In re Divine
| Decision Date | 24 May 1991 |
| Docket Number | Bankruptcy No. 4-90-5443. |
| Parties | In re Dick M. DIVINE and Tammy L. Divine, Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
Kenneth E. Keate, St. Paul, Minn., for debtors.
Douglas W. Hinds, Sp. Asst. U.S. Atty., Thomas K. Overton, Sp. Asst. Atty. Gen., Tax Litigation Div., St. Paul, Minn., for creditors.
ORDER DENYING CONFIRMATION
This case came on for hearing on the objections of the Internal Revenue Service and the Minnesota Department of Revenue to confirmation of the debtors' Chapter 13 plan. Kenneth E. Keate appeared on behalf of the debtors. Douglas Hinds, Special Assistant United States Attorney, appeared on behalf of the Internal Revenue Service and Thomas K. Overton, Special Assistant Attorney General, appeared on behalf of the Minnesota Department of Revenue. This court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334 and Local Rule 103(b). This is a core proceeding under § 157(b)(2)(L). Based on the memoranda and arguments of counsel, and the file in this case, I make the following memorandum order.
In March of 1983, the debtors had H & R Block prepare their federal and state income tax returns for the years 1979, 1980, 1981, and 1982. The debtors did not file these returns.
On August 23, 1989, the debtors filed their federal income tax returns for the years 1985, 1986, 1987, and 1988 without payment of any tax. On various days in October 1989, the IRS assessed the tax on these returns and on April 13, 1990, the IRS filed a Notice of Tax Lien for the 1985, 1986, 1987, and 1988 tax, interest and penalties.
On August 7, 1990, the debtors filed their federal income tax returns for the years 1979, 1980, 1981, 1982, 1983, 1984, and 1989 without payment of any tax. On various days in October and November of 1990 the IRS assessed tax, interest and penalties. The debtors also filed their state income tax returns for the years 1979-1989 without payment of any tax.
On September 27, 1990, the debtors filed this Chapter 13 case. The debtors listed their home mortgage, a 1989 truck loan and the tax lien as secured debts. The only unsecured debts listed were their federal and state income tax liabilities.
The IRS and the Minnesota Department of Revenue filed claims for the tax, interest and penalties for the years 1979-1989. The debtors have not objected to their claims.
Secured Claims The debtors propose to sell their home within four years and pay off their home mortgage and the IRS's secured claim. The debtors' anticipate that approximately $28,550.00 will be available to apply to the IRS tax lien once they sell their home.1
Priority Claims Paragraph 2 of the debtors' plan provides monthly payments of $400 to pay all priority claims in full. Paragraph 6 sets up an artificial procedure to determine the amount of the priority claims.
Non-Priority Unsecured Claims The plan separately classifies the non-priority unsecured claims into 2 classes, class 5 and class 6. Class 5, as proposed, consists of the non-priority unsecured tax and interest on the tax claims except to the extent it amounts to interest on penalties. The plan proposes to pay class 5, 10% on the dollar. Class 6 consists of unsecured penalties and interest on penalties. Based on principles of subordination, the plan proposes to pay nothing to class 6.
The IRS and Department of Revenue both objected to confirmation of the debtors' plan.
The dispute in this case revolves around whether the debtors' plan properly treats the secured, priority unsecured and non-priority unsecured claims of the IRS and the Department of Revenue.
The IRS filed a proof of claim on December 4, 1990 and amended that claim on December 17, 1990. The IRS's claim for tax, interest and penalties totalled $94,547.49. Below is a summary of the IRS's claim.
Date Date
Tax Interest Penalty Filed Assessed
1979 513.00 1,279.13 -2 8/7/90 10/15/90
1980 789.00 1,745.02 -2 8/7/90 10/15/90
1981 1,528.00 2,890.77 -2 8/7/90 10/15/90
1982 2,914.00 4,230.62 -2 8/7/90 10/8/90
1983 3,809.00 4,559.71 -2 8/7/90 10/8/90
1984 6,212.00 5,863.78 -2 8/13/90 11/5/90
1985 5,681.00 4,194.44 2,718.48 8/23/89 10/30/89
1986 7,583.00 4,259.33 3,564.01 8/23/89 10/9/89
1987 4,341.00 1,344.93 -3 8/23/89 10/16/89
1988 5,028.00 897.85 -3 8/23/89 10/2/89
1989 4,720.00 283.91 -3 8/7/90 10/1/90
The IRS's claim is deemed allowed because the debtors did not object to the claim as filed. 11 U.S.C. § 502(a). Instead, the debtors chose to deal with their tax liabilities under the plan.
As a matter of tax law, the IRS's tax lien consists of the total claims filed by the IRS for tax, interest and penalties. The tax lien statute states:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
26 U.S.C. § 6321. Tax liens arise at the time taxes are assessed. 26 U.S.C. § 6322. Therefore, the lien for 1985-1988 tax, interest and penalty arose in October of 1989. The lien for 1979-1983 and 1989 tax, interest and penalty arose in October of 1990. Finally the lien for the 1984 tax, interest and penalty arose in November of 1990. The IRS, by filing a Notice of Tax Lien in Hennepin County against the debtors' homestead, on April 13, 1990, perfected the lien for the 1985-1988 tax, interest and penalties. Thus, the IRS has a perfected lien for the tax, interest and penalties for the years 1985-1988 on the debtors' homestead.
In this case, the IRS's tax lien exceeds the amount of the debtors' home equity. Therefore, the IRS's claim is secured only to the extent of the amount of the home equity, $28,550.00. 11 U.S.C. § 506(a). The remainder of the tax lien claim becomes an unsecured claim.
While it is clear what amount of the IRS claim is secured, the debtors and the IRS dispute which years and what elements (tax, interest and penalty) are secured.
The debtors argue that the Supreme Court decision in, United States v. Energy Resources Co., ___ U.S. ___, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990), permits them to determine the treatment of different years' tax liability under the plan. Under this theory, the debtors' plan classifies both the 1980-19844 tax and interest on tax and the 1980-1989 penalties as a non-priority unsecured claim. The plan classifies a portion of the 1985-1988 tax and interest on tax as a secured claim and a portion as priority and non-priority unsecured claims.5 The 1989 tax and interest on tax is classified as a priority unsecured claim.
The IRS disagrees with the debtors as to the right to determine the treatment of the IRS's claim. The IRS's amended claim provides that the secured claim will consist of the 1985 and 1986 tax, interest and penalties. The priority unsecured claims will consist of the 1987-1989 tax and interest. The 1979-1984 tax, interest and penalties and the 1987-1989 penalties will make up the non-priority unsecured claim.
Energy Resources Co. involved a corporation that filed a Chapter 11 case. The issue in Energy Resources Co. was whether the debtor could apply payments under a confirmed plan toward "trust fund" taxes before other taxes. The debtors wanted to ensure that if the reorganization was not successful, the individuals responsible for collecting the taxes would be relieved from liability. The Court found that the bankruptcy court, through its equitable powers, could order that the plan payments be applied to the trust fund taxes first when it is necessary for the success of the reorganization. Energy Resources Co., 110 S.Ct. at 2143.6
In this case, the debtors argue this holding should be broadly construed to allow them to determine the amount of each tax year liability and how it will be dealt with under the plan.
Energy Resources Co. is distinguishable from this case in that it deals with the type of tax that will be paid first under the plan. The debtors in Energy Resources Co. had to deal with both trust fund and non-trust fund taxes. If the plan was not successful in satisfying the overdue trust fund taxes, the IRS could look to the "responsible persons" to satisfy that tax liability. The debtors in that case, wanted their plan payments to be applied to the trust fund taxes first to guarantee that the responsible persons would not later be held accountable for payment of the trust fund taxes. Notably however, the plan provided for paying all taxes in full. It was only the order of payment that was in dispute.
The debtors in this case want to decide the treatment of the tax liability for each tax year. The debtors propose to allocate portions of certain years' tax liability to a secured status and allocate other portions to an unsecured status. This method results in determining the total amount of the taxes, interest and penalties the debtors will be required to pay under the plan. The debtors' proposed plan minimizes the amount they would be required to pay, thereby, essentially allowing most of their tax debt to be discharged. In this case, the debtors are simply attempting to rearrange the tax claims in order to avoid paying as much as possible. This is not what Energy Resources Co. contemplated and I see no reason to apply the debtors' broad interpretation of Energy Resources Co. to the facts of this case.
Although neither the debtors nor the IRS gave me any guidance as to how to best determine the amount of the secured claim,7 I...
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