203 B.R. 653 (Bkrtcy.E.D.Tenn. 1996), 96-3126, In re Trans-Lines West, Inc.

Docket Nº:Adv. No. 96-3126.
Citation:203 B.R. 653
Party Name:In re TRANS-LINES WEST, INC. d/b/a AAMCO Transmissions, Debtor. Maurice K. GUINN, Trustee, Plaintiff, v. Donald P. LINES and United States of America, Defendants. Bankruptcy No. 95-30883.
Case Date:December 17, 1996
Court:United States Bankruptcy Courts, Sixth Circuit
 
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203 B.R. 653 (Bkrtcy.E.D.Tenn. 1996)

In re TRANS-LINES WEST, INC. d/b/a AAMCO Transmissions, Debtor.

Maurice K. GUINN, Trustee, Plaintiff,

v.

Donald P. LINES and United States of America, Defendants.

Bankruptcy No. 95-30883.

Adv. No. 96-3126.

United States Bankruptcy Court, E.D. Tennessee.

December 17, 1996

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Gentry, Tipton, Kizer & McLemore, P.C., Maurice K. Guinn, Trustee, Knoxville, TN, for Plaintiff Maurice K. Guinn.

Carl K. Kirkpatrick, United States Attorney, Knoxville, TN, Michael J. Martineau, United States Department of Justice, Tax Division, Washington, DC, for Defendant U.S.

Kite & Jones, Charles W. Kite, Sevierville, TN, for Defendant Donald P. Lines.

MEMORANDUM ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

RICHARD S. STAIR, Jr., Chief Judge.

The Debtor, Trans-Lines West, Inc., a corporation, operated a business known as AAMCO Transmissions located at 8844 Kingston Pike, Knoxville, Tennessee. The Debtor owns the real estate upon which its business was operated. On April 29, 1989, the Debtor, through Internal Revenue Service Form 2553, elected to be treated as a Subchapter S corporation under the Internal Revenue Code. On August 14, 1989, the Internal Revenue Service (IRS) accepted the Debtor's Subchapter S election in a Notice of Acceptance as an S-Corporation. By a Statement dated March 15, 1995, the Debtor elected to revoke its Subchapter S status. The Statement was not signed. By a Statement of Consent also dated March 15, 1995, Defendant Donald P. Lines, the Debtor's sole shareholder, consented to the revocation of the Debtor's Subchapter S status. The Statement of Consent was not signed. On April 17, 1995, the IRS accepted the Debtor's revocation of its Subchapter S status in a Notice of Revocation of Status as an S-Corporation. 1

On April 12, 1995, the Debtor filed a petition under Chapter 11 of the Bankruptcy Code. On February 22, 1996, an Order was entered approving the United States Trustee's appointment of Maurice K. Guinn as Chapter 11 Trustee. Thereafter, on June 3, 1996, the Trustee commenced this adversary proceeding pursuant to 11 U.S.C.A. §§ 544(b) and 548(a) (West 1993). The Trustee's state law claims relied upon in support of his § 544(b) action are grounded upon Tenn.Code Ann. §§ 66-3-305 through 308 (1993). The Trustee's Complaint, as initially filed, seeks to avoid the Debtor's prepetition revocation of its Subchapter S status under the theory that the revocation constitutes a fraudulent transfer or conveyance. 2

The court has before it cross-motions for summary judgment. On October 7, 1996, the IRS filed a motion entitled "Internal Revenue Service's Motion to Dismiss or for Summary Judgment." Due to the novelty and complexity of the issues raised by the parties, the IRS filed a Request for Oral Argument on Internal Revenue Service's Motion

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to Dismiss or for Summary Judgment on October 16, 1996. Pursuant to an October 17, 1996 Order, the court set the matter for oral argument. On October 28, 1996, the Trustee filed a Motion to Amend Complaint and a Plaintiff Trustee's Response to Internal Revenue Service's Motion to Dismiss or for Summary Judgment. The matter came on for oral argument on October 29, 1996, at which time the court, upon agreement of the IRS, granted the Trustee's Motion to Amend Complaint and continued the oral argument on the IRS's motion to give the Trustee an opportunity to file a cross-motion for summary judgment. The Trustee filed his Amended Complaint on October 29, 1996. The Amended Complaint, in addition to its reiteration of the allegations of fraudulent transfer and conveyance contained in the original Complaint, seeks a determination that the prepetition revocation of the Debtor's status as a Subchapter S corporation was fatally defective; that the Debtor never properly revoked its Subchapter S status; and that the Debtor remains a Subchapter S corporation today as a result. On November 8, 1996, the Trustee filed a Motion for Summary Judgment on the issue of whether the Debtor's status as a Subchapter S corporation was effectively revoked. The IRS filed an Opposition to Trustee's Motion for Summary Judgment on November 19, 1996. The foregoing motions and responses are supported by documents and affidavits executed by the Trustee and Michael J. Martineau, trial counsel for the IRS. Oral argument was heard on November 25, 1996.

This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(A), (H), (O) (West 1993).

I

Fed.R.Civ.P. 12(b), made applicable to this adversary proceeding through Fed.R.Bankr.P. 7012(b), dictates that motions to dismiss for failure to state a claim are to be treated as summary judgment motions whenever "matters outside the pleading are presented to and not excluded by the court." However, the court possesses absolute discretion in determining whether it will accept the evidence presented apart from the pleadings. Kulwicki v. Dawson, 969 F.2d 1454, 1462 (3d Cir.1992). In the instant proceeding, the court exercises its discretion to accept the affidavit and exhibits attached to the Internal Revenue Service's Motion to Dismiss or for Summary Judgment. Therefore, the IRS's motion will be treated exclusively as a motion for summary judgment.

Pursuant to Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding through Fed.R.Bankr.P. 7056, summary judgment is available only when a party is entitled to a judgment as a matter of law and when, after consideration of the evidence presented by the pleadings, affidavits, answers to interrogatories, and depositions in a light most favorable to the nonmoving party, there remain no genuine issues of material fact. The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. The factual dispute must be genuine. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir.1989).

II

The court will first address the Trustee's Motion for Summary Judgment which "requests entry of a judgment that the [D]ebtor's S-Corporation status has not been revoked." The Trustee argues that the Debtor's revocation of its Subchapter S status was invalid because it failed to comply with all of the requirements of revocation set forth in Treas.Reg. § 1.1362-6 (1992). Specifically, the Debtor's Statement of revocation and Donald P. Lines's Statement of Consent were not signed. 3 In its Opposition

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to Trustee's Motion for Summary Judgment, the IRS argues that the Trustee lacks standing to challenge the validity of the Debtor's Subchapter S status.

The doctrine of standing is comprised of "several judicially self-imposed limits on the exercise of federal jurisdiction." Allen v. Wright, 468 U.S. 737, 750, 104 S.Ct. 3315, 3324, 82 L.Ed.2d 556 (1984), reh'g denied, 468 U.S. 1250, 105 S.Ct. 51, 82 L.Ed.2d 942 (1984),and reh'g denied, 468 U.S. 1250, 105 S.Ct. 52, 82 L.Ed.2d 942 (1984). One such limitation is the "general prohibition on a litigant's raising another person's legal rights." Id. In the present proceeding, the IRS contends that "[t]he validity of the revocation, as is the validity of all tax filings with the IRS, is a matter solely between the taxpayer and the IRS." (Opp'n to Trustee's Mot. for Summ.J. at 7.) The IRS advanced a similar argument in Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976).

In this Court petitioners have argued that a policy of the IRS to tax or not to tax certain individuals or organizations, whether embodied in a Revenue Ruling or otherwise developed, cannot be challenged by third parties whose own tax liabilities are not affected. Their theory is that the entire history of this country's revenue system, including but not limited to the evolution of the Code, manifests a consistent congressional intent to vest exclusive authority for the administration of the tax laws in the Secretary and his duly authorized delegates, subject to oversight by the appropriate committees of Congress itself. It is argued that allowing third-party suits questioning the tax treatment accorded other taxpayers would transfer determination of general revenue policy away from those to whom Congress has entrusted it and vest it in the federal courts.

Id. at 36, 96 S.Ct. at 1923 (footnote omitted). The Simon Court, however, did "not reach ... the question of whether a third party ever may challenge IRS treatment of another." 4 Id. As a result, courts must perform a case by case inquiry into the standing of the party challenging the tax liability of a third party. See Allen, at 751-52, 104 S.Ct. at 3325. The party seeking the court's jurisdiction bears the burden of alleging facts that clearly demonstrate that he or she is " 'a proper party to invoke judicial resolution of the dispute.' " United States v. Hays, 515 U.S. 737, ----, 115 S.Ct. 2431, 2435, 132 L.Ed.2d 635 (1995) (quoting FW/PBS, Inc. v. City of Dallas, 493 U.S. 215, 231-32, 110 S.Ct. 596, 608, 107 L.Ed.2d 603 (1990) (quoting Warth v. Seldin, 422 U.S. 490, 517, 95 S.Ct. 2197, 2215, 45 L.Ed.2d 343 (1975))).

The doctrine of standing " 'focuses on the party seeking to get his complaint before a federal court and not on the issues he wishes to have adjudicated.' " Valley Forge Christian College v. Ams. United for Separation of Church and State, Inc., 454 U.S. 464, 484, 102 S.Ct. 752, 765, 70 L.Ed.2d 700 (1982) (quoting Flast v. Cohen, 392 U.S. 83, 98, 88 S.Ct. 1942, 1952, 20 L.Ed.2d 947 (1968)); see also Warth, at 498, 95 S.Ct. at 2205 ("[T]he question of standing is whether

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the litigant is entitled to have the court decide the merits of the...

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