Opinion
Case No. 91-0433-CIV-MARCUS
April 8, 1992
Discharge — Taxes — Seventh Priority Claims. — If a tax claim satisfies any subsection of Section 507(a)(7)(A), the claim is classified as a seventh priority. Here, a tax deficiency that was assessable after the debtor had filed for Chapter 7 relief was a seventh priority claim, and was thus nondischargeable under Section 523(a)(1)(A).
See Sec. 507(a)(7) at ¶ 9032 and Sec. 523(a)(1) at ¶ 9227.
Discharge — Taxes — Penalties. — Penalties
attributable to the debtor's tax deficiencies for two separate tax years were both discharged; one portion because the underlying deficiency was discharged through the Internal Revenue Service's untimely assessment, and the other portion because the "transaction or event" that gave rise to the penalties (here, the debtor's filing of the tax return) occurred more than three years before the debtor had filed for Chapter 7 relief.
See Sec. 523(a)(7) at ¶ 9233.
THIS CAUSE comes before the Court on Fred J. Wines' ("the Appellant" or "the Debtor") Appeal from the United States Bankruptcy Court for The Southern District of Florida. The appeal is taken from a Final Order entered by Chief Judge Sidney M. Weaver on January 14, 1991 and reprinted at 122 B.R. 804 (Bankr. S.D. Fla. 1991). Jurisdiction is vested in this Court pursuant to 28 U.S.C. § 158(a).
The Bankruptcy Court below held that tax deficiencies asserted by the United States ("the Creditor" or "the Appellee") for 1984 and 1985 were not discharged by the Debtor's Chapter 7 bankruptcy discharge, filed November 13, 1990. Both the proceeding below and this appeal are limited to the dischargeability of these tax deficiencies; the issue of the correctness of the amounts claimed by the United States has been reserved until dischargeability is determined. For the reasons explained below, the bankruptcy court's judgment is reversed as to its determination of the dischargeability of the 1984 tax deficiency, and the 1984 deficiency is discharged, both tax and tax penalty. The bankruptcy court is affirmed to the extent it found the 1985 tax non-dischargeable; however, the tax penalty portions of the 1985 tax deficiency are hereby discharged.
I. Standard of Review
We sit as an appellate court in review of the bankruptcy court's order. Bankruptcy Rule 8013 provides:
On appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
The Court of Appeals for the Eleventh Circuit has recently addressed the standard of review applicable to an appeal from the bankruptcy court. In In re Holywell the Eleventh Circuit stated:
We note at the outset that we must affirm the factual findings of the bankruptcy court unless they are clearly erroneous. Birmingham Trust National Bank v. Case, 755 F.2d 1474 (11th Cir. 1985). The test for this court, as well as for the district court, is "not whether a different conclusion from the evidence would be appropriate, but whether there is sufficient evidence in the record to prevent clear error in the trial judge's findings." Highland Village Bank v. Bardwell, 610 F.2d 228, 230 (5th Cir. 1980). Conclusions of law, however, are subject to de novo review. Machinery Rental, Inc. v. Herpel, 622 F.2d 709, 713 (5th Cir. 1980).913 F.2d 873,879(11th Cir. 1990).
The district courts may not casually circumvent the clearly erroneous standard. The Court of Appeals for the Seventh Circuit has written:
Once a [factual] determination is made, the district court in review may only accept such findings or reject them as `clearly erroneous;' the district court may not accept the findings of the bankruptcy court and then go on to make additional findings having the effect of contradicting the conclusions of the bankruptcy court.In re Neis, 723 F.2d 584, 589(7th Cir. 1983)
II. The Bankruptcy Court's Decision
The facts surrounding this case, as stated by the bankruptcy court, are as follows:
On March 2, 1989, the debtor was served with a Notice of Deficiency by the Internal Revenue Service pursuant to section 6212 of the Internal Revenue Code. 26 U.S.C. § 6212 (1990). The notice asserted that the debtor owed the Internal Revenue Service a tax deficiency for the tax year 1984 in the amount of $670,135.00, a deficiency for the tax year 1985 in the amount of $59,476.00, and a deficiency for the tax year 1986 in the amount of $27,509.00. The debtor and his wife had timely filed joint tax returns for each of the years in question and had received refunds.
On May 17, 1990, the debtor and his wife filed a Petition For Redetermination with the United States Tax Court seeking a redetermination as to the alleged deficiencies owed to the creditor. Thereafter, on September 15, 1990, the debtor filed his individual petition under Chapter 7 of the Bankruptcy Code in this Court. The creditor was listed by the debtor as having a disputed priority claim on schedule A-1 to the petition. The filing of the bankruptcy petition stayed the proceedings before the tax court. The debtor then instituted the within adversary proceeding seeking a determination from this Court as to the dischargeability of the tax deficiencies for the years 1984 and 1985.
The Bankruptcy Court focused on Bankruptcy Code section 523(a)(1) which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —
(1) for a tax or a customs duty —
(A) of the kind and for the periods specified in section . . . 507(a)(7) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, if required —
(i) was not filed
(ii) was filed after the date on which such return was last due, under applicable law or under extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax; . . .11 U.S.C. § 523(a)(1). Noting that 523(a)(1)(A) undisputedly governed, the bankruptcy court looked to section 507(a)(7) as directed by section 523(a)(1)(A). Section 507(a)(7), also referred to as the "seventh priority," addresses the priority of unsecured claims of governmental units and provides:
(a) The following expenses and claims have priority in the following order:
. . . .
(7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for —
(a) a tax on or measured by income or gross receipts —
(i) 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 including extensions, after three years before the date of the filing of the petition three years before the date of the filing of the petition;
(ii) assessed within 240 days, plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under the applicable law or by agreement, after, the commencement of the case. . . .11 U.S.C. § 507(a)(7).
The debtor argued before the bankruptcy court that both the 1984 and 1985 deficiencies were dischargeable under sections 507(a)(7)(A)(i) and 523(a)(1)(A). Both tax returns were undisputedly filed before "three years before the date of the filing of the petition three years before the date of the filing of the petition": the debtor's 1984 return was filed by April 15, 1985, the 1985 return was filed by April 15, 1986, and the petition was filed on September 15, 1990. The debtor reasoned that since his situation fell beyond inclusion under 507(a)(7)(A)(i), the debt was not a seventh priority claim and was therefore dischargeable.
The bankruptcy court disagreed with the debtor's interpretation of the statute. The Court found that "507(a)(7) is disjunctive: it classifies an unsecured claim for an unpaid income tax as a seventh priority claim on three alternative grounds. Therefore, an unsecured claim for an unpaid tax of the kind specified in any of the three subsections to section 507(a)(7)(A) is a nondischargeable claim." In re Wines, 122 B.R. 804, 806 (Bankr. S.D. Fla. 1991) (citing In re Wood, 78 B.R. 316, 318 (Bankr. M.D.Fla. 1987)).
The bankruptcy court found that both the 1984 and 1895 taxes were assessable after the commencement of the bankruptcy case and were thus properly classified as seventh priority claims under 507(a)(7)(A)(iii). In its discussion of the dischargeability of the 1984 deficiency the court wrote:
[T]he right of the creditor to make an assessment is determined by looking at the period of limitations for assessments and collections as stated in the Internal Revenue code. Generally, as the debtor argued, where the taxpayer has filed a tax return no assessment may be made for a tax that is owing unless the assessment is made within three years of the filing of the return. 26 U.S.C. § 6501(a) (1990).Id. at 807. The bankruptcy court found that the three year statute of limitations did not govern assessment of the 1984 deficiency, however, because "6501(e) of the Internal Revenue Code authorizes the assessment or the commencement of collection proceedings anytime within the six years following the date the return was filed, where the taxpayer underestimated his income by greater than 25 percent of the return." Id. (citing 26 U.S.C. § 6501(e) (1990)). Because of the extended statute of limitations, the court reasoned, "the creditor had the right to serve the debtor with the Notice of Deficiency with respect to the 1984 taxes." Id.
The bankruptcy court reasoned further that under Section 6213 of the Internal Revenue Code, the tax was still assessable. Under this section, of the code,
Within 90 days . . . after the notice of deficiency authorized in section 6212 is mailed . . . the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided. . ., no assessment of a deficiency . . . shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day . . . period, as may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.26 U.S.C. § 6213(a). Based on this section of the Internal Revenue Code the bankruptcy court reasoned as follows:
Because the debtor and his wife filed the Petition For Redetermination the creditor was prohibited from making an assessment on the 1984 deficiency until the tax court rendered a final decision. In turn, the tax court proceedings were stayed by virtue of the filing of the bankruptcy. Accordingly, the Court finds that the 1984 tax deficiency had not been assessed by the creditor, and by operation of section 6213 of the Internal Revenue Code, the deficiency is assessable after the commencement of the case and is, therefore nondischargeable.Id.
The bankruptcy court also found that the 1985 deficiency qualified as a nondischargeable seventh priority debt under 523(a)(1)(A) and 507(a)(7)(A)(iii). The court held as follows:
In regard to the 1985 tax deficiency, the creditor served the Notice of Deficiency in March of 1989, within three years of the filing of the debtor's tax return. The mailing of the Notice of Deficiency tolled the three year period of limitations for 90 days during which time the creditor was barred from making any further assessment against the debtor. 26 U.S.C. § 6593(a)(1) (1990). Within that 90 day period, in May of 1989, the debtor filed the Petition for Redetermination. Again, the filing of the petition prohibited the creditor from making an assessment on the tax deficiency until the tax court rendered a final decision. 26 U.S.C. § 6213 (1990). Because the tax court has not yet rendered a final decision, the 1985 tax deficiency is assessable after the commencement of the bankruptcy case.In re Wines, 122 B.R. at 807-08.
The debtor's appeal from these determinations presents a vigorous assault on the bankruptcy court's reasoning and fact-finding. Appellant maintains (1) that the bankruptcy court erred in applying a six year statute of limitations for the assessment of the 1984 deficiency; (2) that the bankruptcy court erred in its interpretation of 507(a)(7)(A)(iii), and that the "not assessed, but assessable" language deems non-dischargeable only untimely and fraudulent tax returns under Sections 523(a)(1)(B) and 523(a)(1)(C); and (3) that the bankruptcy court erred in holding the entire tax obligation non-dischargeable, as portions of the sum include non-priority penalties under 26 U.S.C. § 6661 and 6653.
Appellant first argues that the bankruptcy court improperly utilized a six year statute of limitations in determining the assessability of the 1984 tax deficiency. As assessability of a tax debt is a threshold question in determining the application of sections 523 and 507(a)(7)(A)(iii), we consider this question first. The debtor has conceded that the bankruptcy court properly concluded that the 1985 tax deficiency was assessable at the time of the filing of the bankruptcy petition. See Appellant's Brief at 9 ("In this case, the IRS established an exception to the three year limitations period for tax year 1985, but failed to do so for tax year 1984.").
As discussed above, the bankruptcy court found that the 1984 tax deficiency was assessable for six years pursuant to 26 U.S.C. § 6501(e). The Supreme Court visited Section 6501 in Badaracco v. Commissioner, 464 U.S. 386 (1984). Though the Court did not address the issue at hand, Badaracco offers guidance as to the proper construction of statutes of limitation in the tax assessment context. The Court wrote:
Our task here is to determine the proper construction of the statute of limitations Congress has written for tax assessments. This Court long ago pronounced the standard: `Statutes of limitation sought to be applied to bar rights of the Government, must receive strict construction in favor of the Government.' E.I. Dupont de Nemours Co. v. Davis, 264 U.S. 456, 462, 44 S.Ct. 364, 366, 68 L.Ed. 788 (1924). See also Lucas v. Pilloid Lumber Co., 281 U.S. 245, 249, 50 S.Ct. 297, 299, 74 L.Ed. 829 (1930). More recently, Judge Roney, in speaking for the former Fifth Circuit, has observed that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government." Lucia v. United States, 474 F.2d 565, 579 (1973).464 U.S. at 391-392.
Internal Revenue Code section 6501(e), the provision under which the bankruptcy court found the extended, six year statute of limitations, provides as follows:
(e) Substantial Omission of items. — Except as otherwise provided in subsection (c) —
(1) Income taxes. — In the case of any tax imposed by subtitle A —
(A) General rule.-If the taxpayer omits from gross income an amount properly includable therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection may be begun without assessment, at any time within 6 years after the return was filed. . . .
26 U.S.C. § 6501(e)(1)(A) (1990). The Supreme Court has stated that section 6501(e)(1)(A) "provides an extended limitations period for the situation where the taxpayer's return nonfraudulenty omits more than 25% of his gross income. . . ." Badaracco, 464 U.S. 386, 392 (1984).
In the instant case, the appellant contests the bankruptcy court's conclusion that the six year statute of limitations provided by section 6501(e)(1)(A) applies. The bankruptcy court's discussion of the issue is limited to the following:
Generally, as the debtor argued, where the taxpayer has filed a return no assessment may be made for a tax that is owing unless the assessment is made within three years of the filing of the return. 26 U.S.C. § 6501(a) (1990). However, section 6501(e) of the Internal Revenue Code authorizes the assessment or the commencement of collection proceedings anytime within the six years following the date the return was filed, where the taxpayer underestimated his income by greater than 25 percent on the return. 26 U.S.C § 6501(e) (1990). Therefore, the creditor had the right to serve the debtor with the Notice of Deficiency with respect to the 1984 taxes.In re Wines, 122 B.R. at 807. The appellant argues that "[t]here was absolutely no competent evidence presented which would have allowed the Bankruptcy Court to reach such a conclusion". Appellant's Brief at 12.
We note again that the Notice of Deficiency was served on March 2, 1989, more than three years after the return was filed, so that if the six years statute of limitations is not applied, the government's claim must fail, as the generally applicable three year period had passed. See 26 U.S.C. § 6501(a) (1991) ("Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed. . . ."); Badaracco, 464 U.S. at 392 ("Section 6501(a) sets forth the general rule: a 3-year period of limitations on the assessment of a tax.")
It is clear that the Commissioner bears the burden of showing that the six year statute of limitations is applicable. In Armes v. Commissioner, a case binding in this Circuit, the Fifth Circuit stated that "where, as here, the Commissioner seeks to rely on an exception to the normal three year statute of limitations, he bears the burden of proving by a preponderance of the evidence that he is entitled to invoke that exception." 448 F.2d 972, 974 (5th Cir. 1971) (citing, inter alia, Wood v. Commissioner, 245 F.2d 888, 893-95 (5th Cir. 1957)). See Flint v. Commissioner, 62 T.C.M. (CCH) 541, 1991 Tax Ct. Memo LEXIS 438, at * 20-21 (1991) ("Respondent [Commissioner] bears the burden of proof as to whether petitioners omitted from their 1984 Federal income tax return an amount in excess of 25 percent of the amount of gross income stated in the return." (citing Reis v. Commissioner, 1 T.C. 9 (1942), aff'd, 142 F.2d 900 (6th Cir. 1944)); Hilton v. Commissioner, 60 T.C.M. (CCH) 217, 1990 Tax Ct. Memo LEXIS 397, at * 20 (1990) ("In order to satisfy his burden, he [the Commissioner] must show that the taxpayer omitted from gross income an amount in excess of 25 percent of the gross income required to be shown in the return").
The appellee notes that the clearly erroneous standard governs our review of the bankruptcy court's factual determination with regard to the finding of a 25% omission, and argues that "[t]here is ample, if not clear-cut, support" for the bankruptcy court's conclusion that the six year statute of limitations applies. Appellee's Brief at 7. The record evidence supporting the bankruptcy court's determination is (1) the testimony offered by Randi Wines, the debtor's wife, and (2) "the presumptively correct IRS determination" contained in the Notice of Deficiency. Appellee's Brief at 7-8. As the bankruptcy court itself provided no factual basis for its conclusions, we consider the bases suggested by appellee.
Randi Wines was the sole witness in the case presented to Judge Weaver. Appellee claims that Ms. Wines response "I'm sure there would be" to a question "about the existence of a substantial underpayment penalty for the tax years at issue" constitutes an "admission by appellant's wife (and fellow petitioner in the Tax Court) giv[ing] clear and undeniable support to Chief Judge Weaver's finding that there was a substantial understatement of income by the appellant and his wife. . . ." Appellee's Brief at 7 (quoting Transcript, at 12).
The debtor, Fred J. Wines, did not testify because of a stress related heart condition. Transcript of Hearing, November 13, 1990, before the Honorable Sidney M. Weaver [hereinafter "Transcript"], at 6.
Appellant's contention is not persuasive. Ms. Wines in no way admitted a substantial underpayment; even if she had, we fail to see how this would establish that the 25% omission threshold had been met. In fact, Ms. Wines was asked "Do you remember the amount the I.R.S. claims you still owed us?" Transcript at 12. She responded, "It was a large amount, it was — I think the first year was $600,000, in excess thereof." Id. The next question queried "Did that amount include any penalties, say a negligence penalty?" Id. "Penalties and interest." Ms. Wines replied. The examiner then asked, "And also a substantial understatement penalty as well, is that not correct?" Ms. Wines, response, which the appellee offers as an admission of substantial underpayment, was: "Whatever they put in there, I'm sure there would be."
We are hard pressed to understand how from the exchange between Ms. Wines and her examiner, the witness's responses could be fairly construed as an admission lending "clear and undeniable support to Chief Judge Weaver's finding that there was a substantial understatement of income by the appellant and his wife." Appellant's Brief at 7. Ms. Wines, simply put, conceded nothing, save, perhaps, her knowledge that a substantial underpayment penalty may have been listed in the Notice of Deficiency. She did not admit that any such penalty was properly imposed.
The second basis for applying a six year statute of limitations propounded by appellee, the "presumptively correct IRS determination" contained in the Notice of Deficiency, is equally unavailing. While it is true that "Internal Revenue Service assessments are presumptively correct," Thompson v. Adams, 685 F. Supp. 842, 845 (M.D. Fla. 1988) (citing Welch v. Helvering, 290 U.S. 111, 115 (1933)), this presumption does not suffice to meet the Commissioner's burden of proof to invoke the extended statute of limitations under Internal Revenue Code section 6501(e)(1)(A). As stated by the Tax Court in Hilton v. Commissioner, the Commissioner "has the burden of proving the applicability of the six-year period of limitations and may not rely on the `presumption of correctness' that normally attaches to his notice of deficiency." 60 T.C.M. (CCH) 217, 1990 Tax Ct. Memo LEXIS 397, at * 20 (1990) (citing) Reis v. Commissioner, 1 T.C. 9, 12-13 (1942), aff'd, 142 F.2d 900 (6th Cir. 1944); Burbage v. Commissioner, 82 T.C. 546, 553 (1984), aff'd, 774 F.2d 644 (4th Cir. 1985). The operation of the burdens has also been illustrated by the Tax Court in Flint v. Commissioner
We stated in Adler v. Commissioner, 85 T.C. 535, 540(1985) as follows:
The bar of the statute of limitations is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proof with respect thereto. Rules 39, 142(a). Where the party pleading such issue makes a showing that the statutory notice was issued beyond normally applicable statute of limitations, however, such party has established a prima facie case. At that point, the burden of going forward with the evidence shifts to the other side, and the other party has the burden of introducing evidence to show that the bar of the statute is not applicable. Where the other party makes such a showing, the burden of going forward with the evidence then shifts back to the party pleading the statute, to show the alleged exception is invalid or otherwise not applicable. The burden of proof, i.e., the burden of ultimate persuasion, however, never shifts from the party who pleads the bar of statute of limitations. See Stern Bros. Co. v. Burnet, 51 F.2d 1042 (8th Cir. 1931), aff'g, 17 B.T.A. 848 (1929); Concrete Engineering Co. v. Commissioner, 58 F.2d 566 (8th Cir. 1932), aff'g, 19 B.T.A. 212 (1930); Estate of Williams v. Commissioner, T.C. Memo. 1955-321.62 T.C.M. (CCH) 541, 1991 Tax Ct. Memo LEXIS 438, at * 15-16 (1991); see In Re Crist, 85 B.R. 807, 814 (Bankr.N.D. Iowa 1988).
While there is no requirement that a court determining the assessability of taxes explicitly acknowledge the allocation of burdens involved in determining the statute of limitations, see Burbage, 774 F.2d at 645, the bankruptcy court's failure to do so is telling in this instance. The court invoked the six year statute of limitations sua sponte and was not briefed by either side as to the statute of limitations issue. Moreover, the court in its Order offered no factual basis for its finding that Internal Revenue Code section 6501(e)(1) applied.
Given the dearth of evidence that a 25% omission has been committed, we are constrained to hold that the finding of the bankruptcy court as to the assessability of the 1984 deficiency is clearly erroneous. The taxpayer made out a prima facie case for invoking the defense of statute of limitations, see Flint, supra, and the Commissioner has failed to prove that the taxpayers omitted in excess of 25% of gross includable income from their return. Accordingly, we hold that the proper statute of limitations was three years, that the 1984 taxes were not assessable after the commencement of the case, and, therefore, are discharged.
The return was jointly filed by the debtor and his wife.
Second, Appellant argues that the 1985 tax debts allegedly owed was discharged pursuant to the July 20, 1990 discharge, and that the bankruptcy court improperly construed section 523(a)(1)(A) and 507(a)(7)(A)(iii) in denying the dischargeability of the 1984 and 1985 deficiencies alleged by the Internal Revenue Service. Section 523(a)(1)(A) makes nondischargeable taxes "of the kind and for the periods specified in section . . . 507(a)(7). . . ." 11 U.S.C. § 523(a)(1)(A). Section 507(iii), in turn, provides a seventh priority claim for taxes (iii) "other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under the applicable law or by agreement, after, the commencement of the case. . . ." 11 U.S.C. § 507(a)(7)(A)(iii). Section 523(a)(1)(B) and 523(a)(1)(C) deny discharge of tax debts with respect to which no return was filed, a return was filed late and after the date two years before the petition was filed, or a fraudulent return were filed.
Appellant maintains that proper interpretation of section 507(a)(7)(A)(iii) requires reading the phrase "not assessed before, but assessable" as modifying the clause immediately preceding it, "other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title". Appellant argues that such construction is mandated by In re Doss, 42 B.R. 749 (Bankr. E.D.Ark. 1984). Moreover, Appellant argues that according to the Doss interpretation, assessability of a tax is irrelevant when considering the dischargeability of a timely, non-fraudulent tax return.
In In re Doss the Debtors filed their income tax return for taxable years 1976, 1977 and 1978 after the last date they were due, but not "after two years before the date of the filing of the petition." 11 U.S.C. § 523(a)(1)(B)(ii). Accordingly the tax debts were not deemed nondischargeable by 523(a)(1)(B). The United States maintained that the tax debt was properly classified as a nondischargeable priority debt under section 507(a)(6)(A)(iii), now 507(a)(7)(A)(iii) and was thus nondischargeable under section 523(a)(1)(A). The debtors argued, in essence, that the United States position attempted to overrule the two year period provided in section 523(a)(1)(B)(ii) by utilizing the three year statute of limitations for assessment provided by the Internal Revenue Code. See 26 U.S.C. § 6501(a). The court restated the United States' position as follows:
The Bankruptcy Amendments and Federal Judgeship Act of 1984. Pub.L. No. 98-353 at § 350, added a new category of priority claims to Section 507(a) and resulted in the renumbering of 507(a)(6) to 507(a)(7).
The [United States] also asserts that the unassessed taxes for years 1976, 1977 and 1978 fall into the third category of priority tax claims pursuant to Section 507(a)(6)(A)(iii) [now section 507(a)(7)(A)(iii)]; that these taxes which were not assessed before commencement of the bankruptcy proceeding, were assessable after that time. As their authority for this ability to assess these taxes and in support of its argument defendant cites the Internal Revenue Code of 1954 (26 U.S.C.) Section 6501(a), which provides that the IRS must assess these taxes within three (3) years after the return was filed. The [United States] reasons that since the debtors filed these returns on November 30, 1979 or December 4, 1979 . . . the statute of limitations on assessment for those years was open when the bankruptcy petition was filed July 7, 1982.In Re Doss, 42 B.R. at 753.
The court characterized the United States' position as a "simplified analysis of § 507(a)(6)(A)(iii)," id. at 753, and found that the government had "conveniently, but inaccurately, paraphrased and given its own interpretation of the section. . . ." Id. at 754. The court held:
It is this court's interpretation of that provision that the clauses following the first comma modify and relate to the first clause. In this court's opinion this is the only interpretation which would allow a court to read together, and give effect to, all provisions of the Code, which is the intent of Congress when drafting a statute. Reiter v. Sonotone Corp., 442 U.S. 330, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979). To do otherwise would, as the debtors contend, render ineffective Section 523(a)(1)(B)(ii) or make it meaningless in a fact situation such as the one presented here.Id. at 754.
We are not bound by In re Doss; we are required, however, to consider it carefully. We note initially that Doss is factually distinguishable from the case before this court. As discussed supra, Doss held that when a tax with respect to which a return was not timely filed is not nondischargeable under the late filing provision of 523(a)(1)(B), the creditor-government may not rely on 507(a)(7)(A)(iii) and 523(a)(1)(A) to render the claim nondischargeable. In the instant case, the returns were timely filed, and section 523(a)(1)(B) was not implicated. As several other courts have noted, the holding in Doss does not bear on a tax claim with respect to which a tax return was timely filed. See, e.g., In re Treister, 52 B.R. 735, 738 n. 2 (Bankr. S.D.N.Y. 1985) ("The debtor's reliance on In re Doss . . . is misplaced since there the tax returns were not timely filed); In re Longley 66 B.R. 237, 241 (Bankr. N.D. Ohio 1986) (distinguishing Doss because debtors in Longley did not file a late tax return); In re Edwards, 74 B.R. 661, 664 (Bankr. N.D. Ohio 1987) (stating that "the Doss decision is distinguishable since the tax claim at issue arose from an untimely filed tax return; the tax return in the instant case was timely filed"); In re Holden, No. 90-01314-13, 1991 Bankr. LEXIS 187, at *3 (Bankr. D. Idaho Feb. 4, 1991) ("The Doss case is dissimilar to the instant case since the taxes at issue do not meet the requirements for Section 523(a)(1)(B)(ii) and thus are not contained in the exclusion contained in Section 507(a)(7)(A)(iii)); see also In re Etheridge, 91 B.R. 842, 845 (Bankr. C.D.Ill. 1988), aff'd sub nom. Etheridge v. Illinois, 127 B.R. 421 (C.D. Ill. 1989) ("In the case before this Court, although Section 523(a)(1)(B)(ii) is involved, Section 507(a)(7)(A)(iii) is not and this court does not believe that the statutory interpretation of Doss can be extended to this case).
Doss nonetheless raises questions about the proper construction of section 507(a)(7)(A)(iii), questions echoed by the debtors appeal. Although the Doss court purports to ground its holding largely in its analysis of 507(a)(1)(A)(iii), its discussion of this subsection and the other provisions of section 507 is limited. Moreover, the court's conclusions as to the interpretation of 507(a)(1)(A)(iii) are based largely on the perceived conflict between this subsection and 523(a)(1)(B)(ii) — the court did not consider the implications of its construction for section 507(a)(7)(A) in its entirety.
Section 507(a)(7)(A) provides:
(a) The following expenses and claims have priority in the following order:
. . . .
(7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for —
(a) a tax on or measured by income or gross receipts —
(i) 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, including extensions, after three years before the date of the filing of the petition three years before the date of the filing of the petition;
(ii) assessed within 240 days, plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under the applicable law or by agreement, after, the commencement of the case. . . .
11 U.S.C. § 507(a)(7)(A). The Doss court's sparse commentary opined that "the clauses following the first comma" of subsection (iii), (that is, "not assessed before, but assessable, under the applicable law or by agreement, after the commencement of the case"), "modify and relate to the first clause" (that is, "other than a tax of a kind specified in section 523(a)(1)").
To say that the latter clauses of subsection (iii) modify the initial clause neither resolves the interpretation of section 507(a)(7)(A) nor justifies the result determined by the Doss court, for if Doss is correct that the latter modifies the former, the scope of the seventh priority is actually expanded.
Section 507(a)(7)(A) is written in the disjunctive — to the extent a tax claim satisfies either subsection (i), (ii) or (iii), it is classified as seventh priority. See 11 U.S.C. § 102(5); In re Easton, 59 B.R. 714, 716-17 (Bankr. C.D. Ill. 1986). If the second portion of 507(a)(7)(A)(iii) ("not assessed before, but assessable. . .") modifies the first ("other than a tax . . . this title"), then the exclusion from seventh priority status afforded 523(a)(1)(B) and 523(a)(1)(C) taxes is limited to those 523(a)(1)(B) and 523(a)(1)(C) claims which are assessable after the commencement of the bankruptcy case. In other words, under the Doss court's interpretation as stated, any allowed unsecured tax claim, other than a claim that satisfied 523(a)(1)(B) or 523(a)(1)(C) and was also assessable after the commencement of the case, would be a seventh priority claim.
The Doss court's ruling, of course, did not manifest an expansion of the seventh priority. If anything, it carved out an exception for latefiled claims that are not made non-dischargeable by 523(a)(1)(B). This aspect of Doss has been noted by other courts considering the case:
The Doss court held that section 507(a)(6)(A) [now 507(a)(7)(A)] contained its own exclusions; namely taxes of a kind specified in Section 523(a)(1)(B), and that merely because a tax was still `assessable' as of the date of the filing of the Title 11 petition did not mean that a tax excluded from the nondischargeability provision of Section 523(a)(1)(B)(ii) was, nonetheless, nondischargeable under Section 507(a)(6)(A)(iii).In re Longley, 66 B.R. 237, 241 (Bankr. N.D. Ohio 1986). See In re Crist, 85 B.R. 807, 812 (Bankr. N.D. Iowa 1988) (quoting Longley). In In Re Crist another bankruptcy court considered the rationale and holding of Doss, and Longley's discussion of Doss, and wrote:
The better interpretation of section 507(a)(7)(A)(iii) is that sections 523(a)(1)(B) and 523(a)(1)(C) are exceptions to subdivision (iii) only. If the exceptions do not apply and the tax is still assessable, the tax would be entitled to priority under section 507(a)(7)(A)(iii). [citations omitted] Further, if a tax met one of the exceptions, it would be nondischargeable but it would not be entitled to priority under section 507(a)(6) Cooper [v. IRS], 48 B.R. at 421 n. 2. `The two categories of tax claims, nondischargeable priority claims and nondischargeable claims, are not mutually exclusive."85 B.R. at 812. As section 523(a)(1)(B) is not implicated in the present case, we need not rule as to the propriety of this aspect of Doss. We are not the first court to question the interpretation of the statute offered by Doss. Chief Judge Weaver, whose decision we address in the instant case, had previously questioned the wisdom of the case. In In re Torrente he wrote: "[T]his Court is not legally bound to follow the Doss decision and respectfully declines to adhere to the construction of the Bankruptcy Code set forth therein. Rather, this Court believes that the proper method of interpreting § 507 and § 523 of the Bankruptcy Code is to rely on the plain meaning of the statute." 75 B.R. 193, 195 n. 2 (Bankr. S.D.Fla. 1987).
Based on the clear meaning of the statute, and the foregoing discussion of the alternative suggested by Doss, we hold that the 1985 tax deficiency, undisputedly assessable after the commencement of the case, is a seventh priority claim under section 507(a)(7)(A)(iii), and is therefore non-dischargeable pursuant to section 523(a)(1)(A).
Finally, Appellant argues that the Bankruptcy court erred in failing to discharge the tax penalty aspects of the 1984 and 1985 deficiencies. In re Burns, 887 F.2d 1541 (11th Cir. 1989), Appellant maintains, mandates the discharge of penalties assessed by the Commissioner. The Commissioner responds that "the applicability and controlling nature of the Burns decision are so clear as to imply that the applicability of the decision was implicit in the lower court's findings," and argues that the bankruptcy court was "simply addressing [its] opinion to the tax deficiency and interest portions of appellee's claim." Appellee's Brief at 12. As it is unclear to the parties and this Court whether the bankruptcy court reserved on the issue or implicitly ruled, we address the issue here to avoid any confusion on remand and in the interest of judicial economy.
Section 523(a)(7) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt —
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty —
(A) relating to a tax of a kind not specified by paragraph 1 of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;
11 U.S.C. § 523(a)(7). The Court of Appeals for the Eleventh Circuit closely examined this section in In re Burns and concluded as follows:
While the language of this subsection frames nondischargeable tax penalties as an exception to an exception to an exception, once the triple negative is taken into account the meaning of the provision gains clarity. A tax penalty is discharged if the tax to which it relates is discharged (in the precise terms of the statute, not nondischargeable) or if the transaction or event giving rise to the penalty occurred more than three years prior to the filing of the bankruptcy petition. Since the statute uses the disjunctive, a tax penalty that does not qualify for discharge under one of the two aforementioned circumstances may still qualify under the other.887 F.2d at 1544. Having held that the asserted 1984 tax deficiency was discharged, see supra, we hold that the penalty portion attributable to the 1984 deficiency is likewise discharged. And though the 1985 tax deficiency was nondischargeable because the tax was still assessable, the "transaction or event" giving rise to the claimed penalties, the filing of the tax return occurred more than three years prior to the filing of the bankruptcy petition.
The Commissioner asserted penalties under Internal Revenue Code section 6661 for substantial understatement of liability, and section 6653(a)(1) for underpayment due to negligence.
The tax was still assessable, despite the passage of three years, because the mailing of the Notice of Deficiency tolled the three year period of limitations for 90 days, and during the extra period the debtor filed his petition for redetermination with the tax court, which never ruled on the petition because of the subsequent filing of the bankruptcy petition. See In re Wines, 122 B.R. at 808.
Accordingly, tax penalties claimed by the Commissioner arising out of the returns for the 1984 and 1985 tax years are hereby discharged.
In summary, we hold that the 1984 claim by the Commissioner is DISCHARGED as to both taxes and penalties asserted and the 1985 tax deficiency is DISCHARGED only as to the tax penalty portion. As the bankruptcy court reserved on the question of the correctness of the amounts claimed, see In re Wines, 122 B.R. at 806, this Cause is REMANDED for further proceedings in light of this Order.
Appellant's Motion to Strike is DENIED.