Swanson v. Comm'r of Internal Revenue

• Citation: 121 T.C. 111,121 T.C. No. 7
• Decision Date: 28 August 2003
• Docket Number: No. 6440–01L.,6440–01L.
• Parties: Neal SWANSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

121 T.C. 111

121 T.C. No. 7

Neal SWANSON, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 6440–01L.

United States Tax Court.

Aug. 28, 2003.

Taxpayer petitioned for review of IRS' determination to proceed with collection on his nonfiled tax liability established by substitute for returns (SFR) prior to his bankruptcy proceedings. The Tax Court, Goeke, J., held that: (1) Tax Court had jurisdiction to determine whether unpaid taxes were discharged in bankruptcy; (2) as a matter of first impression, SFR did not constitute return, within meaning of dischargeable debts in bankruptcy; and (3) IRS was not required to participate in bankruptcy proceeding for tax liabilities that were excepted from discharge.

Decision for IRS.

Neal Swanson, pro se.

Ann S. O'Blenes, for respondent.

OPINION

GOEKE, J.

P did not file Federal income tax returns for the years 1993, 1994, and 1995. R subsequently prepared substitutes for return (SFRs) for P and issued a notice of deficiency to P based on the SFRs covering these years. P filed a petition to this Court, but P's case was later dismissed, and a decision was entered for R because P failed to state a claim upon which relief could be granted. R assessed the tax liabilities for the years 1993, 1994, and 1995. P subsequently filed a petition under ch. 7 of the U.S. Bankruptcy Code. The bankruptcy court entered an order generally releasing P from all dischargeable debts. The bankruptcy court did not expressly determine whether P's unpaid tax liabilities were discharged. R issued a notice of intent to levy, and P requested a hearing before an IRS Appeals officer (A) pursuant to sec. 6330, I.R.C. At the hearing, P claimed that his unpaid liabilities were discharged in bankruptcy. A issued a notice of determination sustaining the levy, and P timely petitioned the Court for review.

Held: We have jurisdiction in this levy proceeding to determine whether P's unpaid liabilities were discharged in bankruptcy. Washington v. Commissioner, 120 T.C. 114, 2003 WL 840965 (2003), followed.

Held, further: P's unpaid liabilities were not discharged in the ch. 7 bankruptcy proceeding. Under 11 U.S.C. sec. 523(a)(1)(B) (2000), if a required return is not filed, then the tax debt is generally excepted from discharge. P did not file Federal income tax returns, and the SFRs prepared by R in this case do not constitute “returns” within the meaning of sec. 523(a)(1)(B) of the Bankruptcy Code. Additionally, R is not enjoined from collecting the unpaid liabilities because the liabilities were excepted from discharge and the bankruptcy court did not make an express determination that the liabilities were discharged. Finally, a default judgment has not occurred because the debt at issue is not of a kind that required R to file a complaint in the bankruptcy court. Therefore, the determination to proceed with collection by levy is sustained.

OPINION

The petition in this case was filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the notice of determination). The substantive issue presented is whether the unpaid liabilities that are the subject of the collection action were discharged in petitioner's chapter 7 bankruptcy proceeding. However, before we can reach this issue, we must first address whether we have jurisdiction to decide the issue and whether petitioner is precluded from arguing that his unpaid liabilities were discharged in bankruptcy.

Background

The parties submitted this case fully stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Lake Dallas, Texas, at the time his petition was filed.

Petitioner did not file Forms 1040, U.S. Individual Income Tax Return, for the taxable years 1993, 1994, and 1995. Copies of MFTRA–X transcripts of petitioner's accounts for the tax years at issue reflect that respondent filed “substitutes for return” ¹ (SFRs) for these years on February 24, 1997. On May 28, 1997, respondent issued a notice of deficiency to petitioner determining deficiencies in and additions to his Federal income taxes for 1993, 1994, and 1995. Petitioner filed a petition and an amended petition with this Court seeking a redetermination. On February 3, 1998, the Court dismissed the case for failure to state a claim upon which relief could be granted and decided that petitioner was liable for the following deficiencies and additions to tax:

+--------------------------------------------+
                ¦    ¦          ¦Additions to Tax            ¦
                +----+----------+----------------------------¦
                ¦Year¦Deficiency¦Sec. 6651(a)(1)¦Sec. 6654(a)¦
                +----+----------+---------------+------------¦
                ¦    ¦          ¦               ¦            ¦
                +----+----------+---------------+------------¦
                ¦1993¦$8,307    ¦$896           ¦---         ¦
                +----+----------+---------------+------------¦
                ¦1994¦8,460     ¦2,115          ¦$436        ¦
                +----+----------+---------------+------------¦
                ¦1995¦10,657    ¦2,524          ¦548         ¦
                +--------------------------------------------+
                

In June 1998, respondent assessed the deficiencies and additions to tax decided in the Court's order of dismissal and decision. Copies of MFTRA–X transcripts reflect that interest on the taxes was also assessed in June 1998. ²

On August 5, 1998, petitioner filed a bankruptcy petition under chapter 7 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. On Schedule E, Supplemental Income and Loss, petitioner reported the Internal Revenue Service (IRS) as the holder of unsecured priority claims for the years 1993, 1994, and 1995. On December 7, 1998, the bankruptcy court entered an order of discharge (discharge order) in petitioner's bankruptcy case. The discharge order states:

DISCHARGE OF DEBTOR

It appearing that a petition commencing a case under title 11, United States code, was filed by or against the person named above on 08/05/98, and that an order for relief was entered under chapter 7, and that no complaint objecting to the discharge of the debtor was filed within the time fixed by the court (or that a complaint objecting to discharge of the debtor was filed and, after due notice and hearing, was not sustained);

IT IS ORDERED THAT:

1. The above-name debtor is released from all dischargeable debts.

2. Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to any of the following:

(a) debts dischargeable under 11 U.S.C. sec. 523;

(b) unless heretofore or hereafter determined by order of this court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4), (6) and (15) of 11 U.S.C. sec. 523(a);

(c) debts determined by this court to be discharged.

3. All creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by paragraph 2 above are enjoined from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor.

Copies of MFTRA–X transcripts reflect that on January 23, 2000, respondent sent to petitioner a notice of intent to levy regarding petitioner's unpaid income tax liabilities for 1993, 1994, and 1995. The copies indicate that on February 10, 2000, petitioner requested a section 6330 hearing. On May 3, 2001, the Appeals Office issued to petitioner a notice of determination regarding petitioner's unpaid liabilities for 1993, 1994, and 1995. The notice states:

Summary of Determination:

It is determined that a levy is appropriate in your case. Appeals has considered the information presented at the Collection Due Process hearing. It is determined that the collection of your unpaid accounts by levy enforcement balances the government's need to efficiently collect your 1993, 1994, and 1995 tax liabilities with your concerns of intrusiveness.

* * *

Legal and Procedural Requirements:

It has been concluded that all required laws and procedures have been followed. The only legal requirements before taking general enforcement action are the notice and demand and the notice of intent to levy with a notice of right to a Collection Due Process Hearing.

Internal computer records indicate that notice and demand of payment have been made within the required time periods for the 1993, 1994 and 1995 years at issue.

The notice of intent to levy, Letter 1058, was properly mailed and included with this notice were all required enclosures. These enclosures include the Form 12153, which you used to make your Collection Due Process hearing request.

Issues Raised by the Taxpayer:

In your hearing request you challenged the assessment of the tax liabilities. You previously challenged the assessment in the United States Tax Court. The Court issued its “Order of Dismissal and Decision” dated February 3, 1998. The Court's decision is final. Appeals will not consider challenges to the underlying liability because you previously challenged the liability and the Tax Court has issued its decision that the taxes are due and owing.

The administrative file shows that you filed bankruptcy. You stated that the unpaid taxes were discharged in your bankruptcy. Section 523(a)(1)(B)(i) of the Bankruptcy Code states that a tax liability is not discharged if the return was not filed. SFR assessed income tax returns are not considered voluntarily filed and are not dischargeable per Section 523(a)(1)(B)(i).

Internal Revenue Service records disclose that you have not filed Form 1040 U.S. Individual Income Tax returns for the years 1996, 1997, 1998, 1999. Appeals will not consider an alternative collection solution because you are not in compliance by voluntarily filing these income tax returns.

You did not agree with Appeals and the Internal Revenue Service concerning the interpretation of the income tax and...