In re Prescription Home Health Care, Inc.

• Decision Date: 30 December 2002
• Docket Number: No. 02-50132.,02-50132.
• Parties: In the Matter of: PRESCRIPTION HOME HEALTH CARE, INC., Debtor. United States of America, Internal Revenue Service, Appellant, v. Prescription Home Health Care, Inc., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

316 F.3d 542

In the Matter of: PRESCRIPTION HOME HEALTH CARE, INC., Debtor.

United States of America, Internal Revenue Service, Appellant, v. Prescription Home Health Care, Inc., Appellee.

No. 02-50132.

United States Court of Appeals, Fifth Circuit.

December 30, 2002.

Michael J. Haungs (argued), Thomas J. Clark, U.S. Dept. of Justice, Tax Div., Washington, DC, for Appellant.

Lynn H. Butler (argued), Hance Scarborough Wright Ginsberg & Brusilow, Austin, TX, for Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before DAVIS, BARKSDALE and DENNIS, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

The Internal Revenue Service contests the district court's affirming a bankruptcy court's confirmation of a debtor's plan of reorganization. The principal issue is whether the bankruptcy court had jurisdiction to enjoin the IRS from, under 26 U.S.C. § 6672, assessing and collecting taxes from a non-debtor officer of the debtor corporation. INJUNCTION VACATED; REMANDED.

I.

Debtor Prescription Home Health Care, Inc., based in San Antonio, Texas, is a provider of home health services. Edward Z. Pena is Prescription's president and sole owner.

In August 2000, Prescription filed a petition under Chapter 11 of the Bankruptcy Code. The IRS was, by far, Prescription's chief creditor; Prescription owed approximately $600,000 in unpaid taxes, interest, and penalties. In fact, the IRS' impending collection efforts motivated the filing by Prescription.

The IRS' claim included: (1) a priority claim of approximately $470,000, consisting of (a) unemployment and payroll taxes that Prescription, as an employer, was required to pay, and (b) approximately $250,000 in "trust fund" taxes (income and payroll taxes that Prescription had withheld from its employees' wages during all of 1999 and three quarters of 2000, but had failed to remit to the IRS); and (2) a general unsecured claim of approximately $140,000 for penalties that had accrued on the taxes through the date of the bankruptcy petition.

Regarding the "trust fund" portion, Internal Revenue Code §§ 3102 and 3402 (26 U.S.C. §§ 3102 and 3402) require employers to withhold federal income and payroll taxes from their employees' wages. These withheld taxes must be remitted to the IRS on a quarterly basis, 26 U.S.C. §§ 3102(b), 3403; and, while in the possession of the employer, they are considered a "special fund in trust for the United States", 26 U.S.C § 7501. As stated, Prescription failed to remit approximately $250,000.

In addition to Prescription's trust fund liability, Pena, as a "responsible person", was personally liable, pursuant to 26 U.S.C. § 6672. It is undisputed that both Prescription and Pena were liable for the unpaid trust fund taxes.

Section 6672(a) states:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to [do so], or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the amount of the tax evaded, or not collected, or not accounted for and paid over.

26 U.S.C. § 6672(a) (emphasis added). This provision, designed to deter misuse of trust funds by corporate officers, see, e.g., United States v. Sotelo, 436 U.S. 268, 277 n. 10, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978), is a means of ensuring the tax is paid, e.g., Newsome v. United States, 431 F.2d 742, 745 (5th Cir.), cert. denied, 411 U.S. 986, 93 S.Ct. 2269, 36 L.Ed.2d 964 (1973). Such "responsible persons" liability is separate and distinct from that imposed on the employer, and the IRS is not required to exhaust its remedies against the delinquent employer before seeking to protect the revenue through a § 6672 assessment. E.g., Hornsby v. Internal Revenue Service, 588 F.2d 952, 954 (5th Cir.1979).

Prescription filed a plan of reorganization in January 2001 and an amended plan that April. The latter provided: Pena would retain his interest in the debtor upon receipt by Prescription of funds equal to the professional fees incurred by Prescription as of the confirmation date; the priority portion of the IRS' claim would be paid in full in equal quarterly installments over a six-year period; and the general unsecured claim would be paid by pro rata distributions from an "unsecured claims fund" over a ten-year period, so that the IRS would receive payments equal to approximately 47 percent of the general unsecured portion of the claim.

The plan further provided: all payments made toward the priority claim would be applied to the trust fund portion until that liability had been paid in full; and, upon plan-confirmation, all creditors would be enjoined from any act to collect from the debtor's "management and employees" any portion of a claim against the debtor, as long as it complied with the plan.

It is the IRS' policy not to assess the § 6672 penalty against a responsible person as long as the debtor is compliant with the terms of its "bankruptcy payment plan", unless statute of limitations concerns are present. 1 Administration, Internal Revenue Manual (CCH) § 1.2.1.1.5.14(6), at 3003. The limitations period for assessing the § 6672 liability against Pena will expire in April 2003 (three years after Prescription filed its employment tax returns). See Lauckner v. United States, 68 F.3d 69 (3d Cir.1995). Therefore, if Prescription were to comply with its plan until then, the period for assessing the penalty against Pena would expire while the injunction remained in effect. In other words, if the debtor made its payments until the end of the limitations period, but defaulted thereafter, and the trust fund taxes had not been paid in full, the IRS could be barred from making an assessment against Pena. (The Government concedes that there is a strong argument that the period should be tolled and that this court could do so.)

The IRS objected, on a number of grounds, to confirmation of Prescription's proposed plan. It contended, inter alia: (1) a bankruptcy court could order plan payments to be first applied to the trust fund portion of a tax liability only upon a showing that such an allocation was necessary for an effective reorganization, and Prescription had not made that showing; (2) the bankruptcy court lacked jurisdiction to enjoin an assessment against a non-debtor third party; and (3) the proposed injunction for the § 6672 assessment violated the Anti-Injunction Act, 26 U.S.C. § 7421(a).

At the confirmation hearing, Pena was asked why, for an effective reorganization, it was necessary to designate all plan payments to the trust fund portion and to enjoin all collection against him. He responded: to make reorganization successful, he would have to devote his time to the debtor's operations; and "it's very difficult to do that when ... I realize I can be assessed [$250,000]". When asked whether the lack of these provisions would interfere with his performance on behalf of the debtor, he answered:

It's a dark cloud hanging over me and I just had — it's very distracting to realize that being a single parent of two, an 11-and 13-year-old, both girls, it's a lot of responsibility on my shoulders to make sure that I am successful in paying back the I.R.S. and without, you know, being able to get into the housing market.

On cross-examination, Pena confirmed that the reason Prescription wanted plan payments first applied to the trust fund liability was because of the "dark cloud" that would be "hanging over [Pena's] head".

At the conclusion of the hearing, the IRS' objections were overruled. The bankruptcy judge noted his approval of payments being first applied to the trust fund liability: "[T]hat's an incentive on the part of the debtor to make sure that the debtor, in fact, performs for as long as possible", because "to the extent the debtor does perform, then there's a positive benefit, not only for the debtor, but also for Mr. Pena". The bankruptcy judge determined that, to both prevent the plan's undoing and ensure the IRS would be paid, it was appropriate to enjoin the § 6672 assessment. He reasoned the plan would prevent Pena from being "thrown out of this business", because if he "has the I.R.S. chasing him around for the rest of his life, he certainly won't be starting another one of these businesses" and "would never generate the kind of revenue... necessary to pay [the IRS]".

In June 2001, the bankruptcy court confirmed Prescription's amended plan, with Pena being permitted to retain his interest in Prescription for a payment of $15,000. Through what the bankruptcy court termed a "conditional injunction", "necessary for the successful reorganization of Prescription", the IRS was enjoined from taking any action under § 6672 to assess or collect any federal employment tax liability from Pena as a responsible party, so long as Prescription remained current on its payments (§ 6672 injunction).

The IRS appealed to district court. In December 2001, that court affirmed the bankruptcy court's order, holding, inter alia: (1) the debtor offered sufficient evidence (through Pena's testimony) to show the designation of plan payments to trust fund liability was necessary for a successful reorganization; and (2) the Anti-Injunction Act does not prevent the bankruptcy court from temporarily modifying the IRS' ability to collect from a responsible person, if that is necessary to the successful reorganization of the debtor, because the bankruptcy court, using its broad discretionary powers under 11 U.S.C. § 105, had jurisdiction to enter the temporary injunction as a proceeding related to the bankruptcy proceeding.

The district court based its holding in part on United States v. Energy Resources Co., Inc., 495 U.S. 545, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990), stating:

Although not directly on point, the Supreme Court's decision in Energy Resources suggests that ...