ON APPEAL FROM AN ORDER OF THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY [Case No. 05-19745/GMB].
The opinion of the court was delivered by: Simandle, District Judge
This matter is before the Court on the appeal of the Internal Revenue Service ("IRS") from an Order entered in the Bankruptcy Court on May 29, 2007, granting the debtor's motion to compel the IRS to return money it seized from his 2006 income tax refund and to pay the debtor's attorney's fees for the costs of litigating that motion. The IRS argues for the first time on appeal that the Bankruptcy Court lacked jurisdiction to hear that motion and that even if the Bankruptcy Court had jurisdiction it erred in granting the motion because there was insubstantial evidence justifying the order. Accordingly, the IRS also argues that the Debtor was not entitled to attorney's fees.
The principal issue to be determined is whether a bankruptcy court has jurisdiction to compel the IRS to return a seized tax refund to a debtor who alleges that the IRS has violated the discharge of that tax debt in bankruptcy, where the former debtor has not first exhausted administrative remedies as required by 26 U.S.C. § 7433(d). For the reasons explained below, the Court shall grant the IRS's appeal and vacate the May 29, 2007 order of the Bankruptcy Court.
Debtor Thomas J. Abate, Jr. Filed a Chapter 7 Bankruptcy Petition on March 29, 2005. One of the creditors in the case was the Internal Revenue Service. A discharge of debts was entered July 20, 2005.
An order entered March 22, 2006 expunged some of the IRS's claims on the bankruptcy estate but permitted an unsecured priority claim in the amount of $6,918.46 and an unsecured non-priority claim in the amount of $2,152.80. The IRS then filed amended claims on May 3, 2006. The IRS also withheld a 2005 tax refund. Abate filed a motion to compel the return of that refund money. Pursuant to a consent order, the IRS returned the money to Abate and expunged the added May 3, 2006 claims on the bankruptcy estate.
In December 2006, the Bankruptcy Trustee paid the IRS $6,918.46, the IRS's unsecured priority claim that had been permitted. The IRS contends that notwithstanding the discharge, it is entitled to recover funds for its allowed unsecured non-priority claim that was never paid and for the post-petition interest that accrued on that claim and the claim that was paid.
On February 12, 2007, the IRS sent notice to Abate of unpaid income taxes for the 2002 tax year. (Bankruptcy Court Docket Item 72, Ex. H.) That notice indicated that Debtor owed the IRS $4,046.89, including $723.25 in penalties for late payment and $978.57 in interest charges. (Id.) Debtor's attorney protested that the permitted priority debt was paid in full and that the remaining debt was discharged. (Ex. I.) The IRS subsequently withheld $4,031.14 from Debtor's 2006 tax year refund.
Abate filed a motion in the Bankruptcy Court on March 2, 2007 again seeking return of the withheld tax refund and requesting attorney's fees for litigating the motion. The IRS now contends it was not properly served with that motion. The motion was returnable April 9, 2007. The IRS, through attorney Dashiel Shapiro, requested adjournment of the hearing date and Abate consented to the request. (See Ex. A to Abate's Designation of Record on Appeal.) There is a record of the Bankruptcy Court adjourning the April 9 hearing to May 7, 2007. The IRS filed no opposition to the motion or a supplemental certification that Abate filed in support of the motion on May 7, 2007. Thus, the Bankruptcy Court entered the May 29, 2007 Order granting the requested relief as unopposed, requiring the IRS to "immediately return to the debtor the sum of $4,031.14, representing the improperly seized 2006 federal income tax refund" as well as sanctioning the IRS for its conduct "in improperly seizing the aforesaid refund" by requiring IRS to pay debtor's counsel $2,800 in attorney's fees plus $9.80 in costs for prosecuting the motion.
This Court is being asked upon this appeal to consider an issue not raised before the Bankruptcy Court challenging the subject matter jurisdiction of the Bankruptcy Court pursuant to 26 U.S.C. § 7433(d) due to the former debtor's failure to have exhausted available IRS remedies. Although the Bankruptcy Court was thus deprived of the opportunity to address this issue, it may be raised on appeal because the issue of a court's subject matter jurisdiction is never waived. Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006); ...