Tax-Bankruptcy-Jurisdiction

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7^th Circuit Court of Appeals

Case Name: Donald Wayne Bush v. United States of America

Case No.: 16-3244

Officials: Sykes, Chief Judge, and Flaum and Easterbrook, Circuit Judges.

Focus: Tax-Bankruptcy-Jurisdiction

The Bushes faced a $100,000 tax debt, with the IRS seeking a 75% fraud penalty while the Bushes proposed a 20% negligence penalty. When the Tax Court trial date arrived, the Bushes filed for bankruptcy, triggering an automatic stay. The IRS submitted a proof of claim, prioritizing the tax debt over other unsecured debts and asserting the penalty as nondischargeable. In response, the Bushes initiated an adversary proceeding, citing 11 U.S.C. 505(a)(1) to contest the penalty. The IRS argued that bankruptcy judges lacked jurisdiction under section 505. However, the Seventh Circuit ruled that bankruptcy courts can determine a debtor’s tax obligations. While section 505 assigns a task to bankruptcy judges, the decision to exercise authority over tax liability remains separate. With the bankruptcy concluded and assets used to pay debts, the residual dispute should now fall under the jurisdiction of the Tax Court.

Vacated and Remanded.

Decided 04/26/24

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