Hutchins v. Internal Revenue Service ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
10-3-1995
Hutchins v IRS
Precedential or Non-Precedential:
Docket 94-5509
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1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-5509 and 94-5510
CHARLES T. HUTCHINS,
Appellant in 94-5509
v.
INTERNAL REVENUE SERVICE;
UNITED STATES OF AMERICA
CHARLES T. HUTCHINS
v.
INTERNAL REVENUE SERVICE;
UNITED STATES OF AMERICA
UNITED STATES OF AMERICA,
Appellant in 94-5510
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 92-cv-04134)
Submitted Pursuant to Third Circuit LAR 34.1(a)
May 24, 1995
Before: GREENBERG, ROTH and ALDISERT, Circuit Judges
(Opinion Filed October 3, 1995)
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3
Charles T. Hutchins
5011 Marshall Road
Farmingdale, NJ 07727
Pro Se Appellant\Cross-Appellee
Faith S. Hochberg
United States Attorney
Loretta C. Argrett
Gary R. Allen
Bruce R. Ellisen
Bridget Rowan
Laurie Snyder
Assistant U.S. Attorneys
Tax Division
U.S Department of Justice
Post Office Box 502
Washington, D.C. 20044
Attorneys for Appellee\Cross-Appellant
OPINION OF THE COURT
Roth, Circuit Judge:
In this appeal, Charles T. Hutchins, appearing pro se,
and the Internal Revenue Service each challenge aspects of the
entry of summary judgment below. The district court granted
summary judgment to the I.R.S. on its counterclaim to recoup an
erroneous tax credit, but then, disturbed by this result, invoked
equitable estoppel sua sponte to bar the I.R.S. from recovering
all but a minor portion its claim. This holding necessarily
denied Hutchins' standing to sue for the original tax credit. We
reverse. Hutchins had standing to pursue his original tax claim
because in the bankruptcy proceedings that gave rise to this
3
case, the tax refund descended to him through abandonment as part
of a properly scheduled antitrust action. Because the I.R.S.
grounded its recoupment claim solely on Hutchins' lack of
standing, our ruling on this issue is dispositive. We reach
neither the validity of the underlying tax refund, which is not
properly before us, nor the application of equitable estoppel,
which is rendered superfluous.
I. Factual and Procedural History
In November 1979 Hutchins, as sole proprietor of
Hutchins Supply Company, filed a Chapter 7 Bankruptcy Petition in
the U.S. Bankruptcy Court in Anchorage, Alaska. After the
initial scheduling of all known assets and liabilities pursuant
to 11 U.S.C. § 521(1), Hutchins learned that his business had
failed because of his competitors' antitrust violations and
unfair business practices. Hutchins instituted an antitrust
action against these competitors, amending his schedules to
reflect the antitrust cause of action as an asset of the bankrupt
estate. By stipulation, the estate trustee allowed Hutchins to
pursue the action, reserving the right to all settlement
proceeds. In 1986, the resulting claims were settled for
$243,000 in cash, which was turned over to the bankruptcy
trustee. In addition, the antitrust defendants withdrew claims
against the bankrupt estate for approximately $76,000 in business
debt. On January 27, 1987, the trustee filed an estate income
tax return reflecting both the cash and the retired debt as
income.
4
On September 21, 1988, the trustee petitioned the U.S.
Bankruptcy Court to abandon any remaining assets to Hutchins. The
requisite order was issued on March 23, 1989. The bankruptcy
proceedings were closed sometime prior to February 1989, re-
opened on March 1, 1989, and closed a second time on March 14,
1990.
On April 2, 1989, Hutchins filed an amended tax return
for 1987, asserting that pursuant to 26 U.S.C. § 108, the $76,000
in retired business debt was not taxable income. Hutchins sought
a tax credit of $38,458, the amount he believed the trustee had
overpaid by erroneously including the $76,000 in retired business
debt as income. On January 22, 1992, the I.R.S. granted in part
the claimed refund and applied a credit of $37,897.04 to
Hutchins' tax arrearages. On September 29, 1992, Hutchins
responded by filing a complaint against the I.R.S. in the U.S.
District Court for the District of New Jersey seeking, among
other relief, an additional credit of $650. The I.R.S. responded
by counterclaiming for the entire January 1992 tax credit,
alleging it was granted erroneously since Hutchins was not the
proper party to receive a refund of taxes paid by the bankruptcy
estate.
On May 24, 1993, the district court dismissed Hutchins'
various prayers for relief on several grounds, leaving the
I.R.S.'s counterclaim as the sole remaining dispute. That order
has not been appealed. On January 10, 1994, on cross motions for
summary judgment, the district court ruled in favor of the I.R.S.
on its counterclaim, denied Hutchins' motion to dismiss, and
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invoked equitable estoppel to bar the I.R.S. from recovering all
but $663 plus interest from Hutchins. Both parties appealed to
this court.
II. Jurisdiction
The district court properly asserted federal
jurisdiction over the I.R.S.'s counterclaim under 26 U.S.C.
§7405(b). We have jurisdiction over the district court's final
order pursuant to 28 U.S.C. § 1291. Our review of a grant of
summary judgment is plenary. Oritani Sav. & Loan Ass'n v.
Fidelity & Deposit Co., 989 F.2d 635, 637 (3d Cir. 1993); Goodman
v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert.
denied, 429 U.S. 1038 (1977). The question of standing is itself
subject to plenary review. Polychrome Int'l Corp. v. Krigger, 5
F.3d 1522, 1530 n.19 (3d Cir. 1993).
III. Discussion
In its counterclaim in district court, the I.R.S.
sought to recoup the entire tax credit it had granted Hutchins by
asserting that he lacked standing to pursue the discrepancy. The
I.R.S. argued that because Hutchins had failed to schedule the
tax claim explicitly as an asset of the bankrupt estate, the
right to the refund was not abandoned but was instead retained by
the estate. Since the refund belonged to that separately taxable
entity, only the trustee could sue for its recovery. Hutchins
therefore had no basis for his claim. Consequently, any tax
refund granted to Hutchins was erroneous and could be recovered.
The district court implicitly conceded this much in an elliptical
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comment1 followed by its sua sponte application of equitable
estoppel. We disagree. This line of reasoning ignores the fact
that the tax refund originated as part of the properly scheduled
antitrust action. The refund claim was at best a derivative
asset that arose as a result of the trustee's tax filings on
behalf of the estate. Moreover, the claim was not asserted until
after the bankruptcy had closed. Since it existed during the
bankruptcy as an integral part of the antitrust claim--or if
separately as a still inchoate right--the tax claim was properly
scheduled through the scheduling of the antitrust action and
descended to Hutchins through abandonment. Hutchins had standing
to sue.
A.
We observe in passing that if the tax refund were a
unique asset that had to be scheduled separately, as the I.R.S.
asserts, then the failure to schedule the refund is fatal to
Hutchins' claim. It is clear that an asset must be properly
scheduled in order to pass to the debtor through abandonment
under 11 U.S.C. § 554. See Vreugdenhill v. Navistar Int'l
Transp. Corp., 950 F.2d 524, 526 (8th Cir. 1991) (refusing to
find unscheduled cause of action abandoned even where trustee was
aware of it prior to abandonment); In re Medley, 29 B.R. 84, 86-
87 (Bankr. M.D. Tenn. 1983) (refusing to abandon unscheduled
1
The opinion's only language on point read: "The Court
is unpersuaded by defendant's argument that the credit issued to
plaintiff's personal account should be completely rescinded
simply because plaintiff may have lacked standing to file the
amended return at issue." Hutchins v. United States, No. 92-4134
(GEB) slip op. at 5 (D.N.J. Jan. 10, 1994) (emphasis added).
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refund claim to debtor); DiStasio v. United States, 22 Cl. Ct.
36, 52 (1990) (holding claim for refund abandoned only if
scheduled); Weiner v. United States, 15 Cl. Ct. 43, 45 (1988)
(retaining unscheduled tax refund claim as property of bankrupt
estate); see generally 4 Collier on Bankruptcy ¶ 554.03 (15th ed.
1994). It is equally clear that since the bankrupt estate
retains unscheduled assets, only the bankruptcy trustee has the
authority to control them. 26 U.S.C. § 554(d) ("property . . .
not abandoned under this section . . . remains property of the
estate"). This authority includes the power to file an amended
tax return. See 26 U.S.C. § 6012(b)(4) (requiring that fiduciary
for estate file estate return); see also Mindlin v. Drexel
Burnham Lambert Group, 160 B.R. 508, 514 (Bankr. S.D.N.Y. 1993)
("By operation of 11 U.S.C. § 554(c) and (d), any asset not
scheduled pursuant to 11 U.S.C. § 521(1) remains property of the
estate, and the debtor loses all rights to enforce it under his
own name."). These propositions, however, beg the fundamental
question raised by this dispute, viz. were the antitrust action
and tax refund claim separate assets? If they were not, then the
tax refund was scheduled as part and parcel of the antitrust
claim, and it descended to Hutchins through abandonment. After
reviewing the respective arguments, we conclude that during the
pendency of the bankruptcy, the tax refund existed as an inherent
part of the properly scheduled antitrust claim.
Initially, it bears noting that the tax refund in this
case differs from the tax refunds that typically appear as
unscheduled assets in bankruptcy proceedings. The standard case
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of an unscheduled tax refund involves an expected refund computed
by the debtor and entered on a personal or corporate tax return,
which the debtor then fails to schedule after declaring
bankruptcy. See, e.g., Mertz v. Rott, 955 F.2d 596 (8th Cir.
1992) (considering estate tax refund that debtors anticipated but
failed to schedule); Doan v. Hudgins, 672 F.2d 831 (11th Cir.
1982) (considering debtor's failure to list expected tax refund);
Barowsky v. Serelson, 102 B.R. 250 (Bankr. D. Wyo. 1989)
(reopening bankruptcy after discovery of anticipated but
unscheduled income tax refund). The scenario is even clearer
when the refund has already been paid by the I.R.S. and yet goes
unscheduled. See In re Maynard, 162 B.R. 349 (Bankr. M.D. Fla.
1993); In re Walton, 158 B.R. 943 (Bankr. N.D. Ohio 1993). In
either case, the debtor knows of the existence of the asset,
expects to receive it, and should have scheduled it.
The instant facts are different. Here, the tax refund
was the result of action by the bankruptcy trustee, and the
claimed discrepancy was not asserted until after the bankruptcy
had closed. More importantly, there was no reason for the debtor
or the trustee to assume, believe, or even guess that any refund
existed. The taxes were paid on income from an antitrust
settlement, so there had been no prior withholding. Assuming
that the trustee computed the tax correctly, there would be no
refund.2
2
When this opinion characterizes the actions of the
trustee as "correct", "incorrect", "erroneous" or the like, it
does so in the abstract. The validity of the underlying refund
is not before us, see discussion infra, and we express no opinion
9
These important factual distinctions indicate that at
the time of the bankruptcy, the crucial asset, indeed the only
asset, was the antitrust settlement. During the bankruptcy, no
"tax refund" asset existed. It was at best an inchoate right.
Creating the legal fiction that this asset arose at the time of
the erroneous filing and existed independently, albeit covertly,
would require every debtor to list as an additional asset a
potential tax refund due to the possibly erroneous filings of the
trustee. Alternatively, the debtor would have to supervise and
double check the actions of the trustee, contrary to the
intention of 11 U.S.C. § 704, which makes the bankruptcy trustee
accountable for all property received. See In re R.E. Lee &
Sons, Inc., 95 B.R. 316 (Bankr. M.D. Pa. 1989) (limiting debtor's
burden to reasonable diligence in completing schedules). There
seems little to recommend either course as an innovation in
bankruptcy procedure.
Neither the district court nor the parties have cited
any authority addressing the status of an undiscovered tax refund
that arises post-petition as a result of the filings of the
trustee. Our efforts have revealed no case on point. The
extensive citations to cases on unscheduled assets are inapposite
if the tax refund did not yet exist. Indeed, these cases would
support Hutchins' claim since he properly scheduled the only
on the propriety of the trustee's actions. We use these terms in
our discussion of standing because Hutchins' original tax refund
depended on a filing error by the trustee. These
characterizations have emerged as a necessary part of the case as
framed by the parties, and the court adopts them as a
convenience.
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existing asset, the antitrust proceeds. Despite the absence of
authority, both parties offer arguments on the issue, and logic
dictates the result.
First, we agree with Hutchins that "[i]t was not the
appellant's right, position or responsibility to amend his
schedules to reflect trustee's accounting and tax payment
errors." Brief of Appellant at 16. Hutchins appears to contend
that, as suggested above, he had no reason to suspect the error
and hence the existence of the refund. We make explicit the
necessary implication: The tax refund was not a known asset at
the time of the bankruptcy and so could not be scheduled
separately pursuant to 11 U.S.C. § 521(1).
Further support flows from the concept of valuation. At
the time of the bankruptcy, the principal asset for distribution
to creditors was the income from the antitrust settlement.
Creditors could reasonably assume that the estate would owe tax
on this money, so the net value of the asset was the amount of
the proceeds less the correct amount of tax. Alternatively,
creditors could expect the net value to equal the amount of the
proceeds less the amount of tax paid by the trustee plus the
amount of any tax refund. There is no need to take this latter
course, which unnecessarily creates two assets from a single
fund. Instead, the antitrust cause of action cum tax refund can
best be viewed as a single asset that was inadvertently
misappraised by the bankruptcy trustee. Assuming for the moment
that Hutchins is correct on the merits of the tax refund, the
trustee's failure to complete the tax return correctly
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effectively undervalued the antitrust claim by approximately
$37,000. This mistake was not discovered until after
abandonment. It is well established in bankruptcy law that
mistakes in valuation will not enable the trustee to recover an
abandoned asset. In re McGowan, 95 B.R. 104 (Bankr. N.D. Iowa
1988) (ruling that abandonment of misvalued asset is
irrevocable); Matter of Enriquez, 22 B.R. 934 (Bankr. Neb. 1982)
(same).
We find these arguments persuasive. We are less
impressed with the I.R.S.'s conclusory assertion that the
antitrust cause of action was "clearly a separate asset" from the
tax refund. Nor are we swayed by the agency's cursory
comparison:
The antitrust action involved damage claims
against various of Hutchins's competitors.
The Government was not a party to that
action, and no federal income tax issues were
involved. Here, in contrast, the Government
is a party, the issue is one of taxation, and
neither the competitors nor antitrust
violations are of concern.
Brief of Appellee at 21. While an accurate description of the
two causes of action as they currently stand, these distinctions
ignore the fact that the relevant time period for scheduling is
not the onset of subsequent litigation but rather the pendency of
the bankruptcy. At that point, no separate tax refund asset
existed, or to the extent that it did, it was subsumed in the
original declaration of the value of the antitrust proceeds.
Our review of these arguments indicates that the tax
refund was properly scheduled to the extent that it could be.
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Hutchins scheduled the only asset of which he was aware, the
antitrust claim. The tax refund arose later as a result of the
actions of the trustee. Hutchins did not cause the trustee to
file an erroneous tax return, and he had no reason to suspect its
existence. Indeed, the discrepancy was not discovered until
after the close of the bankruptcy. We hold that Hutchins acted
properly in scheduling his assets.
B.
This resolution of the scheduling issue necessitates
the conclusion that Hutchins had standing to sue for the tax
refund. Since he properly scheduled the antitrust claim, the
right to the refund descended to him through abandonment.
Hutchins scheduled the antitrust claim properly. On
April 7, 1983, he filed in the U.S. Bankruptcy Court a Motion to
File Amended Schedule B - Statement of All Property of Debtor.
Page 6, line 17 of the amended Schedule B reflected "unliquidated
antitrust claims." This filing scheduled the antitrust claim
pursuant to 11 U.S.C. § 521(1). The tax claim was necessarily
scheduled through this action.
Hutchins then received the right to this tax claim as
an undifferentiated part of the antitrust claim he acquired
through abandonment. On September 21, 1988, the trustee moved
pursuant to 11 U.S.C. § 554(a) for an order "that any remaining
property scheduled by the debtor(s) be abandoned to the debtor(s)
and that any further interest in said property be disclaimed." On
March 23, 1989, the Bankruptcy Court entered the requisite
Abandonment Order.
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Through the abandonment of the antitrust claim,
Hutchins held the right to the potential tax refund on April 2,
1989, when he filed the amended tax return. As a result, he had
standing to contest the I.R.S.'s decision regarding his refund.
See 26 U.S.C. §§ 6402(a), 6511(a), 7422(a); 28 U.S.C. § 1346(a);
see also Boryan v. United States, 690 F. Supp. 459, 463 (E.D. Va.
1988).
C.
Although as a general rule an affirmative holding on
standing is merely a precursor to consideration of the merits, in
the instant case it disposes of the controversy. The I.R.S.
cannot prevail as a matter of law because it took no position in
the district court on the underlying validity of the refund. The
I.R.S. chose to assert only the claim that the refund was paid to
the wrong party, and this argument depended on Hutchins' lack of
standing. Our contrary conclusion resolves the case. We decline
to consider an insufficiently explored, fact-specific, non-
dispositive theory that was not raised below.
On appeal, the I.R.S. attempts to argue for the first
time that the underlying basis of Hutchins' claimed tax refund is
incorrect because the discharge of debt by the antitrust
defendants is not excludible income. Brief of Appellee at 13,
14, 28-33. This argument was not asserted at the trial level.
The I.R.S.'s eleventh hour Reply Brief reference to an isolated
footnote in the record supports rather than contradicts this
conclusion. See Reply Brief of Appellee at 3.
14
Under the prudential policy recognized in Hormel v.
Helvering, 312 U.S. 552, 556 (1941), we need not consider the
I.R.S.'s new argument. See Patterson v. Cuyler, 729 F.2d 925 (3d
Cir. 1984); Toyota Indus. Trucks U.S.A. Inc. v. Citizen Nat'l
Bank, 611 F.2d 465, 470 (3d Cir. 1979); see also Singleton v.
Wulff, 428 U.S. 106, 120 (1976). The reference discovered by the
I.R.S. is remarkable only in its unobtrusiveness. A lone and
diminutive footnote does not constitute the assertion of a legal
theory, especially when the same theory merited seven pages in
the I.R.S.'s appellate brief. See Brief of Appellee at 27-34.
Had the issue truly been asserted at the trial level, these seven
closely argued pages would not have been needed. More
importantly, it is by no means clear that the I.R.S.'s newfound
champion can carry the day. The argument ultimately turns on
whether the $76,000 in claims against the bankrupt estate that
was retired by the antitrust defendants represents "discharge of
indebtedness" excludible under 26 U.S.C. § 108(a)(1) or instead
taxable income for which the discharged debt is merely the
"medium of payment." See United States v. Centennial Savings
Bank F.S.B., 499 U.S. 573, 582 n.7 (1991). Further factual
development would be required to resolve this issue and determine
the extent of any resulting tax differential. An appellate
tribunal is not the proper forum for this task. See Newark
Morning Ledger v. United States, 539 F.2d 929, 932 (3d Cir.
1976).
Put simply, the I.R.S.'s contentions regarding the
merits of the tax refund come too late. In the district court,
15
the I.R.S. based its counterclaim solely on standing, and only
that issue is properly before us. Our contrary disposition of
this point resolves the case.
D.
The district court invoked equitable estoppel sua
sponte because its holding on standing left no bar to the
I.R.S.'s recoupment of the tax credit, a sanction the court found
overly severe. We are disturbed that estoppel would be applied
by the district court without allowing the parties to voice their
opposition to it. Our conclusion, however, renders this issue
superfluous, and we need not reach it.
IV. Conclusion
Contrary to the holding of the district court, Hutchins
had standing to sue as a matter of law. Because at the trial
level the I.R.S. based its counterclaim solely on the absence of
standing, we will reverse and remand with instructions to enter
summary judgment in favor of Hutchins. In doing so, we note only
that appellant must consider himself the fortunate beneficiary of
the appellee's litigation strategy. Had the I.R.S. assiduously
pressed the validity of the tax refund at the trial level,
Hutchins could well have lost his $37,897 bird in the hand in an
ill-conceived grasp at $650 in the bush.
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