Report of the American Bar Association Tax Section Task Force on the Tax Recommendations of the National Bankruptcy Review Commission

TAX JURISDICTION IN NO ASSET CASES

(COMMISSION TRACK NUMBER 339)

Present Law

Section 505 of the Bankruptcy Code provides, subject to enumerated exceptions, that the Bankruptcy Court may determine the "amount or legality of any tax . . . whether or not previously assessed. . . ." Where there are no assets to administer in a Chapter 7 case (and thus no creditors would be adversely affected by a failure to determine the presence of any tax due), courts frequently have exercised their discretion to not decide the tax dispute posed by the debtor. When the courts determine to abstain from determining the amount or legality of a tax and the tax is not discharged in the bankruptcy proceeding, the taxpayer-debtor frequently encounters difficulty in securing a "fresh start." The IRS proceedings involving offers-in-compromise are typically difficult and expensive. The collateral agreements the IRS exacts are frequently prohibitively expensive, if not totally confiscatory. And the taxpayer-debtor is frequently without funds to engage the professional help she requires to process an administrative request for resolution.

Proposals Before the Commission

Commission Track Number 339. Commissioner Shepard proposes to require the Bankruptcy Court to abstain from determining dischargeability of any tax claim where there are no assets to administer or where the debtor's request for a determination of the amount of a tax liability is not accompanied by a demonstration the debtor has an interest in the property of the estate. See Santa Fe Discussion Issues, p. 23, Item IVC4. See also Unnumbered Government Working Group Proposal. The Advisory Committee has recommended that this proposal be withdrawn as unimportant.

Task Force Position

While there is substantial merit in many cases for the Bankruptcy Court to abstain from ruling on presented tax issues in "no asset" cases, current law, which grants the Bankruptcy Court discretion to abstain from deciding precedent tax issues, seems to work well and is flexible enough to provide relief for deserving debtors and to avoid clogging the Bankruptcy Court or presenting untoward inconvenience to the taxing authorities. For a debtor to gain a "fresh start," he is entitled to have a determination he does not owe the asserted tax (fn. 145).

Reasons for Position

When a determination of the amount of nondischargeable tax liabilities could affect the rights of creditors or advance the administration of the bankruptcy case, the Bankruptcy Courts generally exercise their discretion to fix the debtor's tax obligation (fn. 146). But, where creditors' rights are not affected, the Bankruptcy Courts have balanced the desirability of providing the debtor with a "fresh start" with all obligations -- including tax obligations -- fixed and provided for with the desirability of moving the court's docket, the expertise of other forums available to the debtor, including the administrative facilities of the taxing agencies, and any prejudice to either the debtor or the taxing authority (fn. 147). In the majority of cases, the Bankruptcy Courts have abstained from determining a debtor's tax liabilities in "no asset" cases where creditors, other than the taxing authority, would not be affected (fn. 148).

The Internal Revenue Service routinely opposes motions to fix tax liability or secure discharge in "no asset" cases. Were the taxpayer-debtors offered a viable alternative forum to resolve issues of liability or payment terms, the Bankruptcy Courts could be expected to continue to exercise their discretion in favor of abstention from deciding the debtor's motion. But, in the real world, the no asset debtor frequently has no viable alternative to the Bankruptcy Court's hearing and deciding the tax dispute. The condition of pre-payment eliminates access to the Federal District Courts and the Claims Court. Time for filing a petition in the Tax Court may have expired. And securing competent counsel with no means to compensate her can be a daunting task. Thus, it is not surprising, that in a few, deserving cases, the bankruptcy courts have determined to adjudicate the tax claims of a "no asset" debtor over the objections of the taxing authorities (fn. 149).

Given the absence of demonstrated abuse by taxpayer-debtors or obvious failures to exercise appropriate judgment by bankruptcy judges who hear and decide abstention motions, we believe the proposed mandate denying jurisdiction to decide tax disputes in no asset cases is not warranted.

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fn. 145: In re Andeson, 171 B.R. 549, 551 (Bankr. W.D. Va. 1994).

fn. 146: In re Shapiro, 188 B.R. 140, 143-48 (Bankr. E.D. Pa. 1995).

fn. 147: In re Galvano, 116 B.R. 367, 372 (Bankr. E.D. N.Y. 199).

fn. 148: See, e.g., Cohen v. United States, 115 F.2d 505 (1st Cir. 1940); In re Byerly, 154 B.R. 718 (Bankr. S.D. Ind. 1992); In re Millspas, 133 B.R. 547 (Bankr. M.D. Fla. 1991); In re Diez, 45 B.R. 137, 139 (Bankr. S.D. Fla. 1984).

fn. 149: See, In re Anderson, 171 B.R. 549 (Bankr. W.D. Va. 1994) ("[T]he issue simply is whether or not this Debtor owes the tax liability that has been assessed-not whether it should be litigated in another court."); see also In re Queen, 148 B.R. 256 (Bankr. S.D. W. Va. 1992), aff'd., 16 F.3d 411 (4th Cir. 1994) (unpublished opinion).

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