In Re Bankruptcy Estate of Markair, Inc., Debtor. William Barstow, III v. United States Internal Revenue Service

William Barstow, Trustee of the bankruptcy estate of MarkAir, Inc. (MarkAir), seeks to subordinate the proceeds of a judicial lien securing taxes owed to the United States Internal Revenue Service (IRS). The Trustee relies on § 724(b) of the Bankruptcy Code, 11 U.S.C. § 724 (b), which subordinates tax liens to the claims of certain priority unsecured creditors. The bankruptcy court denied the Trustee’s request to subordinate, and the district court affirmed. The Trustee appeals and we, too, affirm. We hold that the term “tax hen” in § 724(b) means a statutory tax hen and that the term does not embrace a judicial hen securing an underlying tax obligation.

FACTUAL AND PROCEDURAL HISTORY

In June of 1992, MarkAir filed for bankruptcy under Chapter 11. When the company filed its petition, it had an outstanding liability for air transportation excise taxes. However, the IRS had not yet filed a Notice of Federal Tax Lien with respect to this liability and, accordingly, had no statutory tax hen.

Thereafter, MarkAir concluded that it had overpaid certain taxes and requested a refund. The IRS asserted a right to offset the amount of the overpayment against the outstanding tax liabilities…