Barbara J. Drake

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INFORMATION

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS

EASTERN DIVISION
IN RE:
BARBARA J. DRAKE, CASE NO. 03-18150-WCH
Chapter 7

DEBTOR

MEMORANDUM OF DECISION REGARDING UNITED STATES’ MOTION TO
ALTER OR AMEND COURT’S ORDER

I. Introduction

The matter before the Court is the motion of the United States of America to alter or
amend a memorandum of decision which J issued earlier this year. In that decision, I concluded
that the IRS had violated the automatic stay when it issued a notice of determination regarding a
request for Innocent Spouse Relief post-petition. The movant contends that the decision should
be altered because it was not afforded an opportunity to brief the issue and that the issue was
wrongly decided. The Debtor disagrees. For the reasons set forth below, I will enter an order
denying the motion.
II. Background

The facts of the underlying tax claim are set forth in my Memorandum of Decision
Regarding Debtor’s Motion to Request the Determination of a Tax Liability, United States’

Motion to Dismiss Debtor’s Motion to Request Determination of Tax Liability and Objections

AUTHENTICATED
U.S. GOVERNMENT
GPO

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Thereto (the “Decision”).' The tax claims described in the Decision arise from two Notices of
Federal Tax Liens which the IRS issued to Barbara Drake (the “Debtor’’) and her spouse in 1997
and 1999. Drake v. Commissioner, 125 T.C. 201, 201-202 (2005). In 2000, the IRS issued to the
Debtor and her spouse a “Final Notice, Notice of Intent to Levy and Notice of Your Right to
Hearing”, with respect to their 1991, 1992, 1994, 1995, and 1997 tax years. The notice asserted
an unpaid tax of $121,478.17 and penalties and interest of $88,607.27.” Jd. at 202. In 2002, the
Debtor filed a request for Innocent Spouse Relief within the statute of limitations for such a
defense. /d. During that year, IRS denied her request and explained that it was continuing to
charge interest and potentially penalties on the unpaid taxes. The Debtor filed for bankruptcy
relief in 2003.

In 2004, while the bankruptcy was pending, the IRS informed the Debtor that her appeal
was denied and provided information on how to appeal the decision (the “Notice of
Determination”).? The Debtor followed the procedure for appeal but the United States Tax Court
(“Tax Court’) ruled that it did not have jurisdiction as the Debtor had not sought and received
relief from the automatic stay before pursuing the appeal. The Debtor then moved this Court to
have the tax liability resolved in this court. After reviewing the Debtor’s motion and the IRS’
objection I ruled that, in issuing the Notice of Determination, the IRS violated the automatic stay.
T also ruled that I would abstain from further hearing the matter. The JRS then filed the United

States’ Motion to Alter or Amend (the “Motion”), the Debtor filed an opposition (the

'In re Drake, 336 B.R. 155 (Bankr. D. Mass. 2006).

? In the Notice of Determination, the IRS sets forth the amount of taxes which were
outstanding for the years 1991, 1992, 1994, 1995 and 1997.

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“Objection”) and the IRS filed a response (the “Response”). I thereafter held a hearing on these
pleadings.

It. Position of the Parties

In the Motion, the IRS explains that it is seeking reconsideraticn to review the issue of
the stay violation because it was not afforded an earlier opportunity to argue the issue. The result
of this failure, it contends, was a faulty decision which will result in untold problems for the IRS.
The matter should be revisited, it argues, because the Notice of Determination could not have
been a stay violation as it was not in furtherance of a collection action or the continuation of an
administrative proceeding against the Debtor. Instead, the IRS contends, the notice was part of
an action which the Debtor commenced to be relieved of liability and eny decision which arises
in that action cannot violate the stay.

The IRS asserts that the two cases upon which I relied in my earlier decision, Beverly and
Smith,* were respectively irrelevant and inapposite, distinguishable andl wrongly decided. The
IRS argues that Beverly is irrclevant because the court ruled in that cas2 that the notice of intent
to levy was in violation of the automatic stay and in this case, the Debtor did not receive a notice
of intent to levy. With respect to Smith, the IRS explains that the Tax Court ruled that the notice
of determination which it issued post-petition violated the automatic stay because it was the
continuation of the notices of intent to levy which it had issued pre-petition. The IRS contends
that the case is inapplicable because it involved a CDP hearing under 26 U.S.C. § 6330 and not a

request for innocent spouse relief. To obtain the latter form of relief, the IRS explains, requires

*See Beverly v. Comm’r, 2005 WL 544842 (2005) and Smith v. Comm’r, 124 T.C. 36
(2005).

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that the requesting spouse seek relief from the liability which indicates that the spouse must
initiate an action. The IRS argues that extending Smith to innocent spouse claims would be
problematic because if a debtor failed to lift the stay to pursue the clairn, that debtor could be
barred from pursuing the matter as the deadline for filing a claim is not tolled under 11 U.S.C. §
108.

In her Objection, the Debtor contends that she requested Innocent Spouse Relief in
response to a Notice of Intent to Levy. She also explains that her request was made during a
CDP hearing.* As such, she argues, the Motion should be denied because the IRS violated the
automatic stay by continuing post-petition “an administrative proceeding which arose due to the
Service’s attempt to collect tax in considering and thereafter denying Mrs. Drake’s Request.”
Objection, p. 4.

In its response, the IRS agrees that the Debtor and her spouse received a notice of intent
to levy but claims that the Debtor made her request for innocent spous? relief at a later time.
That request, the IRS contends, is for relief from a liability and not relief from collection activity.
Even if the request is linked to the notice of intent to levy, the IRS argues that the notice is not
the commencement of any proceeding within the contemplation of 11 U.S.C. § 362(a)(1),
notwithstanding tax court decisions to the contrary.

At the hearing on the Motion, the IRS reiterated the forgoing argument. It also offered
that the Debtor could potentially be denied her day in Tax Court based upon the newly decided

case of In re Ewing, 439 F.3d 1009 (9" Cir. 2006) (ruling Tax Court lecked jurisdiction over

* The Debtor explains that hearings held pursuant to § 6330, a Collection Due Process
Hearing, are referred to as CDP hearings. The CDP hearing was informally suspended as to the
Debtor pending her request for Innocent Spouse Relief. 125 T.C. at 204.

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Innocent Spouse request as tax liability did not arise from a deficiency). The Debtor countered
that the Decision was correct because the request for Innocent Spouse Relief, although brought
separately, is linked inextricably to the Notice of Levy. That is, the Debtor was seeking relief
from both the liability and the collection activity. After the hearing, I took the matter under
advisement.

II. Analysis

As I have explained on numerous occasions, see, e.g., Jn re Wedgestone Finan., 142 B.R.
7 (Bankr. D. Mass. 1992), reconsideration is appropriate when the movant can establish newly
discovered evidence or a manifest error of law. The IRS contends that my ruling with respect to
the violation of the automatic stay constitutes a manifest error of law.

The IRS began a collection action against the Debtor and her husband by issuing notices
of federal tax liens for income tax liabilities for 1991, 1992, 1994, 1995, and 1997. The notice of
levy was for income tax liabilities for 1991, 1992, 1994, 1995, and 1997. The requests for a
CDP and Innocent Spouse Relief requested relief from the tax liabilities for 1991, 1992, 1994,
1995, and 1997. When the IRS denied the Debtor’s request for relief, it informed her that it was
continuing to charge interest and potentially penalties on the unpaid taxes. When the IRS
provided the Debtor with the Notice of Determination, that notice set forth that she remained
liable for the tax years 1991, 1992, 1994, 1995, and 1997. The course of these events is all
related to the collection action which the IRS began. In filing for Innocent Spouse Relief, the

Debtor availed herself of an administrative defense to that collection action.

*The Eighth Circuit supports this holding. Bartman v. C.LR. 2006 WL 1147265 *2 (8"
Cir. 2006) (“We agree with the Ninth Circuit that the tax court lacks jurisdiction under § 6015(e)
unless a deficiency was asserted against the individual petitioning for review.”).

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The IRS is correct that a taxpayer is not obligated to file a CDF or Innocent Spouse
Request. It is also correct to say that a defendant in an adversary proceeding is not required to
file an answer to a complaint objecting to discharge. To so ignore the latter complaint, however,
would enable the plaintiff to obtain a denial of a discharge notwithstanding potentially valid
defenses. Likewise, while a taxpayer is not obligated to pursue a CDP or Innocent Spouse
request, if the taxpayer fails to raise meritorious defenses via a CDP or Innocent Spouse relief,
the IRS is free to proceed with a levy. That the request for Innocent Spouse Relief arises via a
separate procedural mechanism does not alter the fact that in this case the Debtor sought the
relief in response to the ongoing collection actions of the IRS. Similar to the court’s holding in
Smith, I conclude that when the IRS issued the Notice of Determination, it was part and parcel of
the collection action.

IV. Conclusion

The IRS has not met the Wedgestone standard as it has failed tc demonstrate that the

Decision contained a manifest error of law. Accordingly, I will enter a separate order denying

the Motion.

William C, Hillnian
U.S. Bankruptcy Judge

Date: May 16, 2006

Counsel Appearing:

For the IRS: Stephen J. Turanchik, Esq.
For the Debtor: Timothy Burke, Esq.