A New Kind of Tax Shelter That Also Doesn’t Work, and Why Do Molehills Turn Into Mountains?
James and Beverly Nichols filed their 2001 federal income tax return on January 20, 2002. The return showed that they were entitled to a refund in the amount of $2,231.57. They checked the box on their return, making the irrevocable election to apply that amount to payment of future taxes, pursuant to 26 U.S.C. § 6513(d). Sixteen days later, the Nichols filed their chapter 7 petition.
More than five years after these events, the Ninth Circuit has ruled that “the pre-petition application of the right to the tax refund was an asset as of the petition date, and that the Debtors must therefore deliver to the trustee the value of the property under section 542(a).” In re Nichols, 2007 WL 1344219 (9th Cir. May 09, 2007). This is one of those results that seems obviously correct in effect, but a little difficult to lawyer your way into.
The Ninth Circuit’s opinion omits any mention of the amount in dispute. I had to mine the Bankruptcy Court docket for that. Over my years practicing bankruptcy law, I have seen many published decisions at the appellate level that do reveal that the underlying dispute is over a tiny amount of money. At least tiny in relation to the cost of filing a lawsuit in the bankruptcy court, prosecuting an appeal to the US District Court, and then briefing and arguing the case in San Francisco before the Ninth Circuit.
Why did the Trustee file the lawsuit? As far as I can tell, no other assets were administered in the Nichols’ case, so assuming that certiorari is denied (that was meant to be a joke but I wouldn’t be surprised . . . ) the Trustee will get to administer a $2,231.57 estate, plus some interest and costs. Does this come up all the time? Why did the Debtor mount two unsuccessful appeals? Was their lawyer trying to establish a legal principle for the benefit of his own practice and the debtors’ bar? Was it a grudge match? Or do they both just love it so?
I’m going to send a copy of this post to all of the combatants and invite them to comment. I will probably be ashamed in the presence of their diligence and public spirit. Check back to see what they have to say.
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4 comments:
The most important part of this pursuit of an amount of money which couldn't buy lunch at Denny's for the typical creditor body has been left out. It may not be that the Trustee has a burning desire to pursue a little over $2,000. Rather, the US Trustee's office, with all of its staff patiently waiting for that flood of bankruptcy filings they are confidently predicting, may be looking over the shoulder of the trustee, questioning him/her as to why the "asset" is not being pursued. After all, who is the one who will "take it in the shorts" if nothing is recovered? Not the US Trustee's office. Not even the Trustee. Bingo, trustee's counsel--with the US Trustee backing them at fee application time, "win or tie". I wonder what would happen if such matters were taken over by the UST, by statute. Would the UST engage in a fight for the sake of $2,000 in a case like this? Remember, cost is never an object when you're not the one paying the tab.
Shortly after my initial post I did contact the Trustee, and attorneys for both sides to see if there were any particular circumstances which caused this small dispute to end up in a decision by the 9th Circuit. They all gratiously responded to me privately, but no one either: (i) expressed the sentiments of Anonymous; or (ii) indicated that they intended to post a comment. I therefore strongly doubt that Anonymous was connected with the case.
While I wouldn't post the Trustee's comments to me since he chose not to post them himself, I think that he mind me saying that he routinely administers small asset cases and feels that it is important to do so.
-- Cheers, Dean
The influence exerted by the UST Office is often difficult to measure. This is because the UST will not share with anyone outside their office all internal policy matters. Why they do things is often well guarded because policy decisions come from Washington--somewhat annoying since they should be working for the taxpayer. And if that is true, the taxpayer has a right to know what the policy is, how it is made and how it is carried out.
But enough of hammering a cork into the governmental ocean; If a taxpayer cuts a deal with the IRS for the IRS to leave the taxpayer alone (no levy) in exchange for future refunds generated by the taxpayer to be used to pay down on the outstanding back taxes, perhaps the debtor could use an executory contract argument (actually lack of one) much like in a lease where the landlord cannot reject the contract since he has already conveyed possession. [a whopper of a sentence but you get the point] Here, the IRS has already restrained from levying on the taxpayer--just like conveying possession of the premises. The IRS continues to withhold collection activity--i.e. actually performing by doing nothing. Debtor argues--hey--this contract is not executory; the trustee cannot interfere by taking the money which would go to the IRS under the prior deal (like rent payments under a lease where possession has been conveyed and there is nothing left for the tenant to do but pay rent).
Just curious--did the UST take a position on any of this?
Ya thats correct...cost is never the object when the payee is not the concerned person...
cheers,
suma valluru
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