The matters before the Court are the Motion for Contempt and Sanctions (the “Motion for Contempt”) filed by the Debtor and the objection thereto filed by the United States of America on behalf of the Internal Revenue Service (the “IRS”). Through the Motion for Contempt, the Debtor requests that sanctions be imposed against the IRS for allegedly violating the discharge injunction by executing a set-off of the Debtor’s Massachusetts tax refund against the accrued interest on the Debtor’s 2009 federal income taxes, which he previously paid through his Chapter 13 plan.
The Debtor filed a Chapter 13 petition on February 7, 2011. On the same date, he filed a Chapter 13 Plan (the “Plan”) providing for monthly payments in the amount of $800.00 over five years. Through the Plan, the Debtor proposed to pay the IRS a priority claim in the amount of $26,283.00 without interest. The Plan further estimated that general unsecured creditors would receive a 5% dividend on their claims.
On February 18, 2011, the IRS filed a proof of claim in the amount of $31,300.00 for unpaid taxes (the “Claim”). The Claim indicated that the entire amount was entitled to priority pursuant to 11 U.S.C. § 507(a)(8). The attachment to the Claim itemized the amount as follows:
Kind of Tax Tax Period Date Tax Assessed Tax Due INCOME 12/31/2009 Unassessed-No Return $26,300.00 INCOME 12/31/2010 NOT FILED $5,000.00
On March 9, 2011, the IRS filed an amended proof of claim, increasing the total amount due to $36,120.97, but reducing the priority claim to $28,692.20 (the “Amended Claim”). The attachment to the Amended Claim reflected these changes as follows:
Kind of Tax Tax Period Date Tax Assessed Tax Due Interest to Petition Date INCOME 12/31/2009 03/21/2011 $26,283.00 $844.20 INCOME 12/31/2010 PER Return $1,565.00 $0.00
The supporting document further indicates that the IRS assessed a penalty in the amount of $7,428.77.
On April 1, 2011, the Court entered an order modifying the amount to be paid to the IRS to conform to $28,692 (rounded) listed in the Amended Claim and confirming the Plan. On May 3, 2016, the Chapter 13 trustee (the “Trustee”) filed an interim report indicating that the Debtor had completed all payment obligations under the Plan, had filed the Certificate of Debtor Education and the Debtor’s Affidavit Regarding Discharge, and was entitled to a discharge under 11 U.S.C. § 1328(a). The same day, the Court entered an order discharging the Debtor. The case was closed on July 1, 2016.
On November 17, 2016, the Debtor moved to reopen his case for the purpose of seeking sanctions against the IRS for purportedly violating the discharge injunction.
On December 21, 2016, the IRS filed an objection to the Motion for Contempt, asserting that the penalties and post-petition interest due for the 2009 tax year were not paid through the Plan. The Court heard the Motion for Contempt on December 28, 2016. At the hearing, the IRS took the position that the Amended Claim was entitled to priority treatment under 11 U.S.C. § 507(a)(8) and was nondischargeable under 11 U.S.C. § 523(a)(1)(B)(i), and therefore, interest continued to accrue post-petition. The Debtor, on the other hand, argued that a nondischargeable tax claim under 11 U.S.C. § 523(a)(1)(B)(i) is expressly not entitled to priority treatment under 11 U.S.C. § 507(a)(8)(A)(iii). As a result, the Debtor posits that because the Amended Claim was filed as a priority claim and paid accordingly, the IRS is now barred from asserting that it was instead a nondischargeable tax claim.
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