Recent Tax Court Case: Unassessed Taxes are Not Discharged in Bankruptcy

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
Jason@FreemanLaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

A recent Tax Court opinion demonstrates the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  The case emphasizes the need for an attorney knowledgeable in both tax and bankruptcy cases to ensure that the the best, most-viable tax arguments are put forward in the proceedings.

A brief outline of the case is set forth below:

Barnes v. Comm’r, T.C. Memo. 2021-49 | May 4, 2021 | Lauber, J. | Dkt. No. 6330-19L

Short SummaryThe taxpayers challenged a proposed deficiency in the Tax Court related to their 2003 tax year.  Prior to the Tax Court issuing an opinion, the taxpayers filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia.  The IRS participated in the bankruptcy proceedings and filed a proof of claim for tax deficiencies—however, the 2003 tax year was not included.

After the plan was confirmed, the IRS moved to lift the automatic stay to permit the Tax Court to render a decision on the taxpayers’ 2003 tax year.  The bankruptcy court granted the motion, and the Tax Court held that taxpayers owed deficiencies, penalties, and additions to tax for 2003 as determined in the notice of deficiency.

The IRS later assessed the 2003 liability and issued a Notice of Federal Tax Lien for the taxpayers’ 2003, 2008, and 2009 tax years.  The taxpayers filed a timely request for a Collection Due Process (CDP) hearing.  The IRS Settlement Officer agreed to a partial release of the NFTL, finding that the 2008 and 2009 tax liabilities were including in the taxpayers’ bankruptcy.  However, the SO concluded that the lien filing as to 2003 was appropriate.

Key Issue:  Whether the SO abused its discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge.

Primary HoldingsThe SO did not abuse his discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge because unassessed tax liabilities are nondischargeable.

Key Points of Law:

InsightThe Barnes decision shows the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  In these cases, taxpayers should ensure that they have an attorney knowledgeable in both tax and bankruptcy cases to ensure that their best arguments are put forward in those two proceedings.

 

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