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Real Property Sale Proceeds Must Be Used to Pay Unavoided Portion of IRS Tax Lien First
Given the downward pressure on commercial real estate valuations in many areas, and the increasing likelihood that owners of real property will cease paying real property taxes when there is no longer any equity, we report on a recent decision issued by the U.S. Court of Appeals for the Ninth Circuit that reversed a decision of the bankruptcy court, affirmed by the district court, allocating the distribution of the proceeds of a sale of real property pro rata between the Internal Revenue Service on account of its tax lien, and the bankruptcy estate. In this era of textual jurisprudence, it comes as no surprise that the Ninth Circuit scrutinized the lower courts’ reliance on the general powers of the court under Section 105(a) of the Bankruptcy Code to apply a “pro-rata method” in order to effect a distribution to the bankruptcy estate.
In In re Leite, Case No. 23-15825, the U.S. Court of Appeals for the Ninth Circuit reversed the decision of the U.S. Bankruptcy Court for District of Arizona, and in a case of first impression, held where the trustee avoids the portion of a tax lien attributable to penalties, the sale proceeds must be used first to pay in full the unavoided tax lien liability amount rather than allocating the proceeds pro rata.
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