I invite my readers, having by now recovered from Judge Mark V Holmes’ Tolstoyan tale of the appraisal of the estate of the late Michael J. Jackson, and the erudite commentary thereon in the blogosphere and trade press, to observe again the interface between bankruptcy and taxes. Marc S. Barnes and Anne M. Barnes, 2021 T. C. 49, filed 5/4/21, have returned to reprise the missing year; see my blogpost “The Call,” 7/21/20.

Y’all will recall that Marc and Anne filed Ch 11 after post-trial briefing in their Tax Court trial eleven (count ‘em, eleven) years ago. And their Plan was fully paid. Except the missing year’s taxes, add-ons, and chops, were never adjudicated in Bankruptcy Court, because they were never assessed, decision having been stayed during the pendency of the proceeding, including but not limited to the duration of the Ch 11 plan. IRS moved to lift the automatic stay so that Judge Lauber could render decision.

Judge Lauber did, Marc and Anne appealed, and DC Cir affirmed.

IRS then filed NFTL. Marc and Anne, having had a chance to contest, were out on liability. But they did claim discharge in bankruptcy at their CDP.

Judge Lauber: “The SO consulted on this point with an IRS insolvency specialist. The specialist 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. sec. 507(a)(8)(A)(iii) (2006) (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. sec. 523(a)(1)(A) (2006) (excepting certain priority debts from discharge).” 2021 T. C. Memo. 49, at pp. 4-5.

So the SO bounced Marc’s and Anne’s OIC, and suggested a full-pay IA. Marc and Anne rejected that, and went back to Bankruptcy Court to fight about discharge of the missing year. And at that point my blog told the story.

Well, Marc and Anne lost in Bankruptcy Court on tax and interest, but won on add-ons and chops, 11 U.S.C. sec. 507(a)(8)(G) accords priority only to actual out-of-pocket (actual pecuniary loss).

Marc’s and Anne’s argument that the Ch 11 plan permanently barred collection of the missing year is wrong on the law. And their claim that IRS should have filed notice of claim for the missing year is also wrong. “…the fact that the IRS did not amend its proof of claim to include the 2003 liability is irrelevant: 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. sec. 523(a)(1)(A)…. Indeed, even if the 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.” 2021 T. C. Memo. 49, at p. 10.

As we used to sing, “Ain’t no discharge on the ground.”