Phil Hart

[Demosthenes]

May 31, 2012 in Idaho
Idaho tax protester Hart files for bankruptcy
Betsy Z. Russell The Spokesman-Review

BOISE – Tax-protesting Idaho state Rep. Phil Hart, who lost his bid for a fifth term in the GOP primary two weeks ago, has filed for bankruptcy.

In Hart’s petition for Chapter 13 bankruptcy, he lists just three creditors: the IRS, the Idaho State Tax Commission and Anderson & Krieger, a construction-defect law firm in Sacramento, Calif.

To read the full article:
http://www.spokesman.com/stories/2012/m ... ankruptcy/

[Famspear]

Demo, you are the scourge of tax deadbeats everywhere!



Philip Lewis Hart
Chapter 13 bankruptcy petition, filed May 29, 2012
U.S. Bankruptcy Court for the District of Idaho (Coeur d'Alene Div.)
case no. 12-20648-TLM

Chief Judge Terry L. Myers, presiding
C. Barry Zimmerman, Chapter 13 standing trustee

[wserra]

OK, bankruptcy mavens, I have a question: aren't there about fifty reasons why Hart's tax debts are non-dischargeable? Some things, in random order: (1) He didn't file returns. (2) Many years have already been the subject of FTLs (and in fact, as we've posted, there are foreclosures going on as we speak). (3) He's very likely guilty of evasion. (4) "Bad faith" along the lines of In re Love, 957 F.2d 1350 (7th Cir. 1992). Given that it's Hart, I'm sure 46 more reasons exist. But why aren't these four enough?

[Dezcad]

OK, bankruptcy mavens, I have a question: aren't there about fifty reasons why Hart's tax debts are non-dischargeable? Some things, in random order: (1) He didn't file returns. (2) Many years have already been the subject of FTLs (and in fact, as we've posted, there are foreclosures going on as we speak). (3) He's very likely guilty of evasion. (4) "Bad faith" along the lines of In re Love, 957 F.2d 1350 (7th Cir. 1992). Given that it's Hart, I'm sure 46 more reasons exist. But why aren't these four enough?

Please note that he filed Chapter 13, Individual reorganization, and not a Chapter 7 liquidation. Although Chapter 13 does have some "super-discharge" capabilities, Hart will have to provide for full payment of all unsecured priority tax debts (which all of his probably are under 11 USC 507(a)(8)). If the tax debts are secured by a FTL, then those secured tax debts must also be provided for in the Chapter 13 plan. So basically, Hart cannot avoid the payment of those tax debts.

The filing of the Chapter 13 will act as an automatic stay of any foreclosure on those FTLs.

As far as the "bad faith" in the Love case you cite, that is technically a different issue. That does not deal with the dischargeability of a tax debt but rather, the good faith of the bankruptcy filing under 1307. Having only (or primarily) the IRS as a creditor can be evidence of the bad faith filing and subject the petition to dismissal. It is not on the discharge vel non of the tax debt.

In any event, for Hart this may delay the foreclosure but I cannot see how it could relieve him of the payment of his tax debt.

[Prof]

Some additional elaboration (or, as Imalawman would say, pedantry):

Chapter 13 no longer has much of a "super discharge"-- the old version did discharge some tax debt -- old and cold filings for periods outside of 3 years before the petition were discharged if the returns had been on file for more than two years -- so a return for a year ten years in the past, but only filed three years ago, and showing taxes due, would generate a discharge. That provision was struck in the most recent revisions.

Further, taxes due for years in which no return is filed are never discharged, as are tax claims based upon false or fraudulent returns. No chapter of the bankruptcy code generates a discharge for such claims. However, a chapter 13 case will now be dismissed if all tax returns for the 4 years prior to filing are not on file by the date of the meeting of creditors (the trustee can continue the meeting to allow time to finish returns).

Penalities are not allowed as claims; interest is allowed.

If an otherwise dischargeable tax claim is subject to a tax lien, the collateral to which the lien has attached makes the claim secured; pay the secured claim or you lose the collateral. In a chapter 13 case, you could propose a plan to pay the lien off (based upon the value of the collateral) over 5 years.

As to general unsecured (no tax lien) claims, which are not barred from discharge, a chapter 13 would pay those claims in the same percentage as general unsecured debt, over 5 years.

Finally, income taxes due for the three years prior to filing are priority claims and must be paid in full in chapter 13 cases within the 5 year period of the Plan in order for there to be a discharge.

(It's actually more complex than this!)

[Famspear]

Another (somewhat brief) report from the media on the bankruptcy starts this way:

May has not been one of Athol Republican Rep. Phil Hart's better months.....

--from George Prentice, May 31, 2012, "Phil Hart Files For Bankruptcy," Boise Weekly, at:

http://www.boiseweekly.com/CityDesk/arc ... bankruptcy

[Famspear]

Here comes another one.....

For a wacky protester named Phil,
Takin’ free rides was run-of-the-mill.
Yes, the bold Mister Hart
Took some logs -- for a start --
Then ducked taxes that gave him a chill.

[Famspear]

In Hart's bankruptcy, the following items are due on Tuesday, June 12, 2012:

1. Chapter 13 Plan
2. Employee Income Records
3. Chapter 13 Income Form 22C
4. Attorney Disclosure Statement
5. Schedules A thru J
6. Summary of Schedules
7. Statement of Intent
8. Statement of Financial Affairs
9. Statistical Summary

EDIT: The meeting of creditors (which Hart must attend and submit to questions under oath) is scheduled for July 13, 2012. That means that the deadline for providing the Chapter 13 trustee with a copy of Hart's most recent required federal income tax return (which would almost certainly be his 2011 return) is July 6. If Hart does not comply, the case MUST be dismissed unless Hart demonstrates that the failure is due to circumstances beyond his control.

[Paul]

If Hart does not comply, the case MUST be dismissed unless Hart demonstrates that the failure is due to circumstances beyond his control.

Easily done. It's not his fault that the 16th amendment was never ratified!

[Famspear]

Phil Hart has filed various schedules with the Court. I don't have time to study them now, but I notice the following.

He claims to own no real estate.

He claims that none of the debt is secured debt. He lists most of his federal tax liabilities as being contingent, disputed, priority unsecured claims.

He indicates less than $2,000 a month income. He says that his legislative pay has been garnished for the past few years.

EDIT: Correction, he claims he has gross compensation income of $1,722.83 per month. He also reports $500 per month of legislative per diem money, plus $72 per month of book sales, for a total of $2,294.83 gross per month, or $27,537.96 per year.

[Famspear]

He says he has $1,654.99 in cash and bank accounts, plus $11,826 in a retirement account, all of which he claims as exempt. The usual personal effects are listed.

Overall, he claims he owns zero real estate plus personalty (money, personal effect, everything) of $30,726.28.

On the liability side, he claims shows he owes $27,550 in general unsecured liabilities, zero secured debt, and (per an amended Schedule E) priority unsecured debt of $598,009.

The priority unsecured debt is shown as consisting of:

Idaho State Tax Commission
2011 income tax
$560 (not disputed)

Idaho State Tax Commission
1996-2004 income taxes
$42,000 (disputed and contingent)

Internal Revenue Service
2009: $7,393
2010: $4,298
2011: $3,164
total $14,855
plus estimated interest of $1,545
total he shows $16,430 (I compute $16,400)
less amount garnished of $9,981
net owed $6,449, per Debtor's math (not disputed)

Internal Revenue Service
1996 thru 2008: $549,000 (contingent and disputed)

Note: Added correction on total amount of priority claims.

[Famspear]

He reports no repossessions or foreclosures within one year of the bankruptcy.

What about the house he had at one point?

EDIT: OK, just as I thought. I went back and looked earlier in this thread, and there may be an issue about who owns the house. Hart might be contending that the house in Athol, Idaho is held in a trust called the Sarah Elizabeth Hart Trust.

[Famspear]

On May 2, 2012, the U.S. District Court for the District of Idaho, in case number 11-00513-EJL, issued an order to the effect that with respect to the transfer of certain real estate in Idaho, the trustee of the Sarah Elizabeth Hart Trust was not a bona fide purchaser for value without notice of the claim of the United States (the tax claim against Phil Hart). The Court therefore set aside (rendered void) the transfer of the property to that Trust.

The Court also ruled that Jon Lafferty as trustee of the Sarah Elizabeth Hart Trust has no interest in the real estate, and that Lafferty will have no share of the proceeds of the sale (if any) of that property.

I haven't done enough digging yet to determine whether this real estate is the Phil Hart home, or some other piece of real estate.

Meanwhile, although Phil Hart did not show any real estate on his bankruptcy schedules, the U.S. Justice Department filed a suggestion of bankruptcy in the District Court foreclosure case on May 30th. The Justice Department stated that the "United States alleges that Hart owns the real property through a nominee or alter ego, or that he fraudulently transferred the real property in order to avoid paying federal income tax liabilities.....As such, this case may be subject to the automatic stay......."

On June 1st, the District Court accordingly issued an order staying the foreclosure case.

EDIT: I checked, and the real estate is 4430 E. Sarah Loop, at Athol, Idaho (in Kootenai County, Idaho). According to the complaint filed by the Justice Department in District Court, this is indeed the Phil Hart residence.

[The Observer]

On June 1st, the District Court accordingly issued an order staying the foreclosure case.

He reports no repossessions or foreclosures within one year of the bankruptcy.

Ok, I am confused. Who, if anyone, was foreclosing?

He says he has $1,654.99 in cash and bank accounts, plus $11,826 in a retirement account, all of which he claims as exempt.

Maybe Prof will be kind enough to address whether the Isom ruliing would allow the IRS to levy on the accounts.

[Famspear]

Ok, I am confused. Who, if anyone, was foreclosing?

The IRS....federal tax liens.

Maybe Prof will be kind enough to address whether the Isom ruliing would allow the IRS to levy on the accounts.

To the extent that the IRS assessed a given tax and filed a notice of federal tax lien prior to the date of commencement of the case (May 29, 2012) in the proper place or places, the government could ask for relief from the stay and, if the stay were lifted, generally could seize assets to satisfy the tax secured by the lien. I don't know much about Chapter 13 cases, so if there are any special wrinkles that modify that rule in Chapter 13, maybe someone here can help us.

To summarize for those not familiar with the Isom case:

In Isom, I believe the debtors were granted a discharge that actually covered the taxes in question. The problem, of course, was that the tax claims were secured (i.e., there was a valid tax lien).

The debtors in Isom tried to argue that the discharge covered the entire amount of tax liability. The Court of Appeals for the Ninth Circuit rejected that argument. The perfected tax lien is not affected by the discharge.

In Phil Hart's case, I agree with the prior posters here -- the tax liabilities are probably non-dischargeable anyway, on a variety of grounds.

But even to the extent that Hart's taxes would be dischargeable, the discharge (with respect to a given asset) wipes out only the portion of tax amount that exceeds the value of the assets that secure the tax lien. Under the Bankruptcy Code, a bankruptcy discharge covers only personal liability, not in rem liability.

Simple example: Tax lien, properly perfected. Unpaid tax is $100,000. If the only asset covered by the lien has a value of $90,000 (ignore incidental costs to foreclose, etc.), then the discharge covers only the $10,000 difference; the IRS can seize the asset, sell it for $90,000, and satisfy the tax debt to the extent of that $90,000.

EDIT: The case is Isom v. United States (In re Isom), 901 F.2d 744 (9th Cir. 1990).

[Kestrel]

To the extent that the IRS assessed a given tax and filed a notice of federal tax lien prior to the date of commencement of the case (May 29, 2012) in the proper place or places, the government could ask for relief from the stay and, if the stay were lifted, generally could seize assets to satisfy the tax secured by the lien. I don't know much about Chapter 13 cases, so if there are any special wrinkles that modify that rule in Chapter 13, maybe someone here can help us.

The wrinkle in Chapter 13 cases is whether the debtor is complying with the confirmed plan, or the proposed plan if there is one pending before the court.

It has been my experience that the IRS will leave a Chapter 13 case alone so long as all the payments are coming in to the Trustee on time, and the bankruptcy estate remains intact. The unpaid balance of a Priority Unsecured tax debt survives the bankruptcy; uncle can afford to wait.

But (depending on the local IRS attorney and the size of the tax debt) if the debtor misses ONE monthly payment, or fails to timely file and pay on ONE post-petition tax return, the IRS will be on it quicker than a rattlesnake with a motion to dismiss the bankruptcy case.

Obviously, if the debtor wanted court permission to sell an asset encumbered by an IRS lien (his home - because he couldn't or didn't want to keep making the payments), the IRS would have something to say to the court about that.

[The Observer]

But I thought that in Isom the property in question was only subject to the ruling due to the fact that the taxpayers had exempted it from the bankruptcy. If it had been included in the bankruptcy estate, then it would have not been an issue of the lien still attaching if a discharge had been granted to the taxpayers.

In regards to the IRS foreclosing, I must have missed that somwhere in the thread that the IRS actually filed suit in federal court for foreclosure of the personal residence. I am assuming that this happened prior to the bankruptcy?

[Famspear]

But I thought that in Isom the property in question was only subject to the ruling due to the fact that the taxpayers had exempted it from the bankruptcy. If it had been included in the bankruptcy estate, then it would have not been an issue of the lien still attaching if a discharge had been granted to the taxpayers.

No, it wouldn't matter whether the taxpayers claimed the property as exempt or not. If the taxpayer does not claim the property as exempt, the IRS would have to ask for and obtain relief from the automatic stay in order to legally continue its collection action against the property. But regardless of whether the property is claimed as exempt or not, the bankruptcy discharge simply does not affect the lien. To be precise, the discharge does not apply to the amount of the tax liability that is not in excess of the value of the federal tax lien in that property.

In regards to the IRS foreclosing, I must have missed that somwhere in the thread that the IRS actually filed suit in federal court for foreclosure of the personal residence. I am assuming that this happened prior to the bankruptcy?

Yes, the foreclosure suit was filed by the government on October 27, 2011, in the Federal District Court in Idaho, case no. 2:11-cv-00513-EJL.

EDIT: By the way, many assets in bankruptcy cases that are included in the estate (i.e., that are not claimed as exempt, either because the Debtor chooses not to claim the exemption or because the assets are not eligible for exemption) are subject to liens by creditors that survive, regardless of whether the liability owed to that creditor is discharged in the case. The Isom rule, relating to federal tax liens, is pretty much the same rule that would apply to any other kind of claim by any other creditor who holds a perfected lien against a piece of the Debtor's property.

Indeed, on the standard form for the proof of claim to be filed by the creditor with the Court, there are spaces to specify whether the claim is secured, priority unsecured, or general unsecured (the three basic categories). If the asset is included in the estate (i.e., if it's not an exempt asset), a perfected lien against that asset generally survives, regardless of whether the related liability is discharged or not. Often, the creditor will ask the court for relief from the stay and, after obtaining a court order lifting the stay as to that asset for that creditor, will continue with whatever foreclosure procedure is available to that creditor.

If it turns out that the value of the asset is less than the total debt owed, the debt is considered to be bifurcated, for bankruptcy purposes, into a "secured claim" portion and an "unsecured claim" portion (even though the creditor may have classified the entire debt as "secured" on the proof of claim form). If the debt is discharged in the bankruptcy, the only portion that is discharged is the ''unsecured claim" portion of the debt.

[Prof]

But I thought that in Isom the property in question was only subject to the ruling due to the fact that the taxpayers had exempted it from the bankruptcy. If it had been included in the bankruptcy estate, then it would have not been an issue of the lien still attaching if a discharge had been granted to the taxpayers.

No, it wouldn't matter whether the taxpayers claimed the property as exempt or not. If the taxpayer does not claim the property as exempt, the IRS would have to ask for and obtain relief from the automatic stay in order to legally continue its collection action against the property. But regardless of whether the property is claimed as exempt or not, the bankruptcy discharge simply does not affect the lien. To be precise, the discharge does not apply to the amount of the tax liability that is not in excess of the value of the federal tax lien in that property.

In regards to the IRS foreclosing, I must have missed that somwhere in the thread that the IRS actually filed suit in federal court for foreclosure of the personal residence. I am assuming that this happened prior to the bankruptcy?

Yes, the foreclosure suit was filed by the government on October 27, 2011, in the Federal District Court in Idaho, case no. 2:11-cv-00513-EJL.

EDIT: By the way, many assets in bankruptcy cases that are included in the estate (i.e., that are not claimed as exempt, either because the Debtor chooses not to claim the exemption or because the assets are not eligible for exemption) are subject to liens by creditors that survive, regardless of whether the liability owed to that creditor is discharged in the case. The Isom rule, relating to federal tax liens, is pretty much the same rule that would apply to any other kind of claim by any other creditor who holds a perfected lien against a piece of the Debtor's property.

Indeed, on the standard form for the proof of claim to be filed by the creditor with the Court, there are spaces to specify whether the claim is secured, priority unsecured, or general unsecured (the three basic categories). If the asset is included in the estate (i.e., if it's not an exempt asset), a perfected lien against that asset generally survives, regardless of whether the related liability is discharged or not. Often, the creditor will ask the court for relief from the stay and, after obtaining a court order lifting the stay as to that asset for that creditor, will continue with whatever foreclosure procedure is available to that creditor.

If it turns out that the value of the asset is less than the total debt owed, the debt is considered to be bifurcated, for bankruptcy purposes, into a "secured claim" portion and an "unsecured claim" portion (even though the creditor may have classified the entire debt as "secured" on the proof of claim form). If the debt is discharged in the bankruptcy, the only portion that is discharged is the ''unsecured claim" portion of the debt.

To be pedantic, one of my many failures, exempt property is actually property of a bankruptcy estate until abandoned by the Trustee. In a chapter 13 case, the Debtor's post petition income (exempt in Texas) is also part of the estate. In a chapter 11 individual case, the Debtor's post-petition income (defined by various courts in various ways for self-employed persons) is NOT property of the estate.

Liens may be avoided in bankruptcy cases as fraudulent conveyances, preferences, because the lien has a technical deficiency, or under 322(f) where the lien attaches to otherwise exempt property. Tax liens are not preferences (by defninition at sec. 547) and are obviously not fraudulent conveyances. Tax liens attach as permitted by federal law, which, as most of you know, under the supremacy clause, trumps state law exemptons (like the Texas personal property and homestead exemptions, which are quite generous).

[Famspear]

....In a chapter 11 individual case, the Debtor's post-petition income (defined by various courts in various ways for self-employed persons) is NOT property of the estate....

Yes, for cases commenced on or before October 16, 2005. For cases commenced on or after October 17, 2005, I believe section 541(a)(6) of the Bankruptcy Code must be read in light of section 1115(a)(2), so that the estate of an individual in chapter 11 also includes "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first."