In re Payne

• Decision Date: 03 October 2002
• Docket Number: Bankruptcy No. 97 B 39766.,Adversary No. 01 A 00342.
• Citation: 283 B.R. 719
• Parties: In re John Howard PAYNE, Debtor. John Howard Payne, Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

283 B.R. 719

In re John Howard PAYNE, Debtor John Howard Payne, Plaintiff, v. United States of America, Defendant.

Bankruptcy No. 97 B 39766.

Adversary No. 01 A 00342.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

October 3, 2002.

S. Ira Miller, Chicago, IL, for Plaintiff.

Mayer Y. Silber, Office of Chief Counsel, IRS, Chicago, IL, Mandee Rosler Rosenberg, U.S. Department of Justice, Tax Division, for Defendant.

MEMORANDUM OPINION ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

JACK B. SCHMETTERER, Bankruptcy Judge.

Background/History

John Howard Payne ("Plaintiff or Payne") is seeking a declaration that his liability for 1986 taxes due to the United States was discharged through his bankruptcy filing under Chapter 7. Payne filed his Petition on December 31, 1997. The United States Internal Revenue Service ("IRS or USA") was a scheduled creditor for unpaid taxes for the years 1983 through 1991. Payne received a general discharge on April 17, 1998, and his case was closed that same month. However, he was granted leave to reopen his case on April 3, 2001, after the U.S. Internal Revenue Service notified him of its intent to levy on certain assets to collect the 1986 income tax. Payne then filed the instant adversary to determine dischargeability of the alleged tax debt. The USA responded by moving for summary judgment under § 523(a)(1)(B)(i) of the Bankruptcy Code, which excepts from discharge any tax for which the required return was not filed. For reasons discussed below, the motion for summary judgment is denied.

JURISDICTION

Jurisdiction over this matter lies pursuant to 28 U.S.C. § 1334(b) and this is a core proceeding under § 157(b)(2)(i). This matter is referred here under the standing referral of District Court Internal Operating Procedure 15(a). Venue is proper in this district under 28 U.S.C. § 1409(a).

DISCUSSION

Standards for Summary Judgment

Rule 56(c) of the Federal Rules of Civil Procedure, which is made applicable to bankruptcy by Fed.R.Bankr.P. 7056(c), provides that a motion for summary judgment may be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In deciding whether there is a triable dispute, the court must construe all reasonable inferences that can be drawn from the facts in favor of the nonmoving party. Bartman v. Allis-Chalmers Corp., 799 F.2d 311, 312 (7th Cir.1986).

Undisputed Facts

Payne did not controvert the list of undisputed facts submitted by the USA in support of its motion for summary judgment. Therefore, pursuant to Local Rule 402 N(3)(b) the following facts are deemed admitted:

1. The IRS was properly notified of Payne's Chapter 7 bankruptcy case. The IRS never filed a claim against Payne's estate nor did it file an adversary to determine the dischargeability of any of the income taxes owed by Payne.

2. Payne was paid $155,604.77 in wages by RBH of Illinois, Inc. in 1986, from which $44,520 in federal income taxes and $3,003.00 in social security taxes was withheld.

3. The USA gave Payne credit for the $44,520 withheld from his wages on or about April 15, 1987.

4. Payne failed to file a tax return for 1986 on or before the required due date of April 15, 1987.

5. On or about November 6, 1989, the IRS filed a substitute return for Payne pursuant to 26 U.S.C. § 6020(b). That substitute return showed no income for 1986. The IRS then began to investigate to determine the proper tax liability owed by Payne.

6. On or about December 31, 1990, a delegate of the Secretary of Treasury made an assessment for unpaid income tax in the amount of $64,472.00, plus penalties and interest.

7. The IRS has no record that Payne ever filed a tax return for the 1986 tax year.

8. Payne says that he mailed several years of late returns in March of 1992, including the 1986 return. Payne's 402 N Statement. The IRS has acknowledged receiving the other returns, but says it never received the 1986 return. If Payne did file the 1986 return in March of 1992, that was more than two years prior to filing of his Bankruptcy Petition on December 31, 1997.

§ 523 Exceptions to Discharge

Section 523 of the Code which enumerates exceptions to discharge provides in relevant part:

(a) 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 and 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;

(B) with respect to which a return, if required —

(i) was not filed; or

(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

11 U.S.C. § 523(a)(1)(a)(A)-(C).

Exceptions to discharge are narrowly construed in favor of providing the debtor with a fresh start. Goldberg Securities, Inc. v. Scarlata, 979 F.2d 521, 524 (7th Cir.1992) (citation omitted). However, Congress has evinced an intent to balance this policy with recognition of the need to encourage voluntary compliance with applicable tax law. Collier on Bankruptcy, ¶ 507.10 [1][b] (15th ed.2002). Thus, income tax debts have priority and are nondischargeable even if the taxing authority does not file a claim, unless the following criteria are met: (1) the debtor filed the required return and did not attempt to willfully avoid paying the tax (11 U.S.C. § 532(a)(1)(B)-(C)); (2) the taxes came due more than three-years prior to the debtor filing for bankruptcy, including any extensions (11 U.S.C. § 523(a)(1)(A)); (3) the taxes were not assessed within 240 days of filing the bankruptcy, including extensions (11 U.S.C. § 523(a)(1)(A)); and (4) the required return was filed more than two years before the debtor filed for bankruptcy (11 U.S.C. § 523(a)(1)(B)(ii)).

The USA's Argument against Discharge

The USA raises a twofold argument in support of its claim that Payne is ineligible for discharge of his 1986 tax because he failed to file the required return. First, the Internal Revenue Service has no record that the return was ever received by it. Secondly, even if Payne mailed a 1040 Form to the IRS when he says he did, that form does not constitute a valid return for purposes of § 523 because it was mailed after the IRS had already assessed the tax. Each of these arguments will be taken in turn.

For Purpose of Considering the Motion for Summary Judgment, the IRS is Presumed to have Received Return

Payne has raised an unrebutted presumption for purpose of considering the motion for summary judgment that his 1986 tax return was received by the IRS along with his other returns for 1983-1991. His sworn affidavit states that he executed and mailed the 1986 return in 1992 along with his other returns. He attached a purported retained copy of the 1986 return. An unrebutted statement in an affidavit is sufficient to raise a presumption that Payne's return was delivered to the IRS. See Godfrey, 997 F.2d at 338. Particularly in light of the acknowledgment that other returns that were sent at the same time by Payne were received, the IRS's failure to locate the return in issue is insufficient to rebut for purposes of summary judgment a presumption that it was delivered. Nimz, 505 F.2d at 179 (failure of bankruptcy court clerk to locate proof of claims was insufficient to show claims were not received); Barnett v. Okeechobee Hospital, 283 F.3d 1232, 1241 (11th Cir.2002) (same); Sorrentino v. United States of America, 199 F.Supp.2d 1068, 1077 (D.Co.2002) (same involving missing tax return). It is at least possible on the present record that the 1986 return was received by the IRS, which acknowledges receiving the other returns, and was subsequently misplaced. The USA has not offered any evidence to show that this did not happen except proof that its search has not turned up the return in issue.

As argued by the Government, mailing is not filing. United States v. Lombardo, 241 U.S. 73, 76, 36 S.Ct. 508, 60 L.Ed. 897 (1916). To file a required document with a governmental agency, it must be delivered to and received by the proper government official. Id. Congress has elaborated on this requirement with enactment of 26 U.S.C. § 7502¹ which allows a postmark to establish the filing date of a tax return which is mailed before the tax filing deadline.

Under Section 7502, a document is deemed delivered on the date it is postmarked if the document was: (1) properly placed in the U.S. mail prior to the filing deadline; and (2) delivered to the IRS after the deadline. 26 U.S.C. § 7502(a)(1)-(2). Documents sent via registered mail or certified mail constitutes prima facie evidence of delivery, provided the taxpayer has a postmarked receipt showing that the document was mailed before the filing deadline. 26 U.S.C. § 7502(c)(1)-(2). The Government argues that § 7502 abrogated the common law mailbox rule whereunder properly mailing of a document raises a rebuttable presumption that it was received. Matter of Nimz Transportation, 505 F.2d 177, 178 (7th Cir.1974). Thus, it contends that Payne's inability to produce a registration showing that he mailed the return via certified or registered mail means that he cannot as a matter of law establish that the return was filed. See Reply Brief p. 3.

There is a split of authority on the issue of whether § 7502 abolished the mailbox rule applicable under earlier cited authority as to tax filings. See Carroll v. Commissioner, 71 F.3d 1228, 1232 (listing cases). The Eighth and Ninth Circuits have answered this question in the negative. See Anderson...