Kipperman v. IRS (In re 800Ideas.com, Inc.)

Summarized by Geoffrey Miller , Dentons US LLP
12 years 7 months ago

Citation:

Kipperman v. IRS (In re 800Ideas.com, Inc.), Case No. 12-1496 (9th Cir. BAP July 22, 2013)

Tag(s):

Ruling:

The Ninth Circuit BAP agreed with the bankruptcy court’s decision that the tax penalties were properly assessed because the trustee failed to demonstrate reasonable cause for his delay in filing the returns and affirmed on this issue. On the other hand, the BAP did not agree that the tax penalties qualified as an administrative expense under § 503(b)(1)(A), reversing the bankruptcy court. The Court reasoned that the tax penalties were not actual, necessary costs of preserving the estate because the penalties were not incurred in the operation of the business. Moreover, the penalties did not fall within the fundamental fairness doctrine espoused in Reading Co. v. Brown and its progeny because the penalty claim did not arise from the trustee’s active wrongdoing and the trustee was not operating the business of the debtor. However, because actual and necessary costs and expenses of preserving the estate may include types of claims other than those listed under § 503(b)(1)(A), the BAP remanded the case to the bankruptcy court to decide if the tax penalties qualified as an administrative expenses under §503(b)(1)(B), (C) or for other reasons.

Procedural context:

The bankruptcy court for the Southern District of California found that the penalties assessed were proper because the trustee failed to demonstrate reasonable cause for his delay in filing the tax returns within the meaning of IRC § 6699. Moreover, the bankruptcy court allowed the claim of the IRS with administrative expense priority as an actual and necessary cost and expense of preserving the estate under § 503(b)(1)(A). The chapter 7 trustee appealed to the Ninth Circuit BAP.

Facts:

Debtor, a California S corporation, filed chapter 7 bankruptcy with its main asset the potential right to an excise tax refund. The chapter 7 trustee requested the debtor’s accountants prepare the tax return. Due to the trustee’s lack of diligence in supervising the accountants and because the trustee thought this would be a “no asset” case, the tax returns of 2008 and 2010 were filed thirty-three months late. IRS assessed penalties against chapter 7 debtor under 26 U.S.C. (IRC) § 6699 due to the chapter 7 trustee’s failure to timely file debtor’s corporate tax returns. The IRS filed a claim with the bankruptcy court for the penalties with administrative priority. The trustee objected to the penalties arguing that they should not be afforded administrated expense status. Also, the trustee objected to the assessment of the penalties because there was reasonable cause in the delay in filing in that the late filing was based on his mistaken belief that the insolvency of the estate automatically relieved him of the requirement to file the returns.

Judge(s):

Jury, Bason, and Pappas

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