Kipperman v. Internal Revenue Serv. (In re 800ideas.Com, Inc.)
| Decision Date | 22 July 2013 |
| Docket Number | BAP No. SC–12–1496–JuBaPa.,Bankruptcy No. 07–00207. |
| Citation | 496 B.R. 165 |
| Parties | In re 800IDEAS.COM, INC., Debtor. Richard M. Kipperman, Chapter 7 Trustee, Appellant, v. Internal Revenue Service, U.S.A.; United States Trustee; 800Ideas.com, Inc., Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
OPINION TEXT STARTS HERE
Geraldine A. Valdez, Esq., San Diego, CA, Financial Law Group, argued for Appellant Richard M. Kipperman, Chapter 7 Trustee; Anne E. Nelson, Esq., U.S. Department of Justice, argued for Appellee Internal Revenue Service.
Before JURY, BASON * and PAPPAS, Bankruptcy Judges.
Richard M. Kipperman, chapter 7 1 trustee in the case of debtor 800Ideas.com, appeals the bankruptcy court's order allowing the claim of the Internal Revenue Service (IRS) with priority as an actual and necessary cost and expense of preserving the estate under § 503(b)(1)(A).2
IRS's claim arose postpetition when it assessed penalties against debtor under 26 U.S.C. (IRC) § 6699 due to trustee's failure to timely file debtor's corporate tax returns for the years 2008 and 2010. The bankruptcy court found that trustee had not proved reasonable cause for the late-filed returns within the meaning of IRC § 6699 and allowed IRS's claim as an administrative expense claim with first priority under § 503(b)(1)(A).
We agree with the bankruptcy court's decision that trustee failed to demonstrate reasonable cause for his delay in filing the tax returns and AFFIRM on this issue. However, in this case of first impression, we disagree with the court's decision that the penalties qualified as an administrative expense under § 503(b)(1)(A). The penalties did not “preserve the estate” as required under the plain language of § 503(b)(1)(A) nor do they fall within the fundamental fairness doctrine espoused in Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) and its progeny. Although we REVERSE the bankruptcy court's decision on the priority issue as it pertains to § 503(b)(1)(A), we REMAND this matter to the bankruptcy court to decide if the penalties qualify as an administrative expense for other reasons.
The facts are undisputed. On January 19, 2007, debtor, a California S corporation, filed its chapter 7 petition. Kipperman was appointed the chapter 7 trustee. Debtor's liabilities greatly exceeded its assets, with its main asset the potential right to an excise tax refund in an unknown amount for the 2006 tax year.
On March 12, 2007, trustee requested debtor's prepetition accountants, Schaim, Hyde & Company, Inc. (SHCI), to prepare the tax return for the 2006 tax year. SHCI began work on the return and Ms. Hyde, an accountant with the firm, advised trustee that the return would be completed by April 15, 2008. Over a year after the promised date for the return and two years after the initial request, in June 2009, trustee contacted Ms. Hyde to inquire about the status of the return. Ms. Hyde explained that there was a delay because debtor's files were inadvertently sent to storage. In July 2009, trustee again contacted Ms. Hyde regarding the return. She explained that work on the return had stopped due to the lack of payment; however she agreed to do the work. Thereafter, Ms. Hyde sent trustee an engagement letter.
On August 27, 2009, trustee requested the Financial Law Group (FLG) to assist him in obtaining court approval for the employment of SHCI nunc pro tunc.
On January 15, 2010, SHCI completed the return. On January 19, 2010, trustee signed the return. On January 28, 2010, IRS received the return and thereafter notified trustee that it would disallow approximately $1,950.84 of the $38,197 claimed refund.
On March 3, 2010, trustee an application to have SHCI employed nunc pro tunc as of March 12, 2007. On the same date, trustee submitted the first and final fee application for SHCI.
On April 2, 2010, trustee filed an application to employ R. Dean Johnson as an accountant for the estate. The application stated that Johnson would, among other things, prepare the fiduciary income tax returns.
In mid-June 2011, the bankruptcy estate received the tax refund for the 2006 year from IRS in the amount of $36,150.33.
In mid-July 2011, Johnson completed debtor's tax returns for 2007, 2008, 2009 and 2010 and they were filed with IRS. The 2008 and 2010 returns, which are at issue in this appeal, stated that debtor had nine shareholders and reported a zero tax liability. After processing the returns, IRS assessed penalties against debtor under IRC § 6699 in the amounts of $9,612 and $8,775 for the 2008 and 2010 tax years, respectively. IRC § 6699 imposes penalties against an S corporation which fails to timely file its returns. Trustee sought to have the penalties abated to no avail.3
On February 15, 2012, IRS filed a Request for Payment of Internal Revenue Taxes in the bankruptcy court. The request for payment in the amount of $18,667.17 was based on the 2008 and 2010 penalties assessed and was asserted as an administrative priority expense.
On February 23, 2010, trustee objected to the claim, contending that the penalties were not based on any unpaid tax incurred by the bankruptcy estate as required by § 503(b)(1)(C) and, therefore, trustee intended to treat the claim as a subordinated penalty claim under § 726(a)(4).
IRS responded, arguing that the penalties should be afforded administrative expense status under § 503(b)(1)(C) because they constituted a penalty relating to a tax of a kind specified in § 503(b)(1)(B). IRS also asserted that § 726(a)(4) was inapplicable to its postpetition claim because that statute applied to prepetition claims or those arising before the appointment of a trustee.
On April 16, 2012, trustee filed a reply declaration, stating that his failure to timely file the tax returns in question did not result from willful neglect and was due to reasonable cause. The asserted reasonable cause was the estate's insolvency during the tax years in question and trustee's belief that the estate would never be solvent. Trustee also argued again that the penalties and interest were not based on any unpaid tax incurred by the estate as required by § 503(b)(1)(C).
On June 8, 2012, the bankruptcy court heard the matter. At the hearing, IRS contended for the first time that the penalties were entitled to administrative expense priority under § 503(b)(1)(A) as an actual and necessary cost and expense of preserving the estate, citing to Reading, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751, the Ninth Circuit's decision in Tex. Comptroller of Pub. Accounts v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1067 (9th Cir.1998), which adopted the Reading rationale, and this Panel's decision in Gonzalez v. Gottlieb (In re Metro Fulfillment, Inc.), 294 B.R. 306, 309 (9th Cir.BAP2003). According to IRS, the rationale of these cases applied under the facts of this case because trustee had an obligation to comply with the Tax Code by filing timely returns and he did not. In addition, IRS argued that even though an estate may be insolvent, trustee still had an obligation to file a tax return and thus the estate's insolvency did not constitute reasonable cause to excuse the penalty. Due to IRS's new arguments and citations, the bankruptcy court continued the matter to July 20, 2012, and authorized the parties to file further pleadings.
On June 22, 2012, IRS submitted an amended response and declaration with attached exhibits showing IRS account transcripts for the 2008 and 2010 tax years.
On June 29, 2012, trustee submitted an amended response, arguing that the fundamental fairness doctrine espoused in Reading was inapplicable to a chapter 7 case when there was no operating business. Trustee further maintained that administrative priority under § 503(b)(1)(A) was not appropriate when the tax penalties were purely punitive. Finally, trustee again asserted that the estate's insolvency gave him reasonable cause not to timely file the tax returns.
The bankruptcy court issued a tentative ruling on July 19, 2012, requesting (1) an explanation from IRS regarding the calculation of the penalties; and (2) a declaration by trustee, providing further information on the filing of the 2006 tax return for the refund. The court continued the hearing on the claim objection until August 24, 2012.
On August 2, 2012, IRS filed a supplemental declaration addressing the calculation of the penalties.
On August 8, 2012, trustee filed his supplemental declaration setting forth in detail his communications with SHCI regarding its preparation of the 2006 tax returns. The declaration set forth the facts noted above regarding trustee's communications with Ms. Hyde, the eventual employment of her firm, and the receipt of the refund. On the same date, trustee submitted the declaration of Johnson. Johnson declared that he and trustee “concurred” that tax compliance work, except for the 2006 prepetition return prepared by SHCI, should wait until it became more certain that the tax refund would be received. Johnson also provided his opinion as to why § 503(b)(1)(A) was not applicable under the circumstances of the case.4
On August 30, 2012, the bankruptcy court issued a tentative ruling 5 allowing IRS's claim as an administrative expense claim under § 503(b)(1)(A), as an actual and necessary cost of preserving the estate, and finding that trustee had no reasonable cause to delay the filing of the returns at issue while waiting for the excise tax refund. The court noted that further argument would not be helpful and took the hearing off calendar.
On September 18, 2012, the bankruptcy court entered the order allowing IRS's claim as an administrative claim under § 503(b)(1)(A).
On September 25, 2012, trustee filed a timely notice of appeal from the order.
The bankruptcy court had jurisdiction over this...
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