HERBERT A. ROSS, Bankruptcy Judge.
1. INTRODUCTION
In January 1991, the IRS levied on Lawrence McCubbins' pension fund for almost $970,000 for back taxes. McCubbins filed a chapter 7 bankruptcy in April 1993, and was discharged in September 1993.
After McCubbins retired in 1997, the IRS began collecting the monthly pension benefits based on its 1991 levy. McCubbins filed the present adversary proceeding: (a) for a declaration that the taxes involved were discharged and the ERISA qualified pension fund proceeds are exempt; (b) to recover the amounts paid to the IRS under its levy; and, (c) to hold the IRS in contempt for violating the discharge injunction.
The IRS countered that the debtor had filed fraudulent income tax returns for one year and had failed to file returns for others, making the taxes nondischargeable. It also claims its levy was valid despite the bankruptcy.
While the penalties are dischargeable because they were more than three years old when McCubbins filed bankruptcy, the taxes and interest are not because McCubbins filed a fraudulent return and failed to file other returns. Moreover, dischargeability of the penalties does not abrogate the IRS prepetition levy for the full amount of the levy (including penalties) against the pension rights of the debtor, which are not subject to an exemption under the Tax Code. There is still a factual issue as to the degree the pension was vested at the time of the levy.
11 U.S.C. § 523(a)(7)(B).
2. FACTS AND PROCEDURE
Lawrence McCubbins has been a tax protestor for years. In 1989, the tax court held that he filed a fraudulent tax return in 1976, failed to file tax returns in 1977 and 1978, and assessed the following deficiencies and penalties against him:
YEAR DEFICIENCY § 6653(B) PENALTY § 6654 PENALTY TOTALS 1976 2,767.00 1,384.00 0.00 4,151.00 1977 87,924.00 43,932.00 2,919.00 134,775.00 1978 14,727.00 7,364.00 47.00 22,138.00
TOTALS 105,418.00 52,680.00 2,966.00 161,064.00
Lawrence R. McCubbins v Commissioner of Internal Revenue, 57 TCM (CCH) 481, TCM (P-H) 89,245 (1989).
McCubbins failed to file federal income tax returns for the years 1980 through 1987. The IRS filed substitute tax returns for those years, and assessed taxes, interest and penalties. The following is a table of the amounts owed by McCubbins for the tax years 1980 through 1987. These figures were accrued at various times in 1989-1990, so would need to be adjusted to arrive at a true total. TAX YEAR TAXABLE INCOME NEGLIGENCE ESTIMATED TAX FILING PENALTY AUDIT DEFICIENCY INTEREST ON TOTAL PENALTIES PER IRS'S PENALTY PENALTY LATE PER DEFAULT OF DEFICIENCY INTEREST SUBSTI-TUTED 90-DAY LETTER (Including Some RETURN Penalties and Collection Costs) 1980 33,565 476.55 607.24 2,382.75 9,531.00 20,306.04 33,303.58 1981 45,561 13,815.76 1,392.52 4,539.50 18,158.00 29,195.04 67,100.82 1982 63,748 14,391.80 2,491.85 6,399.75 25,599.00 30,987.83 79,870.23 1983 53,542 8,405.12 1,343.72 4,698.75 18,795.00 18,428.59 51,671.18 1984 67,776 9,357.51 1,389.00 5,525.75 22,103.00 20,599.42 58,974.68 1985 55,662 3,772.15 1,059.60 4,622.75 18,491.00 7,490.90 35,436.40 1986 20,872 239.17 0.00 100.00 4,006.00 724.41 5,069.58 1987 13,322 324.78 66.78 344.25 1,939.00 2,800.85 5,475.66 TOTALS 354,048 50,782.84 8,350.71 28,613.50 118,622.00 130,533.08 336,902.13 Notices of the balances due required as a condition of levying appear to have been sent to McCubbins for each of the eleven tax years at various times well before the 1991 levy. The IRS prepared a tax levy in January 1991, having a balance of about $970,000 as of February 1, 1992. The levy was served on the trustee of McCubbins' pension fund, the Operating Engineers Employers Retirement Fund, on January 8, 1991.
See, Declaration of Keith S. Blair, Exhibit 2, Docket Entry 14, filed December 22, 1999, containing two Form 4340, Certificate of Assessments and Payments regarding McCubbins for Individual Income Tax Returns (1040) for tax periods December 31, 1980, through December 31, 1987.
26 U.S.C. § 6331(a).
See, notations on two Form 4340, Certificate of Assessments and Payments regarding McCubbins for Individual Income Tax Returns (1040) for tax periods December 31, 1980, through December 31, 1987, attached to Declaration of Keith S. Blair, Exhibit 2, Docket Entry 14, filed December 22, 1999.
Notice of Levy on Wages, Salary and Other Income, attached as Exhibit A to Declaration of Mike Mida, Docket Entry 15, filed December 22, 1999.
McCubbins filed a chapter 7 bankruptcy on April 12, 1993. He was discharged on September 7, 1993.
In re Lawrence Ray McCubbins, aka Larry McCubbins, Case No. A93-00284-HAR, Voluntary Chapter 7 Petition, Main Case Docket Entry 1, filed April 12, 1993.
Discharge of Debtor, A93-00284-HAR Main Case Docket Entry 24, filed September 7, 1993.
The parties have not informed me whether McCubbins, after the January 1991, levy, continued to work and contribute to the pension fund until he retired and the pension fund went into pay status sometime in 1997. In his bankruptcy petition's Statement of Affairs, he indicates he had no income for the two years immediately preceding 1993. In 1997, the IRS began collecting the retirement proceeds from the trustee, and has collected over $50,000.
Statement of Affairs, Question 1, attached to Voluntary Petition, Main Case Docket Entry 1, filed April 12, 1993.
See, Complaint — Adversarial Proceeding, Docket Entry 1 at page 5, filed October 7, 1999; Declaration of Mike Mida, Docket Entry 15, filed December 22, 1999.
It is not clear from the record how much of the pension fund was vested when the levy was served in January 1991, or when the petition was filed in April 1993, but McCubbins listed an interest in the pension fund in his bankruptcy schedules.
See, Schedule B, attached to the Voluntary Petition filed by debtor, Main Case Docket Entry 1, filed April 12, 1993.
McCubbins filed this adversary proceeding seeking: (a) to have a determination that the taxes, interest and penalties for the years 1976-78 and 1980-87 were discharged by his bankruptcy; (b) that the pension fund is exempt from the IRS's levy; (c) that the IRS should return the funds it has garnished; and, (d) that the IRS should be held in contempt and pay some penalty for having violated Mr. McCubbins' discharge.
The IRS moved for summary judgment. The motion does not explicitly spell out the relief sought, but seems to ask that relief be denied to McCubbins, that the taxes be declared nondischargeable, and that its past and continuing levy on Mr. McCubbins' pension fund is legally justified.
United States' Motion for Summary Judgment, Docket Entry 12, filed December 22, 1999.
McCubbins filed an opposition in which he admits "[t]he Plaintiff never filed returns for tax years 1979 through 1993, because the law did not require that he do so." He also alleges "[n]o legally sufficient levy has ever been issued against the Plaintiff by the Internal Revenue Service," because the pension is exempt and was never properly seized.
Plaintiff's Brief in Opposition to Motion for Summary Judgment, Docket Entry 20, filed January 21, 2000.
Id, page 2.
Id.
3. ISSUES The main issues are:
I. Are the taxes, interest and penalties nondischargeable for filing a fraudulent tax return for 1976, and for failing to file tax returns for 1977, 1978, and 1980-1987?
II. Even if they are discharged, is the IRS's prepetition levy on the debtor's pension rights, made before the pension rights entered into pay status, valid?
4. ANALYSIS 4.1. Dischargeability Issues 4.1.1. The Tax Penalties are Dischargeable All the tax penalties that I am aware of occurred or were assessed more than three years prior to Mr. McCubbins' 1993 bankruptcy petition. The latest stemmed from 1987 taxes, for which a return would have been due (if there was no extension) in April 1988, five years before the bankruptcy. The penalties are thus dischargeable under
11 U.S.C. § 523(a)(7)(B) which provides that tax penalties are dischargeable if they are "imposed with respect to a transaction or event that occurred before three years before the date of filing the petition."
McKay v United States, 957 F.2d 689, 693-94 (9th Cir 1992);Frary v United States (In re Frary), 117 B.R. 541 (Bankr D Alaska 1990); Wright v United States (In re Wright), 2000 WL 137454, *5, ___ B.R. ___ (Bankr ND Cal 2000).
The bankruptcy court is an appropriate forum to determine that the penalties are dischargeable. 4.1.2. 1976-1977 Taxes and Interest are Nondischargeable In the tax court case filed by McCubbins, the tax court judge found that his 1976 tax return was fraudulent in many respects, and that he did not file 1977 or 1978 tax returns. The determination is binding on me in the present proceeding.
11 U.S.C. § 505; see, generally, 15 Collier on Bankruptcy, Chapter TX5: Litigation with the IRS in Bankruptcy Court.
Lawrence R. McCubbins v Commissioner of Internal Revenue, 57 TCM (CCH) 481, TCM (P-H) 89,245 (1989).
11 U.S.C. § 505(a)(2)(A).
The 1976 taxes, therefore, fall squarely within the exception to discharge for a fraudulent return.
11 U.S.C. § 523(a)(1)(C); McKay v United States, 957 F.2d at 691.
The 1977 and 1978 tax obligations were liquidated by the tax court, which found that returns had not been filed. These taxes are nondischargeable because of the failure to file tax returns.
11 U.S.C. § 523(a)(1)(B)(i).
As indicated in Part 4.1.1, the penalties associated with these years are dischargeable.
4.1.3. 1980-1987 Taxes and Interest are Nondischargeable The debtor has admitted that he did not file tax returns for the years 1980-1987. The IRS did file substitute tax returns for the debtor, but these do not qualify as filing a tax return for the purposes of 11 U.S.C. § 523(a) to entitle McCubbins to dischargeability of the 1980-1987 taxes.
See, 26 U.S.C. § 6012, 6020(b).
Bergstrom v United States (In re Bergstrom), 949 F.2d 341, 342-43 (10th Cir 1991); United States v Hatton (In re Hatton), 216 B.R. 278, 280 (9th Cir BAP 1997).
Although the amount of the levy is steep, McCubbins has not questioned the IRS's computations of taxes for these years per se; he has only made a generalized tax-protestor type attack on the system. The IRS produced admissible evidence establishing the amount McCubbins owed for these years by a Form 4340.
Exhibit 2 attached to Declaration of Keith S. Blair, Docket Entry 14, filed December 22, 1999; FRE 803(8); Hughes v United States, 953 F.2d 531, 535, 539-40 (9th Cir 1992).
To defeat the motion for summary judgment, the nonmovant must produce some factual rebuttal to the evidence produced by the movant. Although the court will not impose the requirement of procedural perfection on him because he is acting pro se, McCubbins must still abide by the basic rules in responding to the IRS's summary judgment motion. His failure to rebut the information for the 1980-1987 tax years in any meaningful way allows this court to adopt the IRS's factual contentions about these years.
Security Farms v International Broth. of Teamsters, Chauffers, Warehousemen Helpers, 124 F.3d 999, 1011 (9th Cir 1997); Patterson v International Broth. of Teamsters, Local 959, 121 F.3d 1345, 1350 (9th Cir 1997), cert den 118 SCt 1675 (1998); Lewis v Scott (In re Lewis), 97 F.3d 1182, 1187 (9th Cir 1996).
McCabe v Arave, 827 F.2d 634, 640 fn 6 (9th Cir 1987).
Carter v Commissioner, 784 F.2d 1006, 1008-09 (9th Cir 1986).
Indeed, in a case with facts quite similar to the present proceeding, a bankruptcy court held that debtors were estopped or barred by laches from challenging the IRS's computations.
Allison v United States (In re Allison), 232 B.R. at 201-02, aff'd 245 B.R. 705.
Thus, the taxes and interest for 1980 through 1987 are nondischargeable because no returns were filed. The penalties are dischargeable per Part 4.1.1.
4.2. The IRS's January 1991, Levy 4.2.1. The Levy Was Valid McCubbins makes a scatter gun attack on the levy. Principally, he says it was incorrect because the pension fund was not seized. The pension fund was an intangible, not subject to physical seizure. Service of the levy on the trustee was sufficient, even though the right to payment was deferred to a future date. 4.2.2. The Prepetition Levy on Debtor's Pension Rights, Prior to Their Going Into Pay Status, Remains Effective After Discharge Even if all the taxes, interest and penalties had been discharged, the prepetition levy on McCubbins' pension rights was not avoided by the discharge. The bankruptcy discharge of a debt does not normally discharge the lien rights of a creditor.
Plaintiff's Brief in Opposition to Motion for Summary Judgment, pages 8-15, Docket Entry 20, filed January 21, 2000.
United States v Hemmen, 51 F.3d 883, 887 (9th Cir 1995).
Isom v United States, 901 F.2d 744 (9th Cir 1990); 11 U.S.C. § 524(e).
McCubbins listed an interest in the pension fund, worth an unknown amount, on his bankruptcy schedules. Thus, he was probably at least partially vested at the time of his petition, which was about twenty-seven months after the January 1991, levy. How much he was vested at the time of the levy and at the later date of the petition, is not apparent in the record.
See, Schedule B, attached to the Voluntary Petition filed by debtor, Main Case Docket Entry 1, filed April 12, 1993.
Until the court knows whether he was fully vested, it may not be possible to determine if all of the money received by the IRS under its levy, the $50,000 plus, was appropriately taken. If part of the vesting occurred due to work and contributions to the pension fund after the levy, it might not be covered by the levy. For example, if he was vested for $500 a month in pension payments (payable upon retirement) when the levy occurred in January 1991, and later became entitled to $750 due to subsequent contributions, the additional $250 in monthly pension payments might not be covered under the levy. A levy only applies to property owned by the tax debtor when the levy is served, and not after-acquired property.
26 U.S.C. § 6331(b).
I do not know if the IRS has filed subsequent levies on the pension trustee. If there were none, and there was vesting that took place after the levy, it is possible the IRS is only entitled to a pro rata share of the pension payments it has already received. If, as I suspect, McCubbins was fully vested in January 1991, the IRS's receipt of all the pension payments was proper. McCubbins argues that the IRS's levy on his pension fund rights was avoided when he filed bankruptcy. He contends that the IRS cannot levy against his ERISA qualified pension fund because of its anti-alienation provisions. This is not correct. In In re Raihl, the 9th Circuit BAP, in a case arising out of Alaska, held that the anti-alienation provisions of ERISA do not trump the federal tax lien law.
See, United States v Rice (In re Rice), 1998 WL 939695, *5 and fn 10 (Bankr ED Va 1998), which cites Connor v United States (In re Connor), 27 F.3d 365, 366 (9th Cir 1994).
Plaintiff's Brief in Opposition to Motion for Summary Judgment, page 7, Docket Entry 20, filed January 21, 2000.
Raihl v United States (In re Raihl), 152 B.R. 615, 618 (9th Cir BAP 1993), affirming 1991 WL 322632, 71A AFTR2d 93-4236 (Bankr D Alaska 1991); see, also, Shanbaum v United States, 32 F.3d 180, 183 (5th Cir 1994).
Like the present case, Raihl's pension rights were not in pay status at the time of the lien. They were, however, vested — I do not know if McCubbins' rights were vested in 1991 when the IRS levied on his pension fund. The BAP emphasized that the "unqualified contractual right to receive property is itself a property right," implying that vesting is important.
Raihl v United States (In re Raihl), 152 B.R. at 618; see, also,Allison v United States (In re Allison), 232 B.R. at 205-08, aff'd 245 B.R. 705.
Thus, the IRS must supplement the record to establish the information about the state of vesting of McCubbins' pension rights in January 1991.
There is nothing to stop the IRS now from issuing a new levy, but it should not include the penalty amounts if the court is correct in its analysis in Part 4.1.1 of this Memorandum.
5. CONCLUSION The taxes and interest described in Parts 4.1.2 and 4.1.3 of this Memorandum, adjusted for the passage of time, are nondischargeable. The penalties are dischargeable per Part 4.1.1. I do not know if it is necessary or desirable to arrive at a precise calculation of these amounts. Unless the parties request that one be established, I will not attempt to do so in this proceeding.
The appropriateness of the IRS levy cannot yet be resolved by summary judgment because the court does not know if McCubbins was fully vested when the levy was served on the pension trust fund. If he was fully vested in his pension on January 8, 1991, the date of the IRS's levy, the funds received to date by the IRS rightfully belong to it to apply to McCubbins' tax obligations described in Parts 4.1.1, 4.1.2 and 4.1.3, as well as the penalties mentioned in Part 4.1.1. The continued receipt of funds from the pension to apply to these tax obligations would also be appropriate.
If he was not fully vested, the parties should advise the court regarding the status of vesting, and the legal ramifications of McCubbins not being fully vested at the time of the levy.
I will enter a non-final order based on this Memorandum.