In re GYPC, Inc.

Guy R. Humphrey, United States Bankruptcy Judge

Chapter 7

W. Timothy Miller

Michael L. Meyer

(Counsel for Christopher F. Cummings and Eric Webb)

Phillip L Bednar

(Counsel for the United States of America)

ORDER DENYING, WITHOUT PREJUDICE, MOTION OF CHAPTER 7 TRUSTEE TO CONFIRM AUTHORITY TO FILE AMENDED TAX RETURNS (DOC. 428)

Guy R. Humphrey, United States Bankruptcy Judge

On June 10, 2021 the Chapter 7 Trustee, Donald F. Harker, III (the "Trustee") filed his Motion of Chapter 7 Trustee to Confirm Authority to File Amended Tax Returns (doc. 428). The Trustee, based upon 11 U.S.C. §§ 505(a)(1) and 105, requests this bankruptcy court to find that he had statutory authority to amend the debtor's federal tax returns for 2016 and 2017. This court has jurisdiction to determine this contested matter pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and the Amended General Order of Reference 05-02 (S.D. Ohio). This court has constitutional authority to enter final judgment on this contested matter.

The Trustee's motion is opposed by the two shareholders of the debtor, GYPC, Inc. ("GYPC"), as well as the United States. In order to place this motion in proper context, a brief review of the history of GYPC's tax filings and this bankruptcy case is necessary.

It is undisputed that GYPC was an S corporation in the years immediately before it filed its Chapter 11 petition. At all pertinent times, Cummings and Eric Webb (collectively, the "Shareholders") have been GYPC's shareholders. On February 1, 2017, Christopher Cummings, one of the two shareholders of GYPC, released his rights in a certain revocable trust. Cummings' release of his rights in the revocable trust apparently caused GYPC to become ineligible for S corporation tax status, converting GYPC's tax status to a C corporation. Generally, the impact of the change in tax status from being an S corporation to being a C corporation is that income taxes on corporate earnings would be paid by the corporation, rather than by the Shareholders. In an S corporation, unlike a C corporation, income flows through the corporation to the shareholders, and those shareholders pay the resulting income taxes. See Harker v. Cummings (In re GYPC, Inc.), Adv. No. 19-3046, Adv. No. 19-3047, 2020 Bankr. LEXIS 2384, at *17 (Bankr. S.D. Ohio Aug. 4, 2020) (citing Gitlitz v. Comm'r, 531 U.S. 206, 209 (2001)) ("The [Shareholders] may have benefitted from such a conversion because tax liability that would flow to the shareholders as an S corporation instead would be paid by GYPC if it was a C corporation.").

According to the Trustee's motion, GYPC began as an C corporation in 1995 and elected S corporation status in 2013.

GYPC filed Chapter 11 on March 30, 2017 and filed adversary proceedings against Webb and Cummings in March 2019. See Adv. Nos. 19-3046 and 19-3047. This litigation led to an apparent conflict of interest between GYPC and the Shareholders, and, by agreement between the United States Trustee and GYPC, the court converted this case to Chapter 7 on August 16, 2019. The Trustee was substituted as the plaintiff in the adversary proceedings filed by GYPC, including the litigation in which Cummings and Webb are defendants.

As part of the Cummings and Webb litigation, the Trustee asserted, among other things, that by converting GYPC from an S corporation to a C corporation shortly before the petition date, the Shareholders received a fraudulent or preferential transfer. Webb and Cummings moved to dismiss this particular count, which the court granted. The court found that the Shareholders controlled the decision to change the tax status of an S corporation, and the tax status of an S corporation is not a recognized property interest under applicable non-bankruptcy law.

Subsequently, on or about June 2, 2021, the Trustee amended GYPC's 2016 federal S corporation tax return, the 2017 partial year S corporation tax return up to the date of the apparent change in tax status on February 1, 2017, and a C corporation federal tax return for the balance of 2017. The tax returns were amended to move deferred income that was included in the 2017 tax returns back to the 2016 tax year. The result of such a change, if it ultimately reflected the tax obligations of GYPC for those tax years (by agreement of the parties or a judicial determination), is that millions of dollars of taxable income would flow from an obligation of the GYPC bankruptcy estate back to the Shareholders. As it currently stands, the United States (through its agency, the Internal Revenue Service), has filed an amended administrative claim for taxes, interest and penalties in the total amount of $6, 419, 715.22. Claim 35-2.

About a week after filing the amended tax returns, the Trustee moved this court to confirm his authority to do so. He asserts legal support for this request under § 505(a)(1) of the Code, which states:

The Trustee indicated he needed to amend the tax returns prior to the filing of this motion because of a statute of limitation on amending the 2016 and 2017 federal tax returns. See 26 U.S.C. § 6511 (providing the taxpayer three years from the filing of a return, or two years from when a tax is paid, whichever is later, to amend it to claim a credit or refund of an overpayment).

Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

11 U.S.C. § 505(a)(1). The motion recognizes the established principle that § 505(a)(1) allows for the efficient adjudication of the amount or legality of a tax claim as part of the administration of a debtor's bankruptcy estate. Mich. Emp't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1138 (6th Cir. 1991); In re Beisel, 195 B.R. 378, 379-80 (Bankr. S.D. Ohio 1996). However, as far as determining the Trustee's authority to amend federal S corporation tax returns, the Trustee concedes that he is "unaware of case law addressing the specific request in the Motion[.]" Doc. 428 at 8, ¶ 25.

The Trustee cites cases that purportedly demonstrate this authority as "announced in the opinion as a matter of fact and not the subject of litigation itself." Id. But a careful review of those cases reveals that none of them resolve the specific issue of whether a Chapter 7 trustee can amend an S corporation return. In I.R.S. v. Levy, although it discusses in dicta that the Chapter 7 trustee amended certain pre-petition tax returns, it seems clear that the debtor at all pertinent times was a C corporation, as the discussion involves taxes that would be owed by the estate. 130 B.R. 28, 31 (Bankr. E.D. Va. 1991), rev'd on other grounds, 937 F.2d 265 (4th Cir. 1992). See also United States v. Ralph Owens Trucking Co., Inc. (In re Ralph Owens Trucking Co., Inc.), 09-4215, 2010 WL 395641 (Bankr. N.D. Tex. Jan. 27, 2010) (chapter 7 trustee filed amended corporate tax returns concerning overpayments; no discussion of the tax status of the debtor). In re Goodrich Quality Theaters, Inc., No. DG 20-00759, 2020 WL 5552581, at *1, 2020 Bankr. LEXIS 2452, at *4 (Bankr. W.D. Mich. Sept. 16, 2020) (discussion of a trustee amending returns without a reference to the tax status of the corporation); Darr v. United States (In re TelexFree, LLC), 615 B.R. 362, 367-68 (Bankr. D. Mass. 2000) (no discussion of the tax status of the debtor).

The court does not believe § 505(a)(1) can be expanded beyond its plain meaning to allow this court to determine the trustee's authority to file amended returns as a discrete and separate legal determination from determination of the estate's tax liability. See Internal Revenue Service v. Sulmeyer (In re Grand Chevrolet, Inc.), 153 BR. 296, 299 (C.D. Cal. 1993) ("Pursuant to section 505, a bankruptcy court has the jurisdiction only to determine tax liabilities; there is no grant of jurisdiction to decide issues that are antecedent to the determination of tax liability."). Nor does § 105 provide any further support to the Trustee. Section 105 allows the bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." 11 U.S.C. § 105(a). However, it does not allow the court to "contravene specific statutory provisions." Law v. Siegel, 571 U.S. 415, 421 (2014). The Supreme Court has stated time and again that "'whatever equitable powers remain in the bankruptcy courts must and can be exercised within the confines' of the Bankruptcy Code." Id. (quoting in part Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)). See also Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 n.1 (6th Cir. 2000) (Section 105 may be used to preserve a right otherwise included in the Bankruptcy Code, but not to create a separate private right of action). The Trustee is correct in arguing that he is not asking the court to use § 105 in direct contravention of another Bankruptcy Code section, but by expanding § 505(a)(1) in this matter, the result is similar.

Congress determined that, with certain exceptions, a bankruptcy court could determine the amount or legality of a tax, no more and no less. Section 505 could have been drafted to give bankruptcy courts the ability to separately determine if a trustee had the authority to amend a federal S corporation tax return. But this court must take the Bankruptcy Code as it is written. The

Trustee asks for a separate determination of authority, effectively seeking declaratory relief, not given to bankruptcy courts outside a proper determination under section 505(a)(1). Therefore, the court expresses no opinion at this time on whether the Chapter 7 Trustee has the statutory authority to amend an S corporation federal tax return. The court also is not opining at this time on whether, as argued by the Shareholders, the amended returns are inconsistent with substantive federal tax law.

Based on the court's ruling, and for purposes of determining this motion, the question of whether the authority issue was more appropriately raised in an adversary proceeding is moot. See Fed.R.Bankr.P. 7001(9) (requiring an adversary proceeding "to obtain a declaratory judgment[.]" But see footnote 5, supra.

Further, the Trustee's piecemeal approach to the ultimate dispute with the Shareholders and the United States raises an issue that may not be ripe. Grand Chevrolet, 153 B.R. at 299. The United States has not taken any action as to the amended returns, and therefore has not, as of yet, challenged the Trustee's authority to amend the tax returns. If the Trustee objects to the allowance of the IRS's administrative claim, or otherwise seeks to determine the amount or legality of the United States' tax claim against the estate, that objection may require a determination of the ability of the Trustee to amend the 2016 and 2017 federal tax returns. See footnote 5, supra. Under those circumstances, the authority issue may be subject to determination by this court.

The parties raise multiple arguments concerning the authority issue. The Trustee argues that the Internal Revenue Service's Tax Guide requires a trustee to file a Form 1120S for an S corporation and that 26 U.S.C. § 6012(b)(3) authorizes a trustee to file tax returns for a corporation. The Trustee also notes the Bankruptcy Tax Act of 1980 as supporting his position. See 26 U.S.C. §§ 1398, 1399 (providing, unlike individuals, corporations and partnerships have no separate taxable entity in bankruptcy). The Shareholders find support in Alon Int'l., Inc. v. United States, 910 F.Supp. 233 (W.D. Pa. 1995) and other decisions for the proposition that only the shareholders can amend an S corporation tax return, although it appears none of those decisions include a Chapter 7 trustee. See doc. 440 at 17-19 for the Shareholders' discussion of Alon and other decisions. The United States noted that Alon does not implicate § 6012(b)(3). Doc. 467 at 11. The United States also commented on some regulatory support that the Shareholders, as the taxpayers for the S corporation return, should complete any amendment. Id. (citing C.F.R. § 1.451-1(a)). By contrast, I.R.C. § 6037 does not refer to the taxpayer as the proper party to file or amend an S corporation tax return, but just requires the S corporation to send a copy to each shareholder. 26 U.S.C. § 6037(a) and (b).

It also appears that potentially complex issues of fact and law about the appropriateness of applying deferred income to the 2016 tax year may need to be adjudicated. At that point, it appears that this court could determine that matter and, therefore resolve all issues related to the tax dispute among the government, the Shareholders, and the Trustee, or perhaps abstain to allow what is primarily a tax dispute to be addressed in the United States Tax Court or another court of appropriate jurisdiction. See Grand Chevrolet, 153 B.R. at 300 ("Ultimately, this preliminary dispute may develop into a tax liability controversy and, at that point, even if the Trustee has yet to file a tax return, section 505 will vest the Bankruptcy Court with jurisdiction over it."). But this court cannot use §§ 505(a)(1) or 105 to determine the authority of the Trustee as a separate legal issue, and is particularly reluctant to do so when the authority of a Chapter 7 trustee to amend an S corporation tax return appears to be one of first impression.

The Trustee notes that the Shareholders filed the 2017 and 2018 tax return for GYPC post-conversion, without authority from the Trustee or this court. The court expresses no opinion at this time on that potentially related question of authority. Doc. 428 at 6, ¶ 14. On October 1, 2021 the Trustee filed a complaint against GYPC, Cummings, Webb, and the United States, seeking relief under 11 U.S.C. § 549 that the 2017 and 2018 GYPC tax returns filed by the Shareholders are an avoidable post-petition transfer, and declaratory relief that the Shareholders lacked authority to file those returns, and the Trustee has the authority to file those returns, or amend them. Adv. No 21-3025 (doc. 1).

For all these reasons, the Trustee's motion is denied, without prejudice to being addressed as part of a determination of the legality or amount of tax owed by GYPC pursuant to § 505(a)(1), or other appropriate proceeding.

IT IS SO ORDERED.