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Barnes v. Commissioner (T.C. Memo. 2021-49)

On May 4, 2021, the Tax Court issued a Memorandum Opinion in the case of Barnes v. Commissioner (T.C. Memo. 2021-49). The primary issues presented in Barnes were whether the statute of limitations on collections had run with respect to the petitioners 2003 liability, whether their 2003 tax liability had been discharged in bankruptcy, whether the IRS abused its discretion in sustaining a Notice of Federal Tax Lien as to the 2003 liability.

Background

The petitioners’ trials and tribulations with the IRS began when they jointly filed an untimely Federal income tax return for 2003 reporting a tax liability of $31,000. The IRS sent them a timely notice of deficiency determining a tax deficiency of $55,000, an accuracy-related penalty of $11,000, and a late-filing addition to tax of $6,000.  They had their day in court in 2010, and a month after their Tax Court trial, whilst the parties were engaged in post-trial briefing, the petitioners filed a voluntary Chapter 11 bankruptcy petitioner, which stayed all further Tax Court proceedings.

IRS Participates in Bankruptcy

The IRS filed a proof of claim (later amended) for tax deficiencies petitioners owed for multiple tax years. Neither the original nor the amended proof of claim included the 2003 liability, which was still being litigated in the Tax Court. A year after they filed, in July 2011, the petitioners’ plan of reorganization was confirmed. The plan did not include the 2003 liability.

The Stay is Lifted

In November 2011, the bankruptcy court granted the IRS’ motion to lift the automatic stay so that the Tax Court could render an opinion on the petitioners’ 2003 liability. The Tax Court held that the petitioners owed the deficiency, penalty, and addition to tax for 2003 as determined in the notice of deficiency, and a decision was entered in April 2012. The petitioners appealed to the U.S. Court of Appeals for the D.C. Circuit, which affirmed. See Barnes v. Commissioner, 712 F.3d 581 (D.C. Cir. 2013), aff’g T.C. Memo. 2012-80.

The Notice of Federal Tax Lien

In August 2012, the IRS assessed the petitioners’ 2003 liability. The petitioners, generally proactive in their efforts to avoid payment of their liabilities, for once did nothing.  In November 2017, the IRS sent the petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing. The petitioners timely requested a CDP hearing, and the case was assigned to Appeals. Appeals agreed to a partial release of the NFTL, finding that the 2008 and 2009 tax liabilities were included in the petitioners’ bankruptcy and that the claims had been paid. However, Appeals sustained the lien filing as to 2003, and that is why the petitioners filed the present petition.

The Petitioners’ Claims

Petitioners contended that their tax liability for 2003 was uncollectible on the theory that the “10-year statute of limitations had tolled.”

As Inigo Montoya was known to say, “You keep using this word [toll].  I do not think it means what you think it means.  Indeed, in a legal sense, “toll” means to stop the running of a time period.  This is not, I am sure, what the petitioners intended the word to mean, but they heard it on an infomercial during a break in the 3:00 AM showing of All in the Family, so they went with it.

Appeals patiently explained that the petitioners could not dispute their 2003 liability because it had been finally determined by a decision of the Tax Court. Further, because their 2003 liability was not assessed until August 2012, the 10-year period of limitations on collection did not begin to run until that date. See IRC § 6502(a)(1).

Not to be outdone, the petitioners also argued that their 2003 tax liability, like their 2008 and 2009 tax liabilities, had been discharged in bankruptcy. Appeals (again, ever so patiently) advised that the 2003 liability was a nondischargeable priority debt that was neither addressed in nor discharged by the Plan. See 11 U.S.C. § 507(a)(8)(A)(iii) (defining a “priority debt” to include a tax liability that was “not assessed before, but assessable,” when the bankruptcy case commenced); 11 U.S.C. § 523(a)(1)(A) (excepting certain priority debts from discharge).

The IRS’s Counterpoint

In March 2019, the IRS issued the petitioners a notice of determination sustaining the NFTL insofar as it covered their 2003 liability.

The Bankruptcy Court Intercession

The petitioners filed motions with the bankruptcy court asking that it reopen the case and rule that the 2003 liability had been discharged.  In December 2020, the bankruptcy court issued an opinion ruling that neither the 2003 deficiency nor the interest thereon had been discharged but that the accuracy-related penalty and late-filing addition to tax for 2003 had been discharged.

Underlying Liability or Abuse of Discretion?

Taxpayers may challenge the existence or amount of their underlying tax liability in a CDP case but only if they did not receive a statutory notice of deficiency or otherwise have a prior opportunity to dispute their liability. See IRC § 6330(c)(2)(B). The petitioners had prior opportunity to dispute their 2003 liability, and they “took ample advantage of it.” They received a statutory notice of deficiency, litigated the case in the Tax Court, and then lodged an unsuccessful appeal.

The premise for the petitioners’ challenge to their 2003 liability was that it had been discharged in bankruptcy. The Tax Court observed that whether a debt is still collectible, as opposed to having been paid or discharged, however, is not a challenge to the underlying tax liability (the amount of tax imposed for a particular year), see Melasky v. Commissioner, 151 T.C. 89, 92 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020), rather, it is a question properly addressed in considering whether Appeals abused its discretion.

Abuse of Discretion or Abuse of the Tax Court’s Time?

When deciding whether Appeals abused its discretion in sustaining a NFTL, the Tax Court considers three discrete factors under IRC § 6320(c) and IRC § 6330(c)(3):

  1. whether Appeals properly verified that the requirements of any applicable law or administrative procedure have been met;
  2. whether Appeals considered any relevant issues the petitioners raised; and
  3. whether Appeals determined that all proposed collection action balanced the “need for the efficient collection of taxes” with the “legitimate concerns” of the petitioners that any collection action “be no more intrusive than necessary.”

If Appeals’ determination was based on an erroneous view of the law and petitioners’ liability was discharged in bankruptcy, then the Tax Court will reject the IRS’s views and will find that there was an abuse of discretion. See Swanson v. Commissioner, 121 T.C. 111, 119 (2003).  If the Tax Court does not so find, the petitioners will find themselves up Schitt’s Creek without a paddle (proverbial or otherwise).

Acknowledgment and Then Denial

To their credit, the petitioners ultimately agreed that an unassessed income tax liability generally is nondischargeable. See 11 U.S.C. § 523(a)(1)(A). Nevertheless, they denied that the IRS’s position in the litigation was appropriate.  Their argument was two pronged.

  • First, the petitioners argued that the bankruptcy plan included a “broad injunction” releasing them from all tax obligations.
  • Second, and even less convincing, the petitioners argued that the IRS had their bite at the apple and should be prevented from collecting the petitioners’ 2003 tax debt because it did not file in the bankruptcy case a proof of claim for that debt.

Making Quick Work of the Petitioners’ “Arguments”

“As the bankruptcy court explained in its decision, neither contention is correct.” So said Judge Lauber in a striking bit of brevity, not so very common from this learned jurist.

The provisions of 11 U.S.C. § 1141(d)(2) prohibit a bankruptcy court from discharging a debt that is nondischargeable under 11 U.S.C. § 523. The fact that the IRS did not amend its proof of claim to include the 2003 liability is irrelevant.  “Why?” you may ask. Well, I’ll tell you, dear reader.

The petitioners’ contention/argument/denial/grasp-at-straws is dead wrong because a priority tax claim (such as the IRS’ claim for the 2003 liability) is nondischargeable “whether or not a claim for such tax was filed or allowed.” 11 U.S.C. § 523(a)(1)(A). Indeed, Judge Lauber continued, even if the bankruptcy plan’s injunctive provisions could be read “as broadly as petitioners wish,” an order that purports to discharge a nondischargeable claim would not be binding on the IRS as the claim holder.  So there.

Final Observation

Let’s just hope the petitioners brought life jackets.  Their journey up the creek which began in 2003 has been accruing interest for eighteen years.  I am no mathematician, but even small liabilities (which the petitioners’ liability was not) balloon to behemoth amounts after a few years.  Compounding interest and an eighteen-year fight with the IRS is not a recipe for tax savings.

(T.C. Memo. 2021-49) Barnes v. Commissioner

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