Fein v. United States (In Re Fein)

United States Court of Appeals,

Fifth Circuit.

No. 94-20032

Summary Calendar.

In the Matter of Bruce F. FEIN, Debtor.

Bruce F. FEIN, Appellant,

v.

UNITED STATES of America, Appellee.

June 14, 1994.

Appeal from the United States District Court for the Southern
District of Texas.

Before GARWOOD, SMITH, and DeMOSS, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Individual chapter 11 debtor Bruce Fein appeals the denial of

discharge of priority tax claims. As the plain language of the

Bankruptcy Code renders these claims nondischargeable, we affirm.

I.

In April 1991, Fein petitioned for relief under chapter 11 of

the Bankruptcy Code. At that time, the Internal Revenue Service

("IRS") was auditing his liability for federal income taxes for the

taxable years 1983, 1984, 1985, 1986, and 1989. Fein did not list

the IRS as a creditor in his petition or schedules, but he notified

it of his chapter 11 filing. The IRS did not file a proof of claim

for any tax liabilities prior to confirmation of the plan. In

December, Fein's plan of reorganization was confirmed by the

bankruptcy court.

In March 1992, the IRS issued a notice of deficiency to Fein

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for the taxable years 1983, 1984, 1985, and 1989 in the amounts of

$8,566, $9,952, $4,518, $3,723, and $2,539, respectively. The

deficiencies resulted from improper losses attributable to Fein's

participation in a tax-shelter partnership, Petro-Tech. The

Commissioner also asserted addition to tax against Fein under 26

U.S.C. § 6621(c), which imposes an increased rate of interest when

there is a "substantial underpayment attributable to tax motivated

transactions"; under 26 U.S.C. § 6659 for an underpayment of tax

which is attributable to a valuation overstatement; and under 26

U.S.C. § 6661 for a substantial understatement of income tax.

Fein's petition for redetermination of the deficiencies and

additions to tax is pending in the United States Tax Court.

Fein instituted an adversary proceeding in the bankruptcy

court, claiming that the income tax deficiencies had been

discharged by his bankruptcy proceeding. The bankruptcy court held

that priority tax claims are not discharged in an individual

chapter 11 proceeding and granted summary judgment to the IRS. The

district court affirmed.

II.

Title 11 U.S.C. § 1141(d)(1) provides generally that

confirmation of a chapter 11 plan discharges pre-existing debts,

regardless of whether a proof of claim was filed or the claim was

allowed. Under § 1141(d)(2), confirmation does not discharge an

individual debtor from any debt excepted from discharge under 11

U.S.C. § 523, which excepts from discharge taxes entitled to

priority under 11 U.S.C. § 507. Section 507(a)(7)(A)(iii) provides

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priority status for pre-petition federal income tax liabilities not

yet assessed but still assessable, such as federal income tax

liabilities still under audit.

It is not disputed that the taxes at issue in this case are

priority taxes. Thus, under the plain language of the Bankruptcy

Code, bankruptcy does not discharge a priority tax claim that has

been neither assessed nor filed. See Grynberg v. United States (In

re Grynberg), 986 F.2d 367, 369 (10th Cir.1993) ("Section 523, when

read in conjunction with § 1141(d)(2), provides that confirmation

of a reorganization plan for an individual debtor will not

discharge recent excise taxes "whether or not a claim for such tax

was filed or allowed' "), cert. denied, --- U.S. ----, 114 S.Ct.

57, 126 L.Ed.2d 27 (1993); United States v. Gurwitch (In re

Gurwitch), 794 F.2d 584, 585 (11th Cir.1986) ("The Bankruptcy Code

makes clear under 11 U.S.C. § 1141(d)(2) that the confirmation of

a plan of reorganization does not fix tax liabilities made

nondischargeable under 11 U.S.C. § 523 ... "whether or not a claim

for such tax was filed or allowed' ").

Fein contends that a failure to discharge his tax claims

would prejudice his reorganization, thereby undermining bankruptcy

policy favoring a "fresh start" for debtors. While we recognize

the Bankruptcy Code's interest in providing a "fresh start," this

broad goal is not sufficient to defeat the Code's plain language to

the contrary.

The courts of appeals that have considered this issue have

concluded that in the case of individual debtors, Congress

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consciously opted to place a higher priority on revenue collection

than on debtor rehabilitation or ensuring a "fresh start." See

Grynberg, 986 F.2d at 371; Gurwitch, 794 F.2d at 585-86 ("[I]t is

apparent to us that Congress has made the choice between collection

of revenue and rehabilitation of the debtor by making it extremely

difficult for a debtor to avoid payment of taxes under the

Bankruptcy Code.").

Fein contends that Grynberg and Gurwitch are distinguishable

because, unlike those debtors, he was unaware of the tax claim.

This distinction is irrelevant. Congress was concerned about

"hidden liabilities" and the "undesirable uncertainty" that they

create, but only with respect to corporations and partnerships. In

re Official Committee of Unsecured Creditors of White Farm Equip.

Co., 943 F.2d 752, 756 (7th Cir.1991), cert. denied, --- U.S. ----,

112 S.Ct. 1292, 117 L.Ed.2d 515 (1992). Corporations and

partnerships need to be free of hidden liabilities so that they can

present creditors with a fixed list of liabilities and encourage

creditors to deal with a reorganized debtor. Id. With regard to

individual debtors, by comparison, the deleterious effects of

hidden liabilities are less and are outweighed by the desire for

revenue collection.

III.

Fein contends that the discharge of claims in bankruptcy

serves as res judicata, barring the government's claim. Because

the Bankruptcy Code specifically makes this claim nondischargeable,

however, res judicata does not bar it. Gurwitch, 794 F.2d at 585;

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Grynberg, 986 F.2d at 370. In Grynberg, the court noted that if

the IRS wanted to participate in the debtor's reorganization, it,

like any other debtor, was required to submit its proof of claim.

But, "like any other holder of nondischargeable debt, the IRS is

also free to pursue the debtor outside bankruptcy." Grynberg, 986

F.2d at 370.

Fein contends that this case is controlled by Republic Supply

Co. v. Shoaf, 815 F.2d 1046 (5th Cir.1987), which involved the res

judicata effect of a specific provision in a reorganization plan

providing for the release of a guaranty as to a creditor who

participated in the bankruptcy proceeding. The creditor did not

object to the provision or appeal the order of confirmation. In an

action by the creditor on the guaranty, the creditor argued that

res judicata should not apply because, based upon § 524, the

provision releasing the guarantor was beyond the authority of the

bankruptcy court.

The court recognized that § 524 generally has been interpreted

to preclude the release of guarantors in bankruptcy. Nonetheless,

"the statute does not by its specific words preclude the discharge

of a guaranty when it has been accepted and confirmed as an

integral part of a plan or reorganization." Id. at 1050. Here, in

contrast, the tax liabilities were not a part of the plan, and the

Code specifically provides that confirmation of the plan does not

discharge such nondischargeable debts. Republic Supply,

accordingly, is not controlling.

IV.

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 Fein contends that the equitable doctrine of laches bars the

government from asserting its tax liabilities. That doctrine

prohibits a party from asserting a claim that has been unreasonably

delayed until such time as other parties have acted, or

circumstances have changed resulting in severe prejudice because of

the delay. See Albertson v. T.J. Stevenson & Co., 749 F.2d 223,

233 (5th Cir.1984).

We need not reach the substantive issue of whether the

circumstances of this case are appropriate for the invocation of

laches, as laches "may not be asserted against the United States

when it is acting in its sovereign capacity to enforce a public

right or protect the public interest." See United States v.

Popovich, 820 F.2d 134, 136 (5th Cir.), cert. denied, 484 U.S. 976,

108 S.Ct. 487, 98 L.Ed.2d 485 (1987). The timeliness of government

claims is governed by the statute of limitations enacted by

Congress. See United States v. Summerlin, 310 U.S. 414, 416, 60

S.Ct. 1019, 1020, 84 L.Ed. 1283 (1940); Chevron, U.S.A., Inc. v.

United States, 705 F.2d 1487, 1491 (9th Cir.1983). Fein admits

that the government timely asserted the federal tax liabilities.

Because the liabilities were asserted within the statute of

limitations and the laches doctrine does not apply, Fein's argument

that IRS prejudiced other parties by waiting until after

confirmation is irrelevant. Making these liabilities dischargeable

will inevitably create some uncertainty for individual

reorganization plans. When such uncertainty manifests itself,

there is no reason to suppose that prejudice will result or to

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recognize any prejudice that does result. "Inasmuch as [these

taxes] are nondischargeable, ... a reasonable debtor should expect

that the IRS will seek to enforce such claim." In re Becker's

Motor Transp., 632 F.2d 242, 249 (3d Cir.1980), cert. denied, 450

U.S. 916, 101 S.Ct. 1358, 67 L.Ed.2d 341 (1981).

Finding no error, we AFFIRM the judgment that Fein's priority

tax liabilities in this case were not discharged by his chapter 11

petition.

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