Alberto Gonzales Files - F - Chambers JDP Sylvia Wpfiles Greenway2 JDP WPD Id Uscourts Gov-Greenway Memo
Alberto Gonzales Files - F - Chambers JDP Sylvia Wpfiles Greenway2 JDP WPD Id Uscourts Gov-Greenway Memo
In re:
Debtor.
_______________________________________________________
MEMORANDUM OF DECISION
_______________________________________________________
Appearances:
Background
bankruptcy case by the Internal Revenue Service (“IRS”) for a 1998 tax liability,
MEMORANDUM OF DECISION - 1
subject to discharge.1 The IRS responded, asserting Debtor’s objection had not
been properly served upon the United States Attorney General under Rule
7004(b)(4) and (5), and that its claim for unpaid 1998 taxes is entitled to priority
constitutes the Court’s findings of fact, conclusions of law, and disposition of the
Facts2
federal income tax return for 1998 before the April 15, 1999 deadline, and that his
return was therefore timely filed. However, the IRS thereafter conducted an audit,
and determined that more taxes were owed than reported on Debtor’s return.
Because Debtor disputed the amount, he filed an action in the United States Tax
Court to contest the results of the audit. See Obj. at 1, Docket No. 77. On
1
Unless otherwise indicated, all chapter, section and rule references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1330, the Federal Rules of Bankruptcy Procedure,
Rules 1001–9036, and this Court’s Local Bankruptcy Rules, Rules 1001.1–9034.1, as
promulgated and enacted prior to the effective date of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005).
2
The Court presumes the following facts are not disputed by the parties, but
neither party submitted a stipulation of facts to assist the Court. To determine the
relevant facts, the Court has resorted to gleaning them from the briefs and the
representations made by the attorneys at the hearing.
MEMORANDUM OF DECISION - 2
November 16, 2004, Debtor filed his Chapter 11 petition. Docket No. 1. The
action in Tax Court was therefore stayed. On May 31, 2005, the Court granted
Debtor’s motion to convert his case to one under Chapter 13. Docket No. 31.
The IRS filed its third amended proof of claim, Claim No. 29, on
January 26, 2006, asserting that Debtor owes $11,379 in income taxes and
$5,065.50 in prepetition interest for the tax period ending December 31, 1998, and
that its claim for those taxes is entitled to priority.3 IRS indicates in the proof of
claim that the 1998 tax liability has not been assessed because an examination is
pending.
two amended objections, by mailing a copy to the local U.S. Attorney, directed to
the attention of the “Civil Process Clerk.” Obj. and Am. Obj., Docket Nos. 77, 82,
89. His second amended objection, filed on January 30, 2006, was also served
upon Alberto Gonzales, the Attorney General for the United States. Second Am.
Obj., Docket No. 89. The IRS had previously filed a response to the first amended
3
The IRS originally asserted Debtor owed over $100,000 in taxes, penalties and
interest as an unsecured priority claim. Claim No. 12. All subsequent claims filed in this
case by the IRS concerning the 1998 taxes have borne this reduced amount. See Claim
Nos. 16, 25.
MEMORANDUM OF DECISION - 3
Analysis
Idaho 2004) explained the service requirements under Rule 7004(b) when the IRS
together with Rule 7004(b)(4), requires the objection to claim to be mailed to the
IRS and to the United States by mailing the objection addressed both to the civil
process clerk at the office of the United States attorney for the district in which the
action is brought, and to the Attorney General of the United States in Washington,
D.C. Id. at 33 (discussing Rule 7004(b)(4) and (5)). Rule 7004(b)(5) allows a
reasonable time for service to cure a failure to mail the objection to multiple
agencies of the United States provided the Debtor has mailed a copy of the
objection to either the civil process clerk at the office of the local United States
attorney for the proper district, or to the Attorney General of the United States.
the civil process clerk at the office of the United States attorney for the District of
Idaho and to the local IRS office in Boise, Idaho. Service in this fashion was
However, as noted, the Rule allows a reasonable time for curing such a defect, and
MEMORANDUM OF DECISION - 4
here Debtor’s second amended objection, Docket No. 89, indicates the defect in
service was corrected. Since all three agencies were eventually served by mail
prior to the hearing, the IRS’s objection on the grounds of improper service will be
denied.
should be afforded IRS’s claim for Debtor’s 1998 income taxes, and whether or
not the amount is “liquidated” such that the claim can be allowed. Second Am.
Obj. at 2, Docket No. 89. Debtor argues that because the claim is subject to
dispute and an action in Tax Court is in process, the Court should “disallow” the
accordance with the Bankruptcy Rules constitutes prima facie evidence of the
validity and amount of the claim. Fed. R. Bankr. P. 3001(f). If an objection to the
claim is made, the court is directed to determine the amount of the claim as of the
date the petition was filed, and “shall allow such claim . . . except to the extent
that — (1) such claim is unenforceable against the debtor and property of the
debtor, under any agreement or applicable law for a reason other than because such
MEMORANDUM OF DECISION - 5
claim is contingent or unmatured[.]” 11 U.S.C. § 502(b)(1). Debtor, as the
overcome the prima facie validity of IRS’s claim. In re Pugh, 157 B.R. 898, 901
(9th Cir. BAP 1993). If Debtor succeeds, the IRS bears the ultimate burden of
persuasion that the claim should be allowed. Id. The applicable law here is
federal law. In re West One Mineral, Inc., 96.1 I.B.C.R. 12, 13 (Bankr. D. Idaho
1996).
concerning liability for the debt exists. In re Nicholes, 96.1 I.BC.R. 22, 23 (Bankr.
D. Idaho 1996). Under § 502(b), the Court is permitted to determine the amount of
any disputed claim, and under § 502(c)(1), the Court may estimate contingent or
determination of tax claims. Section 505(a)(1) and (2) allow the Court to
assessed, whether or not paid, and whether or not contested before and adjudicated
MEMORANDUM OF DECISION - 6
by a judicial or administrative tribunal of competent jurisdiction,” so long as the
amount of the tax has not been finally adjudicated by another competent tribunal
of claims allowance. The Court is expressly permitted by the Code to fix the
amount of the IRS’s claim. The Court may abstain from making such
the exercise of that option would not equate to disallowance of the claim.
Debtor does not dispute that he owes income taxes, in some amount,
for 1998. He has cited no law suggesting that the IRS’s claim can not be enforced
against Debtor. Instead, the Court assumes from Debtor’s objection that Debtor
disputes liability as to the amount IRS has determined he owes, and that Debtor
desires to go forward with the prepetition action brought before the United States
Tax Court rather than have this Court, under authority of the Bankruptcy Code,
determine the amount of Debtor’s 1998 tax liability. Under these circumstances,
claim for the 1998 tax liability is entitled to priority of distribution in this case.
MEMORANDUM OF DECISION - 7
Section 507(a)(8)(A) provides in relevant part that allowed unsecured claims of
Both parties agree that the taxes at issue are income taxes. As a result, the
§ 507(a)(8)(A) are stated in the disjunctive; they are separated by “or” rather than
“and.” Thus, a tax debt need come within the requirements of only one of the
three subsections in order to earn priority status. Vitaliano v. Franchise Tax Board
(In re Vitaliano), 178 B.R. 205, 208 (9th Cir. BAP 1995). See also 11 U.S.C.
§ 102(5) (specifying that “or,” when used throughout the Code, is not exclusive);
Longley v. United States (In re Longley), 66 B.R. 237, 240–41 (Bankr. N.D. Ohio
MEMORANDUM OF DECISION - 8
1986) (discussing § 102(5) in the context of § 507(a)(8)(A), and finding that its
Under subsection (iii), so long as the tax upon which the claim is
based is “assessable” as of the petition date and thereafter under applicable law (in
this case, the Internal Revenue Code), the tax claim is entitled to priority even if
the taxes relate to tax years prior to three years before the filing of the petition. In
re Lemke, 145 B.R. 1005, 1006–7 (Bankr. D. Idaho 1991); Longley, 66 B.R. at
242. “Assessment” refers to a well-established tax law concept that describes the
Chamberlin, 04.1 I.B.C.R. at 32 (citing United States v. Dixiline Fin., Inc., 594
F.2d 1311, 1312 (9th Cir. 1979)). See also Anderson v. United States (In re
Anderson), 157 B.R. 104, 108 (Bankr. N.D. Ohio 1993) (“Assessment is a basic
does not automatically occur upon the filing of a tax return. 26 U.S.C. § 6151(a)
(providing that a return is required even without an assessment from the IRS); 26
The tax law allows the IRS three years after the return is filed to
however, during any time in which the IRS is prohibited from making the
MEMORANDUM OF DECISION - 9
assessment because a proceeding has been commenced in Tax Court, until the
decision of the Tax Court becomes final, and for sixty days thereafter. 26 U.S.C.
§ 6503(1)(a); Smith v. C.I.R., 925 F.2d 250, 253 (8th Cir. 1991) (citing
§ 6503(1)(a) and explaining that the three-year statute of limitations is tolled once
§ 507(a)(8)(A)(iii), the IRS’s claim has priority, neither Debtor nor the IRS
Depending upon when Debtor filed his tax return for his 1998 taxes, the IRS
would have three years thereafter within which to make an assessment. Debtor
apparently filed his return on or before April 15, 1999, meaning that the three-year
period would run until, at the latest, April 15, 2002. The three-year limitations
period for assessment would therefore be tolled only if the Tax Court action was
4
The three-year period is also suspended while the IRS is barred from collecting
a tax by a taxpayer’s bankruptcy filing, provided the period had not expired at the time
the bankruptcy case was commenced. In re Klingshirn, 209 B.R. 698, 702 (6th Cir. BAP
1997) aff’d, 147 F.3d 526 (6th Cir. 1998) (interpreting 11 U.S.C. § 108(c), which extends
a statute of limitations that would expire while the automatic stay is in effect). Because
Debtor’s bankruptcy case was filed in 2004, well after the three-year period would have
otherwise expired during 2002, it is the timing of the commencement and pendency of
the Tax Court action that is critical in this instance.
MEMORANDUM OF DECISION - 10
While the parties informed the Court that a trial date before the Tax
Court was set for May 9, 2005, this Court is unaware of the commencement date of
that action. Moreover, the Court is also in the dark concerning when, if at all, the
measure the IRS’s claim against the statutory requirements, the outcome of the
claims litigation hinges upon the burden of proof. Debtor carries the burden of
proof to overcome the prima facia validity of the IRS’s claim, including its
assertion of a priority.
priority to payment of taxes “for a taxable year ending on or before the date of the
filing of the petition for which a return, if required, is last due . . . after three years
before the date of the filing of the petition.” The return for Debtor’s 1998 taxes
was due April 15, 1999, which is beyond the three year look back period measured
from the date Debtor filed his petition in November 2004. Debtor is therefore
correct that the IRS’s claim would not be entitled to priority under
that the IRS’s claim is not entitled to priority fails. Because the subsections of
MEMORANDUM OF DECISION - 11
cannot defeat the IRS’s claim for priority under subsection (iii) by arguing the
Conclusion
§ 502(a), and the IRS’s claim will be allowed as a priority claim. A separate order
course, if Debtor can establish the appropriate factual predicate, he may move for
5
Debtor’s argument that his 1998 tax liability should be subject to discharge
adds nothing to this discussion. Under § 1322(a)(2), Debtor’s plan must provide to pay
the full amount of all claims entitled to priority under § 507. In other words, whether the
IRS’s claim is dischargeable upon confirmation and completion of Debtor’s proposed
Chapter 13 plan raises the same issues and factual questions as the priority analysis
above. For now, since the Court has determined that the IRS’s claim is an allowed
priority claim, it is not dischargeable.
MEMORANDUM OF DECISION - 12