In re Clifford, No. 99-CV-40214-NMG
| Decision Date | 21 November 2000 |
| Docket Number | 00-CV-40158-NMG,00-CV-40159-NMG.,No. 99-CV-40214-NMG |
| Citation | 255 BR 258 |
| Parties | In re Eugene E. CLIFFORD, Debtor. United States of America, Appellant, v. Eugene E. Clifford, Appellee. |
| Court | U.S. District Court — District of Massachusetts |
COPYRIGHT MATERIAL OMITTED
Malcolm J. Barach, Barach & Barach, P.C., Brockton, MA, for Debtor.
Henry J. Riordan, U.S. Dept. of Justice, Tax Division, Washington, DC, for Internal Revenue Service.
On December 28, 1999, Appellant, the Internal Revenue Service ("the IRS") filed an appeal (Bankruptcy Appeal, 99-CV-40214 "the '99 Appeal") from a judgment rendered by the United States Bankruptcy Court. In its Appellants Brief, the IRS claims that the Bankruptcy Court (1) erroneously allowed its proof of claim (filed in the name of the United States of America) in a deficient amount, (2) incorrectly applied a provision of the United States Tax Code to the facts of the case thereby disallowing a claim of the IRS for $175,868.57, and (3) improperly issued two orders requiring the IRS to disgorge funds received by it in the Chapter 13 proceeding of the debtor, Eugene Clifford ("Clifford"). The IRS has also filed in this Court a motion to stay the Bankruptcy Court's order pending appeal and for a hearing.
On September 14, 2000, the IRS filed in this Court two additional appeals (Bankruptcy Appeal, 00-CV-40158 "# 158" and Bankruptcy Appeal, 00-CV-40159 "# 159"). In the # 158 Appeal, the IRS appeals the January 14, 2000 Bankruptcy Court order denying its motions for stay pending appeal and to vacate prior order and in the # 159 Appeal, the IRS appeals a subsequent Bankruptcy Court order which did the same thing.
Pending before this Court are (1) motions of the IRS (a) to consolidate the three Bankruptcy Appeals and (b) for stay pending appeal and request for a hearing and (2) appeals of the IRS from (a) the judgment rendered by the Bankruptcy Court on November 6, 1999 and (b) of two disgorgement orders entered by the Bankruptcy Court.
On April 13, 1995, Clifford filed for protection under Chapter 13 of the Bankruptcy Code (11 U.S.C.) in the United States Bankruptcy Court for the District of Massachusetts. On April 29, 1996, the Bankruptcy Court confirmed Clifford's Chapter 13 plan of reorganization.
On August 2, 1995, the IRS (in the name of the United States of America) filed a proof of claim against Clifford in the amount of $188,454.72. The proof of claim was for (1) personal federal income taxes for the years 1988 and 1992, together with penalties and interest, in the amount of $12,586.15 and (2) two tax "penalty" assessments made against Clifford as an officer of Noyes Insulation, Inc. ("the Company"), with interest, in the amount of $175,868.58. The IRS sought to recover from Clifford the payroll tax withholdings from the wages of Company employees for part of the fourth quarter of 1984 and the first three quarters of 1985. Clifford filed an objection to the IRS claim on September 20, 1996.
The Bankruptcy Court conducted a trial with respect to the IRS claim on November 3, 1996. Clifford testified that he became involved with the Company in February, 1984 with the intent of purchasing it after the owner, Herbert Noyes ("Noyes"), retired. He became the Vice President of the Company in November, made a $15,000 capital contribution and thereafter became a 30% owner of the Company.
Clifford stated that he met with various mechanical contractors, prepared bids, managed projects for the Company, and wrote and signed corporate checks for materials and other items. He had authority to hire and fire any employee who worked on Company insulation projects. He co-signed a $100,000 corporate note in February, 1985 because the Company was having financial difficulties and had a payroll tax delinquency.
Clifford further testified that he had nothing to do with the Company payroll, never saw the corporate books because they were kept in a locked safe, and was told by Noyes that Noyes would take care of all the payroll taxes. Clifford stated that he knew that the company was suffering financial difficulties in December, 1984 but that he suggested to Noyes that it continue to pay some creditors in order to stay in business, by, in his words, "robbing Peter to pay Paul."
After the hearing and brief deliberations, the Bankruptcy Court orally ruled that Clifford was not liable for the penalty assessments because he was not a "responsible person" under 26 U.S.C. § 6672. The Court entered an order allowing the IRS claim for Clifford's personal federal income tax liability in the amount of $3,765.33.
On November 9, 1999, the Bankruptcy Court entered an order ("the First Disgorgement Order") (1) requiring the IRS to refund the excess of the funds received by it over the amount of its allowed claim and (2) ordering Clifford to pay from the resulting surplus an amount he owed to BankBoston for a mortgage arrearage. After the IRS moved to vacate the order for lack of process, the Bankruptcy Court ruled that the first order was moot and issued another order ("the Second Disgorgement Order") on January 14, 2000.
On November 15, 1999, the IRS filed in the Bankruptcy Court a notice of appeal of the decision of the Bankruptcy Court, which is pending before this Court as the '99 Appeal. During the following nine months, the IRS filed numerous motions to stay, to vacate, to consolidate, etc. and notices of appeal the net result of which are the pending motions and appeals described in the introductory section of this Memorandum.
The IRS has moved on three separate occasions to consolidate its appeals pursuant to Fed.R.Civ.P. 42(a), which is made applicable to the instant case by Fed. R.Bankr.P. 9014 and 7042, MLBR 9013-1, and Local Rule 203(A). This Court will allow those motions.
On appeal, the IRS objects to the Bankruptcy Court's partial allowance of its proof of claim in the amount of $3,765, rather than the appropriate amount of $188,454. The IRS contends that (1) the Bankruptcy Court allowed its claim for Clifford's personal federal income tax liability in the amount of $12,586 in its oral ruling but failed to list the appropriate amount in its order and (2) erroneously applied 26 U.S.C. § 6672 to the facts of the case.
The IRS claims that it is entitled to a judgment in the amount of $12,586.15, the full amount of Clifford's personal federal income tax liability for the years 1988 and 1992 because he never objected to the agency's proof of claim either before or at trial. The IRS further contends that the Bankruptcy Court specifically found that the portion of the claim relating to Clifford's personal federal income tax liability was uncontested in its oral ruling and that it should have allowed the proof of claim in that amount in its written order. It contends that the court, in entering its judgment, confused $3,765.33, the exact amount of interest on the claim at the time of trial, with the full amount of the income tax claim and made a clerical error in transcribing the amount of the judgment. In his opposition brief, Clifford does not deny that the IRS is entitled to $12,586.15.
The Bankruptcy Code provides special rules for the administration of claims. Sections 501 and 502 of Title 11 deal with pre-petition claims made against the property of a debtor's estate. Sections 106(1) and 505 of the Bankruptcy Code authorize a bankruptcy court to determine the validity and the amount of tax claims which are normally asserted by the United States against debtors' estates as "proofs of claim" under 11 U.S.C. § 502.
Under the Bankruptcy Code, a creditor may file a proof of claim which is "deemed allowed" unless a party in interest objects. 11 U.S.C. §§ 501(a), 502(a). A proof of claim filed in accordance with the Bankruptcy Rules is prima facie evidence of the validity and amount of the claim. See In re Hemingway Transport, Inc., 993 F.2d 915, 925 (1st Cir.1993), cert. denied, 510 U.S. 914, 114 S.Ct. 303, 126 L.Ed.2d 251 (1993); United States v. Braunstein (In re Pan), 209 B.R. 152, 155-57 (D.Mass.1997). In order to rebut the presumption that attaches to a proof of claim, a party objecting must produce "substantial evidence." See In re Hemingway Transport, Inc., 993 F.2d at 925.
Because federal common law applies to tax proceedings in bankruptcy cases, such cases must be litigated the same way they would be in any other forum. See, e.g., In re Stoecker, 179 F.3d 546, 551 (7th Cir.1999), cert. denied, 528 U.S. 1068, 120 S.Ct. 784, 145 L.Ed.2d 659 (2000); In re Hayes, 240 B.R. 457, 462-63 (Bankr.D.Mass.1999). Under applicable federal common law, a presumption of correctness attaches to a tax assessment made by the IRS. See Geiselman v. United States, 961 F.2d 1, 6 (1st Cir.1992). In order to overcome this presumption, an objecting party must demonstrate by a preponderance of the evidence that the assessment is entirely incorrect. See Caterino v. United States, 794 F.2d 1, 5 (1st Cir.1986).
In this case, the Bankruptcy Court should have entered an order allowing the IRS's proof of claim in the amount of $12,586.15. Apparently, it erred by entering judgment in the amount of the interest, $3,765.33, instead of the amount of the principal, with interest, of $12,586.15. Judgment will be entered in the latter amount.
Sections 3102 and 3402 of the Internal Revenue Code require an employer to deduct and withhold income and social security taxes from the wages paid to its employees. 26 U.S.C. §§ 3102(a), 3402. Section 7501 of the Code provides that the withheld taxes are to be retained by the employer as a special trust...
To continue reading
Request your trial