Anderson v. State of California, Franchise Tax Board

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 03-42872 TG
Chapter 13
TERRY MARLENE ANDERSON,
Debtor.
___________________________/
TERRY MARLENE ANDERSON, 	A.P. No. 09-4162 AT
Plaintiff,
vs.
STATE OF CALIFORNIA,
FRANCHISE TAX BOARD,
Defendants.
___________________________/
MEMORANDUM OF DECISION
In 	the 	above-captioned 	adversary 	proceeding, 	plaintiff 	Terry
Marlene Anderson (“Anderson”) seeks a judgment holding the defendant
Franchise 	Tax 	Board 	(the 	“FTB”) 	in 	civil 	contempt 	for 	violation 	of
the 	discharge 	injunction. 	See 	11 	U.S.C. 	§ 	524(a)(2). 	Anderson
contends that, by attempting to collect additional taxes for the year
2000 	in 	2006, 	the 	FTB 	violated 	the 	injunction 	that 	arose 	from 	the
bankruptcy discharge she received in 2003. 	The FTB abated its claim
for 	additional 	taxes 	without 	conceding 	any 	improper 	conduct.
Signed: November 23, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 25, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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Anderson 	now 	seeks 	reimbursement 	of 	her 	attorneys’ 	fees, 	which
requires the Court to determine whether the FTB’s conduct did in fact
violate the discharge injunction.
The Court concludes that it did. 	As discussed below, the FTB’s
claim 	was 	barred 	by 	the 	applicable 	statute 	of 	limitations. 	In
addition, the claim was a pre-petition claim that was incurred before
Anderson 	filed 	her 	bankruptcy 	case 	and 	which 	the 	FTB 	could 	have
discovered 	in 	time 	to 	file 	a 	proof 	of 	claim. 	Therefore, 	it 	was
subject 	to 	her 	discharge. 	Anderson 	is 	entitled 	to 	her 	reasonable
attorneys’ fees as a result of the FTB’s violation of the discharge
injunction. 	However, 	based 	on 	recent 	Ninth 	Circuit 	authority, 	she
may 	only 	recover 	the 	fees 	she 	incurred 	until 	such 	time 	as 	the 	FTB
agreed to abate its claim. 	See Sternberg v. Johnston, 582 F.3d 1114,
1123-24 (9th Cir. 2009).
SUMMARY OF FACTS
Anderson 	filed 	a 	petition 	under 	chapter 	13 	of 	the 	Bankruptcy
Code 	on 	May 	15, 	2003. 	The 	Court 	confirmed 	Anderson’s 	plan 	on
November 26, 2003. 	She completed the plan and received a discharge
on August 9, 2004. 	The FTB received notice of Anderson’s discharge.
When 	she 	filed, 	Anderson 	scheduled 	the 	FTB 	as 	an 	unsecured
priority 	creditor, 	listing 	as 	owed 	state 	income 	tax 	for 	1998 	and
estimated state income tax for 2001. 	The FTB filed a timely proof of
claim for these years. 	It did not file a proof of claim for the year
2000. 	At that time, the FTB did not believe that Anderson owed any
additional 	state 	income 	taxes 	for 	this 	year. 	Anderson 	had 	timely
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1On May 1, 2006, the IRS abated its claim for additional taxes
for the year 2000. Neither party presented any evidence regarding
the IRS’s reason for abating its claim.
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filed her year 2000 federal and state income tax returns and had paid
the amounts indicated on the forms.
In 	or 	about 	2003, 	the 	Internal 	Revenue 	Service 	(the 	“IRS”)
selected 	Anderson’s 	year 	2000 	federal 	tax 	return 	for 	audit. 	On
February 21, 2005, the IRS assessed an additional $17,285 in federal
taxes 	for 	the 	year 	2000. 	Anderson 	did 	not 	notify 	the 	FTB 	of 	the
additional assessment by the IRS. 	However, the FTB received notice
of 	the 	additional 	assessment 	from 	the 	IRS 	on 	May 	4, 	2005, 	from 	the
IRS. 1
On July 10, 2006, based on the IRS assessment, the FTB issued a
Notice of Proposed Assessment of additional income taxes for the year
2000 	in 	the 	amount 	of 	$6,655. 	Anderson 	challenged 	FTB’s 	proposed
assessment, contending that it had been discharged in her bankruptcy
case. 	The 	FTB 	disregarded 	the 	challenge 	and 	issued 	a 	Notice 	of
Action. 	Thereafter, 	it 	sent 	Anderson 	two 	Income 	Tax 	Due 	Notices.
Anderson 	then 	had 	her 	bankruptcy 	counsel 	contact 	the 	FTB 	on
Anderson’s behalf and advise it of Anderson’s bankruptcy discharge.
Nevertheless, the FTB continued with its collection efforts, issuing
a Past Due Notice.
Between 	September 	and 	November 	2007, 	Anderson’s 	counsel
communicated 	with 	the 	FTB 	several 	times, 	by 	phone 	and 	by 	fax,
regarding 	Anderson’s 	tax 	liability. 	The 	FTB 	maintained 	that 	the
taxes 	had 	been 	properly 	assessed 	and 	had 	not 	been 	discharged 	in
Anderson’s bankruptcy. 	It argued that the taxes represented a post-
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discharge 	obligation 	because 	it 	had 	no 	way 	of 	knowing 	about 	them
until after Anderson received her discharge.
On 	November 	2, 	2007, 	without 	explanation, 	the 	FTB 	informed
Anderson 	of 	its 	decision 	to 	abate 	the 	year 	2000 	tax 	assessment.
However, 	the 	FTB 	does 	not 	concede 	that 	its 	claim 	was 	discharged 	or
that its prior conduct violated the discharge injunction.
The 	FTB 	declined 	to 	reimburse 	Anderson 	for 	attorney’s 	fees
incurred 	over 	the 	course 	of 	their 	negotiations. 	As 	a 	result, 	on
April 	1, 	2009, 	Anderson 	filed 	the 	above-captioned 	adversary
proceeding against FTB to recover these fees.
DISCUSSION
Anderson advances two arguments as to why the FTB’s attempt to
collect the additional year 2000 income taxes was improper. 	First,
she contends that the FTB’s assessment of additional income tax for
the 	year 	2000 	was 	improper 	under 	state 	law. 	Alternatively, 	she
contends that the FTB’s attempt to collect the tax debt violated the
discharge 	injunction. 	Finally, 	she 	asserts 	the 	right 	to 	her
attorneys’ 	fees 	for 	violation 	of 	the 	discharge 	injunction. 	These
three issues are addressed below.
1. 	Was the FTB’s assessment of the year 2000 taxes valid?
Anderson argues that the FTB’s assessment was invalid because it
was 	barred 	by 	the 	statute 	of 	limitations. 	Normally, 	the 	FTB 	is
required to issue a Notice of Proposed Assessment within four years
from the date the return is due or the date it is filed, whichever is
later. 	Cal. 	Rev. 	& 	T. 	Code 	§ 	19057(a). 	Anderson 	timely 	filed 	her
2000 	California 	tax 	return 	on 	April 	15, 	2001. 	Thus, 	the 	normal
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2Anderson contends that the two year limitations period
applies regardless of who gives the FTB notice. 	However, because
the FTB’s assessment was made within two years, we need not resolve
this dispute.
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statute of limitations ran on April 15, 2005. 	The FTB did not issue
its Notice of Proposed Assessment until July 10, 2006.
However, the FTB’s statute of limitations is reopened when the
IRS assesses additional taxes. 	If the FTB receives notification of
the IRS assessment from the taxpayer within six months of the final
assessment, 	the 	FTB 	has 	two 	years 	from 	the 	date 	the 	notice 	is
received to assess additional taxes. 	Cal. Rev. & T. Code § 19059(a).
If not, it may assess the additional taxes at any time. 	Cal. Rev. &
T. 	Code 	§ 	19060(a); 	see 	Ordlock 	v. 	Franchise 	Tax 	Bd., 	38 	Cal. 	4 th
897, 911-912 (Cal. 2006). 2
As stated above, the FTB received notification of the additional
IRS 	assessment 	on 	May 	4, 	2005 	and 	issued 	a 	Notice 	of 	Proposed
Assessment 	on 	July 	10, 	2006. 	Ostensibly, 	therefore, 	but 	for
Anderson’s 	bankruptcy 	discharge, 	it 	would 	seem 	that 	the 	FTB’s
assessment was proper. 	However, 	Anderson 	asserts 	that 	the 	FTB’s
assessment was invalid because the IRS assessment was made after the
expiration of its statute of limitations. 	As a result, according to
Anderson, the statute of limitations applicable to the FTB, which had
previously 	expired, 	was 	never 	reopened. 	Based 	on 	the 	evidence
presented 	(and 	that 	not 	presented), 	the 	Court 	finds 	in 	favor 	of
Anderson on this issue.
The 	normal 	statute 	of 	limitations 	for 	assessment 	of 	federal
income 	taxes 	is 	three 	years 	from 	the 	date 	the 	return 	was 	due 	or
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filed, whichever is later. 	26 U.S.C. § 6501. 	When the IRS issues a
statutory 	notice 	of 	deficiency, 	the 	normal 	three-year 	statute 	of
limitations 	is 	extended 	for 	an 	additional 	150 	days: 	i.e., 	60 	days
after the 90 day period within which the taxpayer may file a petition
with 	the 	Tax 	Court, 	challenging 	the 	assessment. 	26 	U.S.C. 	§ 	6503.
Anderson’s 2000 tax return, which she timely filed, was due on April
15, 2001. 	Therefore, absent a waiver of the statute of limitations
by Anderson, the IRS was required to assess any additional taxes by
September 	12, 	2004. 	The 	IRS 	did 	not 	make 	the 	assessment 	until
February 21, 2005.
The 	FTB 	has 	produced 	no 	evidence 	that 	Anderson 	waived 	the
statute 	of 	limitations 	applicable 	to 	the 	IRS. 	Since 	the 	IRS
assessment was untimely and thus invalid, the FTB did not receive a
new period of time within which to assess the additional taxes, and
its attempt to assess them was improper without regard to Anderson’s
bankruptcy discharge.
2. Was FTB’s claim for year 2000 taxes discharged?
Anderson also contends that the FTB’s assessment of additional
taxes for the year 2000 violated the discharge injunction. 	11 U.S.C.
§ 	524. 	The 	tax 	claim 	existed 	as 	a 	potential 	claim 	before 	Anderson
filed 	her 	bankruptcy 	case. 	The 	FTB 	had 	notice 	of 	Anderson’s
bankruptcy 	filing 	and 	could 	have 	filed 	a 	proof 	of 	claim 	for 	the
additional 	taxes 	within 	the 	claims 	bar 	date. 	Therefore, 	Anderson
reasons, 	it 	was 	discharged 	in 	her 	bankruptcy 	case, 	and 	the 	FTB
violated the discharge injunction when it later tried to enforce the
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claim. 	In support of this position, she cites Joye v. Franchise Tax
Board, 578 F.3d 1070 (9 th Cir. 2009).
In Joye, the debtors filed a bankruptcy petition in March 2001.
They 	scheduled 	the 	FTB 	as 	a 	priority 	creditor 	with 	a 	$10,000 	claim
for the year 2000. 	The claims bar date was September 3, 2001. 	The
FTB 	received 	notice 	of 	the 	bankruptcy 	filing 	and 	did 	not 	file 	a
claim. 	After the claims bar date had passed, the Joyes filed their
state 	income 	tax 	return, 	reflecting 	that 	they 	owed 	taxes 	and
penalties 	for 	the 	year 	2000 	totaling 	$28,178. 	No 	payment 	was 	made
with the return. 	Because it had failed to file a proof of claim, the
FTB 	received 	no 	payment 	through 	the 	Joyes’ 	plan, 	even 	of 	the
scheduled $10,000. 	After the Joyes completed the plan and received
a discharge, the FTB attempted to collect the outstanding taxes for
the 	year 	2000. 	The 	Joyes 	filed 	an 	adversary 	proceeding 	for
violation 	of 	the 	discharge 	injunction. 	The 	Ninth 	Circuit 	held 	for
the Joyes. 	Id. at 1081.
The FTB argues that the outstanding taxes survived the discharge
by virtue of 11 U.S.C. § 1305 and that the taxes constituted a post-
petition claim because payment was not yet due when the Joyes filed
their 	bankruptcy 	petition. 	This 	argument 	was 	rejected 	by 	the 	Joye
court. 	Section 	1305 	permits, 	but 	does 	not 	require, 	a 	taxing
authority 	to 	file 	a 	proof 	of 	claim 	in 	a 	chapter 	13 	case 	for 	post-
petition 	taxes. 	The 	Joye 	court 	held 	that 	§ 	1305 	was 	inapposite 	as
the 	taxes 	in 	question 	were 	pre-petition 	taxes. 	Joye, 	578 	F.3d 	at
1074. 	It noted that the taxes in question were incurred before the
bankruptcy 	was 	filed 	although 	not 	due 	to 	be 	paid 	until 	afterwards.
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It 	noted 	the 	broad 	definition 	of 	“claim” 	in 	the 	Bankruptcy 	Code,
which 	includes 	unliquidated, 	contingent, 	and 	unmatured 	claims. 	It
concluded that this definition was broad enough to cover a debt such
as the Joyes’ year 2000 tax debt. 	Id. at 1075-77.
In Joye, the FTB also argued that, regardless of whether its tax
claim was properly viewed as pre-petition or post-petition, it would
be 	fundamentally 	unfair 	under 	the 	circumstances 	to 	treat 	its 	tax
claim 	as 	discharged. 	Since 	the 	claims 	bar 	date 	expired 	before 	the
Joyes filed their tax return, the FTB had no way to determine whether
the Joyes owed any taxes for 2000. 	The Court rejected this argument.
It found that the FTB had received adequate notice of the bankruptcy
filing 	and 	that 	the 	Joyes 	had 	listed 	the 	FTB 	as 	holding 	a 	priority
claim, 	albeit 	for 	a 	lesser 	amount 	than 	ultimately 	proved 	due. 	The
FTB 	could 	have 	filed 	an 	estimated 	claim 	within 	the 	bar 	date 	and
amended 	it 	later 	when 	the 	precise 	amount 	of 	the 	debt 	was 	known.
Moreover, it found no evidence that the Joyes had acted in bad faith.
Id., at 1080.
The FTB argues that it would be fundamentally unfair to treat as
discharged 	its 	claim 	for 	additional 	year 	2000 	taxes. 	It 	contends
that 	it 	had 	no 	way 	of 	knowing 	about 	the 	tax 	claim 	until 	after 	the
claims bar date. 	It cites case authority holding that a claim does
not 	arise 	until 	such 	time 	as 	it 	may 	be 	fairly 	contemplated 	by 	the
claimant. 	See In re SNTL Corp., 571 F.3d at 839; In re Jensen, 995
F.2d 	925, 	930-31 	(9th 	Cir. 	1993). 	The 	Court 	finds 	this 	argument
unpersuasive. 	Anderson timely filed her tax return for the year 2000
and 	timely 	paid 	what 	she 	believed 	she 	owed. 	The 	FTB 	could 	have
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conducted 	an 	audit 	of 	the 	return 	and 	discovered 	that 	she 	owed
additional 	taxes 	for 	that 	year 	before 	Anderson’s 	2003 	bankruptcy
filing. 	It 	was 	not 	required 	to 	rely 	on 	the 	IRS 	audit 	process.
Therefore, 	the 	Court 	concludes 	that, 	not 	only 	was 	the 	FTB 	claim
barred by the applicable statute of limitations, the claim was also
discharged 	in 	Anderson’s 	bankruptcy 	case. 	Therefore, 	the 	FTB’s
collection efforts post-bankruptcy violated Anderson’s discharge.
3. 	Does FTB’s conduct warrant sanctions for violation of the
discharge injunction?
Anderson seeks reimbursement of her attorneys’ fees from the FTB
as 	a 	sanction 	for 	the 	FTB’s 	violation 	of 	the 	discharge 	injunction.
The 	Court 	concludes 	that 	Anderson 	is 	entitled 	to 	recover 	the 	fees
incurred 	prior 	to 	the 	commencement 	of 	the 	adversary 	proceeding 	but
not those incurred thereafter.
Successful 	completion 	of 	a 	chapter 	13 	payment 	plan 	results 	in
the 	entry 	of 	a 	discharge 	injunction 	with 	respect 	to 	dischargeable
pre-petition debts as provided by 11 U.S.C. § 524(a)– “A discharge in
a 	case 	under 	this 	title 	... 	operates 	as 	an 	injunction 	against 	the
commencement or continuation of an action... to collect, recover, or
offset 	any 	such 	debt 	as 	a 	personal 	liability 	of 	the 	debtor.” 	11
U.S.C. 	§ 	524(a)(2). 	Although 	11 	U.S.C. 	§ 	524 	does 	not 	provide 	any
internal enforcement mechanism, civil contempt is the normal remedy
for 	violation 	of 	the 	discharge 	injunction. 	Walls 	v. 	Wells 	Fargo
Bank, 	N.A., 	276 	F.3d 	502, 	507 	(9 th 	Cir. 	2002). 	Under 	well-settled
Ninth Circuit law, bankruptcy courts have the power to hold a party
in civil contempt under 11 U.S.C. § 105. 	Id. at 509; In re Bennett,
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3Although the Hardy court refers to a violation of the “stay,”
the case actually involves a violation of the discharge injunction.
Hardy, 97 F.3d at 1387.
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298 F.3d 1059, 1069 (9 th Cir. 2002); see also In re Rainbow Magazine,
Inc., 77 F.3d 278, 284 (9th Cir. 1996).
In Bennett, the Ninth Circuit endorsed the two-prong test used
by 	the 	Eleventh 	Circuit 	to 	determine 	whether 	sanctions 	should 	be
awarded for violation of the discharge injunction. 	The Court stated
that, “to justify sanctions, the movant must prove that the creditor
(1) knew the discharge injunction was applicable and (2) intended the
actions which violated the injunction.” 	Bennett, 298 F.3d at 1069,
citing In re Hardy, 97 F.3d 1384, 1390 (11th Cir. 1996). 	In Hardy,
the 	Eleventh 	Circuit 	remanded 	the 	action 	to 	the 	bankruptcy 	court,
stating that sanctions would be warranted if the court found that the
Internal 	Revenue 	Service 	had 	received 	notice 	of 	the 	debtor’s
discharge and “intended the actions which violated the stay.” 3 	Hardy,
97 F.3d at 1930. 	Bankruptcy courts have observed that “[a] creditor
takes a calculated risk, under threat of contempt of 524 or sanctions
under 	the 	362 	automatic 	stay 	where 	it 	undertakes 	to 	make 	its 	own
determination of what the stay or discharge in bankruptcy means.” In
re 	Gray, 	97 	B.R. 	930, 	936 	(Bankr. 	N.D. 	Ill. 	1989); 	See 	also 	In 	re
Clark, 49 B.R. 704, 707 (Bankr. D. Guam 1985).
In this case, it is undisputed that the FTB had knowledge of the
Debtor’s 	bankruptcy 	case 	and 	of 	the 	entry 	of 	Anderson’s 	discharge.
Its good faith belief that the discharge injunction did not apply is
not 	a 	viable 	defense. 	See 	Bennett, 	298 	F.3d 	at 	1069; 	Eskanos 	&
Adler, 	P.C. 	v. 	Leetien, 	309 	F.3d 	1210, 	1215 	(9th 	Cir. 	2002).
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Moreover, 	its 	conduct 	in 	continuing 	to 	try 	to 	collect 	the 	tax 	debt
was 	clearly 	voluntary. 	Because 	FTB 	took 	intentional 	actions 	in
violation 	of 	the 	discharge 	injunction 	with 	knowledge 	of 	the
bankruptcy discharge that gave rise to the injunction, sanctions for
civil contempt are warranted.
Appropriate sanctions “compensate the debtor for her sustained
losses as a sanction for civil contempt upon a creditor who violates
a discharge injunction.” 	Walls v. Wells Fargo Bank, N.A., 255 B.R.
at 44. 	In this case, Debtor incurred attorney’s fees from the time
the 	FTB 	was 	informed 	that 	the 	taxes 	had 	been 	discharged 	until 	it
decided 	to 	abate 	the 	taxes 	in 	November 	of 	2007. 	Anderson 	also
incurred attorney’s fees for prosecuting this civil contempt action
against the FTB. 	However, in Sternberg v. Johnston, 582 F.3d 1114,
1123-24 	(9th 	Cir. 	2009), 	the 	Ninth 	Circuit 	recently 	held, 	in 	the
context of an automatic stay violation, that contempt sanctions could
not 	be 	recovered 	for 	litigating 	the 	right 	to 	attorneys’ 	fees. 	It
based this holding on the American Rule, requiring litigants to bear
their 	own 	attorneys’ 	fees 	absent 	a 	contract 	or 	statute 	to 	the
contrary. 	Id. at 1122.
The 	Ninth 	Circuit 	would 	likely 	reach 	the 	same 	conclusion 	with
respect 	to 	a 	discharge 	violation. 	The 	FTB 	had 	already 	abated 	its
claim when the adversary proceeding was filed. 	Therefore, Anderson
is not entitled to recover any fees incurred for the litigation.
CONCLUSION
The FTB’s assessment of Anderson’s year 2000 taxes was invalid
because 	the 	taxes 	were 	assessed 	outside 	the 	applicable 	statute 	of
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limitations. 	The 	IRS 	assessment, 	which 	triggered 	the 	FTB’s
assessment, was invalid as having been made after the expiration of
its 	statute 	of 	limitations. 	Therefore, 	the 	FTB’s 	statute 	of
limitations was not reopened. 	The FTB had an allowable pre-petition
claim for additional taxes incurred during 2000 which it could have
discovered 	prior 	to 	the 	expiration 	of 	the 	original 	statute 	of
limitations. 	No proof of claim was filed for these additional taxes,
and 	the 	claim 	was 	discharged. 	The 	FTB 	took 	intentional 	actions 	to
enforce 	a 	claim 	that 	had 	been 	discharged 	despite 	knowledge 	of 	the
discharge. 	The FTB’s good faith belief that the claim had not been
discharged 	is 	not 	a 	defense. 	Moreover, 	it 	is 	not 	fundamentally
unfair to hold the claim discharged as the FTB could have discovered
the existence of the claim before Anderson filed her bankruptcy. 	As
a consequence, the FTB must pay sanctions to compensate Anderson for
the 	attorneys’ 	fees 	she 	incurred 	up 	to 	the 	time 	the 	FTB 	abated 	its
claim. 	She 	may 	not 	recover 	her 	fees 	for 	bringing 	the 	adversary
proceeding.
The 	parties 	are 	directed 	to 	meet 	and 	confer 	concerning 	the
amount of recoverable fees and, unless unable to agree, counsel for
Anderson 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	judgment 	in
accordance with this decision. 	If unable to agree, either party may
contact the judge’s calendar clerk to arrange for a hearing.
END OF DOCUMENT
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COURT SERVICE LIST
Robert N. Kolb
Law Offices of Robert N. Kolb
312 4 th Street
Antioch, CA 94509
Kristian D. Whitten
Deputy Attorney General
State of California, Department of Justice
455 Golden Gate Avenue, Suite 11000
San Francisco, CA 94102-7004
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