## F I L E D United States Court of Appeals Tenth Circuit 

### JUN 1 2004 

### PATRICK FISHER Clerk PUBLISH UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

JOHN RODERICK McKOWEN, Plaintiff-Appellant,

v. INTERNAL REVENUE SERVICE, UNITED STATES DEPARTMENT OF THE TREASURY, Defendant-Appellee. No. 01-1345

Appeal from the United States District Court

for the District of Colorado (D.C. No. 01-M-117)
Jeffrey R. Davine of Ballard Spahr Andrews & Ingers oll, LLP, Denver, Colorado (Matthew D. Skeen of Skeen & Skeen, P.C., Denver, C olorado, with him on the briefs) for Plaintiff-Appellant. Karen D. Utiger, Attorney (Eileen J. O’Conner, Assi stant Attorney General, Richard Farber, Bruce R. Ellisen, and Paula K. Spec k, Attorneys, with her on the brief) Tax Division, Washington, D.C., (John W. Suthers, United States Attorney, Denver, Colorado, of Counsel) for Defendant-Appelle e.

Before BRISCOE, ANDERSON and O’BRIEN , Circuit Judges.

O’BRIEN , Circuit Judge.1 McKowen claims he reported all items of income and losses on his 1987

personal tax return. The I.R.S. states those items should have been reported on the 1987 New Century corporate tax return. -2- John Roderick McKowen appeals the district court’s determination that his 1995 bankruptcy proceeding did not discharge his tr ansferee liability for 1987 corporate taxes not paid by his now-defunct busines s. See McKowen v. Internal
Revenue Service , 263 B.R. 618, 619-20 (D. Colo. 2001). Exercising jurisdiction under 28 U.S.C. §§ 158(a) & (d), we affirm.
BACKGROUND McKowen was the sole owner and shareholder of New C entury Corporation (New Century). Sometime in 1987, the company began to be dismantled, and its assets were transferred to McKowen. On his 1992 pe rsonal income tax return, McKowen included net operating loss carryforwards b ased upon net operating losses sustained by New Century during tax years 19 86, 1987, and 1988. In January 1995, he filed a voluntary Chapter 7 bankruptcy petition. An order of discharge was entered that May. Subsequently, in November 1996, the Internal Revenu e Service (I.R.S.) audited McKowen’s 1992 income tax return. After re questing copies of New Century’s corporate tax returns for 1987 and 1988, the I.R.S. learned that no corporate tax return had been filed for 1987. 1 McKowen remedied this omission by filing an amended return for New Century on Apri l 2, 1998.2 The district court remanded the case to the bankrup tcy court, perceiving

McKowen’s argument to raise an equitable claim not decided by the bankruptcy court. Generally, an order of a district court rem anding a case to the bankruptcy court “for significant further proceedings” is not a final appealable decision allowing this Court to exercise jurisdiction. Buckner v. Farmer’s Home Admin. , -3- Review of New Century’s 1987 amended tax return ind icated corporate taxes were owed. The I.R.S. also concluded the 1987 asset tra nsfer subjected McKowen to transferee liability, pursuant to 26 U.S.C. § 6901( a), in the amount of $481,180.00, plus interest and penalties. McKowen , 263 B.R. at 620. Questioning the validity of his tax liability, McKo wen moved for and was granted an opportunity to reopen his 1995 bankruptcy case t o determine whether his transferee liability was discharged. In response, the I.R.S. moved for summary judgment. The bankruptcy court denied the I.R.S.’s motion forsummary judgment, finding McKowen’s transferee liability for the corp orate taxes constituted an unsecured debt, rather than a tax excepted from dis charge. McKowen v. United
States , 2001 WL 241059 (Bankr. D. Colo. 2001). Therefore , the bankruptcy court held the transferee liability was discharged in ban kruptcy. The I.R.S. appealed to the United States District C ourt for the District of Colorado. The district court agreed the transferee liability was not a tax, but found that 26 U.S.C. § 6901(a) required the debt to be treated like a tax for the purposes of exception from bankruptcy discharge. 2 Id . Thus, it reversed the66 F.3d 263, 265 (10th Cir. 1995). However, McKowe n remedied this

jurisdictional barrier when, at his request, the di strict court amended its judgment to eliminate the equity claim and set aside the ord er for remand. -4- bankruptcy court, concluding McKowen’s liability wa s not discharged in the 1995 bankruptcy proceeding. McKowen now appeals the di strict court’s order.
DISCUSSION Dischargeability of Transferee Liability in Bankrup tcy “'In reviewing the decision of a bankruptcy court p ursuant to 28 U.S.C. § 158(a) and (d), the district court and the court of appeals apply the same standards of review that govern appellate review in other cas es.'” In re Country World Casinos, Inc. , 181 F.3d 1146, 1149 (10th Cir. 1999) (quoting In re Hedged-Investments Assocs., Inc. , 84 F.3d 1267, 1268 (10th Cir. 1996). On an appeal of a bankruptcy case, we review the legal co nclusions of the bankruptcy court and the district court de novo

. In re Wise , 346 F.3d 1239, 1241 (10th Cir. 2003); In re Craddock, 149 F.3d 1249, 1257 (10th Cir. 1998). Here, we f ace an issue of first impression: whether a debt arising from transferee liability for unpaid income tax owed by the transferor corporatio n is discharged by the transferee’s bankruptcy. Our analysis necessarily construes the interrelationship between specific provisions of the Bankruptcy Code and the Internal Revenue Code (I.R.C.). The Bankruptcy Code identifies the purpose of a vol untary bankruptcy3 A bankruptcy discharge “operates as an injunction a gainst the

commencement or continuation of an action, the empl oyment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” 1 1 U.S.C. § 524(a)(2). See also 11 U.S.C. 727(b) (a Chapter 7 bankruptcy discharges the debtor from debts arising before the date of discharge).

4 11 U.S.C. § 523(a)(1)(A) states in pertinent part: (a) A discharge under Section 727, 1141, 1228(a), 1 228(b), or 1328(b) of this title does not discharge an individual debtor from any debt– (1) for a tax or a customs duty– (A) of the kind and for the periods specified in se ction 507(a)(2) or 507(a)(8) of this title, whether or not a claim forsuch tax was filed or allowed. 11 U.S.C. § 507(a)(8)(A)(iii) reads: (8) Eighth, allowed unsecured claims of governmenta l units, only to the extent that such claims are for-- (A) a tax on or measured by income or gross receipt s (iii) other than a tax of a kind specified in secti on 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commence ment of the case. -5- discharge as the opportunity to obtain relief from existing debts. See 11 U.S.C. §
524. 3 Though a fresh start for the debtor is the desire d outcome, Congress determined that some debts should survive despite this general policy; it explicitly removed certain types of debt from discharge. At i ssue here is the exception from discharge for a tax that is on or measured by incom e or gross receipts, which is assessable after commencement of the bankruptcy cas e. See 11 U.S.C. § 523(a)(1)(A); 11 U.S.C. § 507(a)(8)(A); 11 U.S.C. § 507(a)(8)(A)(iii). 4 Under Bankruptcy Code 11 U.S.C. § 523(a)(1)(A), a debtor will not be discharged from5 In this case, McKowen’s liability as a transferee i s not before the Court.

We assume, without deciding, that McKowen is liable as a transferee for the taxes owed by New Century for the tax year 1987 in the am ount of $481,180.00.

6 Section 6901 reads: (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisio ns and limitations as in the case of the taxes with respec t to which the liabilities were incurred : 1) Income, estate, and gift taxes.-- A) Transferees.--The liability, at law or in equity , of a transferee of property– (i) of a taxpayer in the case of a tax imposed by s ubtitle A (relating to income taxes). (Emphasis added.) Section 6901 goes on to define atransferee as a “donee, heir, -6- any debt “for a tax” of the kind stated in § 507(a) (8). In turn, § 507(a)(8) specifically identifies a tax on income as exempt f rom discharge. 11 U.S.C. § 523(a)(1)(A); 11 U.S.C. § 507(a)(8)(A)(iii) ( see infrann.6, 7). Under these statutory provisions, it appears that any debt not designated a tax, would be discharged in bankruptcy. On the other hand, the I.R.C. provides that a perso n receiving property from a taxpayer who owes income taxes may be liable for the transferor taxpayer’s tax debt. 5 If so, the I.R.S. may collect the transferor’s in come tax liability from the transferee “in the same manner a nd subject to the same provisions and limitations as in the case of the ta xes with respect to which the liabilities were incurred.” 26 U.S.C. § 6901(a); 6 see Commissioner of Internallegatee, devisee, and distributee . . . .” 26 U.S. C. § 6901(h).

7In Stern , the United States Supreme Court held that transfe ree liability under 26 U.S.C. § 311(a) (the predecessor to 26 U.S .C. § 6901) was not a tax, but rather, a method of collecting taxes. Specifically , the Court held “§ 311 neither creates nor defines a substantive liability but pro vides merely a new procedure by which the Government may collect taxes.” 357 U.S. at 42. -7- Revenue v. Stern , 357 U.S. 39, 44-45 (1958) (existence and extent o f transferee liability determined by state law). Considering th e provisions of the Bankruptcy Code and the I.R.C. in tandem, the district court h eld Section 6901 would be nullified if transferee liability was discharged un der the Bankruptcy Code, and concluded it must be treated the same as the underl ying tax to harmonize the potential conflict between these statutes. 7 McKowen , 263 B.R. at 620-21 (citing 26 U.S.C.§ 6901). We agree. “When Congress has enacted two statutes which appear to conflict, we must attempt to construe their provisions harmoniously.” United States v. State of Colo. , 990 F.2d 1565, 1575 (10th Cir. 1993), cert. denied, 510 U.S. 1092 (1994). Here, McKowen’s transferee liability is derived fro m a tax owed by New Century “on or measured by income,” and is thus exempt from discharge in bankruptcy. 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)(iii). C onsequently, we hold McKowen’s transferee liability was not discharged i n his prior bankruptcy proceeding. In reaching its contrary conclusion, the bankruptcycourt relied on Pert v.8 We also recognize the outcome in Pertmay have been tempered by a

factual situation not present here. In Pert , the debtor’s transferee liability was based upon her receipt of assets from her deceased husband’s estate while unpaid taxes remained assessed against the estate. 201 B. R. at 318-19. In attempting to collect the deceased husband’s unpaid taxes, the go vernment assessed taxes against both the joint return filed with her deceas ed husband and based upon transferee liability. Id . at 320. The court noted that if it characterized transferee liability as a tax, it would allow the government two “bites” at the “nondischargeability apple.” Id . Here, the government is not imposing dual liabil ity. -8- United States , 201 B.R. 316 (Bankr. M.D. Fla. 1996). There, fac ed with an issue similar to the one before us, the bankruptcy court held that transferee liability is not a tax, but “[a]t best, . . . is a general unsec ured claim, assuming a timely proof of claim is filed.” Id. at 320. 8 We find a better approach in the United States Ta x Court’s decision in Hamar v. Commissioner , 42 T.C. 867 (1964). In Hamar , the tax court rejected petitioner’s argument that his t ransferee liability was discharged by his bankruptcy. Id . at 879. The court stated: It must be borne in mind that while the liability o f a transferee may not be a tax liability in the ordinary sense, nevertheless it is a liability for a tax; in other words, the governmentis seeking to collect what is primarily a tax and continues to be a tax although, because of the inability to collect from the taxpay er proper, it seeks to require his transferee to pay. From the standpoi nt of the government the money sought in this case is as muchan item of revenue as it would be were the proceedings to coll ect directed toward the transferor. Id. at 877 (quoting Felland v. Wilkinson , 33 F.2d 961 (D.C. Wis. 1928)). We agree with this rationale and find it to be a descr iptive example of how transferee liability under Section 6901 should apply in this c ase.-9-

The Bankruptcy Code’s specific exemption of income tax debt from discharge reflects Congress’ intent to allow the fe deral government to collect funds lawfully due, even from a debtor who has rece ived a discharge in bankruptcy. Nor is this obligation lessened by the fact that the debt has been transformed from a direct tax liability of a transf eror taxpayer into a transferee liability. Section 6901 provides the direct mechan ism for carrying out this purpose. To ignore section 6901 and discharge McKo wen’s transferee liability would needlessly create a conflict between the disc harge provisions of the Bankruptcy Code and the express language of the I.R .C. § 6901. Such a result would impermissibly override the specific policy ju dgments made by Congress in enacting section 6901. See United States v. Sotelo , 436 U.S. 268, 279 (1978) (“we as judges cannot override the specific policy judgments made by Congress in enacting the statutory provisions . . . .”).
CONCLUSION For the above reasons, we conclude the district cou rt correctly determined that the treatment of the underlying tax directs th e treatment of the transferee liability in bankruptcy discharge. Accordingly, we AFFIRM

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