Johnson v. CIR

United States Court of Appeals
Fifth Circuit
F I L E D
June 1, 2005
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 04-60799
Summary Calendar
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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
______________________________

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Before DAVIS, SMITH, and DENNIS,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
H. Dee Johnson, Jr., appeals a decision of
the United States Tax Court, which upheld the
Internal Revenue Service’s findings of defi-
ciencies in the tax reported on certain of his
returns. Finding no error, we affirm.
I.
On September 3, 1991, Johnson filed a peti-
tion under chapter 7 of the Bankruptcy Code.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 loss to the estate of $153,000.
The estate also included two properties in,
respectively, Argyle, Texas, and Dallas, Texas,
that had been mortgaged to Citicorp Mort-
gage, Inc. (“CMI”); Johnson owed $262,128
on the Argyle property and $128,572 on the
Dallas property.
CMI was granted relief from the bank-
ruptcy 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 en-
joined all creditors whose debts were discha-
rged 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 liquida-
tion proceeds to 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 oper-
ating loss of the estate from his income 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 determina-
tion, arguing that the only debt discharged by
the bankruptcy court was the $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 from the total amount of a debt, the
difference is income for the discharge or can-
cellation 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 gross income. 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 of the taxpayer, including, inter alia,
net operating losses. I.R.C. § 108(b).
* Pursuant to 5TH CIR. R. 47.5, the court has de-
termined that this opinion should not be published
and is not precedent except under the limited cir-
cumstances set forth in 5TH CIR. R. 47.5.4.
1 Title 11, United States Code.

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The parties do not dispute that Johnson as-
sumed 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 of the bankruptcy proceed-
ing, that offsets the claimed NOL. Johnson
claims that the proper amount of COD income
is $4,916 (the amount the bankruptcy court
accepted in its final report as the total amount
of debts left discharged), but the Commission-
er contends that the proper amount also in-
cludes the $197,500 discharged to CMI
through the mortgage foreclosures, totally
eviscerating Johnson’s claimed NOL. 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 of the United States Code (relat-
ing 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 or is 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 dol-
lar excluded by subsection (a).” Based on
these subsections, Johnson believes that be-
cause the bankruptcy court’s final order refer-
enced 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 sub-
section (b)(3).
Johnson’s position is in error because, as
the Tax Court astutely found, Johnson’s rea-
soning is based on a misunderstanding of
bankruptcy law. In exchange for transferring
property to the estate, an eligible debtor re-
ceives a discharge from “all debts that arose
before the date of the order for relief under
this chapter.” Bankr. Code § 727(b) (empha-
sis 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 re-
quired 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 distri-
bution from the estate, it may still enforce its
security interests in 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).

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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 bankr-
uptcy court’s findings are not in tensionSSthe
bankruptcy court found that $4,916 in debt
was discharged as to creditors that filed proofs
of claim against the estate, and the Tax Court
made the additional finding that the CMI debts
were also discharged as a result of the bank-
ruptcy 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 John-
son’s NOL under § 108(b)(2).5
AFFIRMED.
4 See Bankr. Code § 727(b) (“Except as pro-
vided 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 or-
der for relief under this chapter, and any liability
on a claim that is determined under section 502 of
this title as if such claim had arisen before the com-
mencement 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 pursu-
ant 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 bank-
ruptcy court, Johnson’s res judicata and collateral
estoppel arguments are also without merit.

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