Carlson v. IRS, 96 C 1660.
| Decision Date | 17 July 1996 |
| Docket Number | No. 96 C 1660.,96 C 1660. |
| Citation | 198 BR 949 |
| Parties | In re Herbert CARLSON and Margaret Carlson, Appellants, v. INTERNAL REVENUE SERVICE, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Herbert P. Carlson, Iversen, Carlson & Associates, Chicago, IL, for appellants.
Joel Robert Nathan, United States Attorney's Office, Chicago, IL, for appellee.
On February 23, 1994, Herbert and Margaret Carlson filed a voluntary petition for bankruptcy under Chapter 11 of the bankruptcy code. The Internal Revenue Service ("IRS") subsequently filed a proof of claim against the Carlsons for various unpaid taxes, penalties, and interest. The Carlsons objected to the IRS's secured claim for interest and penalties on unpaid income taxes for the years 1990 through 1992. The Carlsons also objected to the IRS's secured claim for unpaid social security taxes ("FICA taxes") and unsecured priority claims for FICA taxes and federal unemployment taxes ("FUTA taxes"). On February 5, 1995, the bankruptcy court entered judgment against the Carlsons and in favor of the IRS on most of the IRS's claim. The Carlsons appeal the bankruptcy court's judgment.
Mr. Carlson is an attorney who operates a law office that currently has a support staff and two attorneys working on a case-by-case basis. Mrs. Carlson is not employed. The Carlsons file their tax returns jointly, and reported taxable income in the amount of $148,868 for 1990, $268,910 for 1991 and $75,646 for 1992. The Carlsons' personal residence is located on Lake Shore Drive, Chicago, Illinois, and was valued at $1,000,000 (subject to a $425,000 secured claim) on the Schedule A filed with the bankruptcy court. The property is held in an Illinois Land Trust with the Chicago Title and Trust Company serving as trustee. The beneficial interest has been assigned as security for a loan. Prior to 1994, the Carlsons also owned a house in LaPorte County, Indiana, which was scheduled with a value of $125,000. Memorandum Opinion, No. 94 B 797 *1 (Bankr.N.D.Ill. Dec. 5, 1995) ().
As a result of their failure to pay federal income taxes for the years 1990, 1991 and 1992, the Carlsons incurred $153,824 in tax liability, plus statutory penalties and interest. The Carlsons also incurred FICA tax liability during this period in connection with employees working at Mr. Carlson's law office. Due to the Carlsons' continuing failure to pay these liabilities, the IRS filed federal tax lien notices in Cook County, Illinois, on December 16, 1992, December 13, 1993, and February 9, 1994. On February 9, 1994, the IRS seized the Carlsons' residence in Chicago (although the Carlsons continue to reside there because the IRS never sold the property). On February 11, 1994, the Carlsons transferred their Indiana property by warranty deed to their son, Peter Carlson, and on February 15, 1994, the deed was recorded in LaPorte County. On February 23, 1994, the Carlsons filed a voluntary petition under Chapter 11 of the bankruptcy code. The bankruptcy court opinion at 1-2.
After the Carlsons sought bankruptcy protection, the IRS filed a federal tax lien notice duplicating the February 9, 1994 tax lien notice. The duplicate notice was filed on April 29, 1994, apparently due to a defect in the IRS's automated systems. On November 8, 1994, the IRS filed a certificate of release that withdrew the April 29 duplicate notice. On February 22, 1995, Mr. Carlson was notified that the form 941 and form 940 tax returns he filed for the years 1993 and 1994 (relating to FICA and FUTA taxes) were selected for audit by the IRS.1 The bankruptcy court opinion at 2.
After the Carlsons sought bankruptcy protection, the IRS filed a proof of claim against them reflecting the liabilities the IRS had secured by tax lien. On November 14, 1994, and again on March 31, 1995, the IRS filed amended proofs of claim adding unsecured priority claims stemming from unpaid FICA and FUTA taxes for 1992 and 1993. The bankruptcy court opinion at 2.
The Carlsons objected to the IRS's secured claim for interest and penalties on unpaid income taxes for the years 1990 through 1992. The Carlsons argued these liabilities should be abated because: (1) § 505(a) of the bankruptcy code allows the abatement of interest stemming from late taxes; (2) the IRS violated the automatic stay when it filed a duplicate tax lien and made audit requests after the Carlsons filed for bankruptcy; (3) when the IRS seized the Carlsons' Chicago residence, they failed to properly notify the trustee of the Illinois Land Trust that held title to the property and the mortgagee of the property, and they failed to comply with other notice procedures set forth in the Internal Revenue Manual ("IRM"); and (4) the Carlsons' payment of medical expenses for their disabled child prevented them from satisfying their income tax obligations, and therefore constituted reasonable cause for their failure to pay. The Carlsons objected to the FICA and FUTA tax claims on grounds that the IRS wrongly characterized workers at Mr. Carlson's law office as employees rather than independent contractors.
The bankruptcy court entered a memorandum opinion on December 5, 1995, and judgment on February 5, 1996. The bankruptcy court held that the IRS's secured claim for interest and penalties was valid. The bankruptcy court also held that most of the IRS's FICA and FUTA tax claims were valid.
The bankruptcy court proceeding was a core proceeding. 28 U.S.C. § 157(b)(2)(B). Accordingly, the court reviews the bankruptcy court's findings of fact under the clearly erroneous standard, and the bankruptcy court's conclusions of law de novo. Fed. R.Bankr.P. 8013; In re Ebbler Furniture & Appliances, Inc., 804 F.2d 87, 89 (7th Cir. 1986).
The IRS assessed interest against the Carlsons under § 6601(a) of the tax code for taxes they failed to pay in 1990, 1991, and 1992.2 The Carlsons argue the bankruptcy court erred when it declined to abate the interest assessed against them pursuant to its powers under § 505(a) of the bankruptcy code.3
The plain language of § 6601 mandates an interest assessment on late tax payments. Purcell v. U.S., 1 F.3d 932, 942 (9th Cir. 1993); In re Cabazon Indian Casino, 57 B.R. 398, 403 (9th Cir. BAP 1986). Section 505(a) does not indicate otherwise. Nor do the bankruptcy court's equitable powers allow it to override the plain mandate of § 6601. Paul Revere Life Ins. Co. v. Brock, 28 F.3d 551, 554 (6th Cir.1994). Accordingly, the bankruptcy court did not err when it declined to abate the interest assessed against the Carlsons pursuant to its powers under § 505(a).
The Carlsons argue the bankruptcy court erred when it declined to abate the interest against them under § 6404(e) of the tax code. Section 6404(e) allows the abatement of interest that is attributable to errors or delays by officers or employees of the IRS. The Carlsons contend the IRS is to blame for their late tax payments because the duplicate lien filed by the IRS prevented them from acquiring financing and paying their taxes.
The Carlsons provide no evidence the IRS's duplicate lien prevented them from acquiring financing and paying their taxes to any greater extent than the IRS's prior February 9 lien. Moreover, although § 6404(e) provides the IRS with discretion to abate interest attributable to errors or delays of its officers or employees, the Carlsons have not sought relief under § 6404(e) from the IRS, and it is doubtful that an administrative decision by the IRS pursuant to this section is subject to judicial review. Selman v. United States, 941 F.2d 1060, 1064 (10th Cir.1991) (); Bax v. Commissioner, 13 F.3d 54, 58 (2nd Cir.1993); Horton Homes, Inc. v. United States, 936 F.2d 548, 551-52 (11th Cir.1991). Accordingly, the bankruptcy court did not err when it declined to abate the interest assessed against the Carlsons under § 6404(e).
The IRS assessed penalties against the Carlsons under §§ 6651(a)(2) and 6654(a) of the tax code for taxes they failed to pay in 1990, 1991, and 1992.4 The Carlsons contend the bankruptcy court erred when it declined to abate these penalties based on the duplicate lien filed by the IRS. The Carlsons maintain the duplicate lien violated the automatic stay because it was filed after their bankruptcy petition.
Section 362(a)(4) of the bankruptcy code imposes a stay on "any act to create, perfect, or enforce any lien against property of the estate." 11 U.S.C. § 362(a)(4). Its intended effect is to preserve the status quo as of the date of the bankruptcy proceeding. The Carlsons provide no legal support for their contention that the duplicate lien violated § 362(a)(4) or any other provision of the bankruptcy code. Nor does it appear that the duplicate lien created, perfected, or enforced a lien interest considering that the duplicate lien could not establish any new rights beyond those already acquired by the prior February 9 lien. Accordingly, the bankruptcy court did not err when it denied an abatement of penalties based on the duplicate lien.
The Carlsons contend no lien remained against their property after the duplicate lien was released because the duplicate lien superseded or merged with all prior liens. However, the cases cited in support of this argument have nothing to do with duplicative liens. Accordingly, the Carlsons demonstrate no basis in law for their merger theory.
The Carlsons contend the bankruptcy court erred when it declined to abate the penalties assessed against them based on two audit requests made by the IRS. The audit requests were made on February 22, 1995 an...
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