King v. Commissioner

51 T.C. 851, 1969 U.S. Tax Ct. LEXIS 185

• Court: United States Tax Court
• Decided: February 26, 1969
• Docket: Docket No. 2093-67
• Status: Published

Opinions

OPINION

Simpson, Judge:

On September 30, 1968, the respondent filed a motion to dismiss the petition in this proceeding for lack of jurisdiction. The question thus raised is whether this Court has jurisdiction to redetermine a deficiency when the petition seeking redetermination was filed after the petitioner was adjudicated a bankrupt, but before his discharge and the termination of the bankruptcy proceeding, and when the Commissioner of Internal Revenue has neither assessed the deficiency nor filed a claim therefor in the bankruptcy proceeding.

On April 4, 1963, the petitioner filed a voluntary petition in bankruptcy with the Federal District Court of the Western District of Missouri, and was thereby adjudicated a bankrupt at the time of the filing of such petition purusant to section 18(f) of the Bankruptcy Act, 11 U.S.C. sec. 41(f). On January 25,1967, a statutory notice of deficiency was issued to the petitioner¹ determining a deficiency in the petitioner’s income tax for the calendar year 1962. On April 25, 1967,² the petitioner timely filed a petition, and on June 30, 1967, an amended petition, for redetermination of the deficiency by this Court. On June 24, 1968, the petitioner was discharged in bankruptcy, and on August 2, 1968, the bankruptcy proceedings were closed. The asserted deficiency has never been assessed against the taxpayer, and the respondent filed no proof of claim with respect to such deficiency in the bankruptcy proceeding.

The normal procedures for the determination of deficiencies and for petitioning this Court for redetermination of such deficiencies are set forth in sections 6212 and 6213 of the Internal Revenue Code of 1954.'³ Section 6212(a) authorizes the Secretary or his delegate to issue a notice of deficiency. Section 6213(a) provides that within the applicable period of time after the mailing of the statutory notice, the taxpayer may petition this Court for redetermination of the deficiency ; and the deficiency may not be assessed or collected until the period for filing a petition in this Court has elapsed, or if a petition is filed, until our decision becomes final. Thus, the taxpayer against whom a deficiency is asserted is given an opportunity to contest it before payment.

Section 6871 establishes an exception to these normal procedures; it provides:

(a) Immediate Assessment. — Upon the adjudication of bankruptcy of any taxpayer in any liquidating proceeding, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency * * * determined by the Secretary or his delegate in respect of a[n income, gift, or estate] tax * * * shall, despite the restrictions imposed by section 6213 (a) upon assessments, be immediately assessed if such deficiency has not theretofore been assessed in accordance with law.

(b) Claim Filed Despite Pewdeecy of Tax Couet Phoceedings. — In the case of a[n income, gift, or estate] tax * * * claims for the deficiency * * * may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Tax Court; but no petition for any such redetermination shall be filed with the Tax Court after the adjudication of bankruptcy, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of the receiver.

The respondent argues that subsection (b) operates as an absolute bar to the filing of a petition in this Court with respect to a, deficiency determined for any year preceding the adjudication of bankruptcy. We disagree.

In Pearl A. Orenduff, 49 T.C. 329 (1968), this Court rejected a similar contention by the respondent. In that case, a statutory notice of deficiency was mailed to the taxpayer after the taxpayer had been discharged in bankruptcy and the bankruptcy proceedings had been closed. Based on the legislative history of the predecessor of section 6871, the Court sa,id at page 332:

The section, as explained by the Senate committee report, was designed to place in the same court the power to adjudicate tax claims as well as the power to distribute the assets available for application on such claims. Otherwise, the assets of the debtor might be distributed before the tax claim could be perfected through the generally applicable administrative and Tax Court procedures. Abel v. Campbell, 334 F. 2d 339 (C.A. 5, 1964). This legislative purpose, on the other hand, does not require that a taxpayer be denied access to this 'Court when a completely new deficiency, neither assessed nor claimed in the bankruptcy court, is determined after the bankruptcy or receivership proceedings are closed.

The Court pointed out that the “no petition” language of section 6871(b) is qualified by “for any such redetermination”; therefore, it held that the “no petition” language applies only when there has been an immediate assessment under section 6871(a) or filing of a claim under the first clause of section 6871(b). Accordingly, the Court held that it had jurisdiction of a petition timely filed seeking redetermination of the deficiency. Cf. Eli McDonald, 23 B.T.A. 521 (1931).

The principle established in Orenduff was sharpened and applied in John V. Prather, 50 T.C. 445 (1968). In that case, the respondent duly filed claims for income tax deficiencies in the bankruptcy proceeding. After the taxpayer had been adjudicated a bankrupt, but while the bankruptcy proceeding was still pending, the respondent sent the taxpayer a notice of deficiency asserting the deficiencies presented in tbe bankruptcy proceeding and also fraud penalties with, respect thereto, and the taxpayer filed a timely petition with this Court. Before the close of the bankruptcy proceeding, the respondent also assessed such deficiencies and penalties against the taxpayer. We held that since the claim for the income tax deficiencies had been presented to the bankruptcy court, we lacked jurisdiction to redetermine them. However, since the claim for the fraud penalty was not and could not have been presented to the bankruptcy court, we held that we had jurisdiction to redetermine that claim. Prather thus applied the principle inherent in the reasoning of Orendujf: the “no petition” language of section 6871(b) operates as a bar to Tax Court jurisdiction only if the taxpayer has had an opportunity to litigate the asserted deficiency in the bankruptcy proceeding.

We think that the present case comes within the reasoning of Orenduf and Prather. The general purpose of the procedures established by sections 6212 and 6213 is to provide taxpayers with an opportunity to secure a judicial determination of any tax deficiency claimed by the respondent without having to pay such deficiency. Section 6871 makes an exception to the general procedures when there is a bankruptcy proceeding pending, but that section has been construed narrowly so as not to deprive taxpayers of the opportunity of litigating tax claims in some forum without having to pay them first. John V. Prather, supra; Pearl A. Orenduff, supra; Eli McDonald, supra. Section 6871(a) and the first clause of section 6871(b) were designed to enable the respondent to present his tax claims in the bankruptcy court. The second clause of section 6871 (b) applies only when the respondent has taken such action as is necessary to offer the taxpayer an opportunity to litigate the tax claim in the bankruptcy proceeding.

In the present case, the respondent made no assessment of the deficiency, and he filed no proof of claim. Although the bankruptcy proceeding was still pending when he sent the notice of deficiency and when the petition was filed with this Court, the claim was not presented in such a manner as to be considered by the bankruptcy court. Though we do not know whether a claim could have been filed in the bankruptcy proceeding at the time the notice was sent or the petition was filed with this Court, we now do know that none was presented. Since the respondent took no action which would raise the claim before the bankruptcy court, this case is essentially like Orenduff and Prather.

The respondent could have presented his tax claim, to the bankruptcy court, but elected not to do so because theie were no assets then available for payment of the claim. Later, he sent the notice of deficiency to the petitioner, apparently recognizing the possibility of collecting the claim out of exempt or “after-acquired” assets. However, he seeks to deny the petitioner the opportunity to have the claimed deficiency redetermined by us, and if we hold that the petitioner is not entitled to his day in this Court, the effect would be to deprive him of his only opportunity to have the deficiency judicially determined before payment thereof.⁴ In enacting the predecessor of section 6811, Congress intended to protect the interest of the Commissioner of Internal Revenue in the bankrupt’s assets; that interest is protected by providing the Commissioner with authority, should he choose to exercise it, to have the tax claim litigated in the forum which has jurisdiction of the assets. There is no indication in the legislative history that Congress intended that, if the Commissioner failed to exercise that authority, the “no petition” language of section 6871(b) should operate to deny to bankrupts what Congress has offered to all other taxpayers — the opportunity -to litigate a claim for income, estate, or gift taxes before payment. The provisions of section 6871 (a) and (b) can be read to protect that opportunity, and we should not adopt an interpretation which curtails it in the absence of a clear congressional intent to do so. See Rutus Aereas Nacionales, S. A. (Ransa) v. United States, 373 F. 2d 213 (C.A. 5, 1967); Jamy Corporation v. Riddell, 337 F. 2d 11 (C.A. 9, 1964), certiorari denied 380 U.S. 953 (1965); Abel v. Campbell, 334 F. 2d 339 (C.A. 5, 1964) ; Cohen v. Gross, 316 F. 2d 521 (C.A. 3, 1963); John V. Prather, supra.

The respondent argues that Kornberg v. Tomlinson, 225 F. Supp. 70 (S.D. Fla. 1964), affirmed per curiam 341 F. 2d 300 (C.A. 5, 1965), supports Iris position. In that case, the court held that the taxpayer could not enjoin collection of a deficiency even though the Government had failed to file a valid proof of claim in the taxpayer’s bankruptcy proceedings. However, as indicated in Orendwff, Kornberg differs from the present case in that there was an immediate assessment of the deficiency in that case. The immediate assessment may give the taxpayer the opportunity to litigate the claimed deficiency in the bankruptcy proceeding. Jamy Corporation v. Riddell, supra. However, if the effect of Kornberg is to deny the taxpayer an opportunity to litigate the tax claim in the Tax Court, even though he has had no opportunity to litigate it in the bankruptcy forum, then we think such, result is not required by the terms of the statute and is inconsistent with the legislative purpose.

Prior to the decisions in Orenduff and Prather, this Court decided a line of cases applying section 6871 or its predecessors to the Tax Court petitions of corporations which were in receivership for the purpose of liquidation or reorganization. E.g., Banco di Napoli Agency in New York, 1 T.C. 8 (1942) ; Louis H. Pink, Supt. of Insurance of New York, 38 B.T.A. 182 (1938); Molly-'es Doll-outfitters, Inc., 38 B.T.A. 1 (1938); Financial and Industrial Securities Corp., 27 B.T.A. 989 (1933); Clifton City Bank, 6 B.T.A. 643 (1927). In those cases, we held that such a corporation in receivership has no right to appeal to this Court from a statutory notice of deficiency mailed during receivership, even though the Commissioner had neither assessed the tax nor, at the time of our decision, presented his claim in the receivership proceeding. In most of those cases, the corporation was to be liquidated, and if the respondent did not present his tax claim in the receivership proceeding and thereby provide the taxpayer with an opportunity to dispute the claim in that proceeding, the respondent would not be able to collect it from the taxpayer at all. The case of individual taxpayers, such as the petitioner herein, is quite different. In the case of’an individual, the respondent may choose, as hr the present case, not to present his claim in the receivership proceeding, but to collect it from exempt or “after-acquired” assets of the taxpayer; and if we were to adopt the respondent’s position in this case, the individual would have no opportunity to dispute the tax claim when it is collected from his exempt or “after-acquired” assets. Because of this difference between the consequences for a corporation involved in a liquidating proceeding and the consequences for an individual taxpayer, our holding in this case is distinguishable from most of those earlier cases. In addition, the principal controversy in these cases concerned whether the taxpayer was involved in a “receivership” or other proceeding of the type described in the predecessors of section 6871; it was assumed that if the taxpayer was so involved, this Court lacked jurisdiction. There was no consideration of the construction of the “no petition” language of section 6871(b) and its predecessors, or of the fact that there are limitations thereon, later adopted by Orenduff, Prather, and the present case. To the extent that our holding is inconsistent with any of those decisions, they will no longer be followed.

There are two other earlier decisions by this Court that should also be mentioned. Section 6861 authorizes the respondent to assess immediately a deficiency in gift, estate, or income tax when he believes that the delay involved in the normal procedures under section 6213 will jeopardize the collection of the tax. In Ruby M. Williams, 44 T.C. 673 (1965), and Leon I. Ross, 38 T.C. 309 (1962), tbe respondent made jeopardy assessments against taxpayers who were, or became, involved in receivership proceedings. This Court held that it lacked jurisdiction to redetermine the deficiencies. However, these cases are distinguishable from the case before us. In the Williams case, the respondent filed his claim in the receivership proceeding (Cohen v. Gross, supra) ; and in Ross, the receivership was of the type provided for by section 7403, which directs the receivership court to determine the merits of the tax claim.

The respondent contends that we should not apply the Orenduff holding to a situation in which the petition is filed with this Court while the bankruptcy proceeding is still pending. He argues that in such a situation we could not act on a motion to dismiss the petition because we would not know whether the respondent has made an assessment or filed a claim with the bankruptcy court until the bankruptcy proceedings are closed. However, this argument does not present any obstacle to our applying Orenduff and Prather in this case. In the first place, the situation suggested by the respondent is not now before us — in the case that we do have before us, we know that no assessment was made and no claim was filed during the pendency of the bankruptcy proceeding. In the second place, when such a situation is presented to the Court, there are a number of ways in which the Court could handle it. We have held that the “no petition” provision of section 6871(b) applies only when the respondent has taken steps sufficient to provide the bankrupt an opportunity to litigate the deficiency in the bankruptcy proceeding. If the respondent has not yet taken such steps when the petition is filed, the Court might defer acting on the motion to dismiss until the close of the bankruptcy proceeding, or it might deny the motion with leave to present it again if a timely claim for the deficiency is presented to the bankruptcy court. Since we are not here presented with the problem, we, of course, do not hold that these methods would be proper, but merely suggest them by way of example.

For these reasons, we hold that this Court has jurisdiction of the petition, and the respondent’s motion to dismiss will be denied.

Eeviewed by the Court.

An affrofriate order will be issued.

1 No question has been raised as to whether the notice was sent to the proper person, and the record contains no evidence or allegation that it was sent to the wrong person. The bankruptcy proceeding was apparently a “no asset” case, and the record gives no indication that a trustee was appointed. Moreover, the respondent has not attempted to satisfy his claim out of the assets of the bankrupt estate, but must look to the petitioner’s “after-acquired” assets, which are not and were not within the jurisdiction of the bankruptcy court. In view of these considerations, we cannot find that the notice of deficiency was improperly sent or that the petitioner is not a proper party in this proceeding.

2 The petition was received by the Tax Court on Apr. 28, 1967. However, it was contained in an envelope that bore a U.S. postmark of Apr. 25, 1967, and therefore under sec. 7502(a), is deemed filed on that date.

3 All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.

4 We Rave stated tlie effect of holding that we lack jurisdiction in this case would he to deprive the taxpayer of any opportunity of litigating the tax claim before payment thereof. We have assumed that if we were to hold that we lacked jurisdiction, the taxpayer would still have the right to pay the tax claim and seek a refund thereof. Sec. 6512 (a) ; see. 301.6512-1 (a) (1), Proced. & Admin. Regs. See also Century Transit. Co. v. United States, 99 F. Supp. 692 (D. N.J. 1951), id. 124 F. Supp. 148 (D. N.J. 1954), reversed on another ground sub nom Fiorentino v. United States, 226 F. 2d 619 (C.A. 3, 1955) ; 3 Casey, Federal Tax Practice, sec. 11.20, pp. 192-193 (1955). However, in a footnote, Mr. Casey has cast some doubt on the correctness of this interpretation of sec. 6512(a). If the petitioner would not be entitled to a day in any court, then the reasons for construing sec. 0871 so as to hold that we have jurisdiction are even more persuasive.