but only to property which existed at the time the bankruptcy was filed; whereas, if the underlying tax claim is not dischargeable, the tax lien can attach to property which existed at the time the bankruptcy was filed as well as to property acquired after the bankruptcy.
Improperly Filed and Defective Tax Liens
For federal tax liens, the Notice of Federal Tax Lien must be filed in the correct office designated by state law for the filing of tax liens. For personal property, the lien must typically be filed in the taxpayer’s county of residence. For real property, the lien must typically be filed in the county in which the real property is situated.
The taxpayer can challenge not only the amount of the underlying claim, which is subject to the tax lien, but also the validity of the tax lien, and in some instances, the value of the tax lien. Thus, the taxpayer can avoid the tax lien by attacking its validity under various conditions and legal theories or, in some cases, the tax lien may remain but be “stripped down” or reduced to the value of the equity in your real or personal property.
Procedurally a tax lien can be avoided if it was improperly filed but is otherwise a valid tax lien or the tax lien can be attacked and invalidated where the tax lien itself is defective or invalid – determined on the date of the filing in bankruptcy.
Improperly filed tax liens can occur when there was improper notice and demand for payment of the tax, the lien is filed in the wrong location – wrong county or venue, filed with the incorrect name, improperly perfected, contain inadequate information, filed in violation of the automatic stay in bankruptcy and for many other reasons.
The validity of the tax lien can be attacked on several grounds including where the tax lien expired, was inadvertently released, was filed with reference to the wrong taxpayer, is based on an invalid assessment, attaches to property which does not belong to the taxpayer, is not property of the debtor’s bankruptcy estate or is exempt under federal law and for a variety of other reasons.
Valuation of Tax Liens
Determining the value of a tax lien is often very important in a Chapter 13 or Chapter 11 bankruptcy case.
The value of the lien is not necessarily the face amount of the tax claim reflected on the lien notice but instead is equal to the value of the unencumbered equity in the assets to which it attaches. The value of the lien will dictate the amount of the tax claim paid to the taxing agency. Although the valuation method typically employed is “replacement cost, “valuing the tax lien often takes into consideration present value calculations, issues of “going concern for businesses,” perishable goods for inventory, bad-debt allowances for accounts receivable and a whole host of other factors considered on a case-by-case basis.
Our tax bankruptcy attorneys regularly contest and adjudicate the validity and value of tax liens with the taxing agencies and in bankruptcy proceedings through adversary proceedings, by motion or the objection to claim process. We work with valuation experts in every area with respect to different types of property to support our challenges to tax lien valuations. Let us examine the propriety of any tax lien(s) in your case and determine if we can attack its validity or value.
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