Iowa Dep't of Revenue Creditor v. DeVries (In re DeVries)

621 B.R. 445

IN RE: Philip Charles DEVRIES, Doing Business as Staple D. Land and Livestock, LLC ; Angie Marie DeVries Debtors

Iowa Department of Revenue Creditor - Appellant

v.Philip Charles DeVries; Angie Marie DeVries Debtors - Appellees

No. 20-6011

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: October 23, 2020

Filed: November 25, 2020

Counsel who presented argument on behalf of the appellant was Brandon J. Gray, AAG, of Des Moines, IA. The following attorney(s) appeared on the appellant brief; Brandon J. Gray, AAG, of Des Moines, IA.

Counsel who presented argument on behalf of the appellee was Joseph A. Peiffer, of Cedar Rapids, IA. The following attorney(s) appeared on the appellee brief; Joseph A. Peiffer, of Cedar Rapids, IA.

Before SCHERMER, NAIL and DOW, Bankruptcy Judges.

SCHERMER, Bankruptcy Judge

The Iowa Department of Revenue (IDR) appeals the bankruptcy court's order confirming the Chapter 12 plan of Philip Charles DeVries and Angie Marie DeVries (Debtors). We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons that follow, we reverse.

ISSUE

The issue on appeal is whether Bankruptcy Code § 1232 allows a Chapter 12 plan to compel a taxing authority to disgorge pre-petition withholdings. We hold that the plain language of § 1232 does not permit such a result.

BACKGROUND

The facts are undisputed. In 2017, Debtors sold farmland and farming machinery, adding a substantial amount of capital gains to their taxable income and resulting in the Debtors owing a significant amount of unpaid income taxes. The Debtors' calendar year 2017 tax liability to the IDR and the United States Internal Revenue Service (IRS) was reduced by withholdings from Angie DeVries's earnings that paid $2,006 to the IDR and $4,584 to the IRS.

In February 2019 when they owed significant income taxes, the Debtors filed a joint petition for relief under Chapter 12. In addition to their 2017 tax returns for all income, the Debtors filed "pro forma" tax returns showing that no income tax liability would have been owed for that year without the farmland and equipment sales. The Debtors' Chapter 12 plan was confirmed with provisions stating that each taxing authority should "refund the overpayment of 2017 income taxes ... to the Debtors" by payment to the Chapter 12 trustee for allocation to attorney fees. The alleged overpayments to the IDR and the IRS were in the amount of the withholdings, $2,006 for the IDR and $4,584 for the IRS.

The IDR and IRS objected to the plan provision compelling them to refund the alleged overpayments. The bankruptcy court overruled the objections and confirmed the Debtors' plan. The court considered the interaction of Bankruptcy Code §§ 1232(a) and 553(a). It stated that the full effects of § 1232(a) were left unclear under the statute. Finding an ambiguity, the court reviewed and relied on the legislative history to hold that under § 1232(a) family farmers with pre-petition capital gains tax debt could "require taxing entities to issue a refund of withheld income taxes to the bankruptcy estate." In re DeVries , No. 19-00181, 2020 WL 2121260, at *2-5 (Bankr. N.D. Iowa April 28, 2020). The IDR pursued its position by appealing the confirmation order. At oral argument, the IDR made clear its opposition to the Debtors' plan does not rely upon the setoff provisions of § 553. This case challenges the scope of Bankruptcy Code § 1232.

STANDARD OF REVIEW

"[T]he appellate court reviews the bankruptcy court's legal decision using a de novo standard and reviews factual findings for clear error." The Bank of Missouri v. Family Pharmacy, Inc. (In re Family Pharmacy, Inc.) , 614 B.R. 58, 60 (B.A.P. 8th Cir. 2020). "Interpretation of the Bankruptcy Code is a question of law requiring de novo review." The Official Comm. of Unsec. Creditors v. The Archdiocese of St. Paul and Minn. (In re The Archdiocese of St. Paul and Minn.) , 888 F.3d 944, 950 (8th Cir. 2018) (citation omitted); In re Family Pharmacy, Inc. , 614 B.R. at 60 (review of bankruptcy court's interpretation and application of Bankruptcy Code provision is de novo ).

DISCUSSION

The language of Bankruptcy Code § 1232(a) dictates the result in this action. It states that:

(a) Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation--

(1) shall be treated as an unsecured claim arising before the date on which the petition is filed;

(2) shall not be entitled to priority under section 507;

(3) shall be provided for under a plan; and

(4) shall be discharged in accordance with section 1228.

11 U.S.C. § 1232(a) (emphasis added).¹ "It is well established that ‘when the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’ " Lamie v. United States Trustee , 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (internal quotation marks omitted) (citation omitted) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. , 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000), in turn quoting United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ). The disposition required by the text in this case is certainly not absurd.

The IDR did not object to the Debtors' Chapter 12 plan's treatment of its claim as non-priority. This appeal concerns only the plan's requirement of disgorgement of the pre-petition withholdings. At oral argument, the Debtors cautioned our decision would have far-reaching ramifications for post-petition sales of farm property that result in capital gains tax. We decline to decide that issue because it is not before us.

Section 1232's language clearly sets forth the scope and purpose of the statute. It is simply a priority-stripping provision. See Knudsen v. I.R.S. , 581 F.3d 696, 718 (8th Cir 2009), (referring to § 1232's predecessor, § 1222(a)(2)(A), as "a priority-stripping provision as opposed to a tax provision."), abrogated on other grounds by Hall v. U.S. , 566 U.S. 506, 132 S.Ct. 1882, 182 L.Ed.2d 840 (2012). The statute does not change the way the amount of a claim of a governmental unit is calculated for the underlying tax liability; it only addresses the priority of such a claim. Nor does § 1232 establish the right to or amount of a refund. With respect to the bankruptcy court's use of the term "refund," any such refund would travel under § 505, not § 1232 which does not mention refunds. Accordingly, nothing in § 1232 authorizes a debtor's Chapter 12 plan to require a taxing authority to disgorge, refund, or turn over pre-petition withholdings for the benefit of the estate.

As § 1232(a) states, it applies to "[a]ny unsecured claim of a governmental unit." 11 U.S.C. § 1232(a) (emphasis added). The Bankruptcy Code defines a "claim," in pertinent part, as "right to payment." 11 U.S.C. § 101(5)(A). The term "claim" cannot be read to include amounts paid to the IDR by pre-petition withholdings. See 11 U.S.C. § 502(b) (if an objection to a proof of claim is filed, "the court, ..., shall determine the amount of such claim ... as of the date of the filing of the petition."). On the petition date, the Debtors did not owe the IDR the amount it had collected pre-petition through withholdings, so it was not a part of the IDR's claim subject to § 1232. Contrary to the Debtors' position, § 1232 provides no basis to magically reverse the application of the pre-petition withheld funds when calculating the IDR's claim.

The Debtors argue that the "pro forma" tax return provides a basis for authorizing debtors under § 1232 to compel return of the amount reflected as a refund. The purpose of the "pro forma" return is to determine the amount of the tax that is entitled to priority treatment. See Knudsen , 581 F. 3d at 718-19. ("[T]he [debtors] should calculate a return for all income, then a second ‘pro forma’ tax return removing all qualifying sales income, ... the taxes shown on the ‘pro forma’ return would represent the portion of the tax claim entitled to priority status, while the difference between the taxes shown on the return for all income and the taxes shown on the ‘pro forma’ return would represent the unsecured portion of the tax claim."). The "pro forma" returns are not prepared to calculate the amount of underlying liability owed. An amount that might hypothetically have been refunded to the Debtor on a "pro forma" tax return is not a "right to payment" and therefore not a "claim." See 11 U.S.C. § 101(5)(A).

The Debtors point to § 1232(a)(4)'s statement that a deprioritized claim may be discharged to the extent not paid under the terms of a confirmed plan as support for their asserted entitlement to a refund. See 11 U.S.C. § 1232(a)(4) ("[a]ny unsecured claim of a governmental unit .... shall be discharged in accordance with section 1228"). Nothing in § 1232 or elsewhere in the Bankruptcy Code suggests that a discharge under § 1228 equates to a return of sums paid pre-petition.

In an effort to rebut the IDR's argument concerning the language of the statute, the Debtors cite to the Eighth Circuit's analysis in Knudsen v. I.R.S. about calculating the allocation a debtor's tax liability between non-priority and priority claims under § 1232's predecessor statute. 581 F.3d at 715-19. They maintain that the court's analysis where the statute was silent about the allocation of tax liability between non-priority and priority claims applies here to the issue of whether a court may order disgorgement of pre-petition withholdings. Because of the statute's silence, the Knudsen court deemed it ambiguous and looked beyond its...