1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-3-1995

Hutchins v IRS

Precedential or Non-Precedential:

Docket 94-5509

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Recommended Citation

"Hutchins v IRS" (1995). 1995 Decisions. Paper 262.

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UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 94-5509 and 94-5510 

 

CHARLES T. HUTCHINS, 

 Appellant in 94-5509 

v. 

 

INTERNAL REVENUE SERVICE; 

UNITED STATES OF AMERICA 

 

 

CHARLES T. HUTCHINS 

v. 

INTERNAL REVENUE SERVICE; 

UNITED STATES OF AMERICA 

UNITED STATES OF AMERICA, 

 Appellant in 94-5510 

 

On Appeal from the United States District Court 

for the District of New Jersey 

(D.C. Civil Action No. 92-cv-04134) 

 

Submitted Pursuant to Third Circuit LAR 34.1(a) 

 May 24, 1995 

 

 Before: GREENBERG, ROTH and ALDISERT, Circuit Judges

(Opinion Filed October 3, 1995) 

 
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3 

Charles T. Hutchins 

5011 Marshall Road 

Farmingdale, NJ 07727 

 Pro Se Appellant\Cross-Appellee 

Faith S. Hochberg 

United States Attorney 

Loretta C. Argrett 

Gary R. Allen 

Bruce R. Ellisen 

Bridget Rowan 

Laurie Snyder 

Assistant U.S. Attorneys 

Tax Division 

U.S Department of Justice 

Post Office Box 502 

Washington, D.C. 20044 

 Attorneys for Appellee\Cross-Appellant 

 

OPINION OF THE COURT 

 

Roth, Circuit Judge: 

 In this appeal, Charles T. Hutchins, appearing pro se, 

and the Internal Revenue Service each challenge aspects of the 

entry of summary judgment below. The district court granted 

summary judgment to the I.R.S. on its counterclaim to recoup an 

erroneous tax credit, but then, disturbed by this result, invoked 

equitable estoppel sua sponte to bar the I.R.S. from recovering 

all but a minor portion its claim. This holding necessarily 

denied Hutchins' standing to sue for the original tax credit. We 

reverse. Hutchins had standing to pursue his original tax claim 

because in the bankruptcy proceedings that gave rise to this 
4 

case, the tax refund descended to him through abandonment as part 

of a properly scheduled antitrust action. Because the I.R.S. 

grounded its recoupment claim solely on Hutchins' lack of 

standing, our ruling on this issue is dispositive. We reach 

neither the validity of the underlying tax refund, which is not 

properly before us, nor the application of equitable estoppel, 

which is rendered superfluous. 

I. Factual and Procedural History

 In November 1979 Hutchins, as sole proprietor of 

Hutchins Supply Company, filed a Chapter 7 Bankruptcy Petition in 

the U.S. Bankruptcy Court in Anchorage, Alaska. After the 

initial scheduling of all known assets and liabilities pursuant 

to 11 U.S.C. § 521(1), Hutchins learned that his business had 

failed because of his competitors' antitrust violations and 

unfair business practices. Hutchins instituted an antitrust 

action against these competitors, amending his schedules to 

reflect the antitrust cause of action as an asset of the bankrupt 

estate. By stipulation, the estate trustee allowed Hutchins to 

pursue the action, reserving the right to all settlement 

proceeds. In 1986, the resulting claims were settled for 

$243,000 in cash, which was turned over to the bankruptcy 

trustee. In addition, the antitrust defendants withdrew claims 

against the bankrupt estate for approximately $76,000 in business 

debt. On January 27, 1987, the trustee filed an estate income 

tax return reflecting both the cash and the retired debt as 

income. 
5 

 On September 21, 1988, the trustee petitioned the U.S. 

Bankruptcy Court to abandon any remaining assets to Hutchins. The 

requisite order was issued on March 23, 1989. The bankruptcy 

proceedings were closed sometime prior to February 1989, reopened on March 1, 1989, and closed a second time on March 14, 

1990. 

 On April 2, 1989, Hutchins filed an amended tax return 

for 1987, asserting that pursuant to 26 U.S.C. § 108, the $76,000 

in retired business debt was not taxable income. Hutchins sought 

a tax credit of $38,458, the amount he believed the trustee had 

overpaid by erroneously including the $76,000 in retired business 

debt as income. On January 22, 1992, the I.R.S. granted in part 

the claimed refund and applied a credit of $37,897.04 to 

Hutchins' tax arrearages. On September 29, 1992, Hutchins 

responded by filing a complaint against the I.R.S. in the U.S. 

District Court for the District of New Jersey seeking, among 

other relief, an additional credit of $650. The I.R.S. responded 

by counterclaiming for the entire January 1992 tax credit, 

alleging it was granted erroneously since Hutchins was not the 

proper party to receive a refund of taxes paid by the bankruptcy 

estate. 

 On May 24, 1993, the district court dismissed Hutchins' 

various prayers for relief on several grounds, leaving the 

I.R.S.'s counterclaim as the sole remaining dispute. That order 

has not been appealed. On January 10, 1994, on cross motions for 

summary judgment, the district court ruled in favor of the I.R.S. 

on its counterclaim, denied Hutchins' motion to dismiss, and 
6 

invoked equitable estoppel to bar the I.R.S. from recovering all 

but $663 plus interest from Hutchins. Both parties appealed to 

this court. 

II. Jurisdiction

 The district court properly asserted federal 

jurisdiction over the I.R.S.'s counterclaim under 26 U.S.C. 

§7405(b). We have jurisdiction over the district court's final 

order pursuant to 28 U.S.C. § 1291. Our review of a grant of 

summary judgment is plenary. Oritani Sav. & Loan Ass'n v. 

Fidelity & Deposit Co., 989 F.2d 635, 637 (3d Cir. 1993); Goodman 

v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert. 

denied, 429 U.S. 1038 (1977). The question of standing is itself 

subject to plenary review. Polychrome Int'l Corp. v. Krigger, 5 

F.3d 1522, 1530 n.19 (3d Cir. 1993). 

III. Discussion

 In its counterclaim in district court, the I.R.S. 

sought to recoup the entire tax credit it had granted Hutchins by 

asserting that he lacked standing to pursue the discrepancy. The 

I.R.S. argued that because Hutchins had failed to schedule the 

tax claim explicitly as an asset of the bankrupt estate, the 

right to the refund was not abandoned but was instead retained by 

the estate. Since the refund belonged to that separately taxable 

entity, only the trustee could sue for its recovery. Hutchins 

therefore had no basis for his claim. Consequently, any tax 

refund granted to Hutchins was erroneous and could be recovered. 

The district court implicitly conceded this much in an elliptical 
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comment1 followed by its sua sponte application of equitable 

estoppel. We disagree. This line of reasoning ignores the fact 

that the tax refund originated as part of the properly scheduled 

antitrust action. The refund claim was at best a derivative 

asset that arose as a result of the trustee's tax filings on 

behalf of the estate. Moreover, the claim was not asserted until 

after the bankruptcy had closed. Since it existed during the 

bankruptcy as an integral part of the antitrust claim--or if 

separately as a still inchoate right--the tax claim was properly 

scheduled through the scheduling of the antitrust action and 

descended to Hutchins through abandonment. Hutchins had standing 

to sue. 

A.

 We observe in passing that if the tax refund were a 

unique asset that had to be scheduled separately, as the I.R.S. 

asserts, then the failure to schedule the refund is fatal to 

Hutchins' claim. It is clear that an asset must be properly 

scheduled in order to pass to the debtor through abandonment 

under 11 U.S.C. § 554. See Vreugdenhill v. Navistar Int'l 

Transp. Corp., 950 F.2d 524, 526 (8th Cir. 1991) (refusing to 

find unscheduled cause of action abandoned even where trustee was 

aware of it prior to abandonment); In re Medley, 29 B.R. 84, 86-

87 (Bankr. M.D. Tenn. 1983) (refusing to abandon unscheduled 

 

1 The opinion's only language on point read: "The Court 

is unpersuaded by defendant's argument that the credit issued to 

plaintiff's personal account should be completely rescinded 

simply because plaintiff may have lacked standing to file the 

amended return at issue." Hutchins v. United States, No. 92-4134 

(GEB) slip op. at 5 (D.N.J. Jan. 10, 1994) (emphasis added). 
8 

refund claim to debtor); DiStasio v. United States, 22 Cl. Ct. 

36, 52 (1990) (holding claim for refund abandoned only if 

scheduled); Weiner v. United States, 15 Cl. Ct. 43, 45 (1988) 

(retaining unscheduled tax refund claim as property of bankrupt 

estate); see generally 4 Collier on Bankruptcy ¶ 554.03 (15th ed. 

1994). It is equally clear that since the bankrupt estate 

retains unscheduled assets, only the bankruptcy trustee has the 

authority to control them. 26 U.S.C. § 554(d) ("property . . . 

not abandoned under this section . . . remains property of the 

estate"). This authority includes the power to file an amended 

tax return. See 26 U.S.C. § 6012(b)(4) (requiring that fiduciary 

for estate file estate return); see also Mindlin v. Drexel 

Burnham Lambert Group, 160 B.R. 508, 514 (Bankr. S.D.N.Y. 1993) 

("By operation of 11 U.S.C. § 554(c) and (d), any asset not 

scheduled pursuant to 11 U.S.C. § 521(1) remains property of the 

estate, and the debtor loses all rights to enforce it under his 

own name."). These propositions, however, beg the fundamental 

question raised by this dispute, viz. were the antitrust action 

and tax refund claim separate assets? If they were not, then the 

tax refund was scheduled as part and parcel of the antitrust 

claim, and it descended to Hutchins through abandonment. After 

reviewing the respective arguments, we conclude that during the 

pendency of the bankruptcy, the tax refund existed as an inherent 

part of the properly scheduled antitrust claim. 

 Initially, it bears noting that the tax refund in this 

case differs from the tax refunds that typically appear as 

unscheduled assets in bankruptcy proceedings. The standard case 
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of an unscheduled tax refund involves an expected refund computed 

by the debtor and entered on a personal or corporate tax return, 

which the debtor then fails to schedule after declaring 

bankruptcy. See, e.g., Mertz v. Rott, 955 F.2d 596 (8th Cir. 

1992) (considering estate tax refund that debtors anticipated but 

failed to schedule); Doan v. Hudgins, 672 F.2d 831 (11th Cir. 

1982) (considering debtor's failure to list expected tax refund); 

Barowsky v. Serelson, 102 B.R. 250 (Bankr. D. Wyo. 1989) 

(reopening bankruptcy after discovery of anticipated but 

unscheduled income tax refund). The scenario is even clearer 

when the refund has already been paid by the I.R.S. and yet goes 

unscheduled. See In re Maynard, 162 B.R. 349 (Bankr. M.D. Fla. 

1993); In re Walton, 158 B.R. 943 (Bankr. N.D. Ohio 1993). In 

either case, the debtor knows of the existence of the asset, 

expects to receive it, and should have scheduled it. 

 The instant facts are different. Here, the tax refund 

was the result of action by the bankruptcy trustee, and the 

claimed discrepancy was not asserted until after the bankruptcy 

had closed. More importantly, there was no reason for the debtor 

or the trustee to assume, believe, or even guess that any refund 

existed. The taxes were paid on income from an antitrust 

settlement, so there had been no prior withholding. Assuming 

that the trustee computed the tax correctly, there would be no 

refund.2

 

2 When this opinion characterizes the actions of the 

trustee as "correct", "incorrect", "erroneous" or the like, it 

does so in the abstract. The validity of the underlying refund 

is not before us, see discussion infra, and we express no opinion 
10 

 These important factual distinctions indicate that at 

the time of the bankruptcy, the crucial asset, indeed the only

asset, was the antitrust settlement. During the bankruptcy, no 

"tax refund" asset existed. It was at best an inchoate right. 

Creating the legal fiction that this asset arose at the time of 

the erroneous filing and existed independently, albeit covertly, 

would require every debtor to list as an additional asset a 

potential tax refund due to the possibly erroneous filings of the 

trustee. Alternatively, the debtor would have to supervise and 

double check the actions of the trustee, contrary to the 

intention of 11 U.S.C. § 704, which makes the bankruptcy trustee 

accountable for all property received. See In re R.E. Lee & 

Sons, Inc., 95 B.R. 316 (Bankr. M.D. Pa. 1989) (limiting debtor's 

burden to reasonable diligence in completing schedules). There 

seems little to recommend either course as an innovation in 

bankruptcy procedure. 

 Neither the district court nor the parties have cited 

any authority addressing the status of an undiscovered tax refund 

that arises post-petition as a result of the filings of the 

trustee. Our efforts have revealed no case on point. The 

extensive citations to cases on unscheduled assets are inapposite 

if the tax refund did not yet exist. Indeed, these cases would 

support Hutchins' claim since he properly scheduled the only 

 

on the propriety of the trustee's actions. We use these terms in 

our discussion of standing because Hutchins' original tax refund 

depended on a filing error by the trustee. These 

characterizations have emerged as a necessary part of the case as 

framed by the parties, and the court adopts them as a 

convenience. 
11 

existing asset, the antitrust proceeds. Despite the absence of 

authority, both parties offer arguments on the issue, and logic 

dictates the result. 

 First, we agree with Hutchins that "[i]t was not the 

appellant's right, position or responsibility to amend his 

schedules to reflect trustee's accounting and tax payment 

errors." Brief of Appellant at 16. Hutchins appears to contend 

that, as suggested above, he had no reason to suspect the error 

and hence the existence of the refund. We make explicit the 

necessary implication: The tax refund was not a known asset at 

the time of the bankruptcy and so could not be scheduled 

separately pursuant to 11 U.S.C. § 521(1). 

 Further support flows from the concept of valuation. At 

the time of the bankruptcy, the principal asset for distribution 

to creditors was the income from the antitrust settlement. 

Creditors could reasonably assume that the estate would owe tax 

on this money, so the net value of the asset was the amount of 

the proceeds less the correct amount of tax. Alternatively, 

creditors could expect the net value to equal the amount of the 

proceeds less the amount of tax paid by the trustee plus the 

amount of any tax refund. There is no need to take this latter 

course, which unnecessarily creates two assets from a single 

fund. Instead, the antitrust cause of action cum tax refund can 

best be viewed as a single asset that was inadvertently 

misappraised by the bankruptcy trustee. Assuming for the moment 

that Hutchins is correct on the merits of the tax refund, the 

trustee's failure to complete the tax return correctly 
12 

effectively undervalued the antitrust claim by approximately 

$37,000. This mistake was not discovered until after 

abandonment. It is well established in bankruptcy law that 

mistakes in valuation will not enable the trustee to recover an 

abandoned asset. In re McGowan, 95 B.R. 104 (Bankr. N.D. Iowa 

1988) (ruling that abandonment of misvalued asset is 

irrevocable); Matter of Enriquez, 22 B.R. 934 (Bankr. Neb. 1982) 

(same). 

 We find these arguments persuasive. We are less 

impressed with the I.R.S.'s conclusory assertion that the 

antitrust cause of action was "clearly a separate asset" from the 

tax refund. Nor are we swayed by the agency's cursory 

comparison: 

The antitrust action involved damage claims 

against various of Hutchins's competitors. 

The Government was not a party to that 

action, and no federal income tax issues were 

involved. Here, in contrast, the Government 

is a party, the issue is one of taxation, and 

neither the competitors nor antitrust 

violations are of concern. 

Brief of Appellee at 21. While an accurate description of the 

two causes of action as they currently stand, these distinctions 

ignore the fact that the relevant time period for scheduling is 

not the onset of subsequent litigation but rather the pendency of 

the bankruptcy. At that point, no separate tax refund asset 

existed, or to the extent that it did, it was subsumed in the 

original declaration of the value of the antitrust proceeds. 

 Our review of these arguments indicates that the tax 

refund was properly scheduled to the extent that it could be. 
13 

Hutchins scheduled the only asset of which he was aware, the 

antitrust claim. The tax refund arose later as a result of the 

actions of the trustee. Hutchins did not cause the trustee to 

file an erroneous tax return, and he had no reason to suspect its 

existence. Indeed, the discrepancy was not discovered until 

after the close of the bankruptcy. We hold that Hutchins acted 

properly in scheduling his assets. 

B.

 This resolution of the scheduling issue necessitates 

the conclusion that Hutchins had standing to sue for the tax 

refund. Since he properly scheduled the antitrust claim, the 

right to the refund descended to him through abandonment. 

 Hutchins scheduled the antitrust claim properly. On 

April 7, 1983, he filed in the U.S. Bankruptcy Court a Motion to 

File Amended Schedule B - Statement of All Property of Debtor. 

Page 6, line 17 of the amended Schedule B reflected "unliquidated 

antitrust claims." This filing scheduled the antitrust claim 

pursuant to 11 U.S.C. § 521(1). The tax claim was necessarily 

scheduled through this action. 

 Hutchins then received the right to this tax claim as 

an undifferentiated part of the antitrust claim he acquired 

through abandonment. On September 21, 1988, the trustee moved 

pursuant to 11 U.S.C. § 554(a) for an order "that any remaining 

property scheduled by the debtor(s) be abandoned to the debtor(s) 

and that any further interest in said property be disclaimed." On 

March 23, 1989, the Bankruptcy Court entered the requisite 

Abandonment Order. 
14 

 Through the abandonment of the antitrust claim, 

Hutchins held the right to the potential tax refund on April 2, 

1989, when he filed the amended tax return. As a result, he had 

standing to contest the I.R.S.'s decision regarding his refund. 

See 26 U.S.C. §§ 6402(a), 6511(a), 7422(a); 28 U.S.C. § 1346(a); 

see also Boryan v. United States, 690 F.Supp. 459, 463 (E.D. Va. 

1988). 

C.

 Although as a general rule an affirmative holding on 

standing is merely a precursor to consideration of the merits, in 

the instant case it disposes of the controversy. The I.R.S. 

cannot prevail as a matter of law because it took no position in 

the district court on the underlying validity of the refund. The 

I.R.S. chose to assert only the claim that the refund was paid to 

the wrong party, and this argument depended on Hutchins' lack of 

standing. Our contrary conclusion resolves the case. We decline 

to consider an insufficiently explored, fact-specific, nondispositive theory that was not raised below. 

 On appeal, the I.R.S. attempts to argue for the first 

time that the underlying basis of Hutchins' claimed tax refund is 

incorrect because the discharge of debt by the antitrust 

defendants is not excludible income. Brief of Appellee at 13, 

14, 28-33. This argument was not asserted at the trial level. 

The I.R.S.'s eleventh hour Reply Brief reference to an isolated 

footnote in the record supports rather than contradicts this 

conclusion. See Reply Brief of Appellee at 3. 
15 

 Under the prudential policy recognized in Hormel v. 

Helvering, 312 U.S. 552, 556 (1941), we need not consider the 

I.R.S.'s new argument. See Patterson v. Cuyler, 729 F.2d 925 (3d 

Cir. 1984); Toyota Indus. Trucks U.S.A. Inc. v. Citizen Nat'l 

Bank, 611 F.2d 465, 470 (3d Cir. 1979); see also Singleton v. 

Wulff, 428 U.S. 106, 120 (1976). The reference discovered by the 

I.R.S. is remarkable only in its unobtrusiveness. A lone and 

diminutive footnote does not constitute the assertion of a legal 

theory, especially when the same theory merited seven pages in 

the I.R.S.'s appellate brief. See Brief of Appellee at 27-34. 

Had the issue truly been asserted at the trial level, these seven 

closely argued pages would not have been needed. More 

importantly, it is by no means clear that the I.R.S.'s newfound 

champion can carry the day. The argument ultimately turns on 

whether the $76,000 in claims against the bankrupt estate that 

was retired by the antitrust defendants represents "discharge of 

indebtedness" excludible under 26 U.S.C. § 108(a)(1) or instead 

taxable income for which the discharged debt is merely the 

"medium of payment." See United States v. Centennial Savings 

Bank F.S.B., 499 U.S. 573, 582 n.7 (1991). Further factual 

development would be required to resolve this issue and determine 

the extent of any resulting tax differential. An appellate 

tribunal is not the proper forum for this task. See Newark 

Morning Ledger v. United States, 539 F.2d 929, 932 (3d Cir. 

1976). 

 Put simply, the I.R.S.'s contentions regarding the 

merits of the tax refund come too late. In the district court, 
16 

the I.R.S. based its counterclaim solely on standing, and only 

that issue is properly before us. Our contrary disposition of 

this point resolves the case. 

D.

 The district court invoked equitable estoppel sua 

sponte because its holding on standing left no bar to the 

I.R.S.'s recoupment of the tax credit, a sanction the court found 

overly severe. We are disturbed that estoppel would be applied 

by the district court without allowing the parties to voice their 

opposition to it. Our conclusion, however, renders this issue 

superfluous, and we need not reach it. 

IV. Conclusion

 Contrary to the holding of the district court, Hutchins 

had standing to sue as a matter of law. Because at the trial 

level the I.R.S. based its counterclaim solely on the absence of 

standing, we will reverse and remand with instructions to enter 

summary judgment in favor of Hutchins. In doing so, we note only 

that appellant must consider himself the fortunate beneficiary of 

the appellee's litigation strategy. Had the I.R.S. assiduously 

pressed the validity of the tax refund at the trial level, 

Hutchins could well have lost his $37,897 bird in the hand in an 

ill-conceived grasp at $650 in the bush.