Opinion
Chapter 11 Case No. 99-13592-WCH, Adversary Proceeding No. 00-1392, CIVIL ACTION NO. 01-10417-REK
February 27, 2002
Opinion
I. Background of Pending Appeal
Pending before this court is an appeal from a decision of the Bankruptcy Court of the District of Massachusetts. The Bankruptcy Court's decision ALLOWED a Motion to Dismiss filed by the United States of America. The debtor/plaintiff, who filed for bankruptcy on April 28, 1999, was seeking to discharge tax liability from 1995 that he owed to the Internal Revenue Service. He argued to the Bankruptcy Court that the income tax was dischargeable under 11 U.S.C. § 507(a)(8)(A)(1).
That section states that income tax liability is dischargeable only:
For a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition.11 U.S.C. § 507(a)(8)(A)(1).
It was undisputed in the lower court that Mr. Kimball sought an automatic extension (Form 4868) to file his tax return until August 15, 1996. As this date would be within three years of the date Mr. Kimball filed his petition for bankruptcy, the debt would normally be nondischargeable. Mr. Kimball advanced the argument that the extension was invalid, however, because of misrepresentations that he made when filing the Form 4868. The bankruptcy court held that a taxpayer cannot receive the benefit of an extension and then argue that it is invalid because of misrepresentations the taxpayer made.
II. Issues on Appeal as Asserted by Appellant
Appellant makes the following, "Statement of Issues on Appeal,"
1. Did the Bankruptcy Court err in entering the decision on the Motion to Dismiss by failing to conduct an evidentiary hearing in the adversary proceeding to determine the extent of the reliance by the United States of America, an essential element in this case?
2. Did the Bankruptcy Court commit reversible error by finding that the Debtor, John H. Kimball, Jr., was estopped to claim his income tax extension requested for the taxable year 1995 was invalid?
3. Did the Bankruptcy Court commit reversible error in failing to hold an evidentiary hearing on the issue of estoppel so as to determine whether an estoppel actually existed and then prevented the Debtor from asserting his 1995 U.S. Form 4868 was invalid?
4. Did the Bankruptcy Court commit reversible error in failing to hold that the United States was estopped to claim the Debtor's 1995 U.S. Form 4868 was valid because of published positions of the United States to the contrary?
5. Did the Bankruptcy Court commit reversible error in failing to hold that the Debtor's request for an extension of time to file his 1995 personal income tax return on U.S. Form 4868 was invalid?
6. Did the Bankruptcy Court commit reversible error in allowing the Claimant to ignore Rev. Rul 79-113, 1979-1 C.B. 389?
7. Did the Bankruptcy Court commit reversible error in failing to hold that the adoption by the United States of inconsistent litigating positions in different courts based solely upon which position benefits the United States violates the abuse of discretion standard of 26 U.S.C. § 7805(b)?
8. Did the Bankruptcy Court commit reversible error in failing to hold that there was no rational basis to the United States asserting the validity of the requested extension other than the collection of taxes?
9. Did the Bankruptcy Court commit reversible error in failing to hold that the United States must apply the tax laws as interpreted by the Courts and the Internal Revenue Service uniformly to all taxpayers?
10. Did the Bankruptcy Court commit reversible error in holding, under an apparent estoppel theory, that the validity of the Debtor's income tax extension could be reviewed only by the United States?
11. Did the Bankruptcy Court commit reversible error in finding that some estoppel based theory allowed the Debtor to be subjected to disparate treatment as to other taxpayers under the Internal Revenue Code?
12. Did the Bankruptcy Court commit reversible error in allowing the United States to adopt a position contrary to the published positions of the United States by and through the Commissioner of Internal Revenue?
Docket No. 4 at 1-2.
III. Disputes About What Issues Are On Appeal
Appellee disputes the debtor/plaintiff's contentions about what issues are properly before this court in this appeal. See Docket No. 4 at 1-2 and Docket No. 5 at 2-3. Upon review of the Bankruptcy Court's decision and the filings of the parties, this court has determined that beyond dispute the applicable statutory provision is 11 U.S.C. § 507(a)(8)(A)(1), and that appellant is entitled to a discharge of tax liability only if the three year period stated in the statute is measured from the original due date for the tax return, April 15, 1996. I conclude, that the text of 11 U.S.C. § 507(a)(8)(A)(1) supports an interpretation requiring that the three year period be measured from the time of the extension, August 15, 1996. The only issues before this court in this appeal are thus limited.
The primary issue the court will consider is whether Kimball is precluded from contending that the extension is invalid because he would be benefitting from his admitted misrepresentation. Kimball describes the Bankruptcy Court's holding as one of estoppel, a word not used in that court's decision. Kimball ignores the Bankruptcy Court's language that only the IRS can invalidate an extension. It is not sufficient for Kimball merely to show an incorrect holding of estoppel. He must instead show that someone other than the IRS has the power to invoke a procedure for invalidation of the extension.
In determining this issue the court will also consider whether the bankruptcy court should have conducted evidentiary hearings before ALLOWING the Motion to Dismiss. . .
IV. Other Issues Asserted by Appellant
The court has determined that Part III above identifies all of the properly presented issues relevant to decision of this appeal. The court finds no merit in appellant's arguments regarding unfairness and disparate treatment on the part of the United States or in the argument that the United States is estopped. The court finds these arguments to be without merit because they are based on a misinterpretation of the respective roles of courts and an administrative agency as prescribed by statute. The law is straightforward that the IRS has the power to challenge an extension, and if it does so, that the court rules only on whether the IRS action was invalid. See Crocker v. Commissioner, 92 T.C. 899 (1989). For a more recent description of this two-step process, see Ahadpour v. Commissioner of Internal Revenue, 79 T.C.M. (CCH) 1583 (2000). Here, the IRS has not challenged the extension and the Bankruptcy Court has not ruled the extension to be invalid.
The IRS can choose to waive its right to challenge the validity of an extension. Usually such a waiver benefits the taxpayer. Thus, any claim of disparate treatment, especially where the IRS has determined not to exercise its discretion to waive, is ultimately unpersuasive. Moreover, as the extension is unchallenged, it would be inappropriate for either the Bankruptcy Court or this court to rule that the IRS is estopped.
Likewise, where an extension is unchallenged by the IRS, it is irrelevant whether its hypothetical invalidity would be ab initio or from the date of the court's determination. The underlying question, here, is whether a taxpayer can seek an invalidation of the automatic extension independently of the IRS. That is the issue to which this opinion turns next.
V. The Merits
Appellant asserts that the bankruptcy court held that Kimball was "somehow estopped" from claiming the invalidity of his Form 4868 extension. Docket No. 4 at 4. Nowhere does the bankruptcy court use the term estoppel. Instead, the bankruptcy court states:
There is a significant amount of case law denying a taxpayer the right to void an extension under 26 C.F.R. § 1.6081-4 (2000). In re Hermann, 217 B.R. 944, 949 (Bankr.N.D.Okla. 1998) ("Having previously obtained the benefit of the extension, . . . [the taxpayer] cannot now escape its burden . . . [t]he regulation [§ 1.6081-4(c)] reasonably infers that only the IRS has the option to declare an extension void."); In re Brustman, 217 B.R. 828, 835 (Bankr.S.D.Cal. 1997) ("[the taxpayer] cannot now step forward to make the self-serving admission of a fraud in estimating his tax liability, and thereby void the automatic extension . . . under IRS regulations, the application for an extension is terminable, not void, at the discretion of the IRS, not the taxpayer."); United States v. Lambrakis, 1994 WL 544289, *2 (E.D.N.Y Sept. 27, 1994) ("under IRS regulations, the application for an extension is terminable, not void, at the discretion of the IRS, not the taxpayer."); In re Gidley, 138 B.R. 298, 300 (Bankr.M.D.Fla. 1992) (holding absent IRS termination, extension was valid and taxpayer lacked authority to void extension).
In re Kimball, 2001 WL 260078, *1 (Bankr.D.Mass. 2001).
The Bankruptcy Court's ruling is consistent with the regulatory procedure prescribed in 26 C.F.R. § 1.6081-4(c). This section states, in part:
Termination of automatic extension. The district director, including the Assistant Commissioner (International), or the director of a service center may terminate at any time an automatic extension by mailing to the taxpayer a notice of termination.26 C.F.R. § 1.6081-4(c)
No mention is made in the regulations of a taxpayer power to question the validity of an extension. Courts that have addressed this issue have held that a taxpayer does not have this power. See United States v. Lambrakis, 1994 WL 544289, *2 (E.D.N.Y. 1994); In re Hermann, 221 B.R. 944, 949 (Bankr.N.D.Okla. 1998); In re Brustman, 217 B.R. 828, 835 (Bankr.C.D.Cal. 1997); In re Gidley, 138 B.R. 298, 300 (Bankr.M.D.Fla. 1992). One of the underlying reasons for this rule may be equitable, as a taxpayer normally would receive a benefit from filing an extension and thus should be precluded from attempting to evade a subsequent burden of filing that extension. Whatever the underlying reasons, in any event, the relevant case law indicates that only the IRS can initiate the two-step process that is described in Crocker.
In these circumstances, the date from which the three year period is measured is the date of the extension, August 15, 1996. See 11 U.S.C. § 507(a)(8)(A)(1). Therefore, Mr. Kimball is not entitled to receive a discharge in bankruptcy of this tax liability. No evidentiary hearing is necessary to make this determination as it is solely a question of law. The court finds no merit in appellant's arguments and AFFIRMS the decision of the bankruptcy court with costs awarded to the appellee.
ORDER
For the foregoing reasons, it is ORDERED:
The Clerk is directed to enter forthwith on a separate document a Final Judgment as follows:
For the reasons stated in the Opinion of February 27, 2002, it is ORDERED:
The decision of the Bankruptcy Court of January 18, 2001, from which this appeal was taken is AFFIRMED. Costs are awarded to appellee.
Final Judgment
For the reasons stated in the Opinion of February 27, 2002, it is ORDERED:
The decision of the Bankruptcy Court of January 18, 2001, from which this appeal was taken is AFFIRMED. Costs are awarded to appellee.