Opinion
No. 92-91503-BHL-7.
May 25, 1994.
Charles J. Cannon, Washington, D.C., for the Internal Revenue Service.
Grant E. Zellefrow, Indianapolis, Indiana, for the debtors.
Opinion
This matter was initiated by the filing of a Complaint to Determine Dischargeability by the Gosciniaks on July 20, 1993, to which the defendants responded on August 17, 1993. The parties have waived a hearing in this matter and have agreed to brief the issue for resolution by the Court. The Debtors/Plaintiffs Pretrial Brief was filed on March 9, 1994. The Pre-Trial Brief of the United States was filed on April 12, 1994.
Findings of Fact
1. Joseph Henry Gosciniak and Carol Dean Gosciniak ["Debtors"] filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code on September 24, 1992, which was subsequently converted to a Chapter 7 proceeding on April 14, 1993.
2. The Internal Revenue Service ["IRS"] filed a proof of claim on October 13, 1992, in the amount of $136,438.75 for unpaid federal income taxes for taxable years 1985 through 1991. The IRS represented that $110,376.05 was a secured claim and the remaining $26,062.70 was an unsecured priority claim pursuant to 11 U.S.C. § 507(a)(7).
3. The IRS filed substitute federal income tax returns pursuant to Internal Revenue Code section 6020(b) for Joseph Gosciniak for the taxable years 1980, 1981, 1982, 1983, 1987, 1988, 1989, 1990, and 1991. The IRS estimated Joseph Gosciniak's unpaid federal income tax liability to be $5,000.99 for each of the years 1987 through 1991. The IRS filed substitute returns for Carol Gosciniak for the taxable years 1983, 1984, 1985, 1986, 1988, and 1991. The Debtors failed to file returns in each of the years substitute returns were filed by the IRS.
Conclusions of Law
Initially, the Court notes that it has jurisdiction over this matter pursuant to 28 U.S.C. § 1334; 28 U.S.C. § 157; 11 U.S.C. § 505; 11 U.S.C. § 523; and the Standing Order of the Southern District of Indiana effective since July 11, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
The debtors seeks a determination of both the tax liability and the dischargeability of the debt. Section 523 provides that a debtor may not be discharged from any debt:
(1) for a tax or a customs duty —
(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(7) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, if required —
(i) was not filed; or
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.
The IRS notes that the debtors did not file tax returns for any of the years a substitute return was filed by the IRS, nor did the debtors sign the substitute returns. The debtors do not refute those facts. Instead, the debtors contend that returns have been treated as having been filed through the IRS assignment of a "Code 150" which designates that the taxes have been "filed or assessed." The essence of the debtors' argument is that the filing of a substitute return allows the assessment and collection process to begin, which constitutes notice sufficient to justify discharge. The debtors cite no authority for their position.
The IRS relies upon the case of In re Bergstrom, 949 F.2d 341 (10th Cir. 1991) wherein that court held that the preparation of substitute returns by the IRS does not "supplant or excuse a taxpayer from fulfilling his original statutory obligation under IRC Section 6012 to file a signed return." Id. at 343 (citing United States v. Lacy, 658 F.2d 396, 397 (5th Cir. 1981) ("[T]he purpose of section 6020(b)(1) is to provide the Internal Revenue Service with a mechanism for assessing the civil liability of a taxpayer who has failed to file a return, not to excuse that taxpayer from criminal liability which results from that failure.")) Indeed, there is a plethora of caselaw to support the IRS's position that substitute returns do not constitute returns within the meaning of Section 523(a)(1)(B)(i). See, In re Carlen, 1991 WL 424977 (Bankr. N.D.Ind); In re Chastang, 116 B.R. 833 (Bankr. M.D.Fla. 1990); In re Rank, 161 B.R. 406 (Bankr. N.D.Ohio 1993); In re Chapin, 148 B.R. 304 (C.D.Ill. 1992); In re Brown, ___ B.R. ___, 1994 WL 170206 (Bankr. S.D.Ala. 1994); In re Pruitt, 107 B.R. 764 (Bankr. D.Wyo. 1989); In re D'Avanza, 132 B.R. 462 (M.D.Fla. 1991); In re Rench, 129 B.R. 649 (Bankr. D.Kan. 1991); In re Hofmann, 76 B.R. 853 (Bankr. S.D.Fla. 1987); In re Haywood, 62 B.R. 482 (Bankr. N.D.Ill. 1986). This Court agrees with the foregoing courts in finding that the substitute returns filed by the IRS on the debtors' behalf does not constitute a return for purposes of 11 U.S.C. § 523(a)(1)(B)(i). In Chapin, supra, the court noted that the legislative history to Section 523 "expressly states a desire to include only those returns actually filed by the debtors in the dischargeability statute." In re Chapin, 148 B.R. 304, 306.
The debtors have presented no evidence of, nor do they contend that they filed, tax returns for any of the taxable years in dispute. Taxes for which the debtor has not filed a required return as of the petition date, or for which a return has been filed beyond its last permitted due date are excepted from discharge. In re Chapin, 148 B.R. at 306 (citing Senate Report No. 989, 95th Cong., 2d Sess. 78 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5864). In accordance with the foregoing caselaw, this Court finds that the debtors' tax liability is nondischargeable.
The IRS further contends that it would be proper to abstain from making determinations regarding the amount and status of the IRS claim in light of the meager amount of assets that appear to be available for distribution, citing In re Byerly, 154 B.R. 718, 720 (Bankr. S.D.Ind. 1992). In that case, this Court noted that a court has discretion to 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. § 505(a)(1).
This Court, in Byerly, abstained from making any determination of tax liability, noting that the grant of such discretion to the bankruptcy court under Section 505(a)(1) serves to "afford a ready determination of the legality or amount of tax claims, which determination, if left to other proceedings, might delay conclusion of the administration of the bankruptcy estate." Id. at 720 (citation omitted). The Court also noted that abstention is appropriate when the impact is minimal and there are no funds available for distribution. See, In re Diez, 45 B.R. 137 (Bankr. S.D.Fla. 1984); In re Millsaps, 133 B.R. 547 (Bankr. M.D.Fla. 1991); In re Kaufman, 115 B.R. 378 (Bankr. S.D.Fla 1990); In re Smith, 122 S.R. 130 (Bankr. M.D.Fla. 1990). See also, In re Hemaya, 153 B.R. 71 (Bankr. D.Kan. 1993).
If this case were still proceeding under Chapter 13 of the Bankruptcy Code, a determination of the tax liability would likely have been necessary for the effective administration of the case. Since this case is now proceeding under Chapter 7, however, and there being an Order in No-Asset Case entered on the docket, the Court finds that determination of the liability would not further the interests of the bankruptcy estate. Therefore, in accordance with the foregoing and relying upon the nature of the evidence before the Court and the circumstances in this case, this Court hereby finds that it would be appropriate to withhold ruling on the amount and status of the IRS claim. The Court does hereby FIND that the debtors' tax liability, without making a determination as to the amount or status of such liability, is nondischargeable.