In re American Motor Club, Inc.
| Decision Date | 29 April 1992 |
| Docket Number | Bankruptcy No. 887-70763-260. |
| Citation | 139 BR 578 |
| Parties | In re AMERICAN MOTOR CLUB, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Rosner & Goodman by Marianne F. Murray, New York City, for Nicholas Neu.
Phillips, Nizer, Benjamin, Krim & Ballon by Louis A. Scarcella, Garden City, N.Y., for debtor.
Philip Irwin Aaron, P.C. by Philip Irwin Aaron, Jules A. Epstein, Syosset, N.Y., for Creditors' Committee.
DECISION ON MOTION TO DETERMINE THE TAX LIABILITY OWED BY AMERICAN MOTOR CLUB, INC. AND AUTHORIZING THE PAYMENT OF SUCH TAX LIABILITY BY THE DEBTOR-IN-POSSESSION
This matter comes before the Court on the Motion of Nicholas Neu ("Neu") for an order pursuant to section 505 of the Bankruptcy Code to determine the tax liability owed by American Motor Club, Inc., the debtor and debtor in possession (the "Debtor" or "AMC") to the Internal Revenue Service (the "IRS") which had been assessed against Neu in his capacity as a director of the Debtor, as a person responsible for the payment of the debtor's withholding taxes, and authorizing the payment by the Debtor-in-Possession of such tax liability to the IRS. After a hearing and for the reasons stated below, Neu's motion is denied.
The Debtor, a New York corporation, was in the business of selling automobile pre-paid collision service contracts to New York residents. A decision of the Supreme Court, State of New York, New York County, dated January 14, 1987, against AMC, held that the contracts constituted an illegal insurance business. By Order and Judgment dated April 18, 1987, AMC was permanently enjoined from engaging in the business of repairing or compensating consumers for motor vehicles damaged as a result of accident or theft, and was assessed a penalty of $5,001,000.00 for its violation of New York State Insurance Law. Shortly thereafter, on May 19, 1987, AMC filed the within petition for relief under Chapter 11 of the Bankruptcy Code.
The stock of AMC is owned by British Management Company, Ltd. ("BIM"), a corporation organized and existing under the laws of the Turks and Calicos Islands. Prior to the filing of the bankruptcy petition, John Senise, Marie Neu and the aforementioned Nicholas Neu were directors of AMC.
On March 20, 1991, Neu received from the IRS a proposed assessment declaring him a responsible person under § 6672 of the Internal Revenue Code (the "IRC") and possibly liable in the amount of $40,364.02 for AMC's failure to pay payroll withholding taxes for the tax period ending March 31, 1987. Thereafter, on August 19, 1991, Neu received notice that he had been assessed a 100% penalty equal to the amount of the unpaid payroll withholding taxes. Neu claims that he commenced the appropriate appeal process before the IRS pursuant to § 6672 by paying the requisite portion of the tax and requesting a refund of the amount paid and an abatement as to the remainder. Although Neu filed the administrative appeal, he did not have sufficient funds to post the necessary bond to stay any enforcement pending the IRS determination of his appeal.
On September 13, 1991, Neu received from the IRS a Notice of Intent to Levy to satisfy the tax assessment against him, which permits the IRS to immediately commence the seizure of Neu's property to satisfy the assessment.
On October 16, 1991, Neu filed the instant motion for an order pursuant to section 505 of the Bankruptcy Code to determine the tax liability owed by the Debtor to the IRS which had been assessed against him and authorizing the Debtor to pay such tax liability to the IRS. In his motion, Neu alleges that he will suffer an extreme hardship if the claim is not authorized to be paid immediately. Furthermore, Neu claims that the Debtor is the actual party responsible for the tax assessment, it has sufficient funds to make the payment, and it anticipates that it will do so upon confirmation of a plan in this Chapter 11 reorganization. It is to be noted that early in this case, it became apparent that none of the officers of the Debtor were continuing on in the operations of the Debtor's affairs. Consequently, an Order was entered by this Court, whereby, the Official Committee of Unsecured Creditors (the "Committee") was substituted as the party plaintiff or defendant in all pending litigation concerning the Debtor and was authorized and empowered to prosecute, defend, compromise or settle, release or abandon any claim or cause of action asserted or assertable by or against the Debtor. The Committee, by its counsel, has proceeded with the ongoing liquidation of the Debtor in this Chapter 11 case in lieu of converting it to a case under Chapter 7. In response to the within motion, by reason of the foregoing, the Debtor's counsel, Phillips, Nizer, Benjamin, Krim & Ballon, Esqs., state that they are unable to take a position on the motion. However, Debtor's counsel requests that the Court defer any payment of the IRS tax claim, as the Debtor's estate may have rights in the claim which it has not yet had the opportunity to assert.1 The Committee filed an affirmation in opposition to Neu's motion asserting that it was Neu, as a principal of the Debtor, who caused the Debtor to fail to pay the taxes on behalf of the Debtor prior to the filing of the petition in bankruptcy. The Committee therefore concludes that, Neu's failure to properly fulfill his obligations as a fiduciary and pay these pre-petition withholding taxes should not be revisited against the Debtor.
Section 505(a) of the Bankruptcy Code grants authority to the bankruptcy court to determine the amount or legality of "any tax, any fine or penalty relating to a tax, or any addition to tax," as long as the amount or legality of the tax has not been contested or adjudicated by a "judicial or administrative tribunal of competent jurisdiction" before the filing of the bankruptcy petition. 11 U.S.C. § 505(a). This Court is therefore precluded from reviewing any determination of a debtor's tax liability where that liability has already been contested or adjudicated. In re Galvano, 116 B.R. 367, 371-72 (Bankr.E.D.N.Y.1990); In re Kaufman, 115 B.R. 378, 379 (Bankr. S.D.Fla.1990); In re Northwest Beverage, Inc., 46 B.R. 631, 635 (Bankr.N.D.Ill.1985) (citing Arkansas Corp. Comm'n v. Thompson, 313 U.S. 132, 142, 61 S.Ct. 888, 891, 85 L.Ed. 1244 (1941)).
Section 505(a) specifies that "the court may determine the amount or legality of any tax. . . ." 11 U.S.C. § 505(a)(1)2 (emphasis added). This language indicates that the Bankruptcy Court's authority to determine a debtor's tax liability is discretionary. Accordingly, the Court may decline to review a debtor's tax liability and refer the debtor's motion for determination to the Tax Court.
There are a number of factors which may be considered by a court when deciding whether to undertake a § 505 review. Galvano, 116 B.R. at 372. These factors include the complexity of the tax issues to be decided, the need to administer the bankruptcy case in an orderly and efficient manner, the burden on the Bankruptcy Court's docket, the length of time required for trial and decision, the asset and liability structure of the debtor, and the prejudice to the debtor and potential prejudice to the taxing authority. Id.; In re Hunt, 95 B.R. 442, 445 (Bankr.N.D.Tex. 1989).
The legislative intent behind § 505 was "to afford a forum for the ready determination of the legality or amount of tax claims, which determination, if left to other proceedings, might delay conclusion of the bankruptcy estate." Kaufman, 115 B.R. at 379 (quoting In re Diez, 45 B.R. 137, 139 (Bankr.S.D.Fla.1984)). In enacting § 505, Congress was concerned with protecting creditors from the dissipation of an estate's assets which could result if creditors were bound by a tax judgment which the debtor, due to its ailing financial condition, failed to contest. In re Fiedel Country Day Sch., 55 B.R. 229, 231 (Bankr.E.D.N.Y. 1985); Northwest Beverage, 46 B.R. at 631.
Therefore, the Bankruptcy Court must abstain from determining a debtor's tax liability in which the interest of the creditors and the debtor would not be served. In re Smith, 122 B.R. 130, 133 (Bankr.M.D.Fla.1990); In re Cooper Properties Liquidating Trust, Inc., 61 B.R. 531, 535 (Bankr.W.D.Tenn.1986). "This conclusion is supported by subclause (b) of § 505 which sets forth specific limitations on the grant set forth in subclause (a) of the section."3 Smith, 122 B.R. at 133. In addition, this conclusion does not prevent this Court from abstaining from the motion on a different ground. For example, "if the impact of abstention on the general administration of the estate of this Chapter 11 Debtor, and, of course, on the Debtor, is minimal or non-existent, abstention may be appropriate." Id.
In order to more clearly evaluate the issue of whether a § 505 review is warranted, this Court must analyze the IRS's taxing procedure. Pursuant to the Internal Revenue Code, employers are required to withhold from their employees' pay checks money representing the employees' personal income taxes4 and social security taxes.5 The employer holds these funds in trust for the United States.6 These funds are commonly referred to as "trust fund taxes." If the employer fails to pay over the trust fund taxes, the IRS may collect an equivalent amount directly from officers or employees of the employer who are responsible for collecting the tax. United States v. Energy Resources Co., 495 U.S. 545, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990); In re Pippinger, 117 B.R. 756, 758-59 (Bankr. M.D.Ga.1990). Section 6672(a) of the Internal Revenue Code provides:
(a) General rule. Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment...
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