Dail v. U.S.

• Decision Date: 17 December 1980
• Docket Number: No. 79-1769,79-1769
• Citation: 635 F.2d 315
• Parties: 81-1 USTC P 9128, 7 Bankr.Ct.Dec. 65, Bankr. L. Rep. P 67,748 Donald G. DAIL, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 315

635 F.2d 315

81-1 USTC P 9128, 7 Bankr.Ct.Dec. 65, Bankr.

L. Rep. P 67,748

Donald G. DAIL, Appellee, v. UNITED STATES of America, Appellant.

No. 79-1769.

United States Court of Appeals Fourth Circuit.

Argued Oct. 6, 1980.

Decided Dec. 17, 1980.

Wynette J. Hewett, Tax Div., Dept. of Justice, Washington, D. C. (George M. Anderson, U. S. Atty., Raleigh, N. C., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Karl Schmeidler, Tax Div., Dept. of Justice, Washington, D. C., on brief), for appellant.

Trawick H. Stubbs, Jr., New Bern, N. C., for appellee.

Before HALL, MURNAGHAN and ERVIN, Circuit Judges.

MURNAGHAN, Circuit Judge:

Appellee filed a voluntary petition in bankruptcy on November 10, 1975. On March 15, 1976 he was granted a discharge, and on August 17, 1976 the bankruptcy proceeding was closed as a "no assets" case.

The IRS had been attempting since 1973 to collect ¹ from appellee ² taxes which it claimed appellee owed for the years 1969, 1970 and 1971. It is not seriously contended that the taxes claimed were not in fact due. The negotiations rather centered on the taxpayer's attempt to get the IRS to accept a reduced figure to compromise a claim of doubtful collectibility, due to taxpayer's precarious financial position.

On March 17, 1976 the IRS sent appellee's attorney a notice that the taxes were being assessed and on March 23, 1976 the IRS issued a notice of deficiency (the ninety-day letter), 26 U.S.C. §§ 6212, 6213. Appellee's attorney responded on March 26, 1976, informing the IRS of the bankruptcy proceedings, and on April 13, 1976 the IRS filed its proof of claim in the Bankruptcy Court.

Appellee then on December 13, 1976, petitioned the Bankruptcy Court to reopen the bankruptcy proceedings for a determination that the tax liabilities had been discharged. The Bankruptcy Court granted the petition to reopen. The parties filed a stipulation of facts. Appellee moved for summary judgment and the IRS moved for partial summary judgment.

The IRS claimed there was no discharge by reason of the bankruptcy because of 11 U.S.C. § 35(a)(1)(c) and (d) (§ 17(a)(1)(c) and (d) of the Bankruptcy Act). ³ The language of moment reads A discharge in bankruptcy shall release a bankrupt from all of his provable debts ...

Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes ...

(c) which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt,

(d) with respect to which the bankrupt made a false or fraudulent return, or willfully attempted in any manner to evade or defeat.

The Bankruptcy Court decided that the taxes were not rendered non-dischargeable by section (c), holding that the government's failure to assess the taxes prior to bankruptcy was not due to a "prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt." It therefore denied the government's motion for partial summary judgment. The Bankruptcy Court also denied appellee's motion for summary judgment because a factfinding hearing would be necessary to determine whether, under subsection (d), appellee had filed fraudulent returns or had willfully attempted to evade or defeat the taxes.

The district court adopted the recommendation of the magistrate to whom it had referred the case and affirmed the decision of the Bankruptcy Court. The government has appealed.

I.

At first blush it appears premature for the case to have reached us. No decision in favor of either party has been reached. All that has happened is that opposing motions for summary judgment have each been denied and the respective claims remain for plenary disposition. However, in a bankruptcy matter, 11 U.S.C. § 47(a) provides in pertinent part:

The United States courts of appeals, in vacation, in chambers, and during their respective terms, as now or as they may be hereafter held, are invested with appellate jurisdiction from the several courts of bankruptcy in their respective jurisdictions in proceedings in bankruptcy, either interlocutory or final, and in controversies arising in proceedings in bankruptcy, to review, affirm, revise, or reverse, both in matters of law and in matters of fact.... (Emphasis supplied.)

Hence, appealability exists even though the orders were interlocutory, provided that they occurred in proceedings in bankruptcy. Columbia Foundry Co. v. Lochner, 179 F.2d 630, 635 (4th Cir. 1950); In re Durensky, 519 F.2d 1024, 1028 (5th Cir. 1975). See In re Abingdon Realty Corp., 634 F.2d 133, at 135 (4th Cir. 1980). ⁴

II.

Turning to the merits, we first consider the effect of 11 U.S.C. § 35(a)(1)(c) which renders non-dischargeable in bankruptcy taxes "not reported on a return ... and ... not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt."

There is no dispute that the taxes were not reported on a return made by the bankrupt. The taxpayer concedes that such was the case. It is equally clear that the bankruptcy, for these purposes, took place on the filing of the petition on November 10, 1975, not at the later time of the discharge of the bankrupt on March 15, 1976. ⁵ Hence a lifting, after November 10, 1975, of the prohibition on assessment pending the exhaustion of administrative or judicial remedies, if such a prohibition was in existence up to that date, would not achieve discharge of the tax liabilities. Only a termination of the prohibition on assessment "prior to bankruptcy" would accomplish that result.

The issue of whether there was a prohibition on assessment pending the exhaustion of administrative or judicial remedies illustrates how difficult to understand language may become for a casual reader when extremely technical areas such as taxation or bankruptcy are concerned and especially when the two are combined. There is no ambiguity over the phrase "administrative or judicial remedies." The conducting of negotiations, up until they were broken off on September 16, 1975, constituted administrative remedies. In re Indian Lake Estates, Inc., 428 F.2d 319, 324 (5th Cir. 1970), cert. denied sub nom. Stewart v. United States, 400 U.S. 964, 91 S.Ct. 366, 27 L.Ed.2d 383 (1970); In re Greve, 39 A.F.T.R.2d 77-525, 76-2 U.S.T.C. P 9805, 85,631 (W.D.Okla., November 15, 1976); In re Ferwerda, 36 A.F.T.R.2d 75-5413, 75-2 U.S.T.C. P 9568, 87,681 (E.D.Wisc., June 23, 1975); In re Laytan Jewelers, Inc., 332 F.Supp. 1153, 1166 (S.D.N.Y.1971) ("The pendency of all the steps before assessment can lawfully be made must be held to be the pendency of administrative remedies available to the bankrupt....")

The same clarity does not, however, exist for the term "prohibition." It is undoubtedly true that, through its power to make jeopardy assessments under 26 U.S.C. §§ 6851, 6861, the IRS was able to make an assessment at any time. So, in the customary sense of the language, there was no prohibition. "Prohibition," for the purposes of the statute with which we are concerned, however, has a very specialized and limited, or partial, meaning, referring to the requirement that, in the case of ordinary assessments, ⁶ they must be preceded by a 90-day letter, with the assessment to be made only upon expiration of the ninety days. ⁷ Prior to compliance with the 90-day letter requirement, assessment, in a non-jeopardy assessment sense, is prohibited.

The cases, while few in number, uniformly support the IRS position that it was, throughout the proceedings, until after bankruptcy, under a prohibition. In re Indian Lake Estates, Inc., 428 F.2d 319, 323-24 (5th Cir. 1970), cert. denied sub nom. Stewart v. United States, 400 U.S. 964, 91 S.Ct. 366, 27 L.Ed.2d 383 (1970); In re Greve, 39 A.F.T.R.2d 77-525, 76-2 U.S.T.C. P 9805, at p. 85,631 (W.D.Okla., November 15, 1976); In re Laytan Jewelers, Inc., 332 F.Supp. 1153, 1165-66 (S.D.N.Y.1971); see also In re Ferwerda, 36 A.F.T.R.2d 75-5413, 75-2 U.S.T.C. P 9568 (E.D.Wisc., June 23, 1975).

The taxpayer cites 1A Collier on Bankruptcy, P 17.14(4) (14th ed. 1978) ⁸ in support of the proposition that the taxes were discharged. Even if the citation from Collier were deemed to support the taxpayer, we do not believe it can prevail in the face of cases uniformly decided in a contrary fashion.

Properly read, the Collier statement addresses a situation in which, prior to bankruptcy, there is a cessation of all administrative or judicial remedies, and thereafter, still before bankruptcy, 90 days or more also elapse, so that an ordinary assessment could have been made. The Collier language is "if an assessment could have been made before bankruptcy (whether it was or not)." ⁹ In the instant case, bankruptcy came less than 90 days (55 days to be exact) after the termination of pursuit of administrative or judicial remedies. So no ordinary assessment before bankruptcy could have been made and Collier does not support the position of the taxpayer.

The taxpayer also seeks to capitalize on the lackadaisical approach by the government to its business of fostering prompt collection of taxes. The IRS responds with criticisms of the taxpayer and an attempt to shift the blame for the delay. It alludes to a supposed congressional purpose not to multiply bankruptcies brought on by too immediate action by the IRS when its proceeding more deliberately might facilitate avoidance of bankruptcy altogether. In re Michaud, 458 F.2d 953, 958-59 fn. 17 (3d Cir. 1972), cert. denied, 409 U.S. 876, 93 S.Ct. 125, 34 L.Ed.2d 129 (1972). In all events, it is not necessary for us to point the finger. ¹⁰ In Indian Lake, supra, 428 F.2d at 324, it was unambiguously stated:

(A)n unassessed federal tax liability is prohibited and therefore not discharged if the "90-day letter"...