In Uncategorized on 03/28/2019 at 18:36

Today Judge Pugh has me walking down memory lane, except memory lane is a red-clay road in SC fifty-plus years ago, with an NCO whose name I’ve mercifully forgotten reminding me that “there ain’t no use in lookin’ down” for the reason stated hereinabove at the head hereof, as my formerly-commissioned colleagues would say.

This discharge is cancellation-of-debt via a discharge in bankruptcy, except it isn’t for Charles K. Breland, Jr., 152 T. C. 9, filed 3/28/19. Chas had two (count ‘em, two) bankruptcies. It’s the earlier one, which was a Chapter 11, with which Judge Pugh and her colleagues are concerned.

Chas was duking it out with IRS over $800K of late-filing chops. IRS and Chas entered into a consent order in US Br Ct. The order determined how much were priority claims and how much general unsecured claims, and how and when Chas was to pay.

IRS did some discovery afterward and tried to amend its claim. IRS claimed Chas owes a further $45 million in tax on unreported income, but the BJ said “no, your claim is what you agreed to in the consent order,” USDCSDAL affirmed, and IRS and Chas stiped out of an appeal to 11 Cir.

Chas tried a Section 7430 admins-and-legals, but lost because IRS had reasonable doubt whether they could proceed separately for the $45 mil.

Well, IRS now hits Chas with a SNOD for the $45 mil, which Chas petitions, asserting claim preclusion (which I and my colleagues eligible for Medicare call “Reece Judy Carter”), or collateral estoppel  (that’s issue preclusion for you recent grads).

IRS says no claim preclusion, as 11USC§523 and 1141 make tax debts of this kind nondischargeable, whether or not they were part of IRS’ notice of claim. OK, so the Ch 11 reorg, even though approved, doesn’t get Chas off the hook, even though he paid what and when the consent order said.

But what about 11USC§505, where Bankruptcy Court can fix tax liabilities? Except Bankruptcy Court never held a hearing on Chas’ total tax liabilities. Bankruptcy Court dealt with IRS’ notice of claim (as amended), and how to handle the sums therein set forth.

Judge Pugh: “We now turn to what the consent order before us did and did not do. First, the consent order did not cite 11 U.S.C. sec. 505(a)(1) or otherwise state that it was issued pursuant to the bankruptcy court’s authority to determine taxes under that section. Nor did it include any factual recitations of petitioner’s income, deductions, and credits, or anywhere state his total Federal tax liability for any year before the court. Rather it was expressly entered to resolve the IRS’ objection to confirmation of the proposed plan of reorganization. By its terms, it: (1) fixed the priority tax claim that would be allowed and paid in the plan of reorganization; (2) capped the unsecured general claim for penalties and described how this disputed claim would be treated under the plan of reorganization; (3) set a hearing date for the adjudication of the unsecured general claim; (4) set a deadline for petitioner to comply with tax return reporting requirements for certain tax years–including those prepetition years that are the subject of this Tax Court proceeding; and (5) modified the plan of reorganization to include a default provision. Indeed, petitioner objected to the IRS’ proof of claim only insofar as he did not believe penalties were owed, and the consent order explicitly left that objection pending. Nowhere did the consent order state that it was intended to determine petitioner’s total prepetition Federal tax liability. And there is no indication that the IRS agreed to waive any of its unique rights under the Bankruptcy Code with respect to the tax debts that were excepted from discharge ‘whether or not a claim for such tax was filed or allowed’. 11 U.S.C. secs. 1141(d)(2), 523(a)(1)(A). We therefore see no basis for concluding that the consent order had the effect of a determination under 11 U.S.C. sec. 505. “ 152 T. C. 9, at pp. 18-19.

Now before anyone jumps on bankruptcy counsel with a “could’a would’a should’a,” remember that Chas may have been a wee bit less than candid with said counsel; but even if he dished, would it be good strategy to invoke 11USC§505 in this case? Especially when the facts might be less than one could desire. One might have had the issue precluded then and there, and not necessarily to the client’s liking.

If a takeaway is needed, it is that without prominent mention of 11USC§505, discharge may be only the beginning.



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