In Re: Jack J. Grynberg, Celeste C. Grynberg, Debtors, Jack J. Grynberg, Celeste C. Grynberg v. United States of America, Gerald S. Swanson, as District Director for the Internal Revenue Service

Citations: 986 F.2d 367; 28 Collier Bankr. Cas. 2d 779; 145 A.L.R. Fed. 647; 71 A.F.T.R.2d (RIA) 1031; 1993 U.S. App. LEXIS 2363; 23 Bankr. Ct. Dec. (CRR) 1697Docket: 91-1445

Court: Court of Appeals for the Tenth Circuit; February 16, 1993; Federal Appellate Court

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Jack and Celeste Grynberg appealed a district court ruling that upheld a bankruptcy court's summary judgment in favor of the United States and the IRS, dismissing the Grynbergs' adversary proceeding. The Grynbergs filed for Chapter 11 bankruptcy in 1981, listing the IRS as a disputed creditor regarding gift and income taxes. The gift tax dispute stemmed from intra-family transfers of mineral interests, for which the Grynbergs did not file tax returns, claiming the transfers were not taxable gifts.

A bar order issued by the bankruptcy court required disputed creditors to file claims by July 31, 1981. The IRS filed a claim for income tax but did not file for the disputed gift tax. The Grynbergs’ joint reorganization plan, approved in April 1982, did not address the disputed gift tax, and the IRS did not object to the plan. In 1989, after the plan's completion, the IRS proposed a nearly $5 million gift tax deficiency. The Grynbergs sought to enjoin the IRS from collecting this deficiency, arguing it was barred by the prior order and discharged upon plan completion.

The bankruptcy court granted summary judgment for the IRS, which the district court affirmed. The appellate court reviewed the bankruptcy court's legal conclusions de novo and factual findings for clear error. The Bankruptcy Code allows for discharge of debts arising before plan confirmation, but certain exceptions apply, specifically under section 523, which may include tax liabilities.

Section 523, in conjunction with 1141(d)(2), stipulates that confirmation of a reorganization plan for an individual debtor does not discharge recent excise taxes, including gift taxes, regardless of whether a claim was filed or allowed. According to Section 6019 of the Internal Revenue Code, individuals making gift transfers exceeding $10,000 must file a return. The plaintiffs argue there is no evidence supporting the district court's conclusion that their transfers constituted taxable gifts requiring a return. The bankruptcy court has yet to address the merits of the gift tax liability, which remains unresolved. However, the lack of a ruling does not support the plaintiffs' argument that no returns were required. The district court's order clarifies that the plaintiffs’ gift tax liability, whatever it may be, remains dischargeable.

These gift taxes fall under the 523(a)(1)(A) exception to discharge, as they are entitled to priority under 507(a)(7). Excise taxes, including gift taxes, are non-dischargeable if the transfers occurred within a three-year statutory window. The plaintiffs contend that the IRS's failure to file a proof of claim by the bankruptcy court's bar date means their gift tax claim should be discharged upon confirmation of the plan. This argument conflicts with the bar order's language and Bankruptcy Rule 3003, which establishes that failure to file a claim prevents a creditor from voting or receiving distributions but does not affect the creditor's ability to collect on nondischargeable debts outside of bankruptcy.

The IRS's claim would remain valid even without filing a proof of claim, and the failure to do so would only impact the right to payment under the plan. Nondischargeable creditors can pursue collection efforts regardless of the bankruptcy discharge provisions. Lastly, while plaintiffs cite cases emphasizing the finality of bar orders, these cases affirm that the IRS is bound to file claims by the bar date but retains the right to pursue nondischargeable debts outside of bankruptcy.

Plaintiffs' assertion that the bar order prevented the gift tax claim is rejected. The defendant's failure to file a proof of claim for the gift taxes barred participation in voting and distribution under the Chapter 11 plan, but this does not influence the nondischargeability exceptions under 11 U.S.C. § 523. Citing *Spruill*, it is established that late or unfiled tax claims can still be deemed nondischargeable. The Bankruptcy Code indicates that the allowance of a tax claim is distinct from its nondischargeability, and failure to file a proof of claim does not preclude actions to determine dischargeability. Bankruptcy Rule 3003(c)(2) limits the consequences of not filing a proof of claim solely to voting and distribution rights. Although allowing the IRS to pursue its claim after a Chapter 11 plan's confirmation may conflict with the discharge provisions' intent, Congress has prioritized tax revenue collection over debtor rehabilitation, a policy this court must uphold. Lastly, plaintiffs argue that without a filed proof of claim, the IRS cannot have a "debt" for nondischargeability under § 523. However, the term "claim" encompasses a broad range of rights to payment, as defined in 11 U.S.C. § 101(5)(A), and does not necessitate proof for existence. Thus, gift taxes qualify as a disputed right to payment and can be considered a "debt" subject to nondischargeability under § 523.

Plaintiffs missed an opportunity to mitigate their financial difficulties through provisions in the Bankruptcy Code designed to protect debtors from nondischargeable debts. Under Section 501(c), if a creditor does not timely file a proof of claim, the debtor or trustee can file on their behalf within thirty days after the bar date, as per Bankruptcy Rule 3004. This mechanism allows the debtor to consolidate all known claims and potentially reduce nondischargeable debts through a bankruptcy plan. Had the plaintiffs utilized this provision, they could have confirmed a reorganization plan that included deferred payments for excise taxes, as allowed under Section 1129(a)(9)(C) and Section 507(a)(7)(E), which pertains to excise taxes on transfers made within three years before filing. Instead, the IRS did not file a claim and, as a result of the plaintiffs' failure to act within the statutory timeframe, the IRS can seek recovery outside of bankruptcy. The plaintiffs remain liable for the nondischargeable debt post-discharge due to this oversight. The document also notes that failure to file a proof of claim leads to exclusion from voting and distribution in the bankruptcy process, posing a significant risk for creditors with nondischargeable debts. Lastly, the text references relevant case law and emphasizes the implications of the bar order related to disputed claims.

Plaintiffs argue that a governmental unit's failure to submit a proof of claim under Hoffman v. Connecticut Dep't of Income Maintenance renders that claim dischargeable, even if it falls within the exceptions to discharge outlined in § 523. The court disagrees, clarifying that Hoffman pertains to jurisdiction, allowing bankruptcy courts to determine the amount and dischargeability of a debtor's liabilities to a state government. However, it emphasizes that a governmental unit's lack of a filed proof of claim does not automatically lead to the discharge of a nondischargeable debt. The ruling reiterates the distinction between jurisdictional authority and the implications of failing to file a claim.