A recent Tax Court opinion demonstrates the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  The case emphasizes the need for an attorney knowledgeable in both tax and bankruptcy cases to ensure that the the best, most-viable tax arguments are put forward in the proceedings.

A brief outline of the case is set forth below:

Barnes v. Comm’r, T.C. Memo. 2021-49 | May 4, 2021 | Lauber, J. | Dkt. No. 6330-19L

Short SummaryThe taxpayers challenged a proposed deficiency in the Tax Court related to their 2003 tax year.  Prior to the Tax Court issuing an opinion, the taxpayers filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia.  The IRS participated in the bankruptcy proceedings and filed a proof of claim for tax deficiencies—however, the 2003 tax year was not included.

After the plan was confirmed, the IRS moved to lift the automatic stay to permit the Tax Court to render a decision on the taxpayers’ 2003 tax year.  The bankruptcy court granted the motion, and the Tax Court held that taxpayers owed deficiencies, penalties, and additions to tax for 2003 as determined in the notice of deficiency.

The IRS later assessed the 2003 liability and issued a Notice of Federal Tax Lien for the taxpayers’ 2003, 2008, and 2009 tax years.  The taxpayers filed a timely request for a Collection Due Process (CDP) hearing.  The IRS Settlement Officer agreed to a partial release of the NFTL, finding that the 2008 and 2009 tax liabilities were including in the taxpayers’ bankruptcy.  However, the SO concluded that the lien filing as to 2003 was appropriate.

Key Issue:  Whether the SO abused its discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge.

Primary HoldingsThe SO did not abuse his discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge because unassessed tax liabilities are nondischargeable.

Key Points of Law:

  • The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).  The Tax Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law.  Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992).
  • Section 6320(c) does not prescribe the standard of review that the Tax Court should apply in reviewing an IRS administrative determination in a CDP case. The general parameters for such review are marked out by the Tax Court’s precedents.  Where the validity or amount of the taxpayer’s underlying liability is at issue, the Tax Court reviews the IRS’ determination de novoGoza v. Comm’r, 114 T.C. 176, 181-82 (2000). Where the taxpayer’s underlying liability is not properly before the Tax Court, the Tax Court reviews the IRS action for abuse of discretion.  See id. at 182.  Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law.  Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st 2006).
  • Taxpayers may challenge the existence or amount of their underlying tax liability in a CDP case but only if they did not receive a statutory notice of deficiency or otherwise have a prior opportunity to dispute their liability. 6330(c)(2)(B).  Whether a debt is still collectible, as opposed to having been paid or discharged, is not a challenge to the underlying tax liability.  Accordingly, it is a question properly addressed in considering whether the SO abused his or her discretion.  Melasky v. Comm’r, 151 T.C. 89, 92 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020).
  • In deciding whether an SO abused his discretion in sustaining an NFL, the Tax Court considers whether he: (1) properly verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues that the taxpayer raised; and (3) determine whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.  6320(c), Sec. 6330(c)(3).  If the SO’s determination was based on an erroneous view of the law and the taxpayer’s liability was discharged in bankruptcy, then the Tax Court must reject the IRS’ views and find that there was an abuse of discretion.  See Swanson v. Comm’r, 121 T.C. 111, 119 (2003).
  • Generally, an unassessed income tax liability is nondischargeable. 11 U.S.C. Sec. 523(a)(1)(A).  And the provisions of 11 U.S.C. Sec. 1141(d)(2) prohibit a bankruptcy court from discharging a debt that is nondischargeable under 11 U.S.C. Sec. 523.

InsightThe Barnes decision shows the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  In these cases, taxpayers should ensure that they have an attorney knowledgeable in both tax and bankruptcy cases to ensure that their best arguments are put forward in those two proceedings.

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