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Supreme Court won’t decide effect of bankruptcy petition on appeal of Tax Court case

Schoppe, (CA 10 03/28/2013) 111 AFTR 2d 2013-1398, cert denied 10/07/2013

The Supreme Court has declined to review a decision of the Tenth Circuit that a taxpayer’s filing of a bankruptcy petition doesn’t operate as a stay of his appeal of an adverse Tax Court decision under 11 USC 362(a)(1). The Tenth Circuit, joining four other circuits, held that a Tax Court petition constitutes a proceeding initiated by the debtor and isn’t a mere continuation of IRS’s administrative proceedings against him.

Background. Under 11 USC 362(a)(1), a bankruptcy petition operates as a stay of “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.” The Tenth Circuit Court of Appeals has held that in interpreting the phrase “against the debtor,” the operative issue is whether the proceedings were originally brought against the debtor, and not whether the debtor is the appellant or appellee. (TW Telecom Holdings Inc. v. Carolina Internet, Ltd. (CA 10 2011) 661 F3d 495)

The Fifth (Freeman v. Comm., (CA 5 1986) 799 F2d 1091) and Eleventh (Roberts v. Comm., (CA 11 1999) 83 AFTR 2d 99-2282) Circuits have held that the debtor does initiate the proceeding by filing a petition. The Ninth Circuit, however, has characterized the debtor’s Tax Court petition as an effective continuation of the assessment procedure commenced by IRS’s administrative proceedings that stays the taxpayer’s appeal. (Delphit v. Comm., (CA 9 1994) 73 AFTR 2d 94-1409) The Third (Rhone-Poulenc Surfactants and Specialties, LP v. Comm., (CA 3 2001) 87 AFTR 2d 2001-2023) and First (Haag v. U.S., (CA 1 2007) 99 AFTR 2d 2007-1986) Circuits have adopted the reasoning of the Fifth and Eleventh Circuits in analogous cases.

Facts. John Schoppe was a real estate agent, broker, consultant, appraiser, and an instructor of real estate licensing classes, as well as a financial planner and an insurance agent. From 2002 to 2007, he didn’t file Federal income tax returns and, except for small amounts of Federal income tax withheld from wages in two of those years, didn’t pay any Federal income tax. IRS prepared substitutes for returns showing income for each year and allowing Schoppe a standard deduction and personal exemption, and made deficiency determinations against Schoppe accordingly. Schoppe submitted untimely returns to IRS in 2009 on which he claimed significant expenses and overall losses for certain years.

Schoppe filed a Tax Court petition seeking redetermination of the deficiencies, claiming that the business expense and itemized deductions on his untimely returns should be allowed. The Tax Court, however, found that with only one exception, he failed to substantiate any of the claimed deductions. It also found that there was no reasonable basis for it to estimate Schoppe’s business expenses, given the “difficulty on the record…of knowing with any confidence the correct nature” of his expenses. Accordingly, it sustained IRS’s deficiency determinations (subject to agreed-upon adjustments) and also upheld IRS’s imposition of various penalties. (Schoppe, TC Memo 2012-153)

Schoppe then appealed the Tax Court’s decision to the Tenth Circuit and, while the case was proceeding, filed a voluntary bankruptcy petition. The Tenth Circuit, prior to this case, had not resolved whether a Tax Court proceeding is one initiated by or against a debtor.

Tenth Circuit’s decision. The Court of Appeals for the Tenth Circuit agreed with the bright-line rule used by the four other circuits that a Tax Court petition is an independent judicial proceeding initiated by the debtor, and not the continuation of an administrative proceeding against him. Therefore, because the instant case originated with Schoppe’s commencement of a judicial proceeding in the Tax Court for a redetermination of his tax deficiencies, the automatic stay under 11 USC 362(a)(1) didn’t apply. (For more on the Court’s decision, see Weekly Alert ¶ 16 04/04/2013.)

No further review. On Oct. 7, 2013, the Supreme Court refused to review the decision of the Tenth Circuit in Schoppe. Accordingly, the Tenth Circuit’s decision is now final.

References: For the effect of an automatic stay in bankruptcy on tax litigation involving the debtor, see FTC 2d/FIN ¶ V-7319 ; United States Tax Reporter ¶ 68,726.01 ; TG ¶ 72001 .