United States Court of Appeals

Fifth Circuit

FILED

June 1, 2005

Charles R. Fulbruge III

Clerk

In the

United States Court of Appeals

for the Fifth Circuit

_______________

m 04-60799

Summary Calendar

_______________

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

______________________________
2

Before DAVIS, SMITH, and DENNIS, 

Circuit Judges.

JERRY E. SMITH, Circuit Judge:*

H. Dee Johnson, Jr., appeals a decision of

the United States TaxCourt, which upheld the

Internal Revenue Service’s findings of deficiencies in the tax reported on certain of his

returns. Finding no error, we affirm.

I.

On September 3, 1991,Johnson filed a petition under chapter 7 of the BankruptcyCode.1

Johnson’s assets that were transferred to the

estate included a $153,000 business debt

payable to him. After becoming an asset of the

estate, the debt became worthless, resulting in

a new operating lossto the estate of $153,000.

The estate also included two properties in,

respectively, Argyle,Texas, andDallas,Texas,

that had been mortgaged to Citicorp Mortgage, Inc. (“CMI”); Johnson owed $262,128

on the Argyle property and $128,572 on the

Dallas property. 

CMI was granted relief from the bankruptcy stay to foreclose on its mortgages. It

sold the Argyle property for $171,500, leaving

an unrecovered deficiency of $90,628; it sold

the Dallas property for $21,700, leaving an

unrecovered deficiency of $106,872. CMI did

not file proofs of claims against the estate for

these unrecovered amounts.

On December 18, 1991, the bankruptcy

court granted Johnson a discharge, releasing

him from “all dischargeable debts,” and enjoined all creditors whose debts were discharged by the order from “engaging in any acts

to collect such debts as personal liabilities” of

the taxpayer. On May 5, 1995, the bankruptcy

court accepted the final report of the trustee,

which reported that the total amount of debts

allowed was $52,590 and that the net liquidation proceedsto be distributed for those claims

was $47,674, which left $4,916 of the allowed

debts discharged and unpaid.

Johnson deducted the $153,000 net operating loss of the estate from hisincome for tax

years 1994 and 1995. The Commissioner

disallowed the deductions, taking the position

that Johnson was released from $197,500 of

indebtedness to CMI, and although this

amount was excluded from income under

I.R.C. § 108(a), it still works, under § 108(b),

to reduce to zero the net operating loss

(“NOL”) from, or carryovers to, the year of

discharge. Johnson challenged this determination, arguing that the only debt discharged by

the bankruptcy court wasthe $4,916 in unpaid

allowed claims reported by the trustee and

noted in the bankruptcy court’s final decree.

II.

Generally, where a taxpayer is released or

discharged fromthe total amount of a debt, the

difference is income for the discharge or cancellation of indebtedness (hereinafter “COD

income”), which is included in gross income

for tax purposes. I.R.C. § 61(a)(12). There

is, however, an exception to this general rule

where the discharge occurs in a bankruptcy

proceeding: That COD income is not included

in grossincome. I.R.C. § 108(a)(1). Although

such COD income is not included in gross

income, it is still used to reduce certain tax

attributes ofthe taxpayer, including, inter alia,

net operating losses. I.R.C. § 108(b).

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published

and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

1

 Title 11, United States Code.
3

The parties do not dispute that Johnson assumed an NOL of $153,000 as a result of the

transfer of the business debt to the bankruptcy

estate. Where the parties part ways, however,

is in the amount of COD income they believe

was excluded from gross income under

§ 108(a) as a result ofthe bankruptcy proceeding, that offsets the claimed NOL. Johnson

claimsthat the proper amount of COD income

is $4,916 (the amount the bankruptcy court

accepted in its final report as the total amount

of debtsleft discharged), but the Commissioner contends that the proper amount also includes the $197,500 discharged to CMI

through the mortgage foreclosures, totally

eviscerating Johnson’s claimedNOL. The Tax

Court agreed with the Commissioner.

III.

Johnson argues that the Tax Court erred,

because he claims the plain language of § 108

requires the Tax Court to accept the findings

of the bankruptcy court with respect to the

amount of COD income that is exempted from

gross income under § 108(a) and offsets his

claimed NOL under § 108(b). In support,

Johnson cites two subsections of § 108. First,

he points to subsection (d)(2), which defines a

“title 11 case” for purposes of § 108 as “a case

under title 11 ofthe United States Code (relating to bankruptcy), but only if the taxpayer is

under the jurisdiction of the court in such case

and the discharge of indebtedness is granted

by the court oris pursuant to a plan approved

by the court” (emphasis added). 

Johnson then quotes subsection (b)(3)(A),

which provides that the §108(b) reduction of

tax attributes “shall be one dollar for each dollar excluded by subsection (a).” Based on

these subsections, Johnson believes that because the bankruptcy court’s final order referenced a discharge of only $4,916 of debt, this

was the only amount that could be excluded

from income under § 108(a) as a result of the

definition set forth in subsection (d)(2), and is

the maximum amount that could offset tax

attributes under subsection (b)(1), because of

the dollar-for-dollar rule established by subsection (b)(3).

Johnson’s position is in error because, as

the Tax Court astutely found, Johnson’s reasoning is based on a misunderstanding of

bankruptcy law. In exchange for transferring

property to the estate, an eligible debtor receives a discharge from “all debts that arose

before the date of the order for relief under

this chapter.” Bankr. Code § 727(b) (emphasis added). The CMI debts arose before the

order for relief was granted in this case, and

were discharged by it, even if not specifically

referenced in the bankruptcy court’s final

order.

The final order issued by the district court

only referenced the $4,916 in discharged debt,

because CMI did not file a proof of claim on

the mortgage debts. CMI had liens on the

Dallas and Argyle properties and was not required to file a proof of claim to protect its

liens.2 Although a creditor that fails to file a

proof of claim is not entitled to receive distribution from the estate, it may still enforce its

security interestsin estate property on which it

has liens, as CMI did by foreclosing on the

mortgages.3 CMI forfeited the right to seek

recourse against Johnson personally for the

2

See Bankr. Code § 506(a), (d); see Simmons

v. Savell (In re Simmons), 765 F.2d 547, 551 (5th

Cir. 1985) (stating that “no creditor is required to

file a proof of claim”).

3

See Johnson v. Home State Bank, 501 U.S.

78, 82 (1991) (stating that bankruptcy discharge

affects only personal liability of debtor, not in rem

action against property). 
4

outstanding debt after the foreclosure sales by

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 bankruptcy court’s findings are not in tensionSSthe

bankruptcy court found that $4,916 in debt

was discharged asto creditorsthat filed proofs

of claim against the estate, and the Tax Court

made the additionalfinding that the CMI debts

were also discharged as a result of the bankruptcy 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 Johnson’s NOL under § 108(b)(2).5

AFFIRMED.

4

See Bankr. Code § 727(b) (“Except as provided 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 order for relief under this chapter, and any liability

on a claim that is determined under section 502 of

thistitle asifsuch claim had arisen before the commencement 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 pursuant to Bankr. Code § 727(b), creditor’s failure to

file proof of claim did not prevent discharge of

debtor’s obligation).

5

 Because we conclude that the findings of the

(continued...)

5

(...continued)

tax court are consistent with those of the bankruptcy court, Johnson’s res judicata and collateral

estoppel arguments are also without merit.