In re Yerushalmi
| Decision Date | 05 June 2019 |
| Docket Number | Case No.: 8-07-72816-las |
| Parties | In re Joseph Yerushalmi, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
The United States of America, on behalf of the Internal Revenue Service ("IRS"), moved pursuant to 11 U.S.C. § 362(d)(1) for entry of an order vacating the automatic stay imposed in this chapter 7 case under 11 U.S.C. § 362(a)1 to permit the IRS to commence proceedings in the United States Tax Court ("Tax Court") to fix the amount of the debtor's alleged income tax liability for tax years 1999 and 2000 [dkt. no. 234]. Debtor opposed that motion [dkt. no. 238]. The Court heard oral argument on the motion and entered a conditional order ("Conditional Order") [dkt. no. 240] granting the IRS relief from the automatic stay. In sum, the Conditional Order allowed the IRS to litigate the debtor's alleged income tax liability before the Tax Court unless debtor filed a complaint against the IRS in this Court or otherwise challenged the IRS' proofs of claim within 30 days of the entry of the Conditional Order. In accordance with the Conditional Order, debtor timely filed an objection to claim numbers 2, 10 and 17 filed by the IRS ("Claims Objection") [dkt. no. 241].
In response to the Claims Objection, the United States moved for the entry of an order (i) dismissing the Claims Objection or, in the alternative, (ii) (a) modifying the Conditional Order to remove the provision allowing debtor to commence an adversary proceeding in thisCourt against the IRS or otherwise challenge the IRS' proofs of claim within 30 days of entry of the Conditional Order, (b) abstaining from hearing the tax dispute in this Court, and (c) vacating the automatic stay imposed under § 362(a) to permit the running of the statutory 150-day period ("150-day Period") under section 6213(f)(1) of the United States Internal Revenue Code of 1986, as amended, 26 U.S.C. § 1 et seq. ("IRC")2, during which debtor may petition the Tax Court for a redetermination of the IRS' proposed assessment of debtor's alleged income tax liability ("Motion to Dismiss Claims Objection") [dkt. no. 244]. Debtor opposed that motion [dkt. no. 247], and the United States replied [dkt. no. 249]. Shortly after the filing of the Motion to Dismiss Claims Objection, the chapter 7 trustee sought approval of a stipulation between the trustee, on behalf of the debtor's bankruptcy estate, and the IRS vacating the automatic stay to permit debtor's alleged income tax liability to be determined in the Tax Court [dkt. no. 246]. Debtor opposed the stipulation [dkt. no. 250]. The trustee subsequently withdrew his application seeking approval of the stipulation.
In addition to the Motion to Dismiss Claims Objection, the United States separately moved for entry of an order vacating the automatic stay for cause under § 362(d)(1) to allow the running of the 150-day Period whether or not this Court abstains from hearing the tax dispute or decides to hear and determine the tax liability at issue ("Third Stay Relief Motion") [dkt. no. 253]. Debtor also opposed that motion [dkt. no. 254].
Thereafter, the trustee filed a motion objecting to proofs of claim 2, 10 and 17 filed by the IRS [dkt. 304] and moved for approval of a stipulation between the bankruptcy estate and the IRS settling the trustee's claims objection [dkt. no. 318]. The settlement stipulation provided, inter alia, for the withdrawal of the trustee' s claims objection, and the joinder by the trustee in the United States' motion for relief from the automatic stay to permit therunning of the 150-day Period. Debtor opposed the trustee's motion to approve the settlement stipulation [dkt. no. 325] and the trustee replied [dkt. nos. 326, 328], as did the United States [dkt no. 327]. After consideration of the parties' submissions, the Court entered an order authorizing the trustee to enter into the settlement stipulation with the IRS [dkt. no. 330].
Currently pending before the Court are the United States' motion to dismiss debtor's objection to the IRS' proof of claim and its motion for relief from the automatic stay to allow commencement of the 150-day Period. The Court heard oral argument over several days and the parties submitted supplemental papers on issues raised at oral argument. The Court has considered carefully all of the arguments and submissions made by the parties in connection with the motions. For the following reasons, the Motion to Dismiss Claims Objection is denied in part and granted in part, and the Third Stay Relief Motion is denied as moot.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (G), and (O) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).
Debtor, a tax attorney in his late seventies, held a 99% interest in the law firm of Yerushalmi & Associates ("Y&A"). Debtor and Y&A each filed a petition under chapter 11 ofthe Bankruptcy Code on July 25, 2007. Debtor's chapter 11 case was converted to a chapter 7 case on October 2, 2007 [dkt. no. 63] and Marc A. Pergament was appointed the chapter 7 trustee of the debtor's bankruptcy estate [dkt. no. 65]. Y&A's chapter 11 case was converted to a chapter 7 case on October 2, 2007 and was closed on May 16, 2017. See bankruptcy case no. 8-07-72817, dkt. nos. 65, 179.
On August 23, 2007, the IRS filed a proof of claim in the amount of $16,650 for income taxes owed for the period ending March 31, 2007 ("Claim No. 2"). Claim No. 2 asserts an unsecured priority tax claim under § 507(a)(8) in the amount of $15,000, plus prepetition interest of $1,550, for a total sum of $16,550, and a general unsecured claim of $100 for penalties, including interest thereon.
On November 28, 2007, the IRS filed an amended proof of claim in the amount of $1,425,536.47 ("Claim No. 10"). Claim No. 10 asserted an unsecured priority tax claim under § 507(a)(8) in the amount of $1,286,434.27, and a general unsecured claim of $139,102.20 for penalties and interest. In addition to the $16,500 asserted in Claim No. 2, Claim No. 10 included (1) a tax assessment for the tax period ending March 31, 1999 in the amount of $587,196, plus prepetition interest of $498,076.76, for a total of $1,085,272.76 and (2) a tax assessment for the tax period ending March 31, 2000 in the amount of $107,815, plus prepetition interest of $76,796.51, for a total of $184,611.51.
On October 4, 2008, the IRS filed an amended proof of claim in the amount of $1,459,673.32 ("Claim No. 17"). Claim No. 17, now the operative claim asserted by the IRS, is based on an unsecured priority tax claim under § 507(a)(8) in the sum of $1,319,993.30, and a general unsecured claim of $139,740.02. Under Claim No. 17, the assessments with respect to the 1999 and 2000 tax years remain the same but the taxes due with respect to the2007 tax year increased from $15,000 to $49,188.25, and the prepetition interest decreased from $1,500 to $860.78.
On December 7, 2007, the IRS issued a statutory notice of deficiency to debtor and his estranged wife, Malka Yerushalmi ("Malka"), for tax years 1999 and 2000 ("Statutory Notice of Deficiency"). In question are certain net operating losses claimed by debtor and Malka in their joint tax returns with respect to debtor's law practice at Y&A. The net operating losses allegedly arose out of a theft by a family friend who had access to debtor's office space at Y&A and debtor's records and financial information even though the friend was not an employee of debtor or Y&A.
Pursuant to IRC § 6213, a taxpayer has 90 days after the IRS mails a statutory notice of deficiency to file a petition with the Tax Court for a redetermination of the deficiency (the "90-day Period"). 26 U.S.C. § 6213(a). By statute, no assessment of a deficiency and no levy or proceeding to collect upon the deficiency shall be instituted or prosecuted until the statutory notice of deficiency has been mailed and the 90-day Period has expired. 26 U.S.C. § 6213(a). If a petition is filed by the taxpayer with the Tax Court within the 90-day Period, then no assessment of a deficiency and no levy or proceeding can be instituted until the Tax Court's decision becomes final. Id.
The 90-day Period was affected by the commencement of debtor's bankruptcy case as the filing of a bankruptcy petition triggers the automatic stay under § 362(a). Relevant here is § 362(a)(8) which enjoins:
the commencement or continuation of a proceeding before the United States Tax Court . . . concerning a tax liability of a debtor that is an individual for a taxable period ending before the date of the order for relief under this title.
11 U.S.C. § 362(a)(8). Because it is only the taxpayer who may petition the Tax Court for a redetermination of a deficiency assessment under IRC § 6213(a), § 362(a)(8) essentially bars an individual debtor from commencing a proceeding before the Tax Court to determine a prepetition tax liability until the automatic stay is no longer in place under § 362(c)(2)4 or the stay is lifted under § 362(d).5 As a result of the automatic stay, Congress not only tolled the number of days left within the 90-day Period at the time of the bankruptcy filing but also extended the time for a debtor to petition the Tax Court by an additional 60 days after the automatic stay ends, so as to give a debtor additional time to decide whether to contest the statutory notice of deficiency by filing a petition...
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