In re ACME Music Co., Inc.

• Court: U.S. Bankruptcy Court — Western District of Pennsylvania
• Writing for the Court: M. BRUCE McCULLOUGH
• Citation: In re ACME Music Co., Inc., 196 B.R. 925 (Bankr. W.D. Pa. 1996)
• Decision Date: 07 June 1996
• Docket Number: Bankruptcy No. 93-23514-MBM. Adversary No. 94-2296.
• Parties: In re ACME MUSIC COMPANY, INC., Debtor. ACME MUSIC COMPANY, INC., Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

196 B.R. 925 (1996)

In re ACME MUSIC COMPANY, INC., Debtor ACME MUSIC COMPANY, INC., Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

Bankruptcy No. 93-23514-MBM. Adversary No. 94-2296.

United States Bankruptcy Court, W.D. Pennsylvania.

June 7, 1996.

COPYRIGHT MATERIAL OMITTED

William C. Kaczynski, Pittsburgh, PA, and James A. Prostko, Phillips & Galanter, PC, Pittsburgh, PA, for ACME Music Co., Inc.

R. Scott Clarke, Michelle O. Gutzmer, Trial Attorney, Tax Division, U.S. Dept. of Justice, Washington, DC, for I.R.S.

MEMORANDUM OPINION

M. BRUCE McCULLOUGH, Bankruptcy Judge.

STATEMENT OF FACTS

ACME Music Company (ACME), debtor and plaintiff in this adversary proceeding, initiated this bankruptcy case by filing a petition under Chapter 11 on October 5, 1993. The Internal Revenue Service (IRS), defendant in this proceeding, filed a proof of claim in this case for $2,893,729.35, asserting liability on ACME's part for outstanding taxes pertaining to the period from 1988-1992.¹ Because ACME objects to both the legality and amount of this claim for taxes, it has requested that this Court, pursuant to 11 U.S.C. § 505(a)(1), determine both the amount and/or legality of such tax assessment. Subsequent to a status conference between the parties on November 21, 1995, this Court framed and proposed to the parties certain issues pertinent to a resolution of a portion or all of this proceeding. At the same time, this Court directed either or both of the parties to submit motions for summary judgment regarding any or all of such issues. ACME submitted a motion for summary judgment which, while not exactly corresponding to this Court's breakdown of the issues, essentially requests full summary judgment. The IRS, in both its response and at a hearing on April 15, 1996, opposes such motion of ACME.

This Court may grant ACME's motion for summary judgment, or partial summary judgment with respect to particular issues, only "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 ie., ACME is entitled to a judgment as a matter of law." Fed.R.Civ.P. Rule 56(c),² 28 U.S.C.A. (West 1992). Stated another way, "where the record, taken as a whole, could not `lead a rational trier of fact to find for the nonmoving party ie., the IRS, summary judgment is proper.'" Hankins v. Temple University, 829 F.2d 437, 440 (3rd Cir.1987). While summary judgment is inappropriate in those instances where a genuine issue remains as to a material fact, this Court may proceed to compile the record in this case, for purposes of this motion only, by resolving all genuine issues of fact, either material or not, in the favor of the IRS.

The following facts are not disputed:³

1. ACME was in the business of placing coin-operated machines that it owns on the premises of others.⁴

2. With only two exceptions, ACME split the gross receipts generated by the machines with the owners of the premises on which the machines were placed pursuant to written agreements between ACME and such owners.

3. ACME reported as income on its federal income tax returns for all years in question only its portion of the profits called for pursuant to such arrangements.

4. ACME entered the premises of location owners during business hours and removed money from the machines on a periodic basis, counting it and distributing at that time a portion to the location owners in accordance with their agreement.⁵

5. The location owners maintained sole possession of the keys to their establishments.

6. With the exception of license fees, the cost of which it shared equally with the location owners, ACME assumed total responsibility for maintenance of its machines and other expenses associated with its placement arrangements.

7. ACME selected, on its own, the particular machines to be placed upon the premises.

8. Differences, often sharp, exist among the beliefs of numerous establishment owners regarding the precise legal, tax, and business classification of their arrangements with ACME. These differences are evidenced by the disparity in depositions among the various establishment owners.

9. ACME, in exchange for the initiation of certain of its arrangements, provided certain location owners with, what ACME termed, an advance on their future earnings from the machines. ACME contends that such advances were to be repaid through future setoffs against the location owners' portion of the funds collected from the machines.

The IRS, while not disputing this contention, maintains that such payments were made in order to allow ACME to place its machines on the particular premises. ACME has not disputed this contention, rather only disputing the IRS\' inference therefrom.

Only one fact clearly seems to be disputed, and that is whether ACME retained sole possession of keys to the machines, the IRS maintaining that it did while ACME maintains otherwise.

As a result of an audit of ACME's operations for the years 1988 and 1989, the IRS determined, for the first time, that ACME's arrangements with the location owners constituted leases of space by ACME; ie., ACME was the lessee and the location owners were the lessors. On the basis of this determination, the IRS then concluded that ACME had made rent payments to the location owners. Because payments to each of the location owners were for more than $600 in each of these years, the IRS contends that ACME was required for each year, pursuant to § 6041(a), (d) of the Internal Revenue Code (IRC),⁶ to file an information return on Form 1099 and issue a corresponding statement to each of the location owners with respect to such remuneration. Because such returns and statements were not issued, the IRS assessed penalties pursuant to IRC §§ 6721(e)⁷ and 6722(c).⁸ The IRS' conclusion that ACME was subject to IRC § 6041(a) also carried with it an obligation on ACME's part to deduct backup withholding taxes from payments to the location owners pursuant to IRC § 3406(a).⁹ ACME has taken the position, as it did in its prior income tax returns, that it was the lessor of the machines and that the location owners were lessees. Such position was upheld by the IRS in its audit of ACME for the years 1986 and 1987. Therefore, ACME maintains that it has not made payments to the location owners and is, therefore, not subject to the IRS' reporting and withholding requirements.

The IRS asserts, alternatively, that if ACME cannot properly be viewed as the lessee in its arrangements with the location owners and, therefore, payments within the meaning of IRC § 6041(a) were not made, such arrangements nevertheless constituted joint ventures between ACME and each location owner. Because IRC § 761(a) mandates that joint ventures are viewed as partnerships for the purpose of federal income taxation,¹⁰ the IRS asserts an alternative obligation on the part of ACME to file partnership returns and furnish statements to the partners for the years in question pursuant to IRC § 6031(a), (b).¹¹ In light of the fact that this obligation was not met by ACME for those years, the IRS asserts alternatively that ACME is subject to penalties pursuant to IRC §§ 6698(a)¹² and 6722(c).¹³ The legality of this alternate contention is also disputed by ACME.¹⁴

DISCUSSION

I. Whether this Court has jurisdiction to determine ACME's tax liability given that such determination may impact non-debtor third parties?

As an initial matter, and in response to an assertion by the IRS in its initial answer to ACME's complaint, this Court wishes to make clear that it has jurisdiction to determine the tax liability of a debtor in the instance where such determination may impact non-debtor third parties. The IRS asserts that, because this Court "lacks jurisdiction to litigate the tax liability of, or tax matters relating to, non-debtor third parties," it also may not entertain ACME's § 505(a) motion. This assertion is incorrect notwithstanding that a determination of ACME's tax liability in this case may ultimately impact tax matters pertaining to the establishment owners as well as principals and/or employees of ACME, all of whom are non-debtor third parties in this case. The settled law, at least in the Third Circuit, is that a bankruptcy court, pursuant to 28 U.S.C. §§ 1334 and 157, (a) may determine the tax liability of a debtor regardless of the impact (and binding effect) which such determination may also have on non-debtors, but (b) may not determine the tax liability of non-debtors in those instances where such determination would not, in any way, directly and substantially affect the debtor's bankruptcy case. Quattrone Accountants, Inc. v. I.R.S., 895 F.2d 921, 924-26 (3rd Cir.1990);¹⁵see also Matter of Campbell Enterprises, Inc., 66 B.R. 200, 202-04 (Bankr.D.N.J.1986); In re Major Dynamics, Inc., 14 B.R. 969, 972 (Bankr.S.D.Cal.1981). Applying this proposition to this case, this Court clearly has jurisdiction to determine ACME's tax liability pursuant to 11 U.S.C. § 505(a) because such a determination will directly and substantially affect ACME's bankruptcy case notwithstanding its possible impact upon non-debtor third parties. Moreover, because this Court is called upon to determine the tax liability of the debtor, this proceeding is also a core proceeding pursuant to 28 U.S.C. § 157(b)(1), (b)(2)(A), (b)(2)(B), and (b)(2)(O).

The IRS has not argued, in the alternative, that this court should abstain from determining ACME's tax liability pursuant to 28 U.S.C. § 1334(c)(1). However, a motion to that effect would also fail because another proceeding regarding ACME's tax liability is not presently in process, and lifting the automatic stay and commencing such an action in another court would be inefficient.

II. Whether ACME's arrangements with the location owners rendered it subject to the information reporting requirements of IRC §...