CCA 200851061: Forfeiture proceeds routed through a Chapter 11 trustee look involuntary twice over

Plain-English summary

A colleague has drafted an analysis, listed two facts that worry them, and sent it up for a reaction. The reply says the two worries are smaller than they look and adds a third argument the draft left out.

The framework the exchange assumes, without ever stating it, is the distinction between voluntary and involuntary payments. A taxpayer who pays voluntarily may tell the Service which liability to apply the money to. Where the payment is involuntary, the Service applies it as it chooses, which in a case involving employment taxes usually means applying it where it does the government the most good rather than where the taxpayer would prefer. So the characterization is the whole question, and the release is about whether these remittances can be called involuntary.

The first worry was that the amounts remitted had been agreed upon in settlement, which sounds voluntary. The writer reframes it around the test as the case law states it: whether the payments were received by agents of the United States as a result of distraint or levy, or from a legal proceeding in which the government is seeking to collect delinquent taxes or to file a claim for them. Here there was a legal proceeding, so the settlement label does not control. The second worry was that the proceeding was not instituted specifically to collect taxes, since it was a complaint for civil forfeiture. The answer is that the complaint alleged the funds were the proceeds of bankruptcy fraud, and the Service had filed proofs of claim for employment and trust fund taxes in the related chapter 11 cases. On that footing the Service may argue the remittances trace directly to claims for taxes, which is what the test asks.

The addition is the bankruptcy dimension, which the draft had not addressed. The proceeds were ultimately remitted by the bankruptcy trustee, and the writer points to a First Circuit holding that payments made under a Chapter 11 plan were involuntary. They are careful about how much that case carries: the Supreme Court affirmed, but principally for a different proposition, that a bankruptcy court may direct the Service as to which liability a payment must be applied in the interest of a successful reorganization. So the involuntariness holding is offered as something to buttress the position rather than to rest it on. The writer also points to chapter 16 of the Chief Counsel Bankruptcy Practice Deskbook, on designation of payments in bankruptcy, as the thorough treatment.

The release reaches no conclusion. It says the Service may argue the point and calls itself informal thoughts and musings, ending with an invitation to call and a suggestion to run the matter past the bankruptcy branch, whose new chief is named. No Code section or regulation is cited anywhere in it.

The three cases are named as the release names them, Amos with a pinpoint page, Muntwyler with nothing further, and Energy Resources Co., 871 F.2d 223, 230 (1st Cir. 1989). The citation-checking tool was unavailable in this session, so none of the three was confirmed here and no year or reporter has been supplied from outside the document. Check them independently before relying on them.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "Amos at 69" as the short form; lower-case "chapter 11" in the text against the capitalized "Chapter 11 plan" later; "in the interest effectuating a successful reorganization" with the missing word; "any of the these matters"; and "employment/trust fund taxes".

Ruling snapshot

• Question: Can settlement remittances arising from a civil forfeiture action and paid over by a bankruptcy trustee be treated as involuntary payments?
• Outcome: Advice given, informal and inconclusive. The writer thinks the draft is on the right track. A settlement is not disqualifying where the payments came from a legal proceeding, and a forfeiture complaint alleging proceeds of bankruptcy fraud, combined with the proofs of claim filed for employment and trust fund taxes, lets the Service argue the remittances trace directly to claims for taxes. The Chapter 11 aspect further buttresses involuntariness, since the funds were remitted by a Chapter 11 trustee. The writer calls this informal thoughts and musings and refers the matter on.
• Key authorities: Amos, at 69, and Muntwyler, both cited without reporter or year; Energy Resources Co., 871 F.2d 223, 230 (1st Cir. 1989), affirmed by the Supreme Court; chapter 16 of the Chief Counsel Bankruptcy Practice Deskbook. None was independently verified here. The document cites no Code section.

Full text (IRS public release)

ID: CCA_2008100707190825 Number: 200851061
Office: ------------- Release Date: 12/19/2008

UILC: 01.00.00-00

From: -----------------
Sent: Tuesday, October 07, 2008 7:19:12 AM
To: ------------------------
Cc: --------------------------------------
Subject: RE: Question re application of payments

I think that you are on the right track and Amos and Muntwyler are the places to start. Also, I am less concerned about the two troubling facts that you list, below. First, while it is true that the amounts remitted were agreed upon in settlement, the question is whether the payments were payments "received by agents of the United States as a result of distraint or levy or from a legal proceeding in which the government is seeking to collect delinquent taxes or to file a claim therefor." Amos at 69. In this case, there was a legal proceeding, which brings us to your second concern, that the legal proceeding was not instituted specifically to collect taxes. Although under your facts we are dealing with a complaint for civil forfeiture action, the complaint alleged that the funds were the proceeds of bankruptcy fraud. Moreover, the Service had filed proofs of claim in the ----- and -------- chapter 11 cases for employment/trust fund taxes. Accordingly, it seems to me that the Service may argue that the remittances trace directly to claims for taxes.

In addition, I think that you need to address the bankruptcy aspects of these matters. You indicate that the proceeds ultimately were remitted by the bankruptcy trustee. In Energy Resources Co., 871 F.2d 223, 230 (1st Cir. 1989), the First Circuit held that payments made pursuant to a Chapter 11 plan were involuntary. The Supreme Court affirmed, although that case principally stands for the proposition that, in the interest effectuating a successful reorganization, a bankruptcy court may direct the Service to which liability a payment must be applied. Accordingly, under the facts as outlined in your memorandum, I think that the Service further may buttress its position that the payments were involuntary because when all is said and done, they were remitted by a Chapter 11 trustee. I would direct your attention to chapter 16 of the Chief Counsel Bankruptcy Practice Deskbook (Designation of Payments in Bankruptcy), which has a thorough discussion of this matter.

These are just my informal thoughts and musings. Feel free to call me directly if you further want to discuss any of the these matters. ---------------------. Also, you might want to run this by someone in --------
----------- because of the bankruptcy elements. -------------------- is the new branch chief over there and he may be reached at ---------------------.

Regards,

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