In re Payne

• Decision Date: 02 March 2004
• Docket Number: Bankruptcy No. 97 B 39766.,Adversary No. 01 A 00342.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re John Howard PAYNE, Debtor. John Howard Payne, Plaintiff, v. United States of America, Defendant.

Page 230

306 B.R. 230

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.

March 2, 2004.

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

Craig K. Weaver, U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant.

Mayer Y. Silber, Office of Chief Counsel, IRS, Joel Nathan, Office of United States Attorney, Chicago, IL, for Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

The instant adversary relates to the Chapter 7 bankruptcy petition of John Howard Payne ("Payne"). Plaintiff Payne seeks a declaration that his liability for overdue taxes due for 1986 was discharged through his bankruptcy filing and also seeks damages for willful violation of the discharge injunction under 26 U.S.C. § 7433(e). The Defendant United States of America ("United States" or "Government"), on behalf of the Internal Revenue Service ("IRS" or "Agency"), contests dischargeability of the 1986 tax debt which Payne seeks under 11 U.S.C. § 523(a)(1)(B)(ii). It first denies that Payne ever filed anything for that tax year, alternatively asserts that if he did file anything it was not a tax "return" under § 523(a)(1)(B) that was filed before the agency assessed tax liability for 1986, and that the lateness of any filing renders the tax debt nondischargeable.

Following trial, the Court now makes and enters the following Findings of Fact and Conclusions of Law, pursuant to which judgment is separately entered in favor of Payne.

CASE HISTORY

Payne scheduled the IRS as a creditor, but despite notice of the Chapter 7 bankruptcy case, the Government did not participate. After entry of a discharge order generally discharging Payne's debt, the IRS served him with its notice of intent to levy his income and assets. Pl.'s Tr. Exh. 16.¹ Payne then moved to reopen his bankruptcy case and sought by motion to enjoin the IRS from violating the discharge order. That motion was stricken without prejudice to Payne filing an adversary complaint as required by Fed.R.Bank.P. 7001. In this Adversary proceeding, Payne seeks declaration that his 1986 tax debt was discharged, but not an injunction. Alternatively, he claims that the tax assessment was in error as to calculations. The United States moved for summary judgment. For reasons discussed in an earlier Memorandum Opinion, Payne v. United States of America (In re Payne), 283 B.R. 719 (Bankr.N.D.Ill.2002) that motion was denied. Therefore, the case went to trial, and the following Findings of Fact and Conclusions of Law are made and entered.

FINDINGS OF FACT

Findings of Fact are based on evidence presented at trial, and stipulation of the parties filed herein as to uncontested facts.

1. John Howard Payne filed a petition for relief under Chapter 7 of the Bankruptcy Code on December 31, 1997.

2. Payne scheduled the United States Internal Revenue Service as a creditor for unpaid income taxes for the years 1983 through 1991. Although properly notified of Payne's bankruptcy case, the IRS did not file a claim or an adversary proceeding to determine dischargeability of any of those taxes. Payne received a general bankruptcy discharge order entered in 1998. (Stipulation ¶¶ 2 and 3.)

3. For the calendar year 1986, Payne received $155,604.77 in wages, from which $44,520 was withheld for federal income taxes and $3,007 was withheld for social security taxes. Payne's Form 1040 Federal Income Tax Return for the 1986 tax year was due on or before April 15, 1987.

4. Payne did not file timely tax returns for tax years 1983 through and including 1990, prompting the IRS to begin on or about November 6, 1989 an investigation to determine Payne's tax liability.

5. On or about December 31, 1990, a delegate of the Secretary of the Treasury made an assessment against the Plaintiff for unpaid federal income tax for the 1986 tax year in the amount of $64,472 plus statutory interest and penalties (Stipulation ¶ 10.) Payne did not establish at trial that the assessment was erroneously calculated.

6. Payne did not petition the Tax Court for a redetermination of the IRS's assessment.

7. In March 1992, approximately five years prior to his bankruptcy filing, Payne mailed his Form 1040 income tax returns for all of the tax years 1983 through 1990 without payment (Stipulation ¶¶ 11 and 12). In doing so Payne attempted to advise the IRS of his tax liabilities and effectuate offers to compromise those liabilities. He used an accounting firm to prepare those returns. (Pl.'s Tr. Exh. 13, p. 2.) The 1986 Form 1040 had Payne's W-2 and other documentation attached. The Secretary of the Treasury made assessments for Payne's unpaid taxes for all the foregoing years except 1986 from the late-filed returns.

8. The IRS levied Payne's wages in November, 1992. In December 1992, Payne submitted three offers at different times in varying amounts ($100,000, $124,000 and $99,500) to resolve his tax debt for all the foregoing tax years. Payne listed his inability to pay as the reason he could not satisfy the full amounts due. Pl.'s Tr. Exh. 3. In conjunction with each settlement offer, he tendered a down payment of $1,000. The IRS eventually rejected all those offers to compromise, but in negotiating the offers the IRS did not dispute that a Form 1040 had been filed by Payne for the year 1986.

9. The United States acknowledges receipt of Payne's offers to compromise, his payments, and late Form 1040 tax returns except for the year 1986, and acknowledges the dischargeability of his tax debt for each tax year 1983 through 1990, except for the year 1986. Def.'s Brief ¶ 20 at 3. The 1986 taxable year is the only year in dispute.

10. In the taxable year of 1986, Payne received $155,604.77 in wages, and amounts of $44,520.00 and $3,003.00 were withheld, respectively, for federal income taxes and social security tax. Because of the withholdings, Payne received a credit of $44,520.00 against the amount of income tax assessed.

11. In 1999, the IRS sent Payne notice stating that the 1986 tax return had not been received.

12. In 2001, Payne received notice that the IRS again intended to levy his assets and income for failure to pay the 1986 tax debt. To forestall the IRS's levy, Payne moved to reopen his bankruptcy case and filed the instant Adversary Complaint. Pl.'s Tr. Exh. 16.

13. Although the Complaint prays for damages, no evidence was offered as to any specific economic damages.

14. Further fact statements contained in the Conclusions of Law will stand as additional Findings of Fact.

CONCLUSIONS OF LAW

JURISDICTION

Jurisdiction lies under 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This proceeding is referred here by the District Court under the standing referral procedure in District Court Internal Operating Procedure 15(a). Venue is proper in this District under 28 U.S.C. § 1409(a).

DISCUSSION

Payne's Adversary Complaint seeks both a declaration that his 1986 tax debt was discharged, and also for damages under 26 USC § 7433, provisions of the Internal Revenue Code permitting recovery of damages against the United States for willful violations of the automatic stay or discharge injunction.

Payne alleges that the IRS violated the discharge injunction since it was aware by bankruptcy notice of his bankruptcy and discharge but nonetheless proceeded to levy his assets. Am. Compl. ¶ 5. The IRS justifies its collection effort, maintaining that Payne's 1986 tax liability is non-dischargeable under 11 U.S.C. § 523(a)(1)(B)(i). Answ. at 1.

The granting of a discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor." 11 U.S.C. § 524(a)(2).

The discharge injunction applies only to dischargeable debts. Collier on Bankruptcy ¶ 524.02 at 524-12 (15th rev. ed.2000); Pettibone Corp v. United States (In re Pettibone Corp.), 161 B.R. 960, 964 (N.D.Ill.1993) (holding that because the debtors obligations were not discharged, section 524 did not apply).

Accordingly, it must first be determined whether the 1986 tax debt was discharged, and if so whether the statutory discharge injunction was willfully violated.

I. THE 1986 TAXES WERE DISCHARGED

A. Late filings of the 1986 Tax Return

The first basis for the Government's position is that the IRS has no record of ever receiving the Plaintiff's 1986 Form 1040 tax return for 1986. If Payne failed to file a tax return for 1986, that would except the 1986 debt from discharge. 11 U.S.C. § 523(a)(1)(B)(i). The Government argues that because it cannot locate the tax return for 1986 that Payne says he filed along with returns for other years, and Payne did not establish that the return was delivered through certified or registered mail as allowed by 26 U.S.C. § 7502(c); therefore it contends that Payne did not file anything. Defendant moved for summary judgment on that basis, but that motion was denied by opinion holding that triable issue of fact existed over whether Payne filed his return. See In re Payne, 283 B.R. at 725.

The trial record contains evidence supporting Payne's contention of filing: First, there is Payne's retained copy of the 1986 Form 1040 signed by his accountant preparer and dated by the preparer February 10, 1992. This corroborates Payne's testimony that the 1986 return was prepared and filed in March 1992. Pl.'s Tr. Exh 13. Second, all the returns were prepared by an accounting firm and mailed by Payne to the IRS. Third, the Government concedes receipt of the late filed tax returns for all other years that were filed at the same time as the 1986 return. The foregoing evidence raises a rebuttable presumption of receipt and delivery. In re Nimz Transportation, Inc., 505 F.2d 177, 179 (7th Cir.19...