Baron v. Comm'r of Internal Revenue

• Decision Date: 21 March 1979
• Docket Number: Docket No. 8229–77.
• Citation: 71 T.C. 1028
• Parties: JOHN H. BARON AND RUBY A. BARON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

71 T.C. 1028

JOHN H. BARON AND RUBY A. BARON, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8229–77.

United States Tax Court

Filed March 21, 1979.

Respondent issued a joint notice of deficiency to John H. Baron and Ruby A. Baron after an involuntary petition in bankruptcy had been filed against John but while the bankruptcy proceeding was still pending. John and Ruby filed a joint petition in this Court and subsequently filed a motion to dismiss for lack of jurisdiction. Held: The Tax Court lacks jurisdiction as to John H. Baron but has jurisdiction with respect to Ruby A. Baron. Petitioners' motion to dismiss for lack of jurisdiction granted as to John H. Baron and denied with respect to Ruby A. Baron. Jay B. Kelly, for the petitioners.

James C. Lanning, for the respondent.

OPINION

DRENNEN, Judge:

This matter is before the Court on petitioners' motion to dismiss for lack of jurisdiction. Respondent objected to the motion and, after a hearing, the parties submitted stipulations of fact and briefs stating their positions.

Petitioners' motion and respondent's objection raise two issues: (1) Whether this Court lacks jurisdiction under section 6871(b), I.R.C. 1954,¹ to redetermine a deficiency and negligence addition to tax for a prebankruptcy year where an involuntary petition in bankruptcy was filed against petitioner John H. Baron, Baron was adjudicated a bankrupt before filing the Tax Court petition, respondent made no assessment against Baron, and respondent did not file a proof of claim in the bankruptcy proceedings; and (2) Whether this Court lacks jurisdiction with respect to Ruby A. Baron, the bankrupt petitioner's wife, who was not involved in the bankruptcy court proceeding, but who filed a joint petition in this Court in response to a joint notice of deficiency issued to John and Ruby.

All of the facts have been stipulated by the parties. The stipulations of fact and attached exhibits are incorporated herein by this reference.

Petitioners' joint Federal income tax return for the taxable year 1970 was filed with the Internal Revenue Service after May 14, 1971, but prior to June 18, 1971. The address on the return was 1820 Shadywood Road, Wayzata, Minn. Petitioners did not sign a consent extending the period of limitations within which the Internal Revenue Service could assess any tax due with respect to 1970.

On July 26, 1972, the District Director of Internal Revenue Service at Saint Paul, Minn., mailed a letter to petitioners notifying them that an examination of their 1970 return showed no change was required in the tax reported and that the return was accepted as filed.

An involuntary petition in bankruptcy was filed against petitioner John H. Baron (hereinafter John) on August 18, 1972. He was adjudicated a bankrupt on December 5, 1972. James H. Levy was appointed by the bankruptcy court as trustee for the estate of John H. Baron. Petitioner Ruby A. Baron (hereinafter Ruby) was not involved in the bankruptcy proceedings.

Respondent has not made an assessment against John for the year 1970 under section 6871(a). The United States was not scheduled as a creditor for taxes owed for the year 1970 on the schedules filed by John in the bankruptcy proceeding. Respondent has not made a claim for taxes for the year 1970 in the bankruptcy proceeding, which is currently pending due to an appeal. A bar date for filing such claims was July 16, 1973.

Sometime on or before April 14, 1977, the internal revenue agent who reexamined the petitioners' return for the taxable year ended December 31, 1970, was aware of the bankruptcy proceedings instituted against John H. Baron, and he noted this information in his report dated April 14, 1977.

The statutory notice of deficiency on which this case is based was mailed to petitioners on May 4, 1977. It was addressed to both John and Ruby at the address given on the return for 1970. It determined that there was unreported income for the year 1970 in the amount of $62,260; and that there was a deficiency in income tax in the amount of $25,677.63 and an addition to tax under section 6653(a) in the amount of $1,283.88. Respondent did not mail a separate notice of deficiency for 1970 to Ruby. Respondent did not mail a notice of deficiency to the trustee in bankruptcy.

John and Ruby Baron filed a timely joint petition for redetermination of the deficiency set forth in the notice of deficiency on July 27, 1977. Respondent filed an answer, affirmatively alleging grounds for defense against petitioners' statute of limitations plea, and petitioners filed a reply.

When the case was called for trial on September 19, 1978, petitioners filed a motion to dismiss for lack of jurisdiction,² stating as grounds therefor: (1) Respondent failed to issue a notice of deficiency pursuant to section 6871(a); (2) respondent failed to issue the notice of deficiency to the proper person; (3) respondent cannot issue a valid notice of deficiency during pendency of the bankruptcy proceeding; and (4) the period of limitations for issuance of a notice of deficiency had expired.

On brief, petitioners emphasize two points: (1) That since John filed a petition in bankruptcy before he filed a petition in this Court, section 6871(b) operates to deny this Court jurisdiction as to John, and (2) that the notice of deficiency, having been issued to John and Ruby jointly, is a nullity as to both John and Ruby, and hence this Court has no jurisdiction over Ruby. We agree with petitioners on the first point, that this Court has no jurisdiction over John, but disagree with petitioners on the second point, concluding that this Court does have jurisdiction over Ruby.

The jurisdiction of this Court is governed by statute. Sec. 7442. In general, the jurisdiction of the Court depends upon the issuance by the Secretary of the Treasury or his delegate of a notice of deficiency and timely filing of a petition. Secs. 6212 and 6213. Rule 13, Tax Court Rules of Practice and Procedure.

Where a taxpayer has been adjudicated a bankrupt, however, section 6871 establishes a different procedure: In that event, section 6871(a) provides that the Secretary of the Treasury or his delegate shall, despite the restrictions imposed by section 6213(a) upon assessments, immediately assess any deficiency, together with all interest, additional amounts, or additions to the tax provided by law in respect of an income, gift, or estate tax. Section 6871(b) in effect limits the jurisdiction of this Court where the taxpayer has been adjudicated a bankrupt. It states:

SEC. 6871. CLAIMS FOR INCOME, ESTATE, AND GIFT TAXES IN BANKRUPTCY AND RECEIVERSHIP PROCEEDINGS.

(b) CLAIM FIELD DESPITE PENDENCY OF TAX COURT PROCEEDINGS.—In the case of a tax imposed by subtitle A or B claims for the deficiency and such interest, additional amounts, and additions to the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Tax Court; but no petition for any such redetermination shall be filed with the Tax Court after the adjudication of bankruptcy, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of the receiver. [Emphasis added.]

Petitioners' position is that section 6871(b) precludes us from taking jurisdiction here.

We have previously considered section 6871(b) under similar circumstances. In Sharpe v. Commissioner, 69 T.C. 19 (1977) (a Court-reviewed opinion), the taxpayer had been adjudicated a bankrupt after filing a voluntary petition in bankruptcy. The Commissioner subsequently assessed a deficiency for Federal income taxes and additions to tax under section 6651(a)(1) and, after filing a proof of claim for the taxes only, sent the taxpayer a notice of deficiency. With respect to Tax Court jurisdiction over the deficiency, we held this Court to be without jurisdiction in accordance with earlier case law: Prather v. Commissioner, 50 T.C. 445 (1968); Izen v. Commissioner, 64 T.C. 919 (1975). With respect to our jurisdiction over the additions to tax, we recognized in Sharpe that King v. Commissioner, 51 T.C. 851 (1969), as well as the portions of our opinions in Prather and Izen on this issue supported a finding of jurisdiction. However, we noted in Sharpe that none of those opinions had considered the effect of section 2(a)(2A) (added in 1966) or 17(c) (added in 1970) of the Bankruptcy Act. After considering these provisions, we found our reasoning as expressed in King, Prather, and Izen no longer persuasive and announced that they would no longer be followed on this point.

In Sharpe, we explained the Court's interpretation of section 6871:

It is our present view that by establishing a different method for assessment and collection of taxes where bankruptcy intervenes, Congress intended that ‘tax’ matters in their entirety be settled by the bankruptcy court under bankruptcy procedures instead of by the Tax Court under the procedures set forth in sections 6212(a) and 6213(a), except where the Tax Court petition antedates the petition in bankruptcy. See Kornberg v. Tomlinson, 341 F.2d 300 (5th Cir. 1965); Abel v. Campbell, 334 F.2d 339 (5th Cir. 1964); Cohen v. Gross, 316 F.2d 521 (3d Cir. 1963). This view is fortified by the plain language of section 2a(2A) of the Bankruptcy Act and a newly established trend in the case law where the vigorous exercise of the bankruptcy court's jurisdiction compels reconsideration of the King [v. Commissioner, 51 T.C. 851 (1969)] rationale. Several courts have held that bankruptcy courts do have jurisdiction, notwithstanding the absence of the filing of a proof of claim, to determine various tax matters in the context of the bankruptcy...