United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 97-6088 NE

 

In re: Richard L. Kearns,

*

*

*

Debtor. *

*

*

United States of America, * APPEAL

FROM THE UNITED

* STATES BANKRUPTCY

Appellant, * COURT

FOR THE 

* DISTRICT OF NEBRASKA

v. *

*

Richard L. Kearns, *

*

*

Appellee. *

 

Submitted: February 12, 1998

Filed: April 6, 1998

 

Before WILLIAM A. HILL, SCHERMER and SCOTT, Bankruptcy Judges.

 

SCOTT, Bankruptcy Judge

I

The United States of America appeals from an Order of the

Bankruptcy Court entered on October 15, 1997, determining the

debtor’s post-petition tax liability for the 1990, 1991, 1992,

1993, and 1994 taxable years, and permitting an offset against
2

the proof of claim filed by the Internal Revenue Service for

1989 federal income taxes. Because we determine that
Payments in the nature of restitution are deductible with respect to the tax years in 1

which they are made. 26 U.S.C. § 165; see generally Stephens v. Comm’r, 905 F.2d 667

(2d Cir. 1990). Thus, if the debtor made a restitution payment in 1991, he was entitled

to claim a deductions of the amounts paid on his 1040 return for the 1991 taxable year. 

Apparently, the debtor did not avail himself of this opportunity.

3

the bankruptcy court was without subject matter jurisdiction

to determine the federal income tax liability for the 1990

through 1994 taxable years, the opinion below will be vacated.

II.

This Chapter 11 bankruptcy case was filed by the debtor on

August 24, 1990, ten days after he made the last of several

improper withdrawals from a trust account. On June 3, 1991,

the United States, by the Internal Revenue Service, filed a

proof of claim in the amount of $142,718 for federal income

taxes for the 1989 taxable year. The taxes were based upon the

additional $500,000 of income the debtor acquired through

embezzlement during the 1989 taxable year. The debtor objected

to the proof of claim on the basis that the funds were not

income. An evidentiary hearing was held on the objection after

which the bankruptcy court found, by opinion entered on

November 10, 1994, that the debtor had embezzled the funds and

that these funds constituted income to him under the Internal

Revenue Code. The IRS proof of claim was allowed in its

entirety. Near the conclusion of the opinion, the Court

indicated that it would consider any appropriate motion for

reconsideration, Fed. R. Bankr. Proc.3008, apparently based

upon the implication, from evidence at the hearing, that the

debtor may have made restitution in subsequent tax years. No

years were specified and the opinion does not indicate what tax

years the Court believed would be in issue.1
From the recitation in the motion for reconsideration, it appears that the delay was 2

occasioned by settlement negotiations between the parties.

4

Almost two years later, on August 5, 1996, the debtor

2

filed his motion for reconsideration. The motion does not

reference any tax year other than 1989 and requests that the

Court find that the debtor made restitution and that the debtor

and his wife receive an offset equal to 25% of the embezzlement

amount. The United States filed a formal
Of course, lack of subject matter jurisdiction may be raised at any stage of the 3

litigation, including before an appellate court. 

 At this juncture, the United States untimely raised the defense that the statute of 4

limitations had lapsed. Inasmuch as the bankruptcy court lacked subject matter

jurisdiction based upon the debtor’s failure to file a claim for refund, we do not reach the

issues relating to the statute of limitations defense. 

5

response objecting to the motion. On February 12, 1996, the

Court issued an order stating that it would reconsider the

allowance of the claim and would set an evidentiary hearing.

In the course of this second stage of the tax litigation,

the parties submitted a preliminary pretrial statement in which

the United States specifically asserted that the bankruptcy

court lacked subject matter jurisdiction over the 1990 through

1994 taxable years. The United States asserted that the only 3

tax year over which the bankruptcy court had jurisdiction was

1989, the year for which a proof of claim was filed. On March

10, 1997, the court removed the case from the hearing docket

after the parties agreed to stipulate to the facts. The

stipulation was submitted on March 31, 1997. The United States

position that the bankruptcy court lacked subject matter

jurisdiction over any year other than 1989 was again raised.4

III.

Substantive tax issues arise in the bankruptcy court by

several avenues. Such issues most frequently arise when a

debtor in bankruptcy, or the trustee, objects to a proof of

claim filed by the Internal Revenue Service. Complaints to

determine dischargeability, although more frequently raising

lien issues, may also involve substantive tax issues.

Inasmuch as the United States has waived sovereign immunity

with respect to the tax years stated in the proof of claim, 11

U.S.C. § 106, there is no issue of subject matter jurisdiction
6

in such cases where a proof of claim governing the disputed

taxes is filed. Occasionally, a non-debtor seeks determination

of tax liability before the bankruptcy court. However, there

is little, if any basis for bankruptcy court jurisdiction over

tax liabilities of a nondebtor. In re Proactive Technologies,

Inc., 215 B.R. 796 (Bankr. N.D. Okla. 1997); see 26 U.S.C. §

7421(a). The situation is less clear, however, when the debtor

seeks a determination of tax liability which
7

does not relate to the tax years which are asserted in the

proof of claim or for which the estate has no interest. 

The Internal Revenue Code provides that “No suit or

proceeding shall be maintained in any court for the recovery

of any internal revenue tax alleged to have been erroneously

or illegally assessed or collected...until a claim for refund

or credit has been duly filed with the Secretary...” 26 U.S.C.

§ 7422(a). It is well settled that no court has subject matter

jurisdiction over a tax dispute unless the taxpayer has filed

a claim for refund with the Internal Revenue Service. United

States v. Dalm, 494 U.S. 596, 609 n.6 (1990); Smith v. United

States (In re Smith), 921 F.2d 136, 138-39 (8 Cir. 1990). th

The Bankruptcy Code also addresses the ability of the

bankruptcy court to make determinations of tax liability:

(a)(1)Except as provided in

paragraph (2) of this subsection,

the court may determine the amount

or legality of any tax, any fine or

penalty relating to a tax, or any

addition to tax, whether or not

previously assessed, whether or not

paid, and whether or not contested

before and adjudicated by a judicial

or administrative tribunal of

competent jurisdiction.

(2) The court may not so determine –

***

(B) any right of the estate to

a tax refund, before the earlier of

– 

(i) 120 days after the

trustee properly requests

such refund from the

governmental unit from
8

which such re fund is

claimed; or

(ii) a determination

by such governmental unit

of such request.

11 U.S.C. § 505(a)(1), (2)(B). Although section 505(a) begins

with broad language, permitting the bankruptcy court to

determine tax liability, the grant of authority is
The taxing authority, the Internal Revenue Service, is the entity which reviews a 5

claim for refund and makes an administrative determination with regard to that claim. In

contrast, officers of the Department of Justice are the persons authorized to represent the

United States in a court of law. 28 U.S.C. § 516.

9

subsequently restricted by the provision of paragraph (2),

which requires the trustee, an entity which includes the

debtor-in-possession, to file a claim for refund with the

appropriate governmental unit. Thus, under the Bankruptcy

Code, the refund procedures outlined in the Internal Revenue

Code and regulations must be pursued as a condition to

bankruptcy court jurisdiction over refund disputes. Smith v.

United States (In re Smith), 921 F.2d 136, 139 (8 Cir. 1990); th

Graham v. United States (In re Graham), 981 F.2d 1135,1138 (10th

Cir. 1992)(“the Grahams do not contend that they have filed the

requisite administrative claim for a refund. Absent such a

filing, the bankruptcy court erred in awarding them a tax

refund. Simply put, no claim, no refund.”); In re St. John’s

Nursing Home, Inc., 169 B.R. 795, 801 (D. Mass. 1994); Perkins

v. United States (In re Perkins), 216 B.R. 220, 225, 227

(Bankr. S.D. Ohio Oct. 10, 1997); In re Penking Trust, 196 B.R.

389, 393 (Bankr. E.D. Tenn. 1996); Great Bay Power Corp. v.

Town of Seabrook (In re EUA Power Corp.), 184 B.R. 631 (Bankr.

D.N.H. 1995); Cumberland Farms, Inc. v. Town of Barnstable (In

re Cumberland Farms, Inc.), 175 B.R. 138, 139-142 (Bankr. D.

Mass. 1994); Millsaps v. United States (In re Millsaps), 133

B.R. 547, 552-553 (Bankr. M.D. Fla.), aff’d, 138 B.R. 87 (M.D.

Fla. 1991); see King v. United States, 495 F. Supp. 334, 336

(D. Neb. 1980). In this manner, the taxing authority is given 5

a reasonable opportunity to review any refund claim under its

normal administrative procedures.

The debtor first asserts that the United States

essentially conceded all issues by “stipulating to allow the

deductions against the proof of claim in settlement.” First,
10

since the issue is one of subject matter jurisdiction, any

“concession” is of no relevance. No party may waive a lack of

subject matter jurisdiction. Williams v. Rogers, 449 F.2d 513,

517 (8 Cir. 1971), cert. denied, 405 U.S. 926 (1972). Every th

court has an independent obligation to determine its

jurisdiction, and, if subject matter jurisdiction does not

exist, the matter must be dismissed. See id. Indeed, the

matter may be dismissed at any stage of the proceeding or

appellate review if no subject matter jurisdiction exists. Id.
11

Second, The United States did not stipulate to the

jurisdiction of the bankruptcy court to determine the

deductions, but merely stipulated to the calculations of the

amount of the deductions and the taxable amount that the

payments based upon proof that the payments were in the nature

of restitution. Thus, the United States stipulated to many of

the mechanical facts which were not in dispute, but did not,

in any manner waive arguments concerning the necessity of

filing a claim for refund or the court’s subject matter

jurisdiction.

The debtor next asserts that the bankruptcy court had

jurisdiction to determine whether an offset was available.

While it is true that a bankruptcy court has jurisdiction to

make the appropriate decisions under section 553 of the

Bankruptcy Code governing offset of debts, that provision does

not permit a party to leapfrog over the initial issue of

whether the court has jurisdiction to determine whether the

party is entitled to a refund at all. The proposed use of the

funds is not relevant to the determination of the entitlement

to a refund. Whether an offset is appropriate under the

Bankruptcy Code is a separate, secondary issue. 

Section 505(a)(2)(B) provides that the bankruptcy court

may not determine any right of the estate to a refund until the

trustee requests a refund. The debtor concludes that since it

is not the estate requesting a refund, the subparagraph does

not apply such that the bankruptcy court has jurisdiction to

determine the right to refund. The difficulties with this

argument are legion. The debtor is essentially asserting that

the bankruptcy court has unlimited jurisdiction to determine

a tax dispute of, apparently, any person or entity, at any

time, so long as the estate will not receive the funds. The

absurdity of this argument is demonstrated by the simple fact

that if the estate is not to receive the refund, the matter
12

does not belong in bankruptcy court. The general unsecured

creditors, not the debtor, are the intended beneficiaries of

section 505(a). In re Penking Trust, 196 B.R. 389, 394 (Bankr.

E.D. Tenn. 1996). Indeed, bankruptcy courts, even if

jurisdiction exists, will abstain if the estate has no interest

in the funds. See, e.g., Williams v. United States (In re

Williams), 190 B.R. 225 (Bankr. W.D. Pa. 1995); Starnes v.

United States (In re Starnes), 159 B.R. 748 (Bankr. W.D.N.C.

1993); In re St. John's Nursing Home, Inc., 154 B.R. 117

(Bankr. D. Mass. 1993), aff’d, 169 B.R. 795 (D. Mass.

1994)(abstention in trustee's action for valuation of propertytax purposes warranted where plan had been confirmed, no other

issues barred closing twelve-year old case, and only party to

benefit from redetermination would be the
13

debtor); In re Hemaya, 153 B.R. 71 (Bankr. D. Kan. 1993);

Millsaps v. United States (In re Millsaps), 133 B.R. 547, 554

(Bankr. M.D. Fla.), aff’d, 138 B.R. 87 (M.D. Fla. 1991)(“[T]he

debate in the House of Representatives leading to the passage

of this section clearly shows that, when there is no need for

a determination of the amount of the tax for estate

administration purposes, Congress did not intend or foresee

that the bankruptcy court would be the forum for this

litigation.”). Second, if the funds sought are not property

of the estate, there is no right to an offset and the

bankruptcy court would have no jurisdiction on that asserted

basis. Third, if the property is not property of the estate,

there is no jurisdiction over the property such that the Court

should not make a determination of the right to refund.

Fourth, the confirmed plan did not provide that any refund

would be paid to creditors. Indeed, the plan did not

contemplate that any refund was due; it addressed only the

objection to the proof of claim and contemplated that the

estate may have to pay all or part of that claim. It thus

appears that only the individual debtor would receive the

refund and there is no interest of the estate in the refund.

Finally, this argument raises the problematic issue of

post-confirmation jurisdiction. The plan was confirmed on

August 5, 1992, before the debtor objected to the proof of

claim. The third amendment to the plan, filed on July 15,

1992, provided for full payment of the 1989 federal income

taxes stated in the proof of claim. This provision was

qualified, however, by the ability to object to the proof of

claim and pay any lesser amount, as determined by the

bankruptcy court. This retention of right to object to the

plan had been stated in the Second Amendment to the Plan filed

on May 1, 1992, the Amendment to Plan filed on April 8, 1992,

and the Amended Liquidating Plan of Reorganization, filed on

December 4, 1991. Each of these plans and amendments provided
14

for post-confirmation bankruptcy court jurisdiction “for a

determination of said claim at a later date at Debtor’s

election.” (Emphasis added.) The plan also provided for

retention of jurisdiction to allow claims and hear objections

to claims “for the purpose of determining and resolving all

matters incident to the Plan and to carry out the provisions

of the plan and to determine any controversies thereunder.”

Although the language in the plan is broad, this provision

does not necessarily provide for post-confirmation subject

matter jurisdiction or post-confirmation jurisdiction over
 It is also questionable whether the motion for reconsideration contains sufficient 6

information to apprise the governmental unit of the basis for the refund. The motion for

reconsideration does not even state what tax years are involved and for which the debtor

seeks a refund. Cf. Perkins v. United States (In re Perkins), 216 B.R. 220, 225 (Bankr.

S.D. Ohio Oct. 10, 1997); Meisner v. United States, 78 A.F.T.R.2d 96-5278, 96-2

U.S.T.C. ¶ 50,369, 1996 WL 442717 (D. Neb. June 5, 1996)(same). 

15

disputes relating to tax refunds for post-confirmation tax

years. See In re Maley, 152 B.R. 789, 791-92 (Bankr. W.D. N.Y.

1992). In any event, the determination of the individual’s

right to a refund for the 1990-1994 taxable years has nothing

to do with the administration of the confirmed plan.

The debtor also asserts that his motion for

reconsideration filed with the bankruptcy court constitutes a

claim for refund. A motion for reconsideration is not a claim

for refund. Section 505 requires that the trustee properly

request a refund from the governmental unit from which such

refund is claimed. There is no authority to suggest that the

United States Bankruptcy Court is the governmental unit with

which to file an administrative claim for refund. Indeed,

such a construction renders subparagraph (B) of section

505(a)(2) a nullity. If a motion filed with the court can be

construed as a proper claim for refund, there is no purpose in

the requirement that a claim for refund be filed at all, or for

that matter, with any other governmental unit.

The governmental unit charged with determining

administrative tax matters is the Department of Treasury,

Internal Revenue Service. Cf. Bob Jones University v. United

States, 461 U.S. 574, 596 (1983). It is in the IRS

regulations (26 C.F.R.) that the procedures for filing claims

for tax refunds are found. Thus, in order to comply with the

requirements of section 505(a)(2), the debtor was required to

submit a “proper” claim for refund with the Internal Revenue

6
16

Service pursuant to the regulations governing claims for

refund. See generally 26 C.F.R. §§ 301.6402-2, 301.6402-3.

The debtor admits that he failed to file a claim for refund

with the Internal Revenue Service. Accordingly, there is no

subject matter jurisdiction over the disputed, post-bankruptcy

tax years for which no claim was filed.
17

Finally, the debtor asserts that the filing of the proof

of claim for the 1989 taxable year constituted a waiver of

sovereign immunity under Bankruptcy Code section 106(b), (c).

Section 106 provides in pertinent part:

(b) A governmental unit that has

filed a proof of claim in the case

is deemed to have waived sovereign

immunity with respect to a claim

against such governmental unit that

is property of the estate and that

arose out of the same transaction or

occurrence out of which the claim of

such governmental unit arose.

(c) Nothwithstanding any assertion

of sovereign immunity by a

governmental unit, there shall be

offset against a claim or interest

of a governmental unit any claim

against such governmental unit that

is property of the state.

11 U.S.C. § 106(b), (c) (emphasis added).

Debtor’s argument with regard to section 106(c) is in

direct conflict with his argument construing section

505(a)(2)(B). For purposes of section 505(a), the debtor

asserts that he, the individual who happens to be a debtor in

bankruptcy, is seeking a tax refund. Because, he argues, the

estate is not seeking the refund, the restrictions of section

505(a)(2)(B) do not apply to him such that he was not required

to file a claim for refund. However, in order for section

106(c) to apply to waive sovereign immunity, the claim against

the governmental unit must be property of the estate. The

debtor cannot have it both ways.

The claim for a refund regarding post-petition (part postconfirmation) tax years, is not property of the estate. 11
18

U.S.C. § 541(a)(property of the estate consists of all

interests in property “as of the commencement of the case.”).

Since the claim for a refund is not property of the estate,

section 106(c) does not apply to waive sovereign immunity.

Accordingly, subject matter jurisdiction cannot be found under

section 106(c).
If it is true, as debtor suggests, that the claim for refund arose out of the same 7

transaction or occurrence as the proof of claim, the debtor’s claim was a compulsory

counterclaim to the proof of claim. Under Rule 13, Federal Rules of Civil Procedure, the

debtor was required to raise these issues at the time of the original objection to the proof

of claim. Rule 7013, however, limits the harm to a debtor-in-possession if the failure to

plead the counterclaim is “through oversight, inadvertence, or excusable neglect, or when

justice so requires, by permitting the debtor-in-possession to amend the pleading or

commence a new adversary proceeding or separate action. Fed. R. Bankr. P. 7013.

In any event, whether the matters necessarily arise out of the same transaction or

occurrence is also problematic. In determining the concept "same conduct, transaction or

occurrence," the Eighth Circuit applies four different tests. See generally Blue Dane

Simmental Corp. v. American Simmental Assoc., 952 F. Supp. 1399 (D. Neb. 1997). In

only one of these tests can it be considered that the matters arise out of the same

transaction or occurrence. In determining the debtor’s right to a refund vis-a-vis the

merits of the United States proof of claim, neither the issues of law nor fact are the same.

The doctrine of res judicata would have no impact upon the debtor’s claim for refund

despite the determination of the liability for the 1989 tax year, and little, if any, of the

evidence presented in the litigation regarding the 1989 tax year would aid in the proof

regarding the 1990 through 1994 tax years. The only relationship between the facts and

issues is that they are derived from the debtor’s embezzlement of trust funds. 

19

The debtor’s argument under Section 106(b) is met with the

same infirmity. In order for section 106(b) to apply to waive

sovereign immunity, and thereby confer subject matter

jurisdiction, the claim for the tax refund for the postpetition taxable years must (1) be property of the estate, and

(2) arise out of the same transaction or occurrence out of

which the claim of such governmental unit arose, i.e., the

prepetition 1989 tax year. As discussed above, the claim for

refund belongs to the individual debtor, not the bankruptcy

estate such that this section does not apply. In this

7

context, the error in debtor’s reliance on In re Dunhill

Medical, Inc., 77 A.F.T.R. 2d 96-1917, 96-1U.S.T.C. ¶ 50,276

(Bankr. D.N.J. 1996) and Michaud v. United States, 206 B.R. 1

(D.N.H. 1997) is demonstrated. In both of those cases, the

bankruptcy courts found subject matter jurisdiction to offset

claims with regard to particular prepetition tax years because
20

proofs of claim had been filed. In each of those cases, both

the tax years stated in the proof of claim and the years for

which a refund was requested were identical. Extending the

holdings of Dunhill and Michaud beyond the particular tax years

for which a proof of claim is filed conflicts with the holding

of the
It is also questionable whether these cases are correctly decided. Dunhill and 8

Michaud seem to inappropriately trump the precise language and clear meaning of the

Bankruptcy Code with portions of legislative history. Dunhill also rests on case law

which does not support its conclusions. Michaud relies on Dunhill.

21

controlling authority in the Eighth Circuit, Smith v. United

States (In re Smith), 921 F.2d 136, 138-39 (8 Cir. 1990). th 8

IV.

Under the Bankruptcy Code, a debtor, debtor-in-possession

and trustee are provided means by which to contest tax

liability and dischargeability. The Bankruptcy Code, however,

did not abrogate all provisions relating to administrative

procedures under nonbankruptcy law. Indeed, Section 505(a),

while it provides for a shortened procedure with regard to

administrative determination of tax refunds, expressly

maintains the jurisdictional requirement found in the Internal

Revenue Code, 26 U.S.C. § 7422. In order to provide for

bankruptcy court jurisdiction over his claim for a federal

income tax refund, the debtor was required to, but did not,

file a “proper” claim for refund with the Internal Revenue

Service. The procedures outlined in section 505(a), governing

determination of refunds from governmental agencies, does not

expand a debtor’s right to a refund beyond that granted to

every other taxpayer. See Millsaps v. United States (In re

Millsaps), 133 B.R. 547, 555 (Bankr. M.D. Fla.), aff’d, 138

B.R. 87 (M.D. Fla. 1991)(“Were this court to respond to the Millsaps’ tardy call

by exercising its jurisdiction, no bankruptcy interest would be furthered...Although it is true

that an exercise of this jurisdiction would benefit the debtors and further the ‘fresh start’

policy of the Bankruptcy Code, that interest would only be served at the expense of the

orderly enforcement of the internal revenue laws. Unless the Court abstains in these unusual

circumstances, every taxpayer would know that he or she could ignore all of the tax protest

and determination procedures and opportunities provided by the Internal Revenue Code and

regulations, allow all time periods they provide to expire, watch the Service finally determine
22

a tax, and then years later come into this court and obtain the judicial determination the

taxpayer chose not to seek before. The interest of justice cannot be furthered by that

result.”). Having failed to comply with the provision of section 505(a)(2)(B), the bankruptcy

court was without subject matter jurisdiction to determine
23

whether the individual debtor was entitled to a refund, and, thereafter, whether the debtor

was entitled to offset his 1989 federal income tax liability against any refund. Accordingly,

we vacate the order below, entered on October 15, 1997, and remand for the Bankruptcy

Court to allow the United States proof of claim for internal revenue taxes, as filed, in accord

with the Bankruptcy Court order entered November 10, 1994.

A true copy.

Attest:

CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE

EIGHTH CIRCUIT