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OIC Cases - bankruptcy
 
In the Matter of Charles Peterson, Debtor, U.S.
Bankruptcy Court, Dist. Neb.; BK03-40948, November 4, 2004.
MEMORANDUM
MAHONEY,
Chief Judge: Hearing was held in Lincoln, Nebraska, on October 18, 2004,
on the United States' motion to alter, amend, or reconsider (Fil. #144)
and resistance by the debtor (Fil. #147). John Hahn appeared for the
debtor, and Gerald Leedom and Ellyn Grant appeared for the Internal
Revenue Service. This memorandum contains findings of fact and
conclusions of law required by Federal Rule of Bankruptcy Procedure 7052
and Federal Rule of Civil Procedure 52. This is a core proceeding as
defined by 28 U.S.C. §157(b)(2)(B) and (O).
This matter arises from the debtor's efforts to deal with a debt of
approximately $102,000 for payroll taxes, a priority claim in this case.
He proposes to make an "offer in compromise" to the Internal
Revenue Service, which the IRS will not process for any taxpayer in
bankruptcy. At the debtor's request, I ordered the IRS to process and
consider the debtor's offer in compromise as it would for a taxpayer
outside of bankruptcy. See Order of Sept. 2, 2004 (Fil. #142).
The government then filed this motion to alter or amend or reconsider
that order.
The Internal Revenue Code permits the Treasury Secretary to compromise
any civil or criminal case arising under the revenue laws. The
Secretary, through the Commissioner of Internal Revenue, has promulgated
guidelines for IRS employees to follow in considering such offers, and
has left to IRS discretion the decision of which offers in compromise
are "processable." In accordance with such guidelines and
procedures, the IRS has determined that offers in compromise from
taxpayers in bankruptcy are not "processable" and will not be
accepted for processing, on the basis that resolution of the claim is
best accomplished in the bankruptcy case under the bankruptcy code and
procedural rules.
The IRS's Office of Chief Counsel has published a notice reiterating the
agency's position that in accordance with protecting the government's
interests, the IRS will not accept less than is required to be repaid by
the bankruptcy code unless the debtor can demonstrate that agreeing to
accept less through the plan is in the government's best interest. This
decision is to be made on a case-by-case basis by evaluating the
reorganization plan, not a proposed offer in compromise.
In essence, the IRS takes the position that by choosing to file a
Chapter 13 case, a debtor acknowledges full payment of the IRS's
priority claim is required. Such a debtor may propose alternate terms
for payment of the IRS claim in his or her plan. The IRS will review the
plan and determine whether to object to or negotiate the proposed terms.
However, the IRS has given no example of a Chapter 13 case in which it
has accepted a plan that gave it less than full payment of a priority
claim.
Counsel for the United States asserts that exercise of discretion on the
part of the IRS in determining it will not entertain offers in
compromise from those in bankruptcy is an agency action that is not
subject to judicial review, and that a court order to the contrary is in
the nature of a writ of mandamus.
I continue to stand by my prior ruling. I am not attempting to interfere
with internal agency procedures. However, as suggested in the prior
order, the debtor is not asking for special treatment or consideration
contrary to law. The position taken by the IRS on this issue is set
forth in a revenue procedure and in a notice from chief counsel. Neither
of these carry the force and effect of law, and may not even be entitled
to much deference.
Neither the Internal Revenue Code nor the Treasury Regulations contain
the prohibition against accepting offers in compromise from taxpayers in
bankruptcy. That provision appears in Revenue
Procedure 2003-71 and is
clarified in the July 12, 2004, notice from the Office of Chief Counsel.
A revenue procedure is an internal procedural guide. It represents
official IRS position on a matter of procedure, but it is not mandatory.
See Estate of Shapiro v. Commissioner [ 97-1
USTC ¶60,267], 111 F.3d 1010,
1017-18 (2d Cir. 1997), cert. denied, 118 S.Ct. 686 (1998).
Interestingly, the Shapiro case involved a taxpayer who wanted to
force the IRS to accept supplemental estate tax returns which recomputed
tax liability based on annual interest payments, as provided for in the
revenue procedure. The IRS argued that despite what the procedure
stated, its "administratively convenient" practice was to not
accept such supplemental returns from a taxpayer who was also involved
in a Tax Court case, citing the difficulty of coordinating collection
activities when the amount of tax liability had not been finally
determined. The court found this to be a reasonable policy and ruled
that the IRS was not bound by this particular revenue procedure, and
thereby ruled against the taxpayer.
In Shapiro, the Second Circuit discussed the
"well-established" rule that revenue procedures generally are
directory, not mandatory, and are mere guidelines without the force of
law. [ 97-1
USTC ¶60,267], 111 F.3d at 1017.
The court also noted, however, that if a revenue procedure is properly
characterized as a substantive statement instead of a procedural
directive, the IRS may be required to follow it in every case. Id.
"The IRS will be bound by a published rule if 1) the rule
prescribes substantive rules --not interpretive rules, general
statements of policy or rules of agency organization, procedure or
practice, and 2) the agency promulgated the rules pursuant to a specific
statutory grant of authority and in conformance with the procedural
requirements imposed by Congress." Id. at 1017-1018 (quoting
Ward v. Commissioner [ 86-1
USTC ¶9286], 784 F.2d 1424,
1430-31 (9th Cir. 1986)).
Because most revenue procedures are simply procedural rules promulgated
by the Internal Revenue Commissioner without the need for approval by
the Secretary of the Treasury, and because the revenue procedure at
issue in this case states on its face that its purpose is to
"explain the procedures applicable to the submission and processing
of offers to compromise", it clearly is not substantive and does
not have the force of law. Where an agency's interpretation is made
informally, without "the rigors of notice and comment," it is
not entitled to Chevron deference. Demma Fruit Co. v. Old
Fashioned Enter., Inc. (In re Old Fashioned Enter., Inc.), 236 F.3d
422, 425-26 (8th Cir. 2001) (citing King v. Morrison, 231 F.3d
1094, 1096 (8th Cir. 2000)).
While cases such as Shapiro are in the IRS's favor in that the
court found the IRS is not bound by the revenue procedure, it seems to
me to be almost disingenuous to apply the reasoning of such cases only
to the IRS's benefit. In other words, Shapiro said the IRS does
not have to follow its own non-mandatory procedure. Here, the IRS wants
me to enforce a non-mandatory agency procedure so it does not have to
entertain the debtor's offer in compromise. I am not inclined to do so.
After a considered review of the arguments made and authorities cited by
the IRS, I nevertheless arrive at the same conclusion as I did
previously and again follow the reasoning of Holmes v. United States
(In re Holmes) [ 2003-2
USTC ¶50,685], 298 B.R.
477 (Bankr. M.D. Ga. 2003), aff'd, 309 B.R. 824 (M.D. Ga. 2004).
Apparently the IRS ignored the order of the court in Holmes, even
after affirmance, but the fact it was ignored does not make it bad law.
In this case, the IRS may either process an offer in compromise, which
the tax code authorizes any taxpayer to submit, or take seriously its
stated position that it will, in good faith, consider accepting less
than the bankruptcy code requires in a Chapter 13 plan.
Separate order will be entered.
Internal Revenue
Service, Appellant v. William K. Holmes, Appellee, U.S.
District Court, Mid. Dist. Ga., Macon Div.; 5:03-CV-356 (CAR), March 15,
2004, Affirming BC-DC Ga., 2003-2
USTC ¶50,685.
ORDER
ON APPEAL AND ORDER TO EXPEDITE APPEAL
ROYAL,
District Judge: Before the Court is an appeal by the Internal Revenue
Service (hereafter IRS) from the decision of the United States
Bankruptcy Court dated September 12, 2003. Also before the Court is a
motion by Appellee to expedite the appeal process [Tab 6]. The Court
recognizes the concerns of Appellee in having this appeal process
delayed and will do its best to expedite this appeal in a timely
fashion. To the extent it is possible to do so, the Court HEREBY
GRANTS Appellee's Motion to Expedite the Appeal.
As to the appeal itself, the Order appealed from directs Appellant IRS
to consider Appellee Holmes' offer in compromise to satisfy his tax
liability in the same manner as the IRS would consider any offer in
compromise made by a person who is not involved in a bankruptcy
proceeding. The IRS appeals this decision and directive by the
Bankruptcy Court. Having considered the record, the briefs filed by both
parties, and the relevant case law, this Court agrees with the
Bankruptcy Court's decision. This Court finds that the Bankruptcy Court
had the authority to enter this Order and further directs Appellant IRS
to consider Appellee's offer in compromise. Therefore, the decision of
the Bankruptcy Court is HEREBY AFFIRMED.
BACKGROUND
William K. Holmes (hereafter Appellee or Debtor) is currently a debtor
in a Chapter 11 proceeding before the United States Bankruptcy Court for
the Middle District of Georgia. The following events led up to his
bankruptcy and to the present procedural posture of this case. Debtor
owned approximately 3.2 million shares of WorldCom Stock in 2000. The
stock at one time had a value of about $200,000,000.00. As WorldCom
began to show signs of financial difficulty, Debtor's stock broker sold
Debtor's stocks as they decreased in value in order to meet margin
calls. While the sale of such stocks resulted in capital gains with
accompanying tax liabilities to Debtor, Debtor did not receive cash with
which to pay the tax liability because the sale proceeds went directly
to pay margin debt. On July 1, 2002, Debtor filed a bankruptcy petition
seeking relief under Chapter 11 for a plan of liquidation.
The Internal Revenue Service (hereafter IRS or Appellant) filed an
amended proof of claim in the bankruptcy proceeding, which included a
priority claim for income tax and interest totaling $9,372,245.01 and a
general unsecured claim for $920,462.40 for penalties pertaining to the
tax due. Debtor then submitted an offer of compromise to the IRS to pay
$621,326.00 in satisfaction of the IRS' claims against him. The IRS
returned the offer to Debtor and informed Debtor that they would not
process the offer because they have a policy against considering any
offers of compromise made by persons who are involved in pending
bankruptcy proceedings.
Debtor subsequently filed with the Bankruptcy Court a motion to
determine tax liability and an objection to the IRS' claim. Debtor
requested that the Bankruptcy Court enter an order requiring the IRS to
consider the offer of compromise based on the argument that 11 U.S.C. §525
prohibits discriminatory treatment, including the denial of
consideration of offers in compromise, against debtors involved in
bankruptcy. The Bankruptcy Court held a hearing and then entered an
Order on September 10, 2003, requiring the IRS to consider the offer of
compromise made by Debtor (hereafter Order). The Bankruptcy Court
rejected Debtor's argument as to applicability of §525, holding that an
offer in compromise fails to meet the statutory definition of anything
which the denial of is considered discriminatory. In other words, an
offer in compromise was not a "license" as Debtor argued.
However, the Bankruptcy Court followed the reasoning of a recent
decision in the District Court of the Western District of Virginia, In
re Macher [ 2004-1
USTC ¶50,114], 303 B.R. 798 (W.D.
Vir. 2003) and held that while §525 did not authorize such a decision,
§105 did. Section 105 provides that a bankruptcy court "may issue
any order, process or judgment that is necessary to carry out the
provisions of this title." The Bankruptcy Court in this situation
held that §105 authorized their decision to direct the IRS to process
and consider Debtor's offer in compromise.
The IRS, via the United States Government, entered a timely appeal to
the Order of the Bankruptcy Court. The appeal contends that the
Bankruptcy Court lacked subject matter jurisdiction to direct the IRS to
consider the offer in compromise. The appeal also argues that forcing
the IRS to consider offers in compromise from debtors involved in
bankruptcy proceedings will open a Pandora's box of problems as well as
violate the Anti-Injunction Act set forth at 26 U.S.C. §7421(a).
Debtor timely responded to this appeal, and the IRS timely replied. It
is this appeal and the related briefs that are presently before this
Court for decision.
STANDARD
OF REVIEW
This Court will accept a bankruptcy court's findings of fact unless
those findings are clearly erroneous. See Fed. Bankr. R. 8013; In
re Sublett, 895 F.2d 1381, 1383 (11th Cir. 1990); In re Club
Assocs., 951 F.2d 1233, 1228 (11th Cir. 1992). A district court is
not authorized to make independent findings of fact. See id.
at 1384. Moreover, if a bankruptcy court's findings are "silent or
ambiguous as to an outcome determinative factual question," remand
to the bankruptcy court is required. Id. ( quoting Wegner
v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987) (internal quotes
omitted)).
In contrast, conclusions of law, including a bankruptcy court's
interpretation and application of the Bankruptcy Code, are reviewed de
novo. See In re Chase & Sanborn Corp., 904 F.2d
588, 593 (11th Cir. 1990). As such, this Court is not required to give
any deference to a bankruptcy court's interpretation of law or its
application of the law to the facts. Goerg v. Parungao, 930 F.2d
1563, 1566 (11th Cir. 1991).
DISCUSSION
I. Appellee's Contention that this Court Lacks Jurisdiction Over
the Appeal
In its brief, Appellant states that this Court has jurisdiction over
this appeal under 28 U.S.C. §158 (a)(1) which states that the District
Court may hear appeals only from "final judgments, orders, and
decrees." Appellee argues in his response brief that this Court
lacks jurisdiction over the appeal because the judgment made in the
Bankruptcy Court is not "final." This argument is not
persuasive to the Court.
In his Motion to Determine Tax Liability, the only relief Appellee
sought was for the Bankruptcy Court to direct Appellant to consider the
offer in compromise. That relief was granted, and therefore this was a
final judgment. The Eleventh Circuit very clearly stated in In re
Saber, 264 F.3d 1317, 1324 (11 th Cir. 2001), that
"a final judgment gives one party what they want --the plaintiff
either receives the relief [he] sought or the defendant receives a
judgment ending the controversy." Here, Appellee got what he asked
for in the Bankruptcy Court. This Court finds that this was a final
judgment, and the appeal is properly before this Court for decision.
II. Appellant's Argument that Bankruptcy Court Lacked Subject
Matter Jurisdiction to Enter Its Order
From its reading of 11 U.S.C. §525, the Court agrees with the
Bankruptcy Court's determination that this statute does not authorize
the Bankruptcy Court to direct Appellant to consider an offer in
compromise from a debtor involved in bankruptcy proceedings.
As to 11 U.S.C. §105, which states that a bankruptcy court "may
issue any order, process or judgment that is necessary to carry out the
provisions of this title," this Court is inclined to agree with the
Bankruptcy Court's reading of that statute, especially in light of the
clear reasoning for this position outlined by sister courts in other
jurisdictions. Appellant's arguments to the contrary are not persuasive.
First, Appellant outlines how a debtor's tax liabilities are
non-dischargeable under 11 U.S.C. §523 or §1141 because they are
claims for priority tax, resulting interest, and related penalties.
Appellant argues that these are rights afforded to creditors by the
Bankruptcy Code that the Bankruptcy Court is trying to abridge by its
Order. This Court fails to see how the Bankruptcy Court is attempting to
abridge any right afforded to Appellant. There is no argument made by
any party to discharge any tax liability under any Bankruptcy Code
provision. Debtor is asking for Appellant to consider discharging a
portion of his tax liability under the IRS' own offer in compromise
provision set forth in the Internal Revenue Code at I.R.C.
§7122. The Order of the
Bankruptcy Court merely insists that Appellant IRS apply the same
guidelines applicable to other taxpayers to debtors involved in
bankruptcy when assessing these offers in compromise. This Court finds
no merit to the argument that the Bankruptcy Court is attempting to
abridge rights afforded to Appellant as a creditor of Appellee.
Second, Appellant argues that the Bankruptcy Court overstepped the
bounds of §105 because its Order was not entered in furtherance of a
"provision of this title" and, therefore, is outside the
subject matter jurisdiction of the Bankruptcy Court. In its review of
the Bankruptcy Court's Order and the other pertinent law, this Court
finds that §105 has been granted a broad reading by most courts and
even by the government when such a reading suited its purpose. See
generally, Young v. U.S. [ 2002-1
USTC ¶50,257], 535 U.S. 43
(2002); In re Morgan [ 99-2
USTC ¶50,712], 182 F.3d 775 (11 th
Cir. 1999); In re Jove Engineering, Inc. [ 96-2
USTC ¶50,469], 92 F.3d 1539 (11 th
Cir. 1996). Section 105 states that the bankruptcy court has the
discretion to issue any order that is necessary and appropriate to carry
out the provisions of this title. "The broad term 'any' is only
limited to those orders that are 'necessary and appropriate' to carry
out the Bankruptcy Code." In re Jove Engineering, Inc. [ 96-2
USTC ¶50,469], 92 F.3d at 1554.
This Court agrees with the reasoning of the Bankruptcy Court, its
reliance on Macher, and the broad reading afforded to §105 by
other courts. This Court finds that the negotiation process outlined in
§1129 of the Bankruptcy Code is sufficient as a provision of the
Bankruptcy Code for the purposes of the Bankruptcy Court's Order
pursuant to §105. The lower court cited this provision in a footnote
but also speaks about the provision throughout its Order, mentioning the
"negotiation process" and the need to "'work something
out'" with Appellant. The Order of the Bankruptcy Court was crafted
with the intent to be within the bounds of §105. It was meant to carry
out this negotiation process provision and the goal behind it which is
central to the purpose and function of the Bankruptcy Code, to provide
an individual with a way and means to work out his or her financial
difficulties. This Court finds that the Bankruptcy Court was within its
subject matter jurisdiction, as afforded it by §105, to enter the Order
in question and affirms the decision of the Bankruptcy Court on this
matter.
III. Appellant's Argument that Forcing IRS to Consider Appellee's
Offer in Compromise Violates the Anti-Injunction Act
Appellant states that the Bankruptcy Court cannot force the IRS to
accept an offer in compromise as this would violate the Anti-Injunction
Act, 26 U.S.C. §7421.
This argument reflects a generally accepted principle in the courts that
have specifically addressed this issue. See generally, In re
American Bicycle Association [ 90-1
USTC ¶50,104], 895 F.2d 1277,
1280 (9 th Cir. 1990); Addington v. U.S. [ 99-1
USTC ¶50,441], 75 F.Supp.2d 520,
524 (S.D. W. Va. 1999); In re Davidson, 156 B.R. 600, 602 (Bankr.
E.D.Ark. 1993). However, Appellant's argument concerning the
Anti-Injunction Act is misplaced. The Bankruptcy Court, in its Order,
did not force the IRS to accept an offer in compromise and even
specifically acknowledged that it does not have the power to do so. The
Bankruptcy Court only directed the IRS to consider or process
Debtor's offer in compromise. Consider and accept are not
synonymous.
Furthermore, Appellant presents what it deems to be a scary picture of
what the "handwriting on the wall" might say if the IRS is
forced to consider these offers in compromise by debtors involved in
bankruptcy proceedings. Appellee states that "this entire portion
of the Government's argument relates to the fear of a contingency that,
in line with the Bankruptcy Court's understanding of the law, is
unfounded." [Tab 9]. The Court agrees with Appellee on this point.
Appellant is arguing for future possibilities that have no basis in fact
or law. The Court is not moved by this argument and, thus, maintains its
position in affirming the Bankruptcy Court's order.
CONCLUSION
The Court finds that it does have jurisdiction over the present appeal.
As to the merits of the appeal itself, the Court finds that the
Bankruptcy Court made a correct interpretation of the law and will not
disturb its findings of fact. The Court also finds that Appellant's
arguments surrounding the possible future effects of the Bankruptcy
Court's decision and the connection with the Anti-Injunction Act are
misplaced and misleading. Accordingly, the Court finds that the decision
of the Bankruptcy Court is HEREBY AFFIRMED.
SO ORDERED.
In re Roland Harry Macher, Debtor.
United States of America, Appellant v. Roland Harry Macher, Appellee, U.S.
District Court, West. Dist. Va., Roanoke Div.; 00-03659-WSR-11, December
2, 2003.
Affirming a BC-DC Va. decision, 2003-2
USTC ¶50,537.
MEMORANDUM
OPINION
KISER,
Senior District Judge: Before this court is the appeal of the United
States ("Government" or "IRS"), pursuant to 28 U.S.C.
§158(a), from an order of the United States Bankruptcy Court for the
Western District of Virginia. By a May 29, 2003, order and corrected
opinion of June 5, 2003, the Bankruptcy Court directed the United States
to process Debtor Macher's offer in compromise as part of his proposed
Chapter 11 reorganization plan. The parties stipulated to the relevant
facts, and for the reasons stated below, I agree with the legal
conclusions and result reached by the Bankruptcy Court. I therefore
affirm the Bankruptcy Court's order and direct the IRS to consider
Macher's plan. This court is not empowered to dictate that the IRS
accept any plan which calls for Macher to pay less than 100% of the
IRS's priority claim arising from trust fund taxes improperly diverted
by Macher. However, a reasonable reconciliation of internal IRS policy
with the "fresh start" policy of the Bankruptcy Code must
resist the Government's refusal to process and consider, and its summary
rejection of, a Chapter 11 debtor's reorganization plan which proposes a
compromise payment of his tax deficiency.
I. Factual Background
The parties stipulated to the following facts. Roland Macher filed a
Chapter 11 petition on November 9, 2000. The Internal Revenue Service
holds a priority claim of over $273,000 in payroll taxes Macher
collected from employees in trust to pay over to the IRS, but instead
diverted to other uses. Macher is now the debtor-in-possession of the
underlying business.
Macher's Second Amended Plan provided for the IRS's priority claim to be
paid at twenty cents on the dollar at 8% p.a. interest over five years.
The IRS filed an objection to the Plan and demanded full payment. At the
confirmation hearing, the Assistant United States Attorney representing
the IRS advised the Bankruptcy Court that Macher's proposed payment
constituted an "offer in compromise" from a debtor in
bankruptcy which the IRS would not consider. Section 5.8.3.2.1(1)(B) of
the current IRS manual provides: "An offer [in compromise] will not
be considered during a bankruptcy proceeding." Though not
explicitly stated in the parties' briefs, it appears, and I accept as
fact for the purposes of this disposition, that a reorganization of the
underlying business is a practical impossibility if the IRS does not
compromise its priority tax claim.
In the Bankruptcy Court proceedings, counsel extensively briefed the
IRS's stated policy not to consider offers in compromise from debtors in
terms of whether it violated (1) Bankruptcy Code §525 which prevents
certain classes of governmental discrimination (such as in licensing and
chartering) against persons who are, or have been debtors under the
Bankruptcy Act, or (2) the "fresh start" objectives of the
Bankruptcy Code.
In its memorandum opinion, the Bankruptcy Court rejected the §525
grounds for obligating the IRS to consider Macher's offer, a decision
neither party questions on appeal. However, the Bankruptcy Court
concluded that the IRS could not dismiss Macher's offer in compromise
without processing and considering it, as the IRS does with offers in
compromise from nondebtors. The Bankruptcy Court reasoned that the IRS
policy embodied in IRS Manual §5.8.3.2.1(1)(B) "directly conflicts
with the policies underlying the Bankruptcy Code in general and the
reorganization provisions of Chapter 11 in particular" for four
reasons.
First, the issue is not whether the debtor can compel the IRS to accept
his offer (which he cannot), but whether the IRS at least ought to give
a debtor's offer in compromise the same consideration as a nondebtor's
offer (which it should). Second, just as a nondebtor's offer does not
mean that the taxpayer does not owe the back taxes, but simply that he
will be unable to pay them in a reasonable amount of time, the IRS
should consider a debtor's offer not as a contention that a portion of
the taxes are dischargeable, but simply as a recognition of what he can
pay. Third, the IRS's stated policy makes a "fresh start"
impossible because a debtor cannot obtain a Chapter 11 discharge of his
dischargeable obligations without the IRS's approval of a plan, yet the
IRS will not even consider an offer in compromise from a debtor. Fourth,
honoring a policy which precludes the government from even entering into
negotiations "seems at odds with common sense" and "puts
the government at cross-purposes with the beneficial purposes underlying
the reorganization provisions of Chapter 11."
With these reasons as its foundation, the Bankruptcy Court entered an
order "requiring the United States to process and consider the
Debtor's offer in compromise of his tax liabilities." Though the
Bankruptcy Court was silent as to the statutory basis on which it
founded its decision, the parties on appeal agree that the Bankruptcy
Court was invoking its broad equitable powers under 11 U.S.C. §105(a),
which provides that a bankruptcy court "may issue any order,
process, or judgment that is necessary to carry out the provisions of
this title."
II. Analysis of Arguments on Appeal
The United States appeals the Bankruptcy Court's ruling on two grounds.
I address each in turn under a de novo standard of review. In
re Johnson, 960 F.2d 396, 399 (4th Cir. 1992).
A.
Jurisdiction of Bankruptcy Court
The IRS argues that the Bankruptcy Court exceeded its equitable powers
under §105 because that section's general grant of power and general
Bankruptcy Code "fresh start" policy should not defeat the
specific balance regarding debtor tax collection made by Congress in §1129(a)(9)
and §1129(a)(7). In the Government's view, because §1129(a)(9)(C)
requires that 100% of priority tax claims be paid through a Chapter 11
plan while §1129(a)(7) indicates that non-priority tax claims need not
be paid in full, a bankruptcy court is not empowered to upset the
congressional balance by requiring the IRS to consider offers in
compromise of priority tax claims proposed by a debtor.
The Government's contention that it is "`abundantly clear' from the
express language of the Bankruptcy Code that Congress meant to bar
confirmation of Chapter 11 reorganization plans that do not pay 100% of
priority claims," quoting Johnson v. Edinboro State College,
728 F.2d 163, 164 (3d Cir. 1984), overstates the policy of §1129(a)(9)
and misconstrues the issue here. Section 1129(a)(9) begins with the
qualifier: "Except to the extent that the holder of a particular
claim has agreed to a different treatment of such claim...." The
strictures of §1129(a)(9)(C) --that priority tax claims be paid in full
and within six years of the date of assessment --apply only if the
claimant does not agree to a different treatment. See 15
Collier on Bankruptcy ¶TX4.05[4][c] (Rel.84, Dec. 2002). Therefore,
Congress meant to bar Chapter 11 plans only when the claim holder does
not agree to an alternative treatment of the claim. To be sure, Congress
has denied courts the power to confirm, over the objection of a claim
holder, a Chapter 11 plan that does not pay 100% of priority claims
within the conditions set by §1129(a)(9)(C). However, given the
introductory qualifier of §1129(a)(9), the Bankruptcy Code's
"fresh start" principle, and the common sense realities of
bankruptcy reorganizations, the more reasonable conclusion is that
Congress has contemplated a spirit of negotiation in §1129(a)(9), and
not the mechanical refusal by the IRS to consider offers in compromise
proposed by debtors.
Indeed, in both its main brief and reply brief the Government indicates
that the IRS recognizes the flexibility of §1129(a)(9) and its
authority to compromise priority tax claims. Further, a close reading of
the Johnson case, which the Government quotes at length, supports
the proposition that the holders of non-dischargeable claims retain the
flexibility to negotiate with debtors and should consider debtors'
repayment proposals.
The IRS states that its practice is to be flexible in negotiating with
debtors "under appropriate circumstances." As an example of
this flexibility, in its main brief the IRS indicates that when
appropriate it will extend the repayment period beyond the six years
provided in §1129(a)(9)(C). In support of this proposition, the
Government cites IRS Manual §25.17.11.5.2(8) which states: "In
certain rare cases, a deficient plan may provide the best alternative if
collection through liquidation or dismissal would be less that the
amount proposed in the plan." This provision indicates that the IRS
not only can agree to extend §1129(a)(9)(C)'s deadline, but that the
IRS has the discretion to negotiate a less-than-100% repayment of a
priority tax claim. By steadfastly invoking IRS Manual §5.8.3.2.1(1)(B)
to refuse to consider Macher's reorganization plan and arguing that
"[p]ayment of 100% of priority taxes is a statutory prerequisite
to confirmation," the IRS has no way of ascertaining whether
liquidation or the proposed compromise is more advantageous.
In its reply brief, the Government cites IRS Manual §25.17.11.5.2(7)
for the proposition that when a Chapter 11 plan proposes less-than-full
payment, there is to be no negotiation. IRS Manual §25.17.11.5.2(7)
reads: "If the plan does not meet the minimum requirements for
payment under the Bankruptcy Code, or there are other serious concerns,
[the IRS employee] should advise the debtor's attorney of the
deficiencies and negotiate an acceptable plan. The changes would then be
included in an amended plan or in the order confirming the plan."
The Government interprets this language as "emphasi[zing] ...
negotiation, not in the sense of compromise, but rather in the sense of
expressing a preference to obtain an acceptable plan that meets the
requirements of 11 U.S.C. §1129 without resorting to judicial
intervention...." In the context of a bankruptcy reorganization,
the crabbed definition of "negotiate" as tolerating no
compromise alone strains reasonableness; and the Government's
interpretative logic ultimately fails by repeating the error of ignoring
§1129(a)(9)'s qualifying language. As shown above, the IRS erroneously
takes the "requirements of 11 U.S.C. §1129(a)(9)" to mandate
full payment of its priority claims within six years of assessment.
Under a proper reading of §1129(a)(9) --one that recognizes a claim
holders' authority to agree to compromise treatment of their claims in a
reorganization plan --the term "negotiate" in IRS Manual §25.17.11.5.2(7)
can recapture its plain meaning of "to confer with another so as to
arrive at the settlement of some matter." Webster's Ninth New
Collegiate Dictionary (1984).
Also in its reply brief, the Government argues that "in this case
[the IRS] acted no differently than any other rational priority creditor
would" in objecting to the confirmation of a Chapter 11 plan that
proposed a 20% payment of its non-dischargeable claim. The IRS's
invocation of IRS Manual §5.8.3.2.1(1)(B) to reject Macher's
reorganization plan without considering its terms in light of Macher's
financial condition and the liquidation value of the relevant assets is
indicative of a reflex action and belies the Government's contention
that it was acting "rationally." It may well be that the IRS
has determined through repeated dealings with similarly situated debtors
that the increased informational, processing, and opportunity costs of
considering offers in compromise in Chapter 11 plans exceeds its
marginal increase in recuperation through case-by-case determinations,
and thus may be considered "rational" in a systemic way.
However, the IRS has offered no evidence in this vein, so it is a
question I do not reach in this case.
A preference for negotiated settlement over litigation undergirded the Johnson
decision on which the Government heavily relies in explicating the
congressional balance between the Bankruptcy Code's "fresh
start" policy and statutes governing collection actions of
non-dischargeable claims. In Johnson, the debtor argued that the
Bankruptcy Code prohibited his school's policy of denying the issuance
of diplomas and academic transcripts to bankruptcy debtors who owed
non-dischargeable student loans. The Third Circuit disagreed, noting
that "it is abundantly clear from both the legislative history and
the text of the Bankruptcy Code itself that Congress meant to bar the
discharge of educational loans like those Johnson received...." Johnson,
728 F.2d at 164. However, in a point the Government fails to note, the
college's policy which the Third Circuit determined was not nullified by
the Bankruptcy Code, was to withhold the documents from "students
who have made no payments on their educational loans, [and] have
not approached the college to arrange a more flexible repayment schedule
...." Id. at 166 (emphasis added). Here, through his
reorganization plan, Macher is proposing an alternative repayment
schedule that offers a twenty-cents-on-the-dollar payment. Unlike in Johnson,
Macher has not ignored his debt; rather he is actively trying to
negotiate a reorganization within the rules prescribed by the Bankruptcy
Code. Therefore, at best the Government's reliance on Johnson is
misplaced; at worst Johnson undercuts the Government's position
by suggesting that the Bankruptcy Code contemplates a regime in which
creditors negotiate with debtors, and does so even in regards to
non-dischargeable claims.
Considering §1129(a)(9)'s flexibility to compromise priority tax
claims, the contradictory policies of the Internal Revenue Manual, and
the "fresh start" principle of the Bankruptcy Code, I agree
with the Bankruptcy Court's judgment that its equitable powers under §105
extend to requiring the IRS to at least consider debtors' Chapter 11
plans, and that it was appropriate to order the IRS to process Macher's
plan.
B.
Anti-Injunction Act
The IRS argues that the Bankruptcy Court's order violates the
Anti-Injunction Act of the Internal Revenue Code, which states:
"[Except for provisions not relevant here], no suit for the purpose
of restraining the assessment or collection of any tax shall be
maintained in any court by any person, whether or not such person is the
person against whom such tax was assessed." 26 U.S.C. §7421.
In the IRS's view, the Anti-Injunction Act prevents courts from
interfering with the assessment and collection procedures of the
Internal Revenue Code.
I am not convinced that a court order directing the IRS to consider a
debtor's offer in compromise as it does offers from nondebtors
constitutes an injunction under the Anti-Injunction Act. The automatic
stay provisions of Bankruptcy Code §362 apply to priority tax claims
held by the IRS, and thus enjoin the IRS from collecting trust fund
taxes from debtors. As long as the automatic stay is in place, the
Anti-Injunction Act poses no threat to a bankruptcy court's jurisdiction
"to enjoin the assessment and/or collection of taxes in order to
protect its jurisdiction, administer the bankrupt's estate in an orderly
and efficient manner, and fulfill the ultimate policy of the Bankruptcy
Act." Bostwick v. United States [ 75-2
USTC ¶9630], 521 F.2d 741, 744
(8th Cir. 1975).
Three types of cases highlight the potency of bankruptcy protection, and
support the interpretation that the reach of the Anti-Injunction Act
does not penetrate an automatic stay: (1) cases outside of bankruptcy in
which a party must defeat application of the Anti-Injunction Act in
order to avoid financial ruin; (2) cases in bankruptcy, but which
concern matters beyond the automatic stay's protection; and (3) cases in
bankruptcy involving non-debtor officers of debtor corporations.
The first set of cases is controlled by the Supreme Court case of Enochs
v. Williams Packing & Navigation Co. [ 62-2
USTC ¶9545], 370 U.S. 1 (1962).
Though the business in Enochs had not yet sought bankruptcy
protection, it was undisputed both that the business would be ruined
were the Government able to collect all the diverted trust fund taxes
owed, and that the owner himself did not have the funds to pay the tax. Id.
at 2. Notwithstanding this state of affairs, the Court determined that
the Anti-Injunction Act barred courts from enjoining the Government from
collecting. Id. at 6 (noting that a suit for an injunction may
not be entertained "merely because collection would cause an
irreparable injury, such as the ruination of the taxpayer's
enterprise"). Here, all the essential facts but one are the same as
in Enochs. In both cases, a judgment proof owner of a struggling
business improperly diverted withholding taxes to operate the business
and then sought to enjoin federal tax collection authorities from
collecting the full amount due. However, unlike Enochs, the
present case is in the context of a bankruptcy proceeding, and the
Government has not cited, nor I have I been able to locate, a single
case that applies the Anti-Injunction Act to restrict a bankruptcy
court's ability to administer a bankruptcy estate under §362
protection.
Illustrative of the second class of cases is In re: Heritage Village
Church and Missionary Fellowship ("PTL Club") [ 88-2
USTC ¶9476], 851 F.2d 104 (4th
Cir. 1988). The Fourth Circuit in PTL Club determined that the
Anti-Injunction Act precluded the bankruptcy court from enjoining the
IRS from revoking the debtor's tax-exempt status precisely because that
status was beyond the reach of the automatic stay. Id. at 105.
Observing that "[t]here is no express provision in the Bankruptcy
Code indicating congressional intent that the Code supersede the
Anti-Injunction Act," id., the Fourth Circuit "decline[d]
to create an exception to the Act in the absence of express
congressional intent." Id. at 106. The Fourth Circuit
accepted the bankruptcy court's finding that the revocation of the PTL
Club's tax-exempt status would terminate all of PTL Club's
reorganization efforts, a "harm [that] would certainly justify a
preliminary injunction if the court had jurisdiction to issue one."
Id. However, because "revocation of PTL's tax-exempt status
[was] not an `act to collect, assess, or recover' taxes," the
automatic stay afforded PTL no protection. Id. at 105 (citing 11
U.S.C.A. §362(a)(6)).
Regarding the third set of cases indicating that the Anti-Injunction Act
does not penetrate the automatic stay, the IRS correctly notes that the
Anti-Injunction Act has been applied to block bankruptcy courts from
enjoining the Government's collection attempts from non-debtor
individuals when the corporate debtor had misappropriated withholding
taxes. See 26 U.S.C. §6672
(providing for a 100% "responsible officer penalty" in such
situations). This is as it should be --bankruptcy courts do not have
jurisdiction over a debtor corporation's officers. See In re:
Pierce Coal & Constr., Inc. [ 85-1
USTC ¶9419], 49 B.R. 779, 780 (Bankr.
N.D. W.V. 1985) ("Bankruptcy does not provide a haven for a
bankrupt corporate debtor's officers who have failed in their corporate
duties."). In Matter of LaSalle Rolling Mills, Inc., the
Seventh Circuit relied upon the Anti-Injunction Act to defeat the claim
of a debtor-in-possession that the Government should be barred from
seeking "responsible officer penalties" from the owners
because such penalty would block any possibility that the business could
successfully reorganize. [ 87-2
USTC ¶9592], 832 F.2d 390, 392
(7th Cir. 1987). The court noted the different treatment §362 gives
certain acts by the IRS to conclude that "Congress is capable of
creating ... `bankruptcy exception[s]."' Id. at 394 (noting
that §362(a)(8) applies the automatic stay to actions in the United
States Tax Court while §362(b)(8) indicates that the automatic stay
does not apply to "the issuance to the debtor by a governmental
unit of a notice of tax deficiency"). Congress has not created an
"Anti-Injunction Act exception" to the automatic stay, no
court has yet recognized one, and I decline to declare one in this case.
The Anti-Injunction Act is indeed a powerful tool in the IRS arsenal,
but one could not reasonably maintain, as the Government's logic would
lead one to conclude, that it can penetrate a §362 injunction. When, as
here, a §362 injunction is in place and the IRS has filed a proof of
claim against the relevant debtor-in-possession, the IRS must act in
accordance with the Bankruptcy Code and the reasonable interpretations
of its underlying policy as applied by bankruptcy courts. Thus clear of
Anti-Injunction Act-based interference, the Bankruptcy Court's
determination that the IRS must process and consider Macher's Chapter 11
reorganization falls within its broad §105 powers.
III.
Conclusion
The Government relies on the exercise of a reductio ad absurdum:
Because the IRS cannot be forced to accept less than 100% payment of a
priority tax claim, its logic goes, the IRS can refuse to consider
debtors' reorganization plans that provide for less than full payment of
the claim. This policy not only upends the "fresh start" and
rehabilitative goals of bankruptcy, it seals off the IRS from exercising
its discretionary authority to negotiate such valid claims under
Bankruptcy Code §1129(a)(9). Therefore, I find that the Bankruptcy
Court acted within its authority when it directed the IRS to process and
consider Macher's reorganization plan as it would an offer in compromise
from a nondebtor. Accordingly, I AFFIRM the decision below.
The IRS has announced
its nonacquiescence with respect to In re Macher, in which a
federal district court upheld a bankruptcy court's order compelling the
IRS to consider an individual debtor's offer in compromise. The district
court found that the IRS's policy of mechanically rejecting a debtor's
offer in compromise did not allow the "fresh start," generally
promoted by the bankruptcy laws. The district court also found that the
IRS's rejection of such offers contradicted the IRS's general practice
of being flexible in negotiating with debtors, Nonacquiescence
Announcement, I.R.B. 2004-32, August 9, 2004.
In
re 1900 M Restaurant Associates, Inc., Debtor; 1900 M Restaurant
Associates, Inc., Plaintiff v. United States of America, Defendant,
U.S. Bankruptcy Court, Dist. D.C.; 03-00717, January 24, 2005.
JUDGMENT
DECISION REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT
The plaintiff, 1900 M Restaurant Associates, Inc., is the debtor in the
case, pending under chapter 11 of the Bankruptcy Code (11 U.S.C.), to
which this adversary proceeding relates. Its complaint seeks an order
compelling the United States of America to have its Internal Revenue
Service ("IRS") consider under §
7122(a) of the Internal Revenue
Code (26 U.S.C.) an offer-in-compromise submitted by the debtor to the
IRS on IRS Form 656 in January 2004, after the commencement of the
bankruptcy case, but before the filing of any proposed chapter 11 plan.
(The offer-in-compromise proposed a schedule of payments to the IRS in
satisfaction of its claims for less than the full amount of those
claims.) The complaint also seeks a declaration that the IRS's policy to
refuse to consider offers-in-compromise submitted on Form 656 during the
pendency of a case under chapter 11 of the Bankruptcy Code, and the
IRS's refusal to consider the January 2004 offer-in-compromise based on
that policy, constitute discrimination in violation of 11 U.S.C. §
525(a). Upon consideration of the parties' cross-motions for summary
judgment, the court will dismiss the proceeding.
I
Section
7122(a) of the Internal Revenue
Code provides:
(a) AUTHORIZATION. --The Secretary may
compromise any civil or criminal case arising under the internal revenue
law prior to reference to the Department of Justice for prosecution or
defense; and the Attorney General or his delegate may compromise any
such case after reference to the Department of Justice for prosecution
or defense.
An offer to compromise a tax liability pursuant to §
7122 "must be submitted
according to the procedures, and in the form and manner, prescribed by
the Secretary" (26 C.F.R. § 301.7122-1(d)(1)), and "[t]he IRS
may ... return an offer to compromise a tax liability if it determines
that the offer was submitted solely to delay collection or was
otherwise nonprocessable" (26 C.F.R. § 301.7122-1(d)(2)
(emphasis added)). The procedural details regarding offers-in-compromise
have been left to Rev.
Proc. 2003-71. Generally,
offers-in-compromise may be submitted on IRS Form 656, the form the
debtor employed here. However, the Revenue Procedure directs IRS
personnel to treat any such offer-in-compromise as "nonprocessable"
if a bankruptcy case of the taxpayer is pending. As set forth in IRS
Chief Counsel Notice
2004-25 (July 12, 2004), the IRS
"considers payment proposals submitted by taxpayers in bankruptcy
through the plan confirmation process." Instead of employing what
the Chief Counsel Notice refers to as "the bulk processing
operations established for the high volume of administrative
offers-in-compromise received by the Service," the Notice indicates
that the IRS vests in employees of the IRS's office which handles
insolvency matters the responsibility "to consider payment
proposals, usually in the form of a proposed plan, regarding the payment
of the Service's claims in a bankruptcy case." The Notice lays out
several factors for IRS insolvency employees to consider in making a
discretionary determination regarding whether to accept a plan that
provides less than what is statutorily required to be paid under the
Bankruptcy Code. Among the criteria which the Notice indicates are to be
employed is "whether creditors with the same priority, such as
state taxing authorities, are accepting less than full payment of their
claims."
In compliance with the Revenue Procedure, the IRS returned the debtor's
January 2004 Form 656 offer-in-compromise as nonprocessable.
Subsequently the debtor filed a proposed amended plan of reorganization
which assumes that its offer-in-compromise will be processed and which
incorporates alternative terms in the event that the offer-in-compromise
is not accepted. The IRS, through the Department of Justice, has
objected to confirmation of the debtor's proposed plan.
II
In seeking to compel processing of its offer-in-compromise, the debtor
relies on 11 U.S.C. § 525(a) which provides in relevant part that:
a governmental unit may not deny, revoke,
suspend, or refuse to renew a license, permit, charter, franchise, or
other similar grant to, [or] ... discriminate with respect to such a
grant against ... a person that is ... a debtor under this title ...
solely because such ... debtor is ... a debtor under this title ....
[Emphasis added.] Based on Macher v. United States (In re Macher),
2003 WL 23169807 (Bankr. W.D. Va.), aff'd sub nom. United
States v. Macher (In re Macher), 303 B.R. 798 (W.D. Va. 2003), and Holmes
v. United States (In re Holmes), 298 B.R. 477 (Bankr. M.D. Ga.
2003), aff'd sub nom. IRS v. Holmes, 309 B.R.
824 (M.D. Ga. 2004), the court concludes that 11 U.S.C. § 525(a) does
not apply to the IRS's refusal to consider an offer-in-compromise under §
7122 during the pendency of a bankruptcy case. But see Mills
v. United States (In re Mills), 240 B.R. 689 (Bankr. S.D. W.Va.
1999); Chapman v. United States (In re Chapman), 1999 WL 550793 (Bankr.
S.D. W.Va. 1999).
To elaborate, the debtor's asserted "right to submit an
offer-in-compromise" on Form 656 is not a "license, permit,
charter, or franchise" within the ordinary meaning of those words.
Nor is it a "grant" within any of the ordinary meanings of
that word as discussed in Stoltz v. Brattleboro Hous. Auth. (In re
Stoltz), 315 F.3d 80, 89-90 (2nd Cir. 2002), 1
and certainly not a grant similar to a "license, permit, charter,
[or] franchise" as required by § 525(a).
The government's compromise of tax claims, a modification of debt
obligations, is similar to the governmental programs for extensions of
credit which were held not to fall within the categories of § 525(a) in
Watts v. Pennsylvania Hous. Fin. Co. (In re Watts), 876 F.2d 1090
(3d Cir. 1989), and Toth v. Michigan State Hous. Dev. Auth., 136
F.3d 477 (6th Cir.), cert. denied, 524 U.S. 954 (1998). The
debtor's reliance on Stoltz is misplaced because Stoltz
involved revocation of a public housing lease, a clear property right,
that qualified as a "grant" in the ordinary sense of that
word. 2
Accordingly, the debtor is entitled to no relief under § 525(a).
III
The debtor alternatively seeks an order under 11 U.S.C. § 105(a)
compelling the IRS to consider its Form 656 offer-in-compromise. Section
105(a) provides in relevant part that "[t]he court may issue any
order, process, or judgment that is necessary or appropriate to carry
out the provisions of this title." To the extent that the debtor is
invoking the remedy of mandamus, the relief it seeks is inappropriate.
A.
As noted in the legislative history to § 105(a), the statute:
is similar in effect to the All Writs
Statute, 28 U.S.C. 1651 .... The section is repeated here for the sake
of continuity from current law and ease of reference, and to cover any
powers traditionally exercised by a bankruptcy court that are not
encompassed by the All Writs Statute.
H.R. Rep. 95-595, 95th Cong., 1st Sess., at 316-17 (1977), reprinted
in 1978 U.S.Code Cong. & Ad. News 5963, 6273-74. 3 To the
extent the debtor seeks to compel performance of an alleged duty, the
relief the debtor seeks is in the nature of mandamus. See Georges v.
Quinn, 853 F.2d 994, 995 (1st Cir. 1988); United States v. Brock (In re
Wingreen Co.), 412 F.2d 1048, 1051 (5th Cir. 1969). The writ of mandamus
is one of the writs that have traditionally been available under the All
Writs Statute. See Norton v. Southern Utah Wilderness Alliance, 542 U.S.
_____, _____, 124 S.Ct. 2373, 2379 (2004). Accordingly, to the extent
appropriate, mandamus may be granted under 11 U.S.C. § 105 as well.
Although there is also a specific mandamus statute applicable to
officers and agents of the United States, 28 U.S.C. § 1361, that
provision was enacted as part of the Mandamus and Venue Act of 1962
which was intended to make the use of the remedy more readily available
by, for example, not limiting mandamus actions to the district in which
the agency's head resided. See Stafford v. Briggs, 444
U.S. 527, 535 (1980). Accordingly, decisions which deny mandamus on
general mandamus principles under § 1361 are equally applicable to
requests for relief in the nature of mandamus under the All Writs
Statute or its bankruptcy analog, 11 U.S.C. § 105.
As observed in Consolidated Edison Co. of New York, Inc. v. Ashcroft,
286 F.3d 600, 605 (D.C. Cir.), cert. denied, 537 U.S. 1029
(2002):
"[A] 'drastic' remedy, 'to be invoked
only in extraordinary situations,'" In re Papandreou, 139
F.3d 247, 249 (D.C. Cir. 1998) ( quoting Kerr v. U.S. Dist. Court,
426 U.S. 394, 402, 96 S.Ct. 2119, 2123, 48 L.Ed.2d 725 (1976)), mandamus
is inappropriate except where a public official has violated a
"ministerial" duty. Such a duty must be "so plainly
prescribed as to be free from doubt and equivalent to a positive
command.... [W]here the duty is not thus plainly prescribed, but depends
on a statute or statutes the construction or application of which is not
free from doubt, it is regarded as involving the character of judgment
or discretion which cannot be controlled by mandamus." Wilbur v.
United States, 281 U.S. 206, 218-19, 50 S.Ct. 320, 324-25, 74 L.Ed.
809 (1929).
And as observed in Power v. Barnhart, 292 F.3d 781, 784 (D.C.
Cir. 2002):
The "remedy of mandamus is a drastic
one, to be invoked only in extraordinary circumstances." Mandamus
is available only if: "(1) the plaintiff has a clear right to
relief; (2) the defendant has a clear duty to act; and (3) there is no
other adequate remedy available to plaintiff." The party seeking
mandamus "has the burden of showing that 'its right to issuance of
the writ is clear and indisputable.'"
(Citations omitted.) See also Heckler v. Ringer,
466 U.S. 602, 616 (1984) (clear nondiscretionary duty required).
B.
The IRS owes no clear duty to the debtor under §
7122 to process an
offer-in-compromise submitted on Form 656 which its Revenue Procedure
has specifically treated as nonprocessable when a bankruptcy case of the
taxpayer is pending. Section
7122 does not command the
Secretary to consider an offer-in-compromise; it only provides that the
Secretary or the Department of Justice, as the case may be, may
compromise a civil tax liability. The discretion vested in the Secretary
to compromise carries with it the discretion not to exercise the
Secretary's discretion. See United States v. Smith, Barney,
Harris, Upham and Co., 45 AFTR2d 80-1105, 80-1 USTC ¶ 9108 (S.D.N.Y.
1979) ("[T]he decision whether to discuss settlement and whether to
issue a summons is a discretionary one that cannot be compelled by the
court." (Citation omitted.)); Carroll v. IRS, 14 AFTR2d
5564; 64-2 USTC ¶ 9687 (E.D.N.Y. 1964) ("The decision to accept or
reject a compromise offer by its nature involves the discretion of
administrative authority and can not be compelled by any action for a
mandatory injunction."). See also Horton Homes,
Inc. v. United States, 936 F.2d 548, 554 (11th Cir. 1991) (except in
a case of invidious discrimination which violates the Constitution,
"judicial review of IRS's exercise or nonexercise of
discretion under section
6404(e)(1) [providing that the
Secretary may abate an assessment of interest] is not available"
(emphasis added)); 4 United
States v. Williams, 514 U.S. 527, 537 n.9 (1995) ("§
6325(b)(3) [Secretary's
discretionary authority to issue a certificate of discharge] presents no
question of administrative exhaustion as a prelude to judicial review,
for that 'remedy' lies entirely within the Government's
discretion."); E.J. Friedman Co. v. United States, 6 F.3d 1355,
1358, 1359 (9th Cir. 1993) (decision whether to discharge lien as
valueless is within Secretary's discretion and accordingly unreviewable
under Administrative Procedure Act and a bar to quieting title in a 28
U.S.C. § 2410 action on the basis of valuelessness).
Although Mills, 240 B.R. at 696, held that consideration of
offers-in-compromise is a non-discretionary duty, it relied on a
subsequently discredited statement, purely unnecessary dictum, in United
States v. Garden State National Bank, 465 F. Supp. 437 (D.N.J.), aff'd,
607 F.2d 61 (3d Cir. 1979). Garden State was a summons
enforcement proceeding in which the district court addressed the issue
of good faith regarding issuance of the summonses by the IRS during an
ongoing criminal investigation, and testimony that if a taxpayer
requests a settlement conference, the taxpayer:
will at most be allowed to come in, and
will be listened to, but no negotiations will be engaged in until after
the investigation has been completed, and the internal reviews that
follow have resulted in a decision (arrived at unilaterally by IRS and
not by negotiation) not to refer [the case] to the Department of Justice
[for criminal prosecution].
Garden State, 465 F. Supp. at 439. It was in that context that
the court stated that "[w]hile the grant of authority to compromise
does not command that a compromise agreement be reached, it does imply a
mandate to negotiate, to make the effort, to explore the potential for
compromise before deciding unilaterally whether or not to refer [the
case to the Department of Justice for criminal prosecution]." Garden
State, 465 F. Supp. at 439-40. As the district court itself
recognized, the statement was unnecessary to its decision because the
taxpayer had made no offer. On appeal, the court of appeals declined to
adopt this dictum, affirming on different grounds, and expressly held
that "the refusal of the Service to enter into compromise
negotiations, standing alone, does not amount to 'bad faith.'" Garden
State, 607 F.2d at 73. 5 The court
of appeals thus implicitly recognized that there are circumstances in
which the Secretary ought to be able to exercise discretion not to
consider an offer-in-compromise. Subsequently, the court in Smith,
Barney, 45 AFTR2d 80-1105, 80-1 USTC ¶ 9108, criticized Garden State as
"logically, practically, and legally unsound," 6 and
recognized the nonreviewable discretionary nature of the Secretary's
settlement authority. The Mills decision fails to acknowledge Smith,
Barney, and is otherwise unpersuasive in placing reliance on the
district court's misguided dictum in Garden State.
In exercising the statutory discretion of §
7122(a), the Secretary is
generally free to specify what types of offers will be processed. See
Boulez v. Commissioner, 810 F.2d 209 (D.C. Cir.), cert. denied,
484 U.S. 896 (1987) (Secretary could refuse by regulation to consider
oral offers-in-compromise). 26 U.S.C. §
7122(c)(1) requires the Secretary
to prescribe guidelines for IRS personnel "to determine whether an
off-in-compromise is adequate and should be accepted to resolve a
dispute." The Secretary has viewed the issue of adequacy as
including the issue of whether an offer-in-compromise is processable: an
offer to compromise a tax liability pursuant to §
7122 "must be submitted
according to the procedures, and in the form and manner, prescribed by
the Secretary" (26 C.F.R. § 301.7122-1(d)(1)), and "[t]he IRS
may ... return an offer to compromise a tax liability if it determines
that the offer was submitted solely to delay collection or was
otherwise nonprocessable" (26 C.F.R. § 301.7122-1(d)(2)
(emphasis added)).
The details of what offers-in-compromise are nonprocessable has been
left to Rev.
Proc. 2003-71, § 5 ("When
an Offer Becomes Pending and Return of Offers"), 2003-36 I.R.B.
517, and it makes clear that an offer-in-compromise is nonprocessable
when a bankruptcy case is pending. 7
The only statutory limitations on the Secretary's discretion under §
7122(a) arise implicitly from
three parts of 26 U.S.C. §
7122(c):
The first of these is the command of §
7122(c)(2)(B) that the Secretary's guidelines for determining
whether an offer-in-compromise is adequate and should be accepted must,
in effect, direct IRS personnel not blindly to apply standard allowances
prescribed under the guidelines for basic living expenses. 8
This implicitly means that the Secretary has no discretion to treat an
offer as nonprocessable solely because the offer proposes not to follow
the guidelines' standard allowances for basic living expenses.
The second is the command of §
7122(c)(3)(A) that IRS personnel "shall not reject an
offer-in-compromise from a low-income taxpayer sol |
