IRS changes stance on debtors' pensions.

According to a recent notice, the IRS will no longer argue that the value of its secured claim includes the debtor's interest in a pension plan excluded from the bankruptcy estate under Bankruptcy Code Section 541 (c) (2).

Discussion

Under Bankruptcy Code Section 506(a), a creditor with a lien on bankruptcy estate property holds a secured claim to the extent of the value of the creditor's interest in the estate's interest in such property. Bankruptcy Code Section 541(a) provides that, on the commencement of a bankruptcy case, an estate is created that consists of all the debtor's legal and equitable interests on that date. However, according to Section 541 (c)(2), nonbankruptcy law restrictions on the transfer of a beneficial interest in a trust are enforceable in a bankruptcy case.

In Patterson v. Shumate, 504 US 753 (1992), the Supreme Court determined that an anti-alienation clause required for compliance with the Employee Retirement Income Security Act of 1974 (ERISA) and tax qualification, and contained in the debtor's plan, was a restriction on transfer enforceable under "nonbankruptcy law" within the meaning of Section 541(c)(2). Accordingly, it held that the ERISA-qualified pension plan was excluded from the debtor's bankruptcy estate under that section.

However, In re Lyons, 148 BR 88 (Bankr. Ct., DC DC 1992) held that, because the anti-alienation provisions in a pension plan were "ineffective against Federal tax liens," they were not enforceable against the IlLS under applicable nonbankruptcy law, under Section 541(c) (2). Thus, the court held that the debtor's rights in the pension plan remained the estate's property under Section 541(c)(1) and were included in the IRS'S secured claim's value under Section 506(a).

The IRS had mixed success in advancing the position that its secured claim includes the value of a debtor's interest in a pension plan subject to a Federal tax lien (compare In re McIver, 255 BP. 281 (DC MD 2000) (following Lyons, the court held that the Service's secured claim included the value of annuity payments the debtor received under teacher retirement plans) with In re Keyes, 255 BR 819 (Bankr. Ct., ED VA 2000) (in discussing the split of authority, the court held that an ERISA-qualified pension plan is not included in the debtor's estate for purposes of securing the Service's claim)).

In Snyder, 343 F3d 1171 (9th Cir. 2003), the Ninth Circuit rejected the Lyons approach and held that the IRS did not hold a secured claim as to the debtor's interest in an ERISA-qualified pension plan, because the interest was excluded from the bankruptcy estate under Section 541(c)(2). The court reasoned that the anti-alienation clause in the debtor's plan prevented a transfer of the debtor's interest to the bankruptcy estate as to all creditors, including the IRS; thus, it could not be used to secure the IRS'S claim under Section 506(a). The court noted, however, that the Service's liens are not extinguished or otherwise affected, and continue to exist outside of bankruptcy.

Thus, when a debtor's interest in a pension plan is excluded from the estate under Section 541(c)(2), the IRS will not include such interest in its secured claim. However, its lien against the debtor's interest in the plan is not extinguished and will continue to exist notwithstanding the bankruptcy proceeding. CC 2004-033 (9/9/04)

REFLECTIONS: The IRS subsequently issued a formal acquiescence to the Ninth Circuit's decision in Snyder, that the IRS's secured bankruptcy claim did not include the debtor's interest in an ERISA-qualified plan.

2004 Arthur J. Dixon Award

The AICPATax Division's Tax Executive Committee voted to bestow the Arthur J. Dixon Award for 2004 on Robert M. Rosen, a CPA and an attorney. Rosen is a retired partner of Ernst & Young LLP, Washington, DC, where he practiced for 28 years, as an expert in consolidated returns. He is a former co-editor of The Tax Adviser's Tax Clinic.

The prestigious annual prize was created to honor the memory of a CPA known for his outstanding service to the tax profession and the Tax Division.