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 debtors 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 creditors interest in the estates 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 debtors 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 debtors 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 debtors 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 IRS under applicable nonbankruptcy law, under Section 541(c)(2). Thus, the court held that the debtors rights in the pension plan remained the estates property under Section 541(c)(1) and were included in the IRSs secured claims value under Section 506(a).

The IRS had mixed success in advancing the position that its secured claim includes the value of a debtors interest in a pension plan subject to a Federal tax lien (compare In re McIver, 255 BR 281 (DC MD 2000) (following Lyons, the court held that the Services 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 debtors estate for purposes of securing the Services 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 debtors 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 debtors plan prevented a transfer of the debtors interest to the bankruptcy estate as to all creditors, including the IRS; thus, it could not be used to secure the IRSs claim under Section 506(a). The court noted, however, that the Services liens are not extinguished or otherwise affected, and continue to exist outside of bankruptcy.

Thus, when a debtors 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 debtors 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 Circuits decision in Snyder, that the IRSs secured bankruptcy claim did not include the debtors interest in an ERISA-qualified plan.