In Minor v. United States, Bankruptcy Case No. 2:13-bk-23787-BR (C.D. Cal. 2021), the district court addressed a debtor’s claim that a stipulation by the IRS barred the collection of taxes for the year covered by the stipulation. Here, the district court affirmed the dismissal of the adversary proceeding based on the IRS request for a judgment on the pleadings.
Mr. Minor filed his chapter 7 bankruptcy petition on May 24, 2013. Already you have a clue that this will not be an ordinary chapter 7 case, since almost eight years have elapsed after the filing of the bankruptcy petition. He received a discharge on May 18, 2015, almost two years after filing the bankruptcy petition. On March 9, 2018, the IRS filed an amended proof of claim for $24,857,210.48 for secured liabilities, $997,869.07 for priority liabilities and $61,398.90 as a general unsecured claim.
Mr. Minor also owed taxes to the state of California, which filed its own claim. The bankruptcy estate did not have sufficient assets to satisfy the state and federal claims for taxes. The IRS and the state entered into a stipulation splitting the available assets. With respect to the IRS claim the stipulation provided:
The IRS Claim shall be allowed as a secured claim in the amount of the IRS Sotheby’s Share in the amount of $586,604.12 (the ‘IRS Secured Claim’), a priority claim in the amount of $997,869.07 (the ‘IRS Priority Claim’), a general unsecured claim in the amount of $19,706,386.41, and a subordinated claim for penalties in the amount of $4,625,648.18.
The court approved the stipulation. Afterward, the IRS notified Mr. Minor that he still owed $462,432 for 2009. He brought this action arguing that the stipulation together with his discharge prevented that IRS from coming after him at this point to collect the unpaid taxes.
The parties agreed that the taxes for 2009 had priority status since the return was due less than three years prior to the filing of the bankruptcy petition (I assume he filed a request for extension of time to file the 2009 return since the normal due date for 2009 is outside the three year period.) The parties agreed that priority taxes are excepted from discharge under BC 523(a)(1)(A).
At issue is the impact of the stipulation on the ordinary application of the discharge rules. The IRS argues that the stipulation did not impact discharge but merely divided the available property in the estate. Mr. Minor cites bankruptcy cases from other districts arguing that a stipulation can trigger discharge.
The bankruptcy and district courts point out that the stipulation did not discuss discharge and that Mr. Minor was not a party to the stipulation. Because bankruptcy courts, pursuant to BC 505, can determine the amount of tax, a stipulation of a tax creditor to an amount of tax can serve as a final judgment binding the tax authority to the amount of tax stipulated. That type of stipulation would address the merits of the liability and not simply split available assets for distribution from the estate. Mr. Minor’s argument draws from cases involving a contest of the tax liability itself and seeks to import the result of a stipulation in that situation to a division among tax creditors in the same class attempting to divide a limited pot of funds. The order of the bankruptcy court regarding the stipulation in this case binds the IRS and California with respect to the division of the funds but not with respect to their underlying liabilities.
Mr. Minor was not in privity with the parties entering into the stipulation. No identity of claims exists in his case that would support a determination that the IRS bound itself to a lower recovery with respect to taxes excepted from discharge simply because it accepted a certain amount of payment from the available funds. In describing the outcome and the arguments the court observed:
It must be noted that the United States’ main argument in this action seems to be that Minor’s 2009 tax debt is nondischargeable. However, as explained in Breland, 474 B.R. at 770, whether Minor’s 2009 tax debt is nondischargeable under § 523(a)(1)(A) is irrelevant. Whether the Stipulation discusses dischargeability is irrelevant. The only pertinent issue here is whether the IRS is bound, by res judicata, to the amount designated as the IRS Priority Claim in the Stipulation Order.
The court correctly notes that even though the 2009 meets the criteria for an exception to discharge, the possibility still exists that the IRS could have stipulated to a lower amount of debt, which could bind it. Even though that possibility exists, that’s not what the IRS did here. The debtor tries to read too much into an agreement between two parties, and the court correctly determines that splitting the available assets does not imply a settlement on the correct amount of the debt or the dischargeability of the debt.