United States District Court, S.D. Indiana, Indianapolis Division
In re DONALD WAYNE BUSH and KIMBERLY ANN BUSH, Debtors. Bankruptcy No. 14-9053-JMC
ENTRY ON JUDICIAL REVIEW
William T. Lawrence, Judge
cause is before the Court on an appeal by the United States
of America of two rulings of the Bankruptcy Court: an order
granting the Debtors’ Motion to Determine Tax Liability
and an order denying the United States’ motion to
reconsider that order. For the reasons set forth below, the
bankruptcy court’s rulings are REVERSED, the
Debtors’ first motion to strike (Dkt. No. 18) is
DENIED, and the Debtors’ second motion to strike (Dkt.
No. 20) and the United States’ motion to expedite (Dkt.
No. 22) are DENIED AS MOOT.
September 6, 2013, the IRS issued a Notice of Deficiency to
the Debtors asserting tax deficiencies in the amount of $107,
034 and fraud penalties in the amount of $80, 275.50 (75% of
the taxes owed) for tax years 2009, 2010, and 2011. On
September 23, 2013, the taxpayers filed a petition with the
United States Tax Court, which had the effect of barring the
IRS from assessing or collecting the tax until the Tax Court
case was concluded. During the Tax Court proceedings, the
parties reached stipulations that reduced the tax
deficiencies for the three years to a total of $100, 136. The
only issue thus remaining before the Tax Court was whether
the Debtors’ returns were fraudulent, which would
result in the assessment of 75% fraud penalties under IRC
§ 6663(a), or negligent, which would result in the
assessment of 20% penalties under IRC § 6662(a).
September 30, 2014, the morning the Tax Court trial was
scheduled to begin, the Debtors filed a Chapter 13 bankruptcy
petition, which automatically stayed the commencement of the
Tax Court trial. In response, the United States filed an
emergency motion to lift the automatic stay. The United
States’ motion was denied by the Bankruptcy Court.
Debtors filed their schedules of assets and liabilities on
October 14, 2014, listing assets worth $308, 748.00 and
liabilities of $281, 750. The liabilities did not include
federal and state taxes; the Debtors listed the amount of
these liabilities as “unknown, ” but noted that
the federal tax liability was “$100, 000ish.” On
October 15, 2014, the Debtors filed a Notice of Conversion to
Chapter 7. The next day, the IRS filed a Proof of Claim,
which was objected to by the Debtors and which was amended
several times over the course of the next several months. As
noted above, the parties eventually stipulated that the
amount of taxes owed by the Debtors (excluding any penalties
and interest) was $100, 136.
meantime, on December 28, 2014, the Debtors filed a Motion to
Determine Tax Liability pursuant to 11 U.S.C. § 505
(“§ 505 motion”). The Debtors stated in the
motion that because they believed they would be able to reach
an agreement with the IRS with regard to the amount of tax
owed, the primary dispute was whether the IRS was entitled to
the 75% tax penalty it sought. Accordingly, they asked the
Bankruptcy Court to “establish that IRS is owed the
tax, but not the fraud penalty.” The Bankruptcy Court
issued the Debtors a general discharge on March 16, 2015.
This lifted the automatic stay and permitted the Tax Court
proceeding to resume. The Tax Court scheduled a trial for
October 2015. This trial eventually was continued to permit
resolution of this appeal.
United States responded to the Debtors’ § 505
Motion on May 19, 2015, asking that the Bankruptcy Court
dismiss the motion for lack of jurisdiction or,
alternatively, that the Bankruptcy Court abstain from
deciding the tax issue in favor of allowing it to proceed
before the Tax Court. After the motion was fully briefed and
a hearing was held, the Bankruptcy Court granted the
Debtors’ § 505 Motion; it also denied the United
States’ subsequent motion to reconsider that ruling.
The United States filed a Notice of Appeal and a Motion for
Leave to Appeal those rulings, which this Court granted. The
issues presented are now ripe for this Court’s review.
are three ancillary motions to resolve before turning to the
merits of the United States’ appeal. First, the Debtors
move to strike the United States’ reply brief as
untimely. As the United States correctly points out, the
Debtors’ calculation of the date the reply brief was
due failed to account for the additional three days
“for mailing” that are added pursuant to
Fed.R.Bankr.P. 9006(f). The reply brief was not late, and the
motion to strike (Dkt. No. 18) is DENIED.
the Debtors have moved to strike the declaration of the
Trustee that was attached to the United States’ reply
brief because it is not part of the Record on Appeal. As it
is not necessary for the Court to consider that declaration
in ruling on this appeal, the motion to strike (Dkt. No. 20)
is DENIED AS MOOT.
the United States filed a Request to Expedite Decision and
Statement Regarding Oral Argument (Dkt. No. 22). The Court
has determined that oral argument is not necessary, as the
parties have thoroughly briefed the relevant issues. The
request to expedite is DENIED AS MOOT.
United States argues that the Bankruptcy Court erred when it
found that it had jurisdiction to determine the amount of the
Debtors’ tax penalties or, alternatively, that the
Bankruptcy Court should have abstained from making that
determination in favor of permitting the Tax Court proceeding
to go forward. When reviewing a decision of the Bankruptcy
Court, conclusions of law made by the Bankruptcy Court are
reviewed de novo, In re Jepson, 816 F.3d 942, 944
(7th Cir. 2016), while a Bankruptcy Court’s decision