IRS v. Pransky

• Decision Date: 30 March 2001
• Docket Number: No. CIV. 00-2066(GEB).,CIV. 00-2066(GEB).
• Citation: 261 BR 380
• Parties: INTERNAL REVENUE SERVICE, Appellants, v. Roger PRANSKY, Appellee.
• Court: U.S. District Court — District of New Jersey

261 B.R. 380 (2001)

INTERNAL REVENUE SERVICE, Appellants, v.Roger PRANSKY, Appellee.

No. CIV. 00-2066(GEB).

United States District Court, D. New Jersey.

March 30, 2001.

Robert J. Cleary, United States Attorney, Newark, NJ, James J. Wilkinson, U.S. Department of Justice, Washington, DC, for the Internal Revenue Service.

Michael I. Saltzman, White & Case LLP, New York City, Morris S. Bauer, Ravin, Greenberg & Marks, P.A., Roseland, NJ, for Roger Pransky.

OPINION

BROWN, District Judge.

This matter comes before the Court upon the appeal of the Internal Revenue Service from the Order of the United States Bankruptcy Court for the District of New Jersey("Bankruptcy Court") issued by the Honorable William H. Gindin, U.S.B.J., March 17, 2000.This Court exercises appellate jurisdiction pursuant to 28 U.S.C. § 158(a).The Court having considered the submissions of the parties and having heard oral argument, finds that the Bankruptcy Court lacked jurisdiction to adjudicate Roger Pransky's complaint as it relates to the 1984 and 1985 tax years, and affirms the Bankruptcy Court's holding as to its determination that the debtor's remittances for 1986 and 1987 constituted deposits and not payments.The Court will vacate the March 17, 2000 Order of the Bankruptcy Court and remand this matter to the Bankruptcy Court for a final determination of the debtor's estate.

I.BACKGROUND

Appellee, Roger Pransky("Pransky" or "debtor"), filed a bankruptcy petition pursuant to Chapter 11 of the United States Bankruptcy Code on January 15, 1997.SeePransky v. Internal Revenue Service,245 B.R. 478, 480(Bankr.D.N.J.1999).In response to plaintiff's petition, the Internal Revenue Service ("IRS" or "government") filed a timely proof of claim on February 27, 1997, in the amount of $131,237.02.Seeid. at 481.The debtor and the IRS filed motions for summary judgment on the issue of whether the Bankruptcy Court had jurisdiction to determine the legality of the tax imposed the statute of limitations in 26 U.S.C. § 6511(a).Seeid.

A.Debtor's Tax History

In 1985, the debtor was under investigation by the United States Attorney's Office.SeeBrief of Appellee ("Appellee's Br.")at 3.Pransky decided not to file any tax returns during the pending investigation, rather the debtor's attorney submitted monetary remittances to the Internal Revenue Service on his behalf.Seeid. at 4-5.Each of these remittances was accompanied by a letter from the debtor's attorney stating that the money was "to be applied to the account of the captioned taxpayers for any income tax liability they may have for the year."SeePransky,245 B.R. at 480.In April of 1985, the debtor filed a timely Form 4868 extension request and an estimated payment of $9,500 for the 1984 tax year.Seeid.The new deadline for the 1984 taxes became August 15, 1985.Seeid.On April 17, 1986, Pransky's attorney sent a remittance to the IRS in the amount of $40,000 for the 1984 tax year.Seeid.Additionally, $4,000 was withheld from Pransky's wages during 1984.Seeid.For the 1985 tax year, Pransky submitted a payment of $20,000 along with a Form 4868 extension request on April 15, 1986.Seeid. at 481.The new deadline for filing of the 1985 tax return became October 15, 1986, and Pransky forwarded a remittance to the IRS in the amount of $150,000, on July 8, 1987, and the debtor's employer withheld an additional $35,000 from his wages for 1985.Seeid.The IRS also received a remittance on July 8, 1987 in the amount of $315,000 toward the debtor's tax liability for 1986.¹See id.In addition, the debtor's employer withheld $50,000 for that year.Seeid.On April 21, 1998, Pransky remitted $9,500 toward his liability for 1987 and his employer withheld $1,564.Seeid.

The debtor finally filed returns for 1984, 1985, and 1986 on December 11, 1991, and filed his return for 1987 on July 20, 1992.Seeid. at 480.The returns reflected an overpayment of the taxes actually due for the 1984 and 1985 tax years.Seeid. at 481.Indeed IRS transcripts indicate an overpayment in the amount of $27,437.97 for 1984, and an overpayment in the amount of $31,697 for the 1985 tax year.Seeid.The debtor sought to apply these overpayments toward the taxes he owed for 1986 and 1987.Seeid.The IRS treated the credits as refund requests, and disallowed the 1984 and 1985 requests on February 20, 1992, and March 9, 1992 respectively.Seeid.The IRS determined the refund requests were time barred under the statute of limitations in 26 U.S.C. § 6511(a), resulting in the stated underpayments.Seeid.

According to the IRS Certificate of Assessments and Payments, Pransky is current on his tax liability for 1984 through 1986, but the 1987 account has an outstanding balance of $144,874.74.Seeid.On February 27, 1997, during the course of Pransky's voluntary bankruptcy proceeding, the IRS filed its proof of claim in the amount of $131,237.02 for the balance of the 1987 taxes.Seeid.The amount reflected a balance of $2,183.28 in taxes, $34,650.15 in penalties, and $94,403.59 in interest.Seeid.On April 7, 1998, Pransky instituted the underlying adversary proceeding "seeking a determination of his federal income tax liability for the taxable years 1984 through 1987."Plaintiff's Complaint ("Pl.'s Compl.")¶ 1.

B.The Bankruptcy Court's Decision

Pransky and the Internal Revenue Service both filed motions for summary judgment on the issue of the application of the statute of limitations in 26 U.S.C. § 6511(a).²Seeid. at 480.The debtor claimed he was entitled to recover the funds remitted to the IRS for the 1984 and 1985 tax years because they were deposits submitted to prevent the assessment of interest and penalties until he filed his official tax returns.Seeid. at 481.Pransky argued that the statute of limitations in 26 U.S.C. § 6511(a) did not operate to bar his suit because the limitations time frame did not begin to run until he filed his tax returns in 1991 and 1992.Seeid.Conversely, the IRS argued that Pransky's failure to apply for a refund by filing timely tax returns, pursuant to § 6511(a), was a bar to the Bankruptcy Court's jurisdiction to determine the validity of the government's proof of claim to the extent that it involved 1984 and 1985.Seeid.

The Bankruptcy Court noted that both parties agreed upon the material facts of the case and asserted jurisdiction pursuant to 11 U.S.C. § 505(a)(1), which incorporates the statute of limitations in § 6511(a).Seeid. at 482.The Court below indicated that the filing of a claim for refund was governed by 26 U.S.C. §§ 6511(a)and7422(a).³Seeid.The outcome of the motions depended upon the characterization of Pransky's remittances as either deposits or payments; if the remittances were payments, then Pransky's claim for refund would be time barred under § 6511(a).Seeid.

The Bankruptcy Court examined the law regarding whether a remittance constitutes a payment or a deposit, noting that the Court of Appeals for the Third Circuit has rejected a per se rule for classifying such remittances as deposits.Seeid. at 483-84(citingFortugno v. Comm'r Internal Revenue,353 F.2d 429, 435(3d Cir.1965)).The Court below determined there must first be an "assessment or an acquiescence in the proposed deficiency before a remittance can be deemed a payment for purposes of § 6511," and that the debtor did not have a determined liability until after the filing of his tax returns in 1991 and 1992.Pransky,245 B.R. at 484, 485.The Bankruptcy Court held that Pransky's remittances were deposits in the nature of a cash bond, thus the statute of limitations contained in § 6511(a) did not bar Pransky's adversary proceeding.Seeid. at 485.The Bankruptcy Court was unpersuaded by the IRS's treatment of the remittances as advance tax payments, and its contention that an express agreement between the taxpayer and the IRS was required for a remittance to be treated as a deposit.Seeid. at 485.The Court below also found that the remittances did not commit Pransky to any defined tax liability, because the correspondence which accompanied those remittances established the debtor's intent to submit them as deposits.Seeid.Finally, the Bankruptcy Court sustained the imposition of delinquency penalties because the debtor failed to timely submit the remittances in question.Seeid. at 486.

II.DISCUSSION

A.Standard of Review

Bankruptcy Rule 8013 provides, in pertinent part: "On appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses."Id."A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conclusion that a mistake has been committed."United States v. United States Gypsum Co.,333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746(1948).A bankruptcy court's conclusions of law, on the other hand, are subject to plenary review.SeeBrown v. Pennsylvania State Employees Credit Union,851 F.2d 81, 84(3d Cir.1988).When mixed questions of law and fact are presented, the appropriate standard must be applied to each component of the appeal.SeeIn re Sharon Steel Corp.,871 F.2d 1217, 1222(3d Cir.1989).

B.Issues Raised on Appeal

On appeal, the IRS raises two arguments in favor of overruling the decision of the Bankruptcy Court.SeeBrief for Appellant ("Appellant's Br.")at 1.The government argues that Pransky's "suit to recover income tax refunds was untimely because it was filed more than 2 years after the Internal Revenue Service denied the taxpayer's claim for refund" for the 1984 and 1985 tax years.Id.The IRS...