In re Pt-1 Communications, Inc., 01-12655-CEC.

• Decision Date: 07 December 2006
• Docket Number: No. 01-12655-CEC.,No. 01-12658-CEC.,No. 01-12660-CEC.,01-12655-CEC.,01-12658-CEC.,01-12660-CEC.
• Parties: In re PT-1 COMMUNICATIONS, INC.; PT-1 Long Distance, Inc.; and PT-1 Technologies, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of New York

Page 217

357 B.R. 217

In re PT-1 COMMUNICATIONS, INC.; PT-1 Long Distance, Inc.; and PT-1 Technologies, Inc., Debtors.

No. 01-12655-CEC.

No. 01-12658-CEC.

No. 01-12660-CEC.

United States Bankruptcy Court, E.D. New York.

December 7, 2006.

Laurence May, Cole, Schotz, Meisel, Forman & Leonard, P.A., New York, NY, for Edward P. Bond, Liquidating Trustee of the Liquidating Trust U/A/W PT-1 Communications, Inc., PT-1 Long Distance, Inc., and PT-1 Technologies, Inc.

DECISION

CARLA E. CRAIG, Bankruptcy Judge.

This matter comes before the Court on the motion of the Liquidating Trustee (the "Trustee") of the Liquidating Trust U/A/W PT-1 Communications, Inc., PT-1 Long Distance, Inc., and PT-1 Technologies, Inc. ("Liquidating Trust") for summary judgment expunging the proof of claim of the Internal Revenue Service ("IRS"). The IRS's proof of claim seeks taxes, interest and penalties for the period March 9, 2001 through December 31, 2001, in the aggregate amount of $1,051,126.50 and for the tax year ending December 31, 2002 (the "2002 tax year") in the aggregate amount of $7,863,701.84.

This decision addresses only the portion of the IRS's proof of claim seeking taxes, interest and penalties for the 2002 tax year. For the reasons set forth below, the Trustee's motion for summary judgment seeking to expunge the IRS's proof of claim is granted as it relates to the 2002 tax year. With respect to the remainder of the Trustee's motion for summary judgment, relating to the IRS's proof of claim for the period March 9, 2001 through December 31, 2001, and seeking summary judgment on certain counterclaims, decision is reserved.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(B) and (C) and the Eastern District of New York standing order of reference dated August 28, 1986. This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

Facts

These bankruptcy cases were commenced by the filing of voluntary petitions for relief under Chapter 11 on March 9, 2001. No chapter 11 trustee was ever, appointed. PT-1 Communications, Inc., PT-1 Long Distance, Inc., and PT-1 Technologies, Inc., as debtors and debtors in possession (the "debtors") continued in possession of their assets and in the management of their businesses until the debtors' Second Amended Joint Plan of Reorganization dated as of August 31, 2004 ("Plan") was confirmed on November 23, 2004. At that time, as provided in Article 5 of the Plan, certain of the debtors' assets were transferred to the Liquidating Trust to be distributed in accordance with the Plan, and certain of the debtors' rights and powers were also transferred to the Liquidating Trust.

On September 15, 2003, PT-1 Communications, Inc. and its subsidiaries (collectively, "PT-1") filed a tax return for the 2002 tax year (the "2002 return"). The 2002 return was filed at the IRS's Ogden Submission Processing Center in Ogden, Utah. Along with the 2002 return, PT-1 filed a request for determination of its federal tax liability for the 2002 tax year pursuant to § 505(b) of the Bankruptcy Code (the "505(b) request"). A copy of the 2002 return and the 505(b) request was also sent to the IRS special insolvency unit located in Manhattan.

The IRS did not notify PT-1 that the 2002 return had been selected for examination within the 60-day period prescribed by § 505(b). Instead, it filed its proof of claim in February, 2004, two and a half months after the expiration of the period notifying PT-1 for the first time of its claim that taxes are due for the 2002 tax year. The IRS's proof of claim has been amended from time to time, most recently on August 1, 2006 (this proof of claim, together with all previously filed IRS proofs of claim and all amendments thereto, the "Proof of Claim").

Applicable Bankruptcy Law

The Bankruptcy Code provides a mechanism for a trustee, or debtor in possession, to obtain a prompt determination of post-petition tax liability. Section 505(b) states, in relevant part,

A trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the governmental unit charged with responsibility for collection or determination of such tax. Unless such return is fraudulent, or contains a material misrepresentation, the trustee, the debtor, and any successor to the debtor are discharged from any liability for such tax —

(1) upon payment of the tax shown on such return, if —

(A) such governmental unit does not notify the trustee, within 60 days after such request, that such return has been selected for examination; or

(B) such governmental unit does not complete such an examination and notify the trustee of any tax due, within 180 days after such request or within such additional time as the court, for cause permits . . . .

11 U.S.C. § 505(b). Section 505(b), like the other sections of Chapter 5 of the Bankruptcy Code, applies in Chapter 11 cases. 11 U.S.C. § 103(a). Although § 505(b) provides for a trustee to make a 505(b) request, the authority to make such a request in a chapter 11 case, where a trustee has not been appointed, belongs to the debtor in possession. See 11 U.S.C. § 1107(a) ("Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights . . . and powers, and shall perform, all the functions and duties . . . of a trustee serving in a case under this chapter." (emphasis added)). Also relevant to this motion is § 1101(1) of the Bankruptcy Code, which provides that, except where a chapter 11 trustee has qualified and is serving in the case, the term "debtor in possession" means the debtor.

The IRS's Arguments

The IRS does not dispute that § 505(b), if applicable, would prevent it from collecting any additional taxes from PT-1 for the 2002 tax year. Instead, it claims that § 505(b) is inapplicable in this case for two reasons.

First, the IRS claims that no proper request for determination of PT-1's 2002 tax liability, effective to trigger the statutory 60-day period, was ever made, because the 505(b) request was submitted to the IRS's Ogden Submission Processing Center along with the 2002 return. According to the IRS, the 505(b) request, in order to be effective, should have been sent to the Office of the District Director for the district in which this case is pending, notwithstanding the fact that the position of District Director had been abolished at some point prior to the commencement of this bankruptcy case, and well before the 505(b) request was made. Alternatively, the IRS argues that service of the 505(b) request should have been made in accordance with the provisions of this Court's local rule, E.D.N.Y. LBR 2002-2. For reasons that will be explained below, these arguments are without merit.

Equally lacking in merit is the IRS's substantive argument against the applicability of § 505(b). According to the IRS, although § 505(b) discharges the trustee, the debtor, and any successor to the debtor, it does not discharge the estate, and therefore the Liquidating Trust remains liable for the obligation. This argument is based upon flawed case law and upon a misunderstanding of the applicability of those cases in the context of chapter 11 and on the particular facts of this case.

PT-1's Method of Making the 505(b) Request Was Sufficient

PT-1 attached its 505(b) request, entitled "Request for prompt assessment under section 505(b) of the Bankruptcy Code", to the cover page of its 2002 return, and sent the return and the request to the IRS's Ogden Submission Processing Center. There is no question that this was the appropriate place to file the 2002 return.

It appears from the language of § 505(b) that this was sufficient to invoke its provisions. Section 505(b) states that "a trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the governmental unit charged with responsibility for collection or determination of such tax" 11 U.S.C. § 505(b)(emphasis added). The most reasonable interpretation of this statutory language is that the request for a 505(b) determination is to be submitted with the tax return. Certainly this conclusion is appropriate where no other current address for filing a 505(b) request is provided by the IRS. Accordingly, the 505(b) request was properly made in accordance with the statute.

PT-1's 505(b) request was also made in accordance with IRS directives in effect at the time. In 1981, the IRS published Revenue Procedure 81-17, which directed that requests for prompt determination of tax liability under § 505(b) be filed with the District Director for the district in which the case is pending. Rev. Proc. 81-17, 1981-1 C.B. 688, 1981-20 I.R.B. 48, 1981 WL 164968. However, the position of District. Director was abolished prior to the commencement of this case, and in April, 2003, the IRS published Notice 2003-19, entitled "Place For Filing Certain Elections, Statements, Returns and Other Documents". Notice 2003-19, 2003-1 C.B. 703, 2003-14 I.R.B. 703, 2003 WL 1252523. The introductory paragraph of this notice states:

This notice advises taxpayers of the proper address for filing certain elections, statements, and other documents with the Service as a result of the reorganization, including with respect to offices or officials that no longer exist as part of the reorganization.

Id. Although Notice 2003-19 does not expressly refer to 505(b) requests, it does specify the location for filing corporate tax returns. Id. Given that the stated purpose of the Notice is to "advise...