Consent Order Signed by Debtor and IRS Does Not Preclude Additional Tax Assessments

(Parker Tax Publishing June 2024)

The Eleventh Circuit affirmed the Tax Court and held that a Consent Order signed by a debtor in bankruptcy and the IRS was not a final determination of the debtor's tax liability for the years at issue. As a result, the IRS is not barred by res judicata or collateral estoppel from filing additional notices of deficiency for those years. Breland v. Comm'r, 2024 PTC 184 (11th Cir. 2024).

Background

In 2009, Charles Breland, Jr. filed for Chapter 11 bankruptcy in the Southern District of Alabama. The IRS subsequently filed a proof of claim for taxes, interest, and penalties that it said Breland owed for tax years 2004 through 2008. The IRS amended that proof of claim four times. The last proof of claim was for approximately $6.8 million. In 2010, Breland filed a Chapter 11 Plan of Reorganization, which the IRS objected to based in part on the ground that the plan did not provide for payment of the entire amount of taxes the IRS claimed that Breland owed. To resolve the objection, the IRS and Breland entered into a Consent Order in which the IRS withdrew its $6.8 million claim and reinstated a prior claim of approximately $2.02 million. The Consent Order further provided that Breland would preserve his objection to the IRS's proof of claim and the IRS's right to assess taxes would be reinstated upon default by Breland.

Despite reaching an agreement via the Consent Order, the IRS continued to investigate the amount of taxes Breland owed and subsequently sought to amend its claim to add additional taxes. The bankruptcy court denied the requested amendment. The IRS appealed that decision to the District Court of Southern Alabama which remanded the appeal to the bankruptcy court. On remand, the bankruptcy court again denied the motion to amend. The IRS again appealed that decision to the District Court of Southern Alabama which affirmed the decision. In 2016, the bankruptcy court entered an order closing the 2009 bankruptcy case.

In June of 2012, while the bankruptcy case was on remand, the IRS issued a deficiency notice to Breland for tax years 2004, 2005, and 2008. Breland filed suit in the Tax Court, disputing the deficiencies, and arguing that the amounts sought were barred by collateral estoppel and res judicata because the Consent Order from the bankruptcy proceeding was, he argued, a final determination of his tax liability for years 2004-2008. The Tax Court case was stayed until the resolution of the 2009 bankruptcy case in 2016.

After the stay was lifted, Breland moved for summary judgment in the Tax Court case. In Breland v. Comm'r, 152 T.C. 156 (2019), the Tax Court denied Breland's motion, holding that the Consent Order did not bar the deficiencies. The Tax Court held that res judicata did not apply because the causes of action were not the same. In other words, the Tax Court was asked to redetermine Breland's total tax liability, while the Consent Order resolved the IRS's objection to a bankruptcy reorganization plan. The Tax Court emphasized that the facts necessary to the deficiency case before it (i.e., Breland's income, deductions, and credits) were not necessarily considered during the bankruptcy plan confirmation proceeding, which primarily addressed viability of a proposed reorganization. The court noted that certain taxes are nondischargeable and cited case law for the proposition that confirmation of a plan of reorganization does not fix nondischargeable tax liabilities. With respect to Breland's argument that the Consent Order was issued under the bankruptcy court's authority to determine taxes under 11 U.S.C. Sec. 505, the Tax Court held that the Consent Order was not issued under that provision of the Bankruptcy Code because the Consent Order did not cite that provision or otherwise state that it was issued pursuant to the bankruptcy court's authority to determine taxes under that section.

Ultimately, the Tax Court agreed with Breland's argument that, if the Consent Order had fixed his total federal tax liability for the years at issue then it would have preclusive effect. But, the Tax Court said, the bankruptcy court had only resolved the amount of the IRS's claim to be allowed in the plan of reorganization and, under the Bankruptcy Code and case law, allowing a claim does not constitute a final determination of federal tax liabilities. Thus, the Tax Court concluded that the IRS was not precluded from asserting additional nondischargeable debts and that Breland owed a deficiency for 2004 and was owed a refund for 2008. As to 2005, the parties stipulated that the notice of deficiency had been issued after the statute of limitations had run and so Breland did not owe anything for that year.

Breland appealed to the Eleventh Circuit, arguing that the Consent Order was a final determination of his tax liability for the years in question, and thus collateral estoppel and res judicata barred the IRS from assessing additional taxes for those years. Additionally, Breland argued that the IRS relinquished its right to assess additional taxes because the Consent Order stated that the IRS's right to assess taxes was prohibited unless Breland defaulted on the IRS's claim, which he did not do.

Analysis

The Eleventh Circuit rejected Breland's arguments and held that the Consent Order was not a final determination of Breland's tax liability for the years in question. Instead, the court said, the Consent Order merely determined the amount of taxes that the bankruptcy estate would pay, but it did not fix the total amount of Breland's underlying, nondischargeable tax debt nor did it prevent the IRS from assessing additional taxes beyond what was contemplated by the plan.

The Eleventh Circuit observed that a bankruptcy court has the power to determine tax debts under 11 U.S.C. Sec. 505, whether or not the tax was previously assessed or adjudicated. However, the court said, in order to invoke Section 505, one of the parties typically must file a motion requesting that the bankruptcy court make a determination under 11 U.S.C. Sec. 505 and that did not happen in this case. Citing its decision in In re Gurwitch, 794 F.2d 584 (11th Cir. 1986), the Eleventh Circuit noted that unlike determinations under 11 U.S.C. Sec. 505, the claims-allowance and plan-confirmation processes in bankruptcy do not result in a final determination of the amount of nondischargeable tax debts for res judicata purposes. That is because, the court said, unless 11 U.S.C. Sec. 505 is invoked, the only issue before the bankruptcy court at the time of a claim objection is the amount that will be paid by the bankruptcy estate - not the total amount of the underlying debt.

Observation: In In re Gurwitch, the Eleventh Circuit rejected a debtor's argument that a Chapter 11 plan that had been confirmed had fixed the amount of taxes he owed and any other taxes added after confirmation were barred by res judicata. The Eleventh Circuit explained that the Bankruptcy Code makes clear under 11 U.S.C. Sec. 1141(d)(2) that the confirmation of a plan of reorganization does not fix tax liabilities made nondischargeable under 11 U.S.C. 523 and that such taxes are nondischargeable whether or not a claim for such tax was filed or allowed.

Addressing Breland's argument that his case was distinguishable from In re Gurwitch because he and the IRS signed a Consent Order, the court said that the mere fact that the claim amount was stipulated to in a Consent Order did not bring his case outside the sweep of In re Gurwitch and its progeny. No matter how the claim amount was reached, the court said, unless the bankruptcy court acted under its Section 505 authority, the bankruptcy court's role in the process was to determine the amount to be paid by the bankruptcy estate, not to fix the total amount of the underlying debt.

The court also rejected Breland's argument that (1) the Consent Order in his case was unique because the IRS expressly gave up or relinquished its right to assess additional income taxes, and (2) because he did not default on the agreement, the IRS's assessment powers were never reinstated and so the IRS could not assess any additional taxes. The best reading of the Consent Order, the court explained, was not that it was a blanket prohibition on the IRS's ability to assess additional taxes against Breland generally, but that it only prohibited the IRS from assessing the taxes set out in the plan as it prohibited the IRS from assessing taxes unless Breland defaulted on "the plan" by not fully paying the taxes contemplated in the plan. Thus, the court concluded, the prohibition was limited to assessing the taxes contemplated in the plan and nothing about the Consent Order suggested to the court that it was meant to fix Breland's total tax liability or apply to taxes outside those covered in the plan.

For a discussion of the discharge of taxes in bankruptcy, see Parker Tax ¶16,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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