In re Shapiro
| Decision Date | 24 October 1995 |
| Docket Number | Bankruptcy No. 95-11405F. Adv. No. 95-0306F. |
| Citation | 188 BR 140 |
| Parties | In re Barry SHAPIRO and Nancy J. Shapiro, Debtors. Barry SHAPIRO and Nancy J. Shapiro, Plaintiffs, v. UNITED STATES of America-Internal Revenue Service, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Karl J. Fingerhood, Trial Attorney, Tax Division, Office of the United States Attorney, U.S. Department of Justice, Washington, D.C., for defendant.
David A. Kasen, Kasen, Kasen & Braverman, Philadelphia, PA, for debtors/plaintiffs.
The debtors, Barry and Nancy Shapiro, have filed an adversary proceeding seeking a determination of their prepetition federal tax liability under section 505 of the Bankruptcy Code, along with a determination of the dischargeability of this debt under section 523. The defendant United States filed an answer, and later a motion for summary judgment, which was coupled with a request to abstain. The debtors responded with a cross-motion for summary judgment, which included their opposition to abstention.
As will be discussed, the parties have resolved between themselves all issues concerning dischargeability. What remains is the debtors' request that I fix the amount of their non-dischargeable tax debt, and the defendant's request that I abstain from so doing. At bottom, the United States contends that a bankruptcy court should exercise its discretion and refrain from determining the non-dischargeable tax liability of chapter 7 debtors when, as in this instance, the chapter 7 case has been determined by the chapter 7 trustee to be a "no-asset" case; that is, when there are no non-exempt assets available for distribution to creditors. Conversely, the debtors maintain that a bankruptcy court should exercise its statutory authority to determine the amount of their tax liability which will not be discharged when, as in this instance, the chapter 7 debtor can no longer seek review in the United States Tax Court.
For the reasons set forth below, I conclude that it is appropriate to abstain from fixing the debtors' prepetition non-dischargeable tax liability.
The following facts are not in dispute.
Mr. and Mrs. Shapiro filed a voluntary petition in bankruptcy under chapter 7 on February 24, 1995. Michael Kaliner, Esquire was appointed interim chapter 7 trustee by the United States trustee pursuant to 11 U.S.C. § 701. The debtors' bankruptcy schedules disclosed that they owned no property which was available for distribution to creditors by the trustee. Accordingly, notice was sent to all creditors that no proofs of claim need be filed. Fed.R.Bankr.P. 2002(e). On April 28, 1995, the interim trustee presided over a creditors' meeting in accordance with section 341(a). As no permanent trustee was elected, the interim trustee was placed in that role. 11 U.S.C. § 702(d). The chapter 7 trustee promptly filed a report disclosing that no assets were available for distribution to creditors.
The debtors thereafter filed the instant complaint. They assert that the Internal Revenue Service "has pursued the debtors for alleged tax liabilities claimed by the defendant to be in excess of one million dollars." Complaint, ¶ 6. The debtors request that this bankruptcy court determine the amount of their federal tax obligation, if any, which is not dischargeable, as well as determine the dischargeability of their federal tax obligations.
The United States and the debtors filed cross-motions for summary judgment. Neither the motions nor accompanying attachments disclose the amount of the federal tax claim, although it appears that liability is based upon allegedly unpaid federal income taxes as well as taxes due pursuant to 26 U.S.C. § 6672.
At the hearing held on these motions for summary judgment, the parties stated that they had reached an accord on the issue of dischargeability only, and they submitted a consent order to that effect. Under this consent agreement, the parties agree that the debtors have no federal tax liabilities for the years 1982 and 1983. Furthermore, the debtors' federal income tax obligations for the years 1980, 1981, 1984, 1985, 1986, 1987, and 1988 are conceded by the IRS to be dischargeable. Conversely, the debtors acknowledge that their federal income tax obligations for the years 1989, 1990, 1991, 1992, 1993, and 1994 are non-dischargeable. In addition, the husband/debtor's section 6672 tax liability based upon assessments made on April 15, 1985 and August 3, 1987 is not dischargeable.
The parties apparently concur that, as to some or all of the non-dischargeable taxes, more than ninety days had elapsed as of the date of the debtors' bankruptcy filing since the notice of tax deficiency was mailed to them by the IRS. Accordingly, as to those taxes, the debtors may not now seek a determination from the United States Tax Court. See 26 U.S.C. § 6213(a). While a partial payment may suffice with respect to the debtors' tax obligation under 26 U.S.C. § 6672, the debtors otherwise are now limited to paying in full the taxes assessed and seeking a refund in the appropriate United States District Court, 26 U.S.C. § 7422, or possibly in the United States Court of Federal Claims. See Bob Jones University v. Simon, 416 U.S. 725, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974) (); Hillyer v. Commissioner Internal Revenue, 817 F.Supp. 532 (M.D.Pa.1993) (same); see generally Schiff v. United States, 24 Cl.Ct. 249 (1991).1
In their opposition to the defendant's abstention request, the debtors assert that they cannot afford to pay the disputed tax liability and then seek a refund. Therefore, the debtors maintain that this bankruptcy court should fix their non-dischargeable liability.
There is no dispute that I have the power on the request of a debtor (as well as a creditor) to determine the dischargeability of a particular claim. Fed.R.Bankr.P. 4007(a) (); accord, e.g., In re Deel, 65 B.R. 230 (Bankr.W.D.Va.1986) (). Here, however, the parties have agreed to all issues surrounding dischargeability and a consent order to that effect has been approved.
The debtors request that I go further and fix the amount of their tax obligation which will not be discharged. They argue that such a determination is imperative if they are to enjoy their "fresh start" after bankruptcy. In support, they refer to 11 U.S.C. § 505(a), which states in relevant part:
(a)(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.2
The United States counters that because the text of section 505(a)(1) uses the word "may," the exercise of this statutory power is discretionary. In no-asset chapter 7 cases, since there will be no distribution to creditors, the defendant maintains that there is no valid purpose to adjudicating the debtors' tax liability in a bankruptcy court.
The language of section 505(a) makes clear that the bankruptcy court exercise of authority to fix a debtor's tax liability is discretionary. Accord, e.g., In re Queen, 148 B.R. 256, 259 (S.D.W.Va.1992), aff'd without op., 16 F.3d 411 (4th Cir.1994); In re Galvano, 116 B.R. 367 (Bankr.E.D.N.Y.1990). The most frequent articulation of the general factors to be considered in the exercise of this discretion is as follows:
In formulating a decision to exercise his discretion, the bankruptcy judge must examine the issue case by case. The analysis necessarily includes balancing the Bankruptcy Court\'s need to administer the bankruptcy case in an orderly and efficient manner, the complexity of the tax issues to be decided, the asset and liability structure of the debtor, the length of time required for trial and decision, judicial economy and efficiency, the burden on the Bankruptcy Court\'s docket, prejudice to the debtor and potential prejudice to the taxing authority responsible for collection from inconsistent assessments.
In re Hunt, 95 B.R. 442, 445 (Bankr. N.D.Tex.1989); accord In re Galvano, 116 B.R. at 372.
To some extent, the above framework for the exercise of discretion in applying section 505(a) looked to the congressional purposes behind this statutory enactment. Two purposes have been identified:
Two policies underlie § 505\'s grant of federal authority to determine state tax matters. First, § 505 allows the prompt resolution of a debtor\'s tax liability, where that liability has not yet been determined prior to the bankruptcy proceeding, in the same forum addressing the debtor\'s overall financial condition. See City of New York v. Fashion Wear Realty Co. (In re Fashion Wear Realty Co.), 14 B.R. 287, 290 (D.C.N.Y.1981) (§ 2(a)(2A)). Secondly, § 505 protects "creditors from the dissipation of the estate\'s assets which could result if the creditors were bound by a tax judgment which the debtor, due to his ailing financial condition, did not contest."
City Vending of Muskogee v. Oklahoma Tax Com'n, 898 F.2d 122, 124-25 (10th Cir.), cert. denied, 498 U.S. 823, 111 S.Ct. 75, 112 L.Ed.2d 48 (1990) (quoting In re Northwest Beverage, Inc., 46 B.R. 631, 635 (Bankr. N.D.Ill.1985)); accord, e.g., In re Hunt, 95 B.R. at 444.
The majority approach is to conclude that neither of the above two purposes — prompt administration of the bankruptcy case...
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