In re Dawes

• Decision Date: 21 June 2011
• Docket Number: No. 09–3129.,09–3129.
• Citation: 107 A.F.T.R.2d 2011,65 Collier Bankr.Cas.2d 1336,2011 USTC P 50454,652 F.3d 1236,55 Bankr.Ct.Dec. 4
• Parties: In re Donald W. DAWES; Phyllis C. Dawes, Debtors,United States of America, Appellant,v.Donald W. Dawes; Phyllis C. Dawes, Appellees,andEdward J. Nazar, Trustee, Defendant.
• Court: U.S. Court of Appeals — Tenth Circuit

652 F.3d 1236

107 A.F.T.R.2d 2011-2671

2011-1 USTC P 50,454

65 Collier Bankr.Cas.2d 1336

55 Bankr.Ct.Dec. 4

In re Donald W. DAWES; Phyllis C. Dawes, Debtors,United States of America, Appellant,

v.Donald W. Dawes; Phyllis C. Dawes, Appellees,andEdward J. Nazar, Trustee, Defendant.

No. 09–3129.

United States Court of Appeals, Tenth Circuit.

June 21, 2011.

Patrick J. Urda, Attorney, Tax Division (John A. DiCicco, Acting Assistant Attorney General; Bruce R. Ellisen, Attorney, Tax Division; and Lanny D. Welch, United States Attorney, with him on the briefs), United States Department of Justice, Washington, D.C., for Appellant.Mark J. Lazzo, Mark J. Lazzo, P.A., Wichita, KS, for Debtors–Appellees.Before TYMKOVICH, McKAY, and GORSUCH, Circuit Judges.GORSUCH, Circuit Judge.

Can a taxpayer avoid income taxes by selling farm assets after declaring Chapter 12 bankruptcy? In at least this respect, the tax collector bears resemblance to the grim reaper: always hovering, never avoidable. While the law provides some forms of tax relief, it stops short of forgiving taxes incurred by a Chapter 12 debtor after filing a bankruptcy petition. And the taxes at issue here were incurred by the Daweses after they petitioned for bankruptcy. So it is that the Daweses must pay the tax collector his due and we must reverse.

The Daweses' struggle with the IRS has a lengthy provenance. Decades ago, and after repeated trips up and down the federal court system, the couple pleaded guilty for failing to file income tax returns in 1981 through 1983. All this is documented in no fewer than three of our published opinions. See United States v. Dawes, 951 F.2d 1189 (10th Cir.1991); United States v. Dawes, 895 F.2d 1581 (10th Cir.1990); United States v. Dawes, 874 F.2d 746 (10th Cir.1989). But all this, as it turned out, was just the beginning. The Daweses also failed to pay all their taxes for still more years, including 1986–1988 and 1990. This led the IRS to seek—and ultimately obtain—a judgment declaring, first, that the Daweses had fraudulently conveyed certain assets in an effort to avoid their creditors; and, second, that those unlawful conveyances were null and void. Some six years ago we affirmed this result. See United States v. Dawes, 161 Fed.Appx. 742 (10th Cir.2005) (unpublished). After and in light of this ruling the government proceeded to execute its judgment, notifying the Daweses that it intended to take possession of various pieces of their property. But before it could do so, the Daweses declared bankruptcy, seeking the protections of Chapter 12.

And that brings us to the latest installment of this epic. After declaring bankruptcy, the Daweses, with the permission of the bankruptcy court, sold several tracts of farm land. This sale, of course, created income tax liabilities. The Daweses proceeded to submit a bankruptcy reorganization plan in which they proposed to treat their newly incurred tax liabilities as general unsecured claims. As unsecured claims, the taxes would be entitled to no priority, paid only to the extent funds might be available after priority claims were satisfied, and any remaining unpaid portion would be eligible for discharge. Unsurprisingly, the IRS didn't take kindly to this proposal. It opposed the plan vigorously—but just as unsuccessfully—first before the bankruptcy court and then on appeal before the district court. The IRS now brings its complaint to this court, asking us to undo its earlier losses.

How is that the Daweses think they can defeat the IRS's tax claim? For the most part, of course, a bankruptcy filing offers scarce relief from the tax man. Other creditors may be neglected, but rarely the IRS. See, e.g., 11 U.S.C. §§ 503(b), 507(a)(2), 507(a)(8) & 523(a)(1). Even so, the Daweses have their eye on a special provision of Chapter 12 that, they say, makes their situation special. Under § 1222(a)(2)(A), certain claims that are otherwise entitled to priority payment status under § 507, but that happen to be owed to the government as a result of the sale of farm assets, are downgraded, treated as mere unsecured claims, and made eligible for discharge. No one disputes that the taxes at issue here are owed to the government and are owed as a result of the sale of farm assets. So the only question is whether the taxes are entitled to priority under § 507. Moving to that provision, the Daweses point out that claims entitled to priority include “administrative expenses allowed under section 503(b).” 11 U.S.C. § 507(a)(2). And with this the Daweses take us next to § 503(b). That statute, they observe, speaks of “administrative expenses ... including ... any tax ... incurred by the estate.” 11 U.S.C. § 503(b)(1)(B)(i). Mapping their way through the thicket of the U.S.Code in this way, the Daweses argue that, because the federal income taxes at issue here are owed to the IRS as a result of a farm asset sale and were “incurred by the estate,” they may be treated as general unsecured claims.

Whether this is so—whether income taxes flowing from the sale of a farm asset during a Chapter 12 bankruptcy are taxes “incurred by the estate” and so subject to downgrade and discharge—is a question that has divided our sister circuits. The Eighth Circuit says yes; the Ninth says no. See Knudsen v. I.R.S., 581 F.3d 696, 710 (8th Cir.2009); United States v. Hall, 617 F.3d 1161, 1163 (9th Cir.2010), cert. granted, 79 U.S.L.W. 3421 (June 13, 2011) (No. 10–875). The same disagreement has beset the bankruptcy courts as well. Compare I.R.S. v. Ficken, 430 B.R. 663, 672 (10th Cir. BAP 2010) and In re Schilke, 379 B.R. 899, 903 (Bankr.D.Neb.2007) with Smith v. I.R.S., 447 B.R. 435, 447 (Bankr.W.D.Pa.2011).

Today, we must pick sides in this debate and we side with the Ninth. Whatever other problems may lurk in the Daweses' statutory analysis (and the IRS insists there are several), post-petition income taxes incurred during Chapter 12 proceedings are liabilities of the individual debtor and not the bankruptcy estate. As such, they are not within the purview of the bankruptcy proceedings or included in the reorganization plan. Instead, the taxes are due from the debtor personally, and the IRS's recourse remains exclusively with the individual debtor, separate and apart from the Chapter 12 estate and unaffected by the bankruptcy discharge. That this is so is suggested by an examination of the plain language of the statute before us, the larger statutory structure, and Congress's expressed purposes.

To begin, the plain language of § 503(b). The Daweses' argument hinges on the term “incurred by the estate” and the submission that the post-petition income tax at issue here was incurred by their bankruptcy estate rather than by them personally. But what does it mean for a tax to be incurred by the estate? Happily, that critical term has a definition that is as well-settled as it is precise. Black's Law Dictionary tells us that to “incur” means to “suffer or bring on oneself,” as in a “liability or expense.” Black's Law Dictionary 782 (8th ed. 2004). Webster's says the same thing, and adds the alternate definition “[to] become liable or subject to.” Webster's Third New International Dictionary 1146 (2002) (unabridged); see also 7 Oxford English Dictionary 834–35 (2d ed. 1989) (“To run or fall into (some consequence, usually undesirable or injurious); to become through one's own action liable or subject to”). While at the margin there might be some distinctions between these definitions, they don't leave any room for debate on this proposition: one who has “incurred” an expense is liable for it.

To determine who has “incurred” a tax, then, we must ask who is liable for paying it. And to answer that question we must look to the relevant tax authority. Of course, Congress is free (and in some cases has chosen) to use the bankruptcy code to control certain aspects of how federal or state tax law operates during reorganizations. But, when the code hasn't told us otherwise, our attention is rightly turned to the underlying tax law to see who owes what. Indeed, bankruptcy law often relies on underlying income tax laws to assign priorities in bankruptcy. See, e.g., § 507(a)(8)(A)(i) (treatment of pre-petition tax turns on when the tax return was due); § 507(a)(8)(B) (treatment of property tax turns on when it was last payable without penalty); § 346 (commanding that state and local income taxes be allocated between debtor and bankruptcy estate in a way that generally follows their treatment under the federal Internal Revenue Code). When the bankruptcy code defers a question to existing tax law, our role is to apply that law, not to invent new rules of our liking.

This is one of those occasions, and the relevant tax authority is the federal government itself, so we need only flip forward a few titles in the U.S.Code to see how tax liability is allocated as between debtor and estate. And there, in Title 26, the answer is plain. In individual Chapter 7 and 11 bankruptcies, the trustee is charged with filing a separate return on behalf of the bankruptcy estate and paying from that estate any resulting taxes. See 26 U.S.C. §§ 1398(c), 6012(a)(8), (b)(3), (b)(4), & 6151(a). There's no escaping that those are “taxes incurred by the estate”—the estate is obligated by federal law to pay them. But in Chapter 12 and 13 bankruptcies, the debtor—not the bankruptcy estate—bears the sole responsibility for filing and paying post-petition federal income taxes. See 26 U.S.C. § 1399; 26 U.S.C. § 6151(a); Holywell Corp. v. Smith, 503 U.S. 47, 52, 112 S.Ct. 1021, 117 L.Ed.2d 196 (1992) (“The Internal Revenue Code ties the duty to pay federal income taxes to the duty to make an income tax return.”). Only the debtor, not the estate, is liable for the payment of these taxes. And this, in turn, answers the question posed by § 503(b): because a Chapter 12 or Chapter 13 estate isn't liable for post-petition federal income taxes, the estate...