Quattrone Accountants, Inc. v. I.R.S.

• Decision Date: 26 October 1989
• Docket Number: No. 89-3386,89-3386
• Citation: 895 F.2d 921
• Parties: -580, 90-1 USTC P 50,103, 22 Collier Bankr.Cas.2d 427, 20 Bankr.Ct.Dec. 168, Bankr. L. Rep. P 73,256 QUATTRONE ACCOUNTANTS, INC. and Philip P. Quattrone, Appellants, v. INTERNAL REVENUE SERVICE. . Submitted Pursuant to Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 921

895 F.2d 921

65 A.F.T.R.2d 90-580, 90-1 USTC P 50,103,

22 Collier Bankr.Cas.2d 427, 20 Bankr.Ct.Dec. 168,

Bankr. L. Rep. P 73,256

QUATTRONE ACCOUNTANTS, INC. and Philip P. Quattrone, Appellants, v. INTERNAL REVENUE SERVICE.

No. 89-3386.

United States Court of Appeals, Third Circuit.

Submitted Pursuant to Third

Circuit Rule 12(6)

October 26, 1989.

Decided Feb. 12, 1990.

Paul R. Yagelski, Pittsburgh, Pa., for appellants.

Gary R. Allen, Deborah Swann, Kenneth L. Greene, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for appellee.

Before HUTCHINSON and NYGAARD, Circuit Judges, and DUBOIS, District Judge. ^*

OPINION OF THE COURT

NYGAARD, Circuit Judge

Debtor, Quattrone Accountants, Inc. (debtor) and Philip P. Quattrone appeal from the order of the district court affirming the bankruptcy court's determination that debtor is a responsible person who willfully failed to pay over federal employment taxes incurred by the United Dairy Farmers Cooperative Association (UDF) under 26 U.S.C. Sec. 6672, and that the bankruptcy court had no jurisdiction to determine Philip Quattrone's tax liability under Section 6672. We will affirm.

I.

Debtor is a corporation that provided professional accounting services. Philip Quattrone is a part owner and principal officer of the debtor. In the late 1960's, UDF, which produced and marketed milk and cheese products, hired debtor to perform all of its accounting and financial activities. These activities included:

1) meeting with the president of UDF, Ernest Hayes, on an almost daily basis to discuss UDF finances;

2) calculating UDF's payroll and distributing paychecks;

3) receiving directly all of UDF's bills;

4) paying all of UDF's standard monthly bills by use of a signature stamp without prior approval;

5) making joint decisions with Hayes to pay debts outside of standard monthly payments;

6) preparing and filing UDF's federal, state and local tax returns;

7) procuring and managing all of UDF's loans.

In early 1980, UDF began its financial slide which culminated in filing for bankruptcy. First, the Department of Agriculture required UDF to modify its schedule of payments to suppliers. This change caused many creditors to be paid late. Soon, Pittsburgh National Bank called an $800,000 loan claiming it to be in default. In response, debtor, although assuring UDF that the loan was not in default, suggested that the alleged default could be cured by having UDF's members lend UDF two-thirds of one month's milk receipts. UDF and its members accepted this suggestion. Then, as a consequence of the members' loan to UDF, the Department of Agriculture brought suit against UDF for reasons not germane to this appeal and obtained a $1.2 million judgment.

About this time, the Internal Revenue Service (IRS) began investigating UDF. UDF owed the IRS $50,000 in withholding taxes. To cure the tax deficit, debtor formed a group of investors willing to lend UDF $250,000. The loan was supposed to cure the current liability as well as cover withholding taxes anticipated for the following four quarters. UDF put up $3.5 million in equipment as security. During the course of the following year UDF constantly questioned debtor whether the quarterly tax payments were being made. Debtor assured UDF that the withholding taxes were being paid. In late 1981, UDF told debtor to produce receipts to verify that the withholding taxes were being paid. The receipts did not correspond to the amounts due. In fact, the withholding taxes due for the quarters ending June 30, 1981 and September 9, 1981 were not paid. Consequently, UDF fired debtor.

In October, 1982, UDF filed a Chapter 11 bankruptcy petition. UDF listed withholding taxes due for the periods ending June 30, 1981 and September 9, 1981 as one of its debts. On January 1, 1984, the IRS assessed a 100% penalty against Philip Quattrone pursuant to 26 U.S.C. Sec. 6672. Around March, 1985 the IRS assessed a 100% penalty against debtor pursuant to Section 6672. In September, 1986, debtor filed a Chapter 11 bankruptcy petition. The IRS then filed a proof of claim asserting its claim against debtor for UDF's unpaid withholding taxes pursuant to Section 6672. Debtor and Philip Quattrone objected; later, both filed a complaint in bankruptcy court requesting the court to determine the Section 6672 tax liability of each.

The bankruptcy court held that debtor was liable under Section 6672 as a responsible person who willfully failed to pay over UDF's withholding taxes. The court concluded that debtor was a responsible person because debtor operated as UDF's internal accounting department with the authority to pay bills, distribute payroll, and prepare and file all UDF tax returns all without prior approval of the UDF Board. The court concluded that debtor willfully failed to pay over the withholding taxes because debtor knew of the tax deficiencies, but failed to exercise its considerable influence on the Board of UDF to get them to pay the taxes, and because debtor obtained money specifically to pay withholding taxes, but used the money instead to pay off other creditors. Lastly, the bankruptcy court held that it had no jurisdiction to determine the tax liability of Philip Quattrone. The court examined 11 U.S.C. Sec. 505(a)(1) and concluded that Section 505 permitted it to determine only the tax liabilities of a debtor or the estate, not of non-debtor thirdparties.

The district court affirmed the order of the bankruptcy court, 100 B.R. 235. The district court agreed with the bankruptcy court that it had no jurisdiction over Philip Quattrone. The district court examined both 11 U.S.C. Sec. 505(a)(1) and 28 U.S.C. Sec. 1334 and concluded,

Congress did not intend to empower bankruptcy courts to consider any tax whatsoever, on whomever imposed, even though such tax liability might have some conceivable effect on the administration of the bankruptcy estate. To do so would, in effect, burden the bankruptcy courts with tax issues that are better suited for the tax courts.

Slip. op. at 8. The district court concluded that the bankruptcy court's findings were not clearly erroneous and that those findings supported the bankruptcy court's conclusion that debtor was liable under Section 6672. Debtor and Philip Quattrone then filed this timely appeal.

II.

We have jurisdiction pursuant to 28 U.S.C. Secs. 158(d) and 1291. Our review of the district court "effectively amounts to review of the bankruptcy court's opinion in the first instance." In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989). The bankruptcy court made two findings of ultimate fact: ¹ whether debtor is a "responsible person" and whether debtor "willfully failed" to pay over taxes. When we review ultimate facts, we must accept the trial court's findings of basic and inferred facts unless they are clearly erroneous, but we exercise plenary review of "the trial court's choice and interpretation of legal precepts and its application of these precepts" to the basic and inferred facts. Id. We have plenary review of the bankruptcy court's decision regarding subject matter jurisdiction. York Bank & Trust v. Federal Savings & Loan Ins. Corp., 851 F.2d 637 (3d Cir.1988); In re Bobroff, 766 F.2d 797 (3d Cir.1985).

III.

Appellant Philip Quattrone argues that the bankruptcy court has jurisdiction over the question of his tax liability under Section 6672 pursuant to 28 U.S.C. Sec. 1334 and 11 U.S.C. Sec. 505.

Quattrone argues that Section 505 does not expressly limit the bankruptcy court to determining only a debtor's tax liability and, thus, it allows the court to decide his tax liability. The IRS argues that Section 505 prohibits the bankruptcy court from deciding Philip Quattrone's tax liability under Section 6672. We disagree with both arguments. We conclude that Section 505 does not address the situation presented before us and, therefore, neither limits nor grants jurisdiction here.

Although we agree with the IRS' assertion that Section 505 refers only to debtor tax liability, we disagree with the IRS that Section 505 limits the bankruptcy court's jurisdiction to determine tax liability to only debtors. But see In re Brandt-Airflex Corp., 843 F.2d 90 (2d Cir.1988) (Section 505(a) does not confer bankruptcy court jurisdiction to determine the 26 U.S.C. Sec. 3505 liability of a non-debtor); United States v. Huckabee, 783 F.2d 1546 (11th Cir.1986) (the jurisdiction of the bankruptcy court extends only to determinations of the tax liabilities of debtors, not non-debtors). The IRS further argues that the general grant of jurisdiction in Section 1334 does not expand Section 505's specific grant of jurisdiction and concludes that, when read together, Section 505 controls. We also disagree with this argument.

When we review how the language and purpose of Section 505 has evolved, we conclude that Section 505 was intended to clarify the bankruptcy court's jurisdiction over tax claims, not limit its jurisdiction only to debtors.

Section 505(a)(1) provides (a)(1) Except as provided in paragraph (2) of this subsection, the court may 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.

11 U.S.C. Sec. 505(a)(1). Section 505(a) was derived from Section 2(a)(2A) of the former Bankruptcy Act, 11 U.S.C. Sec. 11(a)(2A). Section 2(a)(2A) was promulgated in 1966 in response to Arkansas Corp. Comm's v. Thompson, 313 U.S. 132, 61 S.Ct. 888, 85 L.Ed. 1244 (1941), in which the Supreme Court held that Section 64(a)(4) of the 1898 Bankruptcy Act did not empower the bankruptcy courts to redetermine and revise the value of a property for tax purposes when that value had already been determined by a state's quasi-judicial agency. ² In response to the Supreme Court's...