In re Martinez

• Decision Date: 13 April 2007
• Docket Number: Adversary No. 03-1232.,Bankruptcy No. 02-15471.
• Citation: 366 B.R. 604
• Parties: In re Elvin L. MARTINEZ, Debtor. Elvin L. Martinez, Plaintiff, v. United States of America, Department of the Treasury, Internal Revenue Service, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Louisiana

366 B.R. 604

In re Elvin L. MARTINEZ, Debtor Elvin L. Martinez, Plaintiff, v. United States of America, Department of the Treasury, Internal Revenue Service, Defendant.

Bankruptcy No. 02-15471.

Adversary No. 03-1232.

United States Bankruptcy Court, E.D. Louisiana.

April 13, 2007.

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Eric J. Derbes, Frederick L. Bunol, The Derbes Law Firm, LLC, Metairie, LA, for Plaintiff.

Candice Turner, John M. Bilheimer, Rebeccah Bower, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

JERRY A. BROWN, Bankruptcy Judge.

This matter came on for trial on October 19 and 20, 2006 on the complaint of Elvin Martinez, the debtor, against the Internal Revenue Service of the United States under 11 U.S.C. § 523(a)(1)(A) seeking a discharge of the tax obligations of Mr. Martinez. For the reasons set forth below, the court finds that the tax obligations of the debtor for the years 1990 through 1993 are not dischargeable, and the tax obligations of the debtor for the years 1987 through 1989 are dischargeable.

I. Procedural History

The debtor filed a petition under Chapter 7 of the United States Bankruptcy Code on August 2, 2002.¹ No proofs of claim were filed in the case, and the case was designated as a "no asset" case by the Chapter 7 trustee. A discharge order was entered on November 4, 2002, and the case was closed on November 14, 2002. On October 3, 2003 the case was reopened to allow the debtor to file a complaint seeking a determination that the income tax liabilities owed by the debtor for the years 1987 through 1993 were not excepted from the discharge under § 523(a) of the Bankruptcy Code. The IRS answered the complaint, and the court held a hearing on cross motions for summary judgment on November 17, 2004. On February 9, 2005 the court ruled in favor of the IRS holding that the tax liability was not discharged. The debtor appealed to the district court, and on June 30, 2005 the case was remanded to the bankruptcy court for further evaluation in light of a March 25, 2005 decision issued by the United States Court of Appeals for the Ninth Circuit, River City Ranches # 1, Ltd. v. CIR, 401 F.3d 1136 (9th Cir.2005). Upon remand, the court found that in light of the district court's directive there were unsettled issues of material fact in the case and entered an order denying summary judgment on March 2, 2006. A two day trial was held on October 19 and 20, 2006.

II. Background Facts

This case arises from the debtor's involvement in several partnerships formed by Walter J. Hoyt, III. Over a period of approximately 30 years, Hoyt formed numerous partnerships to own, breed and manage sheep and cattle. Hoyt used these partnerships as illegal tax shelters in order to take tax deductions, claim tax credits, and defraud his partners. Although Hoyt was under investigation by the IRS and other government agencies for a number of years, it was not until 1999 that he was indicted by the U.S. government. Hoyt was eventually convicted for conspiracy, mail fraud, bankruptcy fraud, and money laundering. He is currently serving a lengthy sentence in federal prison.²

The debtor first met with a Hoyt representative in December 1985, and signed three subscription agreements to join Hoyt partnerships.³ A fourth subscription agreement Was signed by Hoyt in the debtor's name.⁴ The debtor continued in these partnerships until 1994.⁵ Hoyt was designated as the Tax Matters Partner ("TMP") in all of the Hoyt partnerships.⁶ Generally, the IRS has three years from the later of the date the partnership return was filed or three years from the last day for filing the return for the year to issue a notice of Final Partnership Administrative Adjustments ("FPAA").⁷ An FPAA is the notice that the IRS sends to the TMP when it has a disagreement with a partnership over the amount of a gain or a loss and is the equivalent of a statutory notice of deficiency that the IRS would send to an individual or a corporation.⁸ The three year time period for issuing a notice of FPAA. can be extended with the consent of the TMP. Hoyt signed extensions for the partnerships that the debtor was involved with between February 1991 and March 1993 for the tax years 1987, 1988 and 1989.⁹ The extensions gave the IRS until December 31, 1993 to issue notices of FPAA. In late 1993 the IRS sent notices of FPAA to Hoyt, the TMP for the partnerships for the tax years 1987 through 1989.¹⁰ The parties agree that the notices of FPAA sent for the' years 1987 through 1989 were timely only if the extensions granted by Hoyt for those tax years were valid. The IRS sent timely notices of FPAA to Hoyt for the tax years 1990 through 1993 without needing any extensions.¹¹ Upon the mailing of an FPAA, the TMP for the partnership has 90 days to file a petition challenging the FPAA with the tax court.¹² Hoyt filed timely petitions in tax court contesting all of the FPAAs for the partnerships for the years 1987 through 1993.¹³ All of those petitions are still being litigated in the tax court, so to date there has been no final resolution of the petitions. Hoyt was eventually removed as the TMP for all of the Hoyt partnerships by motion of the IRS in 2003.¹⁴

III. Legal Analysis

A. Sections 523(a)(1)(A) and 507(a)(8)(A)(iii) of the Bankruptcy Code¹⁵

Section 523(a)(1)(A) of the Bankruptcy Code states:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

(1) for a tax or a customs duty —

(A) of the kind arid for the periods specified in section 507(a)(2) or 507(a)(8) of this title, .whether or not a claim for such tax was filed or allowed.

Section 507(a)(8)(A)(iii) of the Code states:

Allowed unsecured claims of governmental units, only to the extent that such claims are for —

(A) a tax on or measured by income or gross receipts —

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case.

The court addressed its interpretation of § 507(a)(8)(A)(iii) in the memorandum opinion for this case dated February 9, 2005.¹⁶ The court continues to hold that § 507(a)(8)(A)(iii) refers to taxes which are still assessable after the commencement of the case, including taxes for which a tax court case is pending at the time of the bankruptcy filing. At issue then is whether these taxes are still assessable in light of the evidence presented at the trial.

In most actions to determine the dischargeability of a debt under § 523(a), the creditor seeking to have its debt excepted from discharge bears the burden of proof.¹⁷ The creditor need only prove its case by a preponderance of the evidence.¹⁸ In determining whether a particular debt falls within one of the exceptions to § 523, the statute should be narrowly construed against the objecting creditor and in favor of the debtor.¹⁹

B. The Tax Court Petitions — Tax Years 1990-1993

The IRS argues that with respect to the years 1990 through 1993 the IRS timely issued the FPAAs within three years of the filing of the partnership returns, so no consents to extend the assessment period for those years was required. In response to the timely filed FPAAs, Hoyt filed tax court petitions contesting the FPAAs. The debtor does not contest that the FPAAs were timely but instead contends that the tax court petitions filed by Hoyt were invalid because Hoyt was operating under a disabling conflict of interest when he filed the petitions. There do not appear to be any Fifth Circuit Court of Appeals cases addressing this issue, but the IRS cites Martin v. C.I.R., 436 F.3d 1216 (10th Cir.2006), O'Neill v. U.S., 44 F.3d 803 (9th Cir.1995), United States v. Shahadi, 340 F.2d 56 (3rd Cir.1965), and American Equitable Assurance Company v. Helvering, 68 F.2d 46 (2nd Cir.1933) for the proposition that even an unauthorized or otherwise defective petition to the tax court challenging an FPAA extends the statute of limitations for the IRS to make an assessment of a taxpayer's income.

American Equitable Assurance Company v. Helvering, 68 F.2d 46 (2nd Cir.1933), held that the 60 day period the IRS had to make an assessment after issuing a notice of deficiency was suspended pursuant to § 277 of the Revenue Act of 1926 once a petition for redetermination was placed on the tax court docket, regardless of the fact that the petition was later found to be defective:

Even though the Board dismissed this proceeding ... for want of jurisdiction ... the placing of the proceeding on its docket gave it whatever right to act is involved in determining whether or not the petition was sufficient to give it jurisdiction to decide the matter on the merits. At any rate, a proceeding had been commenced which required the Board of Tax Appeals to make a decision though not necessarily on the merits. Because the effect of the passage of time would be the same whether the Board made its decision on the merits or on some other ground, if the period stated in the statute of limitations meantime expired, it is reasonable to believe that Congress did not intend to have the time a proceeding was pending before the Board counted any more when the decision was a dismissal for want of jurisdiction than when it was not.²⁰

A subsequent decision by the Third Circuit Court of Appeals followed the Second Circuit's reasoning, holding that, "the cases construing § 277 have uniformly construed it in the broadest fashion, to stop the running of the statute when matters are being litigated in the Tax Court under any circumstances."²¹

In the O'Neill case the Ninth Circuit discusses 26 U.S.C. § 6229(d), a descendent of § 277 that applies specifically to partnership returns.²² In O'Neill the IRS mailed the timely FPAA notice to the TMP, who unbeknownst to the IRS, the tax court, any of the parties or their counsel...