In re Wood
| Decision Date | 15 July 1999 |
| Docket Number | No. CV-98-2604 MMM.,CV-98-2604 MMM. |
| Citation | 240 BR 609 |
| Court | U.S. District Court — Central District of California |
| Parties | In re Lee Ardell WOOD, faw Wood & Morimoto, a professional corporation, Debtor. United States of America, Appellant, v. Lee Ardell Wood, faw Wood & Morimoto, a professional corporation, Appellee. |
Edward M Robbins, Jr., Gregory A Roth, AUSA Office of U.S. Attorney, Tax Division, Los Angeles, CA, for United States of America, appellant.
Brad D Krasnoff, Brad D Krasnoff Law Offices, Encino, CA, for Lee Ardell Wood, faw Wood & Morimoto, a professional corporation, appellee.
ORDER REVERSING BANKRUPTCY COURT'S ORDER GRANTING DEBTOR'S EMERGENCY MOTION RE VIOLATION OF ORDER CONFIRMING PLAN
This is an appeal by the United States (the "IRS") from a September 23, 1997 order of the United States Bankruptcy Court for the Central District of California.1 This court has appellate jurisdiction pursuant to 28 U.S.C. § 158(b) and (c). The appeal charges that the bankruptcy court erred in holding that the IRS was bound by the terms of the Chapter 11 debtor's confirmed plan of reorganization, and barred from collecting taxes due and owing for tax year 1995 in any manner inconsistent with the confirmed plan.
The IRS had notice of Wood's Chapter 11 Amended Plan of Reorganization, which provided the manner and method in which Wood's 1995 taxes would be paid. Nonetheless, the 1995 taxes were a post-petition liability that could not be collected from the bankruptcy estate. Even had they been properly collected from the estate, the taxes were a nondischargeable debt under 11 U.S.C. §§ 1141(d)(2) and 523, and thus could have been collected outside the plan in any event. These facts, and the further fact that the Anti-Injunction Act precludes entry of an order "restraining the assessment or collection of any tax," require reversal of the bankruptcy court's order insofar as it restrains the IRS from attempting to collect Wood's 1995 tax liability.
Lee Ardell Wood ("Wood"), an attorney, filed a voluntary Chapter 11 bankruptcy petition in 1993.2 Thereafter, Wood filed a plan of reorganization, which he withdrew in July 1995 prior to its being confirmed. The Chapter 11 proceeding was later dismissed.3 Facing collection pressure from the IRS, Wood filed a second Chapter 11 petition on October 24, 1995.4
On January 23, 1996, the bankruptcy court established March 29, 1996 as the last date on which to file a proof of claim in Wood's Chapter 11 proceeding.5 On April 23, 1996, the IRS filed a proof of claim for taxes due for periods ranging from 1989 to 1994. The IRS subsequently admitted that this filing was "untimely."6 No claim was ever filed for 1995 taxes.
On April 3, 1996, Wood filed an initial plan of reorganization.7 The plan reflected that Wood had unpaid federal income tax liabilities for taxable years up to and including 1994. It made no mention of liability for tax year 1995.8 Additionally, Wood did not at any time file a bifurcated tax return for tax year 1995, as permitted by 26 U.S.C. § 1398(d)(2)(A).9
On July 31, 1996, the IRS filed an objection to Wood's proposed plan on the ground that the tax liabilities were not properly treated.10 On August 13, 1996, the IRS withdrew its objection because "the Service's proof of claim dated April 17, 1996 was not timely filed."11 Confirmation of Wood's Plan of Reorganization was nevertheless denied by the bankruptcy court at a hearing on August 28, 1996.12
On October 31, 1996, Wood filed an Amended Plan of Reorganization.13 As respects the payment of taxes due the IRS, including "unpaid income taxes for the tax year 1995," the Amended Plan provided that "the IRS shall be granted a continuing lien on all currently owned and any after-acquired property as security for its priority tax claims including taxes due for 1995."14 It continued: "The priority tax claim will then be treated as a Class 2 allowed Secured Claim and paid in accordance with the provision for payment of Class 2 claims."15 Class 2 allowed Secured Claims were to be paid in monthly installments of $1,250 for the first fourteen months of the plan, at $3,250 for months fifteen through thirty-three, and at $5,250 thereafter until paid in full. The balance was to bear interest at an annual rate of 8%.16
The bankruptcy court found, and the IRS does not dispute, that the Amended Plan was properly served on the IRS. The IRS did not file any objection to the Amended Plan.17 On March 26, 1997, the bankruptcy court conducted a hearing at which it approved confirmation of the Amended Plan,18 and entered an order of confirmation on June 11, 1997.19
In April 1997, the IRS advised Wood's counsel that, following confirmation of the Amended Plan, collection activity would begin with respect to taxes due and owing for the 1995 tax year. Wood's liability, including penalties, totaled $73,194.34 plus interest as of July 2, 1997.20 On June 9, 1997, the IRS issued a Final Levy Notice for tax years 1989 through 1995.21 On June 26, 1997, Wood filed an Emergency Motion seeking an order from the bankruptcy court "that the IRS is in violation of the Confirmed Plan."22
The IRS responded on July 3, 1997,23 and the bankruptcy court heard initial argument that day. Thereafter, it continued the hearing to August 6 because the IRS had not been properly served.24 On July 25, 1997, Wood filed a supplemental memorandum in support of his motion.25 On August 3, 1997, the IRS filed a detailed response.26 At the August 6 hearing, Wood clarified that he sought an order that any effort by the IRS to collect 1995 taxes violated the confirmed plan of reorganization.27
At the hearing on Wood's motion, the bankruptcy court cited cases holding that confirmed plans of reorganization, like final judgments, "are binding on all parties and issues that could have been raised concerning such plans are barred by res judicata."28 See, e.g., Trulis v. Barton, 67 F.3d 779 (9th Cir.1995);29 In re Circle K Corp., 198 B.R. 784 (Bkrtcy.D.Ariz.1996). Based on this authority, the bankruptcy court made findings and directed counsel to prepare an order providing that the IRS "had notice of the plan provisions and did not timely object; that the IRS is bound by the terms of the confirmed plan;" and "that the Service is barred from enforcing its claims in any manner other than as provided for in the confirmed plan."30
The IRS appeals this order only to the extent it addresses the payment of 1995 taxes. The Service contends the bankruptcy court's order should be reversed because the taxes are a post-petition liability of the debtor, and because the Anti-Injunction Act prohibits entry of an order barring the collection of taxes.31
The bankruptcy court's findings of fact are reviewed for clear error. Its conclusions of law are reviewed de novo. Henderson v. Buchanan, 985 F.2d 1021, 1023 (9th Cir.1993).
There is no question that Wood's federal income tax liabilities are nondischargeable under 11 U.S.C. § 523. The parties dispute, however, when and how those taxes may be collected. The IRS maintains that, because the taxes are a nondischargeable debt, they may be collected outside the reorganization plan, citing In re Gurwitch, 794 F.2d 584 (11th Cir.1986), In re Adelman, 90 B.R. 1012 (Bankr.S.D.1988), and In re Howell, 84 B.R. 834 (Bankr.M.D.Fla.1988). Wood concedes the tax liability is nondischargeable. He argues, however, that its collection is controlled by the specific provisions of the reorganization plan, citing In re Martin, 150 B.R. 43 (Bankr.S.D.Cal.1993) and In re Mercado, 124 B.R. 799 (Bankr. C.D.Cal.1991). All parties agree that taxes owing for years 1987 through 1994 are pre-petition debt subject to the reorganization plan.32 At issue is whether the post-petition debt for 1995 taxes may be collected outside the plan.33
Initially, there is no question that the 1995 taxes are a post-petition liability. Wood filed his Chapter 11 petition on October 24, 1995. Given this fact, Wood could have filed an election bifurcating 1995 into two tax years as permitted by 26 U.S.C. § 1398(d)(2)(A),34 at any time prior to April 15, 1996.35 He admits he did not do so. Because Wood failed to bifurcate the tax year, his entire 1995 tax liability is a post-petition debt. 26 U.S.C. § 1398(d)(2)(A). "If the debtor makes the election, the tax liability attributable to the pre-petition year constitutes a priority claim against the estate; but if he does not, the entire liability for the year of the bankruptcy filing is a claim against the debtor . . . not collectible from the estate." In re Haedo, 211 B.R. 149, 152 (Bkrtcy. S.D.N.Y.1997). See also In re Johnson, 190 B.R. 724, 726 (Bankr.D.Mass.1995) ().
Wood's failure to make the election "leaves the IRS with a post-petition tax claim against Wood individually, but with no claim whatsoever against the bankruptcy estate for any part of the 1995 tax liability." In re Johnson, supra, 190 B.R. at 726. See also In re Smith, 210 B.R. 689, 692 (Bankr.D.Md.1997); In re Haedo, supra, 211 B.R. at 152; In re Moore, 132 B.R. 533, 534-35 (Bankr. W.D.Pa.1991); In re Mirman, 98 B.R. 742, 745 (Bankr.E.D.Va.1989); In re Turboff, 93 B.R. 523, 525 (Bankr.S.D.Tex.1988). In light of this fact, the question is whether, by including provisions in the amended reorganization plan purporting to govern the payment of this post-petition debt, Wood could control the timing and method of the taxes' payment.
Had Wood not attempted to control payment of the 1995 taxes through the plan, the IRS could clearly have collected the debt outside the plan. This would be true even if the taxes were a liability of the...
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