Internal Revenue Svc v. Stern

• Court: Court of Appeals for the Fifth Circuit
• Decided: December 20, 1999
• Docket: 98-11250
• Status: Unpublished

Opinion

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

_____________________

No. 98-11250 _____________________

In The Matter Of: KENNETH WAYNE STERN,

Debtor. _______________________________________

INTERNAL REVENUE SERVICE,

Appellee,

v.

KENNETH WAYNE STERN,

Appellant. _________________________________________________________________

Appeal from the United States District Court for the Northern District of Texas Docket No. 3:98-CV-1002-H _________________________________________________________________

December 16, 1999

Before KING, Chief Judge, and POLITZ and STEWART, Circuit Judges.

PER CURIAM:*

Debtor-Appellant Kenneth Wayne Stern appeals from a district

court judgment reversing the bankruptcy court’s order disallowing

a portion of the Internal Revenue Service’s claims. The

64`29+87bankruptcy court determined that the IRS was not entitled

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. to equitable tolling under 11 U.S.C. § 105(a) of time limitations

within 11 U.S.C. § 523(a)(1)(B)(ii). Because we find that the

bankruptcy court did not abuse its discretion in refusing to

toll, we reverse the district court’s judgment.

I. FACTUAL AND PROCEDURAL BACKGROUND

This case arises because Stern failed to timely pay income

taxes and also filed numerous bankruptcy petitions. His first

Chapter 13 petition was filed on January 11, 1991, and was

dismissed on July 31, 1991 because Stern missed several payments.

Amounts collected by the bankruptcy trustee were returned under

11 U.S.C. § 1326(a)(2). His second Chapter 13 petition was filed

on January 15, 1992. This case was dismissed on December 12,

1992 because Stern’s liabilities exceeded the $100,000 maximum

specified in 11 U.S.C. § 109(e). On August 24, 1992, while his

second Chapter 13 case was ongoing, Stern filed income tax

returns for the 1987, 1988, 1989, and 1990 tax years.

The IRS assessed Stern’s tax liabilities for 1989 and 1990

on February 22, 1993, and his tax liabilities for 1987 and 1988

on March 29, 1993. Collection efforts began on May 31, 1993,

with an agent being assigned in June of that year.

On February 28, 1994, Stern entered an installment agreement

with the IRS, under which he was to pay approximately $650 per

month. However, Stern stopped making payments after six months.

Stern filed a Chapter 7 bankruptcy petition on September 9, 1994.

2 On January 10, 1995, he received a general discharge. The IRS

resumed its collection efforts on June 12, 1995.

In 1996, the IRS filed and later amended a proof of claim

for federal income taxes for the years 1987 to 1994. Stern

objected to liabilities for the 1987-1990 period, arguing that

these had been discharged on January 10, 1995. As of the date of

his Chapter 7 petition, Stern’s returns for the 1987-1990 period

had been filed for more than two years, see 11 U.S.C.

§ 523(a)(1)(B)(ii), taxes had been assessed for more than 240

days, see 11 U.S.C. § 507(a)(8)(A)(ii), and the last date for

filing a return without penalty was over three years before. See

11 U.S.C. § 507(a)(8)(A)(i).

Without tolling of the time limitations in § 507(a)(8), the

IRS would lose its priority. More detrimental to the IRS,

without tolling of the two-year limitation in § 523(a)(1)(B)(ii),

Stern’s tax debt would be discharged. After an evidentiary

hearing, the bankruptcy court held that the IRS was not entitled

to equitable tolling under 11 U.S.C. § 105(a) during Stern’s

prior bankruptcy cases because evidence did not support a finding

3 of bad faith filings.1 Therefore, the IRS’ claims for the 1987-

1990 period were disallowed.

The district court, reversing the bankruptcy court, held in

a bench opinion that the equities supported the IRS’ position

that time restrictions in each of the relevant provisions should

be equitably tolled. The time during which the automatic stay

associated with each of Stern’s prior two bankruptcies was in

effect, as well as an additional six months after each stay was

lifted, were not to be counted in determining whether the time

limitations of § 523(a)(1)(B)(ii) or § 507(a)(8)(A)(i) had been

exceeded. As a result, tax liabilities for the 1987-1990 period

were not discharged in the debtor’s previous Chapter 7

bankruptcy.

II. ANALYSIS

Stern argues that the district court misinterpreted the

facts of the case and substituted its own interpretation of those

facts for that of the bankruptcy court, and that it improperly

1 Section 105(a) provides:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

11 U.S.C. § 105(a).

4 applied our holding in Quenzer v. United States (In re Quenzer),

19 F.3d 163 (5th Cir. 1993). For these reasons, he argues, the

district court’s order should be reversed.

In reviewing the district court’s reversal of the bankruptcy

court’s order, we apply the same standards as are to be applied

by the district court. See Kennard v. MBank Waco, N.A. (In re

Kennard), 970 F.2d 1455 (5th Cir. 1992). Findings of fact are

reviewed under the clearly erroneous standard, and conclusions of

law are reviewed de novo. See Traina v. Whitney Nat’l Bank, 109

F.3d 244, 246 (5th Cir. 1997). We review the bankruptcy court’s

determination to employ or not to employ its § 105(a) powers

under an abuse of discretion standard. See In re Coastal Plains,

Inc., 179 F.3d 197, 204 (5th Cir. 1999). “The abuse-of-

discretion standard includes review to determine that the

discretion was not guided by erroneous legal conclusions.” Koon

v. United States, 518 U.S. 81, 100 (1996); see also Coastal

Plains, 179 F.3d at 205; Latvian Shipping Co. v. Baltic Shipping

Co., 99 F.3d 690, 692 (5th Cir.1996) (“We will not find an abuse

of discretion unless the . . . court’s factual findings are

clearly erroneous or incorrect legal standards were applied.”).

We have noted that “the powers granted by [§ 105(a)] must be

exercised in a manner that is consistent with the Bankruptcy

Code,” Chiasson v. J. Louis Matherne & Assocs. (In re Oxford

Management, Inc.), 4 F.3d 1329, 1334 (5th Cir. 1993), and that

the section “does not authorize the bankruptcy courts to create

5 substantive rights that are otherwise unavailable under

applicable law, or constitute a roving commission to do equity.”

United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986)

(footnote omitted). Within these confines, the section allows

courts to issue orders, processes, or judgments they determine

are necessary or appropriate to carry out the provisions of the

Bankruptcy Code, and to “tak[e] any action or mak[e] any

determination necessary or appropriate to enforce or implement

court orders or rules, or to prevent an abuse of process.” 11

U.S.C. § 105(a).

Whether a court should invoke its equitable powers under

§ 105(a) is a matter of discretion. See Perkins Coie v. Sadkin

(In re Sadkin), 36 F.3d 473, 478-79 (5th Cir. 1994) (“Section

105(a) provides equitable powers for the bankruptcy court to use

at its discretion.”). In Quenzer, we noted that “[e]quitable

considerations are largely fact driven” and that “‘[t]he essence

of equity jurisdiction has been the power . . . to mould each

decree to the necessities of the particular case.’” 19 F.3d at

165 (quoting Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944)

(Douglas, J.)). Since Quenzer was decided, courts have drawn on

this language and have considered the overall facts of the

particular case before them in their determinations of whether

time limitations within § 507(a)(8) should be tolled. See, e.g.,

Clark v. IRS (In re Clark), 184 B.R. 728 (Bankr. N.D. Tex. 1995);

Miller v. IRS (In re Miller), 199 B.R. 631 (Bankr. S.D. Tex.

6 1996). At least one court has taken the same approach to its

assessment of whether § 105(a) should be used to toll limitations

within § 523(a)(1)(B)(ii), a section also at issue here. See

Hollowell v. IRS (In re Hollowell), 222 B.R. 790 (Bankr. N.D.

Miss. 1998). In each of these cases, the court found that the

circumstances warranted equitable tolling.

In this case, the bankruptcy court drew a different

conclusion: that the facts of the case before it did not warrant

use of its equitable powers under § 105(a). A thorough review of

the full record, applicable law, and the bankruptcy court’s

careful opinion leads us to conclude that it did not abuse its

discretion in deciding that the IRS had not met its burden of

showing that it was entitled to equitable tolling. The

bankruptcy court did not apply inappropriate legal standards in

determining whether to toll the time limitations within

§ 523(a)(1)(B)(ii). It clearly assessed a number of different

facts before making its determination. We see no reason to

conclude that its findings of fact are clearly erroneous. The

district court apparently viewed the facts differently, and

decided that the equities favored the IRS. This, however, is not

sufficient to reverse the bankruptcy court’s determination.

As a result, the district court’s judgment reversing the

bankruptcy court’s order is REVERSED, and the bankruptcy court’s

order is thereby REINSTATED.