Scott E. Vincent
Vincent, Fontg & Chartier LLC
Kansas City

It is not unusual for the Internal Revenue Service to be actively involved in bankruptcy cases, and the interplay between the automatic stay in bankruptcy and IRS notice requirements often bears careful scrutiny. A recent case, Catherine Beverly v. Commissioner, T.C. Memo. 2005-41 (March 7, 2005), highlights a situation where IRS notices were ineffective because of the automatic stay, and related IRS collection action efforts were improper.

Background

On November 2, 2001, Ms. Beverly filed a voluntary Chapter 13 petition for relief under the Bankruptcy Code. Shortly thereafter, on November 26, 2001, the IRS issued to Ms. Beverly a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing Under Section 6330" ("final notice of intent to levy") with regard to unpaid federal income taxes. On November 27, 2001, the bankruptcy court issued an order dismissing Ms. Beverly's bankruptcy case for failure to file required schedules. On December 6, 2001, the bankruptcy court entered an order closing the case.

On December 19, 2001, Ms. Beverly filed a "Request for a Collection Due Process Hearing," appealing the proposed levy within the IRS.

The IRS rejected Ms. Beverly's position in the administrative collection due process hearing, and in June of 2003 the IRS issued to Ms. Beverly a "Notice of Determination Concerning Collection Action(s)." This determination stated that the IRS intended to proceed with the proposed levy pursuant to its notices issued during the pending bankruptcy. Ms. Beverly then filed a petition with the Tax Court challenging the IRS determination. In Tax Court, the IRS filed a motion for summary judgment on the issues.

Relevant Law

Section 6331 of the Internal Revenue Code provides that, if any person liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment, the secretary is authorized to collect the tax by levy. However, the secretary must provide the person with notice, including notice of the administrative appeals available to the person, before proceeding with collection by levy.

Section 6330 of the Internal Revenue Code generally provides that the commissioner cannot proceed with the collection of taxes by way of a levy on a person's property until the person has been given notice of, and the opportunity for, an administrative review of the matter (in the form of an Appeals Office hearing), and thereafter with an opportunity for judicial review of the administrative determination.

There was no dispute in the Beverly case that the IRS issued the final notice of intent to levy after Ms. Beverly filed her bankruptcy petition and while the automatic stay remained in effect. As a result, the court evaluated the IRS actions in light of the provisions governing the automatic stay.

The Bankruptcy Code provides an automatic stay that operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy estate. More specifically, the automatic stay provisions bar "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title." 11 U.S.C. Section 362(a) (2000).

Unless relief from the automatic stay is granted by order of the bankruptcy court, the automatic stay generally remains in effect until the earliest of the closing of the case, dismissal of the case, or the grant or denial of a discharge.

Court's Analysis

The Beverly court concluded that the IRS violated the automatic stay when it issued the final notice of intent to levy, dated November 26, 2001, to Ms. Beverly. The court indicated that issuance of the final notice of intent to levy constituted the commencement of an administrative proceeding against petitioner, and concluded that the final notice of intent to levy, therefore, was barred by the automatic stay. Finally, the court noted that collection activity undertaken in violation of the automatic stay is considered void or invalid.

The court also rejected IRS equitable arguments. The IRS argued that Ms. Beverly should be estopped from asserting that the final notice of intent to levy violated the automatic stay because she failed to inform the IRS during pending administrative proceedings that she had filed a bankruptcy petition. However, the record suggested that Ms. Beverly was acting pro se throughout the IRS administrative proceedings, and the court found that it appeared Ms. Beverly had acted in good faith. The court also noted that the IRS had previously issued administrative guidance concluding that the issuance of a final notice of intent to levy to a person with an open bankruptcy case would violate the automatic stay. Considering all the circumstances, the court declined to apply an equitable principle to bar consideration of the validity of the final notice of intent to levy.

The court held that the final notice of intent to levy was issued to Ms. Beverly in violation of the automatic stay and, therefore, was invalid. As a result, the IRS was found to have abused its discretion by concluding in the notice of determination that collection action pursuant to the proposed levy should proceed.

Conclusion

As noted above, the Beverly case highlights the relationship between Internal Revenue Code provisions regarding IRS collection activity and the automatic stay provisions in the Bankruptcy Code. These provisions come into play in many bankruptcies, and bear careful review under the facts of each case.