Opinion
Case No. 11-53853 Adv. Pro. No. 19-02113
2021-07-23
IN RE: Jerry L. SPROUT and Leslie Carpenter-Sprout, Debtor(s). Jerry L. Sprout, et al., Plaintiff(s), v. Internal Revenue Service, Defendant(s).
James E. Nobile, Nobile & Thompson Co LPA, Hilliard, OH, for Debtor(s). Samuel P. Jones, Tax Division, Dept. of Justice, Washington, DC, for Defendant(s).
James E. Nobile, Nobile & Thompson Co LPA, Hilliard, OH, for Debtor(s).
Samuel P. Jones, Tax Division, Dept. of Justice, Washington, DC, for Defendant(s).
MEMORANDUM OPINION AND ORDER GRANTING IN PART DEFENDANT UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT (DOC. #26)
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for consideration of the Defendant United States of America's Motion for Summary Judgment (Doc. #26) (the "Motion"), the Plaintiffs' Response in Opposition to Defendant's Motion for Summary Judgment (Doc. #28) (the "Response") filed by Jerry Sprout and Leslie Carpenter-Sprout (the "Debtors"), and the Defendant United States of America's Reply in Support of Its Motion for Summary Judgment (Doc. #31) (the "Reply").
The United States of America ("IRS"), the defendant in this adversary proceeding, requests that this Court determine that IRS is entitled to judgment in its favor on the following issues: (1) that the Debtors are liable for unpaid penalties, and interest on taxes and penalties, for the income tax years of 2007, 2008, and 2010; (2) that any claims for taxes, penalties, and interest for those tax years are nondischargeable; and (3) that the Debtors' confirmed Chapter 11 plan of reorganization did not effect a discharge of any of the nondischargeable debts owed IRS. The Court having considered the record and the arguments of the parties, makes the following findings and conclusions.
IRS requested summary judgment on a number of other matters; however, they do not appear to be at issue in this case.
I. Jurisdiction
Pursuant to 28 U.S.C. § 1334, the United States District Court for the Southern District of Ohio entered Amended General Order 05-02, referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Findings of Fact
Upon the pleadings, admissions on file, affidavits, and other materials submitted with the Motion, the Response, and the Reply, the Court makes the following findings of fact:
The Debtors filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 12, 2011. IRS timely filed a proof of claim. IRS subsequently filed an amended proof of claim indicating that the amount of its pre-petition claim was approximately $152,748 , of which IRS asserted that $14,114 was secured, $70,867 was general unsecured non-priority, and $67,767 was priority. The Debtors filed their First Amended Chapter 11 Plan of Reorganization (Doc. #49) (the "Plan") on October 27, 2011. The Plan provided the following treatment for IRS' claim:
For ease of reading, the Court has left off the cents in various amounts recited in this opinion.
[T]he Debtors do not believe that the IRS is entitled to an Allowed Secured Claim. Any property to which an IRS tax lien would attach is over-encumbered or entirely exempt under both State and Federal law.
The IRS' claim shall be bifurcated into priority and general non-priority unsecured claims as follows.
The Debtors will pay the IRS an Allowed Priority Claim of $67,767.00. Beginning with the first month following the month of the Effective Date, the Debtors shall pay the IRS pursuant to 11 U.S.C. [§] 1129(a)(9)(C) by making regular monthly cash payments in the amount of $1,130.00 to the IRS on or before last day of each consecutive month for sixty (60) months.
The above figure represents the amounts the Debtors believe are entitled to secured status and/or priority under 11 U.S.C. §§ 506(a) and 507(a)(8). This amount consists of all tax and interest due for tax years 2007, 2008, 2009, and 2010.
All remaining amounts due to the IRS for tax years 2005 and 2006 and all general penalty amounts for all tax years are not entitled to priority treatment under 11 U.S.C. § 507(a)(8), and shall be treated as a general, unsecured, non-priority claim and will be paid pursuant to the provisions of CLASS G.
IRS objected to the Plan (Doc. #66), which was resolved by the entry of Agreed Order Resolving Objection of the United States to Confirmation of Debtors' Amended Chapter 11 Plan (Doc. #69) (the "Agreed Order"). The Agreed Order allowed IRS a secured claim in the amount of $7,000.00, which the Debtors would pay within thirty days of entry of the Agreed Order. The Agreed Order further provided that the parties' agreement did not affect the treatment of IRS' remaining priority and general unsecured claims pursuant to the Plan. Thereafter, on February 24, 2012, the Court confirmed the Plan, Order Confirming Chapter 11 Plan (Doc. #71) (the "Confirming Order"), and the Debtors paid IRS' secured claim ($7000) in full pursuant to the Agreed Order. Thereafter, pursuant to the terms of the confirmed Plan, the Debtors paid IRS' priority claim ($67,767) in full and a dividend of $12,583 on its allowed general unsecured claim.
The IRS further amended its POC on February 27, 2012 (the "Claim"), after entry of the Agreed Order and confirmation of the Plan to indicate that the amount of its pre-petition claim was approximately $152,775 of which $7,000 was secured, $78,008 was general unsecured non-priority, and $67,767 was unsecured priority.
The Plan classified IRS' general unsecured non-priority claim as a Class G claim. The Plan provided that Class G claims were to be paid on a pro rata basis from a pool of funds contributed by the Debtors over five years.
On January 15, 2019, the Debtors received their bankruptcy discharge. Order Granting Chapter 11 Individual Discharge (Doc. #100) (the "Discharge Order"). After entry of the Discharge Order, IRS began sending the Debtors notices of intent to levy for 2007, 2008, and 2010 income tax years (the "Priority Tax Period"). IRS indicated in its tax levy notices that the Debtors owe the following amounts:
(1) Tax Year 2007: $574 (amount owed) , plus $6,004 in failure-to-pay penalty, and $2,514 in interest;
(2) Tax Year 2008: $777 (amount owed), plus $1,193 in failure-to-pay penalty, and $47 in interest; and
(3) Tax Year 2010: $16 (amount owed), plus $643 in interest.
The notices of levy state "amount you owed", and according to the IRS, this represents the balance of pre-petition assessed tax, penalties, and interest after application of payments on the account, but do not include the unassessed accruals for failure-to-pay penalties and interest on tax and penalties.
The Debtors countered with a complaint commencing this adversary proceeding, seeking a declaratory judgment that the Debtors' debts owed to IRS for tax years 2007, 2008, and 2010 have been paid and/or discharged pursuant to the terms of the Plan.
The Motion contends that there are no issues of material fact and that IRS is entitled to judgment as a matter of law.
III. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, provides that a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party seeking summary judgment bears the initial burden of "informing the ... court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
If the movant satisfies this burden, the nonmoving party must then assert that a fact is genuinely disputed and must support the assertion by citing to particular parts of the record. See Fed. R. Civ. P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the non-moving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc ., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When deciding a motion for summary judgment, all justifiable inferences must be viewed in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp ., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Anderson , 477 U.S. at 255, 106 S.Ct. 2505.
The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:
[T]he moving [party] may discharge its burden by "pointing out to the ... court ... that there is an absence of evidence to support the nonmoving party's case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its [position]. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must
be evidence on which the jury could reasonably find for the [nonmoving party]."
Hall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997) (citations omitted). A material fact is one whose resolution will affect the determination of the underlying action. See Tenn. Dep't of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. See Schaffer v. A.O. Smith Harvestore Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996). "The substantive law determines which facts are ‘material’ for summary judgment purposes." Hanover Ins. Co. v. Am. Eng'g Co. , 33 F.3d 727, 730 (6th Cir.1994). In determining whether each party has met its burden, the court must keep in mind that "[o]ne of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses ...." Celotex , 477 U.S. at 323–24, 106 S.Ct. 2548.
IV. Discussion
The essential issue before the Court is whether the Debtors' tax and related liabilities for the Priority Tax Period were discharged pursuant to the terms of the Plan, the Confirming Order, and the Discharge Order.
The Debtors contend that they have made all of their payments that were required under the Plan, and as a result, have fully satisfied their obligations to IRS. The Debtors further argue that IRS failed to appeal the Confirming Order and Discharge Order, and thus, it is required to accept the payment set forth in the confirmed Plan in full satisfaction of its claims, thereby resulting in the Debtors owing IRS nothing after the Discharge Order was entered.
IRS argues, however, that an unpaid balance remains owing to the IRS for the following items related to the Priority Tax Period: (1) post-petition interest on the taxes; (2) penalties and pre-petition interest on penalties; and (3) post-petition interest on penalties. IRS argues that neither the Plan nor the Claim contemplated that these debts would be fully paid even though the Debtors made all their payments according to the terms of the Plan. IRS asserts that the penalties related to the Priority Tax Period are nondischargeable under 11 U.S.C. § 523(a)(7). And further, IRS contends that it is not bound by the terms of the Plan and thereby prohibited from collecting the remaining debts related to the Priority Tax Period and post-petition interest thereon, because same are nondischargeable as a matter of law.
A. Dischargeability of 2007, 2008 and 2010 Tax Debt
Section 523(a) of the Bankruptcy Code provides discrete categories of debts that are excepted from discharge. The categories that are relevant to this case are those that involve priority taxes and penalties related to taxes. With respect to tax liabilities, 11 U.S.C. § 523(a) provides in pertinent part as follows:
(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required—
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;
....
11 U.S.C. § 523(a)(1). The exception under § 523(a)(1)(A) excepts from discharge any tax debt or unsecured claim(s) of the government that is entitled to priority status pursuant to § 507(a)(8). Priority status is afforded to claims for, among other things, income taxes attributable to the tax years for which a return was due within three years prior to the filing of the bankruptcy case. 11 U.S.C. § 507(a)(8) provides in pertinent part as follows:
(a) The following expenses and claims have priority in the following order:
...
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
(i) 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)(i). The Claim filed by IRS in this case included, among other things, an unsecured priority claim in the amount of $67,767 for taxes and interest thereon as of the date of the filing of the Debtors' petition for the Priority Tax Period (the "Priority Claim"). The Priority Claim was a debt for income taxes for which a return was due within three years prior to the filing of the bankruptcy case. Accordingly, the Priority Claim was entitled to priority status under § 507(a)(8)(A)(i), and because of that, it was also excepted from discharge pursuant § 523(a)(1)(A). Stated more simply, the Priority Claim is a nondischargeable debt.
B. Dischargeability of Penalties under § 523(a)(7)
11 U.S.C. § 523(a)(7) further provides that:
(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
...
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty—
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition[.]
11 U.S.C. § 523(a)(7). As stated by the Eleventh Circuit Court of Appeals:
While the language of this subsection frames nondischargeable tax penalties as an exception to an exception to an exception, once the triple negative is taken into account the meaning of the provision gains clarity. A tax penalty is discharged if the tax to which it relates is discharged (in the precise terms of the statute, not nondischargeable) or if the transaction or event giving rise to the penalty occurred more than three years prior to the filing of the bankruptcy petition. Since the statute uses the disjunctive,
a tax penalty that does not qualify for discharge under one of the two aforementioned circumstances may still qualify under the other.
Burns v. United States (In re Burns) , 887 F.2d 1541, 1544 (11th Cir. 1989). The penalties that IRS is attempting to collect from the Debtors pursuant to the tax levies are penalties related to the Priority Claim. The Court has concluded above that the debts related to the Priority Claim are nondischargeable under §§ 523(a)(1) and 507(a)(8). Furthermore, the penalties that IRS is attempting to collect from the Debtors pursuant to the tax levies relate to the Priority Tax Period, and as such, do not relate to a transaction or event that occurred more than three years prior to the filing of the bankruptcy petition. Because the underlying Priority Claim is nondischargeable and the penalties do not relate to a transaction or event that occurred more than three years prior to the filing of the bankruptcy petition, the penalties are also nondischargeable pursuant to § 523(a)(7).
C. Interest on the Nondischargeable Tax Claim
Pre-petition interest is nondischargeable when it relates to an otherwise nondischargeable tax debt. See Cinquegrani v. United States (In re Cinquegrani), 1993 WL 134752, 1993 Bankr. LEXIS 985 (Bankr. N.D. Ill. 1993) ; In re Garcia , 955 F.2d 16 (5th Cir. 1992) ; Burns v. United States (In re Burns) , 887 F.2d 1541 (11th Cir. 1989) ; In re Hanna , 872 F.2d 829 (8th Cir. 1989) ; and In re Larson , 862 F.2d 112 (7th Cir. 1988). Furthermore, the Supreme Court in Bruning v. United States , 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), held that post-petition interest on an unpaid nondischargeable tax debt continues to be a personal liability of the debtor after bankruptcy. "[T]he government may recover post-petition interest on nondischarged debts for taxes regardless of whether the underlying debt has been paid or not." United States v. River Coal Co. , 748 F.2d 1103, 1107 (6th Cir. 1984). In this case, there remains, among other things, unpaid post-petition interest on the taxes and unpaid pre-petition and post-petition interest on penalties relating to the Priority Claim. As the Court has concluded that the Priority Claim is a nondischargeable debt, the interest related to same is also nondischargeable.
Notwithstanding the determination of the nondischargeability of the Priority Claim and the interest and penalties related to same, the Debtors assert that it was their intention to fully pay the Priority Claim so that when they completed the Plan, they would have no further liability to IRS. The Debtors contend that based on the terms of the Plan and the effect of confirmation, they have accomplished this objective.
D. Effect of Confirmation of the Plan of Reorganization
The Debtors do not dispute that the taxes related to the Priority Claim are nondischargeable, nor do they argue that the penalties and interest related thereto are nondischargeable. The Debtors do, however, contend that based on the terms of the Plan and the effect of confirmation, the Debtors had no remaining liability to IRS once they completed their payments and received their discharges.
The effect of confirmation is governed by 11 U.S.C. § 1141 and provides in pertinent part as follows:
(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor, ... and any creditor, ... whether or not the claim or interest of such creditor ... is impaired under the plan
and whether or not such creditor ... has accepted the plan.
...
(d)(2) A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title.
11 U.S.C. § 1141(a) and (d)(2). Although a confirmed plan generally binds a creditor to the treatment as provided in the plan, a debt that is excepted from discharge under § 523 will survive issuance of the debtor's discharge, and the creditor entitled to payment of its nondischargeable debt may pursue collection of same upon the completion of the debtor's plan. "[T]he confirmation of a plan of reorganization does not fix tax liabilities made nondischargeable under 11 U.S.C. § 523." In re Gurwitch , 794 F.2d 584, 585 (11th Cir. 1986).
Nonetheless, the Debtors contend that the following Plan provisions limit IRS' ability to collect upon its nondischargeable debt:
[T]he Debtors do not believe that the IRS is entitled to an Allowed Secured Claim. Any property to which an IRS tax lien would attach is over-encumbered or entirely exempt under both State and Federal law.
The IRS' claim shall be bifurcated into priority and general non-priority unsecured claims as follows.
The Debtors will pay the IRS an Allowed Priority Claim of $67,767.00. Beginning with the first month following the month of the Effective Date, the Debtors shall pay the IRS pursuant to 11 U.S.C. [§] 1129(a)(9)(C) by making regular monthly cash payments in the amount of $1,130.00 to the IRS on or before last day of each consecutive month for sixty (60) months.
The above figure represents the amounts the Debtors believe are entitled to secured status and/or priority under 11 U.S.C. §§ 506(a) and 507(a)(8). This amount consists of all tax and interest due for tax years 2007, 2008, 2009, and 2010.
All remaining amounts due to the IRS for tax years 2005 and 2006 and all general penalty amounts for all tax years are not entitled to priority treatment under 11 U.S.C. § 507(a)(8), and shall be treated as a general, unsecured, non-priority claim and will be paid pursuant to the provisions of CLASS G.
First Am. Plan 10 (Doc. #49).
According to the Debtors, these provisions in the Plan limit IRS to accepting only the amounts provided to be paid thereunder as full satisfaction of any debt related to those tax years and discharged any further liability they may have to IRS. The Debtors' argument, however, ignores the plain language of §§ 1141(d)(2) and 523 to the contrary. "Under § 1141(d)(2), confirmation does not discharge an individual debtor from any debt excepted from discharge under 11 U.S.C. § 523, which excepts from discharge taxes entitled to priority under 11 U.S.C. § 507." Fein v. United States (In re Fein) , 22 F.3d 631, 632 (5th Cir. 1994). Pursuant to the plain language of the Code, a bankruptcy does not and cannot discharge a priority tax claim. The parties in this case do not dispute that the taxes, penalties, and interest at issue relate to priority taxes and are excepted from discharge under § 523. Accordingly, the Plan did not discharge the unpaid tax debts related to the Priority Claim because same are nondischargeable under § 523 and § 1141(d)(2) excludes them from discharge. The binding effect of the Plan in this case is limited to the treatment of the allowed amount of IRS' Claim under the Plan, but it does not discharge any amounts that may still be due after completion of the Plan.
The Debtors insist that they intended to have no further liability to IRS once their Plan was completed. This does not avail them. The Plan fails to contain any language that could be interpreted as discharging claims that are otherwise nondischargeable. There is no language in the provisions cited above, or elsewhere in the Plan, that indicate the payments received by IRS will be in full satisfaction of the tax debts such that any remaining personal liability of the Debtors shall be discharged upon completion of the Plan.
Furthermore, the provisions of the Plan regarding discharge are antithetical to the Debtors' position. The Plan provides in pertinent part as follows: "Once a discharge is ultimately issued by the Court, it shall be effective as to all debts except those that would otherwise be nondischargeable under 11 U.S.C. § 523 ." First Am. Plan 20 (Doc. #49) (emphasis added). With respect to general unsecured non-priority claims, the Plan provides that "[u]pon completion of all payments, or unless otherwise ordered to occur at an earlier time, the Debtors shall receive a permanent discharge of all remaining dischargeable debt treated in CLASS G." First Am. Plan 13 (Doc. #49) (emphasis added). The Plan further provides a specific exception for nondischargeable debts with respect to the applicability of the injunction provision. The Plan states that:
Except as to debts that are deemed nondischargeable under 11 U.S.C. § 523 , all creditors that have held, currently hold or may hold a Claim or other debt or liability against the Debtors shall be permanently enjoined from taking any of the following actions against (I) the Debtors; or (ii) against any of his property, on account of, or in any way relating to, any such Claim, debts or liabilities: (a) commencing or continuing in any manner any action or other proceeding; (b) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order; (c) creating, perfecting or enforcing any lien or encumbrance; (d) asserting a setoff or right of subrogation of any kind against any debt, liability or obligation due to the Debtors; and (e) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan.
First Am. Plan 20 (Doc. #49) (emphasis added). The plain language of the Plan specifically recognizes that nondischargeable debts are not being discharged. As previously discussed, the tax debts related to the Priority Claim are nondischargeable under 11 U.S.C. § 523. Accordingly, based on the specific language in the Plan those debts were excepted from the Debtors' discharge.
Additionally, 11 U.S.C. § 1129(a)(9)(c) essentially requires a chapter 11 plan of reorganization to provide for interest on IRS' claims. The Debtors' Plan does not. The Claim did not list any amounts or claims for post-petition interest or penalties; the Claim specifically states that any penalties and interest contained therein are only calculated through the petition date. The Plan provided for payment of the Priority Claim in the same amount as stated in the Claim, so by its own terms, the Plan failed to provide any post-petition interest for the Priority Claim. The Plan did not contain any additional language that proposed to pay post-petition interest or suggest a specific interest rate for same. Furthermore, the Plan provided that IRS' unsecured non-priority claim would be paid as a Class G claim pro rata with other such claims; the Plan provided for payment of those claims on a pro rata basis from a pool of funds contributed by the Debtors over five years, with no interest. Based on the plain language of the Plan, the Debtors failed to provide for interest on IRS' claims as required by § 1129(a)(9)(c), and in the absence of IRS' agreement, the Court erred in confirming the Plan without this provision. The Debtors posit that IRS did agree to this as illustrated by the Agreed Order, but nothing in the Agreed Order suggests that IRS contemplated anything with respect to interest on its claims. In any case, the failure to provide for interest in the Plan does not somehow morph the IRS' nondischargeable claims into discharged claims.
Nonetheless, the Debtors urge this Court to disregard the plain language of the Plan and §§ 1141(d)(2) and 523 based on the Supreme Court decision in United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). In Espinosa , the bankruptcy court confirmed a Chapter 13 plan that proposed to pay the principal on the debtor's student loan debt and discharge the interest once the principal was paid. In general, a Chapter 13 debtor may obtain a discharge of student loan debt only if failure to discharge the debt would impose an undue hardship on the debtor and his dependents under 11 U.S.C. § 523(a)(8). Pursuant to Federal Rule of Bankruptcy Procedure 7004, a party in interest must file a complaint instituting an adversary proceeding for the bankruptcy court to make such a determination. The debtor did not do so. The debtor completed his payments on the principal of the student loan, and upon completion of the confirmed plan, received a discharge. Thereafter, the United States Department of Education ("DOE") attempted to collect the unpaid interest on the student loan, so the debtor filed a motion requesting that the bankruptcy court enforce its discharge order. DOE opposed the motion and filed a cross-motion under Federal Rule of Civil Procedure 60(b)(4) seeking to set aside as void the bankruptcy court's order confirming the Chapter 13 plan. The Supreme Court held that it was legal error that the bankruptcy court failed to find undue hardship before confirming the plan, but the confirmation order was not void and remained enforceable because the student loan creditor had notice of the error and failed to object or timely appeal. The Supreme Court specifically noted as follows:
Sections 1328(a) and 523(a)(8) provide that student loan debt is dischargeable in a Chapter 13 proceeding if a court makes a finding of undue hardship. In contrast, other provisions in Chapter 13 provide that certain other debts are not dischargeable under any circumstances. See, e.g. , §§ 523(a)(1)(B), (C) (specified tax debts); § 523(a)(5) (domestic support obligations); § 523(a)(9) (debts "caused by" the debtor's unlawful operation of a vehicle while intoxicated). We express no view on the conditions under which an order confirming the discharge of one of these types of debt could be set aside as void.
United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 273 n.10, 130 S. Ct. 1367, 1379, 176 L.Ed.2d 158 (2010).
The Debtors in this case urge the Court to extend the rationale in Espinosa to this case and conclude that even if the Plan provisions effectuated a discharge of an otherwise nondischargeable debt in contravention of the Code, IRS should be bound by the Plan because IRS had notice of the improper plan provisions and failed to object to the treatment of its Claim or appeal the Confirming Order or Discharge Order. Since no language in the Plan supports the Debtors' position that the Debtors' discharge effected a discharge of nondischargeable tax and related debt to IRS, the Debtors' theory does not make sense.
The Supreme Court specifically reserved judgment regarding whether an order confirming a Chapter 13 plan would be void if the plan discharged a debt that was not dischargeable under any circumstances, such as a tax debt. Moreover, several courts have questioned the propriety of extending the holding in Espinosa to permit the discharge of debts that are otherwise not subject to discharge under any circumstances. See De Boer v. Talsma (In re Talsma) , 496 B.R. 828, 838 (Bankr. N.D. Tex. 2013) (" Espinosa cannot be construed broadly to permit a debtor to discharge any non-dischargeable debt. Instead, Espinosa must be construed narrowly only to permit debtors' unopposed plans to discharge debts that are at least theoretically dischargeable under the Code (like student loans)."); United States v. Johnston (In re Johnston) , 2014 U.S. Dist. LEXIS 158950, at *11 (D. Ariz. 2014) (noting that Espinosa dealt with a type of debt that can be discharged under certain circumstances); Fla. Dep't of Revenue v. Diaz (In re Diaz) , 647 F.3d 1073, 1090 (11th Cir. 2011) ("[I]f a creditor holds a child-support debt, then whether the bankruptcy court disallows all, part, or even none of that creditor's claim has no bearing on whether any portion of the debt is discharged—no part of a child-support debt is "dischargeable under any circumstances" in a Chapter 13 case."). But this Court need not decide this particular question because (unlike the Espinosa plan) the Debtors' Plan, by its own terms, does not effect discharge of the nondischargeable Priority Claim and the interest and penalties related to same. The Court declines to extend the holding in Espinosa to this case.
E. Additions to Tax
Finally, the Debtors contend that IRS improperly assessed additions to tax in the form of failure-to-pay penalties relating to the Priority Claim during the pendency of the case in violation of 26 U.S.C. § 6658. IRS contests that failure-to-pay penalties accrued or were assessed during the pendency of the Debtors' bankruptcy case.
26 U.S.C. § 6658 provides as follows:
(a) Certain failures to pay tax. No addition to the tax shall be made under section 6651, 6654, or 6655 for failure to make timely payment of tax with respect to a period during which a case is pending under title 11 of the United States Code—
(1) if such tax was incurred by the estate and the failure occurred pursuant to an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses, or
(2) if—
(A) such tax was incurred by the debtor before the earlier of the order for relief or (in the involuntary case) the appointment of a trustee, and
(B)
(I) the petition was filed before the due date prescribed by law (including extensions) for filing a return of such tax, or
(ii) the date for making the addition to the tax occurs on or after the day on which the petition was filed.
(b) Exception for collected taxes. Subsection (a) shall not apply to any liability for an addition to the tax which arises from the failure to pay or deposit a tax withheld or collected from others and required to be paid to the United States.
The evidence submitted by IRS with its Motion reveals the following: IRS maintains a computer database called the Integrated Data Retrieval System ("IDRS") that keeps records and stores information regarding the reporting, assessment, and collection of taxpayers' federal income tax liabilities. IDRS can generate account transcripts or reports that organize and display information regarding a particular taxpayer and tax period. One such report provides the balance owing for a particular taxpayer for a particular tax period as of a particular date (the "INTSTD Report"). The INTSTD Report also provides a detailed accounting of accrued interest and penalties on a particular taxpayer's account. IDRS can also produce a transcript that provides information concerning a taxpayer's account for a particular tax year, including but not limited to, the assessment and abatements of tax liability, and the posting of payments and credits to the liability, and they include a brief description of each listed transaction or event noted on the account in plain language (the "Plain Language Transcript"). Events or transactions that occur with respect to a taxpayer's account for each tax period are recorded in IDRS using numeric transaction codes. The transaction code that pauses the accrual and assessment of failure-to-pay penalties is identified as the "520 transaction code." In accordance with the internal operating procedures of IRS, a representative inputs the 520 transaction code into IDRS to stop the accrual of failure-to-pay penalties on a taxpayer's account when a bankruptcy case is filed. The INTSTD Reports and Plain Language Transcripts related to the Priority Tax Period all contain the 520 transaction code. Accordingly, it appears based on the record, that IRS paused the accrual and assessment of failure-to-pay penalties in accordance with 26 U.S.C. § 6658. The Debtors did not submit any evidence to rebut IRS' evidence.
F. Amount of Liability Pursuant to the Tax Levies
Although the Court concludes as a matter of law that the Plan and Confirmation Order did not discharge any unpaid debts for taxes, penalties, or interest related to the Priority Tax Period, the Court is not able to determine the actual amounts that remain unpaid based on the INTSTD Report and Plain Language Transcripts that are attached to the Motion. The Court was not able to reconcile the amounts stated in the tax levies for the tax years 2007, 2008, and 2010 with the INTSTD Report and Plain Language Transcripts. For example, the notice of tax levy for the tax year 2007 indicates the amount for "interest charges" is $2,514; however, according to the Plain Language Transcript for that same tax year, the amount for interest is $2,730. In addition, the INTSTD report for the tax year 2007 lists an amount of $2,501 for what appears to be accrued interest. Accordingly, the Court will schedule a hearing to determine the specific dollar amounts related to the Priority Tax Period that remain unpaid.
V. Conclusion
For the foregoing reasons, the Court finds that as a matter of law, any claims for taxes, penalties, and interest for the income tax years 2007, 2008, and 2010 are nondischargeable, not subject to the Debtors' discharge, and any remaining unpaid claims for same survived the bankruptcy as personal liabilities of the Debtors. Accordingly, it is
ORDERED AND ADJUDGED that the Defendant United States of America's Motion for Summary Judgment (Doc. #26) is granted in part; and the Court holds that any claims for taxes, penalties, and interest for the income tax years 2007, 2008, and 2010 are nondischargeable, not subject to the Debtors' discharge, and any remaining unpaid claims for same survived the bankruptcy as personal liabilities of the Debtors.