Opinion
Case No. 97-4088-CE, Adv. No. 97-97216
April 15, 2002
ORDER-REMAND DETERMINATION OF TAX LIABILITY
This matter is before the court upon remand from the United States District Court for the Southern District of Iowa. Plaintiff Dennis Harker (hereinafter Debtor) commenced the present adversary proceeding to determine the dischargeability of a debt pursuant to 11 U.S.C. § 523 asking the court to determine that tax claims of the United States of America/Internal Revenue Service (hereinafter USA/IRS) were not entitled to priority status under 11 U.S.C. § 507(a)(7) and that the tax lien be released. On April 27, 1998, the bankruptcy court entered judgment in favor of Debtor. The court determined that his 1985 and 1986 federal income tax debts were not excepted from discharge under 11 U.S.C. § 523(a)(1)(C) and that Debtor was not liable for any federal income tax for 1987. The court further determined that fraud penalties and interest on the penalties were dischargeable.
On appeal, the United States District Court for the Southern District of Iowa affirmed the bankruptcy court's decision as to the penalties and interest on the penalties. The district court reversed the decision as to the 1985 and 1986 federal income taxes holding that the taxes for those years were not excepted from discharge. The district court remanded the case to the bankruptcy court for determination of the amounts of tax due for 1985 and 1986 and for any interest on tax for 1985 through 1987 inclusive.
On June 12, 2000, a hearing was held on the above matter. Attorney Jerrold Wanek represented Debtor; Assistant United States Attorney William C. Purdy represented USA/IRS. At the conclusion of the hearing, the court took the matter under advisement and invited the parties to submit briefs limited to the record before the court.
USA/IRS subsequently filed a Motion to Supplement Record on Remand and a Declaration of Revenue Officer Howard Hoy. USA/IRS asked the court to consider the declaration in conjunction with the June 12, 2000, hearing and incorporated the declaration into its post-hearing brief.
On motion by Debtor, the court struck both the Declaration and the post-hearing brief. After a hearing on the Motion to Supplement the Record, the court entered an order denying USA/IRS's request to supplement the record with the declaration, and reopening the record for the limited purpose of taking further testimony by Officer Hoy.
On April 30, 2001, hearing was held to accept the additional testimony of Officer Hoy. Attorney Jerrold Wanek represented Debtor, and attorney Robert D. Metcalfe represented USA/IRS. At the conclusion of the hearing, the court closed the record and requested argument by written brief, limited to the evidence in the record. The briefs have been received, and the court now considers the matter fully submitted.
The court has jurisdiction of this matter pursuant to 28 U.S.C. § 157(b)(1) and § 1334 and order of the United States District Court for the Southern District of Iowa. This is a core proceeding. 28 U.S.C. § 157(b)(2)(1). The court, upon review of the pleadings, memorandums, and arguments of counsel, now enters its findings and conclusions pursuant to F.R.Bankr.P. 7052.
FINDINGS OF FACT
1. In 1989, criminal charges of tax evasion were brought against Debtor and his then wife Mary Harker. As a result of the charges, Debtor pled guilty to one count of tax evasion for the year of 1987, and Mary Harker pled guilty to a charge of tax evasion for 1985.
2. Debtor and Mary Harker paid more than $245,000.00 for 1987 taxes and interest. On October 11, 1991, the United States Attorney filed a satisfaction of judgment with the clerk of the United States District Court for the Southern District of Iowa indicating that full restitution was received.
3. The Internal Revenue Service determined that the Harkers were liable for tax deficiencies and additions for fraud and substantial underpayment for the tax years 1985, 1986, and 1987. After receiving notice of the claimed deficiencies, the Harkers filed a petition with the Tax Court.
4. The Tax Court issued its opinion sustaining the determination of the IRS, and on May 1, 1995, the Tax Court entered its decision setting forth the amount of deficiencies and additions to tax that were to be assessed against the Harkers.
5. The Tax Court found deficiencies of income tax due in the amounts of $17,080.00 for the year 1985 and $135,622.00 for the year 1986. It found no deficiencies in income tax for the year 1987.
6. The Tax Court found additions to tax due for the year 1985 as follows: Under I.R.C. § 6653(b)(1), in the amount of $10,035.00; under I.R.C, § 6653(b)(2), in an amount to 50% of the statutory interest due on $20,070.00 from April 15, 1986, to the earlier of the date of the assessment of the tax or the date of the payment of the tax; and under I.R.C. § 6661, in the amount of 5,017.00.
7. The Tax Court found additions to tax due for the year 1986 as follows:
Under I.R.C. § 6653(b)(1)(A), in the amount of $127,709.00; under I.R.C. § 6653(b)(1)(B), in the amount equal to 50% of the statutory interest due on $170,279.00 from April 15, 1987, to the earlier of the date of assessment of the tax or, the date of the payment of the tax; and under I.R.C. § 6661 in the amount of $42,570.00.
8. The Tax Court found additions to tax due for the year 1987 as follows:
Under I.R.C. § 6653(b)(1)(A), in the amount of $196,184.00; under I.R.C. § 6653(b)(1)(B), in the amount equal to 50% of the statutory interest due on $261,578.60 from April 15, 1988, to the earlier of the date of assessment of the tax or, the date of the payment of the tax; and under I.R.C. § 6661 in the amount of $65,395.00.
9. Debtor filed a petition for relief under chapter 13 of title 11, the Bankruptcy Code on May 16, 1995.
10. On August 22, 1995, the IRS assessed taxes and penalties in accordance with the Tax Court's decision.
11. On June 14, 1996, this court entered an order granting in part, and denying in part the chapter 13 trustee's Motion To Dismiss which had been joined by the IRS. The court's decision mooted objections to plan confirmation raised by the trustee, the IRS, and Earlham Savings Bank. The court gave Debtor 20 days from the date of the filing of the order to file a Motion to Convert the case, or the case would be dismissed without further notice.
12. Debtor appealed the June 14, 1996 decision.
13. The IRS recorded a federal tax lien in the amount of $1,073,298.20 with the Polk County recorder on July 12, 1996.
14. On July 30, 1996, Debtor flied a motion requesting a clarification and extension of the automatic stay during the appeal process. Debtor requested that the court find the filing of the tax liens in violation of the automatic stay and therefore void. The court subsequently denied Debtor's motion finding that the filing of the order dismissing the case was a ministerial act. The order of June 14, 1996, was self-executing and was not final until 20 days elapsed from the filing of the order. The automatic stay terminated at the end of the 20-day period. The bankruptcy court held that the IRS did not violate the automatic stay by filing the tax lien and notice to levy. The bankruptcy court denied Debtor's request for stay pending appeal.
15. On August 23, 1996, the bankruptcy court entered an order dismissing Debtor's chapter 13 case pursuant to the June 14, 1996 order.
16. On August 26, 1996, the United States District Court for the Southern District of Iowa partially granted Debtor's motion for a stay pending appeal. The district court's order provided that the government "shall not take final action affecting title on property prior to this court's final ruling on the merits of this bankruptcy appeal."
17. Debtor's appeal was ultimately unsuccessful.
18. On September 8, 1997, Debtor filed a petition for relief under chapter 7 of title 11.
19. On September 23, 1997, Debtor commenced the present adversary proceeding to determine the dischargeability of tax liability claimed by the IRS.
20. On November 4, 1997, the chapter 7 trustee filed a report of abandonment and a report of no assets.
21. On January 16, 1998, USA/IRS filed a Motion for Relief from Stay for Administrative Sale. USA/IRS asked the court to lift the automatic stay to permit the sale of seized assets. USA/IRS stated that it had seized 145.84 acres of vacant land located in Boone County, Iowa and a two-story frame dwelling known as 2607 Woodland Ave., West Des Moines, Iowa. USA/IRS subsequently amended its motion to indicate that both properties were seized on July 9, 1997.
22. After a hearing, this court entered an order terminating the automatic stay to permit USA/IRS to proceed in rem against the real estate located in Boone County and the dwelling located in Polk County.
23. USA/IRS offered the Boone County real estate for sale at public auction on August 19, 1998. The property was described as "136 acre farm."
24. Both properties were sold in August of 1998. The Boone County real estate sale yielded net proceeds of $225,021.16, and the Polk County real estate sale yielded net proceeds of $58,557.
25. Debtor did not attempt to have the sale of the farm set aside based on the discrepancy in acreage amounts.
26. On October 27, 1998, Debtor received a chapter 7 discharge.
DISCUSSION
In its order of April 21, 1998, this court determined that tax penalties and interest thereon assessed or accruing to Debtor for the years 1985 through 1987 were dischargeable. The court further ordered that any tax and interest on the taxes for the year 1987 were nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). In its order of April 27, 1998, the court determined that Debtor owed no taxes for 1987. The United States District Court for the Southern District of Iowa affirmed these determinations on appeal. The district court reversed on the dischargeability of Debtor's liability for taxes for the years 1985 and 1986, and determined that Debtor's tax liability for those years was nondisehargeable, as was his liability for pre- and post-petition interest on taxes for the years 1985 through 1987. The district court remanded the case for a determination of Debtor's nondisehargeable tax liability.
Debtor raises several arguments in his attempt to persuade the court that he has no tax liability. USA/IRS responds at length to Debtor's various arguments. However, the crux of the matter is Debtor's contention that USA/IRS has not properly credited his tax accounts for payments made. Debtor contends that USA/IRS has not carried its burden in proving that any amount of tax is owed.
Debtor properly states the settled rules that exceptions to discharge are to be construed narrowly, and the burden of proving a statutory exception lies with the party opposing the discharge. Werner v. Hofmann, 5 F.3d 1170, 1172 (8th Cir. 1993); Belfry v. Cardozo (In re Belfry), 862 F.2d 661, 662 (8th Cir. 1988). USA/IRS likewise is correct that tax assessments are generally presumed to be correct, and the taxpayer must come forward with evidence to persuade the court that the assessment is erroneous. North Dakota State Univ. v. United States, 255 F.3d 599, 603 (8th Cir. 2001); see also 26 C.F.R. § 601.104(c)(1) (assessments are considered prima facie correct for all purposes).
"Upon trial of an assessment . . . the federal courts have regularly held that upon introduction into evidence of the government's Certificate of Assessment the government has made its prima facie case, and a rebuttable presumption of liability has arisen." United States v. De Beradinis, 395 F. Supp. 944, 950 (D. Conn. 1975). Where tax is at issue the Second Circuit has summarized the burdens as follows:
Thus, overall, the Government has the burden of coming forward and persuading the trier that the taxpayer has or had a tax liability. If not challenged the assessment establishes that liability. A taxpayer's challenge must persuade the trier by a preponderance of the evidence that the assessment is erroneous. The Government then must still persuade the trier that on the basis of all the evidence there was a tax liability—perhaps in a different amount than initially asserted— for which the taxpayer was responsible.
Id. quoting United States v. Lease, 346 F.2d 696, 701 (2nd Cir. 1965).
In the present case, USA/IRS presented as evidence certified transcripts for Debtor's tax accounts for the years 1985 through 1987. USA/IRS also presented the testimony of Revenue Officer Howard Hoy. The Tax Court decision was also in evidence.
In its May 1, 1995, decision, the Tax Court found Debtor and his then wife Mary liable for deficiencies of income tax due in the amounts of $17,080.00 for the year 1985 and $135,622.00 for the year 1986. It found no deficiencies in income tax for the year 1987. The Tax Court further found that various penalties should be added to the tax liability.
The transcripts show amounts added to Debtors accounts on August 22, 1995. The court finds that with the exception of $26,375.65 added to the 1987 transcript and identified as "additional tax assessment" these entries were entered in response to the Tax Court decision.
The court determines that sufficient evidence exists to establish a prima facie case that Debtor has a tax liability. Accordingly, the burden shifts to Debtor to persuade the court that the assessment is erroneous.
At the hearing, Debtor pointed out that although the transcripts purport to be an accurate account of Debtor's liability as of May 15, 2000, they contain no abatement of penalties and interest on penalties discharged in Debtor's bankruptcy. Officer Hoy conceded that at best, the transcripts were "historical documents." The court has previously ruled that any penalties and interest thereon is dischargeable. The district court affirmed this part of the ruling. Debtor received a discharge on October 27, 1998. Therefore, any penalties and interest thereon attributable to the tax deficiencies for the years 1985 through 1987 remaining on Debtor's account on the discharge date should be abated.
Additionally, Debtor points out that the Tax Court determined that no tax deficiency existed for 1987. However, the tax transcript for that year shows an entry on August 22, 1995, for a tax deficiency in the amount of $26,375.65. Officer Hoy conceded that the $26,375.65 tax assessment was entered in error. The government, as of the filing date of this decision, has now abated the tax and interest assessed for the year ending December 31, 1987, so this correction has been made. ( See Debtor's Motion to Reopen Record filed on January 30, 2002 (DN 90)).
Debtor raises issues surrounding the sale of the Boone county real estate by the government. First, Debtor argues that the property was sold per acre, and the government advertised and sold it as 136 acres when in reality was over 145 acres in size. Debtor maintains that the government "cheated" him of almost $30,000.00. He argues that the court should order the IRS to credit the amount of the forgone proceeds against his nondisehargeable tax liability.
Assuming without deciding that Debtor is correct, the court will not grant the requested relief. The court granted relief from the automatic stay because the property was fully encumbered by the tax lien, and Debtor could not provide adequate protection to USA/IRS. The court lifted the stay and allowed USA/IRS to proceed in rem with the tax sale. The chapter 7 trustee did not object to either the relief from stay or the sale. The sale was not conducted under this court's supervision and has no effect on the property of the estate. Therefore, the court finds that this is not the proper forum to raise this issue.
Second, Debtor argues that USA/IRS improperly applied the proceeds from the tax sales of the Boone county real estate and the Polk County dwelling. Debtor maintains that it is the general policy of the IRS to apply payments to the oldest tax first and then to subsequent taxes. Officer Hoy verified that is the usual policy.
Debtor asks the court to direct the government to apply the proceeds from the sale of the Boone County real estate and the Polk County dwelling to tax and interest on tax first, then to penalty, an application consistent with the general policy of the IRS. For the following reasons, the court will not grant the request.
It is well settled, that outside of bankruptcy, a taxpayer may direct the application of a voluntary payment made to the IRS to whatever liability he chooses. Jehan-Das, Inc. v. United States (In re Jehan-Das, Inc.), 925 F.2d 237, 238 (8th Cir. 1991); United States v. Pepperman, 976 F.2d 123, 127 (3d Cir. 1992); Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983). When the taxpayer makes a voluntary payment, but does not identify a particular liability, the IRS may apply the payment as it chooses. Muntwyler, 703 F.2d at 1032. If the payment is involuntary, the IRS will direct the allocation of the payment. In re Jehan-Das, 925 F.2d at 238. The rule has its roots in the common law which recognized that a debtor may indicate which debt is to be paid when payment is submitted to a creditor, but may not indicate the application of funds when the creditor has to involuntarily collect the funds. Pepperman, 976 F.2d at 127.
An involuntary payment is defined as "`any payment received by agents of the United States as a result of distraint or levy or from a legal proceeding in which the government is seeking to collect its delinquent taxes or file a claim therefor.'" Id. quoting Amos v. Commissioner, 47 T.C. 65, 69 (1966). An administrative action alone is insufficient to make any subsequent payment involuntary. The action must result in "an actual seizure of property or money as in a levy." Muntwyler, 703 F.2d at 1033.
In this case, USA/IRS requested and received relief from the automatic stay. In its order of February 25, 1998, the court noted that proceeds from the sale would not constitute a voluntary payment; therefore, Debtor could not direct the IRS where to apply the proceeds. The court now reiterates that the proceeds from the sale of the Boone County real estate and the Polk County dwelling constitute involuntary payments because the funds were the result of a levy and sale by the IRS. Consistent with its February 25, 1998, order, the court will not instruct the IRS as to the application of the funds.
Debtor further argues that he made substantial tax payments in the period of 1990-1991, and the IRS failed to credit his account with the full amount paid. USA/IRS claims to have given credit for all funds received.
While an inspection of Debtor's tax transcripts fails to disclose when and how each of the alleged payments was applied, the court believes the issue is resolved by the Tax Court decision. In its order, the district court held that Debtor was collaterally estopped from relitigating issues previously raised and decided by the Tax Court. The Tax Court determined the amount of Debtor's tax deficiency for each of the years in question, as of the entry of its May 1, 1995 order. In making its determination, the Tax Court must have necessarily taken into consideration the payments that Debtor made during the time period in question. The court finds that as of May 1, 1995, Debtor's tax deficiency for the year 1985 was $17,080.00, for the year 1986 was $135,622.00, and for the year 1987 was $0.00.
Debtor raises a similar argument concerning payments made in restitution for the 1987 tax evasion charge. Debtor claims that the IRS failed to credit over $81,000.00 to his account. Here again, an inspection of the transcripts fails to uncover a credit to the account during the time period when the payments were made to the Department of Justice. However, as stated above the Tax Court must have necessarily considered the payments in making its determination, and this court is bound by that determination.
Debtor also argues that because the Tax Court decision does not contain a reference to interest on the tax deficiency, he is not liable for interest until the date of the judgment. Debtor is mistaken to the extent that § 6601 of the Tax Code provides that interest will accrue on underpayments and nonpayments of tax from the date due until the date paid. 26 U.S.C. § 6601 (1983 Ed. Supplement IV 1983-1987). Clearly, interest is available on the tax deficiencies for 1985 and 1986.
However, Debtor is correct that the Tax Court determined that there was no tax deficiency for 1987. He entered into an agreement whereby he plead guilty to one count of tax evasion for 1987. As part of his sentence, Debtor was apparently ordered to pay restitution in the amount of $245,856.45. Said amount would necessarily constitute the amount of damage that USA/IRS incurred as a result of Debtor's conduct. Debtor paid the restitution, and the government acknowledged full payment in a Satisfaction of Judgment filed with the district court clerk on October 11, 1991.
USA/IRS claims that Debtor owes additional interest of slightly more than $95,000.00 for 1987. The tax transcript for 1987 shows interest assessments on August 22, 1995, and September 9, 1996. Neither entry specifies upon what liability the interest accrued. In other words, the transcripts do not differentiate between interest on penalty and interest on tax. As stated above, assessments are assumed correct and raise a rebuttable presumption of fact.
Here the court finds that Debtor has rebutted the presumption of nondischargeable interest liability for the year 1987. The Tax Court found no tax deficiency for 1987. Debtor provided statements from the Department of Justice showing the restitution payment timely made with no accrual of interest. While the tax transcripts show additional assessment of tax after the final restitution payment, Debtor provided tax statements showing additional tax and interest and the payment thereof. Officer Hoy's summary shows that Debtor's 1987 account had a balance of over $11,000.00 as of July 6, 1992. A figure that the court's own calculation, based on the tax transcripts, bears out.
Based on the evidence before it, the court concludes that the interest assessments were either entered erroneously or constitute interest on penalties. In either instance, Debtor is not liable for payment. Accordingly, the court finds that Debtor has no interest liability for 1987.
Debtor additionally raises various arguments concerning stay violations and preferential transfers. The court finds that these arguments are without merit. This court previously determined that government held a valid lien on the property in question, and lifted the stay to allow it to proceed with the sales. Any issue of preferential transfer is for the trustee to raise.
Finally, Debtor asks the court to exercise its equitable powers and discharge Debtor from all remaining tax liability. Even if the scope of § 105 grants such broad power, the court declines to grant Debtor's request. Although USA/IRS's litigation of its case has been far from exemplary, Debtor's own conduct brought him to his current situation. Debtor understated income and actively attempted to evade income tax liability. Needless to say, he is not a sympathetic debtor, and equity does not balance in his favor for the requested relief.
ORDER
IT IS THEREFORE ORDERED, as follows:
(1) Debtor Dennis Harker's tax liability as of April 30, 2001, for the year 1985 is $76,819.54. Said amount is comprised of $17,462.58 of tax deficiency, collection costs, and lien fees, and $59,356.96 of accrued interest as provided in Defendant's Exhibit D.
(2) Debtor Dennis Barker's tax liability as of April 30, 2001, for the year 1986 is $532,761.96. Said amount is comprised of $135,622.00 of tax deficiency and $397,139.96 of accrued interest as provided in Defendant's Exhibit E.
(3) Debtor Dennis Barker's tax liability as of April 30, 2001, for the year 1987 is $0.00. Debtor has paid the required taxes and interest and no balance is outstanding.