Johnson v. Commissioner ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
In the June 1, 2005
United States Court of Appeals Charles R. Fulbruge III
for the Fifth Circuit Clerk
_______________
m 04-60799
Summary Calendar
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H. DEE JOHNSON, JR.; ET AL.,
Petitioners,
H. DEE JOHNSON, JR.,
Petitioner-Appellant,
VERSUS
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
_________________________
Appeal from the United States Tax Court
m 10839-99
______________________________
Before DAVIS, SMITH, and DENNIS, him from “all dischargeable debts,” and en-
Circuit Judges. joined all creditors whose debts were discha-
rged by the order from “engaging in any acts
JERRY E. SMITH, Circuit Judge:* to collect such debts as personal liabilities” of
the taxpayer. On May 5, 1995, the bankruptcy
H. Dee Johnson, Jr., appeals a decision of court accepted the final report of the trustee,
the United States Tax Court, which upheld the which reported that the total amount of debts
Internal Revenue Service’s findings of defi- allowed was $52,590 and that the net liquida-
ciencies in the tax reported on certain of his tion proceeds to be distributed for those claims
returns. Finding no error, we affirm. was $47,674, which left $4,916 of the allowed
debts discharged and unpaid.
I.
On September 3, 1991, Johnson filed a peti- Johnson deducted the $153,000 net oper-
tion under chapter 7 of the Bankruptcy Code.1 ating loss of the estate from his income for tax
Johnson’s assets that were transferred to the years 1994 and 1995. The Commissioner
estate included a $153,000 business debt disallowed the deductions, taking the position
payable to him. After becoming an asset of the that Johnson was released from $197,500 of
estate, the debt became worthless, resulting in indebtedness to CMI, and although this
a new operating loss to the estate of $153,000. amount was excluded from income under
The estate also included two properties in, I.R.C. § 108(a), it still works, under § 108(b),
respectively, Argyle, Texas, and Dallas, Texas, to reduce to zero the net operating loss
that had been mortgaged to Citicorp Mort- (“NOL”) from, or carryovers to, the year of
gage, Inc. (“CMI”); Johnson owed $262,128 discharge. Johnson challenged this determina-
on the Argyle property and $128,572 on the tion, arguing that the only debt discharged by
Dallas property. the bankruptcy court was the $4,916 in unpaid
allowed claims reported by the trustee and
CMI was granted relief from the bank- noted in the bankruptcy court’s final decree.
ruptcy stay to foreclose on its mortgages. It
sold the Argyle property for $171,500, leaving II.
an unrecovered deficiency of $90,628; it sold Generally, where a taxpayer is released or
the Dallas property for $21,700, leaving an discharged from the total amount of a debt, the
unrecovered deficiency of $106,872. CMI did difference is income for the discharge or can-
not file proofs of claims against the estate for cellation of indebtedness (hereinafter “COD
these unrecovered amounts. income”), which is included in gross income
for tax purposes. I.R.C. § 61(a)(12). There
On December 18, 1991, the bankruptcy is, however, an except ion to this general rule
court granted Johnson a discharge, releasing where the discharge occurs in a bankruptcy
proceeding: That COD income is not included
in gross income. I.R.C. § 108(a)(1). Although
*
Pursuant to 5TH CIR. R. 47.5, the court has de- such COD income is not included in gross
termined that this opinion should not be published income, it is still used to reduce certain tax
and is not precedent except under the limited cir- attributes of the taxpayer, including, inter alia,
cumstances set forth in 5TH CIR. R. 47.5.4.
net operating losses. I.R.C. § 108(b).
1
Title 11, United States Code.
2
The parties do not dispute that Johnson as- from income under § 108(a) as a result of the
sumed an NOL of $153,000 as a result of the definition set forth in subsection (d)(2), and is
transfer of the business debt to the bankruptcy the maximum amount that could offset tax
estate. Where the parties part ways, however, attributes under subsection (b)(1), because of
is in the amount of COD income they believe the dollar-for-dollar rule established by sub-
was excluded from gross income under section (b)(3).
§ 108(a) as a result of the bankruptcy proceed-
ing, that offsets the claimed NOL. Johnson Johnson’s position is in error because, as
claims that the proper amount of COD income the Tax Court astutely found, Johnson’s rea-
is $4,916 (the amount the bankruptcy court soning is based on a misunderstanding of
accepted in its final report as the total amount bankruptcy law. In exchange for transferring
of debts left discharged), but the Commission- property to the estate, an eligible debtor re-
er contends that the proper amount also in- ceives a discharge from “all debts that arose
cludes the $197,500 discharged to CMI before the date of the order for relief under
through the mortgage foreclosures, totally this chapter.” Bankr. Code § 727(b) (empha-
eviscerating Johnson’s claimed NOL. The Tax sis added). The CMI debts arose before the
Court agreed with the Commissioner. order for relief was granted in this case, and
were discharged by it, even if not specifically
III. referenced in the bankruptcy court’s final
Johnson argues that the Tax Court erred, order.
because he claims the plain language of § 108
requires the Tax Court to accept the findings The final order issued by the district court
of the bankruptcy court with respect to the only referenced the $4,916 in discharged debt,
amount of COD income that is exempted from because CMI did not file a proof of claim on
gross income under § 108(a) and offsets his the mortgage debts. CMI had liens on the
claimed NOL under § 108(b). In support, Dallas and Argyle properties and was not re-
Johnson cites two subsections of § 108. First, quired to file a proof of claim to protect its
he points to subsection (d)(2), which defines a liens.2 Although a creditor that fails to file a
“title 11 case” for purposes of § 108 as “a case proof of claim is not entitled to receive distri-
under title 11 of the United States Code (relat- bution from the estate, it may still enforce its
ing to bankruptcy), but only if the taxpayer is security interests in estate property on which it
under the jurisdiction of the court in such case has liens, as CMI did by foreclosing on the
and the discharge of indebtedness is granted mortgages.3 CMI forfeited the right to seek
by the court or is pursuant to a plan approved recourse against Johnson personally for the
by the court” (emphasis added).
2
Johnson then quotes subsection (b)(3)(A), See Bankr. Code § 506(a), (d); see Simmons
which provides that the §108(b) reduction of v. Savell (In re Simmons), 765 F.2d 547, 551 (5th
tax attributes “shall be one dollar for each dol- Cir. 1985) (stating that “no creditor is required to
lar excluded by subsection (a).” Based on file a proof of claim”).
these subsections, Johnson believes that be- 3
See Johnson v. Home State Bank, 501 U.S.
cause the bankruptcy court’s final order refer-
78, 82 (1991) (stating that bankruptcy discharge
enced a discharge of only $4,916 of debt, this affects only personal liability of debtor, not in rem
was the only amount that could be excluded action against property).
3
outstanding debt after the foreclosure sales by AFFIRMED.
not filing a proof of claim in the required
period, so that debt was discharged as a result
of the grant of relief, regardless of whether
that fact was mentioned in the bankruptcy
court’s final report.4
IV.
In summary, the Tax Court’s and bankr-
uptcy court’s findings are not in tensionSSthe
bankruptcy court found that $4,916 in debt
was discharged as to creditors that filed proofs
of claim against the estate, and the Tax Court
made the additional finding that the CMI debts
were also discharged as a result of the bank-
ruptcy court’s order, although they were not
specifically mentioned in the final order of
relief. The Tax Court appropriately found that
the CMI debts were discharged as a result of
the grant of relief from the bankruptcy court
under Bankr. Code § 727(b), so they plainly
fell within the definition of discharged debt in
“a title 11 case” as defined by I.R.C. § 108-
(d)(2), and thus were appropriately excludable
under § 108(a) and applicable to offset John-
son’s NOL under § 108(b)(2).5
4
See Bankr. Code § 727(b) (“Except as pro-
vided in section 523 of this title, a discharge under
section (a) of this section discharges the debtor
from all debts that arose before the date of the or-
der for relief under this chapter, and any liability
on a claim that is determined under section 502 of
this title as if such claim had arisen before the com-
mencement of the case, whether or not a proof of
claim based on any such liability is filed . . . )
(emphasis added); see also In re Tall, 79 B.R. 291,
294 (Bankr. S.D. Ohio 1987) (finding that pursu-
ant to Bankr. Code § 727(b), creditor’s failure to
file proof of claim did not prevent discharge of
5
debtor’s obligation). (...continued)
tax court are consistent with those of the bank-
5
Because we conclude that the findings of the ruptcy court, Johnson’s res judicata and collateral
(continued...) estoppel arguments are also without merit.
4