Individual with Regular Income — Liquidated Debts — Tax Penalties. — Tax penalties arising under 26 U.S.C. § 6700 and 6701 are "in the nature of a tort debt," and thus are excluded from the computation of a Chapter 13 debtor's unsecured debt under Section 109(e).
ABEL, Chief Bankruptcy Judge
See Sec. 109(e) at ¶ 7055.
The United States, on behalf of the Internal Revenue Service, filed a motion to dismiss this Chapter 13 case on October 21, 1991. The basis of the motion was that the Debtor did not qualify under Chapter 13 because his debts exceeded the $100,000 statutory limit for unsecured debt under section 109(e). 11 U.S.C. § 109(e). The IRS contends that penalties it assessed must be included in the Debtor's unsecured debt. While many types of tax penalties are included when computing a debtor's unsecured debt, the court finds that the penalties involved in this proceeding are in the nature of a tort debt. They are, thus, the type of debt Congress intended to exclude from the section 109(e) computation.
After considering the evidence and briefing, the court has made the following findings of fact and conclusions of law. Where appropriate, findings of fact shall be deemed conclusions of law and conclusions of law shall be deemed findings of fact.
JURISDICTION
This bankruptcy case was referred to this court by the standing order of reference, and the court has jurisdiction over the case in accordance with 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O).
FINDINGS OF FACT
Facts Relating to This Bankruptcy Proceeding
1. William Eugene Bailey ("Debtor") filed a petition for relief under Chapter 13 of the Bankruptcy Code on July 24, 1991. The Debtor listed the Internal Revenue Service ("IRS") as a creditor with a disputed, contingent, or unknown claim. His schedules indicate that he has $14,353.05 unsecured debt exclusive of the IRS claim.
2. The IRS filed a proof of claim on September 5, 1991, claiming $19,797 in unsecured priority claims and $1,455,179 in unsecured general claims. $1,398,804 of the general unsecured priority claim was based on an assessment for tax penalties under 26 U.S.C sec. 6700 and 26 U.S.C. § 6701. Before the filing of the proof of claim, the IRS had not assessed the taxes.
3. The Debtor filed a complaint to determine the dischargeability of the tax claims and an objection to the IRS claim. The court has ordered all the adversary rules applicable to the objection to the proof of claim and has consolidated both matters for discovery and trial.
Facts Relating to the Tax Penalties.
The court has relied upon the evidence adduced at the hearing in this case, but the facts are almost the same as the Robertson case pending before the Honorable Robert C. McGuire. The court, therefore, wishes to acknowledge that it has adopted much of Judge McGuire's statement of the facts.
4. The Debtor is both an attorney and a certified public accountant. He is a partner in the certified public accounting firm of Bailey, Vaught Roberson Co. ("BVR").
5. Beginning in 1982, BVR advised several partnership clients which had contracted with an entity known as Coral. Coral purportedly was organized to develop monoclonal antibodies for diagnostic purposes.
6. In connection with BVR's representation of its partnership clients, BVR hired the Texas law firm of Durant Mankoff to research the deductibility of research and development expenses for a company which had contracted with Coral. Durant Mankoff prepared a legal opinion in 1982 which provided legal authorities indicating that companies who contracted with Coral could claim the research and development expenses as a deduction. Durant Mankoff republished its opinion in 1983 and 1984 without modification of the original conclusion.
7. Interests in Coral were marketed as tax shelters, and the interests were sold in cruzeiros, the Brazilian currency. The tax shelter was tied to the expected decrease in value relative to the U.S. dollar. The notes contained no mechanism for monetary correction to accommodate the cruzeiro's marked change in value. By 1988 cruzeiro notes that cost $525,000 in 1982 could be paid to Coral for approximately $184.
8. The IRS disallowed a significant portion of the deductions taken by the partnerships on 1982-1983 tax returns for payments, expenses, and debt incurred in connection with the Coral research projects on the basis that the Coral debt was a fiction, and the partnerships did not truly contract with Coral with a profit motive. Agro Science Co. v. C.I.R., 934 F.2d 573 (5th Cir. 1991); United States v. Campbell, 897 F.2d 1317 (5th Cir. 1990)
CONCLUSIONS OF LAW
1. There is one legal issue to be resolved in this case: are tax penalties arising under sections 6700 and 6701 of the Internal Revenue Code contingent and unliquidated as contemplated by section 109(e) of the Bankruptcy Code?
2. This court agrees with the analysis of Judge McGuire in a case involving the same facts and law as this case. His reasoning in the Robertson case is adopted by this court, and a copy of the opinion is attached and hereby incorporated. In re Robertson, No. 391-35663 (Bankr. N.D. Tex. March 5, 1992).
3. As in the Robertson case, this case will not be set for confirmation of the plan until the tax issues are resolved.
Comments