Opinion
Case No. 00-50774-RLJ-13.
July 8, 2005
MEMORANDUM OPINION AND ORDER
The Internal Revenue Service ("IRS") seeks dismissal of this chapter 13 case because of the debtors' failure to pay their income taxes during the pendency of this case. The debtors contend that dismissal is inequitable as they are within five months of completing their sixty-month chapter 13 plan.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
On August 7, 2000, debtors Danilo F. Gonzalez and Nancy D. Gonzalez filed their chapter 13 case. The debtors' chapter 13 plan was confirmed on June 28, 2001. The IRS filed an amended proof of claim for delinquent income taxes in the amount of $367,802.01, which included a secured claim in the amount of $236,964.82, an unsecured priority claim in the amount of $121,376.70, and a general unsecured claim of $9,460.49. This delinquency constituted 1040 income taxes owed for the 1994, 1995, 1996, 1997, 1998, and 1999 tax years. The confirmation order provides that the value of the collateral securing the IRS's claimed secured claim of $236,964.82 for the years 1994-1996 was $33,088.23. The order further provides that payment of the IRS's priority claims for the 1997-1999 would begin the fifth month after confirmation. The debtors currently contribute approximately $4,700 per month and have paid a total of $208,933.81 thus far under their plan.
Unfortunately, the debtors' habit of not paying their taxes continued after they filed their bankruptcy petition. As of March 1, 2005, the debtors are delinquent for post-petition taxes as follows: (a) 1040 income tax for the year ending December 31, 2000, in the amount of $41,152.53; (b) 1040 income tax for year ending in 2001, in the amount of $46,312.39; (c) 1040 income tax for the year ending in 2002, in the amount of $47,890.42; and (d) 1040 income tax for the year ending 2003 in the amount of $42,004.66. The total delinquent amount for post-petition taxes is $177,360.00, which is not disputed by the debtors. The debtors are, however, current in making their chapter 13 plan payments, and are five months away from completing their sixty-month chapter 13 plan.
This Court may dismiss a chapter 13 case for cause under 11 U.S.C. § 1307(c); In re Koval, 205 B.R. 72, 75 (Bankr. N.D. Tex. 1996). "Lack of good faith is `cause' for dismissal" and may warrant dismissal with prejudice to refiling. Stathatos v. Trustee ( In re Stathatos), 163 B.R. 83, 87 (Bankr. N.D. Tex. 1993).
Chapter 13 debtors who file in the Northern District of Texas are required to file all post-petition federal tax returns when due (or procure an extension from the appropriate taxing authority) and to pay all taxes timely. See General Order 98-4 for the Northern District of Texas (as amended by General Order 2003-03). General Order 98-4 provides in relevant part:
9.i. The Debtor shall timely file all post-petition federal tax returns, and shall pay all tax due pursuant to said returns either directly to the IRS or to the Trustee, upon modification of the Final Plan providing for payment of such to the IRS. The IRS shall mail written notice to the Trustee, Debtor and Debtor's counsel of Debtor's failure to comply with this paragraph.
. . .
k. Regarding post-petition taxes, if the Debtor does not fully comply within 30 days of the notice provided in paragraph i, either by (1) filing the return and paying the tax, including applicable penalties and interest, in full, or (2) filing the return and filing a Final Plan modification to pay the tax, including applicable penalties and interest in full; . . . the IRS will notify the Trustee of said non-compliance and the Trustee may file a motion to dismiss the case due to said non-compliance.
In Koval, this court (The Honorable Harold C. Abramson presiding) faced a situation very similar to that at bar. Robert Koval, a licensed physician, filed bankruptcy under chapter 7 on March 26, 1991. Koval received his chapter 7 discharge on August 23, 1991. On the same date, August 23, 1991, Koval filed a chapter 13 bankruptcy. Koval then filed a proof of claim on behalf of the IRS for tax years 1989, 1990, and 1991 in the estimated aggregate amount of $500,000. Koval, 205 B.R. at 73. After filing bankruptcy, Koval incurred additional tax liability in the amount of $528,018.23. This amount represented Koval's failure to file federal tax returns for any of the years after filing his 1991 chapter 13 petition. Judge Abramson criticized the debtor's failure to pay post-petition taxes:
Debtors should not be able to afford themselves of the special and equitable benefits afforded by the Bankruptcy Code while ignoring the duties and responsibilities imposed by the Tax Code. It is not good faith for Debtors to file Chapter 13 bankruptcy and then continue to earn income but not pay the post-petition taxes on that income.
Id. at 76.
Here, as in Koval, the debtors had significant pre-petition tax debts. And, as in Koval, the debtors continued their inexplicable habit of not paying their federal income taxes after filing for relief under chapter 13 of the Bankruptcy Code. This conduct sets a pattern of dishonesty and bad faith. See id. As Judge Abramson aptly stated, "[f]ailure of Debtors in this case to timely file all post-petition federal tax returns, and to pay all tax due pursuant to the returns, and to comply with § 9(h), of General Order 93-1 violates the spirit of the General Order and is cause for dismissal." Id. Failure to comply with General Order 98-4 is also grounds for dismissal pursuant to 11 U.S.C. § 1307(c). Id.; see Berryhill v. U.S. ( In re Berryhill). 189 B.R. § 463 (N.D. Ill. 1995).
General Order 98-4 supersedes General Order 93-1.
The record reveals that every year since 1994, the debtors have failed to pay their federal income taxes. In 2000, the debtors sought the protection of the Bankruptcy Code, and used the Code to set a payment schedule for their pre-petition tax debt. Unfortunately, the debtors continued their habit of neglecting their federal tax liability by failing to file 1040 tax returns and to pay their taxes for each year since their petition date. Such facts call for dismissal of this case, albeit without prejudice as the IRS did not so request. It is, therefore
ORDERED that this chapter 13 proceeding of Danilo F. Gonzalez and Nancy D. Gonzalez is hereby dismissed without prejudice.