King v. Comm'r of Internal Revenue , Docket No. 2093-67.

• Decision Date: 26 February 1969
• Docket Number: Docket No. 2093-67.
• Parties: SAMUEL J. KING, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

51 T.C. 851

SAMUEL J. KING, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2093-67.

Tax Court of the United States.

Filed February 26, 1969.

Thomas J. Stevens, for the respondent.

After having been adjudicated a bankrupt but before discharge and termination of the bankruptcy proceeding, the taxpayer received a statutory notice of deficiency for the taxable year 1962 and filed a timely petition with this Court. The respondent did not present a claim for this deficiency in the bankruptcy proceeding nor has he assessed it. Held, this court has jurisdiction to redetermine the deficiency; the respondent's motion to dismiss is denied.

SIMPSON, Judge:

On September 30, 1968, the respondent filed a motion to dismiss the petition in this proceeding for lack of jurisdiction. The question thus raised is whether this Court has jurisdiction to redetermine a deficiency when the petition seeking redetermination was filed after the petitioner was adjudicated a bankrupt, but before his discharge and the termination of the bankruptcy proceeding, and when the Commissioner of Internal Revenue has neither assessed the deficiency nor filed a claim therefor in the bankruptcy proceeding.

On April 4, 1963, the petitioner filed a voluntary petition in bankruptcy with the Federal District Court of the Western District of Missouri, and was thereby adjudicated a bankrupt at the time of the filing of such petition pursuant to section 18(f) of the Bankruptcy Act, 11 U.S.C. sec. 41(f). On January 25, 1967, a statutory notice of deficiency was issued to the petitioner¹ determining a deficiency in the petitioner's income tax for the calendar year 1962. On April 25, 1967,² the petitioner timely filed a petition, and on June 30, 1967, an amended petition, for redetermination of the deficiency by this Court. On June 24, 1968, the petitioner was discharged in bankruptcy, and on August 2, 1968, the bankruptcy proceedings were closed. The asserted deficiency has never been assessed against the taxpayer, and the respondent filed no proof of claim with respect to such deficiency in the bankruptcy proceeding.

The normal procedures for the determination of deficiencies and for petitioning this Court for redetermination of such deficiencies are set forth in sections 6212 and 6213 of the Internal Revenue Code of 1954. ³ Section 6212(a) authorizes the Secretary or his delegate to issue a notice of deficiency. Section 6213(a) provides that within the applicable period of time after the mailing of the statutory notice, the taxpayer may petition this Court for redetermination of the deficiency; and the deficiency may not be assessed or collected until the period for filing a petition in this Court has elapsed, or if a petition is filed, until our decision becomes final. Thus, the taxpayer against whom a deficiency is asserted is given an opportunity to contest it before payment.

Section 6871 establishes an exception to these normal procedures; it provides:

(a) IMMEDIATE ASSESSMENT.— Upon the adjudication of bankruptcy of any taxpayer in any liquidating proceeding, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency * * * determined by the Secretary or his delegate in respect of a(n income, gift, or estate) tax * * * shall, despite the restrictions imposed by section 3213(a) upon assessments, be immediately assessed if such deficiency has not theretofore been assessed in accordance with law.

(b) CLAIM FILED DESPITE PENDENCY OF TAX COURT PROCEEDINGS.— In the case of a(n income, gift, or estate) tax * * * claims for the deficiency * * * may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Tax Court; but no petition for any such redetermination shall be filed with the Tax Court after the adjudication of bankruptcy, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of the receiver.

The respondent argues that subsection (b) operates as an absolute bar to the filing of a petition in this Court with respect to a deficiency determined for any year preceding the adjudication of bankruptcy. We disagree.

In Pearl A. Orenduff, 49 T.C. 329 (1968), this Court rejected a similar contention by the respondent. In that case, a statutory notice of deficiency was mailed to the taxpayer after the taxpayer had been discharged in bankruptcy and the bankruptcy proceedings had been closed. Based on the legislative history of the predecessor of section 6871, the Court said at page 332:

The section, as explained by the Senate committee report, was designed to place in the same court the power to adjudicate tax claims as well as the power to distribute the assets available for application on such claims. Otherwise, the assets of the debtor might be distributed before the tax claim could be perfected through the generally applicable administrative and Tax Court procedures. Abel v. Campbell, 334 F.2d 339 (C.A. 5, 1964). This legislative purpose, on the other hand, does not require that a taxpayer be denied access to this Court when a completely new deficiency, neither assessed nor claimed in the bankruptcy court, is determined after the bankruptcy or receivership proceedings are closed.

The Court pointed out that the ‘no petition’ language of section 6871(b) is qualified by ‘for any such redetermination’; therefore, it held that the ‘no petition’ language applies only when there has been an immediate assessment under section 6871(a) or filing of a claim under the first clause of section 6871(b). Accordingly, the Court held that it had jurisdiction of a petition timely filed seeking redetermination of the deficiency. Cf. Eli McDonald, 23 B.T.A. 521 (1931).

The principle established in Orenduff was sharpened and applied in John V. Prather, 50 T.C. 445 (1968). In that case, the respondent duly filed claims for income tax deficiencies in the bankruptcy proceeding. After the taxpayer had been adjudicated a bankrupt, but while the bankruptcy proceeding was still pending, the respondent sent the taxpayer a notice of deficiency asserting the deficiencies presented in the bankruptcy proceeding and also fraud penalties with respect thereto, and the taxpayer filed a timely petition with this Court. Before the close of the bankruptcy proceeding, the respondent also assessed such deficiencies and penalties against the taxpayer. We held that since the claim for the income tax deficiencies had been presented to the bankruptcy court, we lacked jurisdiction to redetermine them. However, since the claim for the fraud penalty was not and could not have been presented to the bankruptcy court, we held that we had jurisdiction to redetermine that claim. Prather thus applied the principle inherent in the reasoning of Orenduff: the ‘no petition’ language of section 6871(b) operates as a bar to Tax Court jurisdiction only if the taxpayer has had an opportunity to litigate the asserted deficiency in the bankruptcy proceeding.

We think that the present case comes within the reasoning of Orenduff and Prather. The general purpose of the procedures established by sections 6212 and 6213 is to provide taxpayers with an opportunity to secure a judicial determination of any tax deficiency claimed by the respondent without having to pay such deficiency. Section 6871 makes an exception to the general procedures when there is a bankruptcy proceeding pending, but that section has been construed narrowly so as not to deprive taxpayers of the opportunity of litigating tax claims in some forum without having to pay them first. John V. Prather, supra; Pearl A. Orenduff, supra; Eli McDonald, supra. Section 6871(a) and the first clause of section 6871(b) were designed to enable the respondent to present his tax claims in the bankruptcy court. The second clause of section 6871(b) applies only when the respondent has taken such action as is necessary to offer the taxpayer an opportunity to litigate the tax claim in the bankruptcy proceeding.

In the present case, the respondent made no assessment of the deficiency, and he filed no proof of claim. Although the bankruptcy proceeding was still pending when he sent the notice of deficiency and when the petition was filed with this Court, the claim was not presented in such a manner as to be considered by the bankruptcy court. Though we do not know whether a claim could have been filed in the bankruptcy proceeding at the time the notice was sent or the petition was filed with this Court, we now do know that none was presented. Since the respondent took no action which would raise the claim before the bankruptcy court, this case is essentially like Orenduff and Prather.

The respondent could have presented his tax claim to the bankruptcy court, but elected not to do so because there were no assets then available for payment of the claim. Later, he sent the notice of deficiency to the petitioner, apparently recognizing the possibility of collecting the claim out of exempt or ‘after-acquired’ assets. However, he seeks to deny the petitioner the opportunity to have the claimed deficiency redetermined by us, and if we hold that the petitioner is not entitled to his day in this Court, the effect would be to deprive him of his only opportunity to have the deficiency judicially determined before payment thereof.⁴ In enacting the predecessor of section 6871, Congress intended to protect...