Opinion
CASE NO. 00-02529-8-JRL
June 20, 2000
ORDER
This chapter 13 case is before the court on the debtors' motion to avoid two federal tax liens pursuant to § 522(f)(1) of the Bankruptcy Code. This motion is appropriate for decision without a hearing.
The two tax liens at issue have an aggregate value of $35,323 and are identified in paragraph 2 of the motion as "judicial tax liens." The liens are subsequently described in more detail as: 1) a "filed . . . tax lien" in the approximate amount of $6,851, recorded in Book 79, Page 252 in the Wayne County Courthouse, and 2) a "judgment" in the approximate amount of $28,472, recorded in Book 77, Page 126 in the Wayne County Courthouse. Because the debtors' motion is brought under § 522(f)(1), the court assumes for purposes of this motion that both liens have been reduced to judgment.
Taxes are not normally collected by judgment. Instead, § 6331 of the Internal Revenue Code gives the Service the right to collect taxes by levy if notice is given in the manner provided by statute. 26U.S.C. § 6331.
A federal tax lien arises by operation of law if the taxpayer fails to pay a tax liability after the Internal Revenue Service ("Service") makes a demand for payment. 26 U.S.C. § 6321. The lien arises in favor of the United States and attaches to "all property and rights to property" belonging to the taxpayer. Because it is created by operation of law, a federal tax lien is not valid as to third parties "until notice thereof' has been filed in the manner provided by state law. 26 U.S.C. § 6321(a) and (f). Thus, tax liens are created and perfected through a two step process. The assessment of taxes by the Service creates a tax lien that is valid as between the taxpayer and the United States. The Service then perfects this lien as to the rest of the world by properly filing a Notice of Federal Tax Lien.
Like most states, North Carolina has adopted the Uniform Federal Lien Registration Act. See N.C. Gen. Stat. § 4448.10 and following. Under this statute, the Service perfects a federal tax lien as to real property by filing a Notice of Lien in the office of the clerk of superior court of the county in which the real property is located. N.C. Gen. Stat. § 44-68.12(b). After the Notice of Lien is filed, the Service's lien rights in the taxpayer's property are fixed, without need for the entry and docketing of any subsequent judgment. It follows that a federal tax lien is a statutory lien, as opposed to a judicial lien — even if the underlying tax debt is subsequently reduced to judgment. See, e.g., Rench v. United States (In re Rench), 129 BR. 649 (Bankr. D. Kan. 1991).
Section 522 of the Bankruptcy Code recognizes the special nature of tax liens, specifically providing that the debtor's exempt property remains encumbered by a pre-petition "tax lien, notice of which is properly filed . . . ." 11 U.S.C. § 522(c)(2)3). North Carolina's exemptions statute, N.C. Gen. Stat. § 1C-1601, expresses this concept as well. Section 1C-1601(e)(1) provides that "[t]he exemptions provided . . . are inapplicable to claims . . . [o]f the United States or its agencies as provided by federal law." As a result of this section, the North Carolina exemptions statute has no application to federal tax liens, which are instead governed by the separate set of exemptions from levy contained in the Internal Revenue Code. See 26 U.S.C. § 6334.
Section 522(f)(1)(A) allows a bankruptcy debtor to avoid a judicial lien to the extent that lien impairs an exemption to which the debtor would otherwise be entitled. There are two distinct reasons why this section cannot be used to avoid a federal tax lien. First, tax liens — which arise by operation of law and not by virtue of any judgment are not judicial liens. See also 11 U.S.C. § 101(36). Second, because § 522 and North Carolina's exemptions statute have no application to tax liens, it is impossible for a tax lien to impair an exemption to which the debtor would otherwise be entitled.
Based on the foregoing, the debtors' motion to avoid tax liens is denied.