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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