Harker v. Internal Revenue Serv. (In re Citro)
| Decision Date | 30 August 2018 |
| Docket Number | Case No. 16-32161,Adv. No. 18-3008 |
| Parties | In re: RALPH LOUIS CITRO LISA A. CITRO, Debtors DONALD F. HARKER, III, Plaintiff v. INTERNAL REVENUE SERVICE ET AL., Defendants |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
This decision concerns whether a Chapter 7 trustee can pursue the debtors' pre-petition waiver of a net operating loss carryback on a tax return as a fraudulent transfer.
In this Chapter 7 case, the trustee, Donald F. Harker (the "Trustee"), has filed a complaint to recover a fraudulent transfer under 11 U.S.C. §§ 548 and 5501 of the Bankruptcy Code against the Ohio Department of Taxation, and the United States, sued in the name of the Internal Revenue Service (the "IRS"). The IRS has moved to dismiss the complaint for failure to state a claim for which relief can be granted.
The Trustee's legal theory is based upon a net operating loss ("NOL") claimed by the debtors on their 2015 federal tax return totaling $326,273.2 According to the complaint, had the debtors, Ralph and Lisa Citro (the "Citros"), applied this NOL to past tax returns, rather than affirmatively electing to waive this "carryback," they would have been entitled to refunds from prior tax returns, including, but not limited to, a $53,092 refund on their 2013 federal tax return. See 26 U.S.C. § 172(b)(1)(A) [I.R.C. § 172(b)(1)(A)]3 (providing that a NOL carryback generally may be claimed in the two prior taxable years from the taxable year of the NOL). The Trustee argues the waiver of the carryback constitutes a constructive fraudulent transfer of a property interest under § 548(a)(1)(B) because the Citros were insolvent, and the decision to apply the NOL to future tax years is worth less than the carryback would have been. Therefore, the carryback waiver was for less than reasonably equivalent value. The Trustee also asserts actual fraud under § 548(a)(1)(A), claiming that the waiver was made by the Citros with the actual intent to hinder, delay or defraud the Citros' creditors. Further, the Trustee seeks to recover the carryback under § 550 and an order requiring "the [IRS] pay to [the Trustee] an amount equal to all revenue produced by the waived NOL carryback while under the control of the defendant" and requiring "areconveyance or repayment thereof by the [IRS] to The Trustee for the benefit of the bankruptcy estate." doc. 1, Complaint, ¶15.
The IRS has moved to dismiss for a number of reasons, including that the proceeding is barred by the sovereign immunity of the United States and that the complaint does not plead facts which establish that: a) the NOL election was a transfer under § 101(54); b) the Citros failed to receive reasonably equivalent value; c) actual fraud occurred; and d) the IRS was a transferee of the election. Finally, the IRS asserts the Trustee's complaint fails to plead fraud with the required particularity.4 The Trustee has opposed the motion and, alternatively, moves to amend the complaint to cure any pleading deficiencies.
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference, Amended General Order No. 05-02 (S.D. Ohio Sept. 16, 2016). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H). Nevertheless, in Stern v. Marshall, the Supreme Court determined that bankruptcy courts do not have constitutional authority to enter final judgment over certain core proceedings. 564 U.S. 462 (2011). In Waldman v. Stone, the Sixth Circuit determined that bankruptcy courts do not have constitutional authority to enter final judgment on state law fraud claims and, citing Granfinanceira, S.A. v. Nordberg, 492 U.S. 33, 55 (1989), also noted that fraudulent conveyance claims require an Article III court to enter final judgment. 698 F.3d 910, 921 (6th Cir. 2012). In light of Stern and Waldman, the court requested the parties to file a statement as to whether they consent to the bankruptcy court entering final judgment on any "Stern" claims involved in this proceeding. See Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) (). On August 9, 2018 the parties filed a joint statement which provided that one or more of the parties declined to consent to the bankruptcy court's entry of final judgment on any "Stern" claims. doc. 31. Therefore, it appears this court cannot enter final judgment.See General Order 05-02 of the United States District Court for the Southern District of Ohio (providing the bankruptcy court can submit proposed findings to the district court when it may lack constitutional authority to enter final judgment). However, the court's determination to deny the IRS's motion to dismiss is interlocutory and does not implicate Stern. Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Brothers Holdings Inc.), 469 B.R. 415, 424 n.5 (Bankr. S.D.N.Y. 2012) (); Jones v. Brand (In re Belmonte), 551 B.R. 723, 726 n.3 (Bankr. E.D.N.Y. 2016) ().
A motion to dismiss an adversary proceeding for "failure to state a claim upon which relief can be granted" is governed by Federal Rule of Civil Procedure 12(b)(6) (applicable by Federal Rule of Bankruptcy Procedure 7012(b)). The factual allegations must put the defendant on notice as to the claims being alleged and provide a sufficient factual predicate to make the allegations plausible, and not merely possible. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Federal courts are not obligated to accept as true legal conclusions couched as factual allegations. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While detailed factual allegations are not necessary, the allegations must be sufficiently detailed to create more than speculation of a cause of action. Id. A claim is plausible if the factual allegations are sufficient to allow "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." HDC, LLC v. Ann Arbor, 675 F.3d 608, 611 (6th Cir. 2012) (citations and internal quotation marks omitted). See Fed. R. Civ. P. 8(a)(2), applicable by Fed. R. Bankr. P. 7008, which requires "a short and plain statement of the claim showing that the pleader is entitled to relief[.]").
The IRS argues that the relief sought by the Trustee is barred by the doctrine of sovereign immunity and, as a corollary, such relief is beyond this court's jurisdiction. The United States may not be sued without its consent and any waiver must be unequivocal. U.S.Dep't of Energy v. Ohio, 503 U.S. 607, 615 (1992). Section 106 of the Bankruptcy Code provides that government units waive their sovereign immunity for fraudulent transfer actions brought under § 548 and a recovery of such transfer under § 550. 11 U.S.C. § 106(a)(1). However, the IRS has taken the position that the relief sought by the Trustee, by requesting a refund of the 2013-year tax paid based on the 2015 NOL, requires compliance with both I.R.C. § 7422(a) and § 505(a)(2).
I.R.C. § 7422(a) provides:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.
In addition, § 505(a)(2) provides that the bankruptcy court may not determine the right of the estate to a tax refund before either the IRS determines the amount of the refund or "120 days after the trustee properly requests such refund from the government unit for which such refund is claimed." 11 U.S.C. § 505(a)(2). A "proper" request is one that complies with the taxing authority's procedure to seek a refund. United States v. Kearns, 177 F.3d 706, 710 (8th Cir. 1999) (); U.S. v. Bond, 762 F.3d 255, 260 (2d Cir. 2014) () United States v. Neary (In re Armstrong), 206 F.3d 465, 471-72 (5th Cir. 2000) ().
The exhaustion of remedies requirement under § 7422(a) is mandatory. U.S. v. Williams, 514 U.S. 527, 533 (1995) (). See Berera v. Mesa Medical Group, PLLC, 779 F.3d 352, 359 (6th Cir. 2015) (). Earlier decisions also have concluded refund claims must comply with § 7422(a). See, e.g. McDonnell v. United States, 180 F.3d 721, 722 (6th Cir. 1999) ().
Specifically, the IRS asserts that a taxpayer must file an administrative claim within three years of the date the return was filed or 2 years from when the tax was paid. I.R.C. § 6511(a). Because this claim involved a carryback election, the three years runs from the loss-year return, i.e. the 2015 return. I.R.C. § 6511(d)(2). It follows that the Trustee would have, assuming the election to waive NOL carryback was avoided, until April of 2019 to file an amended return on behalf of the Citros for 2015...
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