In Re Robert H. Isom; Mary E. Isom, Debtors.robert H. Isom; Mary E. Isom, Appellants, v. United States of America, Internal Revenue Service, Appellee, 901 F.2d 744 (9th Cir. 1990)

The question presented is whether the I.R.S. must release tax liens, pursuant to 26 U.S.C. § 6325(a) (1), when the underlying tax debt has been discharged in bankruptcy.

BACKGROUND

There are no material facts in dispute. Robert and Mary Isom filed for chapter 7 bankruptcy in March 1987. At that time, the I.R.S. had valid tax liens against the debtors' property for unpaid taxes from 1974 through 1982. The taxes were dischargeable under 11 U.S.C. §§ 523(a) (1), 507(a) (7), and 727.

The debtors sought an order in the bankruptcy proceeding to compel the I.R.S. to release the liens under 26 U.S.C. § 6325(a) (1). The bankruptcy court granted that relief by summary judgment in favor of the debtors. The Bankruptcy Appellate Panel reversed with one judge dissenting. In re Isom, 95 B.R. 148 (9th Cir. BAP 1988). We have jurisdiction under 28 U.S.C. § 158(d), and we affirm the judgment of the Bankruptcy Appellate Panel.

ANALYSIS

We review de novo the appellate panel's decision. Romley v. Sun Nat'l Bank (In Re Two S. Corp.), 875 F.2d 240, 242 (9th Cir. 1989). We review de novo the bankruptcy court's decision granting summary judgment. Id.

The Internal Revenue Code, at 26 U.S.C. § 6325(a) (1), provides that a lien shall be released when:

The Secretary finds that the liability for the amount assessed ... has been fully satisfied or has become legally unenforceable. (Emphasis added)

The debtors argue that the liability becomes legally unenforceable upon the discharge of taxes in bankruptcy,¹  so the liens must be released. We disagree.

The liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding. A discharge in bankruptcy prevents the I.R.S. from taking any action to collect the debt as a personal liability of the debtor. The debtors concede, however, that their property remains liable for a debt secured by a valid lien, including a tax lien. See Long v. Bullard, 117 U.S. 617, 6 S. Ct. 917, 29 L. Ed. 1004 (1886); see also Southtrust Bank v. Thomas (In re Thomas), 883 F.2d 991, 997 (11th Cir. 1989) (discussing Congressional intent to codify the rule of Long v. Bullard) ; H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 361, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5862; S.Rep. No. 95-989, 95th Cong., 2d Sess. 76, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5862 (indicating Congressional intent that the rule of Long v. Bullard survive).

We hold that 26 U.S.C. § 6325(a) (1) does not require the I.R.S. to release valid tax liens when the underlying tax debt is discharged in bankruptcy.

The debtors argue that although liability is not defined in the tax code, "liability for the amount assessed" refers only to personal liability.²  We reject that strained reading of Sec. 6325. That provision is designed to protect taxpayers by requiring the I.R.S. to release liens when the tax debt has become satisfied or is no longer legally enforceable. Allowing these liens to remain alive does not defeat the purpose of Sec. 6325 because Congress intended for valid tax liens to survive bankruptcy.³ 

Finally, the debtors argue, and the BAP dissenting judge agreed, that allowing the liens to remain defeats the fresh start policy underlying the bankruptcy code. We disagree. 11 U.S.C. § 522 allows debtors to exempt stated property from the bankrupt estate so that they may have a fresh start. It also provides for the survival of tax liens on that property. 11 U.S.C. § 522(c) (2) (B). In defining fresh start, Congress took cognizance of the fact that tax liens would survive.

AFFIRMED.