In re Crist, Bankruptcy No. 86-01450D
| Decision Date | 29 January 1988 |
| Docket Number | Adv. No. 87-0084D.,Bankruptcy No. 86-01450D |
| Citation | 85 BR 807 |
| Parties | In re Robert L. CRIST and Linda S. Crist, Debtors. Robert L. CRIST and Linda S. Crist, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
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Dennis Naughton, Dubuque, Iowa, for plaintiffs.
Seth Farber, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.
The matter before the Court is a complaint filed by Robert L. Crist and Linda S. Crist (Debtors) to determine the dischargeability under 11 U.S.C. section 523(a)(1) of certain federal personal income tax liabilities and to determine the extent of their liability, if any, under 11 U.S.C. section 505. A hearing was held on October 14, 1987 and the matter was submitted by Order of same day to the undersigned for consideration. The Court now issues this ruling which shall constitute Findings and Conclusions as required by Bankr.R. 7052. This is a core proceeding pursuant to 28 U.S.C. section 157(b)(2)(I).
Prior to filing a Chapter 7 petition in bankruptcy on June 16, 1986, Debtors were trying to resolve 1981 and 1982 tax matters with the Internal Revenue Service (IRS). Personal returns for Debtors for both years were prepared and timely filed by their accountants in the Maquoketa, Iowa office of Dee Gosling and Company (Maquoketa Accountants). IRS questioned the 1981 return for inter alia a capital loss carryback from a phonograph record distribution investment which resulted in a large deduction. Mr. Crist testified that he was advised by the agent who sold the record investment to him not to consent to an extension of the assessment period for the 1981 tax year. He further testified that he understood that the tax problem with this record distribution investment would be handled on a national level and that his Maquoketa Accountants were working on it.
IRS questioned the 1982 return for inter alia an investment credit carryback from a hog farming venture into which Debtors entered for tax benefits. Deb Shanku of IRS first contacted Mr. Crist on this 1982 matter in the fall of 1984. He directed her to his Maquoketa Accountants. Mr. Crist later met with the Maquoketa Accountants on this and other matters. John Berge, a Certified Public Accountant, with Dee Gosling and Company in its Clinton, Iowa office was assigned to work on the 1982 matter.
By memo of August 4, 1984, Berge asked Debtors to sign an IRS Form 2848 which would give Berge power of attorney for 1982 tax matters. No mention of any other year was made in the memo or on the form. Debtors signed the form on August 7, 1984 and it was received by the IRS on August 13, 1984.
By letter of September 6, 1984 to the Debtors, Berge discussed his review with IRS of two of Debtors' tax matters — the farming venture and a corporate matter involving Crist Construction. There was no mention in the letter of the 1981 tax year dispute concerning the record distribution investment. However, Berge requested powers of attorney for the years 1975 through 1983 to cover the years affected by carrybacks from the adjustments discussed with IRS and provided Debtors with two new IRS Forms 2848. These forms were signed by Debtors on September 18, 1984 and received by IRS on September 24, 1984.
By memo of October 2____,1 1984, Berge provided Debtors with two IRS Forms 872-A, "Special Consent to Extend the Time to Assess Tax" (Special Consent). The memo was captioned "Extension 1981 Tax Return next line Forms 872-A." Berge explained that the Special Consents, "do not agree to any tax liability they merely extend the statute of limitations which is needed primarily because of the Master Recording court case." Debtors did not sign and return the two Special Consents for the 1981 tax year. Debtors and Berge had no further contact or conversations about the forms. By letter of December 12, 1984, Guy Hoard, an IRS agent, sent two Special Consent forms to Debtors for tax year 1981. The letter did not explain the forms or identify a need for Debtors to sign them. Debtors did not sign and return either form or have any further contact with the IRS on the issue.
Berge and Hoard subsequently discussed the Special Consents. A Special Consent covering the 1981 tax year was signed by Berge on behalf of Debtors and dated January 8, 1985. It was received by the IRS and signed by an IRS group manager on January 9, 1985.
Berge testified that he thought a waiver of the applicable statute of limitation via a Special Consent was in Debtors' best interest so that their appeal rights would be preserved. Berge, however, testified that he was unaware that Hoard had contacted Debtors directly on this matter.
Mr. Crist testified that he did not contact either the IRS or Berge concerning his desire that a Special Consent not be executed. He further stated he had no knowledge that Berge had executed the form on their behalf until Debtors began to prepare their bankruptcy petition.
On January 27, 1986, Debtors signed a Special Consent for tax year 1982. Dennis Naughton also signed it on February 4, 1986 as their representative.2 It was received by the IRS appeals office in Des Moines on February 7, 1986 and signed and dated by an IRS appeals officer on February 7, 1986.
Crists filed their petition in bankruptcy on June 16, 1986. A discharge was entered October 7, 1986. Final Decree was entered December 10, 1987.
By two certified letters dated December 19, 1986, IRS informed Robert Crist that the IRS had determined deficiencies for tax years 1975, 1976, 1978, 1979, 1981 and 1982. The letters explained what options were available to Debtors if they desired to contest the deficiencies while they are in bankruptcy.
By complaint of March 12, 1987, Debtors seek a determination of the dischargeability of the IRS claims. Debtors assert the following:
(1) Under Doss v. United States, 42 B.R. 749 (Bankr.E.D.Ark.1984), and pursuant to 11 U.S.C. section 507(a)(7)(A)(iii) and 11 U.S.C. section 523(a)(1)(B), these tax claims are not priority claims and, therefore, are dischargeable;
(2) No valid extension of the period of time in which a tax for 1981 may be assessed was executed by Debtors;
(3) If Debtors' attorney-in-fact could execute a Special Consent IRS Form 872-A for 1981 on Debtors' behalf, IRS is estopped from reliance thereon because IRS made material misrepresentations to Debtors on which Debtors relied;
(4) If the Special Consents for 1981 and 1982 are valid, they are valid only for assessment of 1981 and 1982 taxes;
(5) If the Special Consents for 1981 and 1982 are valid, IRS has failed to assess the taxes within sixty days after the Notice of Deficiency as stated on the Special Consent form 872-A or within 150 days thereafter as stated by law and so the right to do so has expired.
IRS counters that the statute of limitations for both 1981 and 1982 were extended by valid executions of Special Consents. Further, IRS notes that the assessments for 1975, 1976, 1978 and 1979 tax years involve carrybacks from the 1981 tax year and, therefore, the statute of limitations for those years has not yet run under 26 U.S.C. sections 6501(j) and 6501(k). Finally, IRS states the taxes in question are or may be assessable after the commencement of Debtors' bankruptcy and, accordingly, are not dischargeable under 11 U.S.C. section 507(a)(7)(A)(iii).
The non-dischargeability of certain taxes is set forth under 11 U.S.C. section 523. It provides:
11 U.S.C. section 523(a)(1). In other words, if a tax claim is of a type described above, it is non-dischargeable. Since Debtors' tax returns for all years were timely filed and there is no claim of fraud (subparagraphs (B) and (C)), the Court must examine section 523(a)(1)(A), and consequently, the priority of claims established under sections 507(a)(2) and 507(a)(7), to determine whether IRS's claims are therein described.
Section 507(a)(2) establishes a second priority of unsecured claims in the ordinary course of business in an involuntary case. It is clearly inapplicable here.
Section 507(a)(7)(A)3 establishes a seventh priority for allowed unsecured claims of governmental units, only to the extent that such claims are for:
11 U.S.C. section 507(a)(7)(A). Subdivision (i) is inapplicable since each of the returns for the tax years in question was due more than three years before Debtors' petition was filed in June of 1986. Moreover, IRS concedes that ...
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