In re Hatton
| Decision Date | 28 November 1997 |
| Docket Number | BAP No. WW-97-1430-RYHR,Adversary No. 96-37271.,Bankruptcy NO. 94-32774T |
| Parties | In re James H. HATTON, Debtor. UNITED STATES of America, Appellant, v. James H. HATTON, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Deirdre A. Donnelly, U.S. Department of Justice, Washington, DC, for United States of America.
Christopher E. Allen, Bonneville, Viert, Morton & McGoldrick, Tacoma, WA, for James H. Hatton.
Before RYAN, HAGAN, and RUSSELL, Bankruptcy Judges.
Debtor James H. Hatton ("Appellee"), filed a complaint (the "Complaint") to have his tax liabilities for various years, including 1983, declared dischargeable. Appellant, the United States of America ("Appellant"), admitted that Appellee's tax liabilities for all years except 1983 were discharged. Appellee brought a motion for summary judgment (the "Motion"), which the bankruptcy court granted. Appellant timely appealed. We AFFIRM.
The facts relevant to this appeal are not in dispute. On July 15, 1994, Appellee filed a chapter 7 bankruptcy. Among the debts listed in his schedules filed with his bankruptcy petition, Appellee listed federal tax obligations for the years 1983 through 1986 and 1988 through 1990. On October 12, 1994, Appellee received a discharge. On January 15, 1995, Appellant filed a secured claim for $43,611.32 (the "Claim") for the same tax years that Appellee listed on his schedules.
Alleging that Appellant had wrongfully converted Appellee's tax refunds and applied them to the Claim, Appellee filed the Complaint on November 1, 1996 to have the bankruptcy court determine that the taxes, interest, and penalties making up the Claim were discharged. Appellee also requested the return of all tax refunds applied to the Claim. Appellant answered admitting that tax liabilities, including any interest and penalties, for tax years 1984 through 1986 and 1988 through 1990 were discharged. However, Appellant asserted that any taxes, interest, and penalties for 1983 were not discharged. Additionally, Appellant claimed that because the Claim was secured it had the right to collect against Appellee's exempt and abandoned property.
On April 2, 1997, Appellee filed the Motion seeking to have the bankruptcy court determine that his 1983 tax obligations were discharged. The facts supporting the Motion indicated that on March 25, 1985, the Internal Revenue Service ("IRS") assessed the 1983 taxes against Appellee when it filed a form 1040 on his behalf (the "Form 1040"). The Form 1040 indicated a tax liability of $3,824, less a credit of $1,032, plus penalties of $1,043. Appellant later assessed a civil penalty on August 19, 1985 for $200. Appellee received a letter dated November 29, 1991 from revenue officer Charles Emerson requesting a meeting to discuss payment of outstanding taxes and penalties. Appellee and his attorney, Paul Alvestead, met Emerson, and Emerson produced a copy of the Form 1040. After reviewing the Form 1040, Appellee acknowledged that he owed the taxes. Appellee testified that, if requested, he would have signed the Form 1040. He further testified that, at all times, he was willing to provide the IRS with any additional information, but the IRS did not request more information.
The focus of the meeting then shifted to payment of the delinquent tax obligations. Over several months, the parties conducted negotiations that eventually resulted in the execution of an installment agreement on IRS Form 433-D (the "Installment Agreement"). The Installment Agreement, approved June 16, 1992, required Appellee to pay $200 per month to satisfy his tax obligations aggregating $35,191.20 for the delinquent tax years including 1983. Appellee made payments in accordance with the terms of the Installment Agreement until he filed bankruptcy in 1994 and, by that time, had paid the principal tax obligation for 1983. According to the Claim, at the time of the bankruptcy petition, Appellee still owed the civil penalty of $200 for 1983, other penalties of $135.02, and total interest of $7,984.47.
At the hearing on the Motion on May 1, 1997, the bankruptcy court agreed with Appellee that under the circumstances Appellee's 1983 tax obligations should be discharged and granted the Motion. The order granting the Motion was entered on May 22, 1997, and Appellant filed its notice of appeal on May 30, 1997.
Whether the bankruptcy court erred in discharging Appellee's 1983 tax obligation to Appellant.
We review a grant of summary judgment de novo. Bank of Los Angeles v. Official PACA Creditors' Comm. (In re Southland + Keystone), 132 B.R. 632, 637 (9th Cir. BAP 1991). Because there are no issues of fact in controversy, our role is limited to ascertaining whether the bankruptcy court correctly applied the relevant law.
Under Bankruptcy Code (the "Code")1 §§ 523(a)(1)(B)(i) and (ii)2, a chapter 7 discharge does not discharge an individual debtor from a tax debt if a required return was not filed or was filed after the date on which such return was last due and after two years before the date of the filing of the bankruptcy petition. Bergstrom v. United States of America (In re Bergstrom), 949 F.2d 341, 342 (10th Cir.1991). A person with tax liability must file a tax return on an approved form. 26 U.S.C. § 6011(a).3 Appellee was liable for taxes for 1983, and he did not file a tax return on an approved form for that tax year. Additionally, upon the signing of the Installment Agreement (combined with the previously filed Form 1040), the requirement of filing a tax return more than two years prior to the filing of the bankruptcy petition was satisfied.
Under IRC § 6020(b)(1), the IRS can file a return on behalf of a taxpayer based on available information. The IRS did that here in 1985 when it filed the Form 1040. "Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes." IRC § 6020(b)(2). The courts, however, have almost unanimously held that the filing of a return by the IRS under § 6020(b)(1) does not satisfy the § 523(a)(1)(B)(i) requirement. Bergstrom, 949 F.2d at 343 (); Lowrie v. United States of America (In re Lowrie), 162 B.R. 864, 867 (Bankr.D.Nev.1994). Appellee contends that an exception to this general rule of nondischargeability has been recognized. The bankruptcy court in Lowrie attempted to harmonize conflicting cases in this area. The debtor, Lowrie, failed to file tax returns for two years. After meeting with the IRS agent, Lowrie signed 1902-B forms attached to the 1040 forms prepared by the agent. However, the debtor did not sign the 1040 forms. Id. at 865. According to the testimony of Lowrie's attorney, the IRS agent represented that the forms substituted for the filing of the debtor's 1040 returns. Id. at 866. Lowrie argued that her tax debts should be discharged as an exception to the general rule, citing Carapella v. United States of America (In re Carapella), 84 B.R. 779 (Bankr.M.D.Fla.1988), the lone case at the time holding for the debtor in this situation.
In Carapella, the bankruptcy court held that where the debtor had signed an 870 form, the debtor had effectively filed a return under IRC § 6020(a). Id. at 782. Under IRC § 6020(a), the IRS may file a 1040 form with the help of the taxpayer, and if signed by the taxpayer, it will become the taxpayer's return. The bankruptcy court relied on Revenue Ruling 74-203, which held that an executed 870 form with accompanying schedules constitutes a return under IRC § 6020(a) and Germantown Trust Co. v. Commissioner, 309 U.S. 304, 309, 60 S.Ct. 566, 568-69, 84 L.Ed. 770 (1940). Carapella, 84 B.R. at 782. In Germantown, the Supreme Court rejected the contention that "where a fiduciary, in good faith, makes what it deems the appropriate return, which discloses all of the data from which the tax . . . can be computed, such a return is to be deemed no return." 309 U.S. at 309, 60 S.Ct. at 569. In holding that the 870 form was a substituted return even though the 870 form had no attached schedules, the bankruptcy court in Carapella found that the IRS had sufficient information because it had prepared the summary of taxes owed and assessed the taxes due and the debtor had acknowledged the assessments as his tax liability. 84 B.R. at 782.
Distinguishing Carapella, the bankruptcy court in Gushue v. Internal Revenue Service (In re Gushue), 126 B.R. 202 (Bankr.E.D.Pa. 1991), held that a debtor could not successfully argue that a stipulation, reached after the debtor contested a tax assessment in the tax court, constituted an IRC § 6020(a) return. The court stated that IRC § 6020(a) was "designed to benefit a taxpayer who, after failing to file a return, cooperates with the IRS and provides all information necessary to enable the IRS to prepare the return for the taxpayer." Id. at 204-05.
The Lowrie court harmonized these cases by contrasting the situation where the debtor does not cooperate with the IRS, does not sign anything, and does not admit to the taxes owing, with the situation where the debtor meets with the IRS, signs a form containing sufficient information to calculate the tax, and admits to the taxes owing. In the latter situation, the Lowrie court held that the documents signed by the debtor are appropriately treated as filed returns for purposes of § 523(a)(1)(B)(i). Lowrie, 162 B.R. at 867. The court, therefore, accepted the signed 1902-B forms admitting to the tax liability as the equivalence of a return and discharged the debtor's tax liabilities. Id.
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