In Re: Russell Schwartz Linda Schwartz, Debtors. Russell Schwartz Linda Schwartz v. United States

Debtors Russell and Linda Schwartz appeal from a Bankruptcy Appellate Panel (BAP) decision that an IRS tax penalty assessed in violation of the Bankruptcy Code’s automatic stay provision is voidable but not void. We reverse the judgment of the BAP.

BACKGROUND

The essential facts of this case are not in dispute. On February 25, 1983, the Schwartzes and their corporation, R.H. Schwartz Construction Specialties, Inc., filed a Chapter 11 bankruptcy petition. On October 8, 1984, the IRS, apparently unaware of the bankruptcy filing, assessed a 100% tax penalty, totaling $65,819.25, against Russell Schwartz pursuant to 26 U.S.C. § 6672 (1988). The Schwartzes did not challenge the tax assessment within the Chapter 11 bankruptcy and stipulated to their dismissal from the Chapter 11 bankruptcy on March 27, 1985.

In August 1987, the IRS filed a Federal Tax Lien with the King County Auditor pursuant to the penalty assessment. The IRS claimed that the penalty had increased to $86,296.60. On October 8, 1987, the Schwartzes filed a Chapter 13 bankruptcy petition. The IRS filed a Proof of Claim in the Chapter 13 bankruptcy on February 19, 1988, alleging that the Schwartzes owed the IRS…