In re Kiesner, Bankruptcy No. 92-23581-MDM
| Decision Date | 19 January 1996 |
| Docket Number | 92-23582-MDM. Adv. No. 95-2070,Bankruptcy No. 92-23581-MDM,95-2069. |
| Parties | In re Roger KIESNER and Iris Kiesner, Debtors. Roger KIESNER and Iris Kiesner, Plaintiffs, v. INTERNAL REVENUE SERVICE, Defendant. In re Peggy Lee KIESNER, Debtor. Peggy Lee KIESNER, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
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Gerald J. Mayhew, Milwaukee, WI, for Plaintiffs.
Thomas P. Schneider, Milwaukee, WI, for Defendant.
The debtors, Peggy Kiesner and Roger and Iris Kiesner, brought identical adversary proceedings in each of their bankruptcy cases asking that this court determine taxes claimed owed by the IRS were discharged or, in the case of certain taxes owed by another entity, the debtors are not liable.
The parties briefed the issues and presented evidence at trial. The final determination of the dollar amount of tax liability will be left to the parties, which they can calculate based on the legal findings in this decision.
This court has jurisdiction under 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This memorandum decision represents this court's findings of fact and conclusions of law pursuant to Fed. R.Bankr.P. 7052.
Peggy and Roger Kiesner, brother and sister, were partners in R & R Automotive, an automobile repair business. Iris is Roger's wife. As partners, Peggy and Roger incurred personal liability for substantial federal taxes while operating R & R Automotive. On April 15, 1991, R & R Automotive filed for protection under chapter 11 of the Bankruptcy Code.
The United States subsequently filed tax claims in the R & R Automotive case for federal employment taxes, interest and penalties (Form 941), for federal unemployment taxes, interest and penalties (Form 940), and for late filing of partnership informational returns, interest and penalties (Form 1065). The Kiesners did not file objections to these tax claims.
On December 9, 1991, the R & R Automotive chapter 11 bankruptcy case was converted to a chapter 7 case. A trustee was appointed, and a liquidation of the partnership assets commenced in order to make a distribution to the creditors of the partnership. The trustee's proposed distribution was approved, and distributions were made on or about October 13, 1994. The R & R Automotive bankruptcy case was closed March 1, 1995.
During the pendency of the R & R Automotive bankruptcy, Peggy Kiesner filed a voluntary petition under chapter 7 of the Bankruptcy Code on May 29, 1992. Roger and Iris Kiesner filed a voluntary joint petition on the same date. Because each was a no-asset case, the IRS did not file any claims, although it was listed as a creditor. Discharges were granted to Peggy, Roger and Iris on August 26, 1992.
Peggy, Roger and Iris Kiesner did not file their 1990 and 1991 individual income tax returns prior to the filing of their bankruptcy petitions. Peggy Kiesner filed her 1990 state and federal returns on August 7, 1992, and her 1991 returns on April 1, 1993. Roger and Iris filed their 1990 returns on August 10, 1992, and their 1991 returns on April 19, 1993. Peggy, Roger and Iris timely filed their 1992 returns on April 15, 1993. All of Roger's and Iris' returns were joint returns.
After the discharges were issued in their individual chapter 7 cases, the IRS offset the Kiesners' individual income tax overpayments and applied them to outstanding tax liabilities resulting from their operation of R & R Automotive. The IRS computer system offset the overpayments primarily to R & R Automotive's Form 941 employment tax liability for the quarter ending March 31, 1989:
The IRS computer system is not designed to, and did not, designate specific portions of the individual income tax overpayments to trust fund or nontrust fund portions of R & R Automotive's employment taxes.
The wages reported by R & R Automotive on its Form 941 for the quarter ending March 31, 1989, were $20,346.96. The tax calculated on that payroll base was $4,902.31, which was composed of $1,846.20 withheld income tax and $3,056.11 gross social security. One-half of the social security amount, $1,528.05, was required to be contributed by the employer and constituted the nontrust fund portion of the tax. Thus, the trust fund portion of the tax for this period was $3,374.25. The nontrust fund tax, plus the penalty and interest computed to the date of final payment on both the trust fund and nontrust fund portions, amounted to $6,964.73.
On October 13, 1994, the IRS credited to the R & R Automotive account $19,855.67, which it received from the bankruptcy trustee. The bankruptcy payments were applied to the following liabilities:
Type of Tax Period Amount
Form 941 employment second quarter 1989 $6,671.45
Form 941 employment third quarter 1989 238.93
Form 941 employment first quarter 1991 1,147.44
Form 941 employment third quarter 1991 136.67
Form 940 unemployment 1988 2,417.62
Form 940 unemployment 1989 2,939.96
Form 940 unemployment 1990 4,995.54
Form 1065 partnership 1988 323.40
Form 1065 partnership 1989 408.35
Form 1065 partnership 1990 576.31
__________
$19,855.67
Transcripts1 provided by the IRS reflected that interest and penalties on the tax liabilities of R & R Automotive continued to accrue between the dates of the filing of R & R Automotive's chapter 11 bankruptcy petition and the distribution to creditors in October 1994. After application of monies received from the R & R Automotive bankruptcy and from the offset of the Kiesners' income tax overpayments, the following tax liabilities remained:
Updated to include accruals through October 31, 1995, the total outstanding liabilities shown on the transcripts amounted to $23,191.80.
Prior to trial, the parties agreed on a number of adjustments to this balance. These included a decrease in federal unemployment tax due to payment of state unemployment taxes. The adjustments also included abatements of interest and possible penalties relating to the above federal tax reduction and a modification of the dates as to which the Kiesners' R & R Automotive liabilities were offset by their income tax overpayments. The IRS has estimated that the Kiesners owe approximately $10,200. Nevertheless, the Kiesners maintain that no outstanding balance is owed because their tax liabilities are either discharged or were not owed at all. Although they concede that trust fund taxes are nondischargeable, the Kiesners insist the amounts claimed owed by the IRS should be reduced by the reapplication to other accounts of monies wrongfully applied to penalties that are dischargeable in their individual cases, or by unlawful additions to taxes. If reallocation of payments and offsets are made, then any remaining unpaid tax liability of R & R Automotive is discharged and is not subject to further collection.
The IRS contends that this court lacks jurisdiction over debtors' claim because the debtors did not first file a timely administrative claim for refund of the taxes. According to the IRS, a taxpayer may not file a suit for a refund or credit of his taxes unless the taxpayer first files an administrative claim for refund (United States' Trial Memorandum, p. 5). The IRS contends that I.R.C. § 7422(a) supports its position:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or...
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