In re Berg

• Decision Date: 01 April 2009
• Docket Number: No. 05-39380DWS.,05-39380DWS.
• Citation: 407 B.R. 167
• Parties: In re Philip Jay BERG, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

407 B.R. 167

In re Philip Jay BERG, Debtor.

No. 05-39380DWS.

United States Bankruptcy Court, E.D. Pennsylvania.

April 1, 2009.

COPYRIGHT MATERIAL OMITTED

David A. Scholl, Law Office of David A. Scholl, Newtown Square, PA, for Debtor.

Philip J. Berg, Law Offices of Philip J. Berg, Lafayette Hill, PA, pro se.

MEMORANDUM OPINION

DIANE WEISS SIGMUND, Bankruptcy Judge.

Before the Court is the Debtor's Objection to Proof of Claim (the "Objection") filed by Department of Treasury—Internal Revenue Service (the "IRS"). After an evidentiary hearing held on January 28, 2009 and consideration of the parties' briefs, the Objection will be denied for the reasons set forth below.

BACKGROUND

Following a series of short-lived stopovers by the Debtor in Chapter 13 and Chapter 11 proceedings, this bankruptcy case, which was commenced on November 29, 2005, is concluding as a liquidation under Chapter 7. Because the value of the estate exceeds the allowed claims to be paid by the Chapter 7 trustee, the benefit of any reduction in claims inures to Debtor. Not surprisingly then, Debtor filed objections to numerous proofs of claim. The resolution of this Objection, deferred for many months as discussed below, is the only remaining one pending and therefore the only impediment to the completion of the case with a full recovery to all claimants.

The Proof of Claim and the Objection. While the IRS filed three proofs of claim, at issue here is the proof of claim dated August 25, 2006 (the "POC") asserting a claim in the amount of $72,512.27 (the "Claim").¹ The Claim includes taxes (income and wage), interest and penalties for the tax years 2002, 2003, 2004 and 2005. Exhibit D-3. The Objection, dated July 9, 2008, was short and to the point:

"The Debtor believes that the sums reflected on the IRS' proof of claim are incorrect. Notably, the claim asserts an estimated income tax liability for 2004 while the Debtor's 2004 federal income tax return is attached as Exhibit "B" indicating that no amount is due."

Doc. No. 403.

Debtor seeks disallowance of the POC because he filed a tax return for 2004 and the POC states that the IRS claim is for estimated liability.² Exhibit D-1. However, Debtor acknowledged at the hearing that he had received a 90-day notice of deficiency (the "Notice") from the IRS in January 2007 based on his filed 2004 return of which the IRS was well aware. Exhibit US-1. The Notice stated an income tax deficiency for 2004 of $27,854 plus penalties under 26 U.S.C. § 6651(a)(1) in the amount of $6,963.50 for a late filed return and under § 6662(a) in the amount of $5,570.88 for substantial underpayment. The Notice attached an itemization of Income Tax Examination Changes which memorialized the IRS' disallowance of most of the business deductions taken by the Debtor on his 2004 return. Moreover, it explained his available options and the procedure to challenge the IRS's determination. Id.³

Clearly the issue was not the IRS's failure to observe that Debtor had filed a return. Not unexpectedly at the hearing, the basis of the Objection changed from the one lodged in the filed Objection to a challenge to the disallowed deductions. What has not changed is that the disputed claim is the 2004 income tax of $27,840.00 plus interest and penalties.⁴

The Adjournments and Document Production. The initial listing of the Objection was on August 12, 2008. At that hearing Debtor's counsel advised me that he was informed that an audit was ongoing and a continuance was requested and granted.⁵ After a fruitless follow-up hearing on September 16, 2008 at which the IRS did not appear due to lack of notice by Debtor's counsel, a hearing was held on October 14, 2008. The IRS expressed a willingness to reconsider the POC upon submission by Debtor of documentary support for the deductions he had taken against his income in the 2004 tax return which were disallowed after the audit. Debtor contended he had not had an opportunity to look for his documents, that the movement of his law practice in late September complicated the search as files were in warehouse storage and that he needed more time. While he had reached an agreement with the IRS for a 90-day continuance to produce documents and have the IRS examine them for a possible resolution, I was not comfortable with the length of the adjournment given the prejudicial effect on creditors awaiting their distribution. The IRS stated that its agreement for the adjournment was based on Debtor's representation that he has documents that would be provided and they would substantiate the deductions. When queried about the necessity for that amount of time, Debtor responded that he was tied up in "heavy litigation" and would not be able to undertake the search for three weeks and then would need three to four more weeks to complete it. Finding that level of effort unacceptable, I gave Debtor 30 days to produce and verify that he produced all the documents he had. He then bargained for and was granted six weeks. I continued the hearing until November 25, 2008 to monitor the document production.

At the hearing on November 25, 2008, Debtor reported a new problem. No longer looking for his documents in the warehouse, he stated he had turned to his accountant for the tax year 2004 for copies of all his supporting documents.⁶ To his surprise, he could not locate him and asked for an additional month to keep trying.⁷

By this hearing Debtor's requests for more time to locate his documents, including his explanations for why he had not been successful to date, had worn thin. Because IRS counsel had traveled from Washington, D.C. each time to no productive end, I scheduled a conference call on December 17, 2008 for a final report on the production of documents. I was at that time advised by his counsel that Debtor was unable to obtain any documents as his accountant had them all and he could not locate the man. Given the pendency of the Objection, I scheduled a final hearing on January 28, 2008 at which the parties were directed to appear and put on their cases. They were advised that there would be no further continuances as the adjournments served no purpose anymore.⁸

The Evidentiary Record. It is undisputed that Debtor operated his law practice in 2004. Thus, Debtor argues it was improper for the IRS to disallow many of his business deductions in full. However, he produced no evidence as to what those deductions should be. Rather Debtor's attorney led him through his tax return, identifying various deductions and asking him to opine on whether they were "all legitimate." Not surprisingly, he looked at his Schedules A and C and concluded they were "fair and accurate," and he could not state any reason they should be disallowed. Tr. at 23-24. His authentication of individual expenses produced nothing other than his unsubstantiated view that his deductions were "legitimate."⁹ The only specific point he made was that his 2004 deductions were completely in line with those taken on his 2001, 2002 and 2003 returns. He did not, however, produce those returns, state what the deductions were or compare the operations of his law practice in 2004 to these other periods.¹⁰ Thus, his observation as to prior years had no probative effect.

Debtor also raised a generalized and conclusory objection to the FICA and FUTA tax components of the claim. While reluctant to state that the disallowance of the 2004 tax deductions was his only objection, it appeared that he had not given any thought to what else might have been objectionable in the POC. Indeed nothing else was mentioned in the filed Objection nor in any of the prior hearings. However, when pressed, he proffered a lukewarm and vague challenge to these other taxes.¹¹

Documentation. While it appears that the IRS left open the possibility that Debtor could produce documentation at the hearing that would enable it to examine the acceptability of the deductions he took to his 2004 income,¹² the Debtor clearly testified that he had not produced any supporting documents either prior to the hearing nor was he prepared to do so at the hearing. When questioned on the record about his efforts to produce substantiating documents, it was apparent that his search for the warehoused records, the original basis of the request for continuance after continuance, was cursory and indeed had been abandoned for the easier route of having them supplied by the accountant. Tr. at 35. He sought to justify his failure to look for his warehoused documents more than a "little" by the fact that his office building had been sold and the contents were now packed into five storage bins.¹³ Thus, the focus of failure to substantiate his deductions with records became the disappearance of Marc Raiken, the accountant whom Debtor claimed had retained them after doing his tax returns. The credibility of that justification was challenged by the IRS which noted that Raiken's name does not appear on the 2004 tax return as tax preparer. Exhibit D-1.

Taking a new tack on the eve of the hearing, his mother was now proffered to supply evidence of the legitimacy of his deductions. He testified that Nissenbaum, although 87 years old at the time, had recorded all his expenditures using double entry bookkeeping and had kept complete records of every transaction that took place in his law firm for over 20 years. He "thought" she had a ledger and he "thought" she had supporting files in which she kept the supporting documents, none of which he could find because of the "hasty" move out of the office building. Tr. at 43. In Nissenbaum's absence,¹⁴ Debtor testified that she told him that some of the records would be with Raiken and the rest in storage somewhere.

Acknowledging the absence of documents to support his deduction of business expenses, Debtor nonetheless contends that it was improper for the IRS to allow no deduction where it is apparent that, as he was operating his law practice in 2004, he...