In re Warren UZIALKO and Ellen Uzialko, Debtors., United States Bankruptcy Court, E.D. Pennsylvania., 339 B.R. 579, No. 05-19978 SR., March 29, 2006

In re Warren UZIALKO and Ellen Uzialko, Debtors.

United States Bankruptcy Court, E.D. Pennsylvania.

339 B.R. 579

No. 05-19978 SR.

March 29, 2006.

Richard B. Gelade, Trenton, NJ, for Debtors.

OPINION

STEPHEN RASLAVICH, Bankruptcy Judge.

I. I ntroduction

Before the Court is the Debtors' Motion to Compel IRS to Consider Offer in Com╜promise. In their Motion, the Debtors seek to compel the United States of Amer╜ica, on behalf of its agency, the Internal Revenue Service (the "IRS") to consider an offer-in-compromise submitted by the Debtors to the IRS during the pendency of this case. The IRS opposes the Motion. The Court held a hearing on this matter on March 3, 2006. For the reasons stated herein, the Court will deny the Debtors' Motion.

II. Background

The Debtors in this case filed a Chapter 13 petition and plan on July 22, 2005. The IRS filed a proof of claim setting forth a secured claim of $288,283.30 and an unse╜cured priority claim of $961.36. On De╜cember 9, 2005, the IRS filed an objection to the Debtors' plan on the basis that it was underfunded and only offered to pay the IRS the amount of $140,000. Wells Fargo, the New Jersey Division of Taxa╜tion and the Commonwealth of Pennsylva╜nia, Department of Revenue, also filed ob╜jections to the plan. On March 2, 2006, the Debtors filed the instant motion seek╜ing to compel the IRS to consider an offer-in-compromise of its federal tax liability.

III. Discussion

The Court must decide whether it has the authority to compel the IRS to consid╜er an offer-in-compromise submitted by the Debtors. An offer-in-compromise is an offer submitted by a taxpayer to pay less than what is owed in federal taxes. The Court will first examine the IRS' stat╜utory authority governing offers-in-com╜promise submitted by taxpayers both in and outside of bankruptcy. Next, the Court will examine the few cases that have squarely addressed this issue.

A. The IRS' Statutory Authority

The sole statutory authority that gov╜erns the consideration of IRS Form 656 offers-in-compromise by the United States Treasury arises from 26 U.S.C. ╖ 7122. See In re Mills, 240 B.R. 689, 692 (Bankr. S.D.W.Va.1999). An offer-in-compromise of a tax liability pursuant to ╖ 7122 "must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary" (26 C.F.R. ╖ 301.7122-1(d)(1)) and "[t]he IRS may . . . return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable ." (26 C.F.R. ╖ 301.7122-1(d)(2) (emphasis added)). Prior to Febru╜ary 12, 1997, the IRS routinely processed offers-in-compromise of taxpayers who met the processability criteria, regardless of whether the applicants had filed for bankruptcy protection. See Mills, 240 B.R. at 692. In February 1997, however, the IRS revised its processability criterion on Form 656 to state "[i]f a taxpayer is in bankruptcy at the time the offer is submit╜ted we will return the offer as nonprocess╜able." Id.

Instead, as set forth in IRS Chief Coun╜sel Notice 2004-25 (July 12, 2004), the IRS "considers payment proposals submitted by taxpayers in bankruptcy through the plan confirmation process." See In re 1900 M Restaurant Associates, Inc., 319 B.R. 302, 304 (Bankr.D.D.C.2005). Rather than employing the bulk processing opera╜tions established for the high volume of administrative offers-in-compromise that the IRS receives, the Chief Counsel Notice indicates that the IRS vests in employees of the IRS' office who handle insolvency matters the responsibility "to consider payment proposals, usually in the form of a proposed plan, regarding the payment of the [IRS'] claims in a bankruptcy case." Id. The Notice goes on to articulate sever╜al factors for IRS insolvency employees to consider in making a discretionary deter╜mination regarding whether to accept a plan that provides less than what is statu╜torily required to be paid under the Bankruptcy Code. Id. Among the criteria is "whether creditors with the same priority, such as state taxing authorities, are ac╜cepting less than full payment of their claims." Id .

B. Legal Precedent

Several cases have addressed the issue of whether a bankruptcy court has the authority to compel the IRS to consider offers-in-compromise from taxpayers in bankruptcy during the pendency of a bankruptcy case. The United States Bankruptcy Court for the Southern Dis╜trict of West Virginia was the first court to address this issue in 1999 in In re Mills, 240 B.R. 689. In Mills, a Chapter 13 debtor brought an adversary proceeding challenging the IRS' policy of not process╜ing offers-in-compromise of federal tax lia╜bility that are submitted by taxpayers in bankruptcy. Specifically, the debtor asked the court to find that the IRS' policy vio╜lates 11 U.S.C. ╖ 525(a) ¹ which prohibits discrimination against individuals in bank╜ruptcy on the sole basis of their bankrupt╜cy filing. Id. at 691. The debtor asserted that the court could use its equitable pow╜ers under 11 U.S.C. ╖ 105 ² to compel the IRS to consider such offers-in-compromise. Id.

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^1. ═ Section 525(a) provides in relevant part that:

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

11 U.S.C. ╖ 525(a) (emphasis added).

^2. ═ Section 105 of the Bankruptcy Code pro╜vides in pertinent part:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the rais╜ing of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

11 U.S.C. ╖ 105(a).

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The court held that the IRS' policy vio╜lates ╖ 525(a) by denying taxpayers, based solely on their bankruptcy filing, the same opportunity accorded to other non-bank╜rupt taxpayers to attempt to negotiate a compromise of their tax obligations. Id. at 698. Although the court acknowledged that the decision on whether to accept an offer-in-compromise is within the sole dis╜cretion of the IRS and cannot be com╜pelled, it found nonetheless that it had the authority to compel the IRS to at least consider such offers. Id . at 695. Conse╜quently, the court mandated that the IRS process the debtor's offer-in-compromise.

Since Mills , other courts have agreed that they can compel the IRS to consider offers-in-compromise by taxpayers in bankruptcy, but on different grounds. One such case is In re Macher , 2003 WL 23169807 (Bankr.W.D.Va. June 5, 2003), a case involving a Chapter 11 individual debtor. In Macher, the United States Bankruptcy Court for the Western District of Virginia disagreed with Mills and held that the IRS' policy does not violate ╖ 525(a). Specifically, the court held that ╖ 525(a), by its terms, even broadly con╜strued, does not prohibit the IRS' practice: "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 consid╜er such offer is not a ▒license, permit, charter, franchise, or other similar grant' made available by the government to its citizens." Macher, 2003 WL 23169807 at *l. Accordingly, the court found ╖ 525(a) does not apply.

Nevertheless, the Macher court went on to hold that the IRS' policy does conflict with the policies underlying the Bankrupt╜cy Code in general and the reorganization provisions of Chapter 11 in particular. Id. at *2. The court opined that a policy that precludes consideration of an offer-in-com╜promise from a Chapter 11 debtor, and that would require the debtor to obtain dismissal of his bankruptcy case before the government would be willing to even process such an offer, interferes with the debtor's ability to proceed with the bank╜ruptcy case and thereby obtain a dis╜charge that would enable him to obtain a "fresh start" that is a fundamental pur╜pose of a bankruptcy case. Id. at *2. Further, the court observed that it is com╜mon in Chapter 11 cases for a debtor and his creditors to engage in negotiations to reach a plan that 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 to the ultimate benefit of every╜one involved. Id. Although recognizing that a creditor may insist upon its rights and decline to support a plan, the court found that "[t]o honor a policy [ ] which precludes the government from even en╜tering 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 un╜derlying the reorganization provisions of Chapter 11." Id. Accordingly, finding that requiring the government to at least re╜ceive and consider a Chapter 11 debtor's offer-in-compromise is consistent with con╜gressional policy encouraging such offers and the purposes of the Bankruptcy sys╜tem, the Macher court entered an order requiring the United States to process and consider the debtor's offer-in-compromise. Id. at *3. Accord In re Holmes, 298 B.R. 477 (Bankr.M.D.Ga.2003) (holding that (1) an offer-in-compromise is not a "license" within the meaning of the Bankruptcy Code's anti-discrimination provision and therefore the IRS' refusal to receive and consider the debtor's offer-in-compromise was not prohibited by ╖ 525; (2) the IRS' internal policy of not considering an offer-in-compromise during the pendency of a Chapter 11 proceeding did not have the force and effect of law; and (3) an order directing the IRS to receive and consider the debtor's offer-in-compromise was nec╜essary and appropriate to carry out the congressional intent found in Chapter 11 of the Code); In re Peterson, 321 B.R. 259 (Bankr.D.Neb.2004) (refusing to enforce non-mandatory IRS agency procedure and compelling the IRS to process offer-in-compromise or take seriously its stated position that it will, in good faith, consider accepting less than the Bankruptcy Code requires in a Chapter 13 plan).

In January 2005, however, the United States Bankruptcy Court for the District of Columbia took the opposite view in In re 1900 M Restaurant, 319 B.R. 302. The 1900 M Restaurant case involved a Chap╜ter 11 corporate debtor. That debtor brought an adversary proceeding to com╜pel the IRS to process its offer-in-compro╜mise of its federal tax liability. On cross-motions for summary judgment, the court denied the debtor's motion but granted the IRS' motion, finding for several reasons that it did not have the authority to compel the IRS to consider offers-in-compromise. In a detailed and comprehensive opinion, the court found the primary issues to be two-fold: (1) whether the IRS' stated fail╜ure to process an offer-in-compromise is a violation of the Code's discrimination pro╜vision, 11 U.S.C. ╖ 525(a), thereby making it invalid; and (2) whether the Court alter╜natively has the authority to enter an order pursuant to 11 U.S.C. ╖ 105 compel╜ling the IRS to consider the debtor's offer-in-compromise.

1. ╖ 525(a)

With regard to the first issue, the court agreed with Macher and Holmes in con╜cluding that ╖ 525(a) does not apply be╜cause the IRS' policy does not adversely impact any "license, permit, charter, fran╜chise" or other similar "grant." See 1900 M Restaurant, 319 B.R. 302, 305. Accord╜ingly, the court concluded that the debtor was entitled to no relief under ╖ 525(a). Id.

2. ╖ 105(a)

Turning its attention to the second issue of whether the court can use ╖ 105 to compel the IRS to consider offers-in-com╜promise, the court found that the relief the debtor was seeking was in the nature of mandamus because the debtor was seeking to compel performance of an alleged duty by the IRS. ³ Id . The court held, however, that it would be inappropriate to use the mandamus remedy, which is limited to compelling the performance of strictly ministerial duties, and which is unavailable when, as here, an alternative adequate remedy (the plan confirmation process) is available. Id. at 313. The remedy of mandamus "is a drastic one, to be invoked only in extraordinary circumstances" and is only available if (1) the plaintiff has a clear right to relief; (2) the defendant has a clear duty to act; and (3) there is no other adequate remedy available to the plaintiff. Id. (citations omitted).

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^3. ═ The court determined that mandamus may be granted under ╖ 105 given its legislative history indicating its similarity to the All Writs Statute. See 1900 M Restaurant, 319 B .R. at 307.

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(a) No Duty

The court held first that the IRS owes no clear duty to the debtor under ╖ 7122 to process an offer-in-compromise which its Revenue Procedure has specifically treated as nonprocessable when a bank╜ruptcy case of the taxpayer is pending. Id . Further, the court observed that ╖ 7122 "does not command the Secretary to consider an offer-in-compromise; it only provides that the Secretary or the Depart╜ment of Justice, as the case may be, may compromise a civil tax liability." Id. (em╜phasis in original). The court found that the IRS' discretion to compromise also carries with it the discretion not to exer╜cise its discretion. Id.

Moreover, the court determined that none of the statutory limitations placed on the IRS' discretion under ╖ 7122(a) (that arise implicitly from ╖ 7122(c)) are applica╜ble. Id . at 310. In other words, the IRS' decision under the Revenue Procedures to not process offers-in-compromise from tax╜payers in bankruptcy does not run afoul of any statutory restrictions. Id. Further╜more, the court found that the only statu╜tory provision that provides for judicial review of decisions regarding offers-in-compromise is not applicable. Id . Hence, the court concluded it ought not review the IRS' discretionary decision to treat as non╜processable the debtor's offer-in-compro╜mise. Id.

Even if review were available, however, the court stated that it would not view as an abuse of discretion the IRS' decision to treat the debtor's offer-in-compromise as nonprocessable when the debtor is in bankruptcy. Id. at 311. Rather, the court held that "[w]hen a bankruptcy case is pending, the IRS rationally can determine that it is inappropriate to assay the treat╜ment of the IRS' claims of offer-in-compro╜mise procedures in isolation from the terms of a proposed plan . . . . Even when a taxpayer's offer-in-compromise includes a proposed plan, the debtor is not in a position to guarantee that it can honor an acceptance of the offer-in-compromise be╜cause a proposed plan's effectiveness is contingent on confirmation of the plan by the bankruptcy court." ⁴ Id. Hence, the court found that it makes sense for the IRS to decide that treatment of the IRS' claims in bankruptcy must be addressed by the IRS by way of the plan confirma╜tion process instead of the offer-in-compro╜mise process. Id. In view of the above, the court held that it cannot find treating offers-in-compromise as nonprocessable vi╜olates any clear nondiscretionary duty of the IRS. Id. As such, the court held that mandamus is unavailable to compel the IRS to consider the debtor's offer-in-com╜promise. Id.

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^4. ═ The Debtors in the instant case argue that the 1900 M Restaurant case is distinguishable because it involved a corporate Chapter 11 debtor, as opposed to an individual Chapter 13 debtor, and because the debtor in 1900 M Restaurant was seeking to compel consider╜ation of an offer-in-compromise before the debtor had submitted a plan of confirmation. A review of the opinion, however, confirms that neither of these distinctions is controlling. First, although the court found that the lack of a proposed plan made the IRS' posi╜tion even more compelling, nothing alters the court's ultimate holding that the plan confir╜mation process-not the offer-in-compromise process-is the appropriate forum for negotiating tax payments when a debtor is in bank╜ruptcy. Second, nothing in the opinion can be read as applicable only to corporate, as opposed to individual debtors, such as would make the court's holding relevant to only one but not the other.

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(b) Adequate Alternative Remedy Ex╜ists

The court also held that mandamus is unavailable on an alternative ground. Mandamus is an extraordinary remedy, available only if other relief is inadequate. Id. at 311-12. The court found that pro╜cessing of a proposed plan through the plan confirmation process is an adequate alternative remedy for the relief sought even though it may not be through the means the debtor desires. Id . at 312. Given that an adequate alternative remedy exists, therefore, the court found that man╜damus is not an appropriate remedy.

(c) Alternate ╖ 105(a) Relief Not Jus╜tified

Finally, the court declined to follow the holdings of Macher and Holmes that "the common sense realities of bankruptcy re╜organizations" and "fresh start" principles justify alternative relief under ╖ 105(a). ⁵ Id. at 313. First, the court noted that Macher and its progeny fail to fully consid╜er the dynamic which arises from a bank╜ruptcy case and which "warrants the IRS being allowed to address treatment of its claims other than through the Form 656 offer-in-compromise process". Id. The court observed that the Chief Counsel No╜tice makes clear the IRS' willingness, prin╜cipally in the context of addressing a pro╜posed plan, to consider agreeing to less than the full amount of tax claims. Id. Moreover, the court observed that the No╜tice lays out sound policy grounds for the IRS' decision to address treatment of tax claims in a bankruptcy case in the context of a proposed plan instead of through an offer-in-compromise. Id. Recognizing that the ultimate goal of a chapter 11 case generally ought to be to achieve a confirmed plan, and that chapter 11 enables creditors to assess a proposed plan, and affords creditors participation in the plan confirmation process, the court determined that requiring the IRS to process a Form 656 offer-in-compromise is "neither neces╜sary nor appropriate to carry out the pro╜visions of the [Bankruptcy Code]" as re╜quired to grant ╖ 105(a) relief. Id . at 314.

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^5. ═ By invoking ╖ 105(a), a debtor is not con╜fined to seeking mandamus relief. See 1900 M Restaurant, 319 B.R. at 313. The debtor in 1900 M Restaurant alternatively urged that the requested relief was justified under ╖ 105(a) as necessary to facilitate reorganiza╜tion and other purposes of the bankruptcy process. Id .

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The court further observed that "section 105(a) does not provide bankruptcy courts with a roving writ, much less a free hand. The authority bestowed thereunder may be invoked only if, and to the extent that, the equitable remedy dispensed by the court is necessary to preserve an identifi╜able right conferred elsewhere in the Bankruptcy Code." See id. at 314 (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); Noonan v. Sec'y of HHS (In re Ludlow Hosp. Soc'y, Inc. ), 124 F.3d 22, 27 (1st Cir.1997)). The "common sense reali╜ties of bankruptcy reorganization", the court held, are not identifiable rights in the Bankruptcy Code. 1900 M Restaurant, 319 B.R. at 315. Similarly, the court held that the "fresh start" principle is not a specific statutory provision and offers no basis for commanding the IRS to process a Form 656 offer-in-compromise. Id. For all of these reasons, the court entered sum╜mary judgment on behalf of the IRS.

C. Analysis

This Court finds the reasoning and anal╜ysis of the 1900 M Restaurant case most compelling. As such, it will adopt that reasoning in holding that the IRS in this case cannot be compelled to process the Debtors' offer-in-compromise.

First, the Court agrees that the IRS' policy does not violate the Bankrupt╜cy Code's anti-discrimination provision. The policy of electing not to process offers-in-compromise submitted by those in bankruptcy does not adversely impact any "li╜cense, permit, charter, franchise" or other similar "grant" as provided for in ╖ 525(a). Consequently, the Debtors are not entitled to relief based on ╖ 525(a).

Second, to the extent that the Debtors are seeking the remedy of manda╜mus under ╖ 105(a), the Court finds that such a remedy is not appropriate under the circumstances. The Court agrees with the court's finding in 1900 M Restaurant that the IRS owes no clear duty to the Debtors and that the IRS' decision to pro╜cess or not process offers-in-compromise lies solely within its discretion. Further╜more, the Court agrees that an adequate alternative remedy exists i.e., the plan con╜firmation process-for the Debtors to at╜tempt to obtain a compromised tax liability from the IRS. For these reasons, the Court finds that mandamus is not an ap╜propriate remedy under ╖ 105(a).

Third, to the extent that the Debtors are asking the Court to exercise its general powers under ╖ 105(a) "to car╜ry out the provisions" of the Code, the Court finds that requiring the IRS to ne╜gotiate with the Debtors outside of the plan confirmation process does not further the provisions of the Code, nor does it foster the ultimate goal of achieving a confirmed plan. Moreover, the Court sees no reason why the IRS ought to be treated differently than any other creditor in en╜joying the freedom to negotiate with the Debtors through the plan confirmation process. Furthermore, the Court agrees that the "common sense realities of bank╜ruptcy reorganization" or "fresh start" principles discussed in Macher and Holmes, although important, are not "iden╜tifiable rights" conferred in the Code nec╜essary for the Court to invoke its ╖ 105(a) authority. See 1900 M Restaurant, 319 B.R. at 314 ("the authority bestowed [under ╖ 105(a)] may be invoked only if, and to the extent that, the equitable remedy dispensed by the court is necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code."). For these reasons, the Court finds that it does not have the authority under ╖ 105(a) to compel the IRS to negotiate outside of the plan confirmation process. Accordingly, the Court shall deny the Debtors' Motion.

An appropriate Order follows.

ORDER

AND Now , upon consideration of the Debtors' Motion to Compel IRS to Consid╜er Offer in Compromise, and opposition thereto, and after a hearing held thereon on March 3, 2006, it is hereby:

ORDERED , that for the reasons stated in the accompanying Opinion, the Motion is DENIED .

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