Breland, Jr. v. Commissioner: Another Bankruptcy-Tax Trap for the Unwary Practitioner

Today we welcome first-time guest blogger Brad D. Jones. With editorial assistance from returning guest Ken Weil, in this post Brad evaluates the implications for bankruptcy debtors and practitioners of the Tax Court’s recent Breland decision. For a bankruptcy primer written for tax practitioners, see the bankruptcy chapter of Effectively Representing Your Client Before the IRS. Ken and Brad will be updating this chapter for the 8th edition of the book, expected to be published in December 2020. Several of Keith’s past PT posts also address the intersection of tax procedure and bankruptcy. Christine

If a tax is non-dischargeable, an understated IRS claim for that tax can have a devastating impact on an individual debtor’s financial well-being post-bankruptcy. This is because 11 U.S.C. § 523(a)(1)(A) of the Bankruptcy Code provides that non-dischargeable IRS claims can be collected by the IRS post-petition “whether or not a claim for such tax was filed or allowed.” If the IRS’s claim is understated, a person’s unpaid tax liabilities will generally be collectible by the IRS even if all of the individual’s available assets were used in the bankruptcy to pay other, lower-priority debts. As a result, an unfiled or undervalued IRS claim can lead the IRS to continue to pursue an individual for unpaid tax debt post-bankruptcy, even if the IRS did not pursue its claims in the bankruptcy case or allowed funds that should have gone to its claims to be paid to other creditors. The issue of how to fix a debtor’s tax liability and what needs to occur in the bankruptcy court to do so was at issue in Breland, Jr. v. Commissioner, 152 T.C. No. 9 (2019).

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Bankruptcy debtors generally have two main avenues to fix the amount of their tax liability for a given year: (1) file a motion for the bankruptcy court to determine the amount of their tax debt pursuant to 11 U.S.C. § 505; or (2) object to the IRS’s proof of claim. See Internal Revenue Service v. Taylor, (In re Taylor), 132 F.3d 256, 262 (5th Cir. 1998). In Breland,the Tax Court considered the effect of a resolved proof-of-claim objection on the ability of the IRS to pursue post-petition claims “regardless of whether a claim for the tax was filed or allowed,” as contemplated in § 523(a)(1)(A).

Breland involved a commercial-real-estate investor who allegedly owed a substantial sum to the IRS post-bankruptcy. The issue was whether the IRS could agree in the bankruptcy to a consent order setting the amount of its priority claim, allowing the debtor to pay a substantial sum to creditors subordinate to the IRS, and then later issue a notice of deficiency seeking up to $45 million more for the same tax years that it had compromised. The Tax Court held that it could, narrowly interpreting the bankruptcy court’s order as not addressing the total amount of the debtor’s federal tax liability. The Tax Court reached that result even though its interpretation conflicted with the interpretation of the bankruptcy court that entered the order. The Tax Court’s holding is surprising given that proof of claim objections are generally res judicata on the IRS and final orders resolving contested matters in bankruptcy are typically given broad preclusive effect. The Breland ruling forces bankruptcy practitioners to be particularly vigilant in addressing tax issues in the bankruptcy context.

Breland undercuts the ability of individual debtors to rely on proof of claim objections to fix the amount of their tax liabilities. In Breland, the debtor filed a Chapter 11 bankruptcy case and the IRS filed a proof of claim stating it was owed over $2 million in income tax for the years 2004 to 2008. The debtor filed an objection, stating in its entirety, that the “Debtor objects to the penalties assessed against him on the grounds that the Debtor had reasonable cause for not paying the taxes on time.” The parties entered into a consent order in which the IRS agreed to settle the debtor’s objection by agreeing to specific amounts for its priority tax debts with both sides agreeing that the disputed penalty portion was a general unsecured claim to be resolved after bankruptcy plan confirmation. After conducting discovery related to the disputed penalty portion, the IRS filed an amended proof of claim and asserted additional tax was due. The debtor objected on the grounds that the consent order fixed the debtor’s tax obligation. The bankruptcy court granted the objection and the IRS appealed. The district court remanded to the bankruptcy court for clarification as to the preclusive effect of the consent order. In response to the remand from the district court, the bankruptcy court ruled:

[T]he Court finds that the Consent Order . . . is the controlling document as to the extent of the Debtor’s tax obligation to the IRS. The Consent Order contains a clear statement of the total IRS claim amount and divides that amount into priority and general unsecured values. . . Moreover, by its terms, the Consent Order appears binding and complete. No specific limitation on the Consent Order’s effect is indicated in its terms. The IRS did not reserve the right to assert additional claims. Indeed, the Consent Order did not reserve any rights to the IRS, only to the Debtor. The purpose of the Consent Order is unclear if it was not meant to bind the IRS to its terms.

The IRS appealed, losing in the district court and stipulating to dismissal of its appeal to the 11th Circuit. In the midst of the proceedings in the bankruptcy and district courts, the IRS issued its notice of deficiency, triggering the filing of the debtor’s petition before the Tax Court.

Outside of bankruptcy, a consent order would normally be res judicata on the IRS’s attempt to collect additional amounts for the tax years set forth in the consent order. See United States v. Int’l Bldg. Co., 345 U.S. 502, 506 (1953) (consent order not binding on the United States for tax years subsequent to those years covered in the consent order). The consent order would also be binding if the tax in question were dischargeable. And Breland agreed that the consent order would be res judicata on the IRS if the “order had fixed petitioner’s total Federal tax liability for the subject tax years.”

Even though on remand the bankruptcy court had directly addressed the issue before the Tax Court and found its own order to be “the controlling document as to the extent of the Debtor’s tax obligation to the IRS,” the Tax Court interpreted the consent order narrowly. In the Tax Court’s view, the bankruptcy court’s order did not control for two reasons: First, the Tax Court believed res judicata did not apply because it believed that the consent order establishing the amount of the IRS’s claim and resolving an objection to plan confirmation is an inherently different proceeding than a proceeding to determine whether a particular liability is owed. The Tax Court noted that debtor’s proof of claim objection only challenged the penalties assessed, which the Court found undercut his argument that the consent order determined the total pre-petition tax liability. Second, in the Tax Court’s view, reading the consent order as a final determination of the debtor’s tax liabilities would have the effect of discharging otherwise non-dischargeable debts and contradict § 523(a)(1)(A). The Tax Court did not think res judicata applied because in its view the consent order was not “a final judgment on the merits of [the debtor’s] entire Federal tax debt for any given year.”

The Tax Court’s statement that a determination of an individual’s tax debt in bankruptcy is not the same cause of action as determining the tax debt generally is puzzling. The Court did not cite to any cases in its res judicata analysis that arose in the context of a settled or litigated proof of claim objection. The Tax Court’s view that the consent order was a different cause of action than a determination of tax liability is a more restrictive interpretation than is typically applied in a res judicata analysis. Generally, causes of action are the same for res judicata purposes if they arise “out of the same nucleus of operative fact.” In re Piper Aircraft Corp., 244 F.3d 1289 (11th Cir. 2001). In the context of a contested proof of claim, it is difficult to see how a dispute over the amount of the same tax, for the same years, and involving the same individual, can possibly not arise out of a common factual nucleus, which is precisely the reason that proof of claim objections generally are res judicata. See Hambrick v. Commissioner, 118 T.C. 348, 353 (2002) (recognizing that unlike proof of claim objections or a tax liability determination by the bankruptcy court, the mere confirmation of a Chapter 11 plan generally does not require a determination of the amount of a debtor’s non-dischargeable tax liability).

Similarly, the Tax Court’s consideration of the non-dischargeable nature of the debt also does not make much sense in the context of interpreting the scope of the bankruptcy court’s order regarding a proof of claim settlement. While unpaid non-dischargeable debts will generally survive whether the plan is confirmed or not, the purpose of a proof of claim objection is different. A claim objection is generally filed to determine the total amount owed, which does not turn on dischargeability (though a claim objection often establishes the facts from which dischargeability can easily be determined). In this case, the debtor conceded the non-dischargeability of the tax at issue. So in compromising the amount of the priority claim under the consent order, the IRS knew it was establishing the amount of the non-dischargeable portion of its claim. The bankruptcy court clearly understood this difference, which is why it interpreted its order as controlling for the amount of tax at issue.

Moreover, the Tax Court did not give any consideration to the way proofs of claims fit within the bankruptcy scheme as a whole. A basic underpinning of bankruptcy law is the absolute priority rule: the concept that higher priority claims (such as priority tax claims) must be paid in full before estate assets are used to pay lower priority claims. See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 983 (2017) (recognizing that the “priority system has long been considered fundamental to the Bankruptcy Code’s operation”). Establishing the amount of priority tax claims and paying those claims before funds are lost paying lower priority debts is central to both the bankruptcy priority scheme and claims filing process – so much so that the Bankruptcy Code permits debtors to file a proof of claim on behalf of the IRS when doing so is necessary to determine the amount of the tax debt. 11 U.S.C. § 501(c); Taylor, 132 F.2d at 262 (suggesting the option of filing a claim for the IRS to fix the amount of the tax debt). The Tax Court’s decision to apply a restrictive reading of the consent order, at odds with the bankruptcy court’s own interpretation, frustrates these objectives of the Bankruptcy Code. It is also incompatible with the deference courts typically exercise in favor of orders entered by another court. See Colonial Auto Center v. Tomlin (In re Tomlin), 105 F.3d 933, 941 (4th Cir. 1997) (recognizing that the bankruptcy court is in the best position to interpret its own order and its interpretation warrants customary deference).

On May 7, 2019, the debtor filed a Motion to certify the Tax Court’s order to permit an immediate appeal and the Tax Court issued an order requiring the IRS to respond by June 10, 2019. Regardless of the outcome of any appeal, Breland is instructive for practitioners with bankruptcy clients facing tax debts. The Tax Court made much of the fact that neither the plan nor the consent order referenced the bankruptcy court’s authority under 11 U.S.C. § 505 to determine the amount of a debtor’s tax liability. It would be advisable for practitioners to seek to include language either in the Chapter 11, 12, or 13 plan or in orders resolving the IRS claims that specifically reference Bankruptcy Code § 505 and state that the plan or the order constitutes a determination of the amount of the total tax due for the years at issue. Similarly, the Tax Court in Breland also appeared troubled that the debtor’s proof of claim objection only stated that the objection was to the amount of the penalties. If a debtor is going to file an objection to the IRS’s proof of claim anyway, it may be helpful to include an objection to any amounts in excess of those asserted in the IRS proof of claim with a reference to 11 U.S.C. § 505.

Update: coincidentally, on the date this post was published the Tax Court issued a memorandum opinion holding that the Brelands had overstated their long-term capital loss by nearly a million dollars. Christine

Ninth Circuit Reenters the Late-Filed-Return Field

On Wednesday I quickly put up a copy of the opinion in Smith with the promise of further discussion.  Today, we are fortunate to have commentary on the case by guest blogger Ken Weil.  Ken blogged with us earlier this year on George Washington’s birthday.  Ken has his own practice in Seattle that focuses on representing individuals with tax debt and resolving that debt through administrative action with the IRS or through bankruptcy. He has written a book on his specialty area, Weil, Taxes and Bankruptcy, (CCH IntelliConnect Service Online Only) (3d ed. 2014). He is a one of the top experts at the crossroads of personal bankruptcy and taxes. We are fortunate to have him back with us again. Keith

Case law continues percolating in the late-filed-return field.  On July 13, the Ninth Circuit decided Smith v. United States (In re Smith), No. 14-15857, Pacer Docket Entry 51. (9th Cir. 2016).  In Smith, the Ninth Circuit reaffirmed its position that, even after the bankruptcy law changed in 2005, a subjective test is still applied to determine whether a document filed by a taxpayer is an honest and reasonable attempt to comply with the tax law.  Smith, supra at p.7; and see, Beard v. Comm’r, 82 T.C. 766, 775-778 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986) (four-part test used to determine whether the document in question is a valid tax return; one of the four parts is whether the taxpayer made an honest and reasonable attempt to comply with the tax law).  This blog piece discusses the subjective and objective tests as methods for determining whether a taxpayer made an honest and reasonable attempt to comply with the law, the previous confusion surrounding the Ninth Circuit’s leading case in the area, the Smith decision, and the interaction of Smith with an earlier 2016 Ninth Circuit Bankruptcy Appellate Panel (BAP) case that rejected application of the one-day-late rule.

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Subjective and objective tests.

Mr. Smith filed his 2001 tax document seven years after it was due and three years after the IRS assessed tax due.  Smith, supra at p.7.  In affirming the district court’s determination that Mr. Smith had not made an honest and reasonable attempt to comply with the tax law, the Ninth Circuit held that United States v. Hatton (In re Hatton), 220 F.3d 1057 (9th Cir. 2000) still applied even after the 2005 Bankruptcy Code amendments.  Smith, supra at p.7.  Hatton used a subjective test and not an objective test to determine whether a document would pass the honest and reasonableness prong of the Beard test.  Under the subjective test, one looks beyond the four corners of the document to determine whether the taxpayer has made an honest and reasonable attempt to comply with the law.  Prior to Smith, the most recent circuit court to look beyond the four corners of the document was the Eleventh, which was blogged hereJustice v. United States (In re Justice), 817 F.3d 738 (11th Cir. 2016).  The objective test limits the applicable inquiry to the four corners of the filed document to determine whether it qualifies as a return.  The leading case in support of the objective test remains Colsen v. United States, 446 F.3d 836 (8th Cir. 2006).  The use of the terms “subjective test” and “objective test” are co-opted, at least in part, from Martin v. United States (In re Martin), 542 B.R. 479, 482 (9th Cir. B.A.P. 2015)(blogged here)(Hindenlang is broad in scope and takes at least a partially subjective focus; the test used by the bankruptcy court was narrow in scope and exclusively objective in focus) and Colsen, 446 F.3d at 840.

Confusion with Hatton.

Hatton had made for somewhat confusing precedent.  In Hatton, the taxpayer flunked two prongs of the Beard test.  The document purporting to be a return was not filed under penalty of perjury and it was filed very late and only after collection pressure from the IRS so that it flunked the subjective test.  Did this dual failure mean that there was still room for the objective test in the Ninth Circuit, especially since the Ninth Circuit BAP had previously applied the objective test?  United States v. Nunez (In re Nunez), 232 B.R. 778 (9th Cir. B.A.P. 1999) (applying the objective test).  Martin, 542 B.R. at 490 swept away any remaining confusion.  It stated clearly that both Hatton reasons for rejecting the document as a return had to be given equal consideration:  “When alternate grounds are given for a holding, neither ground constitutes non-binding dicta.”  Id. (citation omitted).  Martin then applied the subjective test and found the document in question was not an honest and reasonable attempt to comply with the law.  The alternate-grounds rule is also helpful in understanding Smith.  As will be seen in the following paragraphs, the Ninth Circuit was careful to limit its holding to one reason.

The decision in Smith, and, the Court’s refusal to address ancillary arguments.

Like Martin, Smith applied the subjective test.  It held “that Hatton applies to the bankruptcy code as amended….”  Id. at p.7.  The court observed that two Circuit courts, the Tax Court, and both parties all agreed the four-factor Beard test still applied after that the new definition of return in § 523(a)(*) was added to the Bankruptcy Code.  Id. at p.5.  Mr. Smith’s delay in filing made it an easy decision for the court to affirm the district court’s ruling that the tax was nondischargeable.  See, id. at p.6 (“these are not close facts”).  Although it agreed with Martin, Smith never cited Martin.  The failure to cite Martin is an interesting choice, and, this omission is discussed again under the one-day-late rule below.

In Smith, the government argued, as it almost always does, for a per se rule.  The per se rule states that any document filed after the IRS assessment is not a document that will qualify as a return.  The leading case supporting the per se rule is United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029 (6th Cir. 1999).  The Smith Court felt the facts before it were overwhelming, and, it did not need to answer the government’s per se argument.  “We need not decide the close question of whether any post-assessment filing could be ‘honest and reasonable’ because these are not close facts.”  Smith, supra, at p.6 (emphasis in original).  Thus, the government’s per se argument was set aside for now.

Because it held the purported document was not a return, the Court also declined to address the government’s argument that the tax was not associated with a return.  The government had argued that a return was not filed when it assessed the deficiency.  Id. at p.7, n.1; and see, 11 U.S.C. § 523(a)(1)(B) (tax for respect to which a return is made).  Martin addressed this issue, basically stating that the government’s argument proves too much.  Tax debt arises under bankruptcy law at the end of the applicable tax year and almost always exists before an assessment is made and even before a return is filed.  Martin, 542 B.R. at 491.

Impact of Smith on the one-day-late rule in the Ninth Circuit.

The facts in Martin are similar to the facts in Smith, i.e., tax documents filed only after an IRS audit and assessment.  Unlike Smith, Martin addressed the one-day-late rule, and, it rejected the one-day-late rule with a persuasive attack on its underpinnings.  Martin, 542 B.R. at 483-489.

Practitioners in the Ninth Circuit should be acutely aware of the First, Fifth, and Tenth Circuit decisions in support of the one-day-late rule.  McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012); Mallo v. IRS (In re Mallo), 774 F.3d 1313 (10th Cir. 2014); and Fahey v. Mass. Dep’t of Rev. (In re Fahey), 779 F.3d 1 (1st Cir. 2015).  Those cases apply the “applicable filing requirements” language of 11 U.S.C. § 523(a)(*) to mean that a return filed late, even by one second, is not a valid return for bankruptcy purposes.  It is clear that the Smith panel purposely side-stepped the one-day-late rule.  The one-day-late rule is never mentioned in the opinion.  This also means Martin’s persuasive attack on the one-day-late rule is also not mentioned.  (And, yes, I understand that the government did not advocate for it.)

In the Ninth Circuit, although BAP decisions are not binding, they are persuasive and generally held in high regard.  State Compensation Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1005, n.1 (9th Cir. 2010) (Ninth Circuit has never held that bankruptcy courts are bound by BAP decisions, but, BAP opinions are treated as persuasive authority and promote uniformity of bankruptcy law throughout the Circuit); and see, B. Camp, “Bound by the BAP:  The Stare Decisis Effects of BAP Decisions,” 34 San Diego L. Rev. 1643 (1997) (yes, that is Bryan Camp, who posts here).  For all practical purposes, assuming the Smith case goes no further, whether by a request for an en banc hearing or a petition for certiorari, the one-day-late rule will not apply in the Ninth Circuit, at least for now.  It will take a state-court tax case to undo the one-day-late rule.  And, then, the case will need to be before a bankruptcy judge who does not feel bound by BAP decisions or an independent-thinking district court judge.

What happens if the Third Circuit in Davis follows the First, Fifth, and Tenth Circuits and accepts the one-day-late rule?  Keith posted on this recently.  Will the IRS capitulate?  If so, what happens in the Ninth Circuit?  Will the IRS feel strongly enough to litigate the issue in the face of Martin?

Mr. Smith’s counsel must feel that the subjective test is wrong and the Ninth Circuit should have reversed Hatton.  Although the objective test is very much the minority position, there are strong arguments in its favor.  Those arguments are well-stated in Colsen, 446 F.3d at 840-841, and, they do not need to be restated here.  But, from the perspective of containing the one-day-late rule, further appeals, whether a request for an en banc hearing or a petition for certiorari, could easily do more harm than good.  This is doubly so because the IRS still is not pressing the one-day-late rule.  One need look no further than Mallo to see what could happen.  Every case that asks an appeals court to look at the subjective versus objective test is another opportunity for a court to rule in favor of the one-day-late rule.  It is relatively easy for a judge to say that the literal language of § 523(a)(*) must be applied and timeliness is an applicable filing requirement.  It takes much more work to do what Judge Kurtz did and systematically explain why the one-day-late rule does not make sense.  While Mr. Smith and his counsel might disagree, in general, delinquent taxpayers in the Ninth Circuit are very fortunate that the Martin and Smith courts ruled as they did.

Trivia.

Here is one final piece of trivia.  The taxpayer’s first name in Smith is Martin.

 

Will Bankruptcy Get Your Passport Back?

Today, we welcome guest blogger Kenneth C. Weil. Ken has his own practice in Seattle that focuses on representing individuals with tax debt and resolving that debt through administrative action with the IRS or through bankruptcy. He has written a book on his specialty area, Weil, Taxes and Bankruptcy, (CCH IntelliConnect Service Online Only) (3d ed. 2014). In 1994 Congress passed the first major set of reforms to the Bankruptcy Code of 1978 but it knew that more reform was necessary. It set up a bankruptcy commission to look into the needed reforms and the reform commission established a tax advisory panel to assist it with the tax aspects of the reforms. Ken served on the tax advisory panel and has continued to be a leading thinker at the intersection of tax and bankruptcy. 

He serves in the leadership of the Bankruptcy and Workouts (B&W) Committee of the ABA Tax Section. The ABA Tax Section met in Los Angeles in late January where Ken participated in a B&W Committee panel with Bankruptcy Judge Mark Wallace of the Bankruptcy Court for the Central District of California, Santa Ana Division. As part of that panel he presented information regarding the new passport revocation/denial rule. I thought this information might be of interest to the blog readers and persuaded Ken to write something for us. Keith

The Operative Language

New I.R.C. § 7345(a) authorizes the State Department to deny issuance, revoke, or limit a passport if the IRS certifies to the State Department that an individual has seriously delinquent tax debt (SDTD). The operable verbs in § 7345(a) are deny, revoke and limit. Denial and revocation are straight-forward. Limitation is not as clear. By way of example, FAST Act § Section 32101 (e) provides a time-limitation clause for return to the United States for citizens whose passports are being revoked.

For certification to occur, there must be SDTD, which is a defined term with four components. Section 7345(b)(1)(A) provides that the tax debt must have been assessed and be legally enforceable before it can be SDTD. (The requirement of assessment means the standard for SDTD is very different from a claim in bankruptcy, which Bankruptcy Code section 101(5) defines broadly). In addition, Section 7345(b)(1)(B) and (C) require both an “age” component and a size component before tax debt can be SDTD. As to the “age” component, for the assessed and legally enforceable tax debt to be converted into SDTD, the tax liability must have been subject to a notice of federal tax lien (NFTL) and the accompanying administrative rights for seeking a collection due process (CDP) hearing are exhausted or have elapsed, or, the tax liability must have been the subject of a levy. Also, the “qualifying” tax debt must exceed $50,000, including penalties and interest, as indexed for inflation. This means there must be $50,000 of SDTD not $50,000 of tax debt.

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Even if tax debt qualifies as SDTD, there are events that take the debt out of that classification. Section 7345(b)(2) sets out the events that prevent debt from being SDTD. These events are the taxpayer is (i) in an installment agreement (IA), (ii) making payments under an offer in compromise (OIC), (iii) in a pending CDP hearing or has requested one, or (iv)seeking innocent spouse relief (ISR).

Certification can be reversed. Section 7345(c)(1) provides that certification shall be reversed if the debt “ceases to be seriously delinquent tax debt by reason of subsection (b)(2).” In other words, the events in the previous paragraph will support reversal. Certification can also be reversed if the certification were erroneous or the debt is fully satisfied. This means once certification has occurred a partial payment that takes the SDTD below $50,000 will not be grounds for certification reversal.  Rules for the date by which the certification must be reversed are found Section 7345(c)(2).

Certification information transferred from the IRS to the State Department is limited to the taxpayer’s identity information and the amount of the SDTD. I.R.C. § 6103(k)(11).

Examining Fast Act § 32101 More Closely

A close examination of Fast Act § 32101 raises some interesting nuances and a number of unanswered questions.

Seriously delinquent tax debt. The trigger for certification is not $50,000 of tax debt. It is $50,000 of SDTD. To be SDTD, the tax debt must have been subject to a levy or a NFTL with exhausted/elapsed CDP rights. If the individual has some debt that “qualifies” as SDTD and some debt that does not because the collection process has not progressed far enough, only the “qualifying” debt is used to reach the $50,000 total.

Different rules for liens and levies. There is a slight difference in treatment between liens and levies. Tax debt will not convert into SDTD when the NFTL is filed, if CDP rights remain. The actual phrase used in Section 7345(b)(1)(C) is the administrative rights must “have been exhausted or have elapsed.” The best guess is that tax debt is SDTD if the taxpayer has “only” equivalency hearing rights. In contrast, a levy is sufficient to create SDTD.

CDP-hearing-notice rights that are sent because of a NFTL filing must warn of the possibility of a denial, revocation, or limitation of a taxpayer’s passport. In slight contrast, notices of intent to levy must provide that warning. I.R.C. § 6331(d)(4)(G). Presumably, because the notice is provided in the notice of intent to levy, the requirement of an additional notice was not added to the CDP-hearing notice that accompanies the final notice of intent to levy.

Legally unenforceable. The requirement of legal enforceability in § 7345(b)(1) creates difficult issues in the intersection of bankruptcy and § 7345.

Legally unenforceable: discharge granted but NFTL not released. It is unclear whether the tax debt is legally unenforceable if it has been discharged in bankruptcy but the NFTL is not released. Does the NFTL mean the debt is still legally enforceable? Will it make a difference if the tax debt is discharged, the NFTL remains attached to an asset, and the value of the applicable assets is well below $50,000 even though the discharged debt is well above $50,000? Does it make a difference if the value could, at some point, rise above $50,000? If the taxpayer disagrees with the determination that the debt is legally enforceable, then, judicial recourse is available.

Legally unenforceable: repayment plans in bankruptcy. There is no clear answer whether payments pursuant to plans in Chapters 11, 12, or 13, which presumably make the debt temporarily unenforceable but still owing, bar certification. Consider whether special provisions can be added to plans in Chapters 11, 12, or 13 to provide for payment of the tax debt so that the passport will not be certified for revocation, or, if already certified, so that the certification will be reversed. Normally, a special class is not allowed in Chapter 13 to pay unsecured, nondischargeable tax debt. Copeland v. Fink (In re Copeland), 742 F.3d 811 (8th Cir. 2014), held that discrimination to pay nondischargeable tax debt was not allowed; but, discrimination was allowed if the discrimination was proposed in good faith and the degree of discrimination was directly related to the basis or rationale for the discrimination. If the taxpayer needs a passport to work, then, a special class of debt should be allowed. Will this be a sufficient payment plan to prevent denial of issuance or reversal of certification?

If payments under a plan are considered legally unenforceable, postpetition tax debt where property revests in the debtor under the terms of a Chapter 13 may also create a problem. In re Markowicz, 150 B.R. 461 (Bankr. D. Nev. 1993) found that postconfirmation earnings not committed to a plan were not part of the bankruptcy estate, and, the IRS’s postpetition levy to collect postpetition tax did not violate the automatic stay. Similarly, In re DeBerry, 183 B.R. 716 (Bankr. M.D.N.C. 1995) granted the IRS relief from stay to pursue collection of postpetition taxes outside Chapter 13 plan where all plan payments had been made. In such an instance, will some of the tax be considered legally unenforceable or subject to an IA and some legally enforceable?

When certifications will not be made. Some events remove tax debt from the definition of SDTD. If tax debt is not SDTD, then, certification will not be made. These events are the taxpayer is (i) in an IA, (ii) making payments under an OIC, (iii) in a pending CDP hearing or has requested one, or (iv) seeking ISR.

Submission of an OIC is not a listed event. To be an exception, the OIC must have been accepted so that the debt is no longer owed or the taxpayer must be making payments under the OIC. Given the length of time the IRS takes to process offers, this is troubling.

What happens if a revenue officer decides to levy social security at 15% and takes no further action? Will the ongoing levy, which operates like an IA, be sufficient to qualify as an IA under the § 7345(b)(2) exceptions?

What happens if the debtor has insufficient income to warrant an IA? Should currently uncollectible status (CNC) be considered the equivalent of being in an IA? Must the taxpayer be in an IA that pays a de minimis amount to avoid certification, e.g., one dollar a month? A passport might be very important to someone on CNC status, e.g., if one lives near the border or has close family outside the United States.

Certification and the automatic stay. Is certification barred by the bankruptcy automatic stay? Governmental actions that are used to enforce their police and regulatory power are not subject to the automatic stay because of the exception to the stay found in 11 U.S.C. § 362(b)(4). Clearly, the passport rule is a coercive rule to enforce collection. Will it be viewed as a police and regulatory action similar to the criminal collection statutes in Nevada? In Nevada, criminal prosecutions to collect casino debts are not considered a violation of the discharge injunction or the automatic stay. Nash v. Clark Cty Dist. Attorney (In re Nash), 464 B.R. 874 (9th Cir. BAP 2012) held that the Clark County District Attorney had not violated the discharge injunction when enforcing the criminal statute even though the statute was clearly designed to collect unpaid casino debts for the benefit of the casino. Does the automatic stay analysis change if the tax debt is otherwise dischargeable and likely to become legally unenforceable?

Judicial review. Section 7345(e) grants judicial review of certification to the Tax Court and district courts but not to bankruptcy courts. Section 7345(d) provides that notice of certification shall be given to the taxpayer and the notice shall include information about the right to contest the certification.  Notice of reversal of certification must also be given to the taxpayer.

If the taxpayer and the government disagree whether the debt remains legally enforceable after bankruptcy, there may be a back-door entrance into bankruptcy court. Denial or revocation of a passport might subject the taxing authority to an action for a violation of the discharge injunction under 11 U.S.C. § 524. Damages, including attorney’s fees, are notoriously difficult to collect because of the exceptions in section 7433 of the Internal Revenue Code. Given the uncertainty of the new law, one can certainly envision the IRS arguing that its position was substantially justified.