T.C. Memo. 2010-194
UNITED STATES TAX COURT
JOHN L. LEATHLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 31113-09L. Filed September 7, 2010.
Daniel J. Arno, for petitioner.
John M. Janusz, for respondent.
MEMORANDUM OPINION
RUWE, Judge: The petition in this case was filed in
response to a Notice of Determination Concerning Collection
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Action(s) Under Section 6320 and/or 6330 (notice of
determination) for petitioner’s taxable years 2000, 2001 and
2002.1 This case is before the Court on respondent’s motion for
summary judgment filed pursuant to Rule 121. With regard to tax
year 2001, that liability has a zero balance, making that year
moot. Furthermore, petitioner concedes that tax year 2002 is not
at issue. Therefore, the only substantive issue to decide is
whether the determination made by respondent’s settlement officer
to sustain the filing of the notice of Federal tax lien with
respect to the accrued interest on petitioner’s paid 2000 income
tax liability was correct. Petitioner contends that the interest
on the tax liability for 2000 was discharged in petitioner’s
bankruptcy proceeding.
Background
At the time the petition was filed, petitioner resided in
New York.
Petitioner’s 2000 Federal income tax return was due on April
15, 2001. The Internal Revenue Service received the return on
December 4, 2003, without full payment. Petitioner filed a
petition in bankruptcy on October 14, 2005. On or about March 3,
2009, respondent sent to petitioner a Notice of Federal Tax Lien
Filing and Your Right to a Hearing Under IRC 6320, which advised
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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petitioner that a notice of Federal tax lien (NFTL) had been
filed with respect to his 2000, 2001, and 2002 unpaid tax
liabilities and that petitioner could request a hearing with
respondent’s Office of Appeals. Petitioner filed with respondent
a Form 12153, Request for a Collection Due Process or Equivalent
Hearing, for the covered years. Attached to the Form 12153 was a
letter from petitioner’s representative stating, among other
things, that the tax principal for the liabilities at issue had
been paid and that the penalties and interest thereon were
discharged by petitioner’s bankruptcy filing. By letter dated
October 15, 2009, sent to respondent’s settlement officer,
petitioner’s representative reiterated that the tax principal had
been paid and that the interest and penalties had been discharged
“because the incidences that gave rise to these taxes were more
than three years old.” Respondent’s settlement officer sent a
response letter dated November 24, 2009, to petitioner’s
representative advising petitioner that it was respondent’s
position that the penalties were discharged2 in the bankruptcy
but the interest on the principal was not discharged.
Respondent’s Appeals Office issued to petitioner a notice of
determination dated December 4, 2009, for taxable years 2000 (the
year at issue), 2001, and 2002. The notice of determination
2
The Form 4340, Certificate of Assessments, Payments, and
Other Specified Matters, attached to respondent’s motion shows
the abatement of the penalties.
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indicated that respondent’s Appeals Office determined that the
NFTL would not be released and that the interest at issue was not
discharged in petitioner’s bankruptcy.
Petitioner filed with the Court a petition for lien or levy
action under section 6320(c) or 6330(d).
Discussion
This case is before the Court on respondent’s motion for
summary judgment, to which petitioner objects. Summary judgment
is intended to expedite litigation and avoid unnecessary and
expensive trials. See FPL Group, Inc. & Subs. v. Commissioner,
116 T.C. 73, 74 (2001). Rule 121(a) provides that either party
may move for summary judgment upon all or any part of the legal
issues in controversy. Full or partial summary judgment is
appropriate where there is no genuine issue as to any material
fact and a decision may be rendered as a matter of law. See Rule
121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994). The parties agree
that there are no genuine issues in dispute regarding any
material facts. The only issue we must decide is whether the
accrual of interest on petitioner’s income tax liability for 2000
has been discharged in petitioner’s bankruptcy. It is undisputed
that petitioner was not discharged from his liability for the
principal amount of income tax due for 2000.
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A debtor remains personally liable after his discharge for
the principal amount of a nondischargeable tax debt and any
prepetition interest on that tax debt that was not satisfied out
of the bankruptcy estate. Bruning v. United States, 376 U.S.
358, 360 (1964); In re Larson, 862 F.2d 112, 119 (7th Cir. 1988).
A debtor also remains personally liable for postpetition interest
where the underlying tax debt is not discharged. Bruning v.
United States, supra at 360; Hanna v. United States, 872 F.2d
829, 831 (8th Cir. 1989); Burns v. United States, 887 F.2d 1541,
1543 (11th Cir. 1989). Interest is treated as an integral part
of the tax debt upon which it accrues. Bruning v. United States,
supra. Interest has therefore been treated as part of the
“claim”, is accorded the same priority status as the underlying
liability, and has been found to be nondischargeable where the
underlying liability is nondischargeable. In re Larson, supra at
119.
In the case before us, it is uncontested that the principal
amount of tax was not discharged in petitioner’s bankruptcy
proceeding. Because the Federal income tax was not discharged in
the bankruptcy proceeding, any interest with respect to the
nondischargeable tax is also not discharged. On the basis of the
aforementioned caselaw and precedent, we hold that the accrued
interest with respect to petitioner’s underlying tax liability
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for 2000 was not discharged in petitioner’s bankruptcy because
the underlying tax was itself not dischargeable.
Petitioner’s argument that the interest relating to the 2000
tax liability was discharged in petitioner’s bankruptcy
proceeding is predicated on 11 U.S.C. section 523(a)(7)(B)
(2006). Title 11 U.S.C. section 523(a)(7)(B) provides:
§ 523. Exceptions to discharge
(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--
* * * * * * *
(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—-
* * * * * * *
(B) imposed with respect to a transaction or event
that occurred before three years before the date of the
filing of the petition;
[Emphasis added.]
Petitioner argues that “there should be no distinction
between prepetition interest and pecuniary penalties under the
Bankruptcy Law, § 523(a)(7)(B). That section discharges all such
penalties which we believe includes prepetition interest for
events that occurred more than 3 years prior to the filing of the
bankruptcy.” In support, petitioner relies on In re Palmer, 88
Bankr. 101 (N.D. Tex. 1986), and Jones v. United States (In re
Garcia), 955 F.2d 16 (5th Cir. 1992), in which interest was
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characterized as a penalty for priority purposes under 11 U.S.C.
section 507, and upon McKay v. United States, 957 F.2d 689 (9th
Cir. 1992), and Roberts v. United States, 906 F.2d 1440 (10th
Cir. 1990), which recognized that tax penalties can be
dischargeable. Petitioner argues that interest on a tax
liability is treated as a penalty under 11 U.S.C. section 507(a)
(2006) and thus may be dischargeable as a penalty under 11 U.S.C.
section 523(a)(7)(B). Petitioner’s position would yield an
outcome that is contrary to the previously mentioned caselaw
involving the dischargeability of interest which has accrued on
income tax liabilities.
Petitioner cites In re Palmer, supra, and Jones v. United
States (In re Garcia), supra, as the basis for his contention
that there is no distinction between interest on a tax liability
and a tax penalty for purposes of applying 11 U.S.C. section
523(a)(7)(B). However, these cases do not discuss the
application of 11 U.S.C. section 523. Instead, they deal with
the application of 11 U.S.C. section 507, which addresses the
priority accorded to various expenses and claims of creditors.
In both of these cases, the courts likened interest on a tax
liability to penalties for priority purposes under 11 U.S.C.
section 507. However, neither case stands for the proposition
that interest is a penalty that is dischargeable under 11 U.S.C.
section 523(a)(7)(B). The holdings in these cases were limited
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to deciding the narrow priority issue that was before those
courts, and should not be read more broadly to have decided that
interest is a penalty for all purposes under the Bankruptcy Code.
Petitioner also cites McKay v. United States, supra, and
Roberts v. United States, supra, for the proposition that “tax
penalties assessed more than 3 years before the bankruptcy are
dischargeable.” These cases do hold that tax penalties may be
dischargeable under 11 U.S.C. section 523(a)(7)(B). However,
these cases addressed the dischargeability of civil tax fraud
penalties and failure to file Federal income tax return penalties
and not the dischargeability of interest. In McKay v. United
States, supra at 693, the Court of Appeals for the Ninth Circuit
determined that civil fraud penalties were discharged under 11
U.S.C. section 523(a)(7)(B) where the tax penalty was imposed
with respect to a transaction that occurred more than 3 years
before the filing of the petition in bankruptcy. Likewise, the
bankruptcy court in Roberts v. United States, supra at 1445,
determined that penalties for failing to file a Federal income
tax return were dischargeable under 11 U.S.C. section
523(a)(7)(B) where the penalties were imposed with respect to an
event that occurred more than 3 years before the filing of the
bankruptcy petition. However, neither court considered whether
interest is dischargeable under 11 U.S.C. section 523(a)(7)(B)
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because they dealt only with its application regarding
traditional tax penalties.
The decision of the court in Burns v. United States, 887
F.2d 1541 (11th Cir. 1989), is useful in illustrating the proper
analysis in the case before us. In Burns v. United States, supra
at 1543-1544, the court held both that accrued interest on a
nondischargeable tax debt is nondischargeable and that tax fraud
penalties based on a transaction that occurred more than 3 years
before the bankruptcy petition were dischargeable under 11 U.S.C.
section 523(a)(7)(B). That the court considered the treatment of
interest separately from the consideration of the penalties is an
indication that interest and penalties are not one and the same
under the Bankruptcy Code. In Burns v. United States, supra at
1552, the court concluded that 11 U.S.C. section 523(a)(7)(B)
extinguished liability only for tax penalties and not for
interest on the underlying tax itself. This holding illustrates
that interest is distinct from penalties in the analysis under 11
U.S.C. section 523(a)(7)(B).
Petitioner has cited no caselaw holding that interest on a
tax liability is dischargeable under 11 U.S.C. section
523(a)(7)(B). The mere fact that courts have discussed interest
being afforded the same treatment as a penalty for priority
purposes under 11 U.S.C. section 507 does not provide a basis for
treating it the same under 11 U.S.C. section 523. This is
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especially true where there is ample caselaw in which courts have
held that interest on a nondischargeable tax debt is not
discharged in bankruptcy.
On the basis of the record before us, we find that
respondent may proceed with the collection action that was the
subject of the notice of the filing of a Federal tax lien for the
tax year 2000. Accordingly, we will grant respondent’s motion
for summary judgment.
To reflect the foregoing,
An appropriate order and
decision will be entered.