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In re Bush

United States District Court, S.D. Indiana, Indianapolis Division

August 12, 2016

In re DONALD WAYNE BUSH and KIMBERLY ANN BUSH, Debtors. Bankruptcy No. 14-9053-JMC

          ENTRY ON JUDICIAL REVIEW

          Hon. William T. Lawrence, Judge

         This 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.

         I. BACKGROUND

         On 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).

         On 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.

         The 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.

         In the 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.

         The 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.

         II. PRELIMINARY MATTERS

         There 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.

         Next, 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.

         Finally, 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.

         III. DISCUSSION

         The 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 ...


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