Circuits Split on Enjoining the IRS from Pursuing Corporate Officer to Collect Taxes

June 14, 2017

The Anti-Injunction Act prevents a bankruptcy court from enjoining the Internal Revenue Service from pursuing corporate officers to collect trust fund taxes, Bankruptcy Judge Brian K. Tester of San Juan, Puerto Rico, held by wading into a split of circuits.

After filing a chapter 11 petition, the company sought to spread the automatic stay by preventing the IRS from collecting trust fund taxes from company officers.

The IRS filed a motion to dismiss based on the Anti-Injunction Act, 26 U.S.C. § 7421, which prohibits suits “in any court by any person” to restrain “the assessment or collection of any tax,” whether or not the “person is the person against whom such tax was assessed.”

Judge Tester noted that the courts are split on whether Section 105(a) of the Bankruptcy Court in substance makes the Anti-Injunction Act inapplicable in bankruptcy cases. The Eighth Circuit is among courts allowing injunctions to protect the administration of a bankrupt estate. The Third Circuit is in the other camp, prohibiting the bankruptcy court from enjoining the IRS from collecting taxes from non-bankrupt third parties.

Judge Tester sided with courts invoking the Anti-Injunction Act, saying it was enacted to protect the government’s need to assess and collect taxes with a minimum of judicial interference. He also noted that a corporate officer’s liability is “separate and distinct” from the employer’s obligation and that the IRS is not required to attempt collecting from the company first.

There is nothing in the language or legislative history of Section 105, Judge Tester said, “indicating that Congress intended to supersede the proscription of the Anti-Injunction Act to protect third party non-debtors from tax collection.” Indeed, he said, nothing in the Bankruptcy Code allows the bankruptcy court to determine the tax liability of corporate officers.

To the contrary, he said, Section 524 provides that the discharge of a debtor “does not affect the liability of any other entity.”

It was therefore “clear” to Judge Tester that “Congress did not intend Section 105 to create a broad exemption for principals of chapter 11 debtors . . . by reason of their corporation’s bankruptcy.”

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