Opinion
Case No. 95-10194
December 8, 2000
ORDER ON DEBTOR'S MOTION TO HOLD IRS IN CONTEMPT FOR VIOLATION OF DISCHARGE INJUNCTION
This chapter 13 case was reopened on motion of the debtor, Robert D. White, in order for the debtor to prosecute a contempt action against the United States of America and its agency, the Internal Revenue Service (IRS), for an alleged violation of the discharge injunction imposed by 11 U.S.C. § 1328 (a) 524(a). The court took the matter under advisement with the submission of documentary evidence and memoranda of law.
FINDINGS OF FACT
The facts are essentially undisputed. On April 14, 1995, Robert D. White (Debtor) filed his 1994 federal income tax return Form 1040, presumably paying the tax reflected as owed on the return, $1,412.00. On September 18, 1995, the debtor filed his voluntary petition for relief under chapter 13. Notice of the filing of the case was sent to the IRS.
In schedule D, the debtor listed the IRS as a secured creditor with a claim secured by a tax lien on property of the estate to secure income taxes owed for the 1993 tax year. On schedule E, the debtor indicated that he had no priority creditors. At that time, the IRS had not reviewed the 1994 return.
On September 26, 1995, the IRS filed a proof of claim, designated as claim no. 5, asserting a secured claim in the amount of $33,713.82. The IRS claimed taxes due and assessed for the 1993 tax year, including penalties and interest to the date of' the petition.
In December 1995, the IRS determined to and began an audit of the debtor's 1994 1040 return. On October 30, 1996, the IRS notified the debtor that it was proposing adjustments to his 1994 return. The debtor protested the notification. On April 30, 1997, the IRS issued its notice of deficiency, determining tax due for 1994 of $27,185 and a civil fraud penalty of $20,389. The debtor filed two separate petitions in the tax court which were opposed by the IRS on the grounds that the debtor's bankruptcy case deprived the tax court of jurisdiction. Both petitions were dismissed, the second on March 26, 1998.
At no time during the chapter 13 case did the IRS amend its proof of claim or file a new claim for the 1994 income taxes. The IRS admits the failure to file the claim was due to inadvertence. In the court's experience, the IRS generally files claims for any estimated taxes due even if the taxes are not assessed and objects to the confirmation of plans which do not expressly include tax claims.
On January 2, 1996, the debtor filed his first proposed chapter 13 plan. Due to objections from creditors other than the IRS, that plan and subsequent plans were not confirmed. On October 31, 1997, the debtor filed his Second Amended Chapter 13 Plan and properly sent notice to the IRS of the confirmation deadline. The language in the plan and in the subsequent confirmed plan did not change with regard to priority or secured classes.
Eventually, the debtor's Fourth Amended Chapter 13 Plan was confirmed by the court on February 19, 1998. The relevant provision states:
Class 2. Claims entitled to priority pursuant to 11 U.S.C. § 507 . The trustee will pay class 2 claims in full, in deferred payments, unless the holder of a particular class agrees to different treatment. These claims include: Valencia Bell — $1,500.
A notice of confirmation was sent to the IRS on February 23, 1998.
The debtor completed the payments due under the plan and on December 1, 1999, the court entered his discharge. The order provides that "the debtor is discharged from all debts provided for by the plan" with exceptions not relevant here, and "[a]ll creditors are prohibited from attempting to collect any debt that has been discharged in this case."
On June 19, 2000, the IRS assessed the proposed deficiency, including accrued interest, and began collection procedures of the $74,106.45 due. The case was reopened, and this matter followed.
CONCLUSIONS OF LAW
Discharge
The debtor contends that the terms of the confirmed plan encompass the 1994 tax liability of the IRS, the IRS had notice of the terms of the chapter 13 plan, did not object, and therefore, the claim was discharged. The IRS contends that the debt was not provided for by the plan, and therefore, the claim was not discharged.
The issue in this case is whether the debt owed to the IRS for 1994 tax liability was discharged after completion of the confirmed chapter 13 plan. Under § 1327(a), the "provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." The provisions of § 1327(a) give finality effect to a confirmed chapter 13 plan. In re Anderson, 179 F.3d 1253 (10th Cir. 1999).
After a debtor has complied with a binding chapter 13 plan, he is entitled to a discharge. Pursuant to § 1328(a)(1), "after completion by the debtor of all payments under the plan . . . the court shall grant the debtor a discharge of all debts provided for by the plan." Whether the IRS claim was discharged then depends upon whether the claim was "provided for by the plant."
The IRS claim at issue is a priority claim. 11 U.S.C. § 507 (a)(8)(A). A debtor has an obligation to include provisions for payment of priority tax claims known to the debtor. In fact, a plan cannot be confirmed unless it provides "for the full payment, in deferred cash payments of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim." 11 U.S.C. § 1322 (a)(2). The creditor has an obligation also; to establish the amount of its claim by filing a proof of claim. In re Elstien, 238 B.R. 747, 756 (Bankr. N.D. Ill. 1999); In re Sorge, 149 B.R. 197, 201 (Bankr. W.D. Okla, 1993).
The Ninth Circuit Court of Appeals has ruled that the language of § 1328(a)(1) "provided for by the plan" requires only that the plan deal with or refer to the claim. In re Gregory, 705 F.2d 1118, 1122 (9th Cir. 1983). In the Gregory case, an unsecured debt was discharged pursuant to § 1328(a) by a plan provision paying a zero payment on unsecured claims, even though the plan would not have been confirmable if the issue had been raised the discharge. A similar ruling is found in In re Puckett, 193 B.R. 842 (Bankr. N.D. Ill. 1996), where the plan proposed to pay zero to the IRS while the IRS claim exceeded $100,000. The IRS did not object to confirmation or seek to have the confirmed plan modified, and that court held the claim was discharged.
A review of the language contained in the confirmed plan in this case essentially mirrors that of § 1322(a)(2). The plan requires the trustee to pay "claims entitled to priority pursuant to 11 U.S.C. § 507 . . . in full, in deferred payments. . ." The plan expressly lists the claim of Valencia Bell, but the list is not exclusive. In the court's view, Class 2 proposes to pay all priority claims as required. The plan "refers to" the claims and is sufficiently broad to include the IRS claim at issue here.
Had the IRS filed a proof of claim for the 1994 tax liability, the court would have required the debtor to specifically set out the amount of the claim in the plan in order for the trustee to establish feasibility. And had proof of a claim been filed, under the language of the plan the claim would have been paid in full.
The court concludes the confirmed plan in this case referred to and treated all priority claims and thus, all prepetition priority debts were "provided for" under the plan. Consequently, the debtor's liability for the 1994 taxes was discharged after me completed the plan payments.
Sanctions
The debtor seeks his attorney fees and costs incurred in connection with these proceedings as a sanction against the IRS for a violation of the discharge injunction imposed by § 524(a)(2). The bankruptcy court has the power, under § 105, to enforce its orders and to enter civil contempt orders. In re Skinner, 917 F.2d 444, 447 (10th Cir. 1990). This statutorily granted contempt power extends to actions which violate the discharge injunction, In re Costa, 172 B.R. 954, 963 (Bankr. E.D. Cal. 1994), and the use of the contempt power is discretionary. In re Payless Cashways Inc. 254 B.R. 746, 750 (Bankr, W.D. Mo. 2000).
In this case, the debtor is not entirely blameless. As the IRS points out, the debtor initially attempted to litigate the tax liability in the tax court. When the plan was confirmed he knew the IRS was asserting a right to additional 1994 income taxes. He has received the benefit of the discharge of a tax obligation allegedly incurred in part on the basis of a fraudulent return.
Nor has the debtor established damages, except for the fact that attorney fees were incurred to bring this motion. Consequently, the court concludes that sanctions are not appropriate under the facts of this case.
IT IS ORDERED and the court declares that:
1. The debtor's discharge entered in this chapter 13 case on December 1, 1999 discharged the prepetition debt owed to the United States of America and its agency the Internal Revenue Service for tax year 1994 federal income taxes; and
2. The debtor's motion for sanctions against the IRS is denied,