Source: https://law.justia.com/cases/federal/district-courts/BR/205/451/1528074/
Timestamp: 2019-12-11 19:02:49
Document Index: 304061276

Matched Legal Cases: ['§ 121', '§ 121', '§ 541', '§ 1938', '§ 1398', '§ 121', '§ 121', '§ 121', '§ 1398', '§ 1398', '§ 1398', '§ 1398']

In Re Barden, 205 B.R. 451 (E.D.N.Y. 1996) :: Justia
Justia › US Law › Case Law › Federal Courts › District Courts › New York › Eastern District of New York › 1996 › In Re Barden
In Re Barden, 205 B.R. 451 (E.D.N.Y. 1996)
US District Court for the Eastern District of New York - 205 B.R. 451 (E.D.N.Y. 1996)
205 B.R. 451 (1996)
In re Ruby P. BARDEN, Debtor.
Weinberg, Kaley, Gross & Pergmanent by Marc A. Pergament, Anne C. Pollaro, Garden City, NY, for Chapter 7 Trustee.
Zachary W. Carter, United States Attorney, Eastern District of New York by Thomas A. McFarland, Assistant United States *452 Attorney, Tamara H. Lindquist, Trial Attorney, Tax Division, Brooklyn, NY, for U.S.
The Trustee appeals from the December 7, 1994 Bankruptcy Court decision, which denied his motion to use the Section 121 one-time exclusion for the benefit of the bankruptcy estate. In this appeal, the Trustee argues that the bankruptcy estate should be entitled to utilize the debtor's exemption or, in the alternative, that the bankruptcy estate should succeed to a "stepped up" basis in the residence in order to maximize the distribution to the debtor's unsecured creditors.
*453 § 121 One time exclusion of gain from sale of principal residence by individual who has attained age 55
(a) General rule. At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if
Id. When interpreting the tax laws the Court should adhere to the principle that, "exemptions from taxation are to be construed narrowly." See, e.g., Bingler v. Johnson, 394 U.S. 741, 752, 89 S. Ct. 1439, 1445, 22 L. Ed. 2d 695 (1969). "Moreover, we cannot be unmindful of the rule of construction that Congress permits exclusions only as a matter of grace, and the exclusions sections are to be strictly construed against the taxpayer." Estate of Levine, 526 F.2d 717, 721 (2d Cir. 1975) (citations omitted). The burden is on the taxpayer to identify the provision of the Internal Revenue Code that unambiguously authorizes exclusions from income. Payne v. United States, 778 F. Supp. 804, 808 (D.Vt. 1991), aff'd, 980 F.2d 148 (2d Cir.1992), cert. denied, 509 U.S. 904, 113 S. Ct. 2995, 125 L. Ed. 2d 689 (1993).
The Trustee draws the Court's attention to Section 105 of the Bankruptcy Code, which provides that "the court may issue any order, process or judgment that is necessary or appropriate to carry out the provision of this title. . . ." It is the Trustee's position that this section permits the Court to fashion an "equitable result" in which the bankruptcy estate may utilize the Section 121 exclusion. The Trustee argues that such a result will promote the purposes of the Bankruptcy Code by providing the debtor with a "fresh start and [] maximiz[ing] the funds available for distribution to unsecured creditors from the Bankruptcy Estate." See, e.g., In re Fournier, 169 B.R. 282, 284 (Bankr.D.Conn. 1994). The Trustee argues that if the bankruptcy estate is not permitted to use the one-time exclusion, then the intent of the Bankruptcy Code will be frustrated because the creditors' distribution will be reduced and the tax authorities will receive a windfall that they would not have received had the debtor not sought the protection of a Chapter 7 bankruptcy filing. The Court agrees that the estate's use of an income exclusion would impact the amount of funds available for distribution to the creditors, but does note that debtor's "fresh start" would not be in any way affected by a decision regarding the estate's tax liability.
In denying the Trustee's motion to take the one-time exclusion under Section 121, Judge Conrad expressly relied on the reasoning of In re Mehr, a bankruptcy case from the District of New Jersey, in which the court held that the bankruptcy trustee was not entitled to make an election under 26 U.S.C. § 121. In re Mehr, 153 B.R. 430 (Bankr.D.N.J.1993). Looking to the plain language of Section 121, the Mehr court concluded that the term "taxpayer" in Section 121 did not include a bankruptcy estate because it is not an individual of at least 55 years of age who used the home as a primary residence for at least three of the five years preceding its sale. Id. at 433. The Mehr decision also noted that the policy concern underlying the capital gain exclusion is "individuals over age 55 to help promote savings for retirement years." Id. at 434 (citing H.R. 749, 88th Cong., 2d Sess. (1964), 1964 U.S.C.C.A.N. 1354). "When Congress in plain language has expressed its intention, and the legislative history does not demonstrate a contrary purpose, the court is bound to follow the statutory provision as written." Id. at 433; see also, Chapman v. Houston Welfare Rights Org., 441 U.S. 600, 607-09, 99 S. Ct. 1905, 1910-12, 60 L. Ed. 2d 508 (1979).
With regard to the Trustee's argument that the debtor is to receive or inherit a "fresh start" from the bankruptcy filing, the Court notes that it is the creditors, not the debtor as an individual, who would benefit from the estate's use of the debtor's Section 121 exclusion. The creation of the bankruptcy estate divests the debtor of title and rights to property, with the assets going to the trustee for the benefit of creditors and *454 parties in interest. See 11 U.S.C. §§ 541, 704.
[i]n both cases, estates are created into which are transferred the assets of the bankrupt and decedent respectively. Fiduciaries are then appointed by the Court, (a Trustee in the case of a bankrupt's estate and an executor or administrator in the case of a decedent's estate), to settle the affairs of the debtor and decedent respectively. As fiduciaries their duties include marshalling of assets, the determination of debts and liabilities and the payment to creditors. Finally, in theoretical terms, the beneficiaries of the decedent's estate inherit whatever assets remain after the payment of debts and taxes by the fiduciary and the debtor of the bankrupt estate "inherits" a "fresh start" after the payment of debts and taxes by the Trustee."
First, the bankruptcy trustee's obligations to creditors differ from that of an executor. While an executor is clearly responsible for payment of estate's debts, the executor does not have the same duty as a bankruptcy trustee to maximize the distribution to creditors. See, e.g., Fournier, supra, 169 B.R. at 284. The executor of a deceased's estate administers the estate in place of the deceased individual and only one tax return is filed. In contrast, an estate created by an individual bankruptcy filing is a separate tax-paying entity; the debtor and the bankruptcy estate have independent duties to file tax returns. See 26 U.S.C. §§ 1938(e) (f). Furthermore, as the government notes, the debtor and the bankruptcy estate may even have adverse interests with regard to use of the one-time exclusion, in that if the debtor's estate elects the Section 121 exclusion, the debtor would be foreclosed from such an election in the future in connection with the sale of post-bankruptcy acquired property. Such conflicts regarding future use of the exclusion would not arise in the context of a decedent's estate.
In the Court's view, Rev.Rul. 82-1 does not extend by analogy to control the outcome of this bankruptcy appeal. "Revenue rulings represent the official IRS position on application of tax law to specific facts," and are entitled to great deference. Salomon Inc. v. U.S., 976 F.2d 837, 841 (2d Cir.1992) (emphasis added). There are significant factual and legal distinctions between *455 the case of the decedent's estate in Rev.Rul. 82-1 and the present bankruptcy case. In addition, the plain language of Section 121 concerns individual homeowners over the age of 55, as does its underlying policy. In the absence of any statutory authority permitting Section 121 to be used for the benefit of a bankruptcy estate, the Court declines to fashion such a result based on general equity powers.
(g) ESTATE SUCCEEDS TO TAX ATTRIBUTES OF DEBTOR. The estate shall succeed to and take into account the following items (determined as of the first day of the debtor's taxable year in which the case commences) of the debtor
Id. The Trustee contends that subsection (6) should be read to include a Section 121 exclusion as one of the attributes to which the bankruptcy estate succeeds. However, the Trustee cites no authority for such an interpretation. The Court declines to accept the Trustee's interpretation as "implicit" in this section. Implying such a result is contrary to the principles of construction discussed above, which require the Court to construe exclusions narrowly against the taxpayer. See Bingler, supra, 394 U.S. at 752, 89 S. Ct. at 1445; Levine, supra, 526 F.2d at 721.
Moreover, there were not any regulations prescribed by the Secretary in accord with § 1398(g) (8) to include other tax attributes like the § 121 election to be taken by the bankruptcy estate. It is not the function of this Court to enact regulations providing for this § 121 election to be taken by the estate. This function is embodied in the role of Congress or the Secretary to allow for the § 121 election to be taken by the estate. Absent specific authority by the Code to enable a Trustee to utilize such election, this Court clearly cannot permit such an election to be taken.
In re Rueter, 158 B.R. 163, 167 (N.D.Cal. 1993) (citing In re Antonelli, 92-2 USTC ¶ 50,619, at 86,176-77, 1992 WL 403097 (Bankr.D.Md.1992); DiStasio v. U.S. 22 Cl. Ct. 36, 50, 52 (1990); and Mehr, supra).
The Court declines to interpret Section 1398 so as to entitle the bankruptcy estate to succeed to a qualified debtor's capital gain exclusion under Section 121 in the absence of language to that effect in the statute itself. As the United States points out in its brief, Congress chose to enumerate those specific attributes to which the bankruptcy estate succeeds rather than providing for the estate to succeed to all tax attributes of the debtor. The Court can only conclude that if Congress or the Secretary of the Treasury had intended for a bankruptcy estate to succeed to an eligible debtor's Section 121 exclusion, then *456 they would have taken the opportunity to say so in the statute or the regulations.
As discussed above, the Tax Code specifically provides that the debtor's basis is transferred to the bankruptcy estate, where the transfer is not a sale or exchange. See 26 U.S.C. § 1398(g) (6). Section 1398(f) provides,
TREATMENT OF TRANSFERS BETWEEN DEBTOR AND ESTATE.
(1) TRANSFER TO ESTATE NOT TREATED AS DISPOSITION. A transfer (other than sale or exchange) of an asset from the debtor to the estate shall not be treated as a disposition for purposes of any provision of this title assigning tax consequences to a disposition, and the estate shall be treated as the debtor would be treated with respect to such asset.
26 U.S.C. § 1398(f) (1). A bankruptcy estate's succession to property by the filing of a bankruptcy petitions is not considered a taxable event, therefore the estate receives the debtor's basis in the property. See In re Kochell, 804 F.2d 84, 87 (7th Cir.1986); see also In re Young, 153 B.R. 886, 887 (Bankr. D.Neb.1993) ("[t]he Chapter 7 bankruptcy estate succeeds to the debtor's tax attributes pursuant to the Internal Revenue Code § 1398(g). The Trustee thus succeeds to the debtors' basis in property.").
To support his argument for a "stepped up" basis, the Trustee draws the Court's attention to the case of In re Rasmussen, 95 B.R. 657 (Bankr.W.D.Mo.1989). In Rasmussen, the court approved a stipulated settlement between the Chapter 7 Trustee and the Internal Revenue Service with regard to the estate's taxes. The court set forth a lengthy policy discussion, which concludes that considerations of "fairness of reality" favor a stepped up basis in the debtor's property for the estate, so that the unsecured creditors do not bear the burden of the debtor's tax liability. The court reasoned,
"Exchange" is standardly defined by decisional authority as a transfer for any form of tangible property or intangible value. The definition may be sufficiently general and expansive to require a holding that, when debtors transfer property to their bankruptcy estate, receiving a return in discharge of the debts which they owe creditors in amounts which ordinarily equal or exceed the value of the property transferred, it is a transfer by "exchange" the discharge of a pre-existing debt for the transfer of the property.
Id. at 659. The Rasmussen court proposed an interpretation of Section 1398(f) that would grant the taxing authority a lower priority claim than that of unsecured creditors. The court voiced concern that in cases where the tax liability exceeds the amount of money on hand in the estate, not only would unsecured creditors go unpaid, but the trustee might bear individual responsibility for the debtor's nondischargeable tax liability. Id. The Rasmussen approach is characterized by a certain fairness and logic, especially from a creditor's point of view. However, it is stated in the context of a settlement, not a holding, and this Court is aware no others that have adopted its "proposed interpretation" of section 1398(f). As another court observed, "a court is not free to ignore the law merely because it perceives the law as *457 unfair or ill-conceived. This rule is no less applicable to a bankruptcy court than to any other court." In re Card, 114 B.R. 226, 228 (Bankr.N.D.Cal.1990). In Card, the court also noted the following:
By imposing the capital gains tax on the bankruptcy estate as an expense of administration, liability for the tax is shifted from the debtor to the creditor. For this reason several courts in prior years ruled that a liquidating estate was not liable for such taxes. See, e.g., In re Statmaster Corp. (S.D.Fla.1971) 332 F. Supp. 1248, 1260; In re F.P. Newport Corp. (C.D.Cal. 1956) 144 F. Supp. 507.
However, the policy of collecting revenue overcame the policy of doing equity to creditors. Higher courts ruled that a liquidating trustee in bankruptcy is in fact liable for capital gains tax on the sale of estate assets. U.S. v. Sampsell, 266 F.2d 631 (9th Cir.1959); In re I.J. Knight Realty Corp., 501 F.2d 62 (3d Cir.1974). The current law is that the trustee in a Chapter 7 case must both honor the debtor's homestead exemption and pay the capital gains tax when he sells the debtor's residence. In re Duby, 98 B.R. 126 (Bankr.D.R.I. 1989); In re Lambdin, 33 B.R. 11 (Bankr. M.D.Tenn.1983).
The Trustee has provided no legal authority for the proposition that he should receive a "stepped up" basis in the debtor's property. Indeed the argument he advances is contrary to the plain language of the Section 1398(g) of the tax, which provides that bankruptcy estate shall succeed to the debtor's basis in any asset acquired from the debtor (other than by sale or exchange). 26 U.S.C. § 1398(g) (6). Accordingly, the Bankruptcy Court correctly determined that the estate's basis in the real property is that of the debtor.