In re Hallock
| Decision Date | 05 February 1993 |
| Docket Number | Bankruptcy No. B-87-06901-PHX-SSC. |
| Citation | 154 BR 297 |
| Parties | In re Dale C. HALLOCK and Georgeanne G. Hallock, Debtors. |
| Court | U.S. Bankruptcy Court — District of Arizona |
Dale C. Hallock, Georgeanne G. Hallock, pro se.
John N. Vogel, Vogel & Damore, Scottsdale, AZ, for trustee.
James D. Fox, Scottsdale, AZ, Chapter 7 Trustee.
Richard Patrick, United States Attorney's Office, Phoenix, AZ.
By letter dated January 24, 1992, DALE C. HALLOCK, on behalf of himself and his wife, GEORGEANNE G. HALLOCK (the "Debtors"), requested that this Court set a hearing to determine to what extent a tax penalty due and owing by the Debtors to the United States, collected by the Internal Revenue Service, an agency of the United States ("IRS"), could be discharged in bankruptcy. Pursuant to an Order dated February 6, 1992, the Court scheduled an evidentiary hearing for March 31, 1992, on certain issues. Because the Debtors appeared pro se in this matter, a certain amount of time was expended by the IRS, the Debtors, and the Court defining the issues to be resolved. Initially the Court assumed the Debtors wanted a determination of whether the penalty was nondischargeable pursuant to 11 U.S.C. § 523(a)(7), or whether the Court might abate the penalty pursuant to 11 U.S.C. § 505(a).
At the March 31, 1992 hearing, the Court noted that a recent Ninth Circuit decision might have an impact on the proceedings before the Court, and requested further briefing by the parties. The Court also requested that informal discovery proceed, so that the Debtors might review the appellate file maintained by the IRS.
At the May 28, 1992 continued hearing, the Debtors next focused on whether the Debtors had reasonable cause not to pay the tax penalty and whether the penalty should be disallowed pursuant to 11 U.S.C. § 505.
The issues for determination may now be described as:
I. Whether the Bankruptcy Court has subject matter jurisdiction over the controversy;
II. Whether the Debtors are entitled to relief under Section 505 because the IRS failed to abate the penalty pursuant to Section 6404(f) of the Internal Revenue Code;
III. Whether the Debtors have shown that the failure to pay their 1987 federal income tax was due to reasonable cause and not willful neglect; and
IV. Whether the penalty is nondischargeable under Section 523(a)(7).
A Joint Pretrial Statement was filed on June 11, 1992, and an evidentiary hearing was conducted on August 12, 1992. Mr. Hallock testified at the August 12 hearing and exhibits were admitted into evidence. The IRS did not contest the rephrasing of the legal issue set forth in the Joint Pretrial Statement. At the conclusion of the hearing, the Court noted that based upon the evidence presented, the Court believed that the Debtors had failed to carry their burden of proof of showing that their failure to pay their 1987 federal income tax was due to reasonable cause. The Court took the matter under advisement. This shall constitute this Court's findings of fact and conclusions of law. Rule 7052, Rules of Bankruptcy Procedure. The Court has jurisdiction over this matter, except for one issue described hereinafter, and this is a "core" proceeding. 28 U.S.C. §§ 1334 and 157.
On October 30, 1987, the Debtors filed their Chapter 7 bankruptcy petition. One of the Debtors testified that a 1986 change in the Internal Revenue Code had created a tax liability for the Debtors. The Debtors had been principals in a ministorage facility. Although $300,000 was paid by the buyer for the facility, the sale required a recapture of the investment tax credits and depreciation previously taken by the Debtors.
The April, 1988 tax return filed by the Debtors, for the 1987 federal income tax year, reflected that the Debtors had business and interest income. The Debtors had sold real property in 1973, and were still receiving payments on the sale during the 1987 taxable year. The payment to the Debtors was reflected, in part, as "interest income" paid by the Title Insurance Company of Minnesota in the amount of $1,856.1 The return also reflected that the Debtors made a cash charitable contribution during the 1987 taxable year in the amount of $10,046.2 The Debtors also received funds from the ministorage facility in the same taxable year. The Debtors conceded at the time of the trial that in December, 1987 they received a payment in the amount of $20,000 (apparently a principal payment), from the aforesaid 1973 real property sale. The $20,000 payment was received by the Debtors after they filed their bankruptcy petition on October 30, 1987, and was apparently turned over to the bankruptcy trustee.
On April 15, 1988, when the Debtors filed their income tax return for the 1987 taxable year, the tax due and owing was the sum of $29,000. After various setoffs and the payment of $7,420 with the return, the Debtors still owed $19,532 as of June 6, 1988. The liability included a penalty for the failure to pay the tax pursuant to 26 U.S.C. § 6651(a)(2).3 However, as discussed, the Debtors made a charitable contribution of $10,000 in the 1987 taxable year and received a $20,000 payment concerning the sale of real property.
By September 19, 1990, the Debtors had paid their 1987 federal income tax liability, including the sum of $4,883 for the 26 U.S.C. § 6651(a)(2) penalty.
On October 25, 1990, the Trustee objected to the allowance of the IRS claim in the amount of $22,364.17. (Docket Entry No. 55.) Of course, this claim, filed January 26, 1990, had been paid in full by the Debtors by October 25, 1990. The Trustee also believed that the taxes paid constituted a postpetition liability not subject to administration in the Chapter 7 proceedings. Arguably a portion of the liability due and owing by the Debtors constituted a prepetition priority tax claim. No response was filed to the Trustee's objection, and this Court entered an Order on December 6, 1990, disallowing the IRS claim in its entirety and prohibiting payment of said claim from bankruptcy estate assets. (Docket Entry No. 57.) This Order was not appealed, and became a final order of the Bankruptcy Court.
This Court has reviewed the appellate file maintained by the IRS concerning the Debtors.4 This file reflects that the Appellate Office of the IRS received the file concerning the adjustment of the Debtors' tax penalty in August, 1991. The Debtors had apparently written to the IRS in July of 1991, requesting an abatement of the tax penalty added to the tax pursuant to 26 U.S.C. § 6651(a)(2). The file reflects telephone conversations between the Debtors and the Appellate Office.
The appellate file further reflects that the Debtors received certain partnership distributions and turned over the approximate sum of $20,000 to the bankruptcy trustee as a nonexempt asset of the bankruptcy estate.5
After review of all the Debtors' information, the appellate file reflects that the Debtors had cash on-hand in the sum of $10,000 to pay their taxes by the end of 1987, but chose to make a charitable contribution instead. (Indeed the Court has already outlined what the other exhibits reflect on this point.) Therefore, the Appellate Office recommended that only 50 percent of the tax penalty be abated.6 This recommendation was approved by the IRS.
By letter dated November 29, 1991, the IRS abated one-half of the tax penalty under the IRS' 26 U.S.C. § 6404 abatement authority.
At the time of the August 12, 1992 trial, the Debtors presented no evidence to support their position that the Debtors had reasonable cause not to pay the tax penalty. Rather, given the Debtors' financial situation at the end of 1987, and the charitable contribution of $10,000 made during the 1987 taxable year, the position of the IRS to abate one-half of the penalty was appropriate.
A threshold issue of this Court's subject matter jurisdiction over this controversy has been presented by the IRS. A bankruptcy court generally has the authority to determine a debtor's tax liability and such a proceeding is a core proceeding. 11 U.S.C. § 505; See In re Lipetzky, 64 B.R. 431 (Bankr.D.Mont.1986). However, the IRS questioned to what extent this Court could inquire into the actions taken by the Secretary of the IRS concerning the abatement of the Debtors' penalty.
Title 26 U.S.C. § 6404(a) provides, in pertinent part:
Specific subsections of Section 6404 focus on the action that may or must be taken by the Secretary concerning, inter alia, the interest or a penalty that is erroneously or illegally assessed.
In the decision relied upon by the IRS, Selman v. U.S., 733 F.Supp. 1444 (W.D.Okl.1990), the dispute focused on Section 6404(e)(1) and the inaction by the IRS.7 Section 6404(e)(1) permits the Secretary to exercise his/her discretion in determining whether any interest shall be abated which has accrued on any deficiency or the payment of any tax because of an error or delay of an IRS employee or officer in performing a ministerial act. However, this subsection utilizes the discretionary "may" concerning the action to be taken by the Secretary. The Selman Court concluded that no court could review the discretionary decision of the Secretary under Section 6404(e)(1). An abuse of discretion by the Secretary did not give rise to a tax that was erroneously or illegally assessed. The Selman Court did opine that its analysis might be different if the decision to abate interest was mandatory rather than discretionary. Id. at 1446.
Section 6404(f), however, is applicable to the issues before this Court. That subsection provides:
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