In re Gould
| Citation | 385 B.R. 713 |
| Decision Date | 31 March 2008 |
| Docket Number | No. 05-50292-ASW.,05-50292-ASW. |
| Parties | In re Anthony S. GOULD, Debtor. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California |
David A. Boone, Law Offices of David A. Boone, San Jose, CA, for Debtor.
Before the Court is the Motion by United States for Relief from Stay to Set Off Tax Refund (the "Motion") brought by the United States of America, for itself and on behalf of the Internal Revenue Service (collectively, the "IRS"). The IRS requests that the automatic stay of Bankruptcy Code § 362 1 be modified to permit it to offset pre-petition income tax liabilities owed by debtor Anthony S. Gould ("Debtor") against pre-petition income tax refunds2 claimed by Debtor.
Debtor is represented by David A. Boone, Esq. and Leela V. Menon, Esq. of the Law Offices of David A. Boone. Special Assistant United States Attorneys John W. Strate and Rex K. Lee represent the IRS.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Debtor is a divorced father with two teenage dependent children.3 He earns $3,100 per month working as a mechanic,4 and his monthly expenses are $3,025.5 He has very few assets and very few liabilities, other than tax liabilities and refunds. Debtor's only significant assets are a 1987 Jeep Cherokee, a state income tax refund in the amount of $3,217.00, and the federal income tax refund in the amount of $6,852.00 currently at issue.6
Debtor's only significant debts are for income taxes.7 Prior to the filing of his bankruptcy case, Debtor failed to file federal tax returns for 1999 through 2004. Pre-petition, Debtor owed roughly $28,000 to the Franchise Tax Board (the "FTB") and roughly $10,000 to the IRS for unpaid income taxes stretching back to 1991.
On January 20, 2005 (the "Petition Date"), Debtor filed his Voluntary Petition under Chapter 13 of the Bankruptcy Code, his Chapter 13 Plan (the "Original Plan") and his Schedules.
The IRS filed its initial proof of claim against Debtor on February 24, 2005, which included estimated income taxes due for 1999-2004.8 On March 2, 2005, the IRS filed an objection to confirmation of the Original Plan on the basis of Debtor's failure to file tax returns and the Original Plan's failure to provide full payment for the IRS's priority claim as required by Bankruptcy Code § 1322(a)(2).9
On May 26, 2005, Debtor filed Amended Schedules B, C, D and E (the "Amended Schedules"). On his Amended Schedule B, Debtor lists claims for federal income tax refunds for tax years 2002, 2003 and 2004 totaling $11,047.00.10 On his Amended Schedule C, Debtor claimed the following exemptions:
Property Basis in CCP Value
Household furniture, 703.140(b)(3) $ 500.00
appliances, etc
Clothes, shoes and 703.140(b)(3) $ 300.00
accessories
Checking account 703.140(b)(5) $ 400.00
1987 Jeep Cherokee 703.140(b)(2) $ 500.00
2002, 2003, 2004 Fed 703.140(b)(5) $6,852.0011
Income Tax Refunds
2002, 2003, 2004 FTB 703.140(b)(5) $3,217.00
Refunds
No party, including the IRS, filed a timely objection to the exemptions claimed by Debtor in his Amended Schedule C.
At the time Debtor filed the Amended Schedules, Debtor had not yet filed his tax returns for the years 1999 through 2004.12 In June and July of 2005, Debtor filed these tax returns. The balances indicated oh these tax returns by Debtor are as follows:
Year Refund Claimed Deficiency Owed
1999 $ 2,226.00
2000 $ 2,291.00
2001 $ 255.00
2002 $ 2,414.00
2003 $2,314.00
2004 $ 4,438.00
__________ _________
$11,369.0013 $2,569.00
Declaration of Debtor as to Facts Re Opposition to Internal Revenue Service's Motion for Relief from the Automatic Stay ("Debtor's Decl."), filed January 18, 2006, 2:7-17.
After Debtor filed his Amended Schedules and his tax returns for 1999 through 2004, the IRS filed several subsequent amended Proofs of Claim.14
Debtor filed his First Amended Chapter 13 Plan on May 26, 2005 (the "Amended Plan"). No objections were filed to the Amended Plan. The Amended Plan was confirmed on October 5, 2005. The Amended Plan provides that Debtor will pay the sum of $75 per month to the Chapter 13 Trustee for a term of 37 months. This results in a distribution to general unsecured claims of approximately 2 cents on the dollar.15
The IRS filed this Motion on October 25, 2005 seeking to exercise certain alleged setoff rights under Bankruptcy Code § 553. Specifically, the Motion asked that the automatic stay be modified to allow the IRS to "offset the tax refunds totaling $8,733 owed by the IRS to the debtor against the IRS' claim of $9,972.44 against the debtor." Motion, 4:2-4.
While this Motion was pending before the Court, the IRS filed two subsequent amended proofs of claim. On May 22, 2006, the IRS filed its third amended Proof of Claim, asserting a priority claim of $2,709.93 and an unsecured claim of $9,780.63, for a total of $12,490.56. On July 10, 2006, the IRS filed a fourth and final amended proof of claim, in the total amount of $9,972.44 (the "IRS's Final Proof of Claim"), divided as follows:
Secured Claim pursuant to "Right to setoff
$2,702.17 Deficiency owed for 1991 tax period
$2,488.72 Penalty on 1991 deficiency to Petition Date
$1,661.11 Interest on 1991 deficiency to Petition Date
_________
$6,852.00
Unsecured Priority Claim under 507(a)(8)16
$255.00 Deficiency owed for 2001 tax period
$ 52.51 Interest on 2001 deficiency to Petition Date
_______
$307.51
General Unsecured Claim
$2,679.78 Balance of Pre-petition interest for 1991
deficiency
$ 133.15 Interest to Petition Date Priority Claim for
2001 deficiency
_________
$2,812.93
The balances owing between the parties are unclear. The amounts of the income taxes or refunds owing, as asserted by both parties, have repeatedly changed in the course of the case and the pendency of this Motion. In addition, the amount of the "wild card" exemption asserted by Debtor has — at least in the body of the pleadings relating to this Motion, although not in the Amended Schedule C itself — been reduced from $11,047.00 to $6,852.00.17 Correspondingly, the IRS reduced its request for setoff from $8,733 to $6,852 — the total of the 2002 and 2004 refunds Debtor alleges is owed to him.18 The IRS's alleged right of setoff is the sole basis for the $6,852.00 secured portion of the IRS' Final Proof of Claim. Debtor disputes the secured status of the $6,852.00 portion of the IRS's Final Proof of Claim, and has reserved his right to object thereto pending this decision by the Court.19 For the purposes of this Motion, the parties agree that the amount the IRS now seeks to set off is $6,852.00.20
The issue before the Court is whether the IRS should be granted relief from stay, pursuant to Bankruptcy Code § 362, to allow the IRS to offset, pursuant to § 553, Debtor's pre-petition income tax liabilities against Debtor's pre-petition income tax refunds.21 The total amount of the IRS's Final Proof of Claim is $9,972.44, for taxes owing for tax years 1991 and 2001 and pre-petition interest and penalties thereon. Debtor has asserted a claim for an income tax refund for tax years 2002 and 2004 totaling $6,852. By the Motion, the IRS seeks to apply the entire $6,852 owing by the IRS to Debtor against the $9,972.44 tax liability owed by Debtor. If the Motion is granted, the IRS will receive roughly $7,159.51 or slightly over 71% of the $9,972.44 total of the IRS's Final Proof of Claim plus a pro rata distribution on the $2,812.93 balance under the Amended Plan.22 If the Motion is denied, the IRS will receive $307.51 as a priority claim and a pro rata distribution on the balance of $9,664.93.
While this difference in the potential recovery on the IRS's Final Proof of Claim is significant, this case presents a much more significant issue than whether, on the facts here presented, the IRS can establish a right of setoff under § 553, thereby establishing cause for relief from the automatic stay under § 362. This larger issue arises from Debtor's opposition to the Motion. Debtor has opposed the Motion on the basis that the IRS is not entitled to set off against the 2002 and 2004 refunds because Debtor has already fully exempted the refunds pursuant to Bankruptcy Code § 522 and CCP § 703.140(b)(5). Debtor argues that such exemption gives him a superior right to the $6,852. The primary issue presented by the Motion, therefore, is whether the setoff should be allowed against property the debtor has already fully exempted — without challenge by the IRS or any other party.
Bankruptcy Code § 362 imposes an automatic stay against certain acts by creditors against the debtor or property of the estate. Included among the acts prohibited by the automatic stay is "the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor[.]" 11 U.S.C. § 362(a)(7). No exception is made under § 362 — at least as written prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "BAPCPA") — for setoffs by the IRS.23 Therefore, the unambiguous language of § 362(b)(7) stays any right the IRS might otherwise have to set off tax refunds against tax liabilities owing by Debtor.
Even though the IRS's right to set off is stayed by the automatic stay, the IRS, like any other creditor, may ask the court to lift the stay to allow it to exercise a right of setoff. As explained by the Ninth Circuit BAP in In re Pieri, 86...
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