Wukelic v. U.S.

• Decision Date: 01 November 1976
• Docket Number: No. 75-1811,75-1811
• Citation: 544 F.2d 285
• Parties: 76-2 USTC P 9749 In re Carolyn June WUKELIC, Bankruptcy-Appellee, v. UNITED STATES of America, Respondent-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 285

544 F.2d 285

76-2 USTC P 9749

In re Carolyn June WUKELIC, Bankruptcy-Appellee, v. UNITED STATES of America, Respondent-Appellant.

No. 75-1811.

United States Court of Appeals, Sixth Circuit.

Argued June 10, 1976.

Decided Nov. 1, 1976.

William W. Milligan, U.S. Atty., Columbus, Ohio, Scott P. Crampton, Gilbert E. Andrews, Crombie J. D. Garrett, Karl Schmeidler, Tax Div., Appellate Section, Dept. of Justice, Washington, D.C., for appellant.

Robert J. DeLambo, Edward V. Miller, Worthington, Ohio, for appellee.

Before EDWARDS and ENGEL, Circuit Judges, and GREEN, ^* Senior District Judge.

EDWARDS, Circuit Judge.

The United States appeals from a judgment discharging an income tax liability entered by a Bankruptcy Court. The bankrupt taxpayer during 1968 was married to Dr. Richard Haley, with whom she filed a joint tax return for that year. The return indicated that all but a small part of the family income was attributable to Dr. Haley's work as a physician. It reported substantial income, the accuracy of which is not in dispute, but also claimed certain business expense deductions arising from Dr. Haley's medical work, a claimed loss for the operation of a farm, and depreciation on an airplane owned by him. The 1968 tax return showed a tax due of $31,701.10, but no tax was paid thereon. The Internal Revenue Service filed notices of a tax lien as to the taxes reported to be due on the tax return. It also disputed the deductions on the 1968 return.

Wukelic subsequently signed two consents to extend the statutory period for the IRS to determine the deficiency and assess the 1968 income taxes. Ultimately, on April 6, 1972, the IRS notified the taxpayers of a proposed deficiency of $80,203.74 for additional taxes, part of which represented a 50% civil penalty. The taxpayers then sought to pursue their internal remedies within the IRS. While they were still pursuing those remedies and before IRS had (or could have) assessed the deficiency, Wukelic, who had by then divorced Dr. Haley, filed a petition in bankruptcy, listing tax debts due the United States in the amount of $31,701.10 and $80,203.74 and seeking discharge of this debt. Subsequently, in the administrative review the IRS reduced the penalty (from fraud to negligence) resulting in a reduction of the $80,203.74 claim to $43,806.06.

The Bankruptcy Court determined that no assets could be recovered out of the bankrupt's estate. The IRS filed proof of its claim and the Bankruptcy Judge determined that the deficiencies in taxes (both the $31,701.10 and the $43,806.06) had become due and owing more than three years before bankruptcy and were discharged. The District Court affirmed. The government appeals as to the $43,806.06 arising out of the disallowance of the claimed deductions.

At issue in this case is the proper interpretation of § 17(a) of the Bankruptcy Act, 11 U.S.C. § 35 (1970):

§ 35. Dischargeability of debts Debts not affected by discharge

(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are taxes which become legally due and owing by the bankrupt to the United States or to any State or any subdivision thereof within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes (a) which were not assessed in any case in which the bankrupt failed to make a return required by law, (b) which were assessed within one year preceding bankruptcy in any case in which the bankrupt failed to make a return required by law, (c) which were not reported § 17(a)(1)(c) of the Bankruptcy Act, 11 U.S.C. § 35(a)(1)(c) (1970). (Emphasis added.)

on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt . . . .

The government argues that its claim against the bankrupt was within the exception stated in (1)(c) above and was not discharged. Bankrupt Wukelic contends that the additional taxes claimed became due and owing more than three years prior to the bankruptcy and therefore were dischargeable debts under § 17(a). She also claims she "reported" the taxes now at issue within the meaning of § 17(a)(1)(c).

The application of proviso (1)(c) in § 17(a) of the Bankruptcy Act to similar facts has only been considered by two circuits, both of which have sustained the government's position; In re Indian Lake Estates, Inc., 428 F.2d 319 (5th Cir.), cert. denied sub nom., Stewart, Trustee in Bankruptcy v. United States, 400 U.S. 964, 91 S.Ct. 366, 27 L.Ed.2d 383 (1970); and In re Michaud, 458 F.2d 953 (3d Cir.), cert. denied sub nom., Michaud v. United States, 409 U.S. 876, 93 S.Ct. 125, 34 L.Ed.2d 129 (1972). See also 1A Collier, Bankruptcy (14th ed., 1976), Sec. 17.14(4) at 1620-22; In re Cohan, 68-1 U.S.T.C. P 9250 (Ref.N.D.Ga.1967); In re Laytan Jewelers, Inc., 332 F.Supp. 1153 (S.D.N.Y.1971); In re Ferwerda, 75-2 U.S.T.C. P 9568 (E.D.Wis.1975).

The District Judge in finding for the taxpayer in this case discussed and rejected the reasoning of both of these leading cases:

Since it is conceded that the taxes in question were due and owing more than three years at the time the petition in bankruptcy was filed and since it is also undisputed that no assessment was made prior to bankruptcy because administrative remedies were being pursued by Dr. Haley, the issue may be narrowed to a determination of the words "taxes . . . not reported on a return" in the proviso. Briefly stated, the bankrupt-appellee contends, and it was so held by Judge Dilenschneider, that she had "reported" her taxes when she completely stated all her gross income and the basis for the deductions claimed. The United States argues, however, that because the actual tax liability was not properly stated, the bankrupt did not, in fact, "report" her taxes within the meaning of the § 17a(1)(c) proviso.

Judicial interpretation of these words has been limited and divided. Equally scarce is any significant legislative history that would be of help in deciding the interpretation to be given these words. As the United States Court of Appeals for the Fifth Circuit commented:

From all we have been able to discover, the specific proviso which controls the case at bar just never received direct public congressional attention or explication.

In re Indian Lake Estates, Inc., 428 F.2d 319, 323 (5th Cir. 1970), cert. denied 400 U.S. 964, 91 S.Ct. 366, 27 L.Ed.2d 383 (1970). In that case the Fifth Circuit proceeded to conclude that the taxes were not dischargeable. The Court stated:

It is obvious the assessment was for the difference between the amount shown by the taxpayer on its return and the amount calculated as correct by the Director. It is equally transparent that it was therefore an assessment for an amount of taxes not reported on a return made by a bankrupt.

In re Indian Lake Estates, Inc., supra, at 324. Contrary to the case at bar In re Indian Lake Estates, Inc. dealt with a corporate debtor.

The United States Court of Appeals for the Third Circuit came to a similar conclusion regarding non-dischargeability of an individual debtor's taxes by applying the common rule of statutory construction that words are presumed to be used in "their ordinary and usual sense, and with the meaning commonly attributable to them." In re Michaud, 458 F.2d 953,

957 (3d Cir.) cert. denied 409 U.S. 876, 93 S.Ct. 125, 34 L.Ed.2d 129 (1972) (citations omitted). Finding that a dictionary defined "report" as: "to give a formal or official account or statement of; state formally," the Third Circuit concluded that as used by Congress "report" connoted a formal presentation of the tax liability rather than an informal presentation of information which gave rise to the liability. With all due respect to the Third Circuit, I feel compelled to agree with the Bankruptcy Judge herein that neither the rationale nor the result of Michaud is persuasive when applied to the particular facts of this no-asset case. The rationale of Michaud ignores the fundamental purpose behind the Bankruptcy Act: the effective rehabilitation of the individual bankrupt. Because of this purpose, its provisions are remedial in nature and as such should be construed liberally; conversely, exceptions to its remedial provisions should be construed narrowly. See In re Michaud, 317 F.Supp. 1002 (W.D.Pa.1970) reversed on other grounds 458 F.2d 953 (3d Cir. 1972), and cases cited therein. The government's position would not only emasculate the remedial nature of the Bankruptcy Act but would make it contingent upon the intricacies of the tax law as to whether certain claimed deductions were allowed or disallowed by the IRS.

THE ORDINARY MEANING

With respect for the point of view and reasoning of the District Judge, we nonetheless find ourselves in agreement with the results in the Indian Lake and Michaud cases. We recognize, of course, that in 1966 Congress did seek to ameliorate the position of taxpayers vis-a-vis the government whose tax claims up to then were completely exempt from discharge in a bankruptcy proceeding. Our primary reasons for reversing are that the ordinary meaning of the language Congress employed in § 17(a)(1)(c) seems to us to prohibit releasing the bankrupt in this case from her tax liability and we find no legislative history to support a contrary conclusion.

In applicable part the proviso in § 17(a) says:

Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes . . .

(c) which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt . . .

§ 17(a)(1)(c) of the Bankruptcy Act, 11 U.S.C. § 35(a)(1)(c) (1970).

Both parties...