Ellison v. C.I.R.
| Decision Date | 09 April 2008 |
| Docket Number | Civil Action No. 5:06-cv-00575. |
| Citation | 385 B.R. 158 |
| Court | U.S. District Court — Southern District of West Virginia |
| Parties | Kay Dearing ELLISON, Plaintiff, v. COMMISSIONER OF INTERNAL REVENUE Service, Defendant. |
James R. Sheatsley, Gorman Sheatsley & Company, Beckley, WV, for Plaintiff.
Gary L. Call, U.S. Attorney's Office, Charleston, WV, Pat S. Genis, U.S. Department of Justice, Washington, DC, for Defendant.
Pending before the Court are Plaintiffs Motion for Summary Judgment [Docket 16] and the IRS's Cross-Motion for Summary Judgment [Docket 18].1 This matter is before the Court on Plaintiffs appeal for re-determination of the validity of taxes assessed for the tax periods ending September 30, 1993 and December 31, 1993, respectively. Plaintiff originally challenged the validity of the assessments in a collection due process (CDP) hearing before the IRS Appeals Office, which upheld the assessments. Pursuant to 26 U.S.C. §§ 6320(c) and 6330(d), Plaintiff appealed the IRS's determination to the Tax Court. Finding that it lacked jurisdiction,2 the Tax Court dismissed Plaintiffs appeal and instructed her to re-file her appeal in the appropriate United States District Court. On July 21, 2006, Plaintiff timely filed her appeal in this Court. The parties agreed to resolve the case on cross-motions for summary judgment, (See Docket 22 ¶ 3), and the Court heard oral argument on the cross-motions. For the reasons set forth below, the Court GRANTS Plaintiffs Motion for Summary Judgment [Docket 16] and DENIES the IRS's Cross-Motion for Summary Judgment [Docket 18].
The material facts are not in dispute. At issue are two IRS assessments of unpaid trust fund taxes. The assessments arise out of Plaintiffs liability as an officer of Great American Holding Company, Inc. (GAHC), for taxes not paid by the company during the tax periods ending September 30, 1993, and December 30, 1993.3 On January 28, 1994, GAHC ceased its business activities and filed a petition for bankruptcy in the United States Bankruptcy Court for the Southern District of West Virginia. Plaintiff then filed a personal bankruptcy petition with the same court on April 15, 1994.
In May of 1994, IRS agents solicited the execution of a Form 2751 "Proposed Assessment of Trust Fund Recovery" from Plaintiff, essentially obtaining her consent to the assessment of the unpaid trust fund taxes for the periods ending September 30 and December 31, 1993.4 After obtaining Plaintiffs consent, the IRS made an assessment against her for the unpaid trust fund taxes on July 11, 1994. Then, on April 25, 1995, the IRS filed a Notice of Lien against Plaintiff. On June 9, 1997, however, the IRS issued a Certificate of Release, noting that the April 25, 1995 Notice of Lien had been "erroneously filed." It was not until May 29, 1999 that the IRS filed an official Release of Lien absolving Plaintiff of that 1995 lien. Finally, on May 26, 2005, the IRS issued a Notice of Intent to Levy regarding the trust fund taxes assessed on July 11, 1994.5
After receiving the Notice of Intent to Levy, Plaintiff requested a CDP hearing to challenge the propriety of the Notice. After the hearing, on February 2, 2006, the IRS Appeals Office issued a notice of determination finding the Notice of Intent to Levy to be appropriate.6 Plaintiff initially sought review of that determination in the United States Tax Court pursuant to 26 U.S.C. §§ 6320 and 6330. That action, however, was dismissed for lack of jurisdiction and Plaintiff subsequently re-filed her appeal in this Court.
In her summary judgment motion, Plaintiff advances the argument that the IRS's solicitation of the Form 2751 waiver and subsequent assessment of taxes on July 11, 1994, both of which occurred while Plaintiffs bankruptcy proceedings were still pending, violated the automatic stay provisions of the Bankruptcy Code and are therefore void. Based on the alleged invalidity of these acts, Plaintiff requests that the Court absolve her from her liability for the unpaid taxes.
The IRS's cross-motion does not address the validity of its acts; rather, it argues that the Court lacks jurisdiction to review the assessment because Plaintiff did not contest that validity at the CDP hearing. According to the IRS, Plaintiff addressed only two issues at the CDP hearing: her alleged failure to receive notice of the assessment and the propriety of an offer-in-compromise as an alternative remedy. Moreover, the IRS asserts that Plaintiff was precluded from contesting the validity of her underlying liability at the CDP hearing by virtue of her Form 2751 waiver.
In Plaintiffs response to the cross-motion, she contends that she had properly raised the effect of the automatic stay upon the tax assessment during the CDP hearing. Further, Plaintiff asserts that the solicitation of the Form 2751 waiver was itself void as a violation of the automatic stay.
The Court heard oral argument on the cross-motions on November 12, 2007. During that hearing, the IRS conceded that Plaintiff had raised the issue of the validity of the tax assessment during the CDP hearing, but maintained that doing so was improper because her execution of the Form 2751 waived any right she had to do so. Moreover, the IRS argued that even if its 1994 assessment would have violated the automatic stay, the execution of the Form 2751 waiver essentially cures the violation. The issues have been fully briefed and argued before the Court and the matter is now ripe for summary judgment.
.Rule 56(c) of the Federal Rules of Civil Procedure provides that a court shall grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c). "When cross-motions for summary judgment are submitted to a district court, each motion must be considered individually, and the facts relevant to each must be viewed in the light most favorable to the nonmovant." Mellen v. Bunting, 327 F.3d 355, 363 (4th Cir.2003) (citing Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir.2003)). Each moving party bears the burden of showing that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Moreover, each nonmoving party must satisfy their burden of proof by offering more than a mere "scintilla of evidence" in support of their position. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Plaintiffs summary judgment motion raises two issues: (1) whether the IRS's assessment and collection attempts violated the automatic stay; and (2) whether acts in violation of the automatic stay are void as a matter of law.
The Bankruptcy Code protects individuals or businesses who file petitions for bankruptcy from debt collection activities during the pendency of their proceedings. The Code provides that the filing of a bankruptcy petition "operates as a stay, applicable to all entities, of ... any act to create, perfect, or enforce any lien against property of the [petitioner's] estate[, and] any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title[.]" 11 U.S.C. § 362(a).7 A stay imposed by subsection (a) remains effective until the bankruptcy case is closed, dismissed, or discharged. § 362(c). However, a party-in-interest can request that a court grant it relief from the stay under certain limited conditions. See §§ 362(d), (f). At the same time, if an entity willfully violates the stay, an injured party is entitled to recover actual damages and, if appropriate, punitive damages. § 362(k)(1).
The operation of the stay is automatic and "effective immediately upon filing of the petition." Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir.1994). Moreover, "[t]he IRS is subject to the automatic stay when engaged in tax collection activities." See In re Loughnane, 28 B.R. 940, 941 (Bankr.D.Colo. 1983). Therefore, if the IRS attempts to assess or collect taxes from an individual or corporate bankruptcy petitioner without first requesting relief from the stay, its acts violate § 362(a).
In this case, both Plaintiff and GAHC had filed bankruptcy petitions by March of 1994. Consequently, the automatic stay was in effect on May 18, 1994, when the IRS asked Plaintiff to sign the Form 2751. By soliciting Plaintiffs signature, the IRS violated § 362(a)(6), which prohibits "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under [the Bankruptcy Code]." The IRS's subsequent assessment on July 11, 1994, also qualifies as an attempt to assess a claim against Plaintiff while she was under the protection of the stay. Thus, both of these attempts to assess a claim against Plaintiff while she was under the protection of the automatic stay violate the § 362(a) ban.
The Court must now decide what effect a violation of the automatic stay has upon the underlying tax action. Plaintiff argues that the majority of courts adopt the position that violations of the automatic stay are void and without effect. Characterizing an act as "void" or "voidable" has the practical effect of determining which party bears the burden of going forward. See Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 976 (1st Cir.1997). Declaring an act that violates the automatic stay "void" places the burden of validating the underlying action on the offender. Id....
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...majority of circuits hold that a violation of the automatic stay is generally void as a matter of law.’ Ellison v. Comm'r of Internal Revenue Serv., 385 B.R. 158, 163 (S.D.W.Va.2008) (collecting cases from First, Second, Third, Seventh, Ninth, Tenth, and Eleventh Circuits). There is, howeve......
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