In re Coleman

• Decision Date: 02 July 2009
• Docket Number: No. 07-00515-NPO.,07-00515-NPO.
• Citation: 417 B.R. 712
• Parties: In re Kevin COLEMAN and Kevin Coleman Construction, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Mississippi

417 B.R. 712

In re Kevin COLEMAN and Kevin Coleman Construction, Inc., Debtors.

No. 07-00515-NPO.

United States Bankruptcy Court, S.D. Mississippi.

July 2, 2009.

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Craig M. Geno, Melanie T. Vardaman, Harris Jernigan & Geno, PLLC, Ridgeland, MS, for Debtors.

Ronald H. McAlpin, UST, Jackson, MS, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER GRANTING MOTION FOR SUMMARY JUDGMENT FILED BY THE UNITED STATES OF AMERICA, INTERNAL REVENUE SERVICE

NEIL P. OLACK, Bankruptcy Judge.

There came on for consideration the United States' Motion for Summary Judgment (the "Motion") (Dkt. No. 268), the Statement of Undisputed Material Facts (the "IRS Statement") (Dkt. No. 268), the Memorandum (the "IRS Memorandum") (Dkt. No. 269), and the Reply (the "Reply") (Dkt. No. 281) filed by the United States of America, Internal Revenue Service (the "IRS"), and the Debtor's Answer and Response to United States' Motion for Summary Judgment (the "Response") (Dkt. No. 277), the Debtor's Response to the Statement of Undisputed Material Facts (the "Response to the IRS Statement") (Dkt. No. 278), and the Debtor's Memorandum Brief (the "Debtor's Memorandum") (Dkt. No. 279) filed by Kevin Coleman (the "Debtor"), in the above-styled chapter 11 proceeding. Craig M. Geno represented the Debtor, and Laura M. Conner represented the IRS. Having reviewed the above referenced pleadings and all the exhibits attached thereto, together with other pleadings on file and the briefs submitted by the parties, the Court finds that there is no genuine issue as to any material fact and that the IRS is entitled to a judgment as a matter of law. Accordingly, the Motion should be granted for the reasons set forth more fully below.

Jurisdiction

This Court has jurisdiction over the subject matter of and the parties to this proceeding. This matter is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(B). Notice of the Motion was proper under the circumstances.

Facts

There are no genuine issues with respect to the following material facts:

1. In 2001, the Debtor incorporated Kevin Coleman Construction, Inc. ( "KCC") in the State of Mississippi for the purpose of performing certain construction work. The Debtor is the president and sole shareholder of KCC. (Aff. of Debtor, Ex. A to Response; Ex. A to IRS Statement).

2. On behalf of KCC, Debtor signed and caused to be filed Corporate Annual Reports with the Mississippi Secretary of State during the years of KCC's existence, beginning in 2001 and including the relevant years 2005 and 2006. (Ex. F to IRS Statement).

3. The Debtor filed federal individual income tax returns separate and apart from KCC, which filed its own federal corporate income tax returns during the years of its existence, including the relevant time period. (Exs. C, D, and E to IRS Statement).

4. In separate federal income tax returns, the Debtor and KCC both treated withdrawals by the Debtor from KCC's corporate funds in the amounts of $150,780 in 2005 and $277,486 in 2006 as loans, rather than as dividend income. (Debtor's Objection to Claim of the Internal Revenue Service) (the "Debtor's Objection to Claim") (Dkt. No. 240). KCC never intended to collect the loans from the Debtor, and the Debtor never intended to repay them. (Aff. of Debtor, Ex. A to Response; Debtor's Resp. to First Set of Interrogs., Ex. G to IRS Statement). In that regard, Debtor never executed any promissory notes to KCC. (Aff. of Debtor, Ex. A to Response; Debtor's Resp. to First Set of Interrogs., Ex. G to IRS Statement).

5. In approximately December 2006, KCC ceased doing business. (Aff. of Debtor, Ex. A to Response).

6. On February 16, 2007, KCC filed its voluntary petition for relief pursuant to chapter 11 of the Bankruptcy Code in a case styled and numbered In re Kevin Coleman Construction, Inc., Case No. 07-00504-NPO.

7. Three days later, on February 19, 2007, the Debtor filed his voluntary petition for relief (the "Petition") pursuant to chapter 11 of the Bankruptcy Code in the above-styled and numbered case. (Dkt. No. 1).

8. On April 10, 2007, the Debtor filed a Motion for Substantive Consolidation (the "Consolidation Motion") (Dkt. No. 29), asking this Court to consolidate this case with the one filed by KCC. In the Consolidation Motion, the Debtor stated that he was the sole shareholder of KCC and that he and KCC commingled assets and liabilities, established "due/to/from" accounts, borrowed money from one another, and repaid each other's debts. Id. He further stated that all creditors treated him and the KCC as a single entity and that he guaranteed substantially all of the indebtedness of KCC. Id.

9. The Consolidation Motion was duly noticed to the IRS, all creditors, and parties-in-interest. (Dkt. No. 30). Neither the IRS nor any other creditor filed an objection to the relief requested.

10. On May 4, 2007, this Court entered an Order Granting Motion for Substantive Consolidation (the "Consolidation Order") (Dkt. No. 44), thereby consolidating this case with the case of In re Kevin Coleman Construction, Inc., No. 07-00504-NPO. The IRS did not appeal the Consolidation Order in either case.

11. On October 2, 2007, the Debtor filed his plan of reorganization (the "Chapter 11 Plan") in this consolidated case. (Dkt. No. 147).

12. After conducting audits of the Debtor and KCC, the IRS on July 29, 2008, amended its original proof of claim (the "Amended Claim") (Claim No. 1-6) to include an unsecured priority claim against the Debtor in the amount of $74,283.21, including interest accrued to the date of the filing of the Petition. (Ex. B to IRS Statement). This amount represents the Debtor's unpaid individual income taxes for the years 2005 and 2006 arising out of alleged dividend income the Debtor incorrectly reported as loans from KCC. The IRS elected to treat the dividend income as "qualified dividends" subject to the capital gains tax rate and adjusted Debtor's taxes accordingly.¹ The tax adjustments prompted the IRS to file its Amended Claim. Consistent with its Amended Claim, the IRS filed its Objection to Confirmation of Debtors' Plan of Reorganization (Dkt. No. 179) on February 22, 2008.

13. On October 20, 2008, this Court confirmed the Chapter 11 Plan (Dkt. No. 234) for the consolidated estate. This Court temporarily resolved the unsettled issue of the unsecured priority claim of the IRS by requiring the Debtor to escrow $85,000 for payment of the Debtor's 2005 and 2006 federal income taxes and by retaining jurisdiction for the later adjudication of the Amended Claim.

14. On November 14, 2008, the Debtor filed its Objection to Claim. He argued that he and KCC never existed separately, so that any income received by him as dividend income or by KCC as business income in reality constituted income only to the Debtor. He complained that it would be unfair to allow the IRS to tax the same funds twice, i.e., once when they were initially received by KCC and taxed as corporate income and twice when they were received by the Debtor and taxed as dividend income.

15. On December 14, 2008, the IRS filed an Answer to the Debtor's Objection to Claim (Dkt. No. 252) in which it denied the Debtor's requested relief.

16. On March 27, 2009, the IRS filed its Motion, Statement, and IRS Memorandum.

17. The Debtor filed his Response, Response to the IRS Statement, and Debtor's Memorandum on April 13, 2009.

18. The IRS filed its Reply on May 4, 2009.

Motion for Summary Judgment Standard and Burden of Proof

Under Federal Rule of Civil Procedure 56, made applicable to bankruptcy proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate when viewing the evidence in the light most favorable to the nonmoving party, the pleadings, depositions, answers to interrogatories, and admissions, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); see Anderson v Liberty Lobby, Inc., 477 U.S. 242, 251, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Rule 56(e)(2) further provides, in relevant part:

When a motion for summary judgment is properly made and supported, an opposing party may not rely merely on allegations or denials in its own pleading; rather, its response must—by affidavits or as otherwise provided in this rule—set out specific facts showing a genuine issue for trial.

Fed.R.Civ.P. 56(e)(2).

Thus, once the moving party has made its required showing, the nonmoving party must go beyond the pleadings and by its own affidavits or by depositions, answers to interrogatories, and admissions on file designate specific facts to establish that there is a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. Ultimately, the role of this Court is "not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249, 106 S.Ct. 2505; see Hamilton v. Segue Software Inc., 232 F.3d 473, 477 (5th Cir.2000).

The burden of proof in tax cases rests on the taxpayer in the non-bankruptcy context. Woodall v. Comm'r, 964 F.2d 361, 363 (5th Cir.1992). The burden does not shift to the IRS when an objection to a federal tax claim is litigated in bankruptcy court, except as otherwise provided by statute. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 26, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Although there is a mechanism under the Internal Revenue Code, 26 U.S.C. § 7491, that permits the shifting of the burden of proof to the IRS if the taxpayer complies with certain enumerated conditions, the Debtor here has not attempted to avail himself of its specific provisions. See 15 Collier on Bankruptcy ¶ TX5.03 [5][c] (Matthew Bender 15th...