                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-3-1995

Hutchins v IRS
Precedential or Non-Precedential:

Docket 94-5509




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1
            UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT



               No. 94-5509 and 94-5510


                 CHARLES T. HUTCHINS,

                        Appellant in 94-5509

                          v.

              INTERNAL REVENUE SERVICE;
               UNITED STATES OF AMERICA



                  CHARLES T. HUTCHINS

                          v.

              INTERNAL REVENUE SERVICE;
               UNITED STATES OF AMERICA

              UNITED STATES OF AMERICA,

                        Appellant in 94-5510




    On Appeal from the United States District Court
             for the District of New Jersey
          (D.C. Civil Action No. 92-cv-04134)



    Submitted Pursuant to Third Circuit LAR 34.1(a)
                      May 24, 1995

Before: GREENBERG, ROTH and ALDISERT, Circuit Judges


           (Opinion Filed October 3, 1995)




                                                       2
3
Charles T. Hutchins
5011 Marshall Road
Farmingdale, NJ 07727
            Pro Se Appellant\Cross-Appellee

Faith S. Hochberg
United States Attorney
Loretta C. Argrett
Gary R. Allen
Bruce R. Ellisen
Bridget Rowan
Laurie Snyder
Assistant U.S. Attorneys
Tax Division
U.S Department of Justice
Post Office Box 502
Washington, D.C. 20044
           Attorneys for Appellee\Cross-Appellant




                       OPINION OF THE COURT




Roth, Circuit Judge:

           In this appeal, Charles T. Hutchins, appearing pro se,

and the Internal Revenue Service each challenge aspects of the

entry of summary judgment below.   The district court granted

summary judgment to the I.R.S. on its counterclaim to recoup an

erroneous tax credit, but then, disturbed by this result, invoked

equitable estoppel sua sponte to bar the I.R.S. from recovering

all but a minor portion its claim.   This holding necessarily

denied Hutchins' standing to sue for the original tax credit.    We

reverse.   Hutchins had standing to pursue his original tax claim

because in the bankruptcy proceedings that gave rise to this


                                                                    3
case, the tax refund descended to him through abandonment as part

of a properly scheduled antitrust action.    Because the I.R.S.

grounded its recoupment claim solely on Hutchins' lack of

standing, our ruling on this issue is dispositive.     We reach

neither the validity of the underlying tax refund, which is not

properly before us, nor the application of equitable estoppel,

which is rendered superfluous.
                 I.   Factual and Procedural History

            In November 1979 Hutchins, as sole proprietor of

Hutchins Supply Company, filed a Chapter 7 Bankruptcy Petition in

the U.S. Bankruptcy Court in Anchorage, Alaska.    After the

initial scheduling of all known assets and liabilities pursuant

to 11 U.S.C. § 521(1), Hutchins learned that his business had

failed because of his competitors' antitrust violations and

unfair business practices.    Hutchins instituted an antitrust

action against these competitors, amending his schedules to

reflect the antitrust cause of action as an asset of the bankrupt

estate.    By stipulation, the estate trustee allowed Hutchins to

pursue the action, reserving the right to all settlement

proceeds.    In 1986, the resulting claims were settled for

$243,000 in cash, which was turned over to the bankruptcy

trustee.    In addition, the antitrust defendants withdrew claims

against the bankrupt estate for approximately $76,000 in business

debt.   On January 27, 1987, the trustee filed an estate income

tax return reflecting both the cash and the retired debt as

income.




                                                                    4
          On September 21, 1988, the trustee petitioned the U.S.

Bankruptcy Court to abandon any remaining assets to Hutchins. The

requisite order was issued on March 23, 1989.   The bankruptcy

proceedings were closed sometime prior to February 1989, re-

opened on March 1, 1989, and closed a second time on March 14,

1990.

          On April 2, 1989, Hutchins filed an amended tax return

for 1987, asserting that pursuant to 26 U.S.C. § 108, the $76,000

in retired business debt was not taxable income.   Hutchins sought

a tax credit of $38,458, the amount he believed the trustee had

overpaid by erroneously including the $76,000 in retired business

debt as income.   On January 22, 1992, the I.R.S. granted in part

the claimed refund and applied a credit of $37,897.04 to

Hutchins' tax arrearages.   On September 29, 1992, Hutchins

responded by filing a complaint against the I.R.S. in the U.S.

District Court for the District of New Jersey seeking, among

other relief, an additional credit of $650.   The I.R.S. responded

by counterclaiming for the entire January 1992 tax credit,

alleging it was granted erroneously since Hutchins was not the

proper party to receive a refund of taxes paid by the bankruptcy

estate.

          On May 24, 1993, the district court dismissed Hutchins'

various prayers for relief on several grounds, leaving the

I.R.S.'s counterclaim as the sole remaining dispute.   That order

has not been appealed.   On January 10, 1994, on cross motions for

summary judgment, the district court ruled in favor of the I.R.S.

on its counterclaim, denied Hutchins' motion to dismiss, and


                                                                    5
invoked equitable estoppel to bar the I.R.S. from recovering all

but $663 plus interest from Hutchins.      Both parties appealed to

this court.
                           II.    Jurisdiction

            The district court properly asserted federal

jurisdiction over the I.R.S.'s counterclaim under 26 U.S.C.

§7405(b).     We have jurisdiction over the district court's final

order pursuant to 28 U.S.C. § 1291.      Our review of a grant of

summary judgment is plenary.      Oritani Sav. & Loan Ass'n v.

Fidelity & Deposit Co., 989 F.2d 635, 637 (3d Cir. 1993); Goodman

v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert.

denied, 429 U.S. 1038 (1977).      The question of standing is itself

subject to plenary review.       Polychrome Int'l Corp. v. Krigger, 5

F.3d 1522, 1530 n.19 (3d Cir. 1993).


                           III.    Discussion

            In its counterclaim in district court, the I.R.S.

sought to recoup the entire tax credit it had granted Hutchins by

asserting that he lacked standing to pursue the discrepancy.         The

I.R.S. argued that because Hutchins had failed to schedule the

tax claim explicitly as an asset of the bankrupt estate, the

right to the refund was not abandoned but was instead retained by

the estate.    Since the refund belonged to that separately taxable

entity, only the trustee could sue for its recovery.      Hutchins

therefore had no basis for his claim.      Consequently, any tax

refund granted to Hutchins was erroneous and could be recovered.

The district court implicitly conceded this much in an elliptical


                                                                        6
comment1 followed by its sua sponte application of equitable

estoppel.   We disagree.    This line of reasoning ignores the fact

that the tax refund originated as part of the properly scheduled

antitrust action.   The refund claim was at best a derivative

asset that arose as a result of the trustee's tax filings on

behalf of the estate.      Moreover, the claim was not asserted until

after the bankruptcy had closed.        Since it existed during the

bankruptcy as an integral part of the antitrust claim--or if

separately as a still inchoate right--the tax claim was properly

scheduled through the scheduling of the antitrust action and

descended to Hutchins through abandonment.        Hutchins had standing

to sue.
                                   A.

            We observe in passing that if the tax refund were a

unique asset that had to be scheduled separately, as the I.R.S.

asserts, then the failure to schedule the refund is fatal to

Hutchins' claim.    It is clear that an asset must be properly

scheduled in order to pass to the debtor through abandonment

under 11 U.S.C. § 554.      See Vreugdenhill v. Navistar Int'l

Transp. Corp., 950 F.2d 524, 526 (8th Cir. 1991) (refusing to

find unscheduled cause of action abandoned even where trustee was

aware of it prior to abandonment); In re Medley, 29 B.R. 84, 86-

87 (Bankr. M.D. Tenn. 1983) (refusing to abandon unscheduled

1
          The opinion's only language on point read: "The Court
is unpersuaded by defendant's argument that the credit issued to
plaintiff's personal account should be completely rescinded
simply because plaintiff may have lacked standing to file the
amended return at issue." Hutchins v. United States, No. 92-4134
(GEB) slip op. at 5 (D.N.J. Jan. 10, 1994) (emphasis added).


                                                                      7
refund claim to debtor); DiStasio v. United States, 22 Cl. Ct.

36, 52 (1990) (holding claim for refund abandoned only if

scheduled); Weiner v. United States, 15 Cl. Ct. 43, 45 (1988)

(retaining unscheduled tax refund claim as property of bankrupt

estate); see generally 4 Collier on Bankruptcy ¶ 554.03 (15th ed.

1994).   It is equally clear that since the bankrupt estate

retains unscheduled assets, only the bankruptcy trustee has the

authority to control them.   26 U.S.C. § 554(d) ("property . . .

not abandoned under this section . . . remains property of the

estate").   This authority includes the power to file an amended

tax return.    See 26 U.S.C. § 6012(b)(4) (requiring that fiduciary

for estate file estate return); see also Mindlin v. Drexel

Burnham Lambert Group, 160 B.R. 508, 514 (Bankr. S.D.N.Y. 1993)

("By operation of 11 U.S.C. § 554(c) and (d), any asset not

scheduled pursuant to 11 U.S.C. § 521(1) remains property of the

estate, and the debtor loses all rights to enforce it under his

own name.").   These propositions, however, beg the fundamental

question raised by this dispute, viz. were the antitrust action

and tax refund claim separate assets?   If they were not, then the

tax refund was scheduled as part and parcel of the antitrust

claim, and it descended to Hutchins through abandonment.     After

reviewing the respective arguments, we conclude that during the

pendency of the bankruptcy, the tax refund existed as an inherent

part of the properly scheduled antitrust claim.

            Initially, it bears noting that the tax refund in this

case differs from the tax refunds that typically appear as

unscheduled assets in bankruptcy proceedings.    The standard case


                                                                     8
of an unscheduled tax refund involves an expected refund computed

by the debtor and entered on a personal or corporate tax return,

which the debtor then fails to schedule after declaring

bankruptcy.    See, e.g., Mertz v. Rott, 955 F.2d 596 (8th Cir.

1992) (considering estate tax refund that debtors anticipated but

failed to schedule); Doan v. Hudgins, 672 F.2d 831 (11th Cir.

1982) (considering debtor's failure to list expected tax refund);

Barowsky v. Serelson, 102 B.R. 250 (Bankr. D. Wyo. 1989)

(reopening bankruptcy after discovery of anticipated but

unscheduled income tax refund).   The scenario is even clearer

when the refund has already been paid by the I.R.S. and yet goes

unscheduled.    See In re Maynard, 162 B.R. 349 (Bankr. M.D. Fla.

1993); In re Walton, 158 B.R. 943 (Bankr. N.D. Ohio 1993).    In

either case, the debtor knows of the existence of the asset,

expects to receive it, and should have scheduled it.

           The instant facts are different.   Here, the tax refund

was the result of action by the bankruptcy trustee, and the

claimed discrepancy was not asserted until after the bankruptcy

had closed.    More importantly, there was no reason for the debtor

or the trustee to assume, believe, or even guess that any refund

existed.   The taxes were paid on income from an antitrust

settlement, so there had been no prior withholding.    Assuming

that the trustee computed the tax correctly, there would be no

refund.2

2
          When this opinion characterizes the actions of the
trustee as "correct", "incorrect", "erroneous" or the like, it
does so in the abstract. The validity of the underlying refund
is not before us, see discussion infra, and we express no opinion


                                                                     9
           These important factual distinctions indicate that at

the time of the bankruptcy, the crucial asset, indeed the only

asset, was the antitrust settlement.   During the bankruptcy, no

"tax refund" asset existed.   It was at best an inchoate right.

Creating the legal fiction that this asset arose at the time of

the erroneous filing and existed independently, albeit covertly,

would require every debtor to list as an additional asset a

potential tax refund due to the possibly erroneous filings of the

trustee.   Alternatively, the debtor would have to supervise and

double check the actions of the trustee, contrary to the

intention of 11 U.S.C. § 704, which makes the bankruptcy trustee

accountable for all property received.   See In re R.E. Lee &

Sons, Inc., 95 B.R. 316 (Bankr. M.D. Pa. 1989) (limiting debtor's

burden to reasonable diligence in completing schedules).    There

seems little to recommend either course as an innovation in

bankruptcy procedure.

           Neither the district court nor the parties have cited

any authority addressing the status of an undiscovered tax refund

that arises post-petition as a result of the filings of the

trustee.   Our efforts have revealed no case on point.   The

extensive citations to cases on unscheduled assets are inapposite

if the tax refund did not yet exist.   Indeed, these cases would

support Hutchins' claim since he properly scheduled the only

on the propriety of the trustee's actions. We use these terms in
our discussion of standing because Hutchins' original tax refund
depended on a filing error by the trustee. These
characterizations have emerged as a necessary part of the case as
framed by the parties, and the court adopts them as a
convenience.


                                                                    10
existing asset, the antitrust proceeds.   Despite the absence of

authority, both parties offer arguments on the issue, and logic

dictates the result.

           First, we agree with Hutchins that "[i]t was not the

appellant's right, position or responsibility to amend his

schedules to reflect trustee's accounting and tax payment

errors."   Brief of Appellant at 16.   Hutchins appears to contend

that, as suggested above, he had no reason to suspect the error

and hence the existence of the refund.    We make explicit the

necessary implication:   The tax refund was not a known asset at

the time of the bankruptcy and so could not be scheduled

separately pursuant to 11 U.S.C. § 521(1).

           Further support flows from the concept of valuation. At

the time of the bankruptcy, the principal asset for distribution

to creditors was the income from the antitrust settlement.

Creditors could reasonably assume that the estate would owe tax

on this money, so the net value of the asset was the amount of

the proceeds less the correct amount of tax. Alternatively,

creditors could expect the net value to equal the amount of the

proceeds less the amount of tax paid by the trustee plus the

amount of any tax refund.   There is no need to take this latter

course, which unnecessarily creates two assets from a single

fund.   Instead, the antitrust cause of action cum tax refund can

best be viewed as a single asset that was inadvertently

misappraised by the bankruptcy trustee.   Assuming for the moment

that Hutchins is correct on the merits of the tax refund, the

trustee's failure to complete the tax return correctly


                                                                   11
effectively undervalued the antitrust claim by approximately

$37,000.   This mistake was not discovered until after

abandonment.    It is well established in bankruptcy law that

mistakes in valuation will not enable the trustee to recover an

abandoned asset.    In re McGowan, 95 B.R. 104 (Bankr. N.D. Iowa

1988) (ruling that abandonment of misvalued asset is

irrevocable); Matter of Enriquez, 22 B.R. 934 (Bankr. Neb. 1982)

(same).

           We find these arguments persuasive.   We are less

impressed with the I.R.S.'s conclusory assertion that the

antitrust cause of action was "clearly a separate asset" from the

tax refund.    Nor are we swayed by the agency's cursory

comparison:
          The antitrust action involved damage claims
          against various of Hutchins's competitors.
          The Government was not a party to that
          action, and no federal income tax issues were
          involved. Here, in contrast, the Government
          is a party, the issue is one of taxation, and
          neither the competitors nor antitrust
          violations are of concern.

Brief of Appellee at 21.   While an accurate description of the

two causes of action as they currently stand, these distinctions

ignore the fact that the relevant time period for scheduling is

not the onset of subsequent litigation but rather the pendency of

the bankruptcy.    At that point, no separate tax refund asset

existed, or to the extent that it did, it was subsumed in the

original declaration of the value of the antitrust proceeds.

           Our review of these arguments indicates that the tax

refund was properly scheduled to the extent that it could be.



                                                                   12
Hutchins scheduled the only asset of which he was aware, the

antitrust claim.    The tax refund arose later as a result of the

actions of the trustee.    Hutchins did not cause the trustee to

file an erroneous tax return, and he had no reason to suspect its

existence.    Indeed, the discrepancy was not discovered until

after the close of the bankruptcy.     We hold that Hutchins acted

properly in scheduling his assets.
                                  B.

             This resolution of the scheduling issue necessitates

the conclusion that Hutchins had standing to sue for the tax

refund.   Since he properly scheduled the antitrust claim, the

right to the refund descended to him through abandonment.

             Hutchins scheduled the antitrust claim properly.    On

April 7, 1983, he filed in the U.S. Bankruptcy Court a Motion to

File Amended Schedule B - Statement of All Property of Debtor.

Page 6, line 17 of the amended Schedule B reflected "unliquidated

antitrust claims."    This filing scheduled the antitrust claim

pursuant to 11 U.S.C. § 521(1).     The tax claim was necessarily

scheduled through this action.

             Hutchins then received the right to this tax claim as

an undifferentiated part of the antitrust claim he acquired

through abandonment.    On September 21, 1988, the trustee moved

pursuant to 11 U.S.C. § 554(a) for an order "that any remaining

property scheduled by the debtor(s) be abandoned to the debtor(s)

and that any further interest in said property be disclaimed." On

March 23, 1989, the Bankruptcy Court entered the requisite

Abandonment Order.


                                                                      13
             Through the abandonment of the antitrust claim,

Hutchins held the right to the potential tax refund on April 2,

1989, when he filed the amended tax return.     As a result, he had

standing to contest the I.R.S.'s decision regarding his refund.

See 26 U.S.C. §§ 6402(a), 6511(a), 7422(a); 28 U.S.C. § 1346(a);

see also Boryan v. United States, 690 F.Supp. 459, 463 (E.D. Va.

1988).
                                  C.

             Although as a general rule an affirmative holding on

standing is merely a precursor to consideration of the merits, in

the instant case it disposes of the controversy.     The I.R.S.

cannot prevail as a matter of law because it took no position in

the district court on the underlying validity of the refund.        The

I.R.S. chose to assert only the claim that the refund was paid to

the wrong party, and this argument depended on Hutchins' lack of

standing.     Our contrary conclusion resolves the case.   We decline

to consider an insufficiently explored, fact-specific, non-

dispositive theory that was not raised below.

             On appeal, the I.R.S. attempts to argue for the first

time that the underlying basis of Hutchins' claimed tax refund is

incorrect because the discharge of debt by the antitrust

defendants is not excludible income.     Brief of Appellee at 13,

14, 28-33.    This argument was not asserted at the trial level.

The I.R.S.'s eleventh hour Reply Brief reference to an isolated

footnote in the record supports rather than contradicts this

conclusion.     See Reply Brief of Appellee at 3.




                                                                     14
          Under the prudential policy recognized in Hormel v.

Helvering, 312 U.S. 552, 556 (1941), we need not consider the

I.R.S.'s new argument.   See Patterson v. Cuyler, 729 F.2d 925 (3d

Cir. 1984); Toyota Indus. Trucks U.S.A. Inc. v. Citizen Nat'l

Bank, 611 F.2d 465, 470 (3d Cir. 1979); see also Singleton v.

Wulff, 428 U.S. 106, 120 (1976).   The reference discovered by the

I.R.S. is remarkable only in its unobtrusiveness.    A lone and

diminutive footnote does not constitute the assertion of a legal

theory, especially when the same theory merited seven pages in

the I.R.S.'s appellate brief.   See Brief of Appellee at 27-34.

Had the issue truly been asserted at the trial level, these seven

closely argued pages would not have been needed.    More

importantly, it is by no means clear that the I.R.S.'s newfound

champion can carry the day.   The argument ultimately turns on

whether the $76,000 in claims against the bankrupt estate that

was retired by the antitrust defendants represents "discharge of

indebtedness" excludible under 26 U.S.C. § 108(a)(1) or instead

taxable income for which the discharged debt is merely the

"medium of payment."   See United States v. Centennial Savings
Bank F.S.B., 499 U.S. 573, 582 n.7 (1991).   Further factual

development would be required to resolve this issue and determine

the extent of any resulting tax differential.   An appellate

tribunal is not the proper forum for this task.     See Newark

Morning Ledger v. United States, 539 F.2d 929, 932 (3d Cir.

1976).

          Put simply, the I.R.S.'s contentions regarding the

merits of the tax refund come too late.   In the district court,


                                                                   15
the I.R.S. based its counterclaim solely on standing, and only

that issue is properly before us.     Our contrary disposition of

this point resolves the case.
                                 D.

          The district court invoked equitable estoppel sua

sponte because its holding on standing left no bar to the

I.R.S.'s recoupment of the tax credit, a sanction the court found

overly severe.   We are disturbed that estoppel would be applied

by the district court without allowing the parties to voice their

opposition to it.   Our conclusion, however, renders this issue

superfluous, and we need not reach it.


                          IV.   Conclusion

          Contrary to the holding of the district court, Hutchins

had standing to sue as a matter of law.      Because at the trial

level the I.R.S. based its counterclaim solely on the absence of

standing, we will reverse and remand with instructions to enter

summary judgment in favor of Hutchins.    In doing so, we note only

that appellant must consider himself the fortunate beneficiary of

the appellee's litigation strategy.    Had the I.R.S. assiduously

pressed the validity of the tax refund at the trial level,

Hutchins could well have lost his $37,897 bird in the hand in an

ill-conceived grasp at $650 in the bush.




                                                                    16
