Enesco Grp., Inc. v. Campanaro (In re Enesco Grp., Inc.)
| Decision Date | 08 August 2013 |
| Docket Number | No. 07 B 565,No. 11 A 402,07 B 565,11 A 402 |
| Parties | In re: ENESCO GROUP, INC., Debtor. ENESCO GROUP, INC., et al., Plaintiff, v. LEONARD A. CAMPANARO, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
MEMORANDUM OPINION
This matter is before the court for ruling on the motion of defendant United States of America to dismiss Count VI of the amended adversary complaint of David R. Brown, chapter 7 trustee of the estate of debtor Enesco Group, Inc. ("Enesco").1 In Count VI, Brown asks the court to determine under section 505(a)(1) of the Bankruptcy Code, 11 U.S.C. § 505(a)(1), that the estate is entitled to a refund of wrongfully imposed federal tax penalties. The United States moves to dismiss Count VI for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), Fed. R. Civ. P. 12(b)(1) (made applicable by Fed. R. Bankr. P. 7012(b)). Alternatively, the United States requests judgment on the pleadings on Count VI pursuant to Rule 12(c), Fed. R. Civ. P. 12(c) (made applicable by Fed. R. Bankr. P. 7012(b)).
At first blush, subject matter jurisdiction would seem to be secure. Because Brown wants to recover tax penalties for the benefit of Enesco's creditors, the claim is "related to" the Enesco bankruptcy case. 28 U.S.C. § 1334(b) (). But section 505(a)(2)(B) of the Code limits the jurisdiction otherwise granted to bankruptcy courts in section 1334(b), declaring that a bankruptcy court may not determine the estate's right to a tax refund unless certain prerequisites are met. 11 U.S.C. § 505(a)(2)(B). As the United States correctly contends, Brown has failed to allege that he has met those prerequisites. The motion to dismiss Count VI will therefore be granted. Brown will be given leave to amend to make the necessary allegations.
Because the United States contests subject matter jurisdiction, the first question is what information can be considered in deciding the motion. Challenges to subject matter jurisdiction take two forms, facial and factual. Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009). A facial challenge questions the sufficiency of the complaint's jurisdictional allegations. Id. "Facial challenges require only that the court look to the complaint and see if the plaintiff has sufficiently alleged a basis of subject matter jurisdiction." Id. at 443 (emphasis in original). In ruling on a facial challenge, only the complaint is considered, and its allegations are presumed true. Id. at 444; Alicea-Hernandez v. Catholic Bishop of Chi., 320 F.3d 698, 701 (7th Cir. 2003).
A factual challenge, on the other hand, concedes the sufficiency of the allegations but questions whether there is in fact subject matter jurisdiction. Apex Digital, 572 F.3d at 444. Thepresumption of truth falls away, id., and the court looks "beyond the jurisdictional allegations of the complaint and consider[s] any evidence submitted on the issue" to determine if there is subject matter jurisdiction. Farnik v. FDIC, 707 F.3d 717, 721 (7th Cir. 2013).
The motion here presents a facial attack because the United States targets the sufficiency of the amended complaint's allegations: the parties dispute whether Brown's allegations that his accountant sent a letter to the IRS asking for a waiver of the penalties satisfies section 505(a)(2)(B). If, as Brown maintains, the letter is a proper refund request, the jurisdictional limitation in section 505(a)(2)(B) is satisfied, and the court can reach the merits. If, as the United States insists, the letter is not a proper refund request, the jurisdictional limitation applies, and the road to the merits is closed. Either way, the resolution turns on the sufficiency of Brown's allegations and is therefore a facial attack on jurisdiction, restricting the analysis to the amended complaint and its exhibits.
The following facts, then, are drawn from the amended complaint and exhibits. Judicial notice has also been taken of the dockets in the bankruptcy case and adversary proceeding. Fed. R. Evid. 201(d); In re Brent, 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 2011) ().
On January 12, 2007, three related businesses - Enesco Group, Inc. ("Enesco"), Gregg Gift Manufacturing, Inc., and Enesco International Ltd. (the "debtors") - filed chapter 11 bankruptcy cases that were immediately ordered jointly administered. (Am. Compl. ¶ 8). On January 24, 2007, the court approved the employment of Robert M. Fishman and the law firm of Shaw Gussis Fishman Glantz Wolfson & Towbin LLC ("Shaw Gussis") as the Debtors' generalbankruptcy counsel. (Id. ¶ 10). About three months later, the court approved the employment of Deloitte Tax LLP ("Deloitte") as the debtors' accountants. (Id. ¶ 12).
At the times relevant here, Enesco was obligated to complete and timely file an IRS Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) for each of the eighteen operating and dormant foreign subsidiary corporations in which it owned controlling interests. Form 5471 is an informational form used to satisfy the reporting requirements of section 6038 of the Internal Revenue Code, I.R.C. § 6038. (Id. Ex. 9 at 1). Section 6038 requires taxpayers who fall within its scope to report information about the foreign corporations in which they hold ownership interests. (Id.); I.R.C. § 6038(a).
A taxpayer required to complete a Form 5471 must attach the completed form to the taxpayer's annual income tax return. (Id.); Treas. Reg. § 1.6038-2(i). The deadline for filing the form is therefore the same as the deadline for the income tax return. When a taxpayer fails to complete and file the Form 5471 on time, the IRS imposes a fixed dollar penalty of $10,000 per foreign corporation for each annual accounting period. (Id. at 3); I.R.C. § 6038(b)(1). The penalty is imposed even if the foreign corporation is dormant, although the filing procedure for a dormant foreign corporation is less demanding: the taxpayer need only complete the first page of the multi-page form. (Id. at 4); see also Rev. Proc. 92-70, 1992-2 C.B. 435 (1992).
Shaw Gussis and Deloitte advised some of Enesco's principals not to file Enesco's consolidated income tax returns for the 2006 and 2007 reporting periods. According to Brown, the lawyers and accountants told the principals that "the costs of filing Enesco's 2006 and 2007 tax returns would exceed any refunds to which Enesco might be entitled by the filing of these tax returns, and . . . Enesco did not owe any taxes and should not proceed with the filing of these taxreturns in order to maximize the value of the Bankruptcy Estate." (Am. Compl. ¶ 41). Relying on this advice, Enesco did not file the tax returns and so presumably did not file the Forms 5471 that would have accompanied the returns. (Id. ¶ 42).
In July 2008, after the deadlines for filing the Forms 5471 had passed, the Enesco bankruptcy cases were converted to cases under chapter 7. (Id. ¶ 19). Brown was appointed chapter 7 trustee. (Id.). On November 19, 2008, the court approved Brown's employment of Alan D. Lasko as his accountant. (Bankr. Dkt. No. 539).
More than a year later, Brown received a notice from the IRS dated November 16, 2009, addressed to Enesco in care of Brown. (Am. Compl. ¶ 22). The notice said that the IRS had assessed a $10,000 penalty for each of Enesco's eighteen foreign subsidiaries for which Enesco had failed to file a Form 5471 for the 2006 tax year. (Id.). Brown was instructed to pay the total penalties of $ 180,000 within ten days of his receipt of the letter. (Id. Ex. 8). Brown paid the penalties from Enesco's estate on December 3, 2009. (Id. ¶ 31).
About a month later, Lasko (Brown's accountant) sent a letter to the IRS stating that he had filed Enesco's 2006 consolidated corporate return and the Forms 5471 for the foreign subsidiaries. (Id. Ex. 10). Lasko acknowledged that the return and the forms were late but requested a "waiver" of the penalties for the late filing, urging that "no penalty should be assessed because the taxpayer had reasonable cause for the late filing of its 2006 Form 5471s." (Id.).
In his letter, Lasko explained the circumstances he believed constitute reasonable cause for the late filing. He pointed out that Brown first came into the picture when the bankruptcy cases were converted to chapter 7, after the Form 5471 filing deadline had passed. (Id.). At thattime, Lasko said, Brown was a newly-appointed chapter 7 trustee, and Lasko did not have ready access to Enesco's books and records, including tax returns for prior years. (Id.). Accordingly, Lasko was "not immediately aware that Form 5471s were even required." (Id.). Once the need to file the forms became clear, Brown completed and filed the Forms 5471 "as soon as practicable." (Id.). In discussing the circumstances constituting reasonable cause, Lasko focused on Brown. Lasko did not explain why Enesco failed to file the forms when they were due during the period when Enesco was a chapter 11 debtor in possession of its bankruptcy estate. Nor did Lasko ask for a refund or mention that Brown had paid the penalties.
The IRS answered Lasko's letter on March 16, 2010, denying the request for a "penalty adjustment." (Am. Compl. Ex. 11). Without elaboration, the IRS declared that the information Lasko had submitted did "not establish reasonable cause or show due diligence." (Id.). The IRS advised Brown of his options. He was told he "may . . . petition a U.S. District Court for a refund after [he] pay[s] the penalty in full." (Id.). The IRS did not acknowledge that the penalties had already been paid.
On February 22, 2010, the IRS sent Brown a second notice of penalty, this one assessing another $180,000 in penalties because...
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