In re: DONALD WAYNE BUSH and KIMBERLY ANN BUSH

Filing 23

ENTRY ON JUDICIAL REVIEW: For the reasons set forth above, the Bankruptcy Court erred in determining that it had jurisdiction to determine the amount of tax penalties owed by the Debtors. The Debtors' Motion to Determine Tax Liability must be DENIED. Accordingly, the Bankruptcy Court's rulings are REVERSED and this case is REMANDED to the Bankruptcy Court for further proceedings consistent with this ruling ***SEE ENTRY FOR ADDITIONAL INFORMATION***. Signed by Judge William T. Lawrence on 8/12/2016. (DW)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
In re:

)
)
) Cause No. 1:15-cv-1318-WTL-DKL
)
) Bankruptcy Cause No. 14-9053-JMC
) Chapter 7
)

DONALD WAYNE BUSH and
KIMBERLY ANN BUSH,
Debtors.

ENTRY ON JUDICIAL REVIEW
This cause is before the Court on an appeal by the United States of America of two
rulings of the Bankruptcy Court: an order granting the Debtors’ Motion to Determine Tax
Liability and an order denying the United States’ motion to reconsider that order. For the
reasons set forth below, the bankruptcy court’s rulings are REVERSED, the Debtors’ first
motion to strike (Dkt. No. 18) is DENIED, and the Debtors’ second motion to strike (Dkt.
No. 20) and the United States’ motion to expedite (Dkt. No. 22) are DENIED AS MOOT.
I.

BACKGROUND

On September 6, 2013, the IRS issued a Notice of Deficiency to the Debtors asserting tax
deficiencies in the amount of $107,034 and fraud penalties in the amount of $80,275.50 (75% of
the taxes owed) for tax years 2009, 2010, and 2011. On September 23, 2013, the taxpayers filed
a petition with the United States Tax Court, which had the effect of barring the IRS from
assessing or collecting the tax until the Tax Court case was concluded. During the Tax Court
proceedings, the parties reached stipulations that reduced the tax deficiencies for the three years
to a total of $100,136. The only issue thus remaining before the Tax Court was whether the
Debtors’ returns were fraudulent, which would result in the assessment of 75% fraud penalties

under IRC § 6663(a), or negligent, which would result in the assessment of 20% penalties under
IRC § 6662(a).
On September 30, 2014, the morning the Tax Court trial was scheduled to begin, the
Debtors filed a Chapter 13 bankruptcy petition, which automatically stayed the commencement
of the Tax Court trial. In response, the United States filed an emergency motion to lift the
automatic stay. The United States’ motion was denied by the Bankruptcy Court.
The Debtors filed their schedules of assets and liabilities on October 14, 2014, listing
assets worth $308,748.00 and liabilities of $281,750. The liabilities did not include federal and
state taxes; the Debtors listed the amount of these liabilities as “unknown,” but noted that the
federal tax liability was “$100,000ish.”
On October 15, 2014, the Debtors filed a Notice of Conversion to Chapter 7. The next
day, the IRS filed a Proof of Claim, which was objected to by the Debtors and which was
amended several times over the course of the next several months. As noted above, the parties
eventually stipulated that the amount of taxes owed by the Debtors (excluding any penalties and
interest) was $100,136.
In the meantime, on December 28, 2014, the Debtors filed a Motion to Determine Tax
Liability pursuant to 11 U.S.C. § 505 (“§ 505 motion”). The Debtors stated in the motion that
because they believed they would be able to reach an agreement with the IRS with regard to the
amount of tax owed, the primary dispute was whether the IRS was entitled to the 75% tax
penalty it sought. Accordingly, they asked the Bankruptcy Court to “establish that IRS is owed
the tax, but not the fraud penalty.”
The Bankruptcy Court issued the Debtors a general discharge on March 16, 2015. This
lifted the automatic stay and permitted the Tax Court proceeding to resume. The Tax Court

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scheduled a trial for October 2015. This trial eventually was continued to permit resolution of
this appeal.
The United States responded to the Debtors’ § 505 Motion on May 19, 2015, asking that
the Bankruptcy Court dismiss the motion for lack of jurisdiction or, alternatively, that the
Bankruptcy Court abstain from deciding the tax issue in favor of allowing it to proceed before
the Tax Court. After the motion was fully briefed and a hearing was held, the Bankruptcy Court
granted the Debtors’ § 505 Motion; it also denied the United States’ subsequent motion to
reconsider that ruling. The United States filed a Notice of Appeal and a Motion for Leave to
Appeal those rulings, which this Court granted. The issues presented are now ripe for this
Court’s review.
II. PRELIMINARY MATTERS
There are three ancillary motions to resolve before turning to the merits of the United
States’ appeal. First, the Debtors move to strike the United States’ reply brief as untimely. As
the United States correctly points out, the Debtors’ calculation of the date the reply brief was due
failed to account for the additional three days “for mailing” that are added pursuant to Fed. R.
Bankr. P. 9006(f). The reply brief was not late, and the motion to strike (Dkt. No. 18) is
DENIED.
Next, the Debtors have moved to strike the declaration of the Trustee that was attached to
the United States’ reply brief because it is not part of the Record on Appeal. As it is not
necessary for the Court to consider that declaration in ruling on this appeal, the motion to strike
(Dkt. No. 20) is DENIED AS MOOT.
Finally, the United States filed a Request to Expedite Decision and Statement Regarding
Oral Argument (Dkt. No. 22). The Court has determined that oral argument is not necessary, as

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the parties have thoroughly briefed the relevant issues. The request to expedite is DENIED AS
MOOT.
III. DISCUSSION
The United States argues that the Bankruptcy Court erred when it found that it had
jurisdiction to determine the amount of the Debtors’ tax penalties or, alternatively, that the
Bankruptcy Court should have abstained from making that determination in favor of permitting
the Tax Court proceeding to go forward. When reviewing a decision of the Bankruptcy Court,
conclusions of law made by the Bankruptcy Court are reviewed de novo, In re Jepson, 816 F.3d
942, 944 (7th Cir. 2016), while a Bankruptcy Court’s decision whether to abstain is reviewable
only for an abuse of discretion, Matter of U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997)
(citations omitted).
“The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded
in, and limited by, statute.” Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). Pursuant to 28
U.S.C.A. § 1334(b), bankruptcy jurisdiction is limited to “civil proceedings arising under title
11, or arising in or related to cases under title 11.” Id. The Debtors, citing In re Luongo, 295
F.3d 323 (5th Cir. 2001), argue that the statute pursuant to which their motion is brought, 11
U.S.C. § 505, independently grants bankruptcy courts jurisdiction to decide the tax liability of a
debtor.1 While it is true that some courts have so held, the Court disagrees that § 505 permits a
bankruptcy court to exercise jurisdiction over matters that do not otherwise satisfy 28 U.S.C.A. §
1334, the statute that establishes bankruptcy jurisdiction. See In re Johnston, 484 B.R. 698, 712
(Bankr. S.D. Ohio 2012) (holding that § 505 is not an independent grant of jurisdiction) (citing

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The Debtors cite to language in IRS Publication 508 that they believe supports their
position. Even assuming that the Debtors’ reading of the publication is correct, subject matter
jurisdiction obviously cannot be created by the “admission” of a party.
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In re Swain, 437 B.R. 549, 562 (Bankr. E.D. Mich. 2010) and United States v. Zelles (In re CNS,
Inc.), 255 B.R. 198, 201 (N.D. Ohio 2000), but noting the contrary holdings of other courts).
Accordingly, the question is whether the Debtors’ § 505 motion is a “civil proceeding[] arising
under title 11, or arising in or related to [a case] under title 11.”
The determination of the amount of tax penalties owed by the Debtors clearly does not
satisfy “arising in” jurisdiction, which are “administrative matters that arise only in bankruptcy
cases.” In re Repository Techs., Inc., 601 F.3d 710, 719 (7th Cir. 2010). However, the Debtors
argue that the matter “arises under title 11” because 11 U.S.C.A. § 505(a)(1) provides that, with
exceptions not applicable here, a bankruptcy court “may determine the amount or legality of . . .
any fine or penalty relating to a tax.” Since § 505 is a provision in title 11, and they have filed a
motion pursuant to § 505 asking the Bankruptcy Court to determine the amount of a tax penalty,
the Debtors assert that their request “arises under” Title 11.
Courts are divided on the question of whether proceedings under § 505 “arise under”
Title 11. While the Debtors correctly cite In re UAL Corp., 336 B.R. 370 (Bankr. N.D. Ill.
2006), in support of their position that “[t]he determination of tax liability provided for by §
505(a) ‘arises under’ the Bankruptcy Code” and therefore is a “core proceeding,” and the Court
recognizes that other courts have reached the same conclusion, the Court disagrees. The Seventh
Circuit has defined proceedings “arising under Title 11” in the context of determining whether a
proceeding is “core”:
A proceeding is core under section 157 if it invokes a substantive right provided
by title 11 or if it is a proceeding that, by its nature, could arise only in the context
of a bankruptcy case.
Diamond Mortgage Corp. of Illinois v. Sugar, 913 F.2d 1233, 1239 (7th Cir. 1990) (quoting

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Barnett v. Stern, 909 F.2d 973, 981 (7th Cir. 1990)). By filing their motion under § 505, the
Debtors are not invoking a “substantive right” under that statute, but rather a procedural one:
They are seeking to have a substantive question of law that arises under the Internal Revenue
Code decided by means of a procedure provided for by Title 11. Accordingly, the § 505 motion
does not “arise under” Title 11.
That leaves the question of “related to” jurisdiction. The Seventh Circuit takes a more
narrow view of “related to” jurisdiction than many other courts, holding that “a case is ‘related’
to a bankruptcy when the dispute affects the amount of property for distribution [i.e., the debtor’s
estate] or the allocation of property among creditors.” Matter of FedPak Sys., Inc., 80 F.3d 207,
213–14 (7th Cir. 1996). The United States argues that the dispute over the amount of tax
penalties owed by the Debtors in this case does not satisfy this definition because
“[d]etermination of the amount of the tax penalties cannot affect the amount of property
available for distribution to creditors (or create a surplus for the debtors) because the penalties
are subordinated to all other prepetition claims and the estate has insufficient assets to reach the
penalties.” Dkt. No. 14 at 30. In other words, the amount of property available for distribution
to creditors from the estate will be the same whether the Debtors owe 20% negligence penalties
or 75% fraud penalties, because there is no scenario under which funds from the estate will be
used to satisfy the penalties.
The Court agrees with the United States that the § 505 motion cannot be “related to” the
bankruptcy case for jurisdiction purposes unless its resolution will affect the amount of money
available to distribute to creditors from the estate. The Debtors note repeatedly that whether a
surplus might exist in the estate but for any tax penalties has not yet been decided and assert that

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“a strong possibility remains that a surplus exists.” Dkt. No. 15 at 14 n.4. Their only
explanation for this assertion is the following passage from their brief:
In the Debtors’ case here, there is a reasonable possibility of a surplus. Debtors
sought a determination of the amount and dischargeability of the tax debts,
including penalties and interest. The Bankruptcy Court has the penalty and
interest issue under advisement . . . and has not yet made a determination. A
determination by the Bankruptcy Court that penalties and interest are discharged
would result in IRS’ claim being approximately $107,000.00. Debtors’ house
alone ($118,000 based on realtor.com) can satisfy that debt. That discharge would
free up assets in excess of all creditor claims. There are still more than $20,000 in
other assets that the Trustee will have, providing a surplus to the Debtors.
Dkt. No. 15 at 26. This argument ignores the fact that over $60,000 in claims have been made
against the estate by creditors other than the IRS. See Dkt. No. 8-2 at 15-19 (Claims Registry
Summary).2 The Debtors do not suggest that any of those claims will not be allowed and
payable out of the estate, nor do they dispute that those claims will have priority over any tax
penalties that are not discharged by the Bankruptcy Court. Taking the Debtors’ argument at face
value and assuming that the house will generate enough to satisfy the $107,000
nondischargeable3 tax obligation, the “more than $20,000 in other assets” that the Debtors assert
will be available in the estate clearly are not sufficient to satisfy over $60,000 in claims and any
administrative costs. Given the fact that the record cannot support a finding that any tax
penalties will be paid from the estate, it is irrelevant to the administration of the estate how much
those tax penalties are. Accordingly, that determination is not “related to” the bankruptcy, and
the Bankruptcy Court lacked jurisdiction to make it. Assuming some or all of those penalties are
not dischargeable, the Debtors clearly have an interest in how much they are; they simply are not

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It is unnecessary for the Court to take judicial notice of this fact, as requested by the
United States, or to consider the declaration submitted by the United States along with its reply
brief, to which the Debtors object, inasmuch as the claims registry is part of the appellate record.
3
While the Debtors originally asserted that the underlying taxes were dischargeable, they
eventually “consented” to them being “nondischargeable and priority.” Dkt. No. 8 at 563.
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entitled to have that determination (as opposed to the issue of dischargeability) made as part of
their bankruptcy proceeding.
IV. CONCLUSION
For the reasons set forth above, the Bankruptcy Court erred in determining that it had
jurisdiction to determine the amount of tax penalties owed by the Debtors. The Debtors’ Motion
to Determine Tax Liability must be DENIED. Accordingly, the Bankruptcy Court’s rulings are
REVERSED and this case is REMANDED to the Bankruptcy Court for further proceedings
consistent with this ruling.
SO ORDERED: 8/12/16

_______________________________
Hon. William T. Lawrence, Judge
United States District Court
Southern District of Indiana

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