In re Fingers
| Decision Date | 05 January 1993 |
| Docket Number | Bankruptcy No. 89-02143-H7,Adv. No. 91-90597-H7. |
| Citation | 148 BR 586 |
| Court | U.S. Bankruptcy Court — Southern District of California |
| Parties | In re Roland G. FINGERS, Debtor. Roland G. FINGERS, Plaintiff, v. UNITED STATES of America, DEPARTMENT OF TREASURY, INTERNAL REVENUE SERVICE, and State of California Franchise Tax Board, Defendants. |
Jeffrey D. Schreiber, Rothlisberger & Schreiber, Solana Beach, CA, Harold E. Wolfe, Jr., West Palm Beach, FL, for plaintiff/debtor.
George N. Harris, Jr., U.S. Dept. of Justice, Tax Div., Washington, DC, for U.S.
Chapter 7 debtor, Roland G. Fingers ("Fingers") filed a motion for summary judgment and moved for sanctions against the United States of America, Department of the Treasury, Internal Revenue Service ("IRS") for violation of the automatic stay. The IRS moved for retroactive relief from stay. At the June 22, 1992 hearing, the court denied retroactive relief from stay and took the sanctions issue under submission. An order was entered on July 16, 1992, denying retroactive relief from stay and has become final.
This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and § 157 and General Order No. 312-D of the United States District Court, Southern District of California. This is a core proceeding pursuant to § 157(b)(2)(G).
The facts of this case are relatively simple and straight forward. On January 9, 1987, Fingers petitioned the United States Tax Court ("Tax Court") for a redetermination of his 1981 and 1982 federal income tax liability. The tax case subsequently settled and the Tax Court entered a stipulated decision reflecting tax liabilities for 1981 totalling $1,565.00 and for 1982 totalling $74,902.00. The Tax Court's stipulated decision became final on March 20, 1989.
On March 23, 1989, three days after the Tax Court Decision became final, Fingers filed a Chapter 7 bankruptcy.1 The IRS admitted that it was named as a creditor in the bankruptcy case and that it received notice of the filing.
On April 10, 1989, approximately three weeks after Fingers filed, the IRS assessed the 1981 and 1982 tax liability despite its awareness of the pending bankruptcy. The improper assessment went unchallenged during the bankruptcy and almost a year later, on April 6, 1990, Fingers received his discharge. On April 15, 1990, Fingers filed tax refund claims for the pre-petition tax years 1984 through 1989.
On August 22, 1991, Fingers commenced this adversary proceeding which initially sought a determination that the 1982 federal income taxes were dischargeable under § 523(a)(1) and for a determination of the tax debt amount. The IRS moved to dismiss or, in the alternative, for summary judgment on the grounds that the taxes in question were nondischargeable and that Fingers' 1982 tax liability was not subject to redetermination by the bankruptcy court. Subsequently, the IRS withdrew its motion.
With the adversary case still pending, on February 24, 1992, the IRS applied a portion of Fingers' tax overpayments for the years 1984 through 1989 against the 1981 and 1982 tax liabilities. On April 13, 1992, Fingers moved for summary judgment requesting this court to hold that the tax assessment made against Fingers on April 10, 1989, was void. On April 22, 1992, Fingers filed a motion for sanctions under § 362(h). On May 15, 1992, the IRS moved for retroactive relief from stay as to the April 10, 1989, assessment.
Under § 362, the stay is effective against all entities and all acts. In re Fuller, 134 B.R. 945, 947 (9th Cir.BAP 1992). It is undisputed that the IRS's tax assessment on April 10, 1989, violated the Bankruptcy Code's automatic stay provision. 11 U.S.C. § 362(a)(6). Violations of the automatic stay are void. In re Schwartz, 954 F.2d 569, 571 (9th Cir.1992). Section 362(d)(1), however, empowers the court to grant relief from the automatic stay by "terminating, annulling, modifying, or conditioning it." Algeran, Inc. v. Advance Ross Corp., 759 F.2d 1421 (9th Cir. 1985). Thus, a creditor can seek retroactive relief to validate an otherwise void act.
Equitable principles may justify the retroactive relief from stay, but any equitable exception to the automatic stay should be narrow and applied only in extreme circumstances. In re Shamblin, 890 F.2d 123, 126 (9th Cir.1989). To support the policy of giving the debtor a breathing spell, the courts should be especially hesitant to validate acts committed during the pendency of the stay. In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir.1984).
The IRS contends several factors justify retroactive relief in this case. First, the IRS argues that the assessment had no effect on the bankruptcy proceeding. The IRS notes that it did not file a claim in the no asset Chapter 7 bankruptcy estate and only seeks to collect nondischargeable tax liabilities that were inadvertently assessed in violation of the automatic stay. Despite the assessment, the IRS claims that although the ultimate legal effect would be to create a lien on the taxpayer's post-petition property, there were no new rights created against estate property and no real or possible impact upon the bankruptcy proceeding.
The IRS contends that the equities weigh in its favor as well. Specifically, the IRS asserts that the assessment did not interfere with the orderly administration of the bankruptcy case, while on the other hand, if retroactive relief is not granted the debtor will receive a windfall by being relieved of an otherwise nondischargeable debt. The IRS also urges the court to consider the strong public policy of protecting the public fisc.
Despite the IRS's contentions, this case does not involve the kind of extreme circumstances that warrant granting retroactive relief from stay as contemplated by the Shamblin court. The IRS received notice of the bankruptcy and therefore easily could have sought relief from stay before assessing the tax. Moreover, the IRS took no action whatsoever after the assessment to petition the bankruptcy court for an order lifting the stay and validating the assessment. Rather, the IRS simply waited for the debtor to respond to the improper assessment, and approximately two and a half years later, requests retroactive relief from the bankruptcy court for the first time.
The fact that the IRS filed no formal proof of claim is likewise unpersuasive. Typically the IRS would decide not to file a claim where there are few, if any, assets in the estate and where the tax is nondischargeable under 11 U.S.C. § 523.
Finally, the IRS had a second opportunity to make a valid assessment after the debtor was discharged. Had the IRS been following its own internal method of monitoring bankruptcy cases, it would have been aware of the debtor's discharge on April 6, 1990, giving it another window of opportunity to make a valid assessment. 26 U.S.C. § 6503. The Internal Revenue Manual provides that field offices:
Monitor any case on appeal that is involved in a bankruptcy proceeding in order to make the assessment as soon as one of the three events set forth in 11 U.S.C. § 362(c) occurs. This monitoring should take place at least once every 30 days.
§ 5483.21(8) and subsections (35)(13) and (10). Thus, the court concluded at the June 22, 1992 hearing, that the IRS was not entitled to retroactive relief from stay as to the April 10, 1989 assessment.
The court notes that the setting aside of the tax assessment does not determine a taxpayer's liability for unpaid taxes, for the assessment does not create the liability. See Bull v. United States, 295 U.S. 247, 259, 55 S.Ct. 695, 699, 79 L.Ed. 1421 (1935); United States v. Latham, 754 F.2d 747, 750 (7th Cir.1985); Jenkins v. Smith, 99 F.2d 827 (2d Cir.1938). Accordingly, the validity of the IRS assessments may not affect the amount of the IRS's general unsecured claim.2
Fingers also requested this court to assess sanctions under 11 U.S.C. § 362(h) against the IRS in an amount equal to attorneys' fees, accountants' fees and costs incurred by the him in defending this action.
Section 362(h) states:
(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys\' fees, and, in appropriate circumstances, may recover punitive damages.
11 U.S.C. § 362(h).
The Ninth Circuit has defined the word "willful" as used in § 362(h):
A "willful violation" does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant\'s actions which violated the stay were intentional. Whether the party believes in good faith that it had a right to the property is not relevant to whether the act was "willful" or whether compensation must be awarded.
Goichman v. Bloom, 875 F.2d 224, 227 (9th Cir.1989). As it is undisputed that the IRS had notice of the bankruptcy case, it necessarily follows that the government willfully violated the automatic stay by making the assessment during the pending bankruptcy. See In re Pinkstaff, 974 F.2d 113, 115 (9th Cir.1992) citing Carroll v. Tri-Growth Centre City, Ltd., 903 F.2d 1266, 1272 (9th Cir.1990).
Moreover, the automatic stay enjoins the enforcement of "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). Property of the estate includes all legal and equitable interests of the debtor wherever located. The scope of what constitutes property of the estate is broadly construed. 11 U.S.C. § 541(a). Consequently, when Fingers became entitled to the refunds for pre-petition tax years, those monies became estate property protected by the automatic stay.
It is only reasonable to assume that the IRS must have been aware of Fingers'...
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