In Re Douglas P. Demarah, Debtor. Douglas P. Demarah, Debtor-Appellant v. United States

The district court reversed a bankruptcy court order, which avoided the penalty portion of a tax lien against Douglas P. DeMa-rah’s real property. The district court also remanded the case to the bankruptcy court for allocation of the tax lien among various tax periods and types of taxes. DeMarah appealed. We affirm.

FACTS AND PROCEDURAL HISTORY

DeMarah failed to pay various federal income taxes, employment taxes, and the interest and penalties associated with them. In June 1988, the IRS properly filed a notice of a federal tax lien against all of DeMarah’s property.

In April 1991, DeMarah filed a Chapter 7 petition for bankruptcy. He listed unencumbered equity in his property in the amount of $10,736.00, and declared that, pursuant to 11 U.S.C. § 522 , all of his property qualified as exempt from being property of the bankruptcy estate. The IRS filed a timely proof of claim and asserted secured and unsecured claims totalling $42,050.59.

After DeMarah received his Chapter 7 discharge, the IRS began collection activity against his property. DeMarah then filed this adversary action under 11 U.S.C. § 505 seeking: (1) to determine the dischargeability of federal taxes; (2) to set…