Pending before the court are the following motions:

1. The Trustee's Application to Abandon Certain Property to the Debtors, filed May 31, 1994 [re: lots in Palmer, the estate's interest in Geneva Woods Dental Center Partnership, and the estate's interest in Grupe Real Estate Investors 18];

2. The Trustee's Application for Order Authorizing Sale of Property, filed September 1, 1994 [re: Tract C, Mission Hills Subdivision, Palmer Recording District]; and

3. The Trustee's Motion for Order Authorizing Sale of Property Free and Clear of Liens, Except for Lien of Safeco Insurance Company, filed September 1, 1994 [re: Lots 69(a) and 65, Block 2, Geneva Woods Subdivision, the estate's interest in the Geneva Woods Dental Center Partnership, and the estate's interest in the Denali Dental Services Business Trust].

The hearing on the motion to abandon certain property to the debtors was initially scheduled for June 23, 1994, but was continued several times at the request of the parties. A hearing on all three motions was held September 30, 1994. Supplemental briefs have been submitted by the debtors and the Internal Revenue Service ("IRS"). The court has reviewed the entire record in this case and considered the arguments of the parties. Based on the circumstances present in this case, the court has concluded that the trustee's application to abandon certain property will be granted with respect to the lots in Palmer, and denied as to the partnership interests. The court defers ruling on the sale of the Geneva Woods interest pending a valuation hearing on the subject property. The motion to sell Tract C, Mission Hills, will be denied as moot.

Factual Background

The debtors filed their Chapter 7 petition on December 23, 1991. Their schedules reflect that all real and personal property is encumbered by IRS tax liens. It is undisputed that the estate's assets are insufficient to pay the IRS lien in full.

The IRS filed its proof of claim on March 2, 1992, in the amount of $709,906.74 ($352,758 secured; $269,067 priority; $20,326 general unsecured). It filed an amended proof of claim on June 29, 1993, in the amount of $712,257.79 ($352,758 secured; $336,821 priority; $22,677 general unsecured). The IRS tax liens have not been contested. The debtors have filed an adversary proceeding contesting the priority portion of the IRS claim.

During the pendency of this case, the debtors have paid a total of $124,340⁽¹⁾ to the trustee, on advice of their prior counsel, for the purpose of releasing their home and other exempt assets from the IRS tax liens. An agreement regarding a release of the tax liens has not been reached. According to the trustee's accountant, the estate has also received approximately $20,000 from other scheduled partnership interests and $25,000 from notes receivable. The estate had cash on hand of $184,494 as of June 30, 1994 (the actual cash balance in the estate as of that date was $129,930, as the estate has paid estimated federal and State of Arizona taxes totalling $54,564 for fiscal years 1993 and 1994). It is clear that the debtors' contributions constitute the bulk of the funds in the estate.

In addition to the sums presently held by the estate, the following amounts have been deposited in the registry of this court pending a decision on the trustee's motion to abandon: $38,929, deposited September 30, 1994, and $1,303.74, deposited December 7, 1994. Both of these deposits represent checks which the Chapter 7 trustee received in 1994 from the Grupe partnership.

The Trustee's Application to Abandon

In his application to abandon, the trustee seeks permission to abandon to the debtors several parcels of real property in the Palmer Recording District (scheduled market value of $68,225), a 33.33% general partnership interest in the Denali Dental Building (Geneva Woods Dental Center Partnership), and a 1.414286% limited partnership interest in Grupe Real Estate Investors 18. Both partnership interests have a scheduled value of zero.

The trustee seeks to abandon the Palmer real property because the IRS tax liens exceed the value of the parcels and the IRS believes it can liquidate its interest in the parcels better outside of the bankruptcy. The trustee's reasons for seeking to abandon the partnership interests are that these interests have no net value to the estate, their retention would result in substantial tax liability to the estate, and the debtors have tax deductions that are subject to recapture on disposition of the property.

The IRS supports the trustee's proposed abandonment. The debtors concur in the abandonment of the Palmer real property, but object to the abandonment of the partnership interests, especially the Grupe interest, because abandonment will result in an increased tax burden to them. The debtors contend that abandonment will impair their fresh start by shifting tax liability on account of the Grupe interest from the estate to them. If the trustee retains the partnership interests, the debtors have offered to transfer passive activity losses ("PALs") to the estate, via a "section 1398 election", to help offset the tax liability from Grupe.

The trustee's accountant has prepared a chart reflecting the tax liability which the estate will incur, for fiscal years 1993 and 1994, under various scenarios. If the trustee is permitted to abandon the partnership interests and real property parcels to the debtors, and the debtors retain their PALs, the estate's tax liability for the two years will be $3,053. On the other hand, if the trustee retains these assets and the debtors transfer the PALs to offset the resulting taxes, the estate's tax liability for the two years will be $52,449. However, the tax impact will be softened by the two checks which the trustee has received from Grupe, so that the net difference to the estate in terms       4 ABR 66  of funds available for distribution is approximately $10,000. Abandonment of the Grupe partnership interest will have a significant impact on the debtors, because it will create a tax obligation for the debtors of more than $60,000, "for a net cash loss to them of nearly $20,000 through 1994." Abandonment favors the IRS, because the funds it will receive in distribution from the estate will be maximized and it can collect the tax liability generated by the Grupe partnership from the debtors as a post-petition obligation.

In support of abandonment, the trustee and the IRS rely on Mason v. C.I.R., 646 F.2d 1309 (9th Cir. 1980), and In re Nevin, 135 B.R. 652 (Bankr. D. Hawaii 1991). The Mason case discusses the effect of abandonment, rather than the criteria for permitting it, holding that when an asset is abandoned by the trustee, "any title that was vested in the trustee is extinguished, and the title reverts to the bankrupt, nunc pro tunc." Mason, 646 F.2d at 1310. In Nevin, however, the court stated:

The Bankruptcy Code requires that the trustee in a chapter 7 liquidation case expeditiously liquidate the property of the estate or abandon it. See, e.g., In re Groves, 120 B.R. 956 (Bankr. N. D. Ill. 1990). And as noted inIn re Wilson, 94 B.R. 886, 889 (Bankr. E.D. Va. 1989):

Thus, it appears that the only concern of the trustee in determining whether to abandon a claim is whether such action would be in the best interest of the estate. . . . (citations omitted).

In keeping with the goal of the bankruptcy reform movement to divorce courts from ministerial duties, a trustee's disposition of estate property is reviewable only for the purpose of determining whether the decision was made in an arbitrary or capricious manner. Accordingly, when called upon to review contested applications for abandonment, a court must focus its examination upon the reasons underlying the trustee's determination and affirm a decision which reflects a business judgment "made in good faith, upon a reasonable basis and with the scope of his authority under the Code."

In re Wilson, 94 B.R. 886, 888-889 (Bankr. E.D.Va. 1989) (citations omitted).

In the instant case, the focus of the parties has been on the Grupe partnership interest, because of its sizeable tax liability. Courts have split on the issue of whether abandonment of an asset is appropriate when it would result in substantial tax liability for a debtor. In In re A.J. Lane & Co., Inc., 133 B.R. 264 (Bankr. D. Mass. 1991), and In re Rubin, 154 B.R. 897 (Bankr. D.Md. 1992), both cases relied upon by the debtors, motions to abandon were denied, in part, because to do so would thwart the debtor's fresh start by shifting tax consequences from the estate to the debtor. Other courts, focusing on the asset's burden to the estate rather than the impact of abandonment on the debtor, have found abandonment appropriate under these circumstances. See, Matter of Popp, 166 B.R. 697 (Bankr. D.Neb. 1993); In re Terjen, 154 B.R. 456 (E.D.Va. 1993), aff'd, 30 F.3d 131 (4th Cir. 1994); In re Burpo, 148 B.R. 918 (Bankr. W.D.Mo. 1993). In Burpo, the court stated:

This Court recognizes that the thrust of the Bankruptcy Reform Act of 1978 is to afford honest debtors a fresh start. Unfortunately, that is not always possible. In this case, the Court regrets that debtors fall within that unfortunate group that Congress has declared cannot be absolved of all economic sins and truly be born again.

Id., at 148 B.R. 920.

11 U.S.C. § 554 permits the trustee to abandon "any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." The focus of this section is on the estate, not the debtors. Accordingly, I find that abandonment considerations should be based on the asset's value to the estate, rather than the consequences of abandonment to the debtor.

The principle of abandonment was developed . . . to protect the bankruptcy estate from the various costs and burdens of having to administer property which could not conceivably benefit unsecured creditors of the estate.

In re Pauline, 119 B.R. 727, 728 (9th Cir. BAP 1990), citing In re Paolella, 79 B.R. 607, 609, (Bankr. E.D. Pa. 1987) (emphasis added by BAP). In Pauline, the BAP affirmed a bankruptcy court's order directing a Chapter 7 trustee to sell overencumbered real property within 60 days, or the property would be deemed abandoned. The BAP noted that § 554 was designed to prevent "property churning" by a trustee simply to generate a trustee's commission.

I do not find that the trustee's attempts to administer the estate, in this case, constitute "property churning." I do find, however, that the trustee's decision to abandon only certain assets is arbitrary under the circumstances present here. A decision to selectively abandon some assets, where none have equity for the estate, in order to enhance a secured creditor's position is not "made in good faith, upon a reasonable basis and with the scope of [the trustee's] authority under the Code." Wilson, 94 B.R. at 888-889. The trustee has, in effect, become a collection agent for the IRS. This is an improper exercise of his duties under the Code.

I also find that the trustee's delay in administering or abandoning assets in this case is prejudicial to the debtors. This case has been pending since 1991. The trustee's motions to abandon and sell certain assets which are now before this court are the first he has filed reflecting any administration effort on his part. The trustee's inactivity has permitted the estate to retain substantial losses which the debtors could have otherwise used to offset the gain from the Grupe partnership. Pursuant to 26 U.S.C. § 1398(g), the estate acquired approximately $140,000 in capital losses from the debtors when the petition was filed in December, 1991. The gain attributable to the Grupe partnership interest occurred in 1993, but was not reported to the trustee until March, 1994, when the Grupe partnership K-1's were distributed. The trustee's accountant testified that if the Grupe
      4 ABR 69  partnership interest were abandoned to the debtors, the debtors would be unable to use the losses to which the estate succeeded against the Grupe tax liability because unused losses in the estate are only transferred back to the debtors on termination of the estate, pursuant to 26 U.S.C. § 1398(i). As the pending motion to abandon will not terminate the estate, the debtors would not be able to use the losses in the estate retrospectively to adjust their tax liability for 1993.

I also find that the IRS, by failing to promptly move for relief from stay or abandonment of assets, has waived any claim that the estate's administration of assets is prejudicial to it. Due to the passage of time in this case, the trustee's inactivity, and the IRS's failure to promptly move to protect its interests in this case, I conclude the estate should administer the assets which are the subject of the motion to abandon and bear the resulting adverse tax consequences. There are sufficient funds in the estate for it to do so. The trustee's motion to abandon will be denied, except with respect to the Palmer real property. I am granting the motion with respect to the real property solely because that portion of the motion to abandon was uncontested.

The Trustee's Application to Sell Tract C, Mission Hills

At the hearing on September 30, 1994, the court was advised that the offer to purchase Tract C, Mission Hills Subdivision, Palmer Recording District, had been withdrawn. Therefore, the trustee's application to sell this parcel will be denied as moot.

The Trustee's Application to Sell Property Free and Clear of Liens

At the hearing on September 30, 1994, the parties agreed that the issue of abandonment should be determined first, and requested additional time to brief the issue of whether the property could be sold free and clear of the IRS's tax liens without its consent. 11 U.S.C. § 363(f)(5) permits the sale of property free and clear of liens if the secured creditor could be compelled "to accept a money satisfaction of such interest." Accordingly, the issue to be addressed in connection with this motion is the value of the property above the interest of the primary secured creditor, Safeco. A hearing to address this issue will be scheduled, as set forth below. Therefore,

IT IS ORDERED:

1. The Trustee's Application to Abandon Certain Property to the Debtors, filed May 31, 1994, is granted only as to the parcels of real property in Palmer. The motion is denied as to the estate's interests in the Geneva Woods Dental Center Partnership and the Grupe Real Estate Investors 18 partnership;

2. The funds received from Grupe Real Estate Investors 18 ($38,929 deposited September 30, 1994, and $1,303.74 deposited December 7, 1994) shall be released to the Chapter 7 trustee, Gordon Zerbetz;

3. The Trustee's Application for Order Authorizing Sale of Property, filed September 1, 1994, re: Tract C, Mission Hills Subdivision, Palmer Recording District, is denied as moot; and

4. With respect to the Trustee's Motion for Order Authorizing Sale of Property Free and Clear of Liens, Except for Lien of Safeco Insurance Company, filed September 1, 1994, a hearing will be held on Tuesday, February 7, 1995, at the hour of 9:00 a.m., in Courtroom 2, Old Federal Building, 605 West Fourth Avenue, Anchorage, Alaska, for the purpose of determining the value of the Geneva Woods property and the extent of SAFECO's lien therein.

DATED: January 5, 1995.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

1.       4 ABR 64  This figure is based on the testimony of the trustee's accountant, Russ Minkemann, at the hearing on September 30, 1994. According to the debtors' counsel, they have paid $88,000 of non-estate funds to the trustee.