Becker v. Comm'r

T.C. Memo. 2010-120

UNITED STATES TAX COURT

STUART BECKER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12919-08L. Filed June 2, 2010.

Stuart A. Smith and Alan M. Blecher, for petitioner.1

Frederick Mutter, for respondent.

MEMORANDUM OPINION

LARO, Judge: This case is before the Court for decision

without trial. See Rule 122.2 Petitioner petitioned the Court

1
Alan M. Blecher (Mr. Blecher) entered an appearance for
petitioner on Jan. 5, 2009, and withdrew from the case when
Stuart A. Smith entered his appearance on June 17, 2009.
2
Rule references are to the Tax Court Rules of Practice and
(continued...)
 - 2 -

to review the determination of the Internal Revenue Service

Office of Appeals (Appeals) sustaining respondent’s proposed levy

on petitioner’s property. Respondent proposed the levy to

collect approximately $337,000 of Federal income taxes (including

taxes, penalties, and interest) (subject liability) that

respondent’s records showed petitioner owed for 1999 through 2004

(subject years). Petitioner argues that the proposed levy is

improper because the subject liability was discharged in his

bankruptcy case (bankruptcy case). Respondent argues that the

subject liability was not part of the bankruptcy case and was not

discharged. We hold that petitioner is liable for the subject

liability to the extent it was not part of the bankruptcy case.

We shall remand this case to Appeals to determine the portion of

the subject taxes that was not part of the bankruptcy case.

Background

The facts in this background section are obtained primarily

from the parties’ stipulation of facts and the exhibits submitted

therewith. Petitioner resided in New York when his petition was

filed. He filed a Form 1040, U.S. Individual Income Tax Return,

for each of the subject years using the filing status of married

filing separately.

2
(...continued)
Procedure. Unless otherwise indicated, section references are to
the applicable versions of the Internal Revenue Code. Some
dollar amounts are rounded.
 - 3 -

Petitioner has worked for over 30 years as a certified

public accountant specializing in tax matters. On July 13, 1992,

he (as an individual debtor) filed a voluntary petition for

protection under chapter 11 of the Bankruptcy Code. The petition

was filed with the U.S. Bankruptcy Court for the Southern

District of New York. Petitioner’s bankruptcy estate (estate)

included his accounting practice (practice), and petitioner

administered the practice during the 14-year bankruptcy case as

the debtor in possession.3 Petitioner had employees who worked

with him in the practice.

For the subject years, petitioner timely filed Forms 1040 on

which he reported his Federal income tax liabilities as $26,951,

$77,921, $27,243, $58,626, $23,312, and $31,415, respectively.

He did not tender a payment with any of these returns.

Respondent assessed each amount of reported tax and assessed

other amounts for additions to tax and for statutory interest.

Petitioner has since paid $11,570 towards the total amount

assessed for 1999. Petitioner has not paid any of the amounts

assessed for 2000 through 2004.

Each of petitioner’s Federal income tax returns for 2002

through 2004 reported that petitioner was a certified public

accountant who during the year did not receive any wages or

3
Petitioner apparently operated the practice during the
subject years through two entities; namely, Becker & Co., L.L.C.,
and Becker Tax Management Corp.
 - 4 -

salary in his capacity as an employee.4 The returns included

Schedules E, Supplemental Income and Loss, with accompanying

papers that reported that petitioner realized the following

amounts of income from Becker & Co., L.L.C.:

2002 2003 2004

Ordinary income $8,092 $46,978 $96,479
Guaranteed payments 160,000 100,000 -0-
U.S. trustee fee (2,500) -0- (3,000)
165,592 146,978 93,479

The returns also respectively reported that petitioner had

realized “Miscellaneous” income of $100,000, $60,000, and $90,000

from Becker Tax Management Corp.

On November 14, 2005, petitioner filed with the bankruptcy

Court an amended plan of reorganization dated November 9, 2005

(plan). The plan identified the “debtor” as “STUART BECKER as

debtor-in-possession” and stated that

Each Administration [sic] Expense shall be paid in
full, without interest, in cash on the Consummation
Date or upon such other terms as may be agreed upon
between an Administration [sic] Claimant and Debtor;
provided, however, that Administration [sic] Expenses
representing liabilities incurred in the ordinary
course of business by the Debtor, as Debtor-in-
Possession, shall be assumed and paid by the
Reorganized Debtor in the ordinary course of business
or in accordance with the terms and conditions of any
agreements relating thereto. Administration [sic]
expenses to be paid in full on the Consummation Date

4
The record does not include petitioner’s Federal income tax
return for any other year. Nor does the record include any
Federal income tax return (i.e., a Form 1041, U.S. Income Tax
Return for Estates and Trusts) for the estate or establish that
the estate ever filed any such return.
 - 5 -

include post petition taxes to the IRS of $956,623.12
plus interest from November 15, 2005.[5]

Approximately 1 month before that filing, respondent had notified

the bankruptcy court that petitioner (as the debtor in

possession) owed the Internal Revenue Service administrative

expenses of $955,623.12 for taxes, interest, and penalties

attributable to: (1) The estate’s income taxes for 1992, 1993,

1994, 1996, 1997, and 1998 and (2) the failure to pay employee

withholding taxes for numerous periods between December 31, 1994,

and September 30, 2004.6 The $955,623.12 did not include any of

the subject liability.

On February 14, 2006, the bankruptcy court entered an order

confirming the plan which in turn discharged petitioner from any

debt on any claim that arose before the confirmation date, except

5
The plan defined the term “Consummation Date” to mean the
date which is 10 business days after the date upon which the
Bankruptcy Court’s order confirming the plan pursuant to 11
U.S.C. sec. 1129 (2000) was final. The plan defined the term
“Administrative Expense” to mean “any cost or expense of
administration of the Chapter 11 case allowed under § 503(b) of
the Bankruptcy Code”. See 11 U.S.C. sec. 503(b) (2000) (stating
that allowable administrative expenses include “any tax * * *
incurred by the estate * * *, except a tax of a kind specified in
section 507(a)(8) of this title” (generally, taxes on income or
gross receipts for a taxable year ending on or before the date
that the bankruptcy petition was filed)). The plan did not
define the word “Administration”, and we believe the plan
erroneously used that word in lieu of the word “Administrative”.
6
The parties do not explain the $1,000 difference between
this $955,623.12 and the $956,623.12 listed in the plan. We
consider the difference to be inconsequential to our decision.
 - 6 -

as otherwise stated in the plan.7 The order directed

petitioner’s counsel to make disbursements pursuant to the plan

and effectively enjoined all persons holding claims or interests

discharged under the order from taking any action against or

affecting petitioner in his capacity as a “Reorganized Debtor”.

On May 22, 2006, the Bankruptcy Court issued a “Final

Decree” closing the bankruptcy case because all distributions

under the plan had been made. The final decree stated:

Distributions under the above-named Debtor’s
Amended Plan of Reorganization dated November 9, 2005
(the “Plan”) have been made;

The Plan has been substantially consummated within
the meaning of § 1101(2) of the Bankruptcy Code;

The estate of the above named Debtor has been
fully administered.

IT IS ORDERED THAT:

The Chapter 11 case of the above-named Debtor is
closed.

Three weeks before the final decree was issued, respondent

mailed to petitioner the Final Notice of Intent to Levy and Your

Right to a Hearing (levy notice) for the subject years. The levy

notice stated that petitioner owed for those years $337,083 in

Federal income taxes (inclusive of taxes, interest, and

penalties). The $337,083 stems from the assessed tax liabilities

that petitioner reported on his Forms 1040 for the subject years.

7
The plan defined a “claim” as a claim against petitioner in
his capacity as the debtor in possession.
 - 7 -

On May 24, 2006, petitioner timely filed Form 12153, Request

for a Collection Due Process Hearing (request). Petitioner

asserted in the request that he disagreed with the proposed levy

because

The taxpayer filed for protection under Chapter 11 of
the federal bankruptcy laws. The taxes at issue herein
became subject to the authority of the federal
bankruptcy court, which adjudicated said claims as part
of the taxpayer’s Chapter 11 bankruptcy proceeding. On
May 22, 2006, the federal bankruptcy judge issued a
“Final Decree” which closed out the federal bankruptcy
case * * *

On February 22, 2008, respondent’s settlement officer sent

to petitioner (with a copy to his representative, Mr. Blecher) a

letter scheduling petitioner for a telephone hearing at 3:30 p.m.

on March 14, 2008. The letter asked petitioner to call the

settlement officer at the scheduled time and requested that

petitioner complete and send to the settlement officer a

collection information statement (CIS) within 2 weeks of the date

of the letter so that the settlement officer could evaluate

collection alternatives. Petitioner did not participate in the

scheduled hearing and did not submit a completed CIS to the

settlement officer.

On April 17, 2008, the settlement officer informed Mr.

Blecher that the subject liability was a postpetition liability

that was not dischargeable in his bankruptcy case because

petitioner and the estate were separate taxable entities under

Internal Revenue Manual (IRM) part 5.9.8.11.1 (Jan. 1, 2006).
 - 8 -

The settlement officer also informed Mr. Blecher that a

postpetition liability incurred by an individual debtor such as

petitioner may not be claimed in his bankruptcy case. Later that

day, Mr. Blecher replied to the settlement officer that

petitioner was discharged from his postpetition section 6672

liabilities, as well as liabilities for New York State income

taxes which arose during the subject years. Mr. Blecher stated

that petitioner continued to believe that the subject liability

also was discharged in the bankruptcy case. On April 18, 2008,

the settlement officer replied to Mr. Blecher that the settlement

officer’s position was stated in the IRM and suggested that Mr.

Blecher take certain actions to obtain information as to which

taxes were discharged in the bankruptcy case.

Petitioner did not provide to the settlement officer any

financial information that the settlement officer requested from

petitioner to evaluate collection alternatives. Nor did

petitioner propose any collection alternative or challenge the

appropriateness of the issuance of the levy notice. Petitioner

asserted that his bankruptcy discharge prevented respondent from

collecting the subject liability, and petitioner did not raise

any other issue.

On April 24, 2008, Appeals issued petitioner the notice of

determination (notice of determination) underlying this case.

The notice of determination sustained the proposed levy.
 - 9 -

Discussion

I. Jurisdiction

Section 6330(d)(1) entitles a taxpayer such as petitioner

whose property is subject to a Federal income tax levy to appeal

a determination made by Appeals sustaining the propriety of that

levy. Section 6330(d)(1) provides that the appeal shall be “to

the Tax Court (and the Tax Court shall have jurisdiction with

respect to such matter).” This Court’s jurisdiction rests upon

the issuance of a valid notice of determination and the filing of

a timely petition for review. See Smith v. Commissioner,

124 T.C. 36, 38-39 (2005); see also Rule 330(b).

Neither party concludes that we lack jurisdiction over this

case. Nor do we. We have the requisite jurisdiction because the

notice of determination is valid and the petition for review was

timely filed.8 See also Washington v. Commissioner, 120 T.C.

114, 120-121 (2003) (holding that the Court’s jurisdiction

allowed the Court to decide whether a bankruptcy court discharged

the taxpayers from their unpaid Federal income tax liabilities).

8
Nor does either party assert that respondent violated the
automatic stay of 11 U.S.C. sec. 362 (2000) as to any action that
he took with respect to the subject liability. We likewise find
no such action that violated the automatic stay. Cf. Beverly v.
Commissioner, T.C. Memo. 2005-41 (holding that a notice of
intent to levy was invalid where it was issued in violation of
the automatic stay and that the Commissioner was therefore not
entitled to proceed with a proposed collection action sustained
by Appeals).
 - 10 -

II. Standard of Review

Where the existence and the amount of the underlying tax

liability are properly at issue, the Court will review the matter

de novo. See Urbano v. Commissioner, 122 T.C. 384, 393 (2004).

In other cases, the Court will review the determination of

Appeals for an abuse of discretion. See Prince v. Commissioner,

133 T.C. , (2009) (slip op. at 7).

Petitioner does not contest the existence and the amount of

the underlying tax liability. Accordingly, we review the

determination of Appeals using an abuse of discretion standard.

Under that standard, we will reject the determination of Appeals

only if petitioner proves that the determination is arbitrary,

capricious, or without sound basis in fact or in law. See Murphy

v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st

Cir. 2006); Phillips v. Commissioner, 114 T.C. 115, 133 (2000),

affd. 272 F.3d 1172 (9th Cir. 2001). Where, as here, the

determination of Appeals turns on its interpretation of

bankruptcy law, Appeals will have abused its discretion if that

interpretation is unsound. See Swanson v. Commissioner, 121 T.C.

111, 119 (2003). Justice sometimes requires that we remand a

case to Appeals to clarify its determination or to interpret and

to apply relevant law that it may not have considered in making

its determination. Cf. Hoyle v. Commissioner, 131 T.C. 197

(2008) (case remanded to Appeals to clarify record upon which it
 - 11 -

relied in making a determination); Lunsford v. Commissioner, 117

T.C. 183, 189 (2001) (indicating that the Court may remand a case

to Appeals if “necessary or productive” to do so).

III. Review of Determination

A. Parties’ Arguments

Petitioner argues that the subject liability was a claim

against the estate and was (or should have been) included in the

claims before the bankruptcy court. He asserts that the subject

liability arose not from income earned by him personally, but

from income earned by the practice. He concludes that the

subject liability was discharged by the bankruptcy court because

the plan did not provide for its payment.

Respondent agrees that the subject liability was not

mentioned in the plan. Respondent argues that the subject

liability was not (and could not have been) included in the plan

because petitioner and the estate were separate taxpayers and the

subject liability related to postpetition Federal income taxes

petitioner owed in his capacity as an individual rather than as

the debtor in possession. Respondent argues that the subject

liability was not an administrative expense of the estate because

the liability did not relate to a tax imposed on the estate’s

income. Respondent concludes that the subject liability was not

before the bankruptcy court and that it was not discharged by

that court.
 - 12 -

B. Court’s Analysis

Petitioner’s filing of his petition with the Bankruptcy

Court spawned the estate, a separate entity for bankruptcy

purposes and a separate taxpayer for Federal income tax purposes.

See sec. 1398; see also 11 U.S.C. sec. 541(a) (2000); In re

Estate of LaRosa, 364 Bankr. 612, 615-616 (Bankr. N.D. W.Va.

1991). The estate’s property consisted of “all legal or

equitable interests of the debtor [petitioner] in property as of

the commencement of the case” and all proceeds and profits later

emanating from that property. 11 U.S.C. sec. 541(a)(1), (6).

The estate’s property did not include any postpetition earnings

from petitioner’s services performed as an individual debtor.9

See 11 U.S.C. sec. 541(a)(6). Petitioner administered the

estate’s property (including the practice) throughout the

bankruptcy case as the debtor in possession. See 11 U.S.C. secs.

1101, 1104, 1107 (2000).

The gross income of the estate was subject to Federal income

tax, as was the gross income of petitioner. See sec. 1398. The

estate’s gross income included the portion of petitioner’s gross

income to which the estate was entitled under the Bankruptcy

Code. See sec. 1398(e)(1). That portion of gross income was the

9
By contrast, a bankruptcy estate resulting from a ch. 11
filing after Oct. 17, 2005, generally includes the debtor’s
earnings from postpetition services, as well as his or her
subsequently acquired assets. See 11 U.S.C. sec. 1115 (2006).
 - 13 -

income emanating from the estate’s property. See 11 U.S.C. sec.

541(a)(6). Petitioner’s gross income included all items of his

gross income that were not includable in the estate’s gross

income. See sec. 1398(e)(2). The postpetition earnings from

petitioner’s services performed as an individual debtor were one

such item that was includable in his (and not in the estate’s)

gross income, even to the extent that the earnings were realized

by the practice which also realized other income includable in

the estate’s gross income. See sec. 1398(e)(1) and (2); cf.

Fitzsimmons v. Walsh (In re Fitzsimmons), 725 F.2d 1208, 1211-

1212 (9th Cir. 1984) (where an attorney was a sole proprietor

employing other attorneys, his estate’s property included the

earnings from the postpetition services of the other attorneys

but not from his postpetition services); Altchek v. Altchek, 124

Bankr. 944 (Bankr. S.D. N.Y. 1991) (discussing Fitzsimmons and

the views of two bankruptcy courts as to the application of 11

U.S.C. sec. 541(a)(6) to a chapter 11 sole proprietor).

Appeals determined that the subject liability was a

liability of petitioner (and not of the estate) because the

liability was incurred by petitioner. The notice of

determination, however, does not explain Appeals’

characterization of the subject liability as incurred by

petitioner. Nor does the notice of determination explain

Appeals’ rejection of petitioner’s contrary characterization.
 - 14 -

The income underlying the subject liability stemmed primarily

from the practice, and the parties agree that the practice was

property of the estate throughout the bankruptcy case. It seems

natural to conclude, as petitioner does, that the subject

liability was not incurred by petitioner but was incurred by the

estate. See 11 U.S.C. sec. 541(a)(6). To the extent that the

subject liability was incurred by the estate, the liability was

discharged by the bankruptcy court, as petitioner asserts, by

virtue of the fact that the plan did not provide for its payment.

Such is so even if respondent did not intend for such a

discharge. See Creel v. Commissioner, 419 F.3d 1135 (11th Cir.

2005) (U.S. attorney compromised a civil Federal income tax

liability that the Commissioner did not intend to be

compromised), affg. an Order and Decision of this Court dated

Jan. 14, 2004; see also IRM pt. 5.9.8.14.2 (Mar. 1, 2007)

(stating that the Commissioner’s failure to claim an

administrative expense tax in a bankruptcy case may result in a

court’s deciding that the tax was discharged).

The record at hand does not allow us to find the extent (if

any) to which the subject liability was attributable to

petitioner so as to decide whether Appeals abused its discretion

in characterizing that liability as incurred by petitioner.10

10
We give little weight to the fact that petitioner reported
the income underlying the subject liability on his personal
(continued...)
 - 15 -

While the income underlying the subject liability stemmed

primarily from the practice, we are mindful (as discussed above)

that the income is taxable to petitioner (and thus the subject

liability was incurred by petitioner) to the extent that it

represented earnings from postpetition services that petitioner

rendered through the practice in his individual capacity. Given

that Appeals has not adequately explained the reasons underlying

its determination that the subject liability was incurred by

petitioner rather than by the estate, we believe that justice

requires that we remand this case to Appeals to supplement the

notice of determination to explain as much. We shall do so.

Petitioner asks the Court to decide this case in his favor

because the subject liability was unmentioned in the plan. We

decline to do so. The mere fact that the subject liability was

unmentioned in the plan does not necessarily mean that the

subject liability was discharged. During the bankruptcy case,

petitioner filed his personal Federal income tax returns, and

10
(...continued)
income tax returns. First, we do not find that the estate ever
filed a Federal income tax return reporting its income. If such
a return was never filed, then petitioner, apparently a seasoned
tax professional, may not have known that the estate was required
to report its income on its own return. Second, petitioner
disavows that the income underlying the subject liability is his
income, asserting that the income was earned on estate property.
The record shows that the subject income did stem primarily from
the practice, an undisputed asset of the estate, but does not
establish whether the income related to postpetition services
that petitioner rendered in his individual capacity.
 - 16 -

respondent claimed that petitioner owed approximately $950,000 of

Federal taxes (including penalties and interest) as

administrative expenses of the estate. Petitioner deduces that

respondent was on notice of the subject liability, that

respondent omitted that liability in his requests for payment of

administrative expenses, and that the bankruptcy court’s

confirmation of the plan thus discharged petitioner from payment

of the subject liability. We disagree.

The subject liability was not an administrative expense of

the estate (and did not have to be included in the plan) to the

extent that the liability was neither “incurred by the estate”

within the meaning of 11 U.S.C. sec. 503(b) (2000), nor a claim

for payment of the estate’s tax liability. See In re Johnson,

190 Bankr. 724 (Bankr. D. Mass. 1995) (stating that the

postpetition taxes of a debtor are not administrative expenses

and are not discharged in a chapter 11 case). Nor does the fact

that the plan provided for the payment of petitioner’s liability

for postpetition withholding taxes attributable to the employees

of the practice (as well as to income taxes imposed on the

estate’s income) necessarily mean that the plan discharged any

income tax that petitioner owed on income he received in his

individual capacity for services he provided through the

practice. Instead, if the subject liability is traceable to

petitioner (rather than to property of the estate), then, as
 - 17 -

respondent asserts, that liability was not discharged by the

bankruptcy court because it was never before that court.

IV. Conclusion

Petitioner remains liable for the subject liability to the

extent that it was not part of his bankruptcy case. We shall

remand this case to Appeals to determine the portion of the

subject taxes that was not part of the bankruptcy case.

An appropriate order

will be issued.