In re Heritage Vil. Ch. & Missionary Fellowship
| Decision Date | 07 March 1988 |
| Docket Number | Civ. A. No. 88-236. |
| Citation | 87 BR 401 |
| Court | U.S. District Court — District of South Carolina |
| Parties | In re HERITAGE VILLAGE CHURCH AND MISSIONARY FELLOWSHIP, INC., a/k/a PTL, PTL Club, Fort Heritage Campgrounds and Christian Retreat, PTL Enterprise, Debtor. David W. CLARK, Trustee, Appellee, v. UNITED STATES of America, James A. Baker, III, Secretary of the Department of the Treasury, and Lawrence B. Gibbs, Commissioner of Internal Revenue, Appellants. |
Dennis W. Shedd, (Det. F. Bowers, Jr. on brief), Bethea, Jordan & Griffin, Columbia, S.C., R. Bradford Leggett, (Richard B. Howington, Lynne P. Klauer, Allman Spry Humphreys, on brief), Leggett & Howington, P.A., Winston-Salem, N.C., for David W. Clark.
Richard F. Mitchell, (Michael L. Paup, Acting Asst. Atty. Gen., Steven Shapiro, Francis M. Allegra, Betsy E. Burke, Attorneys, Tax Div., on brief), U.S. Dept. of Justice, Washington, D.C., for U.S.
This matter is before the Court on appeal from an order of the bankruptcy court granting a preliminary injunction which prohibits the Internal Revenue Service ("IRS") from revoking the tax exempt status of the debtor, Heritage Village Church and Missionary Fellowship, Inc. ("PTL"). The appellants, United States of America, James A. Baker, III, and Lawrence B. Gibbs ("Government"), appeal the order of the bankruptcy court. For the reasons set forth below, the Court reverses the order granting preliminary injunctive relief.
On May 17, 1973, the IRS issued a letter ruling granting PTL tax exempt status pursuant to 26 U.S.C. § 501(c)(3). On June 12, 1987, PTL filed a voluntary petition for relief under Title 11 of the United States Code. In late 1987, the IRS advised David W. Clark, the Trustee in Bankruptcy, ("Trustee") that the IRS intended to revoke PTL's tax exempt status and to publicly announce the revocation on December 10, 1987. The revocation was to be retroactive to May 31, 1981. On December 9, 1987, the Trustee filed a complaint with the bankruptcy court seeking injunctive relief restraining the defendants from revoking PTL's tax exempt status. That same day, the Trustee filed a motion for a temporary restraining order to enjoin revocation pending a hearing on the matter. The bankruptcy court granted the Trustee's motion and issued a temporary restraining order. A hearing was held before the bankruptcy court on December 16, 1987. By order filed December 21, 1987, the bankruptcy court issued a preliminary injunction "preventing the revocation of the tax exempt status of PTL, or any of its subsidiaries or affiliates, and also preventing the revocation or the withdrawal of a letter ruling declaring that PTL qualifies for tax exempt status under § 501(c)(3) of The Internal Revenue Code." Order at 10. The order states the injunction is to remain in effect through May 1, 1988.
In its order, the bankruptcy court concluded the injunction is authorized under section 362(a)(6) of the Bankruptcy Code which automatically stays "any act to collect and assess taxes." The bankruptcy court further concluded its power to enjoin the revocation is unaffected by the provisions of the Anti-Injunction Act, 26 U.S.C. § 7421, ("Act") because the Act is preempted by the provisions of the Bankruptcy Code.
The Government bases its appeal on two grounds. First, the Government contends the bankruptcy court lacked jurisdiction to issue the injunction because section 362(a) does not stay revocation of a debtor organization's tax exempt status and because the Anti-Injunction Act limits the injunctive powers otherwise conferred on the bankruptcy court. Second, the Government asserts that if the bankruptcy court possessed jurisdiction, it abused its discretion in issuing the injunction. Because this Court concludes the bankruptcy court was without jurisdiction to issue the injunction, it does not reach the Government's second ground.
First, the Court considers whether the injunction is authorized under the automatic stay provisions of section 362(a) of Title 11 of the United States Code. The bankruptcy court concluded section 362(a)(6) automatically stays revocation of a debtor organization's tax exempt status. The Trustee now urges this Court to reach the same conclusion and, in addition, argues the proposed revocation is stayed by subsections (1) and (3) of section 362(a). The Government contends none of these stay provisions prohibits the proposed revocation. The Court agrees with the Government and concludes revocation of PTL's tax exempt status is not automatically stayed under section 362(a).
The bankruptcy court concluded that revocation is prohibited by section 362(a)(6), which stays "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title." Because the Court finds that revocation of a debtor organization's tax exempt status is not an "act to collect, assess or recover" taxes, the proposed revocation is not stayed by section 362(a)(6).
An "assessment" of taxes is a formal, discrete act with specific legal consequences. The IRS makes an assessment of unpaid taxes only after a notice of deficiency is sent to the taxpayer. In re Carlson, 580 F.2d 1365, 1368 (10th Cir.1978). Upon entering an assessment, the IRS sends the taxpayer a notice of assessment and demand for payment within sixty days. 26 U.S.C. § 6303. The assessment gives rise to a federal tax lien which attaches to the taxpayer's property upon failure to pay after notice and demand. Id. at 1368; U.S. v. Mitchell, 349 F.2d 94, 99 (5th Cir.1965); 26 U.S.C. §§ 6321, 6322. In addition, the assessment triggers the six-year statute of limitations for collection of the taxes by levy or by court proceedings. 26 U.S.C. § 6502(a). The proposed revocation of PTL's tax exempt status has none of these characteristics or consequences. In fact, the Trustee has not shown that revocation would have any immediate effect on PTL's tax liability.
In determining that revocation of tax exempt status is an act of assessment, the bankruptcy court relied on Bob Jones University v. Simon, 416 U.S. 725, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974). In that case, the United States Supreme Court held that a suit to enjoin revocation of an organization's tax exempt status violates the Anti-Injunction Act, 26 U.S.C. 7421(a), which prohibits suits to restrain the assessment and collection of taxes. On the basis of that holding, the bankruptcy court concluded that revocation of tax exempt status is an act of assessment. This Court disagrees with the bankruptcy court's interpretation of Bob Jones University.
In Bob Jones University, the Supreme Court held not that revocation is an act of assessment, but only that an injunction against revocation would restrain the assessment of taxes in violation of the language and purposes of the Anti-Injunction Act. As the holding in Bob Jones University implies, revocation is a prerequisite to assessing and collecting taxes from an organization that has been granted a tax exemption under 26 U.S.C. § 501(c)(3). Until the tax exempt status is revoked, the IRS may not assess taxes against a tax exempt organization. Thus, an injunction preventing revocation necessarily prevents assessment. This does not mean, however, that revocation is itself an act of assessment. The Anti-Injunction Act "applies not only to the actual assessment or collection of a tax, but is equally applicable to activities leading up to, and culminating in, such assessment and collection." Lowrie v. United States, 824 F.2d 827, 830 (10th Cir.1987). See also Blech v. United States, 595 F.2d 462, 466 (9th Cir.1979); United States v. Dema, 544 F.2d 1373, 1376 (7th Cir.1976), cert. denied, 429 U.S. 1093, 97 S.Ct. 1106, 51 L.Ed.2d 539 (1977).
The Trustee asserts that even if revocation is not an assessment, it is nonetheless stayed by subsection (a)(1) or (a)(3) of section 362. The Court disagrees and concludes that neither provision stays revocation of tax exempt status.
Section 362(a)(1) stays "the commencement or continuation . . . of a judicial, administrative or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title." Assuming without deciding that this language would, standing alone, stay the proposed revocation, the Court nevertheless finds that revocation is permitted by the section 362(b)(4) exception.
Section 362(b)(4) excepts from the section 362(a)(1) stay "the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." This exception has been broadly construed by the courts and has been applied to permit a wide range of governmental actions. See, e.g., EEOC v. McLean Trucking Co., 834 F.2d 398 (4th Cir.1987) (); In re Commonwealth Oil Refining, 805 F.2d 1175 (5th Cir.1986) (); Cournoyer v. Town of Lincoln, 790 F.2d 971 (1st Cir.1986) (); NLRB v. Evans Plumbing Co., 639 F.2d 291 (5th Cir.1981) (enforcement of NLRB order); Pasadena Offices, Ltd. v. City of So. Pasadena, Fla., 64 B.R. 192 (Bankr.M.D.Fla.1986) (); In re Jesus Loves You, Inc., 40 B.R. 42 (Bankr.M.D.Fla.1984) (); FTC v. R.A. Walker Assocs., Inc., 37 B.R. 608 (D.D.C.1983) (); D.H. Overmyer Telecasting Co. v. Lake Erie Communications, Inc, 35 B.R. 400 (Bankr.N.D.Ohio 1983) (). The legislative history of section 362 indicates that this exception applies "where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a...
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