In re Aberl

• Decision Date: 16 September 1993
• Docket Number: Bankruptcy No. 91-34623,Adv. No. 91-3542.
• Citation: 159 BR 792
• Parties: In re George ABERL, Lois Aberl, Debtors. George ABERL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

159 B.R. 792 (1993)

In re George ABERL, Lois Aberl, Debtors George ABERL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Bankruptcy No. 91-34623, Adv. No. 91-3542.

United States Bankruptcy Court, N.D. Ohio, W.D.

September 16, 1993.

Verne Armstrong, Asst. U.S. Atty., Toledo, OH, Henry Riordan, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, DC, for U.S.

Eugene Canestraro, Fred Henning, Toledo, OH, for debtors.

OPINION AND ORDER DETERMINING DEBT TO BE DISCHARGED

WALTER J. KRASNIEWSKI, Bankruptcy Judge.

This matter is before the Court on George and Lois Aberl's (the "Aberls") complaint to determine dischargeability of federal income taxes for tax years 1981 and 1983 under 11 U.S.C. § 523(a)(1)(A). This section excepts from discharge income taxes assessed within 240 days of a bankruptcy petition (the "240 day rule") plus any time during which the 240 day period is tolled by an offer in compromise pursuant to 11 U.S.C. § 507(a)(7)(A)(ii). Upon the evidence adduced at trial, the Court finds that the Aberls' complaint is well taken and that the Aberls' debt owed to the Internal Revenue Service (the "IRS") for tax years 1981 and 1983 should be discharged.

FACTS

The Aberls filed a petition under Chapter 7 of title 11 on November 27, 1991 (the "Petition").

Prior to the Petition, the Aberls made a formal written offer in compromise of their prior years' federal tax liability in the amount of $35,000 to the IRS on August 21, 1990 (the "Offer"). See Government Exhibit D, Form 656 Offer in Compromise. The IRS assessed the Aberls with deficiencies for the tax years 1981 and 1983 of $26,630.40 and $2,326.46, respectively, on October 19, 1990. On March 12, 1991, the IRS rejected the Offer (the "Rejection"). See Government Exhibit E.

The parties agree that the Aberls did not make another written offer in compromise as prescribed by IRS regulations after the Offer. However, the parties differ as to how certain communications between the Aberls' former counsel Alan Mikesell ("Mikesell") and the IRS subsequent to the Rejection should be characterized.

Should the Court accept any of the three arguments advanced by the IRS, the Aberls' income taxes for tax years 1981 and 1983 will represent nondischargeable priority taxes under 11 U.S.C. § 523(a)(1)(A). First, the IRS argues that the Offer tolled the 240 day rule. Second, the IRS argues that a letter written to the IRS by Mikesell on June 4, 1991 requesting that the IRS reconsider the Offer (the "Letter") or certain oral negotiations which took place between the IRS and Mikesell at a meeting subsequent to the Letter (the "Negotiations") constituted an offer in compromise which tolled the 240 day rule. Third, the IRS argues that the Negotiations and the Letter represented an appeal which made the previously rejected Offer a pending offer thus tolling the 240 day rule. The calculation of these time periods can be illustrated as follows:

                Time after assessment by the IRS on October 19, 1990 and prior to
                Petition filed November 27, 1991                                             404 days
                Calculation of prepetition period during which taxes assessed were nondischargeable
                priority taxes if the Offer tolled the 240 day rule
                Time after assessment by the IRS on October 19, 1990 and prior
                to Rejection on March 12, 1991                                               144 days
                plus 30 days (per IRS interpretation of § 507(a)(7)(A)(ii))                   30 days
                plus 240 days (per IRS interpretation of § 507(a)(7)(A)(ii))                 240 days
                                                                                             ________
                                                                  Total                      414 days
                Calculation of prepetition period during which taxes assessed were nondischargeable
                priority taxes if the Negotiations or the Letter represented either a "renewed offer"
                or an
                "appeal" tolling the 240 day rule
                Time after Letter dated June 4, 1991 and prior to Petition filed
                November 27, 1991                                                             176 days
                plus 30 days (per IRS interpretation of § 507(a)(7)(A)(ii))                    30 days
                plus 240 days (per IRS interpretation of § 507(a)(7)(A)(ii))                  240 days
                                                                                              ________
                                                                   Total                      446 days
                

The Letter requested that the IRS reconsider the Offer or a lesser amount in compromise of the Aberls' tax liability in light of Mr. Aberl's (the "Debtor") age, health and financial condition at that time. See Government Exhibit F, p. 2. The Letter further referred to certain "significant errors" in the Statement of Ability to Pay prepared by IRS agents. See Government Exhibit F, p. 1-2.

Fred Yellon ("Yellon"), an advisor in the Special Procedures Division of the IRS, testified that the IRS treated the Negotiations and the Letter as an appeal and that the Offer was still under consideration until the date of the Petition.

The Aberls argue that Mikesell did not have their consent to enter into an offer in compromise subsequent to the Rejection. Further, the Aberls argue that the Negotiations and the Letter did not constitute an offer in compromise or an appeal.

George Aberl (the "Debtor") testified that the Aberls did not make an offer in compromise after the Rejection. The Debtor further testified that the Aberls did not appeal the Rejection. The Debtor testified that the Negotiations and the Letter were a response to a letter notifying the Aberls of the Rejection. The Aberls received two letters from the IRS inviting them to contact the IRS if they had any questions regarding the Rejection. See Plaintiffs' Exhibits 5 and Government Exhibit E. According to the Debtor, Mikesell told him that though the Offer had been rejected, in Mikesell's opinion the original offer was adequate.

The Debtor testified that he requested that Mikesell contact the IRS to determine whether the IRS would entertain another offer for a lesser amount because of the Debtor's age, health and financial condition. The Debtor also testified that the Aberls did not file a written appeal in response to the letter notifying the Aberls of the proposed Rejection which stated that "you . . . will be provided 15 days to request a written appeal". See Plaintiff's Exhibit 5. The Debtor testified that though Mikesell had the Aberls' consent to discuss the Aberls' prior taxes with the IRS, the Debtor was unaware of the letter which Mikesell submitted to the IRS and that Mikesell did not have the Aberls' consent to enter into an offer in compromise with the IRS or to appeal the Rejection.

Additionally, the parties provided testimony as to the effect of an offer in compromise on collection activities by the IRS in general and to collection activities by the IRS in this particular case.

Ronald Zelienski, IRS Group Manager for the Collection Division, and Yellon indicated that while an offer in compromise is pending, the IRS performs collection activities on a "case-by-case basis".

According to the Debtor, the Aberls received no notification from the IRS that collection activities had been suspended while the Offer was pending. The Debtor also stated that he was contacted after the Rejection, in May of 1991, by Steve Biela, a collection representative for the IRS.

Responding to the Aberls' allegations that certain computer codes on their tax transcripts indicated that their income tax liabilities had been abated, Yellon testified that the entries were made in order to prevent automatic collection activities by the IRS during the pendency of the Aberls' bankruptcy case such as offsetting the Aberls' income taxes and levying on the Aberls' bank accounts.

DISCUSSION

BURDEN OF PROOF

The IRS must prove that the Aberls' tax liability is nondischargeable by the preponderance of the evidence. Hopkins v. U.S. (In re Hopkins), 133 B.R. 102 (Bankr.N.D.Ohio 1991); e.g. Hatchett v. U.S. (In re Hatchett), 1993 WL 360670 (Bankr.E.D.Mich.); Lewis v. U.S. (In re Lewis), 151 B.R. 140 (Bankr.W.D.Tenn. 1992); cf. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (preponderance of the evidence standard applies to actions to except debt from discharge under 11 U.S.C. § 523(a)).

COMMUNICATIONS BETWEEN THE PARTIES PRIOR TO THE REJECTION

The Offer

APPLICABLE STATUTES:

11 U.S.C. § 523 provides that:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

(1) for a tax or a customs duty —

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(7) of this title, whether or not a claim for such tax was filed or allowed.

11 U.S.C. § 507 provides that:

(a) The following expenses and claims have priority in the following order: . . . (7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for —

(A) a tax on or measured by income or gross receipts —

. . . (ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition.

At the outset, the Court notes that "exceptions to dischargeability are to be construed strictly". Manufacturer's Hanover Trust Co. v. Ward (In re Ward), 857 F.2d 1082, 1083 (6th Cir.1988) (citations omitted).

In deciding whether the taxes assessed against the Aberls are dischargeable in bankruptcy, the Court must first decide whether a formal written offer in compromise made prior to the assessment of taxes by the IRS tolled the running of the 240 day rule while the Offer was pending.

In interpreting 11 U.S.C. § 507(a)(7)(A)(ii), this Court "is guided by the fundamental canon that statutory interpretation begins with the language of the statute itself"....