Donald and Madelaine Taffi appeal the judgment of the district court as to the value to be placed on a residence retained by them as debtors in a procеeding under Chapter 11 of the Bankruptcy Code. At issue is the proper construction in this context of 11 U.S.C. § 506(a). The district court valued the residence at its fair market value. We affirm the judgmеnt of the district court, except that we reduce the amount of the government’s tax lien to its allowed secured claim.
FACTS
The Taffis owe the Internal Revenue Service (the IRS) $496,940 fоr tax liability that arose in 1980 and 1981. To secure payment of this claim, the IRS on October 12, 1989 attached a tax hen to the Taffis’ personal residence (the House) and recorded it. The IRS also recorded a hen on the personal property of the Taffis in the amount of $10,-000. Senior hens in the amount of $233,-942.38 already encumbered the House.
The parties stiрulated that the fair market value of the House was $300,000.00. That value represented what a willing and fully informed buyer would pay under fair market conditions. The parties also stipulated that the costs of selling the House in the marketplace would be nine percent, or $27,000.00. Taking into account the senior hens, the IRS would thus secure by the House $66,057.62, or, if hypothetical сosts of sale were deducted, $39,057.62. The parties further stipulated that the House would sell for only $240,000.00 under forced sale conditions. That amount was the foreclosure value of thе House. Under the forced sale scenario, the IRS would secure by the House only $6,057.62 after taking into account the senior hens, and nothing if costs of sale were deducted.
PROCEEDINGS
On May 22, 1991 thе Taffis sought rehef under Chapter 11 and proposed a plan of reorganization (the Plan). On February 27, 1992 the court approved the Plan, by which, inter alia, the Taffis provided for the treatment of the tax hens of the IRS. No objection was made to the Plan, and the order confirming the Plan became final. There remained in dispute between the Taffis and the IRS the valuation of the IRS’s interest in the House.
On August 17, 1992, the bankruptcy court entered judgment in this case. Guided by
In re Mitchell,
The United States appealed to the District Court for the Central District of California. The Taffis filed a cross-appeal. On October 6, 1993 the district court held in favor of the government: under Section 506(a) the House should be valued at the market value. The court also held that the valuation was not affected by the hypothetiсal cost of sale so that the sales cost should not be deducted from the value. The total secured claim of the IRS came to an amount equal to the market value of the House plus the value of the personal property ($300,000 + $10,000 = $310,000), less the senior liens of $233,942.38, resulting in a total secured claim of $76,-057.62. The court further held that the IRS could not be forced to release its lien as to *1192 the unsecured portion and held that the tax liens “passed through the bankruptcy regardless of what the provisions of the plan purported to аccomplish.”
The Taffis appealed to this court. On October 10, 1995 a divided panel upheld the judgment of the district court, distinguishing Mitchell as a ease involving the wholesale value and retаil value of an automobile, not a house, and noting that “the terms “wholesale’ and ‘retail’ represent two different fair market values for an automobile”, while the forced sаle value of a residence “does not represent a fair market value at all.” The court also agreed with the district court that the hypothetical cost of the sаle should not be deducted from the fair market value. Finally, the government conceded that the Plan of reorganization “served to reduce the lien, and that the Plan was binding on thе IRS.” As the IRS had not objected to confirmation of the Plan, its lien had to be reduced to the amount of its secured claim.
This court then took the case en banc.
ANALYSIS
A single question is presented to the en bane court: what is thе appropriate method of valuation prescribed in a reorganization under Chapter 11 where collateral is retained by the debtors for the debtors’ use? The Bankruptcy Code provides:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as thе case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed сlaim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
11 U.S.C. § 506(a).
The “property” of the estate of the debtor is the House. The “interest of the estate” is the ownеrship and possession of the House. The “interest of the creditor” is the tax lien on the House. According to the second sentence of section 506(a), that valuation is to bе done variously depending on the context, in light of two factors, the purpose of the valuation and the use or disposition to be made of the interest.
When a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditоr would receive if it hypothetically had to foreclose and sell the collateral. Neither the foreclosure value nor the costs of repossession are to be considered because no foreclosure is intended. Instead, when the proposed use of the property is continued retention by the debtor, the purpose of the valuation is to determine how much the creditor will receive for the debt- or’s continued possession. Hypothetical sales costs are not to be considered bеcause no sale is intended.
In this ease, the key fact is that the debtors are going to possess the House. This fact determines the disposition and use of the creditor’s interest. Thе foreclosure value is not relevant because no foreclosure is intended by the Plan. The Taffis are in, not outside of, bankruptcy. The IRS is not foreclosing. Valuation must be accomplished within the actual situation presented. Consequently, the value has to be the fair market value of what the debtors are using.
The fair market value is not “replacement value” because the House is not being replaced. The fair market value is the price which a willing seller under no compulsion to sell and a willing buyer under no compulsiоn to buy would agree upon after the property has been exposed to the market for a reasonable time. The fair market value here has been determined by stiрulation of the parties, approved by the bankruptcy court, to be $300,000.
There is nothing inequitable in this result. By agreeing to the Plan and allowing the Taffis to retain their residence, the IRS runs а risk. It is appropriate that it also benefit
*1193
from the higher valuation.
See In the Matter of Rash
We overrule
In re Mitchell,
Reaching this result, we put this circuit in harmony with all other circuits, except thе Fifth, that have considered the question,
In re Trimble,
Accordingly, the judgment of the district court is AFFIRMED with the modification that the IRS’s concession as to the reduction of the tax lien is to be incorporated into the judgment.