Ted Chritton
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Breland v. Commissioner, the United States Court of Appeals for the Eleventh Circuit held that a plan confirmed under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) that includes an IRS consent decree does not fix the total amount of underlying, non-dischargeable tax debt owed to the Internal Revenue Service (“IRS”), or prevent the IRS from assessing additional taxes.[1] In 2009, Charles K. Breland Jr. (“Breland”) filed a voluntary chapter 11 petition in the bankruptcy court for the Southern District of Alabama.[2] During the chapter 11 case, the IRS filed a proof of claim for outstanding taxes, which Breland objected to. Ultimately, the parties entered into a consent order allowing the IRS’s claim, where the IRS withdrew an amended claim for $6.9 million and reinstated a prior claim for only $2 million.[3] In 2011, after confirmation of a chapter 11 plan that incorporated the consent order, the IRS discovered additional unpaid taxes. Thus, the IRS filed a motion for leave to file an amended proof of claim asserting tax claims for an additional $45 million in taxes Breland owed from 2004 through 2008. The bankruptcy court denied this motion,[4] and the IRS appealed to the district court. The district court ultimately affirmed the bankruptcy court’s holding in October 2016.[5] In parallel, after its motion to amend was denied, the IRS initiated a tax court claim against Breland for the additional unpaid taxes.[6] The tax court ruled in favor of the IRS and was appealed to the United States Court of Appeals for the Eleventh Circuit.[7]
The tax court case, Breland v. Commissioner, arose when the IRS issued a tax deficiency notice after the bankruptcy court denied the IRS’s motion to amend its claim, and the issue was on remand. Initially stayed by the bankruptcy appellate process, Breland v. Commissioner resumed in 2016 after In re Breland concluded.[8] Breland argued that the additional taxes from the deficiency notice were barred by collateral estoppel and res judicata, asserting the bankruptcy court’s ruling that the consent order and chapter 11 reorganization plan had already determined his final tax liability from 2004 to 2008.[9] In 2019, the tax court held that the consent order established Breland’s tax liability under the reorganization plan, but it did not preclude the IRS from asserting additional nondischargeable debts.[10]Breland appealed the tax court’s decision to the Eleventh Circuit.
The Eleventh Circuit’s analysis centers on whether Breland’s case is distinct from the facts of In re Gurwitch as the bankruptcy court ruled.[11] Gurwitch is a prior Eleventh Circuit case holding that an appellant's tax liability was nondischargeable[12], but the bankruptcy court ruled was distinct from Breland’s case as Gurwitch did not involve an IRS consent order.[13] Citing a Tenth Circuit decision as support,[14] the Eleventh Circuit disagreed with the bankruptcy court’s argument that In re Gurwitch differed from his case, as “the mere fact that the claim amount was stipulated to in a consent order does not bring this case outside the sweep of In re Gurwitch and its progeny[.]”[15] The Eleventh Circuit found that the bankruptcy court only had section 505[16] authority to determine payments by the bankruptcy estate, not the total amount of underlying tax debt owed.[17] The Eleventh Circuit upheld the tax court ruling and found that “the best reading of the consent order is not that it was a blanket prohibition on the IRS's ability to assess additional taxes against Breland generally.”[18]
A debtor and the IRS may enter into a consent decree that fixes tax liabilities as part of a chapter 11 reorganization. According to the Eleventh Circuit, a chapter 11 plan that fixes tax liabilities with a consent decree will not preclude the IRS from claiming additional taxes for the same period covered as the consent decree if additional unpaid tax liabilities are discovered. Additionally, this case reaffirms that section 1142 of the Bankruptcy Code does not establish tax as unchangeable for chapter 11 petitioners.[19]
[1] See Breland v. Comm’r, No. 23-12345, 2024 U.S. App. LEXIS 13071, at *15 (11th Cir. May 31, 2024).
[2] See In re Breland, No. 09-11139-11-MAM, 2011 Bankr. LEXIS 5037 (Bankr. S.D. Ala. Dec. 20, 2011).
[3] See Breland v. Comm’r at *3 (discussing the consent order in the bankruptcy case).
[4] See In re Breland 474 B.R. 766, 770 (Bankr. S.D. Ala. 2012).
[5] See Breland v. Comm’r, 152 T.C. 156, 159 (Mar. 28, 2019) (describing history of the bankruptcy case).
[6] See id at 156.
[7] See Breland v. Comm’r, No. 23-12345, 2024 U.S. App. LEXIS 13071, at *15 (11th Cir. May 31, 2024).
[8] See id. at 159 (“October 31, 2011, the IRS filed a motion for leave to file an amended proof of claim to assert a claim for tax for 2004 through 2008 of approximately $45 million, alleging that it learned through discovery that petitioner substantially underreported his income in those years.”).
[9] See id. at 160 (discussing Breland’s arguments before the court and if res judicata and estoppel applied).
[10] See id. at 171–72 (stating that the bankruptcy court orders were not binding, and that the bankruptcy courts agreed that they did not have the issue of the consent order’s preclusive effect in tax court properly before them).
[11] See Breland v. Comm’r, LEXIS 13071 at *11 (stating the facts of Gurwitch).
[12] See In re Gurwitch, 794 F.2d 584 (11th Cir. 1986) (affirming the bankruptcy court’s ruling that the amount of the claim had been determined at confirmation and was binding on the parties).
[13] See Breland v. Comm’r, LEXIS 13071 at *4 (“On remand, the Bankruptcy Court again denied the motion to amend, reasoning that this case was distinguishable from In re Gurwitch because In re Gurwitch did not involve a consent order.”).
[14] See DePaolo v. United States ex rel. IRS, 45 F.3d (In re DePaolo), 45 F.3d 373, 374–75 (10th Cir. 1995) (holding that res judicata did not prevent IRS from filing additional, post-confirmation tax claims, despite fact that IRS and debtor had stipulated before to the amount of the tax claim).
[15] See Breland v. Comm’r, LEXIS 13071 at *13.
[16] 11 U.S.C.S. § 505(a)(1) (“[T]he court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction[.]”).
[17] See Breland v. Comm’r, LEXIS 13071 at *14 (“[T]he bankruptcy court's role in the process was to determine the amount to be paid by the bankruptcy estate, not to fix the total amount of the underlying debt[.]”).
[18] See id. at *16 (affirming that the IRS was not barred by res judicata or estoppel for filing additional tax assessments).
[19] See id.; In re Gurwitch, 794 F.2d 584, 585–86 (11th Cir. 1986).
