Herron v. Internal Revenue Serv. (In re Herron)
| Decision Date | 05 October 2021 |
| Docket Number | Case No. 19-24527-TPA,Adv. No. 20-02131-TPA |
| Citation | 634 B.R. 883 |
| Parties | IN RE: Michael K. HERRON, Debtor. Michael K. Herron, Plaintiff v. Internal Revenue Service, United States of America, Defendant |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
634 B.R. 883
IN RE: Michael K. HERRON, Debtor.
Michael K. Herron, Plaintiff
v.
Internal Revenue Service, United States of America, Defendant
Case No. 19-24527-TPA
Adv. No. 20-02131-TPA
United States Bankruptcy Court, W.D. Pennsylvania.
Signed October 5, 2021
Aurelius P. Robleto, Esq., for the Plaintiff.
Elisabeth Bruce, Esq., for the Defendant.
Alexander R. Kalyniuk, Esq., for the Defendant.
MEMORANDUM OPINION
Thomas P. Agresti, United States Bankruptcy Judge
This adversary proceeding raises a number of issues concerning income tax debt that the Debtor/Plaintiff (the "Debtor") owes to the Internal Revenue Service of the United States of America ("IRS") and the associated tax liens asserted by the IRS as affected by the Debtor's bankruptcy filing. For the reasons that follow the Court generally finds in favor of the IRS with respect to the disputed issues, although the Debtor will prevail as to his effort to "strip" the IRS tax lien as to certain individual parcels of real property in which the Debtor lacks equity.1
PROCEDURAL HISTORY
Debtor filed a voluntary Chapter 11 case on November 21, 2019. The petition lists the IRS as both a secured creditor and an unsecured creditor. The IRS filed Claim No. 11-1 on February 11, 2020 asserting a secured claim in the amount of $867,570.25 for tax years 2004 through 2008 and 2010 through 2012, and an unsecured claim in the amount of $77,208.70 for tax years 2011 and 2012, resulting in a total claim of $944,778.95.
The Debtor filed the present adversary proceeding on August 31, 2020. The
Amended Complaint filed by the Debtor at Doc. No. 6 sets forth 11 separate counts for relief, which may conveniently be broken down into four groups which can be summarized briefly as follows:
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On September 14, 2020, shortly after the Amended Complaint was filed, the IRS then filed an amended version of its claim, Claim No. 11–2, this time showing a secured claim of $518,691.13 for tax years 2008, 2010, 2011, and 2012, and an unsecured claim of $426,087.82 for tax years 2004, 2005, 2006, 2007, 2011, and 2012, again resulting in a total claim of $944,778.95. The only differences between the original Claim 11–1 and the amended Claim 11–2 is that the secured claims for tax years 2004, 2005, 2006, and 2007 as stated in Claim 11–1 were changed to unsecured claims in Claim 11–2, and the dates of the tax assessment made by the IRS were changed to a later date for some of the individual tax years.
The IRS filed its Answer to the Amended complaint on October 14, 2020 at Doc. No. 9. After the close of discovery the IRS filed a motion for summary judgment on March 5, 2021 at Doc. No. 14. On April 27, 2021 the Court entered an order granting the IRS summary judgment motion in part by dismissing Count II of the Amended Complaint in light of the fact that under amended Claim 11–2 the IRS is no longer asserting a secured claim for tax years 2004 through 2007 (see n. 2, above), but in all other respects denied the motion. Trial as to the remaining counts was held on June 21, 2021. Both sides then filed post-trial briefs and proposed findings of fact
and conclusions of law, following which time closing arguments were heard.
Running on a parallel track while this adversary proceeding was unfolding was the main bankruptcy case of the Debtor. The Debtor there filed a Second Amended Chapter 11 Plan ("Plan") on December 15, 2020 and an accompanying Disclosure Statement on December 17, 2020. See, main case, Doc. Nos. 265, 270. The Plan and Disclosure Statement both made explicit reference to the within adversary proceeding and indicated that through it the Debtor was seeking a determination that would limit the secured claims of the IRS. See, main case Doc. No. 265 at §§ 1.26, 4.6, and Doc. No. 270 at pages 2, 7. The IRS did not file an objection to either the Plan or Disclosure Statement. The Plan was confirmed on January 22, 2021. See, main case Doc. No. 311. No appeal was ever taken and the confirmation order is therefore final.
Also, during the course of the adversary proceeding, two of the individual parcels of real property that are at issue herein have been sold by the Debtor pursuant to 11 U.S.C. § 363(b). In particular, 340 Roup Avenue, Pittsburgh, PA which is the subject of Count V of the Amended Complaint was approved for sale by the Court on November 3, 2020 and was then subsequently sold on December 10, 2020. See, main case Doc. Nos. 181, 232, 263. Also, 3700 Orpwood Street, Pittsburgh, PA which is the subject of Count IX of the Amended Complaint was approved for sale by the Court on November 3, 2020 and was then subsequently sold on December 4, 2020. See, main case Doc. Nos. 184, 233, 262. The IRS did not object to either of those sales and it does not appear that any of the sale proceeds were paid to the IRS on its claim. Thus, Counts V and IX of the Amended Complaint have effectively become moot. The sale orders issued by the Court approving the sales of these two properties do include the following provision:
It is FURTHER ORDERED, that the above recited liens and claims, be, and they hereby are, transferred to the proceeds of sale, if and to the extent they may be determined to be valid liens against the sold property, that the within decreed sale shall be free, clear and divested of said liens and claims;
The resultant effect of such language in the sale order is that the IRS may have a lien interest in any remaining sale proceeds being held by Debtor's Counsel, but that is a matter not raised in the Amended Complaint and not presently before the Court.
Finally, another parcel of real property, 7167 Ross Rd., Pittsburgh, PA involved in Count IV of the adversary, was the subject of a settlement between the Debtor and Bank of America, N.A. that was approved on February 17, 2021 after no objections were filed. See, main case Doc. Nos. 303, 328. The settlement appears to recognize that the Debtor actually transferred that property to two other individuals in an arms-length transaction in 2009 and has no current ownership interest in it. The Debtor's counsel commented at the trial that this settlement may render Count IV moot, and the Debtor does not address Count IV at all in his post-trial filings. Hence, the Court will treat Count IV as being moot or withdrawn by the Debtor.
FACTUAL FINDINGS
A recitation of the relevant factual background giving rise to the IRS claim is necessary for a full understanding of the legal issues presented. Debtor is an individual currently residing at 1276 West Tacoma St., Hernando, Florida. He is a physician specializing in radiology and highly educated, with masters degrees in business
administration and public administration, in addition to his medical degree. The Debtor is also in the real estate business. As of the date the petition was filed he owned or had an interest in 12 parcels of real estate located in Florida, Pennsylvania, Louisiana and Maryland that he valued cumulatively at approximately $3.5 million.
The Debtor's post-residency medical career as a radiologist began in 2002. In 2006 he and several other partners opened a radiology imaging center. In 2008 the Debtor then opened his own radiology imaging center known as Sugar Mill Diagnostic Imaging, LLC. The "great recession" of 2008 hit shortly thereafter and the Debtor's new imaging business was negatively impacted, but continued in operation.
At some point, probably in 2009, the Debtor spoke with his then-accountant, Phil Price, and told Mr. Price that he was going through financial difficulties.4 The Debtor testified that Mr. Price raised the possibility of amending the Debtors' prior-years' tax returns as a means of obtaining refunds. The Debtor, apparently relying on the expertise of Mr. Price, agreed to that suggestion and gave him the authority to "do what you need to do." Trial Tr. at 48:16. The record discloses that the IRS received a "tentative carryback claim" on behalf of Debtor for each of tax years 2004 through 2007 on September 7, 2009 and it issued refunds to the Debtor for each of those years on that same day. The refund amounts issued to the Debtor for each of the years was as follows:
|
• |
2004 |
$ 89,264.00 |
(Exhibit 6 at Bates # 114) |
|
• |
2005 |
$180,033.42 |
(Exhibit 6 at Bates # 124) |
|
• |
2006 |
$ 37,157.00 |
(Exhibit 6 at Bates # 135) |
|
• |
2007 |
$ 38,587.00 |
(Exhibit 6 at Bates # 146) |
The total amount of refunds sent to Debtor for the 2004 through 2007 tax years was thus $345,041.42. Debtor testified that he used these monies for "helping to fund my business, keep my people employed." Trial Tr. at 48:19-20. Amended tax returns for years 2004 through 2007 were then subsequently filed on behalf of Debtor.
The situation with regard to the 2008 tax year was different because no "tentative carryback claim" was ever filed by the Debtor. The record on the point is unclear, but since the original return for tax year 2008 was not filed until August 4, 2009, perhaps that return already incorporated the information that was in the tentative carryback claims that were filed for tax years 2004 through 2007, so such a filing was not needed for 2008. In any event, the tax records show that a refund of $9,258 for tax year 2008 was sent to the Debtor on August 31, 2009.
Subsequent to the issuance of refunds to the Debtor as outlined above, and the filing of amended tax returns by the Debtor,
the IRS further examined the Debtor's returns and concluded that the refunds should not have been made. Based on that conclusion the IRS then made "supplemental" assessments of tax for the years in question. This will be addressed further in connection with the legal discussion of Count I of the Amended complaint wherein the Debtor argues that the IRS claim for tax years 2004 through 2008 are time barred. The tax claims for tax years 2010 through 2012 are secured claims and are not being challenged as time barred by the Debtor.
The...
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