IX. ADVANTAGES & DISADVANTAGES

1. Advantages:
   1. Stops enforced collection while offer is pending (is this still the IRS's current position?)
   2. Fresh start-wipes out tax, interest and penalties
   3. Wipes out tax liens
2. Disadvantages:
   1. Discloses taxpayer's financial data leading to possible enforced collection action including garnishments, levies or seizures.
   2. Collateral agreement may negate some of benefits
   3. Must stay "clean" for five years
   4. Tolls 10 year collection statute and assessment period for the period of the offer plus one year. If bankruptcy is viable alternative, consider not filing offer until 240 days after assessment.

I. DETERMINE MAXIMUM COLLECTIBILITY

The IRS will first analyze a taxpayer's assets to determine if assets can be liquidated to satisfy the liability. An expense analysis is performed only if the IRS is unable to collect the full liability from available assets. If assets are available to pay the liability in full or in part and a taxpayer is unwilling to voluntarily convert the assets to cash, the IRS may pursue enforced collection action.

II. ANALYZE TAXPAYER'S HISTORY

The IRS will analyze the taxpayer's compliance and tax history before setting up a payment plan. The taxpayer must be current in terms of estimated tax payments and the filing of tax returns. Other factors: Has the taxpayer defaulted on prior installment agreements? Has the taxpayer increased his or her expenses significantly since the tax liabilities were assessed? (e.g. recent purchase of luxury automobile).

III. ALLOWABLE EXPENSES UNDER THE IRS RULES FOR INSTALLMENT AGREEMENTS.

1. The IRS separates expenses into necessary and conditional expenses in the same manner as for offers in compromise (see above).
2. With respect to payment plans, a taxpayer is not required to substantiate expenses which are categorized as National Standards. A taxpayer may be required to substantiate expenses which are categorized as Local Standards. A taxpayer must substantiate expenses which are categorized as Other Necessary and Conditional Expenses. IRM 5323.4.
3. Disposable income, for purposes of an installment agreement, is the amount of income that remains after allowable expenses are deducted from gross income. IRM 5323.12(5).
4. If the taxpayer establishes that he or she can stay current in all tax requirements and that the tax liability, including projected accruals, can be paid within three years, all expenses may be allowed. IRM 5323.431(1). If the taxpayer cannot pay the full liability within three years, any conditional expenses are disallowed.
5. Taxpayers who cannot full pay their accounts within three years may be given up to one year to modify or eliminate excessive necessary and/or not-allowable conditional expenses. For the first year, or other determined period of time up to one year, an installment agreement will be established for an amount, even if minimal, which can be paid until the excessive or not allowable expenses are to be modified or eliminated. IRM 5323.5(1) & (2). Discretion for additional time if asset (e.g. house) cannot be easily liquidated or if liquidation of asset triggers additional taxes.

1. Joe Taxpayer is assessed the trust fund recovery penalty as a responsible person for payroll tax liabilities incurred by Joe Taxpayer, Inc., a California corporation. The assessment date is January 1, 1994 and the assessed liability is $100,000. On January 1, 1995 Joe Taxpayer marries Jane Taxpayer. Jane Taxpayer is current on all of her taxes. Joe Taxpayer submits an offer in compromise for his separate tax liability on January 2, 1995. (a) Does Joe need to list his wife's assets on the Form 433-A? (b) Does Joe need to reflect both his and his wife's income and/or expenses on Form 433-A? (c) Do Jane's assets get included in the net realizable equity calculations when computing the amount of Joe's offer amount?
2. The same facts as in Part 1 above but prior to their marriage Joe and Jane enter into a valid pre-nuptial agreement. The pre-nuptial agreement states that Joe's and Jane's respective pre-marital assets and liabilities shall remain their own separate individual assets and liabilities and that any income that they earn or expenses they incur after the marriage shall remain their own individual income and expenses. Does this change any of the answers to the above questions?
3. The same facts as in Part 1 above but the offer in compromise is not submitted until January 1, 1996 and one week before the offer is submitted, upon the advice of their attorney, Jane and Joe enter into a valid nuptial agreement with terms similar to the pre-nuptial agreement in Part 2. Does this change the analysis of Joe's offer in compromise?
4. Joe and Jane Taxpayer owe the IRS $50,000 for Form 1040 joint tax liabilities for tax years 1992, 1993, 1994 and 1995. Joe and Jane have two dependent children. Joe is self-employed and Jane is not currently working. Joe and Jane bought a house in Santa Clara County in 1975 for $75,000. In the late 1980's when housing prices were skyrocketing, Joe and Jane took out an equity line of credit for $100,000 and subsequently used the money to cover medical bills and to live off of while Joe was out of work. The house is now worth $225,000. Total housing costs per month are $2,450, comprised of the following: mortgage payment of $1,600, utilities of $250, property taxes of $400, basic home maintenance of $100 and homeowners' insurance of $100. If the house were to be sold, there would be a capital gain of approximately $125,000 creating a federal tax of $35,000 and a state tax of $12,000. Other than their home, Joe and Jane have no equity in any assets. (a) What discount factor does the IRS apply when determining the equity of Joe and Jane in their home? Does this rate vary depending on whether or not the housing market is weak or strong? (b) The basic amount allowed for housing in Santa Clara county is $1,418 per month for a family of 2 or less. Does this mean that Joe and Jane have an extra $1,032 per month to give the IRS under the new rules? What if part of the reason that Joe and Jane have a higher mortgage payment is that they earlier refinanced their house to pay a tax liability owed to the IRS? (c) Will the IRS force Joe and Jane to sell their house in order to submit an offer in compromise or work out a payment plan? (d) Should Joe and Jane sell their house in 1996 and then wait until April 15, 1997, after their 1996 tax return is submitted, to file their offer in compromise and include the capital gains liability in the offer? (e) What happens if the IRS has already filed a federal tax lien prior to the sale of the house? (f) If alternative (d) is followed, can the liability to the Franchise Tax Board be counted as a "necessary expense" for the purposes of the IRS offer in compromise?
5. Joe Taxpayer is single and is a sole proprietor photographer. Joe has filed all of his tax returns on time but never makes estimated tax payments and never has enough money to pay his taxes when April 15th rolls around each year. Joe owes a total of $100,000 for tax years 1990 through 1995. Joe has not made his first quarter 1996 estimated tax payment yet. If Joe wants to set up an installment agreement or submit an offer in compromise, what does he need to do in order to get "current" as required by the IRS? Can Joe simply make an estimated tax payment for the second quarter of 1996 and then submit an offer in compromise for all prior periods with unpaid tax liabilities?
6. Joe Junior Taxpayer and Joe Senior Taxpayer are 50/50 shareholders in a California C Corporation that is engaged in a consulting business. Joe Junior and Joe Senior are assessed with the trust fund recovery penalty for unpaid payroll taxes of the Corporation. Joe Senior owns one rental property in California and one in Florida. The California property is worth $200,000 and has a deed of trust of $180,000. The Florida property is worth $200,000 and has a deed of trust of $400,000. The California property has a negative cash flow each month of $200. The Florida property has a positive cash flow each month of $100. (a) For purposes of an offer in compromise or payment plan, are all of the expenses related to the properties counted as "necessary expenses" since they constitute "secured expenses?" (b) Or is the negative cash flow on the California property disregarded but the positive cash flow on the Florida property counted? (c) Would the IRS take into consideration the fact that if Joe Senior let the Florida property go into foreclosure, this would trigger cancellation of indebtedness income?
7. Same facts as above. Joe Senior and Joe Junior each had a monthly salary of $4,000 per month in 1995. In 1996, Joe Junior's salary is adjusted to $2,000 and Joe Senior's salary is set at $4,000. (a) If Joe Junior has no assets and "necessary expenses" equaling his new income, will he be eligible to submit a modest offer proposal? (b) How does the IRS value the stock interest held by Joe Junior in the closely held corporation?
8. Joe Taxpayer owes Form 1040 taxes for tax years 1992 ($25,000) and 1994 ($10,000). The IRS has filed a federal tax lien for both tax years to protect its interest. Joe Taxpayer files a Chapter 7 bankruptcy. Assume that under current bankruptcy law the 1992 tax liability is dischargeable and the 1994 tax liability is non-dischargeable. Joe Taxpayer lists the following assets on his petition: a car worth $10,000, clothes worth $500, miscellaneous personal effects and furnishings of $1,500 and a computer worth $500. Under bankruptcy law, the IRS has a security interest equal to the value of Joe Taxpayer's assets at the time of filing the bankruptcy petition. (a) Can Joe now approach the IRS with an offer in compromise while the Chapter 7 bankruptcy is pending? (b) Is special permission of the Bankruptcy Court or the IRS necessary to go forward with the offer in compromise? (c) How would the IRS value Joe Taxpayer's assets for purposes of the offer in compromise? (d) Assume Joe Taxpayer's income equaled his "necessary" expenses. How much money would Joe need to offer to the IRS to settle his tax debts?
9. Angela Smith owes $750,000 assessed as a Trust Fund Recovery Penalty. The tax was assessed on June 25, 1997, and the present balance, including accrued interest is $1,720,000. Under present IRS procedures, including the present value of her ability to make monthly payments, an offer of $100,000 is determined to be acceptable. Angela proposes to pay this amount as follows: $50,000 on acceptance and monthly payments of $1,000 until the balance is paid. (A) Is this an acceptable offer? (B) Does Angela have to pay interest on the $50,000 deferred amount? (C) Does Angela have to pay interest for the few days between the date the acceptance letter is mailed by IRS and the date she remits payment? (D) Will tax liens be released when she pays the $50,000 down payment? (E) Would this offer be acceptable if the entire amount was based on her ability to pay $2,000 per month (i.e.; Angela has no assets)? (F) If Angela could pay $3,000 per month, would an offer of $35,000 be acceptable (i.e., no other assets), because only 11 months remain on the statute of limitations?
10. Melissa is a self-employed consultant. On Form 433-B she records her average monthly income and expenses for the most recent six months, and shows average monthly gross receipts of $20,000 and expenses of $17,000, resulting in net monthly income of $3,000. Included in her expenses, all properly documented and substantiated, are the following:
    1. Auto: 994 Porsche lease payment. 5 yr. Lease, 3 years remaining. (This is her only vehicle)
       $1,300.00
    2. Transportation: Fuel, repair & maintenance, DMV, etc.
       $400.00
    3. Auto Insurance: (incl. $3,000,000 liability)
       $600.00
    4. Travel, meals & lodging
       $2,500.00
    5. Business Promotion & Entertainment (business related)
       $2,800.00
    6. Swanky downtown office
       $3,000.00
    7. Monthly payment on unsecured line of credit (present balance $175,000 @ 11% interest only (this loan was used for tenant improvements, office furnishings and equipment, etc. Assume high end, but in line with her competition)
    8. San Jose Sharks Season tickets (4 Club seats)
       $1,333.00
    9. Will all of these expenses be allowed for OIC evaluation purposes?
11. Same question as #10 except Melissa is an employee of Consulting, Inc. and the listed expenses are all miscellaneous business expenses rather than schedule C business expenses.
12. In each of the following cases, the taxpayer is a number of years from retirement age:
    What is the value, for OIC purposes, of the following assets:
    1. An IRA invested in a $100,000 certificate of deposit. Would it make any difference if the fund were invested in securities such as stocks or mutual funds, etc.?
    2. A 401(k) plan. The employer matches contributions, and the present balance of the plan is $50,000.
    3. A KEOGH plan with a present value of $225,000.
    4. An employer-provided pension plan presently worth $200,00 if:
       1. The plan is entirely funded by employer contributions.
       2. The employer contributes a stated percentage of the employee's salary and the employee is required to contribute a matching percentage, which is deducted from the employee's pay. How does the employee's part of the contribution affect the monthly income determination?
       3. The employee is required to contribute 2% of her salary, and is permitted to contribute up to an additional 5%, which she has done for a number of years. How do the employee's contributions affect the monthly income determination?
13. Smythe is director of marketing of HIGHTECK, INC., a successful Silicon Valley startup that recently went public at $8.75 per share. HIGHTECK closed today at $12.50 per share. Some analysts believe HIGHTECK will be at $30.00 per share within a year. Part of Smythe's compensation package consists of incentive stock options. Specifically, Smythe has an option to purchase 41,000 shares at $9.00 per share. Smythe can presently exercise the options to 1,000 shares. The remaining options become exercisable semiannually as to 4,000 shares every six months, provided, that Smythe is still employed at HIGHTECK. What is the value of Smythe's stock options for OIC purposes?

I. INTRODUCTION

1. PROPOSED LEGISLATION FOR MAJOR BANKRUPTCY REFORM
   
   
2. CAN A BANKRUPTCY RESULT IN DISCHARGE OF LARGE TAX DEBTS AND AT THE SAME TIME PRESERVE CURRENT ASSETS?
   
   
   1. Many lawyers and CPAs have been under the misguided perception that tax liabilities cannot be discharged in bankruptcy under any circumstances.
   2. The IRS provides scant mention of the use of bankruptcy to eliminate tax liabilities. Publication 908, "Bankruptcy", devotes one small paragraph to the topic stating: "As a general rule, there is no discharge for an individual debtor at the termination of a bankruptcy case for prepetition taxes (as defined earlier) or for taxes for which no return, a late return (filed after a date two years before the filing of the bankruptcy petition), or a fraudulent return was filed. Claims against an individual for other taxes predating the bankruptcy petition by more than three years may be discharged."
   3. The IRS estimates that over $100 billion is owed each year in income tax debts-the so-called "tax gap"-by persons filing tax returns and that at least 10 million taxpayers who are required to file tax returns each year do not file.
   4. The law permitting the discharge of income tax debts was enacted in 1966, over thirty years ago. Prior to 1966, income taxes could not be discharged in bankruptcy in the U.S. However, most of the industrialized countries in the world permitted such discharge as a compassionate law, including England, France, Germany, Australia and Belgium. The Congress recognized the problem: "Frequently, the nondischargeability of taxes prevents an honest but unfortunate debtor from making a fresh start unburdened by what may be an overwhelming liability for accumulated taxes. The large proportion of individual and commercial income now consumed by various taxes makes the problem especially acute." Senate Report 1158.
      
      
3. ALTERNATIVES TO BANKRUPTCY
   
   
   1. Pay the full taxes, penalties and interest now.
   2. Submit an offer in compromise. Be aware that the offer in compromise process can take an agonizingly long period of time for approval. In addition, under the IRS's "allowable living expenses" rules, the amount of expenses allowable for taxpayers has been severely constrained, especially for taxpayers who own homes in higher income states such as California. For example, under the IRS standards, a taxpayer's housing expenses (including mortgage, real estate taxes, property insurance, home owners association dues, repairs, and utilities-including phone, gas, electric, garbage, cable, recycling, and water) cannot exceed $1,625.00 in Santa Clara County. Such an amount would not even cover the costs of a standard mortgage of $150,000 (the average home price in Santa Clara County is over $300,000). Tax practitioners who deal regularly with the California Franchise Tax Board recognize that approval of an offer in compromise is usually futile (although the numbers of acceptances are slowly improving, even if successful the taxpayer is normally required to sign a collateral agreement pledging a percentage of his or her future income over a threshold amount). See attached IRS allowable living expense standards.
   3. Set up an installment agreement and pay the full taxes, penalties and interest over time. Under the IRS's and FTB's "allowable living expenses" rules, the monthly payments may be exorbitant. Moreover, penalties and interest continue to accrue.
   4. With respect to the IRS, there is a 10-year statute of limitations for collection. In some cases the best course of action may be to wait out the 10 years. (Note: 30 year statute of limitations for state tax agencies).
      
      
4. A CHAPTER 7 HYPOTHETICAL
   
   
   1. Hypothetical: Your client was involved in a tax shelter from 1984 to 1989. After litigating the case in U.S. Tax Court for years, a final assessment is issued to your client for $500,000.00 in taxes, interest and penalties for the six tax years on February 15, 1998. A report of the federal assessment is issued to the FTB which in turn issues your client an assessment of $150,000 on March 1, 1998. After being advised that he is not qualified for an offer in compromise (his income is $150,000 per year), your client has set up an installment payment plan with the IRS of $4,000 per month and with the FTB of $2,000 per month. Your client informs you that he cannot possibly afford to pay $6,000 per month based on his current living expenses. Your client's primary asset is the equity in his home of $75,000. The IRS has filed a tax lien in the county in which the residence is located.
   2. Solution: Your client should immediately file a Chapter 7 bankruptcy petition and list the full tax debt of $650,000. After the bankruptcy is completed, your client can negotiate with the IRS for payment of the $75,000 of equity "captured" by the tax lien, assuming that he wants to keep his house. Alternatively, he can walk away from his house and equity, in effect discharging $575,000 of the $650,000 tax debt.
   3. Warning: Legislative changes pending at the time of the writing of this outline would limit the ability of a client with income over $50,000 to file a Chapter 7 bankruptcy petition in certain circumstances.
      
      
5. GENERAL COMPARISON OF CHAPTERS 7 AND 13
   
   
   1. Chapter 7: In a Chapter 7-also called a "liquidating bankruptcy"-all of the debtor's assets and liabilities are marshaled. Any assets in excess of the statutory exemption thresholds are liquidated and paid to creditors in the order specified by the Bankruptcy Code. To the extent that nonexempt assets are insufficient to pay all creditors-which is the most common situation-most or all of the unpaid debts are forgiven, i.e., they are discharged, and the debtor is given a "fresh start." There are no debt limits for a Chapter 7 bankruptcy.
   2. Chapter 13: Chapter 13-also called a "wage earner plan" is a proceeding that allows a debtor to keep all of his property and submit a plan to repay some debts out of future earnings over a three to five year period. A Chapter 13 requires (i) qualification under the debt limits of $269,250 unsecured and $807,750 secured, (ii) a bankruptcy proceeding that continues for 3 to 5 years; and (iii) payment of some of the dischargeable income tax debt through the plan (usually only 2% to 5% and 0% in some jurisdictions).
      
      
6. STATUTORY STRUCTURE
   
   
   1. "The Court shall grant a discharge..." 11 U.S.C. 727(a)
   1. Except as otherwise provided in 11 U.S.C. 523.
      1. Section 523(a)(1)(A) provides that taxes described in Section Section 507(a)(8) are not dischargeable. (Priority Taxes).
      2. Section 523(a)(1)(B) describes additional non-dischargeable taxes.

II. DISCHARGING TAXES IN CHAPTER 7

1. TYPES OF DISCHARGEABLE TAXES
   
   
   1. Income Taxes. Both Federal and State income taxes are dischargeable.
   2. Trust Fund Taxes are nondischargeable. 11 U.S.C. 507(a)(8)(C).
      1. Examples:
         1. Income tax withholding. See In re Vecchio, 20 F.3d 555 (2d Cir. 1994).
         2. Employee's share of FICA but not Employer's share. In re Erickson, 172 B.R. 900 (B.Minn. 1994).
         3. 100% Penalty. U.S. v. Pepperman, 976 F.2d 123, 126 (3d Cir. 1992).
         4. Collected Excise Taxes such as gasoline taxes.
   3. Sales Taxes.
      1. Is a sales tax an excise tax dischargeable under 11 U.S.C. 507(a)(8)(E) if over three years old, or a nondischargeable trust fund tax? Taxes that are imposed upon the customer or buyer, and collected by the seller are trust fund taxes. Taxes imposed on the seller for the privilege of doing business are excise taxes.
      2. If the tax is on gross receipts then it is dischargeable under the same rules as income taxes. In re Raiman, 172 B.R. 933 (9th Cir. BAP).
         
         
2. BASIC DISCHARGEABILITY RULES IN CHAPTER 7. There are 5+ rules. All of the criteria must be met.
   
   
   1. Tax is for a year for which a tax return is last due (including extensions) more than 3 years before the filing date of the petition. Bankruptcy Code Section 507(a)(8)(A)(I).
      1. Refers to due date, not date of actual filing.
         1. Example: 1990 tax return. Taxpayer files extension to 8/15/91. Bankruptcy petition filed 7/16/94. Tax nondischargeable.
   2. The tax was assessed more than 240 days prior to the filing of the bankruptcy petition. Bankruptcy Code Section 507(a)(8)(A)(ii).
      1. 240 days is extended by any period during which an offer in compromise is pending plus 30 days. Id.
         1. An offer in compromise made prior to the assessment of taxes by the IRS does not toll the running of the 240-day period. In re Aberl, 78 F.3d 241, 1996 U.S. App. LEXIS 3907, 1996 FED App. 0077P (6th Cir.).
         2. An offer is pending from the date the statutory waiver is signed by the IRS until an authorized IRS official accepts, rejects or acknowledges withdrawal of the offer in writing. If appealed an offer will continue to be treated as pending until the IRS Appeals Office accepts or rejects the offer in writing. Form 656, para. m. (Rev. 1/97).
         3. But see In re Klein, 189 B.R. 505 (D.C.D. CA 1995) (Filing of appeal did not continue the pendency of the offer). However, the Offer in Compromise form in question apparently did not contain the current language.
      2. IRS Assessment. The date the IRS Officer signs the summary record of assessment showing the amount of tax assessed. IRC Sec. 6203; Treas. Reg. Sec. 301.6203-1. See "plain English" transcript exhibit.
      3. State of California Assessment. The assessment date is the date on which the taxes become final. In re King, 961 F.2d 1423 (1992).
         1. FTB Notice of Proposed Assessment + 60 days. See In re Bracey, 77 F.3d 294 (9th Cir. 1996)
         2. FTB Notice of Action + 30 days.
         3. Sales Tax - After Notice of Determination is issued, and there is a failure to petition, the tax becomes final in 30 days. Rev. & Tax Code Sec. 6561. In petitioned cases the Board's order becomes final 30 days after the Notice of Redetermination is served on the taxpayer. Rev. & Tax Code Sec. 6564.
   3. The tax was not assessable at the time of the filing of the bankruptcy petition. Bankruptcy Code Sec. 507(a)(8)(A)(iii).
   4. A tax return was filed more than 2 years prior to the filing of the bankruptcy petition. Bankruptcy Code Sec. 523(a)(1)(B).
      1. The tax return must have been filed by the taxpayer. IRC Sec. 6020(b) substitute returns are not returns. Bergstrom v. United States, 949 F.2d 341 (10th Cir. 1991).
      2. An amended return is not a tax return for purposes of the 2 year rule. Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934). But see "Tips, Traps, Tricks and the Malpractice Bugaboo," infra, regarding In re Fernandez case. Caveat: Zellerbach is not a bankruptcy case and future cases may adopt Fernandez line of reasoning.
   5. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat any tax. Bankruptcy Code Sec. 523(a)(1)(C).
      1. The burden is on the IRS to prove fraud by a preponderance of the evidence. See Grogan v. Garberm, 111 S.Ct. 654 (1991).
      2. Are affirmative acts other than a mere failure to pay necessary to prove a willful attempt to evade or defeat taxes?
         1. In re Toti, 24 F.3d 806 (6th Cir. 1994). The court held that even though the debtor claimed that he did not file the returns and pay the tax because he did not have sufficient funds, the taxpayer's failure to pay was a willful attempt to evade or defeat his taxes.
         2. In re Haas, 48 F.3d 1153 (11th Cir. 1995). The taxpayer filed timely returns but did not pay the tax because he claimed that he did not have enough funds to pay all of his obligations, and instead paid creditors other than the IRS. The IRS argued that because his nonpayment of tax was intentional and voluntary, the taxpayer had evaded the tax. Held, taxpayer's conduct was not sufficient to bar discharge.
         3. Recent Cases. In re Fegley, 1997 U.S. App. LEXIS 16787 (3rd Cir. 1997) (mere failure to file return or pay tax is willful tax avoidance under Section 523). In re Huber, 1997 Bankr. LEXIS 798 (Bkrtcy.M.D.Fla. 1997) (mere failure to pay tax, without more, is not willful evasion).
   6. The tax is unsecured. Plus requirement. In re Isom, 901 F.2d 744 (9th Cir. 1990).
      1. Lien arises automatically if the taxpayer fails to pay the tax after "notice and demand." IRC Sec. 6321, et. seq. However, for bankruptcy purposes the tax is not secured unless the Notice of Federal Tax Lien has been recorded. See In re Miller, 98 B.R. 110 (N.D.Ga. 1989). Furthermore, the tax is secured only to the extent of the value of the property. 11 U.S.C. 506(a).
         1. Notice of Federal Tax Lien must be filed with County Recorder's Office for the county in which the property is located to be valid as to real property. See IRC Sec. 6323(f).
      2. Initial duration of an IRS tax lien is 10 years. See IRC Sec. 6502; Bowers v. New York & Albany Lighterage Co., 273 U.S. 346 (1927).
      3. State tax lien is 10 years. Cal. Gov. Code Sec. 7172.
         1. May be extended up to a total of 30 years. Cal. Const. Art. 13, Sec. 30.
      4. Lien attaches to all property and rights to property. IRC Sec. 6321.
         1. Bankruptcy and state law exemptions do not apply. Bankruptcy Code Sec. 523(a)(1)(C). In re Crow, 107 B.R. 188 (E.D.Mo. 1989).
         2. For Federal purposes, State law determines where a tax lien notice has to be filed. IRC Sec. 6323(f). In California, as to real property, the notice must be filed in the Office of the Recorder of the county where the property is located. C.C.P. Sec. 2101(b). As to personal property, the notice must be filed with the Secretary of State if the taxpayer is a corporation, limited liability company or partnership. C.C.P. Sec. 2101(c)(1). If the taxpayer is an individual, filing is with the County Recorder for the county in which the taxpayer resides at the time of filing the lien. C.C.P. Sec. 2101(c)(4).
      5. State tax liens.
         1. As to real property, the notice must be filed in the office of the recorder of the county where the property is located. Calif. Gov't Code Sec. 7171(a).
         2. As to personal property, the notice must be filed with the Secretary of State. Calif. Gov't Code Sec. 7171(b).
      6. Tax can be partially secured and partially unsecured. Each part is treated separately.
      7. IRA's and Pension Plans.
         1. The Ninth Circuit has held that a tax lien is enforceable against a debtor's pension plan post-petition if the debtor's interest in the plan was vested and he had an unqualified right to payments as of the petition date. In re Connor, 27 F.2d 365 (1994). Accord, In re Riahl, 93-1 USTC 50,290 (9th Cir. BAP 1993). Thus, the IRS should be able to enforce its lien post-petition against pension payments where the debtor had an unqualified interest in the pension plan, at least to the extent the pension payments are attributable to service performed prepetition.
         2. An IRA is property subject to tax liens after bankruptcy, despite anti-alienation provisions. Treas. Reg. Sec. 1.401(a)-13(b)(2) (IRA not exempt from IRS levies or execution of federal tax judgments). In re Jacobs, 93-1 USTC 50,118 (W.D.Pa. 1992); In re Schreiber, 163 B.R. 327 (B.Ct. N.D. Ill. 1994). See United States v. Sawaf, 74 F.3d 119 (6th Cir. 1996). Contra: In re Tyler, 91-2 USTC 50,534 (B.Ct.Md. 1991). The lien against an IRA (and pension plan as well) should only attach to the value of the IRA as of the petition date, provided that the taxes are dischargeable. The lien should not be enforceable against any post-petition deposits to the IRA account.
         3. State taxes may not be enforced against assets in an ERISA-qualified plan. Retirement Fund Trust of the Plumbing v. Franchise Tax Board, 909 F.2d 1266 (9th Cir. 1990).
      8. Interest and Tax Liens. If the IRS is over-secured, post-petition interest will accrue on its secured claim, up to the value of the property. In re Ron Pair Enterprises, 489 U.S. 235 (1989).
   7. Interest follows the tax. Matter of Larson, 862 F.2d 112 (7th Cir. 1988). Thus, if the taxes are dischargeable, the interest is dischargeable.
   8. Penalties.
      1. Pecuniary loss penalties are nondischargeable. These are penalties intended to compensate the government for monetary losses and therefore fall under the general rules applicable to tax dischargeability (e.g. 100% penalty).
      2. Non-pecuniary loss penalties are dischargeable. These penalties are intended to be punitive, e.g. fraud penalty, negligence penalty, failure to file penalty, failure to pay penalty.
         1. Non-pecuniary loss penalties follow the tax, except for the 3-year rule.
      3. Pecuniary loss penalties are dischargeable even though the underlying tax is not if the penalty is based upon an event occurring more than 3 years prior to the filing of the bankruptcy petition. Bankruptcy Code Sec. 523(a)(7); McKay v. United States, 957 F.2d 689 (9th Cir. 1992).

III. DISCHARGING TAXES IN A CHAPTER 13 "SUPER DISCHARGE"

1. GREATER DISCHARGEABILITY OF TAX CLAIMS IN CHAPTER 13 THAN CHAPTER 7
   
   
   1. The super discharge of Chapter 13 was provided by Congress as an incentive for the debtor to commit to a repayment plan under Chapter 13 as an alternative to providing creditors nothing under a Chapter 7. Hardin v. Caldwell, 1990 U.S. App. LEXIS 3320 (6th Cir. 1990).
   2. There are several situations where a tax that is not dischargeable in a Chapter 7 is dischargeable in a Chapter 13. Chapter 13 allows a broader range of dischargeable taxes because the tax-related exceptions to discharge described in Section 523 of the Bankruptcy Code, which apply to Chapters 7 and 11, do not apply to Chapter 13. 11 U.S.C. Section 1328(a); In re Fox, 130 B.R. 571 (W.D. Wa. 1991). In a Chapter 13, Section 1322(a)(2) of the Bankruptcy Code provides that the only requirements which must be met for discharge are those set forth in Section 507(a)(8) of the Bankruptcy Code dealing with priority taxes.
   3. No tax return filing requirement. In many cases, the debtor has not filed his tax returns at all or has filed them within two years of the bankruptcy filing date. Unlike Chapter 7, Chapter 13 does not require that the debtor must have filed his tax returns for the years in question at least more than two years prior to filing the bankruptcy petition. 11 U.S.C. Section 523(a)(1)(B)(ii).
   4. Late proof of claim. In a Chapter 13 if the taxing entity fails to file a proof of claim on a priority tax (e.g., trust fund recovery penalty taxes or payroll taxes or income taxes due within three years of the bankruptcy filing date) within the time allowed by the Bankruptcy Code, such claim is discharged if (i) the plan provides for full payment of the priority tax claim and (ii) the claim is unsecured. 11 U.S.C. Section 1322(a)(2). The Bankruptcy Reform Act of 1994 extended the time a tax entity has to file a proof of claim to 180 days after the bankruptcy filing date. 11 U.S.C. Section 502(b).
   5. Fraudulent Returns or Willful Evasion. Where a taxpayer filed a fraudulent tax return or engaged in activity that is deemed willful evasion of a tax obligation, such tax is not dischargeable in a Chapter 7. 11 U.S.C. Sec. 523(a)(1)(c). Chapter 13 does not apply these standards. However, the debtor's dishonest prepetition conduct in regard to his tax obligations may be taken into consideration on the issue of a bad faith (i.e., non-cofirmable) plan. A plan was found to be in bad faith where the debtor, among other things, willfully failed to report any tax liabilities and engaged in tax protester activities. In re Morimoto, 171 B.R. 85 (9th Cir. BAP 1994); In re Greatwood, 194 B.R. 637 (9th Cir. BAP 1996; In re Hopkins, 201 B.R. 993 (D.Nev. 1996). Mere failure to file tax returns is ordinarily not sufficient to find bad faith. In re Lilley, 91 F.3d 491 (3rd Cir. 1996).
   6. Punitive Tax Penalties. Unlike Chapter 7, the majority rule is that punitive tax penalties assessed by a tax entity within three years of the bankruptcy filing date are dischargeable nonpriority claims in a Chapter 13 Bankruptcy. Such penalties are therefore treated as general, unsecured, dischargeable debts in the Chapter 13 plan. The majority of courts have held that a tax penalty is punitive if it "is not in compensation for actual pecuniary loss." In re Healis, 49 B.R. 939 (Pa. 1985); In re Henderberg, 108 B.R. 407 (N.Y. 1989); In re Mitchell, 39 B.R. 696 (Ore. 1984). "Punitive" tax penalties include, among others, late filing, non-filing, negligent filing and underpayment penalties.
   7. The "Bad Boy Loophole" (Assessable but not Assessed Taxes). Under the "Bad Boy Loophole," if a return has not been filed and the tax entity has not yet assessed the tax by use of a substitute return or otherwise, the taxpayer can avoid the 240-day rule altogether. Unlike in the Chapter 7 context where assessable taxes are priority taxes under Section 507(a)(8)(A)(iii), this is not the case in Chapter 13. In re Zeig, 194 B.R. 469 (Bkrtcy.D.Neb. 1996), aff'd 206 B.R. 974 (D.Neb. 1997).
   8. Tolling of Post-Petition Penalties. The majority rule is that new penalties may not be added in a Chapter 13 after the bankruptcy filing date. In re Quick, 152 B.R. 909 (W.D.Vir. 1993).
   9. Tolling of Post-Petition Interest. General unsecured and priority unsecured tax claims do not continue to accrue interest after the bankruptcy filing date unless the taxing entitiy would receive 100% payment from a straight Chapter 7 bankruptcy. In re Smith, 196 B.R. 565 (Bkrtcy.M.D.Fla. 1996). Fully secured claims are entitled to accrue interest after the petition is filed and during the Chapter 13 plan. As a matter of practice, in many Chapter 13 plans fully secured claims do not earn interest because interest is not provided for in the plan and the tax entity does not object.
      
      
2. LIEN-STRIPPING ALLOWED IN CHAPTER 13
   
   
   1. The majority rule is that lien stripping is allowed in a Chapter 13 case (however, see item B.2. below) but not in a Chapter 7 case. Dewsnup v. Timm, 112 S.Ct. 773 (1992); In re Frost, 19 B.R. 804 (Kansas 1982); In re Ever, 164 B.R. 132 (Bkrtcy. C.D. Calif. 1994). Lien stripping under Section 506(a) allows the debtor to bifurcate a tax claim into two separate claims: (i) a secured claim corresponding to the debtor's equity in real and personal property subject to the lien and (ii) an unsecured claim for the balance.
   2. The Supreme Court has held that Section 1322(b)(2) prohibits the removal or "strip off" of the unsecured portion of an undersecured claim from a Chapter 13 debtor's personal residence. Nobelman v. American Savings Bank, 508 U.S. 324 (1993). Query: Does Nobelman apply to tax cases where there is no consensual bargain between the creditor and the debtor? A recent 9th Circuit BAP decision has held that Section 1322(b)(2) does not prohibit the removal or strip off of a wholly undersecured lien on a Chapter 13 debtor's personal residence.

IV. TIPS, TRAPS, TRICKS AND THE MALPRACTICE BUGABOO

1. OBTAIN IRS TAX TRANSCRIPTS
   
   
   1. Practitioners should obtain a transcript of account from the IRS. The transcript will show, by type of tax and period, when a return was filed and the dates and amounts of assessments. The practitioner may also need to obtain copies of any offer in compromise and Forms 872 (extension of the statute of limitations on assessment) for the debtor. This may require submitting a Freedom of Information Act request if the debtor does not have the information. Caveat: If the IRS gives erroneous information that you rely on in filing the petition, the IRS is not estopped from collecting the tax. In re Howell, 120 B.R. 137 (9th Cir. BAP 1990); contra, In re Hollenbeck, 166 B.R. 291 (Bk S.D. Tex. 1993).
   2. Plain language transcripts may not show SFRs.
   3. Do not rely on the client for critical information like dates of filing, extensions, dates of audits and assessments, and potential tolling events!
   4. If a rush filing must be made and hard copy transcripts cannot be ordered and analyzed in the short time period, call the Tax Practitioner Hotline to get the relevant data over the phone.
   5. In rush cases consider having client sign acknowledgment form releasing the attorney from liability in the event that the case is filed too early.
      
      
2. ELECTION OF 2-YEAR REPLACEMENT PERIOD FOR ROLLOVER OF HOME SALE MAY DELAY DISCHARGE OF TAXES.
   
   
   1. Hypothetical: Suppose your client filed his 1993 tax return and showed the sale of his residence on June 1, 1993 but deferred the gain by checking the box indicating that it was his intention to replace the residence within two years.
   2. Query: If your client does not in fact replace the residence within the two years and files an amended return so stating at the end of the two-year period, under Section 507(a)(8)(A)(i) of the Bankruptcy Code, are the taxes dischargeable three years after the original due date (i.e., April 16, 1997) or three years after the return due date for the amended tax return (i.e., June 2, 1998)?
   3. IRS's position. The IRS is currently taking the position, based on a recent Nevada bankruptcy case, In re Fernandez, 188 B.R. 34 (Bkrtcy.D.Nev. 1995), that the due date of the amended return starts a new three year period for tax dischargeability purposes because under IRS regulations the taxpayer has an affirmative duty to file an amended return if he does not replace his principal residence under IRC Section 1034 within the 2-year replacement period. This decision runs contrary to the decision in Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934) which held that an amended federal tax return is not a new return but is merely an amendment of the original return. Zellerbach, however, is distinguishable.
      
      
3. CERTAIN EVENTS MAY TOLL RUNNING OF 240-DAY, TWO YEAR AND THREE YEAR PERIODS FOR TAX DISCHARGE.
   
   
   1. The filing of a prior bankruptcy may toll the running of the 240-day, two year and three year rules for the period during which the debtor is in bankruptcy plus 6 months. In re West, 5 F.3d 423 (9th Cir. 1993), cert. denied, 511 U.S. 1081 (1994); In re Waugh, 109 F.3d 489 (8th Cir. 1996).
   2. A number of cases hold to the contrary, however. In re Quenzer, 19 F.3d 163 (5th Cir. 1993) (holding that under the plain language of section 108(c) the statute does not suspend the priority period of section 507(a)(8)). In re Nolan, 1997 Bankr. LEXIS 160 (Bkrtcy.M.D.Tenn. 1997) (holding that the 3-year period was not tolled during a prior bankruptcy because the notion of equitable tolling applies only in cases of debtor misconduct).
   3. Does a request for the issuance of a Taxpayer Assistance Order (Form 911) suspend the running of the time periods? See IRC Sec. 7811(d). There are no cases on point on this issue.
   4. Beginning with 1991 income tax returns California grants an automatic 6-month extension for the filing of income tax returns. The extension is contingent on the filing of a return by October 15th. Compare old FTB Form 3502 (1990) with new FTB Form 3519 (1991). Therefore, for purposes of the three-year rule, the state extension is not the same due date as an IRS extension to file. See In re Sullivan, 1996 Cal. Tax LEXIS 77 (April 11, 1996) (SBE decision).

V. TAX LIENS IN BANKRUPTCY

1. DO TAX LIENS SURVIVE BANKRUPTCY?
   
   
   1. If a tax claim is dischargeable but a valid lien has been filed by the taxing authority, the tax claim is secured up to the amount of the debtor's equity in any real or personal property to which the lien attaches. The tax claim itself is an in personal claim that is dischargeable but a perfected tax lien is an in rem claim that remains enforceable even after the bankruptcy is concluded. In re Isom, 95 B.R. 148 (9th Cir. 1988), 901 F.2d 744 (9th Cir. 1990).
   2. If a tax claim is dischargeable, it survives only on the debtor's property which existed on the bankruptcy filing date, not property acquired after the bankruptcy filing date. In re Ridgley, 81 B.R. 65 (1987); In re Leavel, 124 B.R. 535 (Bkrtcy.S.D.Ill.1991).
   3. The value of the property to which the lien attaches is fixed as of the date of filing the bankruptcy. Subsequent appreciation of the property should not be subject to the lien. Note: It may be advisable, where possible, to file a motion to determine the value of the lien so as to avoid a later dispute as to the value of the property subject to the lien on the date of the bankruptcy filing.
   4. Tax liens attach to all equity in real or personal property regardless of the fact that such equity may be protected, for bankruptcy purposes, by a bankruptcy exemption. U.S. v. Barbier, 896 F.2d 377 (9th Cir. 1990); Crow v. Long, 107 B.R.184 (E. D. Mo. 1989). In contrast, the bankruptcy exemptions do apply to protect assets where no tax lien has been filed and the tax liabilities are dischargeable. 11 U.S.C. 522(c)(1) & (2).
   5. The fact that certain property is exempt from levy by Section 6334 of the Internal Revenue Code (wearing apparel, furnishings and personal effects, books and tools of trade, etc.) does not mean that it is exempt from a tax lien. A Chapter 13 plan normally requires sufficient payment to pay all secured claims including tax liens on all personal property. The debtor must surrender the property or pay the cash equivalent of his or her equity interest in the property. See In re King, 137 B.R. 43 (D.Neb. 1991); In re Barbier, supra.
   6. A tax lien attaches to the debtor's property even if such property is not property of the estate (e.g. an ERISA-qualified retirement plan). In re Anderson, 149 B.R. 591 (9th Cir. BAP 1992).
      1. A tax lien attaches to social security payments. In re Morris, 1993 Bankr. LEXIS 1913 (Bkrtcy. W.D.Tenn. 1993).
      2. A tax lien attaches to postpetition civil service annuity payments. In re Tillery, 204 B.R. 575 (Bkrtcy.E.D.Okla. 1996).
      3. State law controls in determining the debtor's legal interest in the property for federal tax purposes. United States v. National Bank of Commerce, 472 U.S. 713 (1985).
   7. Query: Does a tax lien attach to retirement or pension plan payments that are not fully vested? Does a tax lien attach to a retirement plan or pension plan that is partially vested to the extent of the partial amount vested? There is little or no case law regarding this issue.
      
      
2. STRIPPING TAX LIENS
   
   
   1. Can a debtor bifurcate an undersecured tax lien into two separate claims, one a secured claim equal to the debtor's equity in real and personal property and the other an unsecured claim for the balance? In Dewsnup v. Timm, 112 S.Ct. 773 (1992) the Supreme Court ruled that lien stripping was not permissible in a Chapter 7 case. The lower court opinion emphasized that Section 506 could not be utilized to strip the lien because the trustee had abandoned the property and such assets were no longer part of the bankruptcy estate.
   2. The majority rule is that lien stripping is allowed in Chapter 13 cases. In re Dever, 164 B.R. 132 (Bkrtcy.C.D.Calif. 1994). In Chapter 13 cases, the debtor is permitted to modify the rights of secured claim holders. 11 U.S.C. Sec. 1322(b)(2).
      
      
3. CALCULATING THE VALUE OF TAX LIENS
   
   
   1. The Supreme Court has recently ruled that a secured creditor's lien should be valued at the debtor's replacement cost (rather than retail cost or wholesale cost). Associates Commercial Corp. v. Rash, __ S.Ct. ___.
   2. The Rash decision still leaves open many questions: Can closing costs (e.g. sales commissions) be deducted in determining the equity in the property? Can capital gains taxes be deducted? Is there a reduction for quick sale value?
   3. Post-Chapter 7 bankruptcy planning/strategy: To the extent that the property to which the tax lien attaches has little or no equity, the debtor should consider simply requesting that Special Procedures release the lien.

VI. HOT ISSUES REGARDING CALIFORNIA STATE TAXES

1. DOES FAILURE TO FILE A REPORT OF A FEDERAL TAX ASSESSMENT TRIGGER A NEW TWO-YEAR RULE?
   
   
   1. Hypothetical: Your client owes taxes for a past year's return that was filed over two years ago. Your client is then audited by the IRS and additional taxes, penalties and interest are assessed. However, your client does not report the assessment to the Franchise Tax Board nor file an amended return with California. The FTB, through its information sharing program with the IRS, then issues an additional assessment of state taxes by piggy-backing on the IRS audit determination.
   2. Query: Does the California requirement that the taxpayer "report" an additional federal tax assessment mean that under Section 523 your client is actually required to file an amended return or report with the state and therefore the additional assessed California taxes are not dischargeable until two years after such a return is filed or reported to the FTB? If that is the case, then your client cannot discharge the taxes in a Chapter 7 bankruptcy for at least two more years.
   3. FTB's position: The FTB has been aggressively asserting this position based on a New York case, In Re Blutter, 177 B.R. 209 (Bkrtcy.S.D.N.Y. 1995). However, in a recent Bankruptcy Appellate Panel decision, In re Jerauld, 97 C.D.O.S. 3987 (May 29, 1997), the court rejected the FTB's position and held that the requirement under California law to file a report of a reassessment is not the same for purposes of Section 523(a)(1)(B)(I) as the requirement to file an amended return. However, the FTB is in the process of appealing the Jerauld decision to the Ninth Circuit based on a Seminole (supra) sovereign immunity argument. The FTB will not pursue enforced collection action against taxpayers in this situation provided the taxpayers agree to be bound by the ultimate resolution of the Blutter issue.
      
      
2. JURISDICTION OF THE BANKRUTPCY COURT OVER THE STATE
   
   
   1. Hypothetical: Debtor files a Chapter 7 case to discharge past state taxes amounting to $300,000. With respect to one year there is an issue as to whether the two-year rule was met based on whether one looks to the filing date or the posting date. With respect to another year there is an issue as to whether the assessed taxes were actually owed at all (a false Form 1099 was issued). After the completion of the bankruptcy the FTB garnishes the debtor's wages for the supposedly discharged taxes. The debtor reopens the Chapter 7 case and files an adversary complaint against the FTB to determine dischargeability of the taxes.
   2. Seminole Case. The U.S. Supreme Court ruled in Seminole Tribe of Florida v. Florida, 116 S.Ct. 1114 (1996), that the Seminole Tribe of Florida could not sue the state of Florida in federal court to enforce the Indian Gaming Regulatory Act because the Constitution bars Congress from restricting the sovereign immunity of the states.
   3. FTB's Position. The FTB routinely asserts the Seminole case to deny jurisdiction to the U.S. Bankruptcy Court. The debtor must file a claim in California Superior Court to have the matter litigated while the FTB may pursue enforced collection action to collect the contested liability. Further, under the FTB's current policy, unless the debtor pays the full amount of the taxes, penalties and interest, he will not be permitted to contest the merits of the tax assessment for the year of the falsely issued Form 1099. The FTB will, however, grant state court jurisdiction to the debtor without payment of the tax for the other year since the issue does not go to the merits of the case.
      1. Sovereign immunity will be waived if the State files a proof of claim. In re Burke, 146 F.3d 1313 (11th Cir. 1998). In Burke, the court rejected Georgia's argument that only the State Legislature could waive sovereign immunity. But see Silver v. Baggiano, 804 F.2d 1211, 1214 (11th Cir. 1986) (Attorney General's removal of suit to federal court did not result in a waiver of state immunity because state law did not vest him with the power to waive immunity).
      2. State may not collaterally attack a confirmed Chapter 11 plan. Maryland v. Antonelli Creditors' Liquidating Trust, 123 F.3d 777, 784 (4th Cir. 1997).
      3. In a Chapter 7 the bankruptcy court does not have jurisdiction to determine whether a state tax is dischargeable. In re Elias, 218 Bankr. 80 (9th Cir. BAP 1998). But sovereign immunity does not mean that state taxes are nondischargeable.
      4. The State Courts have the power to determine the dischargeability of state taxes in federal bankruptcy. See In re Elias, supra.
      5. A debtor may be able to pursue a cause of action against the individual state employee who undertook the action constituting violation of the automatic stay based on the doctrine of Ex Parte Young, 209 U.S. 123, 28 S.Ct. 441 (1908); CSX Transp., Inc. v. Board of Pub. Works of West Virginia, 138 F.3d 537 (4th Cir. 1998); See, Natural Resources Defense Council v. Cal. Dept. of Transportation, 96 F.3d 420 (9th Cir. 1996). However, since the Ex Parte Young doctrine only applies to prospective actions, it is of no help where the State has already collected and the debtor is seeking a refund.
      6. A debtor may have a possible remedy in the form of a lawsuit in State Court for violation of federal rights. In re Lazar, 200 B.R. 358 (Bkrtcy.C.D.Cal. 1996); In re Midland Mechanical Contractors, Inc., 200 B.R. 453 (Bkrtcy.N.D.Ga. 1996).

VII. LITIGATING TAX LIABILITIES IN BANKRUPTCY COURT

1. BANKRUPTCY COURT AS ALTERNATIVE FORUM TO U.S. TAX COURT.
   
   If a taxpayer has failed to exercise his or her administrative remedies by filing a Tax Court Petition within 90 days of the Notice of Deficiency, the assessment becomes final and normally cannot be litigated without full payment of the liability. A taxpayer with limited funds may, however, initiate a bankruptcy and object to the claim of the IRS. The Bankruptcy Court would then have jurisdiction to determine the correct tax liability, if any.
   
   
2. GREATER ACCESS TO BANKRUPTCY COURT JURISDICTION OF TAX CONTROVERSIES IN CHAPTER 13 THAN CHAPTER 7.
   
   Although any tax dischargeability complaint may be litigated in Bankruptcy Court, a number of courts have declined jurisdiction for litigating the amount of a tax liability in no-asset Chapter 7 cases (the great majority of Chapter 7 cases are no-asset cases). Bankruptcy Code Sec. 505(a); Parsons v. United States, 153 B.R. 585 (M.D.Fla. 1993); Queen v. United States, 148 B.R. 256 (S.D.WVa. 1992); but see Anderson v. United States, 171 B.R. 549 (W.D.Va. 1994) (it is necessary to determine the tax liability in Chapter 7 no-assets case in order to grant debtor a fresh start).
   
   
3. PROTECTION OF AUTOMATIC STAY.
   
   By litigating a tax case in Bankruptcy Court the debtor can receive protection from IRS levies and other enforced collection action during the pendency of the bankruptcy.
   
   
4. BURDEN OF PROOF MAY BE ON THE IRS IN BANKRUPTCY COURT.
   
   See California Franchise Tax Board v. MacFarlane, 83 F.3d 1041 (9th Cir. 1996).
   
   
5. POTENTIAL TO TRAP CAPITAL GAINS IN BANKRUPTCY ESTATE.
   
   
6. LITIGATING TOTI ISSUE IN BANKRUPTCY COURT