Case Number: 02-96958-PWB, Adversary Proceeding No. 03-9120.United States Bankruptcy Court, N.D. Georgia, Atlanta Division.
August 5, 2005
IN PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE ORDER ON MOTIONS FOR SUMMARY JUDGMENT
PAUL BONAPFEL, Bankruptcy Judge
The Debtor filed her chapter 11 petition on July 8, 2002. The Debtor objects to the claim of the Internal Revenue Service (“IRS”) for additional income tax and penalties owed for the year 1992, for which the Debtor and her non-filing spouse filed their return on January 4, 1995. The Debtor primarily contends that the additional taxes and penalties were not timely assessed. She also asserts that she should not be liable for the additional amounts. Both sides have moved for summary judgment.
It is first helpful to summarize the rules relating to assessment of taxes as applicable here. Under 26 U.S.C. § 6501(a), the IRS must assess a tax within three years of the date of filing the return. Before the IRS may assess a tax, however, it must issue a notice of deficiency. 26 U.S.C. § 6212(a). The notice of deficiency bars assessment for 90 days, during which time the taxpayer may contest the proposed deficiency by filing a petition with the Tax Court. 26 U.S.C. § 6213(a). If a Tax Court petition is timely filed, the IRS may not assess the tax until a decision
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of the Tax Court has become final. 26 U.S.C. § 6213(a). The deadline for assessing a tax is suspended for the period during which the IRS is prohibited from making an assessment or from collecting the tax because of a bankruptcy case and for 60 days thereafter. 26 U.S.C. § 6503(h)(1).
The Debtor and her non-filing husband filed their 1992 return on January 4, 1995. Because of other tax problems, she filed a Chapter 13 case on May 6, 1997. The IRS filed a proof of claim in that case for $102,623.90 on June 18, 1997, with regard to taxes other than those at issue here.
On October 7, 1997, while the Chapter 13 case was pending, the IRS issued a notice of deficiency with regard to the 1992 tax liability. Among other things, the notice proposed to disallow $21,077 in cost of goods sold claimed by the Debtor, $198,118 in expenses claimed by the Debtor, and $39,579 in expenses claimed by the Debtor’s husband. As a result of these and other disallowed items, the tax liability increased by $93,842. In addition, the IRS asserted a negligence penalty pursuant to § 6662 and a failure to file penalty pursuant to § 6651(a)(1). The IRS assessed the taxes on March 23, 1998, and amended its proof of claim to add the additional amounts in the still pending chapter 13 case on July 27, 1998.
The Debtor contends that the IRS did not mail the notice of deficiency to her last known address and that she did not receive actual notice of the deficiency claim within 90 days of its mailing. The Court assumes these facts as true for purposes of ruling on the IRS’ summary judgment motion.
The Debtor asserts that the mailing of the notice of deficiency to the taxpayer’s last known address is essential to its validity, 26 U.S.C. § 6212(b)(1), and that the failure to provide notice of a deficiency bars its assessment. 26 U.S.C. § 6212(a). The Debtor thus concludes that the IRS assessment is invalid due to the lack of a valid and effective notice of deficiency. Implicit
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in the Debtor’s position is the contention that it is now too late for the IRS to assess any additional tax.
The validity of the notice and consequent assessment is not necessary for the IRS to pursue its claim for the additional tax, however, because the time to assess it has not expired. Because the Debtor filed the 1992 return on January 4, 1995, the three year deadline for assessment of additional tax did not expire until January 3, 1998. § 6501(a). Thus, when the Debtor filed her Chapter 13 case on May 6, 1997, the IRS still had 242 days to assess a tax deficiency for 1992. Although § 362(b)(9) permits
the IRS to issue a notice of a deficiency and to assess a tax notwithstanding a pending bankruptcy case, the stay of § 362(a) prevented the IRS from levying to collect any tax. Section 6503(h)(1) suspends the assessment period for the time that a bankruptcy case prevents the IRS from assessing or collecting a tax, plus 60 days. Because the Debtor was in bankruptcy cases and protected by the automatic stay for all but 38 of the 242 days the IRS had left, it still has 204 days after the stay in this case ends, plus 60 days, to assess the tax. Consequently, even if the notice and assessment are wholly ineffective, the IRS may not proceed to issue a notice of deficiency and seek to assess the tax.
The additional taxes claimed by the IRS are still assessable. The IRS has filed a proof of claim in this case, and the Debtor has objected to it, invoking this Court’s authority to determine the proper amount of the tax owed under 11 U.S.C. § 505(a). The Court may determine the Debtor’s tax liability whether or not the taxes have been assessed. Because it is not necessary that the notice or assessment be valid or effective for the IRS to pursue its claim, the Debtor’s motion for summary judgment is denied.
The IRS seeks summary judgment on the merits of its claims on the ground that the Debtor has failed to produce documentary evidence to support the deductions claimed in her return.
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The Debtor indeed appears to concede the absence of documents, and it does not appear that the Debtor’s efforts in this adversary proceeding have been directed to producing evidence that would sustain her burden of proof on these issues. At the same time, it appears that there may be mitigating circumstances beyond the Debtor’s control that account for the loss of documents that may have existed, and the Court is not satisfied that the Debtor will not be able to produce acceptable evidence in support of the deductions that she claimed. In this regard, the Court is concerned that the condition of the record is due to the Debtor’s neglect in pursuing an alternative theory to reduce tax liabilities (or, perhaps, timid acquiescence in the government’s rather confident assertion that documentation is essential) rather than to a total absence of such evidence. The Court notes, further, that the Debtor’s payment of substantial amounts of undisputed taxes in the earlier case and her filing of this bankruptcy case reflect a good faith effort to pay her taxes as properly determined.
The Court, therefore, declines to enter summary judgment in favor of the IRS on the merits. The Court rejects the proposition that 26 U.S.C. §§ 162 and 274 preclude the Debtor from establishing the deductibility of the items in question without documents. To the contrary, there are no specific rules concerning evidentiary matters in § 162, and § 274(d) expressly states, with regard to the more limited matters to which it applies, that deductions may be established by “sufficient evidence corroborating the taxpayer’s own statement.”
If the Debtor or her husband wholly fabricated the return or engaged in other conduct that threatens the integrity of the self-assessment tax system, that will come out soon enough. But if someone (such as an accountant or office staff) helped prepare the return or assisted in the recordkeeping on which it is based, such persons may be able to provide evidentiary support for the Debtor’s deductions. The Debtor should have the opportunity to make her best good faith effort
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to prove her proper tax liability.
This is an unusual case. It could well be that the Debtor’s evidence will fall short of the showing necessary to sustain her burden of proof. In these circumstances, it is inappropriate to require the IRS to bear the expense of preparing for trial. Accordingly, the Court will bifurcate the trial of this matter. The Court will first hear the Debtor’s evidence and determine whether, and to what extent, that evidence would be sufficient to establish the deductibility of items under the Internal Revenue Code. With regard to any items that the Court determines the Debtor has met that burden, the Court will recess the trial for an appropriate period to permit the government to conduct discovery, if desired, and to prepare its case for trial.
It is, therefore, hereby ORDERED that the motions of the Debtor and the IRS for summary judgment be, and they hereby are, denied. The parties are directed to confer with regard to pre-trial procedures, and the Court will conduct a telephonic status conference at 10:00 o’clock a.m. on the 7th day ofSeptember, 2005, to give further direction to the trial of this matter.
IT IS SO ORDERED.
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