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Tenth Circuit Holds Tax Court Action Not Subject to Bankruptcy Automatic Stay

Wednesday, April 3, 2013

The U.S. Court of Appeals for the Tenth Circuit held March 28 that a U.S. Tax Court proceeding brought by a bankrupt debtor is an independent judicial proceeding not subject to the automatic stay because it is not the continuation of an administrative proceeding against the debtor (Schoppe v. Commissioner of Internal Revenue, 10th Cir., No. 12-9010, 3/28/13).

The taxpayer, John Schoppe, a real estate broker and appraiser, sought to stay an adverse Tax Court ruling after he filed a voluntary bankruptcy petition.

Judge Monroe G. McKay, writing for a three-judge panel, said the issue was “an open question” in the circuit, with the panel agreeing to apply “a bright-line rule that a petition filed in Tax Court is an independent judicial proceeding.”

McKay said the panel agreed with the U.S. Court of Appeals for the Fifth Circuit's holding in Freeman v. Commissioner, 799 F.2d 1091 (5th Cir. 1986), which found that the Tax Court proceeding was an independent proceeding initiated by the debtor and not a continuation of an administrative process initiated by the Internal Revenue Service.

McKay said the Freeman decision was subsequently followed by the U.S. Courts of Appeals for the Eleventh, Third, and First Circuits. The panel agreed with these courts and not the ruling by the U.S. Court of Appeals for the Ninth Circuit, which held that a Tax Court proceeding was a continuation of an IRS administrative action.

Tax Court Decision Sustained

After determining that the Tax Court proceeding was not stayed by the bankruptcy case, McKay affirmed the Tax Court's ruling that Schoppe “failed to adequately substantiate” business expense deductions.

Schoppe claimed that he documented expenses in his day planners but did not introduce any day planners into evidence.

In affirming the Tax Court's decision, McKay said, “the [tax] court also found a significant portion of Mr. Schoppe's claimed expenses appeared to be entertainment and away-from-home meal and lodging expenses, which were required to be specifically documented, rather than estimated.”

Judges Terrence L. O'Brien and Bobby R. Baldock were also on the panel.

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