In Re: USA v. Robert MacKenzie

I. Introduction

The Internal Revenue Service (IRS) appeals a judgment of the district court of Arizona that affirmed the bankruptcy court’s allocation of proceeds of the sale of real property on a pro rata basis between the IRS and the Bankruptcy Estate (Estate) in a Chapter 7 bankruptcy. Specifically, the issue before us is the proper allocation method of sale proceeds where the IRS holds a valid tax lien that includes both unpaid taxes and related penalties, and where the Bankruptcy Trustee (Trustee) avoids the penalty portion under 11 U.S.C. § 724(a), but the sale proceeds are insufficient to pay both the tax and the penalty portions of the lien. There is no binding legal authority or Code provision that expressly provides an allocation method in these circumstances. We have jurisdiction under 28 U.S.C. § 158(d)(1). After careful review and consideration of the record and the decisions below, the relevant Code provisions and existing case law, and the parties’ briefing and oral argument, we hold that the pro rata method is inconsistent with the Bankruptcy Code. The district court thus erred in using that method. We therefore reverse and remand this case to the district…