Have you ever found yourself in a situation where you were recognized as an expert, provided guidance or input on a matter, but then had a third party reach a different conclusion? If not, try to imagine yourself in such a situation. How would you react? Would you feel like your expertise had been undermined, or would you feel the need to confront the other party for interfering with your work?
In the case of United States v. Roland Harry Macher (In re Macher), the IRS found itself in precisely this type of situation. Despite providing their guidance and input on the matter, the bankruptcy court reached a different conclusion, which left the IRS feeling challenged and uncertain of its role. The case involves bankruptcy taxes and the court’s ability to boss the IRS around.
Facts & Procedural History
The taxpayer owed payroll taxes. He filed a Chapter 11 bankruptcy on November 9, 2000.
The IRS had a priority claim of over $273,000 for the unpaid taxes. The taxpayer’s Second Amended Plan provided for the IRS’s priority claim to be paid at twenty cents on the dollar at 8% interest over five years. The IRS objected to the plan and demanded full payment, and the Assistant United States Attorney representing the IRS advised the Bankruptcy Court that the taxpayer’s proposed payment constituted an “offer in compromise” from a debtor in bankruptcy which the IRS would not consider.
The Bankruptcy Court ordered the IRS to process and consider the taxpayer’s offer in compromise, citing the conflict between the IRS policy and the fresh start policy of the Bankruptcy Code. The Bankruptcy Court invoked its broad equitable powers under 11 U.S.C. § 105(a) to issue the order. This appeal concerns whether the Bankruptcy Court had the authority to issue such an order.
Bankruptcy Court Order to the IRS
The IRS argued that the Bankruptcy Court exceeded its equitable powers under § 105 because § 1129(a)(9) and § 1129(a)(7) provide a specific balance regarding debtor tax collection, and the Bankruptcy Court should not upset this balance by requiring the IRS to consider offers in compromise of priority tax claims proposed by a debtor.
The court rejected the IRS’s argument, citing § 1129(a)(9)’s flexibility to compromise priority tax claims, the contradictory policies of the Internal Revenue Manual, and the “fresh start” principle of the Bankruptcy Code, and affirmed the Bankruptcy Court’s judgment that its equitable powers under § 105 extend to requiring the IRS to at least consider debtors’ Chapter 11 plans.
The Anti-Injunction Act is No Bar
The Anti-Injunction Act of the Internal Revenue Code prohibits courts from interfering with the assessment and collection procedures of the Internal Revenue Code, except for certain provisions that are not relevant to the present case. The automatic stay provisions of the Bankruptcy Code § 362 apply to priority tax claims held by the IRS and enjoin the IRS from collecting trust fund taxes from debtors. The court held that as long as the automatic stay is in place, the Anti-Injunction Act does not pose a threat to a bankruptcy court’s jurisdiction to enjoin the assessment and/or collection of taxes to protect its jurisdiction, administer the bankrupt’s estate in an orderly and efficient manner, and fulfill the ultimate policy of the Bankruptcy Act.
The IRS Still Disagrees
After the appeal, the IRS issued an Action on Decision to non-acquiesce to the appeals court’s opinion. The IRS disagrees with the court’s conclusion that a bankruptcy court has the authority to order the IRS to process and consider a debtor’s plan of reorganization according to the procedures for administrative offers in compromise for taxpayers who are not in bankruptcy.
The IRS argues that the decision to compromise tax liabilities, including whether to consider a compromise and how much to accept, is within the IRS’s discretion. The IRS has determined that certain cases, including offers submitted by taxpayers who are currently in bankruptcy, are not appropriate candidates for compromise under the administrative offer in compromise program and will be returned to the taxpayer. The IRS contends that court orders that dictate how the IRS exercises its discretionary authority to compromise tax liabilities conflict with the law governing the issuance of writs of mandamus and exceed the authority granted to bankruptcy courts under section 105.
The IRS further notes that payment proposals submitted by taxpayers in bankruptcy will be considered by Insolvency employees in the context of their review of proposed plans, subject to the time constraints and other factors that are unique to bankruptcy litigation, and will be accepted when it is in the interest of the United States to do so.
When a debtor files for bankruptcy, the automatic stay provisions of the Bankruptcy Code § 362 come into effect, which generally prohibits creditors from continuing any collection activities against the debtor, including the IRS’s efforts to collect taxes. However, the IRS can file a proof of claim in the bankruptcy case for any unpaid taxes owed by the debtor. In some cases, a debtor may propose a plan of reorganization that includes an offer in compromise to the IRS to settle their tax debt. If the IRS rejects the offer, the bankruptcy court has the power to order the IRS to consider the offer in good faith. If the IRS refuses to comply with the court’s order, the bankruptcy court can use its power to sanction the IRS. Sanctions may include fines, penalties, or even ordering the IRS to pay damages to the debtor. However, it is worth noting that the bankruptcy court’s power to sanction the IRS is not unlimited. The court must still act within the confines of the Bankruptcy Code and cannot issue an order that conflicts with other laws or regulations governing the IRS’s operations. The IRS can also appeal the court’s order if it believes the court exceeded its authority.
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