IRS v. Westberry

• Court: Court of Appeals for the Sixth Circuit
• Decided: June 6, 2000
• Docket: 98-6779
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0189P (6th Cir.) File Name: 00a0189p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  In re: WILBUR G.

Debtor.  WESTBERRY,  ________________________  No. 98-6779

 > INTERNAL REVENUE SERVICE,  Appellee,     v.  WILBUR G. WESTBERRY,  Appellant.    1 Appeal from the United States District Court for the Middle District of Tennessee at Nashville. No. 98-00438—Todd J. Campbell, District Judge. Argued: February 1, 2000 Decided and Filed: June 6, 2000 Before: COLE and CLAY, Circuit Judges; BELL, District Judge.*

* The Honorable Robert Holmes Bell, United States District Judge for the Western District of Michigan, sitting by designation.

1 2 In re Westberry No. 98-6779

_________________ COUNSEL ARGUED: Mark H. Westlake, WESTLAKE & MARSDEN, Nashville, Tennessee, for Appellant. A. Wray Muoio, TAX DIVISION, DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Mark H. Westlake, WESTLAKE & MARSDEN, Nashville, Tennessee, for Appellant. A. Wray Muoio, TAX DIVISION, DEPARTMENT OF JUSTICE, Washington, D.C., David English Carmack, U.S. DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION, Washington, D.C., for Appellee. _________________ OPINION _________________ R. GUY COLE, JR., Circuit Judge. The sole issue presented in this appeal is whether federal income and self- employment taxes should be considered consumer debt for purposes of 11 U.S.C. § 1301, the codebtor stay set forth in the Bankruptcy Code. For the reasons that follow, we hold that these taxes are not consumer debt and, therefore, AFFIRM the judgment of the district court. I. The facts are stipulated by the parties. The following version is taken from the decision of the bankruptcy court: Wilbur G. Westberry filed Chapter 13 on November 5, 1997. The debtor and his nonfiling spouse jointly owed federal taxes for 1988 of $34,525.02. The debtor’s plan proposed to pay the taxes in full in three years. The IRS began collection against the nonfiling codebtor by serving a notice of levy on her employer. The debtor filed a motion to enforce the codebtor stay. The IRS objected. 10 In re Westberry No. 98-6779 No. 98-6779 In re Westberry 3

same way), we do not believe our interpretation of the The tax debt relates only to income earned in 1988. In Bankruptcy Code need be constrained by the interpretation of that year, the debtor was a self-employed insurance an entirely different statute with a different purpose and salesman. He incurred federal income and history. See, e.g., United States v. Meade, 175 F.3d 215, 221 self-employment taxes on his earnings. All income (1st Cir. 1999) (stating that “precedent teaches that the case earned in 1988 was used by the debtor and his wife for for construing one statute in a manner similar to another is personal, family, or household purposes -- to support weakest when the two have significant differences and, here, themselves and their three dependents. No business the appellant seeks to compare plums with pomegranates”) assets were acquired in 1988, except perhaps a (internal citation omitted).6 typewriter, and no money was spent on businesses, investments, or other profit-making activities. III. In re Westberry, 219 B.R. 976, 977 (Bankr. M.D. Tenn. For the forgoing reasons, we AFFIRM the district court’s 1998). determination that income taxes should not be considered consumer debt for purposes of the § 1301 codebtor stay. The bankruptcy court concluded that income taxes could be consumer debt for purposes of the codebtor stay and that, in this case, because the taxes were incurred “for a personal, family, or household purpose,” the codebtor stay applied. See Westberry, 219 B.R. at 978-79. The IRS appealed. The district court reversed the bankruptcy court, holding that the tax liability at issue was not consumer debt because it was not incurred, but “involuntarily imposed by the government for a public purpose” and resulted “from earning money rather than consumption.” IRS v. Westberry (In re Westberry), No. 3:98-0438 (M.D. Tenn. Nov. 4, 1998). Westberry now appeals the district court’s decision. II. The issue presented here, whether federal income taxes should be considered consumer debt for purposes of 11 U.S.C. § 1301, is a question of law, which we review de novo. See Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir. 1993).

6 The codebtor stay provides that “a creditor may not act . . . Because we have determined that income taxes are not consumer to collect all or any part of a consumer debt of the debtor from debt under the § 1301 codebtor stay, we need not reach the issue of any individual that is liable on such debt with the debtor.” 11 whether the Anti-Injunction Act, 26 U.S.C. § 7421(a), prevents enforcement of the codebtor stay on income taxes. See In re Pressimore, U.S.C. § 1301. Consumer debt is defined in the Bankruptcy 39 B.R. at 244. Code as “debt incurred by an individual primarily for a 4 In re Westberry No. 98-6779 No. 98-6779 In re Westberry 9

personal, family, or household purpose.” 11 U.S.C. § 101(8). the consumer protection statutes upon which the Bankruptcy Westberry argues that the stay should apply to prevent the IRS Code’s definition of consumer debt was derived. See id. at from attempting to collect from his wife,1 the codebtor on the 1054-55. The profit motive analysis is used, and is clearly 1988 taxes because, as stipulated, the money that should have appropriate, to determine whether a debt falls outside the been paid in taxes was used for family and household category of consumer debt. There is nothing inherent in this purposes. test, or direction from the Bankruptcy Code to suggest, that the test defines the only category of non-consumer debt. This is an issue of first impression for our circuit as well as Therefore, while the profit motive analysis may assist in the the federal courts of appeals in general. Almost without determination of which debts are not consumer debt, it does exception, the bankruptcy courts that have addressed this not prohibit other debts from falling outside of the category of question have determined that tax debt should not be consumer debt. See Marshalek, 158 B.R. at 706 (“The profit considered consumer debt for purposes of the codebtor stay. motive test is normally applied to cases involving See, e.g., In re Stovall, 209 B.R. 849, 854 (Bankr. E.D. Va. expenditures. . . . An inability to classify a particular debt as 1997); In re Dye, 190 B.R. 566, 567 (Bankr. N.D. Ill. 1995); a business debt does not automatically relegate it to the status In re Marshalek, 158 B.R. 704, 706 (Bankr. N.D. Ohio 1993); of consumer debt.”). But see Kestell v. Kestell (In re Kestell), In re Greene, 157 B.R. 496, 497 (Bankr. S.D. Ga. 1993); 99 F.3d 146, 149 (4th Cir. 1996) (using the test to determine Goldsby v. United States (In re Goldsby), 135 B.R. 611, 613- that because debt was not business debt, it was consumer 15 (Bankr. E.D. Ark. 1992); In re Reiter, 126 B.R. 961 debt). (Bankr. W.D. Texas 1991); Harrison v. Internal Revenue Service (In re Harrison), 82 B.R. 557, 558 (Bankr. D. Colo. Westberry also argues that income tax debt has been 1987); Pressimone v. Internal Revenue Service (In re deemed personal debt for purposes of the Tax Code and, Pressimone), 39 B.R. 240, 244 (N.D.N.Y. 1984). We find the therefore, the same classification should hold under the weight of these opinions and their reasoning persuasive. Bankruptcy Code.5 For example, he cites the IRS regulation that classifies interest on income tax debt as personal interest, First, a tax debt is “incurred” differently from a consumer which cannot be deducted, to support his argument. See 26 debt. Although it is true that tax debts may be incurred under C.F.R. § 1.163.9T(b)(2)(i)(A). Absent any indication from the Bankruptcy Code, this incurrence is not voluntary on the Congress, see, e.g., Trans World Airlines, Inc. v. Thurston, part of the taxpayer. See Reiter, 126 B.R. at 964; see also 469 U.S. 111, 126 (1985) (using prior interpretations of an Marshalek, 158 B.R. at 706 (stating that “volition is essential” Fair Labor Standards Act provision to interpret language in to a classification as consumer debt in finding that a vehicular the Age Discrimination in Employment Act because Congress accident judgment was not consumer debt under Chapter 7). showed detailed knowledge of the FLSA when enacting the We may at least hope to choose to incur consumer debt; its ADEA) or obvious similarity of language or purpose between certainty being nothing like death and taxes. See Letter from these statutory provisions, see, e.g., Northcross v. Board of Benjamin Franklin to Jean-Baptiste Le Roy (Nov. 13, 1789). Educ. of the Memphis City Schs., 412 U.S. 427, 428 (1973) (noting that a similarity of language and a “common raison d’etre” indicate that two statutes should be interpreted in the

5 1 Westberry does not argue that these statutes are in conflict, which At the time of trial, the debtor and his wife had separated and would, of course, require us to interpret the statutes so as to give effect to maintained separate households. each law. 8 In re Westberry No. 98-6779 No. 98-6779 In re Westberry 5

that cases under these similarly worded statutes guide our Second, consumer debt is incurred for personal or analysis of this issue.4 Congress did not indicate, through the household purposes, as stated in the statute, while taxes are legislative history of § 1301, whether it intended to include incurred for a public purpose. See Stovall, 209 B.R. at 854 taxes under the codebtor stay. (stating that taxes are “imposed by a government for the public welfare” in the course of finding that unpaid personal This distinctive treatment of taxes under the Bankruptcy property tax on the debtor’s car was not consumer debt for Code, as well as the distinctions between tax debt and purposes of the codebtor stay). The Supreme Court has long consumer debt, indicate that the profit motive test, which was noted, in other contexts, the public purpose of the imposition used by the bankruptcy court in this case, is not determinative of taxes. See, e.g., Loan Assoc. v. Topeka, 87 U.S. 655, 664 of this issue. The profit motive test determines that debt is (1874) (“We have established . . . beyond cavil that there can not consumer debt if the debt was “incurred with an eye be no lawful tax which is not laid for a public purpose.”). toward profit.” In re Booth, 858 F.2d 1051, 1055 (5th Cir. 1988). This test was derived from a similar test used under Third, taxes arise from the earning of money, while consumer debt results from its consumption. See Greene, 157 B.R. at 497; Harrison, 82 B.R. at 558; Pressimone, 39 B.R. at 244. Different events give rise to tax debt than to consumer are primarily for personal, family, or household purposes”); 15 U.S.C. debt – Westberry’s obligation to the IRS arose from the § 1602(h) (defining, under the Truth in Lending Act, a “consumer loan” earning of income, not from his expenditure on personal and as “[a transaction] in which the party to whom credit is offered or family items. extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes”). Finally, unlike taxes, consumer debt normally involves the extension of credit. 4 We note that at least two sister circuits have suggested that taxes should not be considered “debt” under the Fair Debt Collection Practices The sum of these material differences leads us to conclude Act. For example, Beggs v. Rossi, 145 F.3d 511, 512 (2d Cir. 1998), that Westberry’s tax debts cannot be considered consumer states: debt for purposes of the § 1301 codebtor stay. The [Fair Debt Collection Practices Act] defines a “debt” as “any obligation or alleged obligation of a consumer to pay Westberry contends that In re Whitelock, 122 B.R. 582 money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are (Bankr. D. Utah 1990) counsels us to decide otherwise. We primarily for personal, family, or household purposes, whether disagree. In Whitelock, the debtor took out a loan from First or not such obligation has been reduced to judgment.” 15 U.S.C. Security Financial (FSF), secured by his mother’s single § 1692a(5). In determining that the personal property taxes at family home, to pay an IRS liability. See id. at 584. The issue in this case are not “debts” within the meaning of the debtor then took out a second note to pay off the first note; FDCPA, the district court relied principally upon the decision of the Court of Appeals for the Third Circuit in Staub v. Harris, this second note was secured by a deed of trust on the same 626 F.2d 275 (3d Cir. 1980). In Staub, the Third Circuit held residence. See id. at 585-86. The debtor filed for bankruptcy that “at a minimum, the statute contemplates that the debt has under Chapter 13 approximately three months later. See id. arisen as a result of the rendition of a service or purchase of The bankruptcy court found that these obligations secured by property or other item of value. The relationship between real property may be considered consumer debt, despite some taxpayer and taxing authority does not encompass that type of language in the legislative history of § 101(7) – the precursor pro tanto exchange which the statutory definition envisages.” Id. at 278. We agree with the district court that Staub is persuasive to § 101(8) -- which states that consumer debt does not authority and is dispositive in this case. include debt secured by real property. See id. at 587 (quoting 6 In re Westberry No. 98-6779 No. 98-6779 In re Westberry 7

124 Cong. Rec. H11,090 (daily ed. Sept. 28, 1978) (statement clearly treated tax debt differently from other debts, including of Rep. Edwards); 124 Cong. Rec. S17,406 (daily ed. Oct. 6, consumer debt. For example, certain tax debts are not 1978) (statement of Sen. DeConcini)). The court looked to dischargeable in bankruptcy, based partially on an assessment the purpose of the debt, concluding that the second loan, of the importance of the collection of tax revenue. See 11 which was used to pay off the first loan that payed the IRS U.S.C. § 523(a)(1) (nondischargeability of certain tax debts); debt, served “a family or household purpose.” Id. at 587. The see also 146 Cong. Rec. S167-05 at *S178 (daily ed. Feb. 1, court assumed that the debt was either consumer or business 2000) (statement of Sen. Levin) (quoting National Bankruptcy and, because there was “no substantial indication that the Review Commission Final Report, Chapter 1: Consumer repayment of the FSF debt was in any manner business Bankruptcy (1997)) (“Other debts are excepted from related,” it was, therefore, consumer debt. Id. Whitelock is discharge because of the inherent nature of the obligation, distinguishable from the present case because the debt was without regard to any culpability of the debtor. Regardless of only indirectly incurred to cover the IRS liability, not directly the debtor’s good faith, for example, . . . many tax claims incurred as in this case. Further, Whitelock, in dictum, remain nondischargeable. Society’s interest in excepting approvingly quotes two cases which find that tax debt is not those debts from discharge outweigh the debtor’s need for a consumer debt. See Whitelock, 122 B.R. at 587 n.8 (citing fresh economic start.”); Bruning v. United States, 376 U.S. Harrison, 82 B.R. at 558; Pressimone, 39 B.R. at 245). 358, 361 (1964) (noting, in the context of an application of a provision of the prior Bankruptcy Code relating to tax debt, In order to determine the meaning of consumer debt, we that the provision “demonstrates congressional judgment that also examine the “language and design of the statute as a certain problems -- e.g., those of financing government -- whole.” Schroyer v. Frankel, 197 F.3d 1170, 1174 (6th Cir. override the value of giving the debtor a wholly fresh start.”). 1999).2 Throughout the Bankruptcy Code, Congress has In addition, tax debts are given a privileged status relative to certain other debts. See, e.g., 11 U.S.C. § 507(a)(8).

2 We note that although we have analyzed whether taxes are This court has not interpreted the “consumer debt” language of the consumer debt based on the plain language and meaning of Bankruptcy Code, even in other contexts within the Code. See Cohen v. the statute, see Zolg v. Kelly (In re Kelly), 841 F.2d 908, 912 De la Cruz, 523 U.S. 213, 220 (1998) (noting the “presumption that equivalent words have equivalent meaning when repeated in the same (9th Cir. 1988) (stating that consumer debt capable of plain statute”). Our sister circuits have examined the “consumer debt” meaning interpretation); Reiter, 126 B.R. 961, 964 (finding no language, as applied to other sections of the Code, but not with respect to need to resort to legislative history to determine if taxes were tax debts. See Stewart v. United State Trustee (In re Stewart), 175 F.3d consumer debt under § 1301), even if we were to find the 796 (10th Cir. 1999) (finding that a Chapter 7 debtor’s funds were put to statutory language ambiguous, the legislative history is not household living expenses and, therefore, were consumer debts); Kestell decisive of this issue. The Bankruptcy Code’s definition of v. Kestell (In re Kestell), 99 F.3d 146 (4th Cir. 1996) (determining, under a profit motive test, that money owed to the debtor’s former wife from a “consumer debt” is derived from consumer protection laws. divorce judgment was consumer debt for purposes of § 707); Burns v. See S. Rep. No. 95-989 at 22 (1978), reprinted in 1978 Citizens Nat’l Bank (In re Burns), 894 F.2d 361 (10th Cir. 1990) (finding U.S.C.C.A.N. 5787, 5808.3 Westberry makes no argument that loans taken out to play the stock market were not consumer debt, for purposes of determining whether attorney fees should be provided under 11 U.S.C. § 523(d)); Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th 3 Cir. 1988) (finding, in a § 707(b) case, that attorney fees were consumer See 15 U.S.C. § 1692(a) (defining “debt,” under the Fair Debt debt because the suit was begun “for the purpose of recovering money Collection Practices Act, as “any obligation or alleged obligation of a allegedly overpaid in purchasing their home”); In re Booth, 858 F.2d 1051 consumer to pay money arising out of a transaction in which the money, (5th Cir. 1988). These cases do not change or detract from our analysis. property, insurance, or services which are the subject of the transaction