Bradford v. U.S. Dep't of the Treasury—internal Revenue Serv. (In re Bradford), Case No. 14–11805–AEC

CourtUnited States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Georgia
Writing for the CourtAustin E. Carter, United States Bankruptcy Judge
Citation534 B.R. 839
PartiesIn re: Charles Clarence Bradford and Jennifer Lynn Bradford, Debtors. Charles Clarence Bradford and Jennifer Lynn Bradford, Movants, v. United States Department of the Treasury—Internal Revenue Service, Respondent.
Decision Date19 July 2015
Docket NumberCase No. 14–11805–AEC

534 B.R. 839

In re: Charles Clarence Bradford and Jennifer Lynn Bradford, Debtors.

Charles Clarence Bradford and Jennifer Lynn Bradford, Movants
v.
United States Department of the Treasury—Internal Revenue Service, Respondent.

Case No. 14–11805–AEC

United States Bankruptcy Court, M.D. Georgia, Albany Division.

Signed July 19, 2015
Entered July 20, 2015


534 B.R. 841

For Debtors: Margaret R. Smith, 305 S. West Street, Bainbridge, Georgia 39819

For Respondent: Bruce T. Russell, U.S. Department of Justice, Ben Franklin Station, P.O. Box 14198, Washington, D.C. 20044, Barbara G. Parker, Assistant United States Attorney, Middle District of Georgia, P.O. Box 1702, Macon, Georgia 31202

MEMORANDUM OPINION

Austin E. Carter, United States Bankruptcy Judge

This contested matter comes before the Court on the Debtors' objection to a claim filed by the Department of the Treasury—Internal Revenue Service (the “IRS”). The Debtors objected to the priority asserted by the IRS regarding a portion of its claim, to which objection the United States of America, on behalf of the IRS, responded. The Court held a hearing on this matter April 14, 2015; the aforementioned parties appeared at the hearing and argued for their respective positions.

Proceedings regarding the allowance or disallowance of claims are core proceedings under 28 U.S.C. § 157(b)(2)(B). The Court states its findings of fact and conclusions of law separately pursuant to Federal Rule of Civil Procedure 52, made applicable to this contested matter by

534 B.R. 842

Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7052 via Bankruptcy Rule 9014.

Findings of Fact

The parties stipulated to the following facts, which the Court adopts as its findings. The IRS timely filed its proof of claim in this Chapter 13 case for unpaid income taxes and associated charges. The proof of claim, as amended, asserts priority status as to $36,385.00 owed pursuant to I.R.C. § 72(t)1 due to the early withdrawal by one of the Debtors from an Individual Retirement Account (“IRA”) (such amount referred to hereinafter as the “Exaction”). The IRS asserts that the Exaction is entitled to priority pursuant to § 507(a)(8) of the Bankruptcy Code,2 either as an income tax (§ 507(a)(8)(A) ) or, alternatively, as a penalty compensating the government for actual pecuniary loss (§ 507(a)(8)(G) ). The Debtors contend that the Exaction is a penalty not in compensation for actual pecuniary loss, and thus not entitled to priority under § 507.

Conclusions of Law

I. Statutory Framework.

Section 502 is the foundation for determining whether a claim is allowed in a bankruptcy case. According to § 502, “[a] claim ..., proof of which is filed under section 501 ..., is deemed allowed, unless a party in interest ... objects,” and “if such objection to a claim is made, the court ... shall allow such claim in such amount, except to the extent that” one of the nine specific disallowance provisions in § 502(b) applies. 11 U.S.C. § 502(a), (b). Section 502(b)(1) provides for the disallowance of any claim to the extent that “such claim is unenforceable against the debtor and property of the debtor, under ... applicable law ...” Id. § 502(b)(1).

Once a party in interest raises an objection pursuant to § 502(b)(1), the burden of proof is determined by applicable law. In re Crutchfield, 492 B.R. 60, 69 (Bankr.M.D.Ga.2013) (citing Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 21, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ). Here, § 507, which governs priorities of claims in bankruptcy cases, is the applicable law;3 accordingly, the burden of proof falls on the IRS. See In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 1009, 1015 (Bankr.S.D.Fla.1991) (collecting burden of proof cases in relation to administrative expense priority).

In relevant part, § 507(a) states:

(a) The following expenses and claims have priority in the following order:
...
(8) Eighth, 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 for a taxable year ...;
...; or
(G) a penalty related to a claim of a kind specified in this paragraph and in
534 B.R. 843
compensation for actual pecuniary loss.

11 U.S.C. § 507(a). Priorities are narrowly construed to support the Bankruptcy Code's objective of equal distribution to similarly situated creditors: “Every claim granted priority status reduces the funds available to general unsecured creditors and may diminish the recovery of other claimants qualifying for equal or lesser priorities.” Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006).4 “[P]referential treatment of a class of creditors is in order only when clearly authorized by Congress.” Id. at 655, 126 S.Ct. 2105. “The theme of the Bankruptcy Act is ‘equality of distribution’, and if one claimant is to be preferred over others, the purpose should be clear from the statute.” Nathanson v. NLRB, 344 U.S. 25, 29, 73 S.Ct. 80, 97 L.Ed. 23 (1952) (citations omitted). Among other reasons, the determination of priority status for claims is important in Chapter 13 cases because a debtor's plan must provide for the payment in full of allowed priority claims (unless the holder of the claim agrees to a different treatment). 11 U.S.C. § 1322(a)(2).

The IRS argues that the Exaction is a “tax on or measured by income or gross receipts for a taxable year” under § 507(a)(8)(A) ; in the alternative, it claims that the Exaction is a penalty in compensation of actual pecuniary loss under § 507(a)(8)(G). Each of these theories supports the IRS's position that the Exaction is entitled to priority status. The parties agree that if the Exaction does not fit into a subcategory of § 507(a)(8), it is not entitled to priority treatment under the Debtors' Plan.

I.R.C. § 72(t)(1) includes in a taxpayer's annual income tax an amount equal to 10% of any taxable distribution from an IRA, unless a listed exception applies (such additional 10% tax hereinafter referred to as the “I.R.C. § 72(t) Exaction”). 26 U.S.C. § 72(t)(l). The most prominent exception in I.R.C. § 72(t) excepts distributions made on or after the taxpayer reaches 59½ years of age, id. § 72(t)(2)(A)(i) ; all other such distributions are often called “early” or “premature” distributions (or withdrawals).5 In addition to the taxpayer-age exception, I.R.C. § 72(t) has exceptions for distributions made after a taxpayer's death or disability, to pay for a taxpayer's medical expenses, to help pay for a taxpayer's first home, and to satisfy a state order of domestic support or property settlement, among others. See id. § 72(t)(2).

II. Case Law.

Although the Tax Code labels the I.R.C. § 72(t) Exaction a “tax” which seemingly falls within the ambit of

534 B.R. 844

§ 507(a)(8)(A) (as it is “on or measured by income or gross receipts for a taxable year”), the parties agree that this Court must look beyond statutory labels. The parties are correct on this point; in United States v. Reorganized CF & I Fabricators of Utah, Inc., the Supreme Court definitively settled this question. See 518 U.S. 213, 224, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996) ( “In sum, we conclude that the 1978 Act reveals no congressional intent to reject generally the interpretive principle that characterizations in the Internal Revenue Code are not dispositive in the bankruptcy context, and no specific provision that would relieve us from making a functional examination of [the exaction in question].”).6

Here, however, the parties' agreement ends. The Debtors urge the Court to follow In re Cassidy, in which the United States Court of Appeals for the Tenth Circuit rejected contentions that the I.R.C. § 72(t) Exaction was entitled to § 507(a)(8) priority either as an income tax or a penalty in compensation for actual pecuniary loss, holding instead that it was a non-pecuniary-loss penalty.7 983 F.2d 161, 162–64 (10th Cir.1992). The Debtors also cite in In re Cespedes, in which the Bankruptcy Court for the Eastern District of North Carolina, on nearly identical facts, adopted Cassidy 's reasoning as consistent with the Supreme Court's ruling in CF & I. 393 B.R. 403 (Bankr.E.D.N.C.2008).8 , 9

534 B.R. 845

Each of these cases held that the I.R.C. § 72(t) Exaction was not a tax and was not a penalty in compensation of actual pecuniary loss, and thus not entitled to priority. In re Cassidy, 983 F.2d at 164 ; In re Cespedes, 393 B.R. at 408. The court in each case considered it necessary or helpful to examine the purpose underlying § 507(a)(8) ; in doing so, each court found that the I.R.C. § 72(t) Exaction contravened that purpose. In re Cassidy, 983 F.2d at 164 (“We ......

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11 practice notes
  • Internal Revenue Serv. v. Juntoff (In re Juntoff), s. 21-8011
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit
    • March 21, 2022
    ...our plain duty is to adopt that which will save the Act.")); see also Bradford v. United States, Dep't of the Treasury (In re Bradford ), 534 B.R. 839, 854 (Bankr. M.D. Ga. 2015) ("[t]he question before the [ Sebelius ] Court was whether it was ‘fairly possible’ to interpret the mandate as ......
  • In re Cousins, BANKRUPTCY NO. 18-10739
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Louisiana
    • April 10, 2019
    ...or of undertakings authorized by it").11 315 U.S. 510, 62 S.Ct. 712, 86 L.Ed. 998 (1942).12 Id. at 517 ; see also In re Bradford , 534 B.R. 839, 851 (Bankr. M.D. Ga. 2015) (evaluating the Court's decision in United States v. New York , 315 U.S. 510, 62 S.Ct. 712, 86 L.Ed. 998 (1942) ).13 Un......
  • In re Kardash, Case No.: 8:16–bk–05715–KRM
    • United States
    • United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida
    • September 21, 2017
    ...claimant is to be preferred over others, the purpose should be clear from the statute.") (internal citations omitted).45 In re Bradford, 534 B.R. 839, 842 (Bankr. M.D. Ga. 2015) ; See In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 10......
  • In re Parrish, CASE NO. 17–02341–5–SWH
    • United States
    • U.S. Bankruptcy Court — Eastern District of North Carolina
    • April 6, 2018
    ...priority under the Bankruptcy Code. The IRS has the burden of proof to establish that its claim is entitled to priority. In re Bradford , 534 B.R. 839, 842 (Bankr. M.D. Ga. 2015) (citing In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R.......
  • Request a trial to view additional results
11 cases
  • Internal Revenue Serv. v. Juntoff (In re Juntoff), s. 21-8011
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit
    • March 21, 2022
    ...our plain duty is to adopt that which will save the Act.")); see also Bradford v. United States, Dep't of the Treasury (In re Bradford ), 534 B.R. 839, 854 (Bankr. M.D. Ga. 2015) ("[t]he question before the [ Sebelius ] Court was whether it was ‘fairly possible’ to interpret the mandate as ......
  • In re Cousins, BANKRUPTCY NO. 18-10739
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Louisiana
    • April 10, 2019
    ...or of undertakings authorized by it").11 315 U.S. 510, 62 S.Ct. 712, 86 L.Ed. 998 (1942).12 Id. at 517 ; see also In re Bradford , 534 B.R. 839, 851 (Bankr. M.D. Ga. 2015) (evaluating the Court's decision in United States v. New York , 315 U.S. 510, 62 S.Ct. 712, 86 L.Ed. 998 (1942) ).13 Un......
  • In re Kardash, Case No.: 8:16–bk–05715–KRM
    • United States
    • United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida
    • September 21, 2017
    ...claimant is to be preferred over others, the purpose should be clear from the statute.") (internal citations omitted).45 In re Bradford, 534 B.R. 839, 842 (Bankr. M.D. Ga. 2015) ; See In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 10......
  • In re Parrish, CASE NO. 17–02341–5–SWH
    • United States
    • U.S. Bankruptcy Court — Eastern District of North Carolina
    • April 6, 2018
    ...priority under the Bankruptcy Code. The IRS has the burden of proof to establish that its claim is entitled to priority. In re Bradford , 534 B.R. 839, 842 (Bankr. M.D. Ga. 2015) (citing In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R.......
  • Request a trial to view additional results

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