Opinion
No. 97-56108
Submitted February 4, 1999 — Pasadena, California
The panel unanimously finds this case suitable for decision without oral argument. Fed.R.App.P. 34(a)(2).
Decided March 19, 1999
Curtis R. Richmond and Barbara Young Richmond, Solana Beach, California, in pro per, for the plaintiffs-appellants.
Thomas J. Sawyer, United States Department of Justice, Tax Division, Washington, D.C., for the defendant-appellee.
Appeal from the United States District Court for the Southern District of California Marilyn L. Huff, District Judge, Presiding, D.C. No. CV-97-00354-MLH.
Opinion by Judge Magill.
OPINION
Daniel and Barbara Richmond appeal from the bankruptcy court's entry of judgment in favor of the Internal Revenue Service (IRS), and the district court's affirmance of that judgment, on several claims arising from the IRS's attempts to assess and collect tax deficiencies for the 1978 and 1979 tax years. They contend that (1) the IRS's collection efforts in 1989 violated the statute of limitations, (2) their discharge from bankruptcy in 1990 discharged them from any liability for the 1978 and 1979 tax years, and (3) the IRS violated the automatic stay. We affirm.
I.
The Richmonds filed their 1978 tax return on July 7, 1980, and filed their 1979 tax return on March 27, 1981. Because the Richmonds did not pay the taxes they listed as due and owing, the IRS assessed tax return deficiencies against them on August 11, 1980 and May 4, 1981, respectively.
A. The First Bankruptcy
On July 27, 1982, before paying their tax return deficiencies, the Richmonds petitioned for bankruptcy under Chapter 7 of the Bankruptcy Code. While the bankruptcy proceedings were pending, the IRS requested the Richmonds to execute Special Consent to Extend Time To Assess Tax Forms for the 1978 and 1979 tax years. The Richmonds complied. In 1985, after auditing the Richmonds' 1978 and 1979 returns, the IRS sent them a statutory notice of deficiency identifying additional taxes owed. However, the IRS was precluded from assessing or attempting to collect these additional taxes, or audit deficiencies, because of the automatic stay.
On April 1, 1988, the bankruptcy court entered an order denying the Richmonds a discharge from bankruptcy. However, the bankruptcy court never informed the IRS about its order and never entered the order on the case docket. The IRS did not become aware of the order until September 21, 1989. In October 1989 the IRS auctioned some of the Richmonds's property and applied the sale proceeds to cover the tax return deficiencies assessed in 1980 and 1981.
B. The Second Bankruptcy
Before the IRS assessed the audit deficiencies against the Richmonds, they filed a second petition for bankruptcy on July 27, 1990. They received a discharge in that case on November 30, 1990. Subsequently, in 1993, the IRS assessed the audit deficiencies against them with respect to their 1978 and 1979 tax returns. In an effort to collect those deficiencies, the IRS served Barbara Richmond's employer with a continuing levy on her wages.
C. The Present Litigation
After Mrs. Richmond's employer was served with the continuing levy, the Richmonds filed suit against the IRS in the bankruptcy court. They claimed that (1) the IRS's 1989 sale of their property violated the applicable statute of limitations, (2) their second bankruptcy discharged them from all liability on the audit deficiencies related to their 1978 and 1979 tax returns, and (3) the IRS violated the automatic stay during their first bankruptcy by requesting them to execute the Special Consent to Extend Time To Assess Tax Forms. The bankruptcy court, and the district court on appeal, denied each of these claims.
II.
"We review the district court's decision on an appeal from a bankruptcy court de novo." Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990). In so doing, we review the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo, see id., cognizant "of the established policy that limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government." West v. United States (In re West), 5 F.3d 423, 426 (9th Cir. 1993) (quotations omitted).
[1] The Richmonds first contend that the IRS was time-barred from selling their property in October of 1989 and applying the proceeds of the sale to satisfy their tax deficiencies. This argument is meritless. Despite filing tax returns for the 1978 and 1979 tax years, the Richmonds failed to remit any taxes to the government. The IRS assessed tax deficiencies against the Richmonds for the amounts shown as due on their returns on August 11, 1980 and May 4, 1981, respectively. Typically, the IRS has only six years to collect an assessed deficiency. See 26 U.S.C. § 6502(a) (1988). However, this six-year period of limitations ceases to run from the time a taxpayer files a petition for bankruptcy until six months after the automatic stay has lifted. See West, 5 F.3d at 425 n. 3; 26 U.S.C. § 6503(i) (1988). In this case, the Richmonds filed their first petition for bankruptcy on July 20, 1982, less than two years after the IRS assessed either deficiency. The bankruptcy court denied the Richmonds a discharge on April 1, 1988, thus lifting the automatic stay. See 11 U.S.C. § 362(c)(2) (1988). The respective limitations periods for collecting the assessed deficiencies, therefore, were suspended between July 20, 1982 and October 1, 1988 (six months after the bankruptcy court denied the discharge). The IRS then sold the property and applied the proceeds of the sale to reduce the Richmonds' tax obligations in October 1989, only one year after the periods resumed running. The IRS's collection activities, thus, were taken well within the six-year limitations period set forth in § 6502.
Now codified at 26 U.S.C. § 6503(h) (1994).
The Richmonds next contend that their second bankruptcy proceeding discharged them from any further liabilities concerning their 1978 and 1979 tax returns. They argue that the IRS was prohibited from assessing any further tax deficiencies against them for the 1978 and 1979 tax years subsequent to their discharge in the second bankruptcy. We disagree.
[2] The Richmonds filed their second petition for bankruptcy protection on July 27, 1990. This time, the bankruptcy court granted them a discharge on November 30, 1990, effectively discharging them from substantially all debts they incurred prior to July 27, 1990. See 11 U.S.C. § 524 (1988). However, they were not discharged from liability for taxes entitled to priority under 11 U.S.C. § 507(a)(7) (1988). See 11 U.S.C. § 523(a)(1)(A) (1988). Accordingly, they were not discharged from liability for taxes that were "not assessed before, but assessable, under applicable law . . ., after, the commencement of the case." 11 U.S.C. § 507(a)(7)(A)(iii). The sole question here is whether the IRS could assess any more tax deficiencies for the 1978 and 1979 tax years against the Richmonds after July 27, 1990.
[3] Typically, the IRS has only three years from the date a return is filed to make a deficiency assessment. See 26 U.S.C. § 6501(a) (1988). However, that three-year period is "suspended for the period during which the Secretary is prohibited . . . from making the assessment . . . and . . . for . . . 60 days thereafter." 26 U.S.C. § 6503(i) (1988). The Richmonds contend that the automatic stay was lifted at the time their discharge in the first bankruptcy was denied on April 1, 1988 and that the three-year period resumed running on May 31, 1988 (sixty days after the bankruptcy court denied the discharge). Under this analysis, it is undisputed that the IRS could no longer assess deficiencies against the Richmonds as of July 27, 1990. The IRS contends that the three-year period remained suspended until it received notice of the denial of discharge on September 21, 1989. Under this analysis, it is undisputed that the IRS could still assess deficiencies after July 27, 1990. The bankruptcy court and district court agreed with the IRS.
[4] Although the automatic stay in the first bankruptcy was lifted when the bankruptcy court entered its April 1, 1988 order denying the Richmonds a discharge, see 11 U.S.C. § 362(c)(2)(C), the IRS did not receive any notice about the April 1, 1988 order until September 21, 1989. The bankruptcy court never entered the order on the case docket and the bankruptcy court clerk, in violation of Bankruptcy Rule 4006, never notified the IRS about the order. See Fed.R.Bankr.P. 4006 (providing that the clerk "shall promptly give notice [of a bankruptcy court's denial of discharge] to all creditors"). Moreover, despite the IRS specifically asking the bankruptcy court clerk about the status of the Richmonds' first bankruptcy case on thirteen separate occasions between May 1988 and September 1989, the clerk never informed the IRS that the court had denied a discharge.
[5] "[A]ctual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests" of a creditor in bankruptcy. Tulsa Prof'l Collection Servs., Inc. v. Pope, 485 U.S. 478, 485 (1988) (quotations omitted). Even the IRS, although not entitled to constitutional protection as a governmental entity, is entitled to receive all notice provided for under the Bankruptcy Code and the Bankruptcy Rules before its rights as a creditor are impaired. See City of New York v. New York, New Haven Hartford R.R., 344 U.S. 293, 296-97 (1953) (holding that a governmental creditor has a right to assume that it will receive all of the notices required by the Bankruptcy Code before its claim against the debtor would be barred); Morgan v. Barsky (In re Barsky), 85 B.R. 550, 553 (C.D. Cal. 1988) (a creditor is entitled to assume that it will receive all notice required under the Bankruptcy Rules), aff'd 933 F.2d 1013, 1014 (9th Cir. 1991); In re Vaughn, 151 B.R. 87, 89 (Bankr. W.D. Tex. 1993) ("governmental entities are entitled to whatever statutory due process is provided in a given legislative scheme" (emphasis omitted)). Accordingly, the IRS was entitled to rely on Bankruptcy Rule 4006 for notification when the discharge was denied. This is especially true here, where the IRS repeatedly attempted to ascertain the status of the Richmonds' first bankruptcy proceeding but the bankruptcy court's and bankruptcy court clerk's actions effectively prevented it from learning of the denial of discharge.
[6] Under these circumstances, we hold that the limitations periods remained suspended until the IRS received notice of the denial of discharge. Holding otherwise would eviscerate the IRS's entitlement to rely on the Bankruptcy Rules' notice provisions and would contradict the purpose of Rule 4006. See Lawrence P. King, 9 Collier on Bankruptcy ¶ 4006.01[1] (15th ed. rev. 1998) (Rule 4006 promulgated to "guarantee all creditors notice if the discharge is . . . denied" so that they will know that the automatic stay has been lifted and "may file suit against the debtor or pursue other collection remedies"). Having the right to rely on Rule 4006 for notification, the IRS also had the right to believe that the automatic stay remained in effect and that the limitations periods remained suspended until it received notification. Because the three-year limitations periods were suspended between July 20, 1982 and September 21, 1989, tax deficiencies for the 1978 and 1979 tax years remained assessable until November 8, 1990 and July 28, 1991, respectively — well after the Richmonds filed their second bankruptcy petition. Therefore, the Richmonds were not discharged from liabilities for those tax years at the conclusion of their second bankruptcy.
We reject the Richmonds' claim that 11 U.S.C. § 108(c) required the IRS to commence assessment of the Richmonds' audit deficiencies before the end of the periods provided for in 26 U.S.C. § 6501(a) and 6503(h).
[7] The Richmonds finally contend that the IRS violated the automatic stay during their first bankruptcy by requesting them to sign Consent To Extend Time To Assess forms in 1983 while the bankruptcy proceeding was pending. At the time of the IRS's conduct, the Bankruptcy Code specifically permitted the IRS to issue a notice of tax deficiency notwithstanding the existence of the automatic stay. See 11 U.S.C. § 362(b)(8) (1982). It is undisputed that the IRS sent the forms to the Richmonds as part of its usual procedure for determining tax deficiencies. Because these forms were an integrated part of the procedure for determining tax deficiencies, they "fall within the umbra of § 362(b)(8)." In re Hardy, 39 B.R. 64, 65-66 (Bankr. E.D. Pa. 1984). Accordingly, the IRS did not violate the automatic stay.
III.
For the foregoing reasons, the district court is AFFIRMED.
Bankruptcy/Tax
The court of appeals affirmed a judgment of the district court. The court held that under the Bankruptcy Code and Bankruptcy Rules, the bankruptcy court's failure to notify the IRS of denial of a taxpayer's bankruptcy suspends the statute of limitations for making a deficiency assessment.
Appellants Curtis and Barbara Richmond filed their 1978 tax return in July 1980, and their 1979 return in March 1981. Because they did not pay the taxes they listed as due and owing, the IRS assessed deficiencies in August 1980 and May 1981.
On July 27, 1982, before paying their tax deficiencies, the Richmonds sought Chapter 7 bankruptcy protection. They complied with the IRS's request that they execute a "consent to extend time to assess tax" forms for the 1978 and 1979 tax years. After an audit, the IRS sent the Richmonds a statutory notice of deficiency in 1985. However, the automatic stay prevented the IRS from assessing or attempting to collect the additional taxes or audit deficiencies.
On April 1, 1988, the bankruptcy court entered an order denying the Richmonds a discharge. However, the court did not inform the IRS of its order, and did not enter it on the case docket. Despite repeated inquiries to the bankruptcy court clerk regarding the status of the case, the IRS did not become aware of the order until September 21, 1989. On October 1989, the IRS auctioned some of the Richmonds' property and applied the proceeds to cover tax return deficiencies in 1980 and 1981.
Before the IRS assessed the audit deficiencies, the Richmonds filed a second bankruptcy petition on July 27, 1990. They received a discharge on November 30. In 1993, the IRS assessed the audit deficiencies against them with respect to the 1978 and 1979 returns. The IRS served Barbara's employer with a continuing levy on her wages.
The Richmonds sued the IRS in bankruptcy court, alleging that the 1989 sale of their property violated the statute of limitations; their second bankruptcy discharged them from all liability on the audit deficiencies related to their 1978 and 1979 returns; and the IRS violated the automatic stay during their first bankruptcy by asking them to execute the special consent. The bankruptcy court rejected their claims. The district court affirmed. The Richmonds appealed.
[1] Despite filing tax returns for the 1978 and 1979 tax years, the Richmonds failed to remit any taxes to the government. Typically, the IRS has only six years to collect an assessed deficiency. However, this period of limitations ceases to run from the time a taxpayer files a bankruptcy petition until six months after the automatic stay has lifted. In this case, the Richmonds filed their first petition less than two years after the IRS assessed either deficiency. The bankruptcy court denied the Richmonds a discharge on April 1, 1988, thus lifting the automatic stay. The limitations periods for collecting the assessed deficiencies therefore were suspended between July 20, 1982 and October 1, 1988. The IRS sold the property and applied the proceeds to reduce the Richmonds' tax obligations in October 1989, only one year after the period resumed running. The IRS's collection activities were well within the six-year limitations period.
[2] The Richmonds filed their second petition on July 27, 1990. This time, the bankruptcy court granted them a discharge on November 30, effectively discharging them from substantially all debts they incurred prior to July 27, 1990. However, they were not discharged from liability for taxes entitled to priority. Accordingly, they were not discharged from liability for taxes that were not assessed before, but assessable under applicable law after commencement of the case.
[3] Typically, the IRS has only three years from the date a return is filed to make a deficiency assessment. However, the that period is suspended for the period during which the Secretary is prohibited from making the assessment, and for 60 days thereafter.
[4] Although the automatic stay in the first bankruptcy was lifted when the bankruptcy court entered its April 1, 1988 order denying the Richmonds a discharge, the IRS did not receive any notice about the order until September 21, 1989.
[5] The IRS is entitled to receive all notice provided for in the Bankruptcy Code and the Bankruptcy Rules before its rights as a creditor are impaired.
[6] The limitations periods remained suspended until the IRS received notice of the denial of discharge. The IRS also had the right to believe that the automatic stay remained in effect and that the limitations period remained suspended until it received notification. The Richmonds were not discharged from liabilities for the 1978 and 1979 tax years at the conclusion of their second bankruptcy.
[7] At the time of the IRS's request for the Richmonds to sign the consent forms, the Bankruptcy Code permitted the IRS to issue a notice of tax deficiency notwithstanding the automatic stay. The IRS sent the forms as part of its usual procedure for determining deficiencies. Because the forms were an integrated part of the procedure for determining deficiencies, the IRS did not violate the automatic stay.