F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
JUN 1 2004
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
JOHN RODERICK McKOWEN,
Plaintiff-Appellant,
v. No. 01-1345
INTERNAL REVENUE SERVICE,
UNITED STATES DEPARTMENT
OF THE TREASURY,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 01-M-117)
Jeffrey R. Davine of Ballard Spahr Andrews & Ingersoll, LLP, Denver, Colorado
(Matthew D. Skeen of Skeen & Skeen, P.C., Denver, Colorado, with him on the
briefs) for Plaintiff-Appellant.
Karen D. Utiger, Attorney (Eileen J. O’Conner, Assistant Attorney General,
Richard Farber, Bruce R. Ellisen, and Paula K. Speck, Attorneys, with her on the
brief) Tax Division, Washington, D.C., (John W. Suthers, United States Attorney,
Denver, Colorado, of Counsel) for Defendant-Appellee.
Before BRISCOE, ANDERSON and O’BRIEN, Circuit Judges.
O’BRIEN, Circuit Judge.
John Roderick McKowen appeals the district court’s determination that his
1995 bankruptcy proceeding did not discharge his transferee liability for 1987
corporate taxes not paid by his now-defunct business. See McKowen v. Internal
Revenue Service, 263 B.R. 618, 619-20 (D. Colo. 2001). Exercising jurisdiction
under 28 U.S.C. §§ 158(a) & (d), we affirm.
BACKGROUND
McKowen was the sole owner and shareholder of New Century Corporation
(New Century). Sometime in 1987, the company began to be dismantled, and its
assets were transferred to McKowen. On his 1992 personal income tax return,
McKowen included net operating loss carryforwards based upon net operating
losses sustained by New Century during tax years 1986, 1987, and 1988. In
January 1995, he filed a voluntary Chapter 7 bankruptcy petition. An order of
discharge was entered that May.
Subsequently, in November 1996, the Internal Revenue Service (I.R.S.)
audited McKowen’s 1992 income tax return. After requesting copies of New
Century’s corporate tax returns for 1987 and 1988, the I.R.S. learned that no
corporate tax return had been filed for 1987. 1 McKowen remedied this omission
by filing an amended return for New Century on April 2, 1998.
1
McKowen claims he reported all items of income and losses on his 1987
personal tax return. The I.R.S. states those items should have been reported on
the 1987 New Century corporate tax return.
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Review of New Century’s 1987 amended tax return indicated corporate taxes were
owed. The I.R.S. also concluded the 1987 asset transfer subjected McKowen to
transferee liability, pursuant to 26 U.S.C. § 6901(a), in the amount of
$481,180.00, plus interest and penalties. McKowen, 263 B.R. at 620.
Questioning the validity of his tax liability, McKowen moved for and was granted
an opportunity to reopen his 1995 bankruptcy case to determine whether his
transferee liability was discharged. In response, the I.R.S. moved for summary
judgment.
The bankruptcy court denied the I.R.S.’s motion for summary judgment,
finding McKowen’s transferee liability for the corporate taxes constituted an
unsecured debt, rather than a tax excepted from discharge. McKowen v. United
States, 2001 WL 241059 (Bankr. D. Colo. 2001). Therefore, the bankruptcy court
held the transferee liability was discharged in bankruptcy.
The I.R.S. appealed to the United States District Court for the District of
Colorado. The district court agreed the transferee liability was not a tax, but
found that 26 U.S.C. § 6901(a) required the debt to be treated like a tax for the
purposes of exception from bankruptcy discharge. 2 Id. Thus, it reversed the
2
The district court remanded the case to the bankruptcy court, perceiving
McKowen’s argument to raise an equitable claim not decided by the bankruptcy
court. Generally, an order of a district court remanding a case to the bankruptcy
court “for significant further proceedings” is not a final appealable decision
allowing this Court to exercise jurisdiction. Buckner v. Farmer’s Home Admin.,
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bankruptcy court, concluding McKowen’s liability was not discharged in the 1995
bankruptcy proceeding. McKowen now appeals the district court’s order.
DISCUSSION
Dischargeability of Transferee Liability in Bankruptcy
“'In reviewing the decision of a bankruptcy court pursuant to 28 U.S.C. §
158(a) and (d), the district court and the court of appeals apply the same standards
of review that govern appellate review in other cases.'” In re Country World
Casinos, Inc., 181 F.3d 1146, 1149 (10th Cir. 1999) (quoting In re
Hedged-Investments Assocs., Inc., 84 F.3d 1267, 1268 (10th Cir. 1996). On an
appeal of a bankruptcy case, we review the legal conclusions of the bankruptcy
court and the district court de novo. In re Wise, 346 F.3d 1239, 1241 (10th Cir.
2003); In re Craddock, 149 F.3d 1249, 1257 (10th Cir. 1998). Here, we face an
issue of first impression: whether a debt arising from transferee liability for
unpaid income tax owed by the transferor corporation is discharged by the
transferee’s bankruptcy. Our analysis necessarily construes the interrelationship
between specific provisions of the Bankruptcy Code and the Internal Revenue
Code (I.R.C.).
The Bankruptcy Code identifies the purpose of a voluntary bankruptcy
66 F.3d 263, 265 (10th Cir. 1995). However, McKowen remedied this
jurisdictional barrier when, at his request, the district court amended its judgment
to eliminate the equity claim and set aside the order for remand.
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discharge as the opportunity to obtain relief from existing debts. See 11 U.S.C. §
524. 3 Though a fresh start for the debtor is the desired outcome, Congress
determined that some debts should survive despite this general policy; it explicitly
removed certain types of debt from discharge. At issue here is the exception from
discharge for a tax that is on or measured by income or gross receipts, which is
assessable after commencement of the bankruptcy case. See 11 U.S.C. §
523(a)(1)(A); 11 U.S.C. § 507(a)(8)(A); 11 U.S.C. § 507(a)(8)(A)(iii). 4 Under
Bankruptcy Code 11 U.S.C. § 523(a)(1)(A), a debtor will not be discharged from
3
A bankruptcy discharge “operates as an injunction against the
commencement or continuation of an action, the employment of process, or an
act, to collect, recover or offset any such debt as a personal liability of the debtor,
whether or not discharge of such debt is waived.” 11 U.S.C. § 524(a)(2). See also
11 U.S.C. 727(b) (a Chapter 7 bankruptcy discharges the debtor from debts
arising before the date of discharge).
4
11 U.S.C. § 523(a)(1)(A) states in pertinent part:
(a) A discharge under Section 727, 1141, 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)(2) or
507(a)(8) of this title, whether or not a claim for such tax was filed or
allowed.
11 U.S.C. § 507(a)(8)(A)(iii) reads:
(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
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or
523(a)(1)(C) of this title, not assessed before, but assessable, under
applicable law or by agreement, after, the commencement of the case.
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any debt “for a tax” of the kind stated in § 507(a)(8). In turn, § 507(a)(8)
specifically identifies a tax on income as exempt from discharge. 11 U.S.C. §
523(a)(1)(A); 11 U.S.C. § 507(a)(8)(A)(iii) (see infra nn.6, 7). Under these
statutory provisions, it appears that any debt not designated a tax, would be
discharged in bankruptcy.
On the other hand, the I.R.C. provides that a person receiving property
from a taxpayer who owes income taxes may be liable for the transferor
taxpayer’s tax debt. 5 If so, the I.R.S. may collect the transferor’s income tax
liability from the transferee “in the same manner and subject to the same
provisions and limitations as in the case of the taxes with respect to which the
liabilities were incurred.” 26 U.S.C. § 6901(a); 6 see Commissioner of Internal
In this case, McKowen’s liability as a transferee is not before the Court.
5
We assume, without deciding, that McKowen is liable as a transferee for the taxes
owed by New Century for the tax year 1987 in the amount of $481,180.00.
6
Section 6901 reads:
(a) The amounts of the following liabilities shall, except as
hereinafter in this section provided, be assessed, paid, and collected
in the same manner and subject to the same provisions and
limitations as in the case of the taxes with respect to which the
liabilities were incurred:
1) Income, estate, and gift taxes.--
A) Transferees.--The liability, at law or in equity, of a transferee of
property–
(i) of a taxpayer in the case of a tax imposed by subtitle A (relating
to income taxes).
(Emphasis added.) Section 6901 goes on to define a transferee as a “donee, heir,
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Revenue v. Stern, 357 U.S. 39, 44-45 (1958) (existence and extent of transferee
liability determined by state law). Considering the provisions of the Bankruptcy
Code and the I.R.C. in tandem, the district court held Section 6901 would be
nullified if transferee liability was discharged under the Bankruptcy Code, and
concluded it must be treated the same as the underlying tax to harmonize the
potential conflict between these statutes. 7 McKowen, 263 B.R. at 620-21 (citing
26 U.S.C.§ 6901). We agree.
“When Congress has enacted two statutes which appear to conflict, we must
attempt to construe their provisions harmoniously.” United States v. State of
Colo., 990 F.2d 1565, 1575 (10th Cir. 1993), cert. denied, 510 U.S. 1092 (1994).
Here, McKowen’s transferee liability is derived from a tax owed by New Century
“on or measured by income,” and is thus exempt from discharge in bankruptcy.
11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)(iii). Consequently, we hold
McKowen’s transferee liability was not discharged in his prior bankruptcy
proceeding.
In reaching its contrary conclusion, the bankruptcy court relied on Pert v.
legatee, devisee, and distributee . . . .” 26 U.S.C. § 6901(h).
7
In Stern, the United States Supreme Court held that transferee liability
under 26 U.S.C. § 311(a) (the predecessor to 26 U.S.C. § 6901) was not a tax, but
rather, a method of collecting taxes. Specifically, the Court held Ҥ 311 neither
creates nor defines a substantive liability but provides merely a new procedure by
which the Government may collect taxes.” 357 U.S. at 42.
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United States, 201 B.R. 316 (Bankr. M.D. Fla. 1996). There, faced with an issue
similar to the one before us, the bankruptcy court held that transferee liability is
not a tax, but “[a]t best, . . . is a general unsecured claim, assuming a timely proof
of claim is filed.” Id. at 320. 8 We find a better approach in the United States Tax
Court’s decision in Hamar v. Commissioner, 42 T.C. 867 (1964). In Hamar, the
tax court rejected petitioner’s argument that his transferee liability was discharged
by his bankruptcy. Id. at 879. The court stated:
It must be borne in mind that while the liability of a transferee may
not be a tax liability in the ordinary sense, nevertheless it is a
liability for a tax; in other words, the government is seeking to
collect what is primarily a tax and continues to be a tax although,
because of the inability to collect from the taxpayer proper, it seeks
to require his transferee to pay. From the standpoint of the
government the money sought in this case is as much an item of
revenue as it would be were the proceedings to collect directed
toward the transferor.
Id. at 877 (quoting Felland v. Wilkinson, 33 F.2d 961 (D.C. Wis. 1928)). We
agree with this rationale and find it to be a descriptive example of how transferee
liability under Section 6901 should apply in this case.
8
We also recognize the outcome in Pert may have been tempered by a
factual situation not present here. In Pert, the debtor’s transferee liability was
based upon her receipt of assets from her deceased husband’s estate while unpaid
taxes remained assessed against the estate. 201 B.R. at 318-19. In attempting to
collect the deceased husband’s unpaid taxes, the government assessed taxes
against both the joint return filed with her deceased husband and based upon
transferee liability. Id. at 320. The court noted that if it characterized transferee
liability as a tax, it would allow the government two “bites” at the “non-
dischargeability apple.” Id. Here, the government is not imposing dual liability.
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The Bankruptcy Code’s specific exemption of income tax debt from
discharge reflects Congress’ intent to allow the federal government to collect
funds lawfully due, even from a debtor who has received a discharge in
bankruptcy. Nor is this obligation lessened by the fact that the debt has been
transformed from a direct tax liability of a transferor taxpayer into a transferee
liability. Section 6901 provides the direct mechanism for carrying out this
purpose. To ignore section 6901 and discharge McKowen’s transferee liability
would needlessly create a conflict between the discharge provisions of the
Bankruptcy Code and the express language of the I.R.C. § 6901. Such a result
would impermissibly override the specific policy judgments made by Congress in
enacting section 6901. See United States v. Sotelo, 436 U.S. 268, 279 (1978)
(“we as judges cannot override the specific policy judgments made by Congress in
enacting the statutory provisions . . . .”).
CONCLUSION
For the above reasons, we conclude the district court correctly determined
that the treatment of the underlying tax directs the treatment of the transferee
liability in bankruptcy discharge. Accordingly, we AFFIRM.
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