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STUART BECKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBecker v. Comm'rDocket No. 12919-08L
United States Tax Court T.C. Memo 2010-120; 2010 Tax Ct. Memo LEXIS 157; 99 T.C.M. (CCH) 1507;June 2, 2010, FiledBecker v. IRS (In re Becker), 407 F.3d 89">407 F.3d 89 , 2005 U.S. App. LEXIS 7339">2005 U.S. App. LEXIS 7339 (2d Cir. N.Y., 2005)*157An appropriate order and decision will be entered.
Frederick Mutter , for respondent.LARO,Judge .LAROMEMORANDUM OPINION
LARO,
Judge : This case is before the Court for decision without trial. SeeRule 122 . 2 Petitioner petitioned the Court to review the determination of the Internal Revenue Service Office of Appeals (Appeals) sustaining respondent's proposed levy on petitioner's property. Respondent proposed the levy to collect approximately $ 337,000 of Federal income taxes (including taxes, penalties, and interest) (subject liability) that respondent's records showed petitioner owed for 1999 through 2004 (subject years). Petitioner argues that the proposed levy is improper because the subject liability was discharged in his bankruptcy case (bankruptcy case). Respondent argues that the subject liability was not part of the bankruptcy case and was not discharged. We hold that petitioner is liable for the subject liability to the extent it was not part of the bankruptcy *158 case. We shall remand this case to Appeals to determine the portion of the subject taxes that was not part of the bankruptcy case.Background The facts in this background section are obtained primarily from the parties' stipulation of facts and the exhibits submitted therewith. Petitioner resided in New York when his petition was filed. He filed a Form 1040, U.S. Individual Income Tax Return, for each of the subject years using the filing status of married filing separately.
Petitioner has worked for over 30 years as a certified public accountant specializing in tax matters. On July 13, 1992, he (as an individual debtor) filed a voluntary petition for protection under chapter 11 of the Bankruptcy Code. The petition was filed with the U.S. Bankruptcy Court for the Southern District of New York. Petitioner's bankruptcy estate (estate) included his accounting practice (practice), and petitioner administered the practice during the 14-year bankruptcy case as the debtor in possession. *159 3 Petitioner had employees who worked with him in the practice.
For the subject years, petitioner timely filed Forms 1040 on which he reported his Federal income tax liabilities as $ 26,951, $ 77,921, $ 27,243, $ 58,626, $ 23,312, and $ 31,415, respectively. He did not tender a payment with any of these returns. Respondent assessed each amount of reported tax and assessed other amounts for additions to tax and for statutory interest. Petitioner has since paid $ 11,570 towards the total amount assessed for 1999. Petitioner has not paid any of the amounts assessed for 2000 through 2004.
Each of petitioner's Federal income tax returns for 2002 through 2004 reported that petitioner was a certified public accountant who during the year did not receive any wages or salary in his capacity as an employee. 4 The returns included Schedules E, Supplemental Income and Loss, with accompanying papers that reported that petitioner realized the following amounts of income from Becker & Co., L.L.C.:
2002 2003 2004 Ordinary income $ 8,092 $ 46,978 $ 96,479 Guaranteed payments 160,000 100,000 -0- U.S. trustee fee (2,500) -0- (3,000) 165,592 146,978 93,479 The *160 returns also respectively reported that petitioner had realized "Miscellaneous" income of $ 100,000, $ 60,000, and $ 90,000 from Becker Tax Management Corp.
On November 14, 2005, petitioner filed with the bankruptcy Court an amended plan of reorganization dated November 9, 2005 (plan). The plan identified the "debtor" as "STUART BECKER as debtor-in-possession" and stated that
Each Administration [sic] Expense shall be paid in full, without interest, in cash on the Consummation Date or upon such other terms as may be agreed upon between an Administration [sic] Claimant and Debtor; provided, however, that Administration [sic] Expenses representing liabilities incurred in the ordinary course of business by the Debtor, as Debtor-in-Possession, shall be assumed and paid by the Reorganized Debtor in the ordinary course of business or in accordance with the terms and conditions of any agreements relating thereto. *161 Administration [sic] expenses to be paid in full on the Consummation Date include post petition taxes to the IRS of $ 956,623.12 plus interest from November 15, 2005. 5*162
On February 14, 2006, the bankruptcy court entered an order confirming the plan which in turn discharged petitioner from any debt on any claim that arose before the confirmation date, except as otherwise stated in the plan. 7 The order directed petitioner's counsel to make disbursements pursuant to the plan and effectively enjoined all persons holding claims or interests discharged under the order from taking any action against or affecting petitioner in his capacity as a "Reorganized Debtor".
On May 22, 2006, the Bankruptcy Court issued a "Final Decree" closing *163 the bankruptcy case because all distributions under the plan had been made. The final decree stated:
Distributions under the above-named Debtor's Amended Plan of Reorganization dated November 9, 2005 (the "Plan") have been made;
The Plan has been substantially consummated within the meaning of
§ 1101(2) of the Bankruptcy Code ;The estate of the above named Debtor has been fully administered.
IT IS ORDERED THAT:
The Chapter 11 case of the above-named Debtor is closed.
Three weeks before the final decree was issued, respondent mailed to petitioner the Final Notice of Intent to Levy and Your Right to a Hearing (levy notice) for the subject years. The levy notice stated that petitioner owed for those years $ 337,083 in Federal income taxes (inclusive of taxes, interest, and penalties). The $ 337,083 stems from the assessed tax liabilities that petitioner reported on his Forms 1040 for the subject years.
On May 24, 2006, petitioner timely filed Form 12153, Request for a Collection Due Process Hearing (request). Petitioner asserted in the request that he disagreed with the proposed levy because
The taxpayer filed for protection under Chapter 11 of the federal bankruptcy laws. The taxes at issue *164 herein became subject to the authority of the federal bankruptcy court, which adjudicated said claims as part of the taxpayer's Chapter 11 bankruptcy proceeding. On May 22, 2006, the federal bankruptcy judge issued a "Final Decree" which closed out the federal bankruptcy case * * *
On February 22, 2008, respondent's settlement officer sent to petitioner (with a copy to his representative, Mr. Blecher) a letter scheduling petitioner for a telephone hearing at 3:30 p.m. on March 14, 2008. The letter asked petitioner to call the settlement officer at the scheduled time and requested that petitioner complete and send to the settlement officer a collection information statement (CIS) within 2 weeks of the date of the letter so that the settlement officer could evaluate collection alternatives. Petitioner did not participate in the scheduled hearing and did not submit a completed CIS to the settlement officer.
On April 17, 2008, the settlement officer informed Mr. Blecher that the subject liability was a postpetition liability that was not dischargeable in his bankruptcy case because petitioner and the estate were separate taxable entities under
Internal Revenue Manual (IRM) part 5.9.8.11.1 *165 (Jan. 1, 2006). The settlement officer also informed Mr. Blecher that a postpetition liability incurred by an individual debtor such as petitioner may not be claimed in his bankruptcy case. Later that day, Mr. Blecher replied to the settlement officer that petitioner was discharged from his postpetitionsection 6672 liabilities, as well as liabilities for New York State income taxes which arose during the subject years. Mr. Blecher stated that petitioner continued to believe that the subject liability also was discharged in the bankruptcy case. On April 18, 2008, the settlement officer replied to Mr. Blecher that the settlement officer's position was stated in the IRM and suggested that Mr. Blecher take certain actions to obtain information as to which taxes were discharged in the bankruptcy case.Petitioner did not provide to the settlement officer any financial information that the settlement officer requested from petitioner to evaluate collection alternatives. Nor did petitioner propose any collection alternative or challenge the appropriateness of the issuance of the levy notice. Petitioner asserted that his bankruptcy discharge prevented respondent from collecting the subject *166 liability, and petitioner did not raise any other issue.
On April 24, 2008, Appeals issued petitioner the notice of determination (notice of determination) underlying this case. The notice of determination sustained the proposed levy.
Discussion I. Jurisdiction Section 6330(d)(1) entitles a taxpayer such as petitioner whose property is subject to a Federal income tax levy to appeal a determination made by Appeals sustaining the propriety of that levy.Section 6330(d)(1) provides that the appeal shall be "to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter)." This Court's jurisdiction rests upon the issuance of a valid notice of determination and the filing of a timely petition for review. SeeSmith v. Commissioner , 124 T.C. 36">124 T.C. 36Rule 330(b) .Neither party concludes that we lack jurisdiction over this case. Nor do we. We have the requisite jurisdiction because the notice of determination is valid and the petition for review was timely filed. 8 See also
Washington v. Commissioner , 120 T.C. 114">120 T.C. 114II. Standard of Review Where the existence and the amount of the underlying tax liability are properly at issue, the Court will review the matter de novo. See
Urbano v. Commissioner , 122 T.C. 384">122 T.C. 384Prince v. Commissioner , 133 T.C. 270">133 T.C. 270Petitioner does not contest the existence and the amount of the underlying tax liability. Accordingly, we review the determination of Appeals using an abuse of discretion standard. Under that standard, we will reject the determination of Appeals only if petitioner proves *168 that the determination is arbitrary, capricious, or without sound basis in fact or in law. See
Murphy v. Commissioner , 125 T.C. 301">125 T.C. 301469 F.3d 27">469 F.3d 27 (1st Cir. 2006);Phillips v. Commissioner , 114 T.C. 115">114 T.C. 115272 F.3d 1172">272 F.3d 1172 (9th Cir. 2001). Where, as here, the determination of Appeals turns on its interpretation of bankruptcy law, Appeals will have abused its discretion if that interpretation is unsound. SeeSwanson v. Commissioner , 121 T.C. 111">121 T.C. 111Hoyle v. Commissioner , 131 T.C. 197 (2008)Lunsford v. Commissioner , 117 T.C. 183">117 T.C. 183III. Review of Determination A. Parties' Arguments Petitioner argues that the subject liability was a claim against the estate and was (or should have been) included in the claims before the bankruptcy court. He asserts that the subject *169 liability arose not from income earned by him personally, but from income earned by the practice. He concludes that the subject liability was discharged by the bankruptcy court because the plan did not provide for its payment.
Respondent agrees that the subject liability was not mentioned in the plan. Respondent argues that the subject liability was not (and could not have been) included in the plan because petitioner and the estate were separate taxpayers and the subject liability related to postpetition Federal income taxes petitioner owed in his capacity as an individual rather than as the debtor in possession. Respondent argues that the subject liability was not an administrative expense of the estate because the liability did not relate to a tax imposed on the estate's income. Respondent concludes that the subject liability was not before the bankruptcy court and that it was not discharged by that court.
B. Court's Analysis Petitioner's filing of his petition with the Bankruptcy Court spawned the estate, a separate entity for bankruptcy purposes and a separate taxpayer for Federal income tax purposes. See
sec. 1398 ; see also11 U.S.C. sec. 541(a) (2000) ;In re Estate of LaRosa , 364 Bankr. 612, 615-616 (Bankr. N.D. W.Va. 1991)11 U.S.C. sec. 541(a)(1) ,(6) . The estate's property did not include any postpetition earnings from petitioner's services performed as an individual debtor. 9 See11 U.S.C. sec. 541(a)(6) . Petitioner administered the estate's property (including the practice) throughout the bankruptcy case as the debtor in possession. See11 U.S.C. secs. 1101 ,1104 ,1107 (2000) .The gross income of the estate was subject to Federal income tax, as was the gross income of petitioner. See
sec. 1398 . The estate's gross income included the portion of petitioner's gross income to which the estate was entitled under the Bankruptcy Code. Seesec. 1398(e)(1) . That portion of gross income was the income emanating from the estate's property. See11 U.S.C. sec. 541(a)(6) . *171 Petitioner's gross income included all items of his gross income that were not includable in the estate's gross income. Seesec. 1398(e)(2) . The postpetition earnings from petitioner's services performed as an individual debtor were one such item that was includable in his (and not in the estate's) gross income, even to the extent that the earnings were realized by the practice which also realized other income includable in the estate's gross income. Seesec. 1398(e)(1) and(2) ; cf.Fitzsimmons v. Walsh (In re Fitzsimmons) , 725 F.2d 1208">725 F.2d 1208Altchek v. Altchek , 124 Bankr. 944 (Bankr. S.D. N.Y. 1991)Fitzsimmons and the views of two bankruptcy courts as to the application of11 U.S.C. sec. 541(a)(6) to a chapter 11 sole proprietor).Appeals determined that the subject liability was a liability of petitioner (and not of the estate) because the liability was incurred by petitioner. The notice of determination, however, does not explain Appeals' characterization *172 of the subject liability as incurred by petitioner. Nor does the notice of determination explain Appeals' rejection of petitioner's contrary characterization. The income underlying the subject liability stemmed primarily from the practice, and the parties agree that the practice was property of the estate throughout the bankruptcy case. It seems natural to conclude, as petitioner does, that the subject liability was not incurred by petitioner but was incurred by the estate. See
11 U.S.C. sec. 541(a)(6) . To the extent that the subject liability was incurred by the estate, the liability was discharged by the bankruptcy court, as petitioner asserts, by virtue of the fact that the plan did not provide for its payment. Such is so even if respondent did not intend for such a discharge. SeeCreel v. Commissioner , 419 F.3d 1135 (11th Cir. 2005)IRM pt. 5.9.8.14.2 (Mar. 1, 2007) (stating that the Commissioner's failure to claim an administrative expense tax in a bankruptcy case may result in a court's *173 deciding that the tax was discharged).The record at hand does not allow us to find the extent (if any) to which the subject liability was attributable to petitioner so as to decide whether Appeals abused its discretion in characterizing that liability as incurred by petitioner. 10*174 While the income underlying the subject liability stemmed primarily from the practice, we are mindful (as discussed above) that the income is taxable to petitioner (and thus the subject liability was incurred by petitioner) to the extent that it represented earnings from postpetition services that petitioner rendered through the practice in his individual capacity. Given that Appeals has not adequately explained the reasons underlying its determination that the subject liability was incurred by petitioner rather than by the estate, we believe that justice requires that we remand this case to Appeals to supplement the notice of determination to explain as much. We shall do so.
Petitioner asks the Court to decide this case in his favor because the subject liability was unmentioned in the plan. We decline to do so. The mere fact that the subject liability was unmentioned in the plan does not necessarily mean that the subject liability was discharged. During the bankruptcy case, petitioner filed his personal Federal income tax returns, and respondent claimed that petitioner owed approximately $ 950,000 of Federal taxes (including penalties and interest) as administrative expenses of the estate. Petitioner deduces that respondent was on notice of the subject liability, that respondent omitted that liability *175 in his requests for payment of administrative expenses, and that the bankruptcy court's confirmation of the plan thus discharged petitioner from payment of the subject liability. We disagree.
The subject liability was not an administrative expense of the estate (and did not have to be included in the plan) to the extent that the liability was neither "incurred by the estate" within the meaning of
11 U.S.C. sec. 503(b) (2000) , nor a claim for payment of the estate's tax liability. SeeIn re Johnson , 190 Bankr. 724 (Bankr. D. Mass. 1995)IV. Conclusion Petitioner remains liable for the subject liability to the extent that it was not part of his bankruptcy case. We shall remand this case to Appeals to determine the portion of the subject taxes that was not part of the bankruptcy case.
An appropriate order will be issued .Footnotes
1. Alan M. Blecher (Mr. Blecher) entered an appearance for petitioner on Jan. 5, 2009, and withdrew from the case when Stuart A. Smith entered his appearance on June 17, 2009.↩
2. Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, section references are to the applicable versions of the Internal Revenue Code. Some dollar amounts are rounded.↩
3. Petitioner apparently operated the practice during the subject years through two entities; namely, Becker & Co., L.L.C., and Becker Tax Management Corp.↩
4. The record does not include petitioner's Federal income tax return for any other year. Nor does the record include any Federal income tax return (i.e., a Form 1041, U.S. Income Tax Return for Estates and Trusts) for the estate or establish that the estate ever filed any such return.↩
5. The plan defined the term "Consummation Date" to mean the date which is 10 business days after the date upon which the Bankruptcy Court's order confirming the plan pursuant to
11 U.S.C. sec. 1129 (2000) was final. The plan defined the term "Administrative Expense" to mean "any cost or expense of administration of the Chapter 11 case allowed under§ 503(b) of the Bankruptcy Code ". See11 U.S.C. sec. 503(b) (2000) (stating that allowable administrative expenses include "any tax * * * incurred by the estate * * *, except a tax of a kind specified insection 507(a)(8)↩ of this title" (generally, taxes on income or gross receipts for a taxable year ending on or before the date that the bankruptcy petition was filed)). The plan did not define the word "Administration", and we believe the plan erroneously used that word in lieu of the word "Administrative".6. The parties do not explain the $ 1,000 difference between this $ 955,623.12 and the $ 956,623.12 listed in the plan. We consider the difference to be inconsequential to our decision.↩
7. The plan defined a "claim" as a claim against petitioner in his capacity as the debtor in possession.↩
8. Nor does either party assert that respondent violated the automatic stay of
11 U.S.C. sec. 362 (2000) as to any action that he took with respect to the subject liability. We likewise find no such action that violated the automatic stay. Cf.Beverly v. Commissioner , T.C. Memo. 2005-41↩9. By contrast, a bankruptcy estate resulting from a ch. 11 filing after Oct. 17, 2005, generally includes the debtor's earnings from postpetition services, as well as his or her subsequently acquired assets. See
11 U.S.C. sec. 1115 (2006)↩ .10. We give little weight to the fact that petitioner reported the income underlying the subject liability on his personal income tax returns. First, we do not find that the estate ever filed a Federal income tax return reporting its income. If such a return was never filed, then petitioner, apparently a seasoned tax professional, may not have known that the estate was required to report its income on its own return. Second, petitioner disavows that the income underlying the subject liability is his income, asserting that the income was earned on estate property. The record shows that the subject income did stem primarily from the practice, an undisputed asset of the estate, but does not establish whether the income related to postpetition services that petitioner rendered in his individual capacity.
Document Info
Docket Number： Docket No. 12919-08L
Citation Numbers： 2010 T.C. Memo. 120, 99 T.C.M. 1507, 2010 Tax Ct. Memo LEXIS 157
Judges： LARO
Filed Date： 6/2/2010
Precedential Status： Non-Precedential
Modified Date： 4/18/2021