IN RE GOODELL, II (Bankr.E.D.Pa. 2006)

Bankruptcy No. 05-16948DWS.United States Bankruptcy Court, E.D. Pennsylvania.
January 4, 2006

MEMORANDUM OPINION
DIANE SIGMUND, Bankruptcy Judge

Before the Court is the (1) Motion of the Chapter 13 trustee to dismiss Chapter 13 case (the “Dismissal Motion”) and (2) Objection (the “Objection”) of the debtor Boyd Ellis Goodell II (“Debtor”) to the proof of claim of the Internal Revenue Service (“IRS”) which asserts an unsecured priority claim of $58,881.03 and an unsecured claim of $48,177.38 (the “Claim”). A hearing was held on November 10, 2005 at which the Trustee pressed for dismissal because Debtor had not filed tax returns and his Chapter 13 plan is infeasible in not treating the Claim as required by applicable Chapter 13 law. With respect to the Objection, Debtor agreed that his sole basis for contesting the Claim was a legal one, i.e., that he did not challenge the amount of the Claim but rather his legal obligation to file tax returns. Accordingly no evidence was presented by either party. Memoranda of law having been submitted, the matter is ripe for decision.[1]

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BACKGROUND

The IRS contends that Debtor has not filed tax returns since 1999. Debtor does not dispute this fact but rather argues that he has not done so because the IRS has not shown him any law that requires him to file returns.[2] When the IRS demonstrates this requirement to his satisfaction and only then, will he file the returns. In the face of Debtor’s refusal to file returns, the IRS has assessed taxes based on information gleaned from third parties which assessments are the basis of the Claim.

Debtor filed this Chapter 13 case on May 16, 2005. A prior Chapter 13 case filed on January 11, 2005 was voluntarily dismissed on April 21, 2005 before the same issues raised by Debtor here could be heard.[3] Thus, Debtor has been under bankruptcy protection for one year with the object of preventing the IRS from taking action against him on account of unpaid tax obligations. It is clear from Debtor’s Schedules and Statement of Affairs that

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Debtor is employed and as of the date of the petition was earning a monthly gross wage of $6,500 per month. Schedule I.[4]

Debtor filed a plan at the inception of the case that provided for monthly payments of $394 from which the Trustee was to solely make disbursements to the IRS to aggregate $23,631 on account of its disputed priority claim.[5] Secured creditors were expressly not to be paid through the plan,[6] and unsecured creditors were not to receive any distribution. At the § 341 meeting held on July 11, 2005 Debtor was directed to file an amended plan as the funding of the original plan was insufficient to pay the IRS priority claim of $58,881.03. Debtor’s failure to do so as well as his failure to file income tax returns generated the Dismissal Motion.[7]

On the hearing date of November 10, Debtor filed two documents. The first was an amended Chapter 13 plan (the “Amended Plan”) which increased monthly payments to

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$987.27 and recognized priority claims of the IRS in the amount of $46,923 and the Pennsylvania Department of Revenue in the amount of $5,081.14.[8] While still making no provision for secured creditors, the Amended Plan provides $16,492.21 or at least 32.33% on account of unsecured claims estimated at $51,009.03. Notably the liquidation analysis reflected in the Amended Plan indicates that unsecured creditors will receive the aforementioned 32.33% distribution under the Amended Plan as opposed to a 66.33% distribution under Chapter 7. The Amended Plan was accompanied by a Motion to Amend Plan (“Amend Motion”) which, while not necessary given the statutory leave to modify a plan anytime before confirmation, 11 U.S.C. § 1323(a), sheds some light on the purported intention of the Amended Plan, i.e., to “reflect liquidation analysis and the `best interests tests’ and any income taxes owed or due, based on returns filed for the aforementioned years,” i.e., 1999-2004. Amend Motion ¶ 4.

Notwithstanding this document that appears to recognize the need to treat the priority component of the Claim (or at least most of it) based on filed tax returns, Debtor continued to argue at the hearing that he had no obligation to file returns or pay taxes until the IRS proved to him that its assessment was correct. The post-hearing memorandum filed on his behalf maintains that position. The Objection that Debtor presses argued that he “did not file returns for the years 1999, 2000, 2001, 2002, 2003 and 2004 because he had no liability and requirement to do so because he had no taxable income pursuant to 26 C.F.R. § 1.861(f)(1).” Objection ¶ 7. His reason for so stating is his view that the IRS “has not provided to him

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proper verification of its claim and an appropriate and acceptable accounting for the moneys paid or seized in the past.”Id. ¶ 10. He joined his objection with a motion requiring the IRS to provide him documentation about its claim.[9]
DISCUSSION

I.
Bankruptcy Rule of Procedure 3001(f) provides that a proof of claim executed and filed in accordance with the rules of procedure constitutes prima facie evidence of the validity and amount of the claim. Amatex Corporation v. Aetna CasualtySurety Co., et al., 107 B.R. 856, 870 (E.D. Pa. 1989); In reWall to Wall Sound Video, Inc., 151 B.R. 700, 701 (Bankr. E.D. Pa. 1993). Even if there is an objection filed to the claim, the evidentiary effect of Rule 3001(f) remains in force. In reWells, 51 B.R. 563, 566 (Bankr.D. Col. 1985). The objecting party carries the burden of going forward with evidence in support of its objection which must be of probative force equal to that of the allegations of the creditor’s proof of claim.Id. “[T]he objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency.”

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In re Allegheny International, Inc., 954 F.2d 167, 173-74 (3d. Cir. 1992). If the objecting party succeeds in overcoming theprima facie effect of the proof of claim, the ultimate burden of persuasion then rests on the Claimant. AlleghenyInternational, 954 F.2d at 174; Wall to Wall Sound,151 B.R. at 701.

Notwithstanding the contentions made in Debtor’s memorandum,[10] the proof of claim is accorded primafacie validity. The threshold question then is whether Debtor has rebutted its prima facie effect. Debtor appears to view that he need not do anything until the IRS provides him with documentation that satisfies him as to his obligation to file returns. There is no basis in the law for this position. Cobb v.Hulsey (In re Cobb), 216 B.R. 676 (Bankr. M.D. Fla. 1998). As the Cobb Court noted with respect to debtors that took the same position as Debtor here:

Debtors’ creative efforts to defeat or undermine the claim are quixotic since the only evidence which could rebut the IRS’s proof of claim would stem from filed tax returns.

Id. at 679. The law requires that income tax returns be filed by every individual having taxable income above the exemption amount. 26 U.S.C. § 6012(a)(1)(a). In re Hahn, 200 B.R. 249, 250 (M.D. Fla. 1996).[11] See also Vines, supra,200 B.R. at 949 (debtor did not

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meet his burden to rebut presumptive validity of IRS claim where he failed to present any evidence that claim was substantively erroneous or invalid in existence or amount). Debtor does not contend that his income is below the exemption amount.[12]
Thus, his sole basis for not filing the tax returns is without merit.

Where as here, a taxpayer fails to file income tax returns, the law makes certain presumptions for the purpose of determining the tax obligation and shifts the burden to the taxpayer to prove the irregularity. Christensen v. United States, 733 F.Supp. 844, 852 (D.N.J. 1990). Thus, Debtor’s view that it need do nothing until the IRS proves its entitlement to collect a tax from him is simply erroneous. Debtor made a choice not to file returns. He lives with the consequences of that choice, i.e., the IRS’s assessments will be presumed correct unless challenged with facts, not as here with legal mumbo jumbo. Because Debtor has presented no evidence to refute the prima facie validity of the IRS’ proof of claim, the Objection will be overruled and the Claim allowed as filed, i.e., $58,881.03 priority and $48,177.38 unsecured.

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II.
The Dismissal Motion is based on Debtor’s failure to file tax returns and an amended plan as directed at the July 2005 § 341 meeting. As noted, the Amended Plan was filed on the day of the hearing on the Dismissal Motion. Nonetheless the Trustee continues to press his Dismissal Motion based on Debtor’s failure to file tax returns and the underfunding of the proposed Amended Plan.

Taxes owed to governmental units are priority claims pursuant to § 507(a)(8).[13] A Chapter 13 plan must provide for the full payment, in deferred cash payments, of all claims entitled to priority under § 507, unless the holder of a particular claim agrees to a different treatment. 11 U.S.C. § 1322(a)(2). The IRS has not agreed to a different treatment. A Chapter 13 plan that does not comply with the provisions of the Bankruptcy Code shall not be confirmed. 11 U.S.C. § 1325(a)(1).

A Chapter 13 plan also must meet the “best interests of creditors” test memorialized in § 1325(a)(4), i.e., an unsecured creditor must receive under the plan no less than it would receive if the estate of the debtor were liquidated under chapter 7 of the Bankruptcy Code. Debtor appears to have recognized that requirement when he amended his plan to provide a distribution to unsecured creditors. Whether his provision is sufficient is discussed below.

Having overruled the Objection, the unsecured priority component of the Claim is allowed in the amount of $58,881.03. The Amended Plan allocates $46,923 to pay the IRS priority claim, and thus is still underfunded. As such, it does not comply with § 1322(a)(2) and will not be confirmed under § 1325(a)(1).

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The unsecured component of the Claim is allowed in the amount of $48,177.38. The Amended Plan quantifies the unsecured claims at $51,009.03 and as stated above, proposes to pay a total of $16,492.21 to the holders of such claims. According to the liquidation analysis in the Amended Plan, Debtor has property valued at $341,628.61 of which $224,542.00 is encumbered by the claims of secured creditors. When taking into account Debtor’s asserted exemptions of $31,250.00 and the payment of priority claims in full, there remains $26,955.58 available to unsecured creditors were Debtor’s property liquidated in a case under Chapter 7. The Chapter 7 trustee fee, which Debtor estimates at $4,133.25, would reduce that distribution further but the Chapter 7 distribution still would be greater than the $16,492.21 provided by the Amended Plan. Thus, neither can the Amended Plan be confirmed under the best interests test of § 1325(a)(1).

In many cases the Court will allow a debtor a further opportunity to amend his plan to meet these confirmation standards. However, the Court believes such leave would be futile in this case. Debtor’s Schedule I and J evidence current monthly joint income of $8,903 against monthly expenses of $8,579, leaving disposable income for payment to the Chapter 13 trustee of $325 per month. From these verified documents, it is apparent that Debtor cannot afford the proposed $987.27 monthly payment to the Trustee, not to mention a larger payment to account for the approximately $15,000 shortfall in the Amended Plan. Moreover, Debtor has been on notice of the need to file an Amended Plan since the § 341 meeting in July 2005. His filing of the Amended Plan on November 10, the day of the Dismissal Motion, did not afford the Trustee the opportunity to examine Debtor about these inconsistencies nor did Debtor explain them at the hearing.

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Finally there is Debtor’s continued unwarranted refusal to file tax returns which of itself is cause for dismissal or conversion of a Chapter 13 case. While not express statutory grounds for dismissal until October 17, 2005 with the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”),[14] it is settled law that the factors enumerated in § 1307 for dismissal or conversion are illustrative only and that lack of good faith in filing a petition presents grounds for relief under § 1307(b). In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996). Courts have readily concluded that the failure to file tax returns after notice and opportunity is provided the debtor of the requirement to do so constitutes bad faith. E.g., Greatwood v. United States of America (In reGreatwood), 194 B.R. 637, 639 (BAP 9th Cir. 1996); In reEilertson, 1995 WL 790065 (Bankr. D.S.C. Nov. 14, 1995); Matterof Crayton, 169 B.R. 243 (Bankr. S.D. Ga. 1994). In filing for bankruptcy relief, Debtor has sought this Court’s protection from creditors, including the IRS. The quid pro quo for that relief is the requirement to comply with the substantive and procedural requirements of Chapter 13.[15] Debtor had four months’ notice of the requirement to file tax

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returns so that the IRS could make a reasoned determination of Debtor’s tax liabilities in order to file its proof of claim. His obstinate refusal to do so notwithstanding the Chapter 13 trustee’s directive and his motion based on a legal position that has been soundly and uniformly rejected when advanced in other bankruptcy courts smacks of bad faith and has resulted in prejudicial delay to creditors in this bankruptcy proceedings. This in itself is specific cause for dismissal under Section 1307(c)(1) of the Bankruptcy Code. Vines, 200 B.R. at 944-45.

For the foregoing reasons, the Dismissal Motion shall be granted. This Chapter 13 case shall be dismissed. Moreover, any future case shall be accompanied by evidence of filed tax returns for the years beginning in 1999 to the tax year preceding the case filing. Absent evidence of the filed returns, the case will be dismissed with prejudice and Debtor shall be barred from filing without leave of Court. An Order consistent with the foregoing Memorandum Opinion shall be entered.

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ORDER AND NOW, this 4th day of January 2006, upon consideration of (1) Motion of the Chapter 13 trustee to dismiss Chapter 13 case (the “Dismissal Motion”) and (2) Objection (the “Objection”) of the debtor Boyd Ellis Goodell, II (“Debtor”) to the proof of claim of the Internal Revenue Service (“IRS”) which asserts an unsecured priority claim of $58,881.03 and an unsecured claim of $48,177.38 (the “Claim”), after notice and hearing, and for the reasons stated in the foregoing Memorandum Opinion;

It is hereby ORDERED that:

1. The Dismissal Motion is GRANTED.

2. Debtor’s Objection to the proof of claim of the IRS is DENIED.
3. Any future case shall be accompanied by evidence of filed tax returns for the years beginning in 1999 to the tax year preceding the case filing. Absent evidence of the filed returns, the case will be dismissed with prejudice and Debtor shall be barred from filing without leave of Court.

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