Opinion
No. S-93-1040 GEB
September 28, 1994
Opinion
The United States appeals orders of the bankruptcy court sustaining the Debtors' objection to the proofs of claim filed by the creditor Internal Revenue Service and denying the United States' motion for retroactive relief from the bankruptcy stay. The order of the bankruptcy court on the Debtors' objections to the IRS' claims is reversed. The Debtors' objections as well as the United States' motion are remanded for further proceedings consistent with this order.
The issues presented by this appeal arise in two related cases involving the individual debtors in this matter and their corporation which has filed its own petition in In re Roger E. Henley, Inc., case number S-93-1041 GEB. The briefs, motions and record in this matter are substantially similar to those filed in the related case.
I. Factual Background
Roger E. Henley, Inc., (the "Corporate Debtor") failed to pay employment taxes to the Internal Revenue Service (the "IRS") for 1985. On March 24, 1986, the IRS began assessing the unpaid taxes. On May 2, 1986, the Corporate Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. After the Corporate Debtor had filed its Chapter 11 petition, the IRS made several additional assessments related to the Corporate Debtor's employment tax liability. Post-petition assessments were made on June 16, 1986, October 29, 1986, April 13, 1987, and May 18, 1987. The IRS filed proofs of claim against the Corporate Debtor on September 2, 1986, April 22, 1987, September 17, 1987, and February 22, 1988. The Corporate Debtor's total tax liability amounted to approximately $215,000.Roger E. Henley and Maria Henley (the "Individual Debtors") filed a Chapter 11 petition on July 10, 1986. The IRS assessed tax deficiencies against the Individual Debtors in the amount of the taxes owed by the Corporate Debtor on January 11, 1988, and $7,224.40 on November 14, 1988. The IRS also filed proofs of claim in the Individual Debtors' bankruptcy proceeding on January 19, 1988, and April 19, 1991, claiming the entire amount of the employment taxes owed by the Corporate Debtor.
Pursuant to 26 U.S.C. § 6672.
The Individual and Corporate Debtors (collectively, the "Debtors") filed first amended plans of reorganization on December 15, 1987, and the bankruptcy court approved both plans in orders dated April 18, 1988. The corporate plan provided for payment of all the Corporate Debtor's approved outstanding debts over a six year period. In addition, the Individual Debtors' plan included a guarantee for payment of Corporate Debtor's tax obligations claimed by the IRS.
On March 19, 1992, the Corporate Debtor sought to modify its reorganization plan to extend the time allowed for repayment of its tax obligations to the IRS. In June, 1992, the bankruptcy court allowed the modification. The Debtors did not raise any objection to the timing of the assessments at that time. On August 13, 1992, the Debtors filed an objection to the IRS tax claims on the grounds that the amount of the claims had been inaccurately calculated. There was no challenge to the timing of the assessments.
On October 27, 1992, the Debtors filed new objections to the IRS' proofs of claim for their unemployment tax deficiencies. Those objections asserted that the assessments made after the Debtors had filed their bankruptcy petitions were void for having been made in violation of the automatic stay provisions of 11 U.S.C. § 362(a). The United States immediately filed its opposition to the Debtors' challenges and also brought motions for retroactive relief from the bankruptcy stay.
The bankruptcy court sustained the objections filed by the Debtors and denied the United States' motions for retroactive relief. (Appellant's Excerpt of Record, Exhibits Q, R, S and T.) The bankruptcy court decided that it was bound by the recent Ninth Circuit decision in In re Schwartz, 954 F.2d 569 (9th Cir. 1993), which held that assessments by the IRS after the commencement of the automatic bankruptcy stay were void. Moreover, the bankruptcy court ruled that, under Schwartz, the proofs of claim filed by the IRS were void as a matter of law. The bankruptcy court also denied the United States' motions for retroactive relief in a brief order that did not include any explanation for its decision. The United States appeals the orders sustaining the Debtors' objections to its proofs of claim and the orders denying its motions for retroactive relief from the automatic stay.
The bankruptcy court concluded that "the decision in Schwartz would be meaningless if the Ninth Circuit did not intend to disallow the tax claims." Order Sustaining Objection to Claim, page 2 (Appellant's Excerpts of Record, Exhibits Q and S.)
II. Analysis A. Standard of Review
This Court has jurisdiction to review the final orders of the bankruptcy court pursuant to 28 U.S.C. § 158(a). The facts underlying this appeal are undisputed and the conclusions of law made by the bankruptcy court are reviewed de novo. In re Contractors Equipment Supply Co., 861 F.2d 241, 243 (9th Cir. 1988). An order on a motion for relief from the automatic stay is reviewed for an abuse of discretion. In re MacDonald, 755 F.2d 715 (9th Cir. 1985); In re Jewett, 146 B.R. 250, 251 (9th Cir. BAP 1992).
B. Appellant's Proofs of Claim and The Schwartz Decision
The IRS asserts that the Bankruptcy Court erred by disallowing the proofs of claim it filed after assessing the Debtors' employment tax liability. Both parties agree that the assessments made by the IRS against the Debtors are void under the Ninth Circuit's decision in In re Schwartz, 954 F.2d 969 (9th Cir. 1992). The IRS asserts, however, that the Schwartz decision does not void its proofs of claim, since the validity of the proofs of claim is not dependent upon the existence of a valid assessment. Debtors counter by arguing that the effect of the Schwartz holding was to defeat the IRS' proof of claim in the Schwartzes' bankruptcy case. Debtors assert that, since the void assessment in Schwartz resulted in the disallowance of the IRS' claim in that case, the same result must hold true in this matter.
The Schwartz decision does not hold that the IRS' proof of claim in that case was invalid. The Debtors argue, however, that the Schwartz decision only makes sense if the proof of claim associated with the void assessment was also invalid. While it may be true that the Schwartzes' challenge against the IRS' claim in that case turned on whether the assessment was void, that conclusion begs the question whether an IRS claim must always be disallowed when the IRS has made a void assessment.
In Schwartz, the debtors filed a Chapter 11 bankruptcy petition on February 25, 1983. The IRS, apparently unaware of the bankruptcy filing, assessed a penalty tax liability against one of the debtors on October 8, 1984. The Schwartzes did not challenge the tax assessment during the Chapter 11 proceedings and stipulated to their dismissal from the Chapter 11 bankruptcy on March 27, 1985.
The IRS assessed the same 100% tax penalty which it assessed against the Debtors in this case (in Schwartz, the total assessment was for $65,819.25). Although referred to as a "penalty," the amount payable by the individuals is not owed in addition to the unpaid taxes owed by the corporation. The effect of the penalty is to impose joint liability for the corporation's tax obligation on certain responsible individuals. 26 U.S.C. § 6672; Anglemyer v. United States, 115 B.R. 510, 511, fn. 3 (D.Md. 1990).
The IRS did not take any action on its lien until August 1987, when it filed a Federal Tax Lien pursuant to the penalty assessment. On October 8, 1987, the Schwartzes filed a Chapter 13 bankruptcy petition and on February 19, 1988, the IRS filed a proof of claim alleging that the Schwartzes owed the IRS $90,787.67 for the tax liability which had been assessed in 1984.
The Schwartzes objected to the IRS claim on the ground that the assessment, which had occurred during their prior bankruptcy, violated the automatic bankruptcy stay and was void. The IRS argued that the assessment was only voidable for being in violation of the stay and, as the Schwartzes did not oppose the assessment during the Chapter 11 bankruptcy, it remained valid.
The court stated that the sole issue before it was "whether creditor violations of the Bankruptcy Code's automatic stay are void or voidable." Id. at 570-571. The court held that the IRS assessment in 1984 was void and, therefore, without effect. The court concluded that "the bankruptcy court's order granting the Schwartzes' objection to the IRS' penalty assessment is correct and should not be disturbed." Id. at 575.
Similarly, when the case was before the Bankruptcy Appellate Panel, it framed the issue by stating:
It is undisputed that this post-petition assessment of the pre-petition taxes violated the automatic stay of 11 U.S.C. § 362(a)(4), (a)(5) and (a)(6). The dispute concerns the effect of this violation upon the validity of the assessment.
In re Schwartz, 119 B.R. 207, 208 (9th Cir. BAP 1990) (emphasis added). The effect of the assessment made during the automatic stay on the IRS' proof of claim (or the underlying tax obligation) was not discussed.
The language employed by the Ninth Circuit both to define the issue it was addressing as well as its holding appears deliberate. It is unmistakable that the Ninth Circuit considered only the effect of the violation of the automatic stay on the validity of the IRS' assessment. Moreover, the court did not mention the IRS' proof of claim, or the effect of its holding on that proof of claim.
It is apparent that the validity of the IRS' assessment in Schwartz was dispositive of the Schwartzes' challenge to the claim filed by the IRS in the Schwartzes' 1987 bankruptcy. It does not necessarily follow, however, the IRS' claim was disallowed because it was associated with a void assessment. The IRS' claim in Schwartz, for example, may have been barred by the statute of limitations once the 1984 assessment was determined by the court to be void. In any event, the Schwartz decision did not hold that proofs of claim filed by the IRS are invalid or that they must be disallowed if filed after a void assessment.
For example, in Anglemyer v. U.S., 115 B.R. 510 (Bkrtcy.D.MD. 1990), the IRS assessed a withholding tax penalty against the debtors on September 14, 1981, two months after debtors had filed a Chapter 7 petition. The debtors received their discharge (but not from the tax liability) on April 22, 1983 and the automatic stay was terminated. The IRS did not attempt to collect on the assessments until 1987 and Mr. Anglemyer filed an action in federal court to oppose the IRS' effort to collect the tax.
The court ruled that the assessment made during the bankruptcy stay was void. The court recognized that, notwithstanding the improper assessment, after the termination of the stay "the Internal Revenue Service could have made a proper assessment of the tax liability in question" until the expiration of the statute of limitations. Id. at 513. The IRS, however, did not do so and its attempt to collect on the tax liability in 1987 was barred by the statute of limitations. Id. at 514. The limitations period for assessing a tax liability or commencing a proceeding in court for collection of such tax without assessment is three years. 26 U.S.C. § 6501(a).
If the statute had run in Schwartz precluding the IRS from reassessing the tax liability (or commencing a proceeding in court for collection of the tax), the determination that the 1984 assessment was void would have effectively disallowed the IRS' 1988 proof of claim.
The Bankruptcy Code broadly defines "claim" to mean a "right of payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. § 101(5)(a). The Debtors became liable for "the [section 6672] penalties when [they] failed `to collect, truthfully account for, and pay over [the required taxes].'" Bronson v. United States, 28 Fed. Cl. 756, 761 (1993) (quoting from 26 U.S.C. § 6672(a)) (last bracketed passage in text). The Debtors' obligation to pay the amounts identified in the IRS' claims did not arise from the IRS' assessments. "[T]he setting aside of the tax assessment does not determine a taxpayer's liability for unpaid taxes, for the assessment does not create the liability." In re Fingers, 148 B.R. 586, 589 (Bkrtcy.S.D.Cal 1993), aff'd ___ B.R. ___, 1994 WL 422155 (S.D.Cal. July 7, 1994). "Accordingly, the validity of the IRS assessments may not affect the amount of the IRS' general unsecured claim." Id.
Assessment refers to "a basic bookkeeping technique used by the IRS to record tax liabilities. Assessment occurs when the IRS' designee signs a summary record sheet containing basic demographic information about the taxpayer; amount of the tax; and tax period." In re Anderson, 157 B.R. 104, 108 (Bkrtcy.N.D.Ohio 1993). See, 26 U.S.C. § 6203. It is well recognized that an assessment "is an administrative determination that a certain amount is currently due and owing as a tax with consequences somewhat similar to reductions of a claim to judgment." United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985).
In this matter, the taxes owed by the Debtors were assessable within the statute of limitations when the Debtors filed their bankruptcy petitions. Debtors cite no authority to support their contention that the IRS' proofs of claim are defeated by reason of the void assessments subsequently made. To the contrary, the IRS may file a valid proof of claim for a tax liability without any assessment. See e.g., In re Anderson, 157 B.R. at 108 (IRS filed a proof of claim for tax liability which was assessable but not assessed at time of bankruptcy petition). Moreover, an unassessed but assessable section 6672 penalty tax liability may be a nondischargeable debt and remain assessable after the a debtor's discharge in bankruptcy. See e.g., Anglemyer v. U.S., 115 B.R. 510 (Bkrtcy.D.MD. 1990); Accord, Fein v. United States, 22 F.3d 631 (5th Cir. 1994); In re Anderson, 157 B.R. at 107.
In addition, the nondischargeability of a tax liability is not dependent upon either assessment or the filing of a proof of claim. See, Fein v. United States, 22 F.3d at 632-633; In re Anderson, 157 B.R. at 107-108.
Even when the IRS makes a void assessment during the automatic stay, the IRS may still reassess the debtor for the same tax liability once the stay is lifted. In re Fingers, 148 B.R. at 589; See also, Anglemyer v. United States, 115 B.R. at 513 (discussed in fn. 7 above). No taxpayer has been exonerated from a tax liability simply because the IRS assessed the tax in violation of the automatic bankruptcy stay. When a taxpayer has escaped a tax liability, it has not been because the debt has been extinguished due to the void assessment but, instead, has been the result of the IRS' failure to reassess the tax within the applicable statute of limitations period once the bankruptcy stay has been lifted. See e.g., Anglemyer v. United States, 115 B.R. 510; United States v. Fisher, 71 A.F.T.R.2d (P-H) 931 (C.D.Cal. 1992); Accord, Bronson v. United States, 28 Fed. Cl. 756.
In Fingers, the court recognized that the assessment during the automatic stay was void under Schwartz but stated:
[T]he IRS had a second opportunity to make a valid assessment after the debtor was discharged. Had the IRS been following its own internal method of monitoring bankruptcy cases, it would have been aware of the debtor's discharge on April 6, 1990, giving it another window of opportunity to make a valid assessment.
148 B.R. at 589.
A proof of claim filed by the IRS in a bankruptcy proceeding which reflects a tax debt of the Debtor is not rendered invalid by a void assessment. Since the obligation to pay the tax is not extinguished by a void assessment, the proof of claim for such obligation remains valid. The Schwartz decision neither holds to the contrary nor vitiates the proofs of claim submitted by the IRS in this matter. Accordingly, the bankruptcy court erred by sustaining the debtors' objections to the IRS claim based exclusively on Schwartz.
Having determined that Schwartz does not defeat the IRS' proofs of claim, the crucial question is whether the IRS is precluded by the statute of limitations from taking further action to collect the tax owed by the Debtors. As the bankruptcy court specifically avoided any determination on that issue, the matter is remanded.
III. Conclusion
The bankruptcy court erred by sustaining the Debtors' objections to the IRS' proofs of claim on the ground that the IRS assessments were void under Schwartz. Accordingly, the Debtors' objection to the IRS' claims is remanded to the bankruptcy court for further proceedings, consistent with this order, as well as for specific findings and conclusions.
In addition, the bankruptcy court did not make any findings or explain its denial of the United States' motion for retroactive relief from the automatic stay and the basis for such decision is not stated in the record. Also, it is unclear whether the bankruptcy court's interpretation and application of Schwartz was a factor in denying the United States' motion. The United States' motion for retroactive relief from the automatic stay is remanded to the bankruptcy court for specific findings and conclusions on the issues presented by such motion.
The Court does not decide the merit of the IRS' claims, the effect of the applicable statute of limitations on such claims, or whether the IRS has complied with the provisions of 26 U.S.C. § 6501 in this matter.
IT IS SO ORDERED.