Ryan, In re

• Decision Date: 26 September 1995
• Docket Number: No. 94-6724,94-6724
• Parties: -6629, 64 USLW 2204, 95-2 USTC P 50,519, Bankr. L. Rep. P 76,646 In re Alvin R. RYAN, Sandra L. Ryan, Debtors. UNITED STATES of America, Plaintiff-Appellant, v. Alvin R. RYAN, Sandra L. Ryan, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1516

64 F.3d 1516

76 A.F.T.R.2d 95-6629, 64 USLW 2204,

95-2 USTC P 50,519,

Bankr. L. Rep. P 76,646

In re Alvin R. RYAN, Sandra L. Ryan, Debtors.

UNITED STATES of America, Plaintiff-Appellant, v. Alvin R. RYAN, Sandra L. Ryan, Defendants-Appellees.

No. 94-6724.

United States Court of Appeals, Eleventh Circuit.

Sept. 26, 1995.

Gary R. Allen, Patricia M. Bowman, Loretta C. Argrett, and Gary D. Gray, Tax Div., Dept. of Justice, Washington, DC, for appellant.

Irvin Grodsky, Grodsky & Heard, P.C., Mobile, AL, for appellees.

Appeal from the United States District Court for the Southern District of Alabama.

Before TJOFLAT, Chief Judge, CARNES, Circuit Judge, and JOHNSON, Senior Circuit Judge.

CARNES, Circuit Judge:

Alvin R. and Sandra L. Ryan overpaid their income tax one year and requested the Internal Revenue Service to apply that overpayment to their unpaid liability for the previous tax year. Instead, the IRS applied that overpayment to the Ryans' tax liability for a different year. After filing for bankruptcy, the Ryans brought an adversary proceeding against the United States in the bankruptcy court, contending that the IRS should have followed their directions about application of the tax overpayment. The bankruptcy court agreed and issued a turnover order under 11 U.S.C. Sec. 542, requiring the IRS either to reallocate the overpayment according to the Ryans' original directions or to pay the amount to the bankruptcy trustee. The district court affirmed.

In this appeal, the government contends that the bankruptcy court lacked jurisdiction to issue the turnover order, and alternatively that the court erred in determining that the IRS was required to comply with the Ryans' instructions about how to apply their overpayment. We disagree with the government's first contention, but agree with the second.

I. BACKGROUND

The facts in this case were stipulated by the parties in the bankruptcy court and are not in dispute. The Ryans reported on their federal income tax return for the 1990 tax year that they had overpaid their federal income tax liability that year by $1,319.00. The overpayment resulted from the Ryans asking their employers to withhold more than eventually became due as income tax. In a letter attached to their 1990 return, the Ryans requested that the IRS apply that overpayment to their unpaid income tax liability for the 1989 tax year. The Ryans owed approximately $1,000.00 of their 1989 income tax, and in addition, still owed income tax for the 1986, 1987, and 1988 tax years. The IRS refused the Ryans' request and informed them that it had applied the overpayment to their 1986 tax liability instead of their 1989 tax liability.

Thirteen months later, in December 1992, the Ryans filed for bankruptcy under Chapter 7 of the Bankruptcy Code. The IRS did not file a claim because the Ryans had no assets available for distribution. The Ryans received a discharge in May of 1993.

The Ryans subsequently brought an adversary proceeding against the government in the bankruptcy court. In their complaint, they asked the court to declare that their 1986, 1987, and 1988 income tax liabilities were discharged under 11 U.S.C. Sec. 523, and to determine the amount of their 1989 tax liability, which they conceded was nondischargeable. ¹ With the ultimate goal of applying their overpayment to the tax liability that was not discharged, the Ryans argued that because their 1990 overpayment was a voluntary payment of taxes, the IRS was required to follow their instructions about how to allocate that payment. Since the overpayment exceeded the amount they owed for 1989, they contended that they had no income tax liability for 1989. The government responded that the Ryans did not have the power to control the application of their 1990 overpayment, because 26 U.S.C. Sec. 6402(a) gives the IRS full discretion to credit a tax overpayment against any tax liability of the person who made the overpayment.

The bankruptcy court agreed with the Ryans. It found that the Ryans' tax liabilities for 1986, 1987, and 1988 were discharged, a determination that is not challenged here. As for the 1989 tax year, the court found that the IRS should have honored the Ryans' request to apply the 1990 tax year overpayment to their 1989 tax liability. The bankruptcy court explained that when a tax payment is voluntary, the taxpayer may direct how the payment should be applied, and that the payment in this case was voluntary. According to the court, by ignoring the Ryans' request and crediting the overpayment against the 1986 tax liability, the IRS had effectively "seized" the overpayment. The court found that property seized by the IRS to satisfy a tax lien is subject to a turnover order under 11 U.S.C. Sec. 542. Consequently, the court ordered the IRS either to apply the overpayment to the nondischarged 1989 tax liability, or to refund the overpayment to the bankruptcy trustee.

The government appealed to the district court, which affirmed without opinion. This appeal followed.

II. DISCUSSION OF JURISDICTION

Before proceeding to the merits of this case, we first address a jurisdictional challenge raised by the government. The government argues that the statutory provision relied on by the bankruptcy court, 11 U.S.C. Sec. 542, did not authorize the bankruptcy court's order in this case. Instead, the government contends, the appropriate procedure in this case was for the Ryans to file for a tax refund. Arguing that the Ryans failed to demonstrate that they had complied with the requisite procedures for obtaining an income tax refund, the government asserts that the court had no jurisdiction to issue an order reallocating the overpayment.

Section 542 of the Bankruptcy Code, with certain exceptions, requires an entity to turn over to the bankruptcy trustee any property of the debtor and to pay the trustee any debts owed to the debtor. See generally 4 Collier on Bankruptcy p 542.01 (Lawrence P. King, ed., 15th ed. 1995). The statute provides, in relevant part:

Turnover of property to the estate

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

(b) Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor.

11 U.S.C.A. Sec. 542(a), (b) (West 1993).

According to the government, neither subsection (a) nor subsection (b) of Sec. 542 authorized the bankruptcy court to order the IRS to turnover the Ryans' overpayment. The government contends that subsection (a), the provision specifically relied upon by the bankruptcy court, applies only to property in which the debtor had an interest as of the commencement of the bankruptcy case. Section 542(a) applies to property "that the trustee may use, sell, or lease under section 363 ...." 11 U.S.C.A. Sec. 542(a) (West 1993). The trustee may use, sell, or lease "property of the estate," 11 U.S.C.A. Sec. 363(b)(1) (West Supp.1995), which is defined in part as "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C.A. Sec. 541(a)(1) (West 1993). Because the IRS had credited the overpayment to the 1986 liability thirteen months prior to the commencement of the bankruptcy case, the government argues that the debtors no longer had any legal or equitable interest in the overpayment. In other words, the overpayment no longer existed once the IRS applied it to the 1986 tax liability.

In addition, the government argues that Sec. 542(b), which was not specifically cited by the bankruptcy court, also is inapplicable. That provision requires an entity to pay any matured debt owed to the debtor, "except to the extent that such debt may be offset ...." 11 U.S.C.A. Sec. 542(b) (West 1993). The government argues that even if the overpayment existed at the time of the bankruptcy case, the government would not be required to refund it to the trustee because the IRS was authorized under 26 U.S.C. Sec. 6402 to offset it against the 1986 tax liability.

The bankruptcy court relied upon United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), which held that Sec. 542(a) allowed a bankruptcy court to order the turnover of personal property the IRS had seized prior to bankruptcy in order to satisfy a tax lien. 462 U.S. at 208-09, 103 S.Ct. at 2315-16. That decision is inapplicable here, the government contends, because the debtor in Whiting Pools retained an equitable interest in the seized property until it was sold, even though he had lost possession of the property. In contrast, the Ryans no longer had any property interest in the 1990 overpayment after the IRS extinguished the overpayment by applying it to another year's tax liability.

Moreover, the government argues, money paid into the United States Treasury is not identifiable property subject to a turnover order. In United States v. Nordic Village, Inc., 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992), the Supreme Court held that a bankruptcy court's in rem jurisdiction did not allow a bankruptcy trustee to recover an unauthorized postpetition transfer to the IRS when the Bankruptcy Code had not otherwise waived the government's sovereign immunity from a trustee's claim for monetary relief. Id. at 38-39, 112 S.Ct. at 1017. ² In reaching this conclusion, the Court...