Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_15-cv-01448/USCOURTS-cand-3_15-cv-01448-0/pdf.json

Parties Involved:
United States of America
Appellant
Kirk Lindsay Wilson
Appellee

Document Text:

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Appellant,

v.

KIRK LINDSAY WILSON,

Appellee.

Case No. 15-cv-01448-VC 

OPINION

The United States of America appeals from an order of the United States Bankruptcy 

Court for the Northern District of California entered on March 12, 2015. The bankruptcy court 

granted partial summary judgment to Kirk Lindsay Wilson on the ground that a tax penalty

imposed on Wilson for failure to file his 2008 taxes was discharged, and that the Internal 

Revenue Service's seizure of Wilson's funds to satisfy the penalty was therefore improper.

1

 

The judgment of the bankruptcy court is reversed and this matter is remanded for further 

proceedings consistent with this opinion.

I. BACKGROUND

Wilson obtained an extension to file his 2008 tax return from April 15, 2009 to October 

15, 2009. Wilson did not in fact file his 2008 tax return until February 2011. The IRS

accordingly imposed penalties on Wilson for his failure to file his 2008 tax return, pursuant to 26 

U.S.C. § 6651(a)(1), and for his failure to pay his 2008 tax obligation, pursuant to 26 U.S.C. § 

 

1

Pursuant to Fed. R. Bankr. P. 8019(b)(3), the Court finds after examining the briefs and the 

record that oral argument is unnecessary because the facts and arguments are adequately 

presented in the papers and the decisional process would not be significantly aided by oral 

argument.

Case 3:15-cv-01448-VC Document 10 Filed 01/21/16 Page 1 of 4
2

6651(a)(2). 

On July 24, 2012, Wilson filed a Chapter 7 petition for bankruptcy. The Chapter 7 

Trustee used the bankruptcy estate funds to satisfy Wilson's non-dischargeable 2008 income tax 

liability, but there were apparently insufficient funds to satisfy either the failure-to-file penalty or 

the failure-to-pay penalty. The IRS subsequently intercepted a California income tax refund due 

to Wilson and levied Wilson's Social Security benefits to satisfy those tax penalties. Wilson then

commenced an adversary proceeding against the IRS, seeking, inter alia, return of the seized 

funds, on the ground that the tax penalties were discharged under 11 U.S.C. § 523(a)(7)(B).

Wilson moved for summary judgment. In the proceedings below, the IRS agreed with 

Wilson that the failure-to-pay penalty was discharged, but argued that the failure-to-file penalty 

was not, and that the seizure of Wilson's funds to satisfy the failure-to-file penalty was therefore 

proper. The bankruptcy court, relying on McKay v. United States, 957 F.2d 689 (9th Cir. 1992), 

granted partial summary judgment in favor of Wilson, concluding that the failure-to-file penalty 

was discharged under section 523(a)(7)(B). The bankruptcy court noted that McKay, in 

construing section 523(a)(7)(B), explained that the statute rendered dischargeable "[a] penalty 

imposed on unpaid taxes accruing more than three years before the filing of the bankruptcy 

petition." 957 F.2d at 693. The bankruptcy court concluded that this sentence should be 

interpreted to mean that the relevant measuring date under the statute is the accrual of the tax 

obligation. The bankruptcy court concluded that Wilson's 2008 tax obligation accrued on April 

15, 2009, more than three years before he filed his bankruptcy petition, and therefore that the 

failure-to-file penalty was discharged. 

II. DISCUSSION

A.

Because the parties agreed before the bankruptcy court that the failure-to-pay penalty was 

discharged, the only issue on appeal in this case is whether the failure-to-file penalty was 

discharged under 11 U.S.C. § 523(a)(7)(B). In reviewing a decision of the bankruptcy court, 

"[t]he district court acts as an appellate court, reviewing the bankruptcy court's findings of fact 

Case 3:15-cv-01448-VC Document 10 Filed 01/21/16 Page 2 of 4
3

under the clearly erroneous standard and its conclusions of law de novo." In re Daniels-Head & 

Associates, 819 F.2d 914, 918 (9th Cir. 1987) (citing In re American Mariner Industries, Inc., 

734 F.2d 426, 429 (9th Cir. 1984)). "The issue of dischargeability of a debt is a mixed question 

of fact and law that is reviewed de novo." Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 

2004) (citing Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 826 (9th Cir. 2002)).

B.

Section 523(a)(7)(B) provides that:

A discharge under . . . this title does not discharge an individual 

debtor from any debt . . . to the extent such debt is for a fine, 

penalty, or forfeiture payable to and for the benefit of a 

governmental unit, and is not compensation for actual pecuniary 

loss, other than a tax penalty . . . imposed with respect to a 

transaction or event that occurred before three years before the date 

of the filing of the petition.

As the Ninth Circuit has explained, section 523(a)(7)(B) is relatively "straightforward": "[i]t 

makes dischargeable any tax penalty 'imposed with respect to a transaction or event that occurred 

before three years before the date of the filing of the petition.'" McKay, 957 F.2d at 693 (quoting 

§ 523(a)(7)(B)). Stated differently, section 523(a)(7)(B) "makes tax penalties of these kinds 

nondischargeable only if the transaction or event giving rise to the penalty occurred during the 3 

years immediately before the date on which the petition under title 11 was filed." In re Burns, 

887 F.2d 1541, 1547 (11th Cir. 1989) (citing S. Rep. No. 1106, 95th Cong., 2d Sess. 23 (1978)). 

The Code does not define "transaction or event." But the most natural application of 

section 527(a)(7)(B) is that the "transaction or event" with respect to which the penalty in this 

case was imposed was Wilson's failure to file by the October 15, 2009 deadline. The penalty 

was imposed pursuant to 26 U.S.C. § 6651(a)(1), which provides that 

In case of failure to file any [required tax] return . . . on the date 

prescribed therefor (determined with regard to any extension of 

time for filing), unless it is shown that such failure is due to 

reasonable cause and not due to willful neglect, there shall be 

added to the amount required to be shown as tax on such return 5 

percent of the amount of such tax if the failure is for not more than 

1 month, with an additional 5 percent for each additional month or 

fraction thereof during which such failure continues, not exceeding 

25 percent in the aggregate.

Case 3:15-cv-01448-VC Document 10 Filed 01/21/16 Page 3 of 4
4

(emphasis added). Indeed, interpreting section 523(a)(7)(B) in combination with section 

6651(a)(1), another district court in this Circuit has concluded that "there is no question that the 

transaction or event to which [a] sanction[] [under section 6651(a)(1)] relate[s] is the failure to 

file a return . . . on the due date. Although the penalties imposed under the provision increase 

with each month the taxpayer remains in non-compliance, this monthly accretion merely changes 

the amount of the taxpayer's liability—it does not alter the date of the transaction giving rise to 

the penalties." In re Hedgecock, 160 B.R. 380, 383 (D. Or. 1993).

Thus, although McKay's statement that "[a] penalty imposed on unpaid taxes accruing 

more than three years before the filing of the bankruptcy petition is dischargeable," 957 F.2d at 

693, could potentially be interpreted to mean a penalty is discharged if the taxes accrued more 

than three years before the filing of the petition, the better reading of that statement, given the 

plain language of section 523(a)(7)(B), is that a penalty accruing more than three years prior to 

filing is discharged under the statute. That is, the penalty is only discharged if the transaction or 

event for which it was imposed occurred three years prior to filing. In this case, the mandatory 

language of section 6651(a)(1) indicates that penalties were required to be imposed when Wilson

failed to file by the extended deadline, such that the penalty could be said to have "accru[ed]" 

within the meaning of McKay on October 16, 2009, when it was clear Wilson had failed to file 

by the extended deadline. 957 F.2d at 693. Because that date was less than three years before 

Wilson's Chapter 7 filing on July 24, 2012, the bankruptcy court's determination that Wilson's 

failure-to-file penalty was discharged under section 523(a)(7)(B) was in error.

III. CONCLUSION

The judgment of the bankruptcy court is reversed. This case is remanded to the 

bankruptcy court for further proceedings consistent with this opinion.

IT IS SO ORDERED.

Dated: January 21, 2016

______________________________________

VINCE CHHABRIA

United States District Judge

Case 3:15-cv-01448-VC Document 10 Filed 01/21/16 Page 4 of 4