Sills v. USA

                  United States Court of Appeals,

                            Fifth Circuit.

                             No. 95-10604

                           Summary Calendar.

   In The Matter of Walter G. SILLS;       Joyce K. Sills, Debtors.

          Walter G. SILLS;    Joyce K. Sills, Appellants,

                                   v.

   UNITED STATES of America, DEPARTMENT OF TREASURY;       Internal
Revenue Service, Appellees.

                             May 3, 1996.

Appeal from the United States District Court for the Northern
District of Texas.

Before JOLLY, JONES and STEWART, Circuit Judges.

     E. GRADY JOLLY, Circuit Judge:

     Walter G. Sills and his wife, Joyce K. Sills, debtors in a

Chapter 13 bankruptcy case, appeal the district court's affirmance

of the bankruptcy court's judgment in favor of the Internal Revenue

Service (the "IRS") in an adversary proceeding challenging the

validity of a tax lien attached to the Sills' house.           The Sills

purchased the house with workers' compensation proceeds from an

injury sustained by Walter Sills.       We affirm.

                                   I

     In   1990,   Walter   Sills   received    $180,000   in    workers'

compensation proceeds as a result of injuries suffered from a fall

while working on an oil platform.       The Sills used the proceeds to

make several purchases, including a house in Dallas County, Texas.

On September 9, 1991, the IRS filed a notice of federal tax lien


                                   1
("NFTL") on the Sills' house in the office of land records of

Dallas County, listing the following federal tax and penalty

liabilities against Walter Sills:

Kind of Tax       Tax Period Ended             Date of Assessment       U n p a i d
                                                                        Balance

6672                    12/31/83                    09/02/85            $ 2,001.06

1040                    12/31/80                    10/13/86             15,204.31

1040                    12/31/81                    02/23/87             14,863.23

1040                    12/31/86                    10/13/86             10,312.59

                                       —————

       On   September   12,    1991,    the     Sills   filed    a    petition   in

bankruptcy for relief under Chapter 7 of the Bankruptcy Code.                     In

January 1992, the case was converted to a proceeding under Chapter

13.    The IRS filed an amended proof of claim in the bankruptcy

proceeding asserting a secured claim for the unpaid taxes and the

penalty     specified   in    the   NFTL,     and   additional       penalties   and

interest.1      The Sills objected to the IRS' proof of claim and

commenced an adversary proceeding challenging the IRS's lien.                    The

parties filed a stipulation of facts in which the Sills agreed

"with the Income taxes, interest and penalties for 1980, 1981,

1983."      The Sills contended, inter alia, that (1) the portion of

the lien for Walter Sills' 1983 tax year liability was invalid

because it erroneously indicated that the liability was for the

1986 tax year and (2) the tax lien was invalid or unenforceable


       1
      The IRS sought to assert its claim only against Walter
Sills' one-half interest in the house, which he owned as
community property with his wife.

                                         2
because property purchased with workers' compensation benefits is

exempt from levy under I.R.C. § 6334(a)(7). They also claimed that

the IRS was required to release the lien pursuant to I.R.C. §

6325(a)(1), or discharge the property from the lien pursuant to

I.R.C.    §    6325(b)(2)(B),      because         the     lien     was    invalid    or

unenforceable.

     The bankruptcy court ultimately ruled that the Sills were

barred from challenging the validity of the portion of the lien for

1983 taxes because of their stipulation concerning income tax

liability for 1983.          It also ruled that Walter Sills' interest in

the house the Sills purchased with his workers' compensation

proceeds was not exempt from levy under I.R.C. § 6334(a)(7).2

     On appeal, the district court affirmed the bankruptcy court's

holding that the house was not exempt from levy.                          In a separate

opinion       issued    in     response       to     the        Sills'     motion    for

reconsideration, the district court noted that it had omitted

discussion of the Sills' claim regarding the validity of the tax

lien for the 1983 tax liability.          The district court ruled that the

bankruptcy      court   committed    error         when    it     viewed    the   Sills'

stipulation on Walter Sills' 1983 tax liability as a stipulation on

the validity of that portion of the tax lien.                     The district court

held, however, that the error in the NFTL was a "minor defect in

the notice" and thus did not render the tax lien for that year

     2
      The court analogized from two Supreme Court decisions
concerning tax levies involving proceeds from the World War
Veterans' Act. See Trotter v. State of Tennessee, 290 U.S. 354,
54 S.Ct. 138, 78 L.Ed. 358 (1933); Lawrence v. Shaw, 300 U.S.
245, 57 S.Ct. 443, 81 L.Ed. 623 (1937).

                                          3
void.    The Sills filed a timely notice of appeal.

                                     II

                                      A

         We   initially   address   whether   that   portion    of   the   NFTL

covering Walter Sills' liability for the 1983 tax year constitutes

a "properly filed" notice of a tax lien under section 522(c)(2)(B)

of the Bankruptcy Code.3       The district court's holding that the

NFTL constituted a proper filing under § 522(c) is reviewable de

novo.     Matter of Walden, 12 F.3d 445, 448 (5th Cir.1994).                The

Sills argue that the NFTL did not constitute a "properly filed"

notice of the Walter Sills' tax liability stemming from the 1983

tax year because the NFTL incorrectly identified 1986 as the tax

year giving rise to the liability.

     Section 6323 of the Internal Revenue Code states that a lien

shall not be valid "as against any purchaser, holder of a security

interest, mechanic's lienor, or judgment lien creditor until notice

thereof which meets the requirements of subsection (f) has been

filed by the Secretary."      I.R.C. § 6323(a) (1994).         Subsection (f)

provides, inter alia, that "[t]he form and content of the notice

... shall be prescribed by the Secretary."               I.R.C. § 6323(f)

(1994).       The applicable IRS regulation requires that the lien


     3
      Property that the debtor elects to exempt from the
bankruptcy estate pursuant to 11 U.S.C. § 522 is not liable
during or after the case for any debt that arose before the
commencement of the case. An exception to this rule is for "a
tax lien, notice of which is properly filed." 11 U.S.C. §
522(c)(2)(B) (1994). The Sills apparently have elected to exempt
the house from the bankruptcy estate under 11 U.S.C. §
522(d)(10)(C).

                                      4
specify:       (1) the taxpayer, (2) the tax liability giving rise to

the lien, and (3) the date that the assessment arose.                26 C.F.R. §

301.6323(f)-1(d)(2) (1995).           Although the NFTL at issue in this

case incorrectly identified 1986, instead of 1983, as the tax year

of the liability giving rise to the lien, the NFTL was filed in the

proper place and correctly identified the taxpayer, the property

and its location, the amount owed, and the date of the assessment.

We agree with the district court that such a minor defect in the

notice is insufficient to render it void.               See Richter's Loan Co.

v. United States, 235 F.2d 753, 755 (5th Cir.1956);             In re Cennamo,

147 B.R. 540, 543 (Bankr.C.D.Cal.1992) ("The purpose of the NFTL is

to give constructive notice, and where there is such notice, a

minor defect in filing will be overlooked").

                                        B

           We now consider the validity of the tax lien on the house in

the light of the fact that the Internal Revenue Code exempts from

levy       "any   amount    payable   to    an   individual     as    workmen's

compensation."       I.R.C. § 6334(a)(7) (1994).         The Sills' underlying

theory of the case is that, because of the § 6334(a)(7) exemption

from levy, the house has no value to the IRS and, thus, the house

meets the criteria for discharge from the lien under I.R.C. §

6325(b)(2)(B),4       or,   alternatively,       that    the   underlying   tax

liability is unenforceable and, thus, the lien meets the criteria

       4
      "[T]he Secretary may issue a certificate of discharge of
any part of the property subject to the lien if the Secretary
determines at any time that the interest of the United States in
the part to be so discharged has no value." I.R.C. §
6325(b)(2)(B) (1994).

                                        5
for release under I.R.C. § 6325(a)(1).5              The Sills argue that the

district court erred in affirming the bankruptcy court's judgment

that the exemption from levy under § 6334(a)(7) does not extend to

property     purchased   for   maintenance     and    support     with    workers'

compensation proceeds.

          We need not determine the reach of the exemption provided by

§ 6334(a)(7).      See Sojourner T. v. Edwards, 974 F.2d 27, 30 (5th

Cir.1992) (court may affirm judgment on any basis supported by the

record), cert. denied, 507 U.S. 972, 113 S.Ct. 1414, 122 L.Ed.2d

785 (1993).      As the courts have held in United States v. Barbier,

896 F.2d 377 (9th Cir.1990), and Matter of Voelker, 42 F.3d 1050

(7th Cir.1994),      whether   property   is    exempt     from    levy    is   not

determinative of the validity or enforceability of a tax lien on

property.     The court in Barbier explained that a lien "is merely a

security interest and does not involve immediate seizure" whereas

a levy "operates as a seizure by the IRS."              896 F.2d at 379.        The

court further explained, "A lien enables the taxpayer to maintain

possession of protected property while allowing the government to

preserve its claim should the status of the property later change."

Id.   The court concluded, "Reading sections 6334 and 6321 together

leads to the conclusion that the former section is a limitation on

the government's ability forcibly to seize the taxpayer's property,

but not a bar to the government's ability to assert a security


      5
      "[T]he Secretary shall issue a certificate of release of
any lien ... not later than 30 days after the day on which [t]he
Secretary finds that the liability ... has become legally
unenforceable." I.R.C. § 6325(a)(1) (1994).

                                     6
interest in such property."   Id.

     Even if the Sills' house were exempt from levy, the tax lien

still may be valid and enforceable.         For example, the IRS may

enforce the lien by foreclosure action under I.R.C. § 7403;      it may

seek to have its lien satisfied in proceedings, instituted by third

parties, in which the IRS is brought pursuant to 28 U.S.C. § 2410;

or it may exercise redemption rights provided by I.R.C. § 7425(d)

if another party forecloses on the property.      The Sills' arguments

that the lien has no value, necessitating discharge of the property

under § 6325(b)(2)(B), or that the underlying tax liability is

unenforceable,    necessitating   release    of   the   lien   under   §

6325(a)(1), are thus meritless.6

                                  III

     For the foregoing reasons, we AFFIRM the judgment of the

district court.

     AFFIRMED.




     6
      The Sills' alternative claim under section 502(b)(1) of the
Bankruptcy Code that the tax liabilities are not an allowable
claim because the tax lien is "unenforceable" is also meritless.

                                   7