United States v. Prescription Home Health Care, Inc. (In Re Prescription Home Health Care, Inc.)

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 02-50132

IN THE MATTER OF: PRESCRIPTION HOME HEALTH CARE, INC.,

Debtor.

UNITED STATES OF AMERICA, Internal Revenue Service,

Appellant,
versus

PRESCRIPTION HOME HEALTH CARE, INC.,

Appellee.
_________________________________________________________________

Appeal from the United States District Court
for the Western District of Texas
_________________________________________________________________

December 30, 2002

Before DAVIS, BARKSDALE, and DENNIS, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

The Internal Revenue Service contests the district court’s

affirming a bankruptcy court’s confirmation of a debtor’s plan of

reorganization. The principal issue is whether the bankruptcy

court had jurisdiction to enjoin the IRS from, under 26 U.S.C. §

6672, assessing and collecting taxes from a non-debtor officer of

the debtor corporation. INJUNCTION VACATED; REMANDED.
 I.

Debtor Prescription Home Health Care, Inc., based in San

Antonio, Texas, is a provider of home health services. Edward Z.

Pena is Prescription’s president and sole owner.

In August 2000, Prescription filed a petition under Chapter 11

of the Bankruptcy Code. The IRS was, by far, Prescription’s chief

creditor; Prescription owed approximately $600,000 in unpaid taxes,

interest, and penalties. In fact, the IRS' impending collection

efforts motivated the filing by Prescription.

The IRS’ claim included: (1) a priority claim of

approximately $470,000, consisting of (a) unemployment and payroll

taxes that Prescription, as an employer, was required to pay, and

(b) approximately $250,000 in “trust fund” taxes (income and

payroll taxes that Prescription had withheld from its employees'

wages during all of 1999 and three quarters of 2000, but had failed

to remit to the IRS); and (2) a general unsecured claim of

approximately $140,000 for penalties that had accrued on the taxes

through the date of the bankruptcy petition.

Regarding the “trust fund” portion, Internal Revenue Code §§

3102 and 3402 (26 U.S.C. §§ 3102 and 3402) require employers to

withhold federal income and payroll taxes from their employees’

wages. These withheld taxes must be remitted to the IRS on a

quarterly basis, 26 U.S.C. §§ 3102(b), 3403; and, while in the

possession of the employer, they are considered a “special fund in

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trust for the United States”, 26 U.S.C § 7501. As stated,

Prescription failed to remit approximately $250,000.

In addition to Prescription’s trust fund liability, Pena, as

a “responsible person”, was personally liable, pursuant to 26

U.S.C. § 6672. It is undisputed that both Prescription and Pena

were liable for the unpaid trust fund taxes.

Section 6672(a) states:

Any person required to collect, truthfully
account for, and pay over any tax imposed by
this title who willfully fails to [do so], or
willfully attempts in any manner to evade or
defeat any such tax or the payment thereof,
shall, in addition to other penalties provided
by law, be liable to a penalty equal to the
amount of the tax evaded, or not collected, or
not accounted for and paid over.

26 U.S.C. § 6672(a) (emphasis added). This provision, designed to

deter misuse of trust funds by corporate officers, see, e.g.,

United States v. Sotelo, 436 U.S. 268, 277 n.10 (1978), is a means

of ensuring the tax is paid, e.g., Newsome v. United States, 431

F.2d 742, 745 (5th Cir.), cert. denied, 411 U.S. 986 (1973). Such

“responsible persons” liability is separate and distinct from that

imposed on the employer, and the IRS is not required to exhaust its

remedies against the delinquent employer before seeking to protect

the revenue through a § 6672 assessment. E.g., Hornsby v. Internal

Revenue Service, 588 F.2d 952, 954 (5th Cir. 1979).

Prescription filed a plan of reorganization in January 2001

and an amended plan that April. The latter provided: Pena would

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retain his interest in the debtor upon receipt by Prescription of

funds equal to the professional fees incurred by Prescription as of

the confirmation date; the priority portion of the IRS' claim would

be paid in full in equal quarterly installments over a six-year

period; and the general unsecured claim would be paid by pro rata

distributions from an “unsecured claims fund” over a ten-year

period, so that the IRS would receive payments equal to

approximately 47 percent of the general unsecured portion of the

claim.

The plan further provided: all payments made toward the

priority claim would be applied to the trust fund portion until

that liability had been paid in full; and, upon plan-confirmation,

all creditors would be enjoined from any act to collect from the

debtor’s “management and employees” any portion of a claim against

the debtor, as long as it complied with the plan.

It is the IRS' policy not to assess the § 6672 penalty against

a responsible person as long as the debtor is compliant with the

terms of its “bankruptcy payment plan”, unless statute of

limitations concerns are present. 1 Administration, Internal

Revenue Manual (CCH) § 1.2.1.1.5.14(6), at 3003. The limitations

period for assessing the § 6672 liability against Pena will expire

in April 2003 (three years after Prescription filed its employment

tax returns). See Lauckner v. United States, 68 F.3d 69 (3d Cir.

1995). Therefore, if Prescription were to comply with its plan

4
until then, the period for assessing the penalty against Pena would

expire while the injunction remained in effect. In other words, if

the debtor made its payments until the end of the limitations

period, but defaulted thereafter, and the trust fund taxes had not

been paid in full, the IRS could be barred from making an

assessment against Pena. (The Government concedes that there is a

strong argument that the period should be tolled and that this

court could do so.)

The IRS objected, on a number of grounds, to confirmation of

Prescription’s proposed plan. It contended, inter alia: (1) a

bankruptcy court could order plan payments to be first applied to

the trust fund portion of a tax liability only upon a showing that

such an allocation was necessary for an effective reorganization,

and Prescription had not made that showing; (2) the bankruptcy

court lacked jurisdiction to enjoin an assessment against a non-

debtor third party; and (3) the proposed injunction for the § 6672

assessment violated the Anti-Injunction Act, 26 U.S.C. § 7421(a).

At the confirmation hearing, Pena was asked why, for an

effective reorganization, it was necessary to designate all plan

payments to the trust fund portion and to enjoin all collection

against him. He responded: to make reorganization successful, he

would have to devote his time to the debtor’s operations; and “it’s

very difficult to do that when ... I realize I can be assessed

[$250,000]”. When asked whether the lack of these provisions would

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interfere with his performance on behalf of the debtor, he

answered:

It’s a dark cloud hanging over me and I just
had – it’s very distracting to realize that
being a single parent of two, an 11- and 13-
year-old, both girls, it’s a lot of
responsibility on my shoulders to make sure
that I am successful in paying back the I.R.S.
and without, you know, being able to get into
the housing market.

On cross-examination, Pena confirmed that the reason Prescription

wanted plan payments first applied to the trust fund liability was

because of the “dark cloud” that would be “hanging over [Pena’s]

head”.

At the conclusion of the hearing, the IRS' objections were

overruled. The bankruptcy judge noted his approval of payments

being first applied to the trust fund liability: “[T]hat’s an

incentive on the part of the debtor to make sure that the debtor,

in fact, performs for as long as possible”, because “to the extent

the debtor does perform, then there’s a positive benefit, not only

for the debtor, but also for Mr. Pena”. The bankruptcy judge

determined that, to both prevent the plan’s undoing and ensure the

IRS would be paid, it was appropriate to enjoin the § 6672

assessment. He reasoned the plan would prevent Pena from being

“thrown out of this business”, because if he “has the I.R.S.

chasing him around for the rest of his life, he certainly won’t be

starting another one of these businesses” and “would never generate

the kind of revenue ... necessary to pay [the IRS]”.

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 In June 2001, the bankruptcy court confirmed Prescription’s

amended plan, with Pena being permitted to retain his interest in

Prescription for a payment of $15,000. Through what the bankruptcy

court termed a “conditional injunction”, “necessary for the

successful reorganization of Prescription”, the IRS was enjoined

from taking any action under § 6672 to assess or collect any

federal employment tax liability from Pena as a responsible party,

so long as Prescription remained current on its payments (§ 6672

injunction).

The IRS appealed to district court. In December 2001, that

court affirmed the bankruptcy court’s order, holding, inter alia:

(1) the debtor offered sufficient evidence (through Pena’s

testimony) to show the designation of plan payments to trust fund

liability was necessary for a successful reorganization; and (2)

the Anti-Injunction Act does not prevent the bankruptcy court from

temporarily modifying the IRS’ ability to collect from a

responsible person, if that is necessary to the successful

reorganization of the debtor, because the bankruptcy court, using

its broad discretionary powers under 11 U.S.C. § 105, had

jurisdiction to enter the temporary injunction as a proceeding

related to the bankruptcy proceeding.

The district court based its holding in part on United States

v. Energy Resources Co., Inc., 495 U.S. 545 (1990), stating:

Although not directly on point, the Supreme
Court’s decision in Energy Resources suggests

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 that the bankruptcy court has broad powers to
temporarily modify the IRS’s ability to
collect from a responsible person if the
modification is necessary to the successful
reorganization of the debtor. An effort by
the IRS to collect $600,000 from Pena would
most likely jeopardize the success of the
reorganization plan. The injunction, however,
does not permanently enjoin the IRS from
collecting the taxes. The injunction operates
only as long as the debtor makes timely
payments, and as such, does not violate the
Anti-Injunction Act....

United States v. Prescription Home Health Care, Inc., No. SA-01-CA-

811-EP, Slip op. at 5 (W.D. Tex. Dec. 13, 2001) (emphasis added).

II.

The IRS maintains: the bankruptcy court lacked jurisdiction

over Pena’s § 6672 liability; and, in the alternative, the Anti-

Injunction Act prohibits the § 6672 injunction. (Because we hold

jurisdiction was lacking, we do not reach the Anti-Injunction Act

issue.) Whether the bankruptcy court can so enjoin the IRS is a

question of law, reviewed de novo. In re Bass, 171 F.3d 1016, 1021

(5th Cir. 1999) (“The holding of a bankruptcy court (or a district

court hearing an appeal from the bankruptcy court) that it has

jurisdiction is a legal determination which we review de novo.”).

Concerning the IRS’ contention that the bankruptcy court

lacks jurisdiction over a non-debtor’s tax liability, Prescription

responds that the court had jurisdiction over Pena’s § 6672

liability because it is a proceeding “related to” Prescription's

8
reorganization. As discussed below, such “related to” language is

found in 28 U.S.C. § 1334(b).

Under 28 U.S.C. § 157 (b)(2)(L), jurisdiction is granted

bankruptcy courts to confirm Chapter 11 reorganization plans; it is

undisputed that the bankruptcy court had jurisdiction over

Prescription's reorganization. On the other hand, bankruptcy

courts are not courts of general jurisdiction and do not have

jurisdiction over an action between non-debtors (such as the § 6672

action between the IRS and Pena), unless that action is “related

to” the bankruptcy. The above-referenced § 1334(b) provides:

Notwithstanding any Act of Congress that
confers exclusive jurisdiction on a court or
courts other than the district courts, the
district courts shall have original but not
exclusive jurisdiction of all civil
proceedings arising under title 11, or arising
in or related to cases under title 11.

(Emphasis added.)

“Related to” jurisdiction has been defined quite broadly. The

usual test is whether the outcome of a proceeding could conceivably

have any effect on the estate being administered in bankruptcy.

Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1993). It is well-

established that, to be “related to” a bankruptcy, it is not

necessary for the proceeding to be against the debtor or the

debtor's property. Id. Nevertheless, “a bankruptcy court’s

‘related to’ jurisdiction cannot be limitless”. Id.

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 Notwithstanding the broad nature of the “related to”

jurisdiction, Congress, cognizant of the Government’s need to

assess and collect taxes with minimal interference, has limited the

jurisdiction of the courts to review tax matters. See, e.g., Bob

Jones University v. Simon, 416 U.S. 725, 736-37 (1974) (discussing

Anti-Injunction Act); Enochs v. Williams Packing & Navigation Co.,

370 U.S. 1, 7 (1962) (same). Generally, judicial review in tax

cases is limited to review of deficiencies in the Tax Court and

refund suits in the district courts and Claims Court. See United

States v. Joe Graham Post No. 119, American Legion, 340 F.2d 474,

476-77 (5th Cir. 1965). See also Bob Jones University, 416 U.S. at

736-37; Enochs, 370 U.S. at 7. While Congress has granted somewhat

broader jurisdiction to courts in the bankruptcy context, it has

done so to allow bankruptcy courts to deal with the tax liabilities

of the debtor and the estate.

For instance, § 505(a)(1) of the Bankruptcy Code (11 U.S.C. §

505(a)(1)) provides: “[T]he court may determine the amount or

legality of any tax, fine, or penalty relating to a tax ... whether

or not previously assessed, whether or not paid, and whether or not

contested before and adjudicated by a judicial or administrative

tribunal....” While this provision speaks of “any tax”, it grants

jurisdiction to determine the tax liabilities of the debtor and the

estate, not those of third parties (as Prescription concedes).

See, e.g., In re Brandt-Airlex Corp., 843 F.2d 90 (2d. Cir. 1988).

10
Accordingly, § 505(b) states that a trustee “may request a

determination of any unpaid liability of the estate for any tax

incurred during the administration of the case”; § 505(c) states:

“Notwithstanding [the automatic stay provision], after

determination by a court of a tax under this section, the

governmental unit charged with responsibility for collection of

such tax may assess such tax against the estate, the debtor, or a

successor to the debtor, as the case may be, subject to any

otherwise applicable law”. (Emphasis added.)

Prescription seems to contend (and the bankruptcy and district

courts apparently accepted) that the bankruptcy court had “related

to” jurisdiction over Pena’s § 6672 tax liability because, as the

district court stated, assessment against Pena would “most likely

jeopardize the success of the reorganization plan”. We disagree.

First, it is well established that a more specific statute

controls over a more general one. E.g., Bulova Watch Co. v. United

States, 365 U.S. 753, 758 (1961). Thus, the general “related to”

jurisdiction of § 1334(b) does not circumvent the specific grant of

jurisdiction to the bankruptcy court to determine tax liabilities.

Under Prescription’s reading of “related to” jurisdiction, all tax

matters could be adjudicated by the bankruptcy court if they could

conceivably affect the debtor’s estate. Such a reading would

render superfluous § 505's grant of jurisdiction to determine the

tax liabilities of the debtor or the estate.

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 Moreover, even if the § 6672 assessment would jeopardize the

success of the plan, this cannot be sufficient to confer “related

to” jurisdiction. As the IRS points out, the theory that a

bankruptcy court has jurisdiction to enjoin any activity that

threatens the debtor’s reorganization prospects would permit the

bankruptcy court to intervene in a wide variety of third-party

disputes. For example, the bankruptcy court would have

jurisdiction over any action (however personal) against key

corporate employees, if they were willing to state that their

morale, concentration, or personal credit would be adversely

affected by that action.

Sister circuits that have addressed directly whether

bankruptcy courts have jurisdiction over the tax liabilities of

non-debtors have held they do not. The Eleventh Circuit, in United

States v. Huckabee Auto Co., 783 F.2d 1546 (11th Cir. 1986),

rejected an injunction designed to prevent a § 6672 assessment

against the debtor’s corporate officers. There, as here, the

bankruptcy court based its injunction on a finding that payment of

the penalty would adversely affect the reorganization; that finding

was based on testimony by the responsible persons.

The district court reversed the bankruptcy court. In

affirming, the Eleventh Circuit held that bankruptcy courts have no

jurisdiction over tax liabilities of non-debtors, even if they have

some role in the debtor corporation or if the § 6672 assessment

12
might have some adverse affect on the reorganization. Id. at 1549

(“[t]he jurisdiction of the bankruptcy courts ... does not ...

extend to the separate liabilities of taxpayers who are not debtors

... [i]t is therefore irrelevant that the penalty, if assessed,

will adversely affect the corporate debtor’s reorganization”).

Likewise, Prescription’s “related to” position was squarely

rejected by the Third Circuit in Quattrone Accountants, Inc. v.

IRS, 895 F.2d 921 (3d. Cir. 1990), which held that the broad

definition of § 1334 “related to” jurisdiction cannot be used in

relation to a Chapter 11 reorganization to extend the bankruptcy

court’s jurisdiction over a non-debtor’s § 6672 liability. The

Third Circuit noted that the “responsible person” liability of the

corporation’s part owner and principal officer was “entirely

separate and distinct from the debtor’s liability to the IRS” and

concluded that the officer’s § 6672 liability was not “related to”

the corporation’s bankruptcy within the meaning of § 1334(b). Id.

at 926-27. Although it recognized that if the non-debtor were

assessed and paid the § 6672 liability, the amount the debtor owed

the IRS would decrease, it reasoned that this did not constitute a

“conceivable effect” on the estate, given the contingent nature of

the payment and the joint and several nature of the debt. Id.

Finally, in a non-§ 6672 context, the Second Circuit, in In re

Brandt-Airflex Corp., held that § 505(a) “does not confer

bankruptcy court jurisdiction over non-debtors”. 843 F.2d at 96

13
(Ҥ 505(a) was certainly not intended to allow bankruptcy courts to

determine the validity of literally any tax, no matter who owes

it”) (emphasis in original). That case addressed the liability of

a payroll financier for a debtor’s withholding taxes under 26

U.S.C. § 3505; the bankruptcy court “did not have the jurisdiction

to determine the § 3505 liability of” the financier, because he was

“a non-debtor”. Id.

In the light of these adverse holdings, Prescription asserts

that Energy Resources, which post-dates Huckabee Auto, Quattrone,

and Brandt-Airflex, controls. As explained supra, the district

court relied upon Energy Resources, “although [noting it is] not

directly on point”.

Energy Resources recognized the broad equitable powers

accorded bankruptcy courts under 11 U.S.C. §§ 105(a) and 1123(b)(6)

(then (b)(5)). Section 105(a) provides: “The court may issue any

order, process, or judgment that is necessary or appropriate to

carry out the provisions of this title”. Section 1123(b)(6) grants

bankruptcy courts authority to approve reorganization plans

including “any ... appropriate provision not inconsistent with the

applicable provisions of this title”. See also 11 U.S.C. § 1129.

Energy Resources stated: “These statutory directives are

consistent with the traditional understanding that bankruptcy

courts, as courts of equity, have broad authority to modify

creditor-debtor relationships”. 495 U.S. at 549. It held that the

14
bankruptcy court’s equitable powers included sufficient authority

to approve a Chapter 11 reorganization plan that required plan

payments by the debtor to the IRS to be first allocated to the

trust fund portion of the IRS’ claim, where necessary to ensure the

success of the plan. Id. As noted, the district court, in

determining that the bankruptcy court had “related to” jurisdiction

to enter the injunction, based its holding primarily on the broad

equitable powers of 11 U.S.C. § 105, as interpreted in Energy

Resources.

Energy Resources, however, addressed only the allocation of

payments in a reorganization plan, specifically whether they could

be first allocated to trust fund liability (an issue the IRS raised

before the bankruptcy and district courts but has elected not to

appeal). Energy Resources did not discuss a bankruptcy court’s

jurisdiction over non-debtor tax liabilities. Nothing in Energy

Resources suggests that bankruptcy courts have jurisdiction to

determine the tax liabilities of non-debtors.

As in Huckabee Auto, Quattrone, and Brandt-Airflex, Pena is

not a debtor in the bankruptcy proceeding. (In fact, he has not

intervened or even sought to intervene in this proceeding.) The

bankruptcy court lacked jurisdiction over his § 6672 tax liability.

In the alternative, Prescription urges that, even if the

bankruptcy court did not have jurisdiction to determine Pena’s tax

liability, the § 6672 injunction is nonetheless valid because it

15
does not determine such liability. The thrust of this assertion

seems to be that, because the injunction is temporary and

conditional (with the IRS retaining the right to employ § 6672

against Pena should Prescription fail to make its payments), the

injunction may postpone, but does not determine, Pena’s tax

liability.

We disagree. As the Eleventh Circuit noted in Huckabee Auto,

§ 6672 liability is tax liability, “assessed and collected in the

same manner as taxes”. 783 F.2d at 1549 (quoting 26 U.S.C. §

6671(a)). By enjoining the IRS from employing § 6672 against Pena,

the bankruptcy court effectively determined that Pena could not be

held liable for the § 6672 taxes. That Pena could again become

subject to such liability at some point in the future, if

Prescription defaults, does not alter the fact that, in essence,

the bankruptcy court held Pena’s current § 6672 liability to be

zero. Moreover, the contention that the injunction is temporary

and conditional (and thus will not necessarily determine Pena’s tax

liability) does not alter that the bankruptcy court, by entering

the injunction, exceeded its jurisdiction by adjudicating Pena’s

tax liability at all.

III.

For the foregoing reasons, the § 6672 injunction is VACATED

and this case is REMANDED to the district court for remand to the

16
bankruptcy court for such further proceedings, consistent with this

opinion, as may be necessary.

INJUNCTION VACATED; REMANDED

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