Monday, November 17, 2008

In re Roland Harry Macher, Debtor. Roland Harry Macher, Plaintiff v. United States of America and Internal Revenue Service, Defendants.

U.S. Bankruptcy Court, West. Dist. Va., Roanoke Div.; 00-03659-WSR-11, May 29, 2003.

[ Code Secs. 6871 and 7122]

Bankruptcy: Offers in compromise: IRS procedures. --
An individual who had filed for bankruptcy was entitled to have his offer in compromise considered by the IRS under the same standards as non-debtor taxpayers. Failure to consider the offer made by the bankruptcy debtor denied him access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. The debtor contended that the amount and terms of payment in his offer represented a reasonable indication of his ability to pay and did not challenge his tax liability or argue that it was dischargeable in bankruptcy. The government's policy precluding consideration of the debtor's offer interfered with his ability to obtain a "fresh start," which is the fundamental purpose of a bankruptcy case. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the U.S. Department of Justice because both agencies are obligated to consider offers in accordance with Code Sec. 7122, without regard to the taxpayer's status. Back references: ¶40,630.108 and ¶41,130.18.


STONE, Bankruptcy Judge: For the reasons noted in the Court's contemporaneous Memorandum Decision, it is


that the United States shall process and consider the Plaintiff's offer in compromise made as a part of his proposed Chapter 11 Plan in accordance with normal procedures and policies applicable to such offers made by taxpayers who are not currently bankruptcy debtors and consistently with the ruling made in such Decision.

The clerk is directed to send copies of this Order and the Memorandum Decision to the Debtor, Mark A. Black, Esq., D. Brian Simpson, Esq., Thomas L. Eckert, Esq., and to the Office of the United States Trustee.


This adversary proceeding places before the Court whether the policy of the Internal Revenue Service to refuse to process or consider "offers in compromise" of a taxpayer's tax liabilities if the taxpayer is a debtor in a pending bankruptcy proceeding violates provisions of the Bankruptcy Code. For the reasons stated below the Court holds that while such policy does not violate 11 U.S.C. §525(a), it does not conflict with the "fresh start" policy of the Bankruptcy Code and is not either authorized or required by applicable statutory provisions. Accordingly, the Court holds that the United States is obliged to provide to bankruptcy debtors who have filed their required returns the same statutory right to have their offers in compromise of their tax liabilities considered as it provides to all taxpayers who are similarly situated other than not being current bankruptcy debtors.


The Court will adopt the Joint Stipulation of Facts, a copy of which is attached as an exhibit to this decision, which has been submitted by the parties, as its Findings of Fact for the purpose of this ruling.


This Court has jurisdiction of this dispute by virtue of the provisions of 28 U.S.C. §§1334(a) and 157(a) and the delegation made to this Court by Order of the District Court entered July 24, 1984. This is a "core" bankruptcy proceeding pursuant to 28 U.S.C. §157(b)(2)(O).

This Court has been cited to only one reported decision dealing with the precise issue presented in this adversary proceeding, Mills v. United States ( In re Mills) [ 2000-1 USTC ¶50,103], 240 B.R. 689 (Bankr. S.D. W.Va. 1999), which compelled the IRS "to consider offers in compromise submitted by bankruptcy debtors in accordance with the provisions of §7122 and the procedures set forth by the Secretary which are not in conflict with this Order." [ 2000-1 USTC ¶50,103], 240 B.R. at 698. The government, although it did not appeal the ruling in question, argues that it was wrongly decided.

Section 525(a) of title 11 of the United States Code provides, with certain exceptions not relevant to the present dispute, that

a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, ... a person that is or has been a debtor under this title ... solely because such bankrupt or debtor is or has been a debtor under this title ....

The Court has considered the rationale of the Mills decision as well as the arguments of the government. While it has great respect for Judge Ronald G. Pearson, who authored such opinion, it agrees with the government's arguments that section 525(a) by its terms, even broadly construed, does not prohibit the IRS practice. It concludes that a statutorily authorized procedure by which a taxpayer may submit an offer to the government in compromise of his tax liabilities and have the government consider such offer is not a "license, permit, charter, franchise, or other similar grant" made available by the government to its citizens. It agrees with the interpretation of the United States Court of Appeals for the Sixth Circuit that the language chosen by Congress indicates that the intended scope of the statute is the "government's role as a gatekeeper in determining who may pursue certain livelihoods" and to prohibit governmental actions punishing bankruptcy debtors "by denying them permission to pursue certain occupations or endeavors." Toth v. Michigan State Housing Devel. Auth., 136 F.3d 477, 480 (6 th Cir. 1998), cert. denied, 524 U.S. 954 (1998). Congress could easily have chosen language which would prohibit any governmental discrimination against bankruptcy debtors, but it did not do so. While the Court agrees that it should interpret the statute broadly enough to fulfill the evident intent of Congress in addressing situations comparable to those enumerated in the statutory language, it should not attempt to stretch the statute the cover other types of governmental discrimination different in kind from that subject to the statute. "The plain language of legislation should be conclusive except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." United States v. Ron Pair [ 89-1 USTC ¶9179], 489 U.S. 235, 242 (1989).

In its memorandum the government concedes that even if its policy does not violate the "literal provisions" of section 525(a), the court "must then determine whether the law or policy is contrary to the fresh start policy underlying the Bankruptcy Code." (Memorandum at p. 3). While not conceding that the policy under attack is discriminatory to bankruptcy debtors, counsel for the government argues that the "only real discriminatory effect is to deny them an unrealistic desire for special relief from the nondischargeability provisions of the Bankruptcy Code." (Memorandum at. P. 11) He further contends that, "The only real impairment to a fresh start for the debtor is the legislative decision to exempt unpaid priority tax claims from discharge in bankruptcy." (Memorandum at p. 12) The Court finds these contentions to be unpersuasive and concludes that the subject policy directly conflicts with the policies underlying the Bankruptcy Code in general and the reorganization provisions of Chapter 11 in particular for the following reasons:

1. The issue is not whether this Court can compel the government to compromise tax liabilities which are non-dischargeable in bankruptcy, it clearly cannot. The Debtor does not seek a determination that such a compromise can be determined by the Court and figuratively shoved down the government's throat, simply that the government ought to be willing to give the same consideration to his "offer in compromise" that it would do so for a taxpayer who is not currently the subject of a bankruptcy case.

2. A taxpayer outside of bankruptcy who submits an "offer in compromise" to the IRS need make no contention that he doesn't "owe" the total sum representing his tax liability. He may assert simply that he simply is unable within any reasonable amount of time to pay it. Similarly, a bankruptcy debtor who submits an offer to compromise need not argue that his tax liability is dischargeable in bankruptcy, just that the amount and terms of payment offered represent a reasonable indication of his ability to pay the sum for which he is obligated.

3. It is not possible to confirm a Chapter 11 Plan which does not provide for payment in full of the government's priority tax claims. A bankruptcy debtor cannot obtain in Chapter 11 a discharge of his "dischargeable" obligations unless he is able to obtain confirmation of a Plan. 11 U.S.C. §1141(d). On its face a policy which precludes consideration of an offer in compromise from a Chapter 11 debtor and which would require the debtor to obtain dismissal of the case before the government would be willing to even process such an offer interferes with the debtor's ability to proceed with the bankruptcy case and thereby obtain a discharge which would enable him to obtain that "fresh start" which is the fundamental purpose of a bankruptcy case.

4. It is a common fact of life in Chapter 11 cases that the debtor and its creditors ordinarily engage in extensive negotiations to reach a Plan which appropriately modifies the creditors' rights to reflect the debtor's financial realities, thereby enabling the debtor to reorganize and restructure its obligations so that it might continue in business for the ultimate long term benefit of the debtor, the creditors and the other communities of interest affected by the debtor's operations. Certainly governmental creditors may insist on their rights and decline to support a Plan which does not assure them of what the Bankruptcy Code permits them to demand. To honor a policy though which precludes the government from even entering into the process of negotiation not only seems at odds with common sense, but also puts the government at cross-purposes with the beneficial purposes underlying the reorganization provisions of Chapter 11. As the noted treatise, Collier on Bankruptcy, notes:

The hallmark of Chapter 11 is flexibility.... The plan negotiation process is intended to lead normally to a consensual plan under which the debtor and a majority of creditors have agreed to both business and financial plans that offer some realistic chance of success.

7 Collier on Bankruptcy §1100.01 at p. 1100-6 (15 th ed. Rev.). Requiring the government to at least receive and consider a Chapter 11 debtor's offer in compromise is consistent both with the Congressional policy encouraging such offers by taxpayers generally and the purposes of the Bankruptcy system. So far as this Court has been able to discern, it is not inconsistent with any other Congressionally expressed policy. The government has utterly failed to advance any persuasive reasons why its earlier policy regarding offers in compromise, which made no distinction between taxpayers inside or outside of bankruptcy, was changed.

5. The IRS points out that under the statute it may not process an offer in compromise once the case has been referred to the Department of Justice. 26 U.S.C. §7122(a). The statute then goes on to provide, however, that "the Attorney General or his delegate may compromise any such case ..." On this point the Court fully agrees with the following rationale expressed by Judge Pearson in the Mills case:

The fact that the authority to make such a compromise may transfer to the Department of Justice after a taxpayer has filed bankruptcy is of no importance. It does not matter which agency of the government has authority over compromise; whichever agency is responsible for such compromise must actually consider them based on the information contained in such offers and in accordance with the procedures set forth in §7122, without regard to whether the applicant has filed bankruptcy.

Offer in compromise during bankruptcy

In re Mills, supra [ 2000-1 USTC ¶50,103], 240 B.R. at 697.


On the basis of the foregoing reasoning, the Court will enter an order requiring the United States to process and consider the Debtor's offer in compromise of his tax liabilities. The Court further expresses the hope that the government will reconsider its current policy refusing to receive such offers from taxpayers who are currently in bankruptcy.

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