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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowA federal appellate panel has answered questions as to whether a bankruptcy court can determine the amount of a debtor’s tax obligations when the debtor is unlikely to pay them. Although a U.S. Bankruptcy Court for the Southern District of Indiana answered yes to that question, a district judge disagreed.
Issues arose in 2013 when the Internal Revenue Service demanded that Donald and Kimberly Bush pay $107,000 in taxes, plus $80,000 in fraud penalties, for tax years 2009, 2010 and 2011. The Bushes petitioned the United States Tax Court for review but then filed for bankruptcy on the day of trial, automatically staying and preventing the tax court from proceeding.
The bankruptcy court declined to lift the stay and the Bushes subsequently initiated an adversary proceeding, asking the bankruptcy court to set the penalty at 20% of their unpaid taxes after the United States filed a proof of claim seeking taxes and penalties. Specifically, the Bushes pointed the bankruptcy court to 11 U.S.C. §505(a)(1), but the 7th Circuit struggled to find the connection in Donald Wayne Bush v. USA, 16-3244.
“Section 505 simply sets out a task for bankruptcy judges. Almost the entirety of the Bankruptcy Code prescribes tasks for bankruptcy judges. For example, §503 tells bankruptcy judges how to determine administrative expenses, and §547 provides for resolution of trustees’ preference-recovery actions. Those and other sections in the Code are unrelated to jurisdiction, just as few of the many thousand substantive rules in the United States Code as a whole concern jurisdiction,” Circuit Judge Frank Easterbrook wrote for the panel.
“… There is no reason why this residual dispute about tax penalties should stick with the bankruptcy judge, who otherwise is done with the case, rather than the specialist judges in the Tax Court,” the 7th Circuit wrote. “Congress has authorized district courts to relinquish jurisdiction of bankruptcy disputes ‘in the interest of justice’, 28 U.S.C. §1334(c)(1), and that description fits the Bushes’ situation. Today the tax dispute stands in the same posture as if the Bushes had never filed for bankruptcy, and the appropriate forum for its resolution is the Tax Court.”
The 7th Circuit then concluded that although the bankruptcy judge was right to hold that he had authority to resolve the tax dispute while the Bushes’ bankruptcy was ongoing, the exercise of that authority was no longer appropriate.
It thus vacated the district judge’s decision and remanded with instructions to remand to the bankruptcy judge for the entry of an order under §1334(c)(1), “which will mark the final step in the Bushes’ bankruptcy proceeding.”
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