In re Dakota Industries, Inc., Bankruptcy No. 87-40209-PKE.

• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of South Dakota
• Writing for the Court: PEDER K. ECKER
• Citation: 131 BR 437
• Parties: In re DAKOTA INDUSTRIES, INC., Debtor.
• Docket Number: Bankruptcy No. 87-40209-PKE.
• Decision Date: 04 September 1991

131 B.R. 437 (1991)

In re DAKOTA INDUSTRIES, INC., Debtor.

Bankruptcy No. 87-40209-PKE.

United States Bankruptcy Court, D. South Dakota, S.D.

September 4, 1991.

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Billie L. Crowe, Trial Atty., U.S. Dept. of Justice, Tax Div., Washington, D.C., for petitioner

Harry A. Engberg, Rollyn H. Samp Law Offices, Sioux Falls, S.D., for respondent.

PEDER K. ECKER, Bankruptcy Judge.

ACTION

This case adjudicates several tax disputes based on stipulated facts. The parties

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and Court agreed that the Court's current law clerk,¹ who worked for both parties on completely unrelated matters, may ethically assist in the instant matter. The Court derives jurisdiction over this core matter, respectively, from 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(B). This memorandum decision constitutes findings of facts and conclusions of law pursuant to Bankr.R. 7052

FACTUAL BACKGROUND

The following facts, gleaned from the record and stipulated to by the parties, cover more than a decade of tax decadence. Only facts stipulated to or clearly enunciated in the record consist of the factual background.

1. In May, 1979, Dakota Industries, Inc. (Dakota), established a trust fund account at a bank (Bank), pursuant to 26 U.S.C. § 7512, due to previous late payment of the trust fund portion of employment taxes.

2. Dakota deposited at least $35,005.58 in Bank through the deposits of $12,836.66 on February 26, 1980, $10,949.22 on February 28, 1980, and $11,219.70 on May 14, 1980.

3. Withdrawals from the trust fund account at Bank included $23,785.22 on April 4, 1980, and $11,220.36 on May 23, 1980, totalling $35,005.58.

4. The Internal Revenue Service (IRS) never received the withdrawn trust funds.

5. Dakota's $23,785.22 check, dated March 20, 1980, to the IRS was returned for insufficient funds.

6. Bank "allegedly" removed $35,004.92 from the trust fund account to Dakota's regular bank account, also located at Bank. "Allegedly" is used rather than conclusive language because Bank is not a party to the lawsuit so it is not in a position to admit or deny allegations of misconduct.

7. Dakota filed Chapter 11 on July 22, 1980.

8. Dakota's Chapter 11 was dismissed on December 6, 1986.

9. Dakota refiled Chapter 11 on April 3, 1987.

10. The IRS filed proofs of claims totalling $546,279.36 on August 21, 1987, covering 1978 through 1986.

11. Undisputed base tax amounts are $220,000 for the 941's and $22,000 for the 940's.

12. The IRS assessed $41,721.72 against Dakota based on a Combined Annual Wage Report (CAWR) adjustment.

13. Dakota's plan was confirmed February 23, 1988.

ISSUES

I. What is the collection statute of limitations on federal taxes and the impact of bankruptcy thereon?

II. Do IRS activities warrant limiting interest accrued or assessments made on Dakota?

III. Who bears the burden of proof in bankruptcy court litigation of a CAWR assessment made by the IRS?

IV. Must the IRS credit a taxpayer the amount of money in an expressly designated trust fund account when said money was misappropriated by a third party?

DISCUSSION

I. The statute of limitations on federal taxes and the impact of bankruptcy thereon.

Congress' codification of the bankruptcy code is found in title 11 of the U.S.Code, and the tax code exists in title 26 of the U.S.Code. The bankruptcy and tax codes detail technical bodies of law. "Where the statute's language is plain, the sole function of the court is to enforce it by its terms." U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Wherever possible, distinct federal bodies of law must be read together without conflict. The

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Court shall apply the codes' plain meanings

Dakota does not allege the IRS assessments were not made timely, but, rather, that the collection period lapsed. The federal tax collection statute of limitations, in pertinent part, reads:

(a) LENGTH OF PERIOD—Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun—

(1) within 10 years after the assessment of the tax, or

(2) prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before the expiration of such 10-year period (or, if there is a release of levy under section 6343 after such 10-year period, then before such release). The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. If a timely proceeding in court for the collection of a tax is commenced, the period during which such tax may be collected by levy shall be extended and shall not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable.

26 U.S.C. § 6502(a) (emphasis in original).

Prior to November, 1990, 26 U.S.C. § 6502(a)'s 10-year collection period bore a six-year time frame. P.L. 101-508, § 11317(a)(1). P.L. 101-508's amendment to 26 U.S.C. § 6502(a) includes a relevant time of:

(c) EFFECTIVE DATE—The amendments made by this section shall apply to—

(1) taxes assessed after the date of the enactment of this Act, and

(2) taxes assessed on or before such date if the period specified in section 6502 of the Internal Revenue Code of 1986 (determined without regard to the amendments made by subsection (a)) for collection of such taxes has not expired as of such date.

P.L. 101-508, § 11317(c) (emphasis in original).

The Court interprets the preceding statement to mean that, if the tax would be discharged as computed by a six-year period as of the effective November, 1990, date, the tax is subject to the six-year rule; otherwise, such tax is subject to a 10-year period. Dakota's tax delinquency spans from 1978 through 1986.

The statute of limitations on collection and assessment of taxes may be suspended for various reasons under 26 U.S.C. § 6503, including:

The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and—

(1) for assessment, 60 days thereafter, and

(2) for collection, 6 months thereafter.

26 U.S.C. § 6503(h). Filing a bankruptcy petition incurs the automatic stay, barring civil activities against all property the debtor has an interest in unless the bankruptcy court approves such actions. 11 U.S.C. §§ 362(a), 541. IRS collection activities are subject to the automatic stay. See Laughlin v. I.R.S., 912 F.2d 197 (8th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 1073, 112 L.Ed.2d 1179 (1991). Filing a bankruptcy petition suspends the tax collection statute of limitations during the pendency of the case and for six months thereafter. Dakota's bankruptcy petitions suspended the tax collection statute during the pendency of the bankruptcy cases and for six months afterwards.

Dakota enjoyed Chapter 11 protection from 1980 through December, 1986, and from April, 1987, through the present. Less than six months elapsed between Dakota's first and second bankruptcies. Therefore, the collection statute suspension,

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valid from the time the bankruptcy petition is filed until six months after the dismissal of the case, never could have started to run again because less than six months separates the two bankruptcy petitions. Dakota's earliest tax debt, incurred for 1978, would be unenforceable in 1984 if no bankruptcy petition or other suspending event enunciated in 26 U.S.C. § 6503 occurred. However, Dakota's Chapter 11 filings suspended the tax collection statute of limitations from 1980 through present since the lapse between petitions was less than six months. In November, 1990, the time the collection statute went from six to 10 years, Dakota was in bankruptcy, so no tax debt expired under the six-year rule. P.L. 101-508, § 11317(a)(1)'s plain language on 26 U.S.C. § 6502's amendment renders all taxes which have not expired as of November, 1990, subject to the 10-year period. The Court holds that Dakota's entire tax debt is subject to the 10-year statute of limitations and that the suspension of the statutory collection period occurred from the filing date of the first petition until six months after the petitions ultimately are dismissed where less than a six-month span separated serial bankruptcy filings

II. Interest accrual on tax debt and the IRS's diligence.

Dakota asserts the IRS's actions of encouraging the Court to dismiss Dakota's first Chapter 11 petition, an inability of the IRS to prove the CAWR adjustments as valid to Dakota's satisfaction, and IRS inactivity justify negating interest and tax assessments. The CAWR is analyzed below in issue III.

A bankruptcy court may reduce or eliminate post-petition interest on an oversecured federal government claim in cases of affirmative misconduct. See Matter of Lapiana, 909 F.2d 221 (7th Cir.1990); U.S. v. Monroe Service Co., 901 F.2d 610, 613 (7th Cir.1990). The IRS cannot idly sit on its rights, as a bankruptcy court may make tax adjudications where the IRS may but has not yet made an assessment. In re Kilen, 129 B.R. 538 (Bankr.N.D.Ill.1991). Civil damages are awardable for unauthorized disclosure of tax returns or tax return data. 26 U.S.C. § 7431. Even though case law permits prodding and penalizing the IRS into action or for previous wrongdoing, the factual stipulation fails to reference any specific IRS wrongdoing. Dakota's confirmed plan required it to make periodic payments to the IRS. The IRS's April 29, 1991, Motion for Relief of the Automatic Stay alleges Dakota neglects its plan-promised...