Delpit v. C.I.R.

• Citation: 18 F.3d 768
• Decision Date: 09 March 1994
• Docket Number: No. 92-70655,92-70655
• Parties: -1409, 62 USLW 2568, 94-1 USTC P 50,127, 25 Bankr.Ct.Dec. 590 Larry D. DELPIT; Dorothy D. Delpit, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 768

18 F.3d 768

73 A.F.T.R.2d 94-1409, 62 USLW 2568, 94-1

USTC P 50,127,

25 Bankr.Ct.Dec. 590

Larry D. DELPIT; Dorothy D. Delpit, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee.

No. 92-70655.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 31, 1994.

Decided March 9, 1994.

John F. Daum, O'Melveny & Myers, Los Angeles, California, for the petitioners-appellants.

Steven W. Parks, United States Department of Justice, Tax Division, Washington, D.C., for the respondent-appellee.

Appeal from the United States Tax Court.

Before D.W. NELSON, REINHARDT, and BRUNETTI, Circuit Judges.

REINHARDT, Circuit Judge:

This case raises the question whether an automatic stay provision of the Bankruptcy Code, 11 U.S.C. Sec. 362(a)(1) ("Section 362(a)(1)"), applies to an appeal from a Tax Court judgment concerning an alleged tax deficiency on the part of the debtor. We conclude that Section 362(a)(1) applies to such an appeal. Accordingly, we hold that the proceedings before us are stayed as a matter of law.

I.

This case arose from a $38,939,020.97 claim by respondent-appellee Commissioner of Internal Revenue ("Commissioner") against petitioners-appellants Larry D. Delpit and Dorothy D. Delpit ("Delpits"). On December 12, 1986, the Commissioner issued a Notice of Deficiency in the above amount to the Delpits. The Commissioner claimed that the Delpits were responsible for certain tax liabilities arising from sham accounting transactions by Kern, Inc. ("Kern"), an oil refinery holding company that was formerly owned by the Delpits.

The Delpits disputed the Commissioner's claim and filed a petition in Tax Court on March 13, 1987. On April 2, 1992, the Tax Court issued memorandum findings of fact and an opinion in favor of the Commissioner. See Delpit v. C.I.R., 61 T.C.M. (CCH) 2303, 1991 WL 43439 (1991), supplemented by 63 T.C.M. (CCH) 3053, 1992 WL 104765 (1992). On May 20, 1992, the Tax Court entered judgment against the Delpits for $25,284,011.00 plus interest. The Delpits' total tax liability now exceeds $70 million. On September 18, 1992, the Delpits filed a timely notice of appeal, and on December 2, 1993, they filed a voluntary petition for bankruptcy.

In their notice of bankruptcy filing to this court, the Delpits claimed that their appeal was automatically stayed under Section 362 of the Bankruptcy Code. The Commissioner disagreed, and urged that we proceed to hear the appeal on the merits. On January 13, 1994, we issued an order limiting oral argument to the stay question.

II.

Section 362 of the Bankruptcy Code, 11 U.S.C. Sec. 362, imposes an automatic stay on certain proceedings upon the filing of a voluntary petition for bankruptcy. ¹ Specifically, Section 362(a)(1) provides that a stay shall be imposed on:

the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding [i] against the debtor that was or could have been commenced before the commencement of the case under this title, or [ii] to recover a claim against the debtor that arose before the commencement of the case under this title[.]

Id. We conclude that both clauses of Section 362(a)(1) apply to an appeal pending before us from a Tax Court judgment concerning an alleged tax deficiency on the part of the debtor.

A.

An appeal from a Tax Court judgment concerning an alleged tax deficiency on the part of the debtor is a "continuation" of an administrative proceeding "against the debtor" within the meaning of the first clause of Section 362(a)(1). The IRS has established a comprehensive income tax assessment procedure that begins with an audit and wends its way through the federal courts, including the Court of Appeals, the final potential step being a denial of certiorari or a judgment in favor of one party or the other by the Supreme Court of the United States. See IRS Publication No. 556, Examination of Returns, Appeal Rights, and Claims for Refund, at 9 (1990).

Under the income tax assessment procedure, a taxpayer is barred from petitioning the Tax Court until he has first participated in a number of administrative proceedings that are initiated "against" him. These proceedings include an audit, a meeting with a revenue agent and a supervisor, a 30-day letter ("Preliminary Notice"), formal proceedings before the IRS Appeals Division, and a 90-day letter ("Notice of Deficiency"). These proceedings may continue with the taxpayer's request to the Tax Court to remove or reduce the deficiency assessment and, next, an appeal by one party or the other to the Court of Appeals.

Here, because the Commissioner prevailed in the Tax Court, the appeal pending before us happens to have been filed by the taxpayer, the Delpits. In other cases, the appeal will have been filed by the Commissioner. Either way, however, the appeal from the Tax Court's judgment is simply a "continuation" of the comprehensive income tax assessment procedure--which is initiated by IRS administrative proceedings "against" the taxpayer. Accordingly, we hold that the automatic stay provisions of Section 362(a)(1) apply to such appeals.

B.

The Delpits' appeal is also a "continuation" of an administrative proceeding "to recover a claim against the debtor" within the meaning of the second clause of Section 362(a)(1). Here, the IRS initiated a proceeding (i.e., an audit) against the taxpayers in order to recover a $38 million claim for an alleged tax deficiency. (The IRS's claim arose in 1986, well before the Delpits filed for bankruptcy.) Because the Delpit's appeal is a "continuation" of that proceeding, we also hold that the appeal is stayed under the second clause of Section 362(a)(1).

III.

A.

The legislative history of Section 362 supports our conclusion that the appeal is stayed. Congress intended to give debtors "a breathing spell" from their creditors and to stop "all collection efforts, all harassment, and all foreclosure actions." H.R.Rep. No. 95-595, 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, at 6296-97. The automatic stay allows debtors, during the period of the stay, "to be relieved of the financial pressures that drove [them] into bankruptcy." Id. at 6297. Accordingly, Section 362 is "extremely broad in scope" and "should apply to almost any type of formal or informal action against the debtor or the property of the estate." 2 Collier on Bankruptcy p 362.04, at 362-34 (15th ed. 1993) (emphasis added) [hereinafter Collier ].

Here, the Delpits' primary debt consists of the $70 million (and growing) Tax Court judgment against them. Staying this case would allow the Delpits to reorganize their finances in an orderly fashion while postponing further legal proceedings and the attendant expenses they would otherwise incur before this court. The stay would give them a breathing spell from the IRS's pursuit. Most important, it might afford the Delpits and the IRS an opportunity to work out a realistic settlement and compromise agreement that might not otherwise be possible.

B.

Our conclusion also finds support in the legislative history of Section 505 of the Bankruptcy Code, 11 U.S.C. Sec. 505. Section 505 sets forth the general treatment of tax claims by a bankruptcy court. In the legislative history to that section, Congress stated that it "authoriz[es] the trustee to prosecute an appeal or review of a tax case." S.Rep. No. 1106, 95th Cong., 2d Sess. (1978), reprinted in 3 Collier p 505.03, at 505-22 (emphasis added). However, the trustee's right to appeal a Tax Court judgment can be fully preserved only if all existing appeals are stayed. Otherwise, the debtor might default on its appeal for any number of reasons (e.g., lack of funds, legal error), and thus deprive the trustee of its ability to prosecute an appeal on the debtor's behalf.

IV.

The Commissioner raises several arguments as to why Section 362(a)(1) does not stay the Delpits' appeal. We reject each of them.

A.

The Commissioner first relies upon Cheng v. Commissioner, 938 F.2d 141 (9th Cir.1991), for the proposition that the automatic stay provisions of Section 362 do not apply to appeals from Tax Court judgments. In Cheng, we held that Section 362(a)(8) of the Bankruptcy Code--which stays the "commencement or continuation of a proceeding before the United States Tax Court concerning the debtor" (emphasis supplied)--does not apply to appeals from Tax Court judgments. See id. at 143. We had no difficulty concluding from the express language of Section 362(a)(8) that it applies only to proceedings before the Tax Court, and not to proceedings before the Court of Appeals. Id. That is precisely what paragraph eight says and precisely how we confined its scope. The Commissioner now contends that Cheng applies here as well.

The Commissioner's reliance on Cheng is misplaced. Cheng's holding was limited to Section 362(a)(8) of the Bankruptcy Code. We did not consider or rule upon the question whether any of the other seven provisions listed in Section 362(a)--e.g., Section 362(a)(1)--is applicable to an appeal from a Tax Court judgment. That is the question before us now. Unlike the taxpayer in Cheng, the Delpits rely upon Section 362 in its entirety; they do not rely just upon Section 362(a)(8). Thus, it is the very different and far broader language of Section 362(a)(1) that we must construe here. Accordingly, Cheng is simply not pertinent to this case. See First Nat'l Bank v. Bartow County Board of Tax Assessors, 470 U.S. 583, 593 n. 6, 105 S.Ct. 1516, 1522 n. 6, 84 L.Ed.2d 535 (1985) (declining to extend a holding to arguments that were not previously addressed).

B.

The Commissioner next argues that the Delpits' reading of Section 362(a)(1) would render Section 362(a)(8) superfluous. In short, the Commissioner says, the Delpits' expansive reading of the former provision would render the latter unnecessary. According to the Commissioner, were we to...