In re Hudson Oil Co., Inc.

• Decision Date: 30 September 1988
• Docket Number: Bankruptcy No. 84-20002 to 84-20009.
• Citation: In re Hudson Oil Co., Inc., 91 B.R. 932 (Bankr. Kan. 1988)
• Parties: In re HUDSON OIL COMPANY, INC., Hudson Refining Company, Inc., Hudson Van Oil Company of Kansas City, Inc., Hudson Realty Company, Inc., Hudson Stations, Inc., Hudson Van Oil Co. of Florida, Inc., Hudson Oil Co. of California, Inc., Hudson Van Oil Company, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

91 B.R. 932 (1988)

In re HUDSON OIL COMPANY, INC., Hudson Refining Company, Inc., Hudson Van Oil Company of Kansas City, Inc., Hudson Realty Company, Inc., Hudson Stations, Inc., Hudson Van Oil Co. of Florida, Inc., Hudson Oil Co. of California, Inc., Hudson Van Oil Company, Debtors.

Bankruptcy Nos. 84-20002 to 84-20009.

United States Bankruptcy Court, D. Kansas.

September 30, 1988.

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Mendel Small and Scott J. Goldstein, of Spencer, Fane, Britt & Browne, Kansas City, Mo., for debtors.

Walter Kellogg, Dallas, Tex., trustee, pro se.

David Snodgrass, Neil J. O'Brien, Terri A. Hunter, Roy Morris, of Gardere & Wynne, Dallas, Tex., F. Stannard Lentz, of Lentz & Clark, Overland Park, Kan., for trustee.

David R. House, Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Janice Miller Karlin, Asst. U.S. Atty., D.Kan., Kansas City, Kan., for I.R.S.

Thomas M. Mullinix and Joanne Stutz, of Evans & Mullinix, Kansas City, Kan., for Creditors Comm.

Carol Park Wood and William Wooley, U.S. Trustee's Office, Wichita, Kan.

MEMORANDUM OPINION AND ORDER

BENJAMIN E. FRANKLIN, Chief Judge.

This matter came for hearing on November 4 & 5, 1987, upon the trustee's second amended motion to resolve the debtors' federal tax, interest, and penalty for the taxable year ending October 31, 1983.The trustee, Walter Kellogg, appeared in person and by and through counsel, Neil J. O'Brien, Terri A. Hunter, and Roy Morris, of Gardere & Wynne, Dallas, Texas.The Internal Revenue Service appeared by and through counsel, David R. House, Trial Attorney, Tax Division for the United States Department of Justice, and Janice Miller Karlin, Assistant United States Attorney for the District of Kansas.The creditors committee appeared by and through its counsel, Thomas Mullinix and Joanne Stutz of Evans & Mullinix, Kansas City, Kansas.The United States Trustee's Office appeared by and through counsel, William Wooley.

FINDINGS OF FACT

Based upon the stipulations, the testimony of witnesses, the exhibits, pleadings, and the record filed herein, the Court finds as follows:

1.Hudson Oil Company, Inc.(hereinafter referred to as "Hudson") is a Kansas corporation with its principal place of business located at 4720 Rainbow, Shawnee Mission, Kansas.Hudson's employer identification number is XXXXXXXXX.Hudson Refining Co., Inc. is a Delaware corporation with its principal place of business located at 4720 Rainbow, Shawnee Mission, Kansas.Hudson Refining's employer identification number is XXXXXXXXX.Hudson Refining is an 80% or more controlled subsidiary of Hudson.Hudson and Hudson Refining filed a consolidated federal income tax return on June 9, 1986, utilizing the accrual method of accounting for the taxable year ending October 31, 1983.

2.On January 3, 1984, debtor filed a petition in this Court for protection under Chapter 11 of Title 11, United States Code.The debtor's tax return for the 1983 tax year was due on January 15, 1984.On January 13, 1984, the debtor-in-possession filed an Application for Automatic Extension of Time to File Corporation Income Tax Return, Form 7004.

3.On March 6, 1984, Walter Kellogg was appointed as trustee to administer debtor's estate.At the time of his appointment, the trustee was unaware of the filing of the Application for Automatic Extension.

4.On March 9, 1984, the trustee selected Dan B. Lain, P.C.(later becoming Lain, Faulkner & Company) as his operations and financial manager.The trustee delegated to Lain the responsibility of filing the federal income tax returns and directed Lain to examine the books and records as soon as possible.Lain became aware of the application for extension of time to file the 1983 return sometime after March 19, 1984.The debtors received a letter from the IRS dated March 19, 1984, stating that extension would expire on March 29, 1984, unless the debtors immediately paid their estimated tax liability.Lain responded to the IRS that no payments could be made toward the tax liability shown on the extension because the tax due was a pre-petition debt subject to the automatic stay.

5.Lain then retained James Yarmchuk, P.C. to prepare and file the debtors' 1983 tax return.Yarmchuk was a highly qualified and competent tax accountant, who both the trustee and Lain had used on several prior occasions.At the time he was retained, Yarmchuk believed that the 1983 return was already past due.Both Lain and Yarmchuk testified that they found that the books and records were in somewhat disarray as a result of the companies' filing of bankruptcy.

6.By April or May of 1984, Yarmchuk testified that he made a preliminary conclusion that there would be no taxable 1983 income for the debtors.Furthermore, Yarmchuk testified that he wanted to file a complete and accurate return, but because of the condition of the books and the shortcomings of the accounting system, he was concerned about the integrity of the numbers.In order to file a complete and accurate return, Yarmchuk testified that he wanted to wait at least until Price Waterhouse & Company completed its audit report of the companies' financial statement for the period January 1, 1983 to January 3, 1984, and the Department of Labor(DOL) completed its calculations.Yarmchuk advised the trustee of his concerns about the integrity of the numbers and the absence of the DOL calculations.The trustee testified that he relied on Yarmchuk's advice and judgment concerning the timing of the filing of the return; and decided not to file the return until receipt of the audit from Price Waterhouse & Co. and the completed calculations from DOL.Price Waterhouse & Co. had been in the midst of its audit of the debtors' 1983 tax year when debtors filed for reorganization, at which time Price Waterhouse ceased its audit of debtors.In April of 1984, the trustee authorized Price Waterhouse to complete the audit, which Price Waterhouse did for the period January 1, 1983 through January 3, 1984, the filing date of the petition.Price Waterhouse delivered its audit to debtors in October of 1984.

7.In addition to waiting for the Price Waterhouse audit, Yarmchuk testified that he also wanted to wait for the calculation of damages in a lawsuit between the Department of Labor(the "DOL") and Hudson.The DOL instituted suit against Hudson in 1977 asserting violations of the minimum wage, overtime and recordkeeping provisions of the Fair Labor Standards Act of 1938.

8.The DOL case was tried over a two-week period, from July 26, 1982 through August 2, 1982.

9.An order was entered October 14, 1983, by the Honorable Earl E. O'Connor entitled "Memorandum and Order."The order set forth findings of fact and conclusions of law wherein the court found that Hudson's actions were not in good faith nor based on reasonable grounds, but rather that the debtor had knowingly, willfully, and blatantly violated the Fair Labor Standards Act of 1938.The order further set forth a formula for calculation of damages by the DOL.In addition, the order awarded post-judgment interest on the damages at the rate of 10% per annum and awarded costs to the DOL.

10.The initial calculations were completed in November, 1984 but due to errors in calculations it was necessary to recalculate the figures which resulted in the completion date being extended to June, 1985.

11.The DOL calculated that the full amount of the liability was $12,842,472, of which $8,937,165 was Hudson's proportionate share.Sometime after June 1985 and before June 1986, the DOL and the trustee entered into a settlement agreement for payment by debtor of $5,500,000, of which $3,460,517 was Hudson's proportionate share.The settlement agreement is subject to approval by this Court.

12.At a meeting of creditors on August 1, 1984, Lain reported to the creditors, including IRS' counsel, Jan Karlin, on the status of the preparation of the 1983 return.Lain also informed the IRS that the filing of the return would be delayed because of the lack of progress in completing the DOL calculations.At subsequent creditors' meetings, Lain updated creditors on the progress of preparation of the 1983 return.Lain reported that there would be no tax liability because of the DOL litigation.Lain also reported that he felt there would be a reasonable position for taking a deduction for the Department of Energy("DOE") litigation.Lain and Karlin had discussions concerning the filing of the returns.By letter dated June 21, 1985, Karlin informed Lain that he should file any federal tax return in Wichita, Kansas.By subsequent letter dated June 25, 1985, Karlin stated that the returns should now be filed in St. Louis, Missouri instead of Wichita.This Court set the last date for filing proof of claims in the chapter 11 proceeding at January 4, 1985.On January 4, 1985, the IRS filed a proof of claim estimating federal income tax for the 1983 tax year at $1,028,902.The IRS' proof of claim did not provide for any type of penalty, late-filing or otherwise.

13.Yarmchuk completed the return on June 9, 1986.The return reflected a net loss for the 1983 tax year of $5,933,201.Among the items reflected on the return, the debtor claimed the following adjustments to income:

a. contained within salaries expense was the amount of $3,460,517 which represented the settlement amount reached with the DOL during June of 1985 through June of 1986.This portion of the salaries expense was not separated out on the return, nor was it disclosed on the return that this portion was attributable to the DOL settlement.Yarmchuk testified that he thought the damages in the DOL lawsuit were deductible in the 1983 tax year because the order entered on October 14, 1983 in that litigation met the all events test, which governs the timing of deductions for contested liabilities, and that the deduction had to be taken in the 1983 return or it would

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