Carlson, Matter of

• Decision Date: 02 December 1997
• Docket Number: No. 96-2959,96-2959
• Citation: 126 F.3d 915
• Parties: -6558, 97-2 USTC P 50,702, Bankr. L. Rep. P 77,508 In the Matter of Herbert P. CARLSON and Margaret P. Carlson, Debtors. Herbert P. CARLSON and Margaret P. Carlson, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 915

126 F.3d 915

80 A.F.T.R.2d 97-6558, 97-2 USTC P 50,702,

Bankr. L. Rep. P 77,508

In the Matter of Herbert P. CARLSON and Margaret P. Carlson,

Debtors.

Herbert P. CARLSON and Margaret P. Carlson, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 96-2959.

United States Court of Appeals, Seventh Circuit.

Argued May 27, 1997.

Decided Sept. 23, 1997.

Rehearing and Suggestion for Rehearing En Banc Denied Dec. 2, 1997.

Bruce R. Ellisen (argued), Carol A. Barthel, Thomas V. Linguanti, Department of Justice, Tax Division, Appellate Section, Washington, DC, Joel R. Nathan, Office of the United States Attorney, Civil Division, Appellate Section, Chicago, IL, Deborah Butler, Internal Revenue Service, Dallas, TX, for Appellee.

Herbert P. Carlson (argued), Iversen, Carlson & Associates, Chicago, IL, for Debtors-Plaintiffs-Appellants.

Before ROVNER, DIANE P. WOOD, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

Herbert Carlson, a lawyer with his own office in downtown Chicago, reported adjusted gross income of $765,433 on his federal tax returns for 1990-92. His taxable income for the three years was reported to be $493,424 with a tax due of $153,824. But Carlson didn't pony up with even a red cent, so the IRS got on his tail, adding interest and penalties to his tax tab. Now, on this appeal from the district court (which affirmed a decision of the bankruptcy court), he warns us that there will be "a taxpayers' revolt coming" if the IRS is allowed to run "roughshod" over people like him. Although that may be a bit melodramatic, we can only hope he's wrong, for we conclude that he must lose his appeal.

Carlson and his wife Margaret filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code in February of 1994. The IRS filed a proof of claim for the unpaid taxes plus penalties and interest. This appeal stems from the allowance, over the Carlsons' objections, of the majority of the IRS' Second Amended Proof of Claim.

Margaret Carlson is not employed. But Herbert, as we noted, made a fair amount of money practicing law in downtown Chicago. And they lived in a home commensurate with Mr. Carlson's income: a $1 million condominium on North Lake Shore Drive (ironically, for a tax case, the address is 1040) in Chicago. The property, subject to a $425,000 mortgage, is held in an Illinois land trust and titled in the name of the trustee. Due to the Carlsons' continued failure to pay up, the IRS filed tax lien notices against the Lake Shore property on December 16, 1992, December 13, 1993, and February 9, 1994. On February 9, 1994, the IRS also seized the Carlsons' residence, although they continued to reside there because the property was never sold. A federal tax lien duplicating the February 9, 1994, notice was filed by the IRS on April 29, 1994, but it was released 7 months later in November.

Unbeknownst to the IRS, the Carlsons also owned a house in LaPorte County, Indiana, valued at $125,000. Two days after the IRS seized the Lake Shore Drive condo the Carlsons transferred title of the Indiana property to their son Peter for zero consideration; the warranty deed was recorded on February 15, 1994. A little more than a week later the Carlsons filed their bankruptcy petition. The IRS then filed its claim.

Meanwhile, the Carlsons also failed to pay all of the social security and Medicare taxes (FICA taxes) and federal unemployment taxes (FUTA taxes) due in connection with people who worked at Mr. Carlson's law office. In February 1995 the IRS notified Mr. Carlson that his 1993 and 1994 returns regarding FICA and FUTA taxes were selected for audit. In the bankruptcy court the IRS amended its proof of claim twice, adding unsecured priority claims stemming from unpaid FICA and FUTA taxes for 1992 and 1993 and unsecured general claims for related interest and penalties.

According to Mr. Carlson, the sole reason he and his wife did not pay their 1990-1992 tax bills was the financial and mental strain caused by the medical condition of their youngest son, who apparently is a manic depressive schizophrenic.

The Carlsons eventually paid their tax bills for the 3 years in question. They refused, however, to pay the accrued interest and penalties and the FICA and FUTA assessments. On December 5, 1995, the bankruptcy court held that the IRS' secured claim for interest and penalties was valid and that, with some exceptions relating to attorneys at Mr. Carlson's firm, the FICA and FUTA tax claims were valid as well. On appeal by the Carlsons, the district court affirmed the bankruptcy court's decision in all respects. The Carlsons, with Mr. Carlson himself at the wheel, appeal that decision. Having reviewed the bankruptcy court's findings of fact for clear error and the conclusions of law, by the district court, de novo, In re Love, 957 F.2d 1350, 1354 (7th Cir.1992); Fed. R. Bankr.P. 8013, we affirm. ¹

Pursuant to 26 U.S.C. § 6601(a), the IRS assessed interest on the Carlsons' unpaid tax liabilities. Section 6601(a) states

[i]f any amount of tax imposed by this title ... is not paid on or before the last date prescribed for payment, interest on such amount ... shall be paid for the period from such last date to the date paid.

The Carlsons argue that despite the mandatory language of § 6601(a) the bankruptcy court had the power, pursuant to 11 U.S.C. §§ 105(a) and 505(a)(1), to abate the interest. Section 105(a) gives the bankruptcy court the authority to issue any order necessary to carry out the provisions of the Bankruptcy Code, and § 505(a)(1) provides that

the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

The Carlsons contend that the bankruptcy court committed an error of law when it held it had no equitable power to override the "addition to tax" imposed by § 6601(a).

Unfortunately for the Carlsons, the bankruptcy court was correct. Section 505(a) gave the bankruptcy court the power to determine "the amount or legality" of the interest assessment. And the Carlsons never asserted that either § 6601(a) itself or its application to their situation was illegal; they only say it's unfair. They also never argued that the IRS miscalculated the amount of interest due. Section 505(a)(1), therefore, has no application to a situation of this sort. In regard to § 105(a), although a bankruptcy court is a court of equity, it cannot use its equitable power to circumvent the law. See INS v. Pangilinan, 486 U.S. 875, 883, 108 S.Ct. 2210, 2215-16, 100 L.Ed.2d 882 (1988) ("Courts of equity can no more disregard statutory and constitutional requirements and provisions than can courts of law.") (quoting Hedges v. Dixon County, 150 U.S. 182, 192, 14 S.Ct. 71, 74-75, 37 L.Ed. 1044 (1893)). Section 6601(a) states that when taxes are late, interest "shall be paid"; the Carlsons' interest assessments were therefore mandatory and proper, accord Johnson v. United States, 602 F.2d 734, 738-39 (6th Cir.1979), and the bankruptcy court would have been wrong to determine otherwise. Its equitable powers do not allow it to override the plain command of § 6601(a). Cf. Paul Revere Life Ins. Co. v. Brock, 28 F.3d 551, 554 (6th Cir.1994).

The Carlsons add that the bankruptcy court should have invoked the "discretionary exception" of 26 U.S.C. § 6404(e)(1), which allows the Secretary of the Treasury, at his discretion, to abate interest attributable to errors or delays of IRS officers or employees. According to the Carlsons, the IRS is to blame for their failure to pay taxes because its duplicate lien, which took almost 7 months to release, prevented them from obtaining refinancing on their residence. Besides the fact that the Carlsons neither approached the IRS (as the Secretary's delegate) seeking relief under § 6404(e)(1) nor presented this argument in the bankruptcy court nor showed how they were prejudiced by the April 29, 1994 filing (since it simply duplicated the prior lien), such an abatement by the Secretary is within his sole authority, and as such it is beyond the scope of judicial review. Argabright v. United States, 35 F.3d 472, 476 (9th Cir.1994); Bax v. Commissioner, 13 F.3d 54, 58 (2nd Cir.1993); Selman v. United States, 941 F.2d 1060, 1064-65 (10th Cir.1991); Horton Homes, Inc. v. United States, 936 F.2d 548, 554 (11th Cir.1991); see P.L. 104-168, Title III § 301(b), 110 Stat. 1457, codified at 26 U.S.C. § 6404(g) (requests for abatement made after July 30, 1996, are reviewable by the Tax Court).

We move next to the penalties assessed against the Carlsons pursuant to 26 U.S.C. §§ 6651(a)(2) and 6654(a). The Carlsons advance six theories in their attempt to invalidate the penalties. None of the six, however, are winners.

The Carlsons' most elaborate argument zeros in on a statutorily permitted excuse for not paying up. Penalties are assessed by the IRS when a taxpayer fails to pay income taxes on time "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." 26 U.S.C. § 6651(a)(2). Unless both reasonable cause and a lack of willful neglect are established, imposition of these penalties is mandatory. United States v. Boyle, 469 U.S. 241, 245, 105 S.Ct. 687, 689-90, 83 L.Ed.2d 622 (1985). Here, it's undisputed that "willful neglect" is not at issue.

In regard to failure to pay estimates on time, penalties are assessed except "to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience." 26 U.S.C. § 6654(e)(3)(A). Although a showing of "reasonable cause" is not often accepted as an excuse for a § 6654(a) penalty, see Lansdown v. Commissioner, 73 F.3d 373 (tabl...