IRS v. Luongo

• Citation: 259 F.3d 323
• Decision Date: 18 July 2001
• Docket Number: No. 00-10475,00-10475
• Parties: (5th Cir. 2001) In the Matter of: CONSTANCE LUONGO, Debtor. INTERNAL REVENUE SERVICE, Appellee, v. CONSTANCE LUONGO, Appellant
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 323

259 F.3d 323 (5th Cir. 2001)

In the Matter of: CONSTANCE LUONGO, Debtor.

INTERNAL REVENUE SERVICE, Appellee, v. CONSTANCE LUONGO, Appellant.

No. 00-10475

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

July 18, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Curtis C. Pett (argued), Bruce Raleigh Ellison, U.S. Dept. of Justice, Tax Div., Washington, DC, for Appellee.

John Park Davis (argued), Davis Law Firm, Hurst, TX, for Appellant.

Appeal from the United States District Court for the Northern District of Texas

Before BARKSDALE, EMILIO M. GARZA and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

Factual and Procedural Background

This case involves a debtor's claim to recover an income tax overpayment for her 1997 tax year. Pursuant to 26 U.S.C. § 6402(a) of the Internal Revenue Code¹ and 11 U.S.C. § 553(a) of the Bankruptcy Code,² the Internal Revenue Service ("IRS") setoff her overpayment against her unpaid 1993 tax liability, a liability which had been discharged under § 727 of the Bankruptcy Code. After the setoff occurred, the debtor moved to reopen her case, and filed amended schedules which for the first time listed her 1997 income tax overpayment as an exempt asset under § 522. The IRS did not file any objection to the reopening of the case or the amended schedules. The bankruptcy court granted the motion to reopen and her schedules were amended. The plaintiff/debtor, Constance Luongo, then brought an action in the bankruptcy court to recover her 1997 tax overpayment. She asserted that the setoff executed by the IRS was improper because (1) the 1993 tax debt had been discharged in bankruptcy, and (2) the 1997 tax overpayment had been exempted from her bankruptcy estate. In response, the IRS argued that the bankruptcy court lacked jurisdiction or that it should abstain from hearing the matter. The IRS further asserted that Bankruptcy Code § 553 preserved the IRS' right to setoff under § 6402(a), notwithstanding the discharge of debtor's unpaid 1993 tax debt or her attempt to exempt the 1997 overpayment. The case was submitted to the bankruptcy court on cross-motions for summary judgment.

The bankruptcy court adopted the opinion in Alexander v. Internal Revenue Service, 225 B.R. 145 (Bankr. W.D. Ky. 1998), and granted plaintiff's motion for summary judgment. Construing the conflicting mandates of the two sections in favor of the debtor, the bankruptcy court in Alexander held that the language in § 522(c) that "property exempted under this section is not liable . . . for any debt of the debtor that arose . . . before the commencement of the case . . ." took precedence over the language of § 553(a) that "this title [the Bankruptcy Code] does not affect any right of a creditor to offset. . . ." The IRS appealed and the district court reversed. The district court held that based on the clear and unambiguous language of § 553(a) the IRS' right of setoff was unaffected by Luongo's claims that the tax overpayment is exempt property and the tax liability was discharged in the bankruptcy proceeding. Appellant Luongo filed a timely notice of appeal.

While neither the district court nor the bankruptcy court afforded the IRS' jurisdictional claims meaningful discussion in their respective opinions, we address these claims first as they are necessarily antecedent to any determination of the merits. In so doing, we conclude that the bankruptcy court had jurisdiction to resolve the debtor's tax dispute and did not abuse its discretion in not abstaining. Further, we hold (1) that the IRS permissibly setoff Appellant's prepetition tax overpayment against her discharged debt and (2) that Appellant could not exempt the overpayment under § 522. Because we find that Appellant could not properly exempt the overpayment at issue, we do not reach the exemption issue decided below -- that is, whether § 522(c) prevents a creditor from exercising its right to setoff preserved in § 553. The judgment of the district court is AFFIRMED.

Analysis

I. Jurisdiction and Abstention

The IRS contends first that the bankruptcy court lacked jurisdiction to consider this matter, or in the alternative, should have abstained. Section 505 authorizes bankruptcy courts to determine the amount or legality of any tax liability of the estate or the debtor. 11 U.S.C. § 505(a)(1).³ This authority, however, is not unlimited. Section 505(a)(2)(B) provides that the bankruptcy court may not determine -

(B) any right of the estate to a tax refund, before the earlier of -

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request.

The IRS contends that the language of § 505(a)(2)(B) precludes a bankruptcy court from deciding the personal tax liability of the debtor. It relies on the inclusion of the terms "the estate" and "the trustee" to argue that § 505 contemplates that only a trustee may obtain a tax refund in bankruptcy court, and then only if the trustee is seeking a refund on behalf of the estate.

Initially, we note that the IRS' reading of this subsection is contrary to the broad grant of jurisdiction in § 505(a)(1) permitting a bankruptcy court to 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." Furthermore, the legislative statements accompanying § 505 make clear that the section "authorizes the bankruptcy court to rule on the merits of any tax claim involving an unpaid tax, fine, or penalty relating to a tax, or any addition to a tax, of the debtor or the estate." 124 Cong.Rec. H 11110 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards introducing the House amendment)(emphasis added), reprinted in, 1978 U.S.C.C.A.N. 5787, 6436, 6490. And under the paragraph heading "Jurisdiction of the tax court in bankruptcy cases," the legislative statements instruct that "the bankruptcy judge will have authority to determine which court will determine the merits of the tax claim both as to claims against the estate and claims against the debtor concerning his personal liability for nondischargeable taxes." 124 Cong.Rec. 32414 (1978) (Statement of Representative Edwards), reprinted in 1978 U.S.C.C.A.N. 6436, 6492-93 (emphasis added); 124 Cong.Rec. 34014 (1978) (Statement of Senator DeConcini), reprinted in 1978 U.S.C.C.A.N. 6505, 6562; see also Begier v. IRS, 496 U.S. 53, 64-65 n. 5, 110 S.Ct. 2258, 2266 n. 5, 110 L.Ed.2d 46 (1990) ("Because of the absence of a conference and the key roles played by Representative Edwards and his counterpart floor manager Senator DeConcini, we have treated their floor statements on the Bankruptcy Reform Act of 1978 as persuasive evidence of congressional intent."). The IRS cites no case supporting its restrictive reading of the bankruptcy court's jurisdiction under § 505. On the contrary, absent the express statutory limitations in § 505(a)(2)(A) and (B), bankruptcy courts have universally recognized their jurisdiction to consider tax issues brought by the debtor, limited only by their discretion to abstain.⁴ In re Hunt, 95 B.R. 442, 445 (Bankr. N.D. Tex. 1989) ("[T]he reported decisions uniformly recognize the Bankruptcy Court's jurisdiction to determine a debtor's tax liability . . . .").

The bankruptcy court's ability to abstain is premised on Congress' use of the word "may" in § 505. In re Beisel, 195 B.R. 378, 379 (Bankr. S.D. Ohio 1996) ("Section 505(a)(1) allows but does not require the Bankruptcy Court to determine a debtor's tax liabilities."). The factors frequently cited by the courts in deciding whether to abstain include the complexity of the tax issues to be decided, the need to administer the bankruptcy case in an orderly and efficient manner, the burden on the bankruptcy court's docket, the length of time required for trial and decision, the asset and liability structure of the debtor, and the prejudice to the taxing authority. In re Hunt, 95 B.R. at 445. Several courts have also taken into consideration what they identify as the two-fold purpose of § 505: (1) "affording a forum for the ready determination of the legality or amount of tax claims, which determination, if left to other proceedings, might delay conclusion of the administration of the bankruptcy estate," In re Diaz, 45 B.R. 137, 138 (Bankr. S.D. Fla. 1984), and (2) "providing an opportunity for the trustee, on behalf of the creditor, to contest the validity and amount of a tax claim when the debtor has been unwilling or unable to do so." In re Millsaps, 133 B.R. 547, 554 (Bankr. M.D. Fla.1991); see also City of Amarillo v. Eakens, 399 F.2d 541, 543-44 (5th Cir. 1968) ("The amendment, by authorizing redeterminations in those instances where the tax claim was never appealed, serves to protect creditors of the bankrupt from the bankrupt's lack of diligence.").

The bankruptcy courts that have focused on these requirements consider general unsecured creditors, not the debtor, the intended beneficiaries of § 505(a). In re Williams, 190 B.R. 225, 227 (Bankr. W.D. Pa. 1995); In re Tropicano Inc., 128 B.R. 153, 161 (Bankr. W.D. Tex. 1991). These courts conclude that when neither of the above two purposes would be served by a bankruptcy court determination of a chapter 7 debtor's tax liability, abstention is warranted. These cases improperly view § 505 in isolation without proper deference to the other goals of the Bankruptcy Code. The bankruptcy court's responsibility in administering the estate is not only to achieve a fair and equitable distribution of assets to the creditors, but also to "relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh." Local Loan v. Hunt, 292 U.S. 234, 244, ...