IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 97-40008
____________________
In the Matter of: DUDLEY DAVIS TAYLOR,
Debtor.
-------------
INTERNAL REVENUE SERVICE,
Appellant,
v.
DUDLEY DAVIS TAYLOR,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Eastern District of Texas
_________________________________________________________________
January 6, 1998
Before KING and JONES, Circuit Judges, and WERLEIN,* District
Judge.
KING, Circuit Judge:
The Internal Revenue Service appeals the bankruptcy court’s
declaratory judgment that it is barred from proceeding against
Dudley Davis Taylor by the res judicata effect of his confirmed
Chapter 11 plan of reorganization, which purported to fix his
liability for a 26 U.S.C. § 6672 penalty at zero. The district
court affirmed the judgment of the bankruptcy court. We reverse.
*
District Judge of the Southern District of Texas, sitting
by designation.
I. FACTUAL AND PROCEDURAL BACKGROUND
In August 1993, appellee Dudley Davis Taylor filed for
Chapter 11 bankruptcy. He had been the president and manager of
Marshall Mill and Elevator Co., Inc. (Marshall Mill). Marshall
Mill filed for Chapter 11 bankruptcy in 1992, and that proceeding
was converted to a Chapter 7 liquidation in 1993. Marshall Mill
withheld income and social security taxes from its employees, but
failed to remit the monies to the Internal Revenue Service (IRS).
As a responsible person, Taylor is liable under § 6672 of the
Internal Revenue Code for a penalty in the amount of those taxes
that Marshall Mill failed to pay. See 26 U.S.C. § 6672.
In Taylor’s petition for bankruptcy, his schedules included
the IRS as a potential creditor with an “unassessed potential 941
penalty--unpaid corporate taxes” claim1 estimated at $80,000,
which was characterized as contingent, unliquidated, and
disputed. Additionally, the petition schedules noted that Taylor
had a significant position at Marshall Mill without being
specific as to the precise nature of the position.
In December 1993, Taylor filed a disclosure statement and a
proposed plan of reorganization. The plan defined the relevant
1
Under 26 U.S.C. §§ 3111, 3402, an employer is required to
withhold income and FICA taxes from the wages of its employees
and pay them over to the IRS. In his brief, Taylor misidentifies
this duty as arising from 26 U.S.C. § 941, which has been
repealed and never referred to this duty in any way. See 26
U.S.C.A. § 941 historical and statutory notes (West 1988 & Supp.
1997). Taylor’s 941 reference therefore must refer to the form
that an employer uses to report these withholding taxes to the
IRS. See 26 C.F.R. § 31.6011(a)–(4)(a)(1) (1997) (requiring
withholding taxes to be reported on Form 941).
2
class of claims as “[a]ll claims entitled to priority of payment
in accordance with 11 U.S.C. § 507 including: . . . [a]ny claim
for taxes or penalties owed to the Internal Revenue Service,
including but not limited to penalties under 26 U.S.C. § 6672.”
The plan proposed that this class be treated as follows:
“Pursuant to 11 U.S.C. § 505, Debtor is not indebted for any
claims in this class. All such claims, whether or not now
asserted, are discharged without receiving payment.” The
disclosure statement contained nearly identical provisions,
estimated the amount of prepetition tax claims to be “$0,” and
identified Taylor’s position at Marshall Mill. However, it did
not mention Marshall Mill’s withholding tax liabilities. The
disclosure statement also described this class of claims, which
included the IRS liability, as unimpaired.
On January 6, 1994, the IRS filed a proof of claim in the
bankruptcy proceeding for unpaid personal income taxes for 1992
to which Taylor objected. After an audit of Taylor’s return, the
IRS subsequently withdrew the claim on February 3, 1994 and
asserted no other claims in Taylor’s bankruptcy proceeding.
On February 22, 1994, the bankruptcy court approved Taylor’s
disclosure statement, and in April 1994, the bankruptcy court
confirmed his proposed Chapter 11 plan (the Plan). The IRS did
receive a copy of the Plan, but it did not participate in the
confirmation hearing. The IRS has not at any time appealed the
confirmation of the Plan.
3
On May 25, 1994, the IRS notified Taylor that a § 6672
penalty of $96,251.15 would be assessed against him based upon
Marshall Mill’s failure to pay over withholding taxes to the
government. On October 13, 1994, Taylor initiated the current
proceeding in the bankruptcy court seeking a declaratory judgment
that he was not indebted to the government for the Marshall Mill
§ 6672 penalty. The bankruptcy court resolved the dispute on
cross-motions for summary judgment and held that the IRS could
not proceed against Taylor for the Marshall Mill § 6672 penalty.
The IRS appealed to the district court, which affirmed the
bankruptcy court’s judgment. The IRS appeals.
II. STANDARD OF REVIEW
The facts in this case are undisputed, leaving only
questions of law to be resolved, which we review de novo. See
Heartland Fed. Sav. & Loan Ass’n v. Briscoe Enters., Ltd., II (In
re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1163 (5th Cir.
1993).
III. DISCUSSION
Taylor argues that the principles of res judicata and
estoppel bar the IRS from proceeding against him to collect the
Marshall Mill § 6672 penalty. The bankruptcy and district courts
ruled that the IRS was barred by the res judicata effect of the
confirmation of the Plan, which purports to determine that the
4
§ 6672 liability is zero.2 We disagree and find that the IRS is
not barred by either principle.
A. Res Judicata
Taylor argues that the bankruptcy court has the authority to
determine the amount of a tax or tax penalty of a debtor under 11
U.S.C. § 505. Relying upon this authority and on his references
to it and to a § 6672 penalty in his Plan, Taylor urges this
court to apply Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th
Cir. 1987), in order to affirm the judgments of the bankruptcy
and district courts, which gave res judicata effect to the Plan
and thus barred the IRS from proceeding against Taylor to collect
the Marshall Mill § 6672 penalty. In Taylor’s view, the IRS’s
filing of a claim for income tax and its subsequent withdrawal,
the Plan’s recitation invoking § 505, the Plan’s reference to
§ 6672 liability, and his listing of the debt in his petition
schedules demonstrate that the bankruptcy court dealt with the
debt, and therefore, the Plan confirmation is binding on the IRS.
In Shoaf, we gave res judicata effect to a confirmed plan
that released a third-party guarantor on one of the debtor’s
2
The bankruptcy court opinion arguably rests upon two
alternative grounds: (1) the debt was discharged by the Plan or
(2) the debt was determined by the Plan to be zero. Taylor
concedes that the Plan could not discharge the debt and that any
discharge by the Plan would be invalid and unenforceable. The
district court interpreted the bankruptcy court’s decision as
resting only upon the second ground, and Taylor only argues that
the bankruptcy court’s decision rests upon the second ground.
Because the only question resolved below that is in dispute is
whether the Plan determined the debt to be zero and is res
judicata in regards to the amount of the debt, we will discuss
the case only in that context.
5
debts. Id. at 1048. The release was a condition of a settlement
between the creditors, including the creditor on the guaranteed
debt, and the deceased debtor’s widow designed to persuade her to
release life insurance proceeds to the estate. Additional
consideration for the release included the guarantor dismissing
with prejudice a separate, related legal action. Id. At a
hearing to amend the plan, the creditor on the guaranteed debt
objected to the inclusion of the release in the plan, and the
bankruptcy court responded that the creditor’s proper course of
action would be to object to the confirmation of the plan. Id.
at 1048-49. At a subsequent hearing, the plan was confirmed
without objection, and the bankruptcy court’s order of
confirmation included express language noting the release of the
guarantor. No appeal ensued. Id. at 1049. Despite the fact
that the Bankruptcy Code’s prohibition against the release of
liability of a third party found in § 524 might have led to a
different result on direct appeal, this court found that the
confirmed plan barred the nonobjecting creditor from proceeding
against the third-party guarantor. Id. at 1048-51; see also 11
U.S.C. § 524(e).
In Sun Finance Co. v. Howard (In re Howard), 972 F.2d 639,
641 (5th Cir. 1992), this court acknowledged that Shoaf presented
the general rule that a confirmed plan was res judicata on the
validity of a plan provision. However, Howard recognized that
our previous decision, Simmons v. Savell (In re Simmons), 765
F.2d 547 (5th Cir. 1985), represented a limited exception to that
6
general rule that reflected the competing concerns expressed in
the Bankruptcy Code. Howard, 972 F.2d at 641.
In Simmons, the debtor listed a secured debt as unsecured in
his proposed plan even after the creditor had filed a proof of
claim indicating his secured status. 765 F.2d at 549. The plan
was confirmed without objection, but the creditor had noted his
objection to the listing of his debt as unsecured on the form for
acceptance of the plan. Id. The debtor then attempted to use
the confirmed plan as res judicata to force the creditor to
cancel his otherwise valid lien. Id. at 550. We held that the
lien remained valid. Id. at 559.
In reaching our conclusion in Simmons, this court considered
the purpose of the proof-of-claim process and the Bankruptcy
Code’s treatment of a secured creditor. An objection to a proof
of claim serves to initiate a contested matter and thereby serves
the purpose of putting the parties on notice that litigation is
required to resolve the objection and to make a final
determination on the allowance or disallowance of the claim. Id.
at 552. Congress intended that a secured creditor could preserve
his lien without participating in the bankruptcy proceeding by
the protections it offers the secured creditor in §§ 502 and 506
of the Bankruptcy Code. Id. at 551-52, 558-59 (discussing 11
U.S.C. §§ 502(a) and 506(d) and In re Tarnow, 749 F.2d 464 (7th
Cir. 1984), which noted that the 1984 amendment to § 506(d)
codified the rule that a secured creditor can preserve his lien
without participating in the bankruptcy proceeding); see also 11
7
U.S.C. §§ 502, 506. Once a proof of claim is filed, the debt is
considered allowed unless the debtor or another party in interest
files an objection to the proof of claim. Id. at 559.
The Simmons opinion considered whether the confirmed plan
could substitute for an objection to a secured claim. Unlike an
objection to a proof of claim, the filing of a plan does not
generally initiate a contested matter with respect to a
particular claim, and when a plan is filed with a petition (as is
the case in Chapter 13), creditors may not have even contemplated
filing proofs of claims. Id. at 552. In deciding that the plan
could not substitute for an objection to the secured claim at
issue, this court stated that
given the differences in purpose and effect of filing a
plan and lodging an objection, Simmons’ filing of the
plan did not clearly place the claim in issue. The
plan is like a proof of claim to which objections are
filed, thereby instituting contested matters, rather
than a vehicle through which objections are made. . .
. The Code and the Rules do not envision the use of a
Plan as a means for objecting to proofs of claims.
Consequently, we hold that Simmons’ plan did not
constitute an objection to Savell’s proof of secured
claim.
Id. at 553 (emphasis added).
We have built upon Simmons in Howard and Boyle Mortgage Co.
v. Cook (In re Cook), No. 93-7459 (5th Cir. June 2, 1994)
(unpublished), both of which also involved secured claims.3 In
Howard, a secured creditor filed a proof of claim to which the
debtor did not object, and the plan, which purported to
3
“Unpublished opinions issued before January 1, 1996, are
precedent.” 5TH CIR. R. 47.5.3.
8
compromise the claim, was confirmed without objection. 972 F.2d
at 640. The Howard court found that the secured creditor was
entitled to the protection of the proof-of-claim process and that
his claim could not be compromised by the confirmed plan unless
an objection was filed to put him on notice that his claim was at
risk. Id. at 641-42. Otherwise, the right to stay outside the
bankruptcy and rely upon one’s lien would be meaningless because
the confirmation of the plan alone could compromise one’s secured
debt. Id. at 641.
In Cook, a debtor attempted to raise a confirmed plan as a
shield to limit recovery on a lien to the amount stated in the
plan where no proof of claim was filed. No. 93-7459, slip op. at
2. The Cook court found that “collapsing the secured creditor’s
ability to object to the plan into his right to preserve his lien
intact absent an objection to his claim . . . effectively
render[s] the claims objection process meaningless.” Id. at 3-4.
Therefore, the court allowed the creditor to maintain his lien
without being limited by the confirmed plan.
The same policies that weigh against a debtor relying upon a
confirmed plan of reorganization to compromise a secured debt
weigh in with equal force in the context of a § 6672 tax penalty.
First and most important, the IRS has the option to remain
outside the bankruptcy proceeding and preserve a debt for a
§ 6672 penalty without filing a claim in Chapter 11. This option
lies in §§ 1141 and 523 of the Bankruptcy Code. Section
1141(d)(2) saves debts excepted from discharge in § 523 from the
9
general discharge of all pre-existing debts given to the debtor
by § 1141(d)(1). See 11 U.S.C. § 1141(d). The debts excepted
from discharge by § 523 include taxes described in § 507(a)(8)4
“whether or not a claim for such tax was filed or allowed.” Id.
§ 523(a)(1)(A). Section 507(a)(8)(C) describes “a tax required
to be collected or withheld and for which the debtor is liable in
whatever capacity.” Id. § 507(a)(8)(C). The responsible person
penalty of § 6672 for withholding taxes falls within
§ 507(a)(8)(C). See In re Vaglica, 112 B.R. 17, 18 (Bankr. E.D.
Tex. 1990). Therefore, the Marshall Mill § 6672 penalty would
normally survive bankruptcy even if no proof of claim was filed.
Accord Fein v. United States, 22 F.3d 631, 633 (5th Cir. 1994)
(“‘[L]ike any other holder of nondischargeable debt, the IRS is
also free to pursue the debtor outside bankruptcy.’” (quoting
Grynberg v. United States (In re Grynberg), 986 F.2d 367, 370
(10th Cir. 1993))).
Second, the normal procedure to determine the amount of a
tax debt is for the debtor (or the IRS) to file a motion
requesting that the bankruptcy court make the determination under
11 U.S.C. § 505. In re Horton, 95 B.R. 436, 440 (Bankr. N.D.
Tex. 1989) (determining a § 6672 liability pursuant to § 505); 15
COLLIER ON BANKRUPTCY ¶ TX5.04[2][b], at TX5-29 (Myron M. Sheinfeld
et al. eds., 15th ed. rev. 1997). Section 505 authorizes the
4
After Taylor’s Plan was confirmed, the Bankruptcy Reform
Act of 1994, Pub. L. No. 103-394, tit. III, sec. 304(c), 108
Stat. 4112, 4142, renumbered the subsections of § 507 and
references thereto without changing the relevant language.
Therefore, all references are to the current Code.
10
court to determine “the amount or legality of any tax . . .
whether or not previously assessed.” 11 U.S.C. § 505(a)(1).
This determination should be made under Rule 9014, which governs
contested matters, because it does not fall within adversary
proceedings as delineated by Rule 7001. See Whelan v. United
States (In re Whelan), 213 B.R. 310, 313 (Bankr. W.D. La. 1997);
Horton, 95 B.R. at 442 n.11; 15 COLLIER ON BANKRUPTCY, supra,
¶ TX5.04[2][b], at TX5-29. Compare FED. R. BANKR. P. 9014 with
FED. R. BANKR. P. 7001. Under Rule 9014, “relief shall be
requested by motion, and reasonable notice and opportunity for
hearing shall be afforded the party against whom relief is
sought.” FED. R. BANKR. P. 9014. The motion should state with
particularity the grounds and the relief desired. FED. R. BANKR.
P. 9013. Alternatively, the debtor can file a proof of claim on
behalf of the IRS and object to it, in order to dispute the
§ 6672 penalty. See 11 U.S.C. § 501(c); United States v. Kolstad
(In re Kolstad), 928 F.2d 171, 173 (5th Cir. 1991); 15 COLLIER ON
BANKRUPTCY, supra, ¶ TX5.03[1].
The Simmons line of cases has held that, in the context of a
secured claim, a confirmed plan does not substitute for an
objection to a proof of claim. See Cook, No. 93-7459, slip op.
at 5-6; Howard, 972 F.2d at 642; Simmons, 765 F.2d at 553.
Filing a § 505 motion institutes a contested matter which puts
the parties on notice that litigation is required to resolve a
dispute as to the amount of the debt, which, as we held in
Simmons, the filing of a plan does not do in relation to a
11
particular debt. See 765 F.2d at 553 (noting that a “plan is
like a proof of claim to which objections are filed, thereby
instituting contested matters, rather than a vehicle through
which objections are made”). Similarly, the confirmation of a
plan does not substitute for a § 505 motion any more than it
substitutes for an objection to a proof of claim. Accord 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.” (footnote omitted)), quoted in Fein, 22 F.3d at
633.
Taylor failed to invoke the power of the bankruptcy
court to determine the amount of the Marshall Mill § 6672
penalty. He did not file a proof of claim on behalf of the IRS
or file a motion under § 505, one of which is necessary to
compromise a nondischargeable debt. Taylor’s listing of the debt
in his schedules, disclosure statement, and Plan along with the
recitation “Pursuant to § 505" did not invoke in any way the tax
determination process. This mere recitation of the authority of
§ 505 does not make a plan confirmation hearing something that it
is not; following the Simmons line of cases, we require an
objection to a proof of claim or a § 505 motion to determine the
amount of a tax debt. This burden is minor and no greater than
the filing of a tax return required of all taxpayers. Therefore,
Taylor’s Plan is not res judicata as to the amount of his
12
liability on the Marshall Mill § 6672 penalty, and the IRS is not
barred from proceeding against him to collect that penalty.
Taylor’s reliance upon the fact that the IRS filed a proof
of claim for income taxes as support for his claim that res
judicata should apply is misplaced. The § 6672 penalty is a
completely separate debt and a separate type of tax which is not
determined by the consideration of an income tax proof of claim.
Cf. Grynberg, 986 F.2d at 371-72 (holding that the IRS’s full
participation in the bankruptcy proceeding in relation to an
income tax debt did not bar it from collecting a gift tax debt
that had also been listed in the debtor’s schedules where the IRS
did not file a proof of claim and the debtor did not force the
IRS into the proceeding on the gift tax debt). Therefore, the
tax determination process was not invoked by the IRS filing an
income tax proof of claim and Taylor’s subsequent objection to
it.
Taylor also attempts to deal with his failure to invoke
properly the tax determination process by arguing that it is
merely a procedural defect that the IRS waived by failing to
object in the bankruptcy proceeding. To so hold would make the
ability of the IRS to remain outside bankruptcy as a tax debt
creditor as meaningless as if we applied res judicata. The IRS’s
ability to remain outside the bankruptcy proceeding is a product
of Congress’s policy decision to elevate the goal of revenue
collection above the debtor’s interest in a fresh start after
bankruptcy. See Fein, 22 F.3d at 633 (“Congress consciously
13
opted to place a higher priority on revenue collection than on
debtor rehabilitation or ensuring a ‘fresh start.’”). The
responsibility for Taylor’s predicament lies only with Taylor and
his counsel because they could have chosen to bring the IRS into
the bankruptcy proceeding by the proof-of-claim process or
through a § 505 motion, which allows the debtor to attenuate the
potential harshness of the congressional policy decision to place
revenue collection above the debtor’s fresh start.5
We do not hold that a bankruptcy court must have distinct
proceedings in order to determine a tax debt or that the court
cannot combine a § 505 hearing and a plan confirmation hearing or
address a tax debt in another manner. See Cook, No. 93-7459,
slip op. at 5 (noting that a combined hearing would be acceptable
and that surely creative bankruptcy courts have properly used
5
Taylor would lead us to believe that he did everything he
could to let the IRS realize that the Marshall Mill § 6672
penalty would be dealt with by his bankruptcy, but the schedules
that accompanied his bankruptcy petition show something else. He
failed to list Marshall Mill as a codebtor or indicate the
existence of a codebtor on the tax debt, but he did list Marshall
Mill as a codebtor on three other claims, including a Texas sales
tax debt. Additionally, in his disclosure statement he listed
the class of claims that included the § 6672 penalty as
unimpaired, which, while technically correct if the tax debt had
been determined to be zero, was inconsistent with the language of
discharge in the treatment of the class of claims. As discussed
in the text, Taylor had the ability to deal with the tax debt in
his bankruptcy proceeding, but these facts, while not at all
dispositive, suggest along with the rest of the proceedings that
the goal of Taylor and his counsel has been to avoid Taylor’s
liability on this tax debt through artful draftsmanship rather
than to determine its amount.
This proceeding may have been costly to the estate and to
the creditor involved, the IRS. The bankruptcy court should
consider whether Taylor’s counsel should bear some of the expense
for this unfortunate maneuver.
14
other methods to efficiently deal with the issues before the
court). Rather, we hold that the confirmation of a plan does not
itself invoke the tax determination process.
B. Estoppel
Taylor alternatively argues that the IRS should be estopped
from collecting on the debt because he relied upon the IRS’s
failure to file a claim in binding himself to the Plan. In order
to establish estoppel against the government in this circuit, a
party must prove affirmative misconduct by the government as well
as the four traditional elements of estoppel. United States v.
Bloom, 112 F.3d 200, 205 (5th Cir. 1997). The traditional
elements of estoppel are “(1) that the party to be estopped was
aware of the facts, and (2) intended his act or omission to be
acted upon; (3) that the party asserting estoppel did not have
knowledge of the facts, and (4) reasonably relied on the conduct
of the other to his substantial injury.” Id.
Taylor relies upon In re La Difference Restaurant, Inc., 29
B.R. 178, 181 n.4, 181-83 (Bankr. S.D.N.Y. 1983), where estoppel
was applied to the IRS in the bankruptcy context using a standard
different from this circuit’s. In La Difference Restaurant, the
IRS negotiated a stipulation to the amount of a tax debt upon
which the debtor relied in arranging his reorganization plan, and
the feasibility of the debtor’s plan hinged upon this
stipulation. Id. at 179-80.6
6
Similar facts led the Tenth Circuit not to apply estoppel
to the IRS using the same affirmative misconduct standard that
this circuit uses. Depaolo v. United States (In re Depaolo), 45
15
In Taylor’s bankruptcy, the IRS stood outside the bankruptcy
proceeding and did not participate, unlike in La Difference
Restaurant where the IRS stipulated to the amount of the tax
liability upon which the plan’s feasibility hinged. Taylor does
not point to any affirmative government misconduct in this case,
and Taylor did not reasonably rely upon any government
representation that the IRS would not seek to enforce its claim
because a reasonable debtor should expect the IRS to enforce
nondischargeable taxes. Fein, 22 F.3d at 634; see also Depaolo
v. United States (In re Depaolo), 45 F.3d 373, 377 (10th Cir.
1995); Gurwitch, 794 F.2d at 586. The only affirmative
misconduct apparent in the record is that of Taylor’s counsel in
pursuing this surreptitious path in attempting to dispose of
Taylor’s § 6672 liability. Therefore, estoppel does not lie
against the IRS to bar it from proceeding against Taylor to
collect on the Marshall Mill § 6672 penalty. Additionally, to
apply estoppel in this case would be inconsistent with the
policies discussed above that allow the IRS to choose to remain
outside a bankruptcy proceeding.
IV. CONCLUSION
For the foregoing reasons, we REVERSE the judgment of the
district court and REMAND the case to the district court for
remand to the bankruptcy court for entry of judgment that the IRS
F.3d 373, 377 (10th Cir. 1995) (finding no estoppel where the IRS
had stipulated to the amount of taxes and later assessed
additional tax amounts).
16
may proceed against Taylor to collect the Marshall Mill § 6672
penalty. Costs shall be borne by Taylor.
17