Fuentes et al v. Danielson, No. 5:2010cv01419 - Document 12 (C.D. Cal. 2011)

Court Description: ORDER AFFIRMING DECISION OF TH UNITED STATES BANKRUPTCY COURT. Court affirms the dismissal of the Chapter 12 petition by Judge Dean D. Pregerson. (Made JS-6. Case Terminated.) (lc)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA ED IN RE: MILTON E. FUENTES, ) Case No. CV 10-01419 DDP ) [Bankruptcy No. 6:10-bk-2091DS] USBC Riverside Debtor, ) ) ORDER AFFIRMING DECISION OF THE MILTON E. FUENTES, ) UNITED STATES BANKRUPTCY COURT ) Adversary number: N/A; Appellant, ) BAP case number CC-10-1329 v. ) ) ROD DANIELSON, Chapter 12 ) Trustee, ) ) Appellee. ) ____________________________ ) 18 19 This matter is before the Court on an appeal from a decision 20 by the United States Bankruptcy Court. After reviewing and 21 considering the materials submitted by the parties, the court 22 affirms the dismissal of the Chapter 12 petition. 23 24 25 cc: US Bankruptcy Court and US Trustee's Office 26 27 28 1 I. Background 2 On April 13, 2010, Milton Eduardo Fuentes ( Fuentes or 3 Debtor ) filed a voluntary bankruptcy petition under Chapter 12 of 4 the Bankruptcy Code. (ER No. 1 at 3) Rod Danielson ( Danielson 5 or Trustee ) was appointed as Trustee. 6 The Trustee determined that Fuentes received the following 7 income for the three years preceding the filing of the petition: 8 Farming Income Social Security & Military Benefits 9 10 2009: $32,837.561 2008: $32,643.00 2007: $54,753.00 $59,128.80 $55,888.80 $53,526.00 11 Based on these figures, the Trustee concluded that (1) less 12 than one-half of Fuentes income in the year preceding the filing 13 of the Chapter 12 petition was derived from farming operations; and 14 (2) Fuentes did not receive more than one-half of his income from 15 farming operations in each of the second and third years preceding 16 the petition date. Concluding that Fuentes did not meet the 17 definition of a family farmer under 11 U.S.C. § 101(18) and 18 thereby finding him ineligible for relief under Chapter 12, the 19 Trustee filed a motion to dismiss Fuentes petition. 20 In his Response, Fuentes argued, in relevant part, that he did 21 meet the criteria of a family farmer because, for Chapter 12 22 purposes, social security benefits must be excluded from the 23 debtor s gross income. At oral argument before the bankruptcy 24 court, Fuentes contended that both his social security and military 25 26 1 27 28 Fuentes claims that he earned $47,059.00 from farming in 2009. Fuentes did not, however, provide any evidence to support this claim. The bankruptcy court did not, therefore, clearly err in its determination of Fuentes 2009 farming income. 2 1 benefits should be excluded from his gross income for purposes of 2 determining whether he qualifies as a family farmer. 3 On August 9, 2010, the bankruptcy court ruled in a memorandum 4 opinion that neither Fuentes social security nor military benefits 5 were excludable from gross income. The court further stated that 6 Fuentes was not a family farmer for purposes of 11 U.S.C. § 7 101(18) because he did not receive more than 50 percent of his 8 gross income from farming operations for the taxable year preceding 9 the filing of the petition or each of the second and third years 10 preceding the petition date. Accordingly, the court declared 11 Fuentes ineligible to seek relief under Chapter 12 and granted 12 Danielson s motion to dismiss. Fuentes now appeals. 13 II. Discussion 14 A. 15 This court has jurisdiction to review appeals from final Jurisdiction 16 orders and judgments of bankruptcy courts under 28 U.S.C. § 158(a). 17 B. 18 The bankruptcy court s conclusions of law are reviewed de Standard of Review 19 novo, while its findings of fact are reviewed for clear error. 20 Blausey v. United States Trustee, 552 F.3d 1124, 1132 (9th Cir. 21 2009)(citing In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005)). The 22 clear error standard is significantly deferential, requiring a 23 definite and firm conviction that a mistake has been committed 24 before reversal is warranted. United States v. Bourseau, 531 F.3d 25 1159, 1164 (9th Cir. 2008)(internal quotation marks omitted). 26 court may affirm on any ground supported by the record. This Thrifty 27 Oil Co. v. Bank of America, Nat l Trust and Sav. Ass n, 322 F.3d 28 1039, 1046 (9th Cir. 2003). 3 1 C. Whether Security and/or Military Benefits Should Be 2 Excluded From The Calculation Of A Debtor s Gross Income 3 Under Chapter 12 Of The Bankruptcy Code. 4 Only a family farmer ... with regular annual income may be a 5 debtor under chapter 12 . . . . 11 U.S.C. § 109(f). The term 6 family farmer includes an individual . . . engaged in a farming 7 operation . . . [who] receive[s] from such farming operation more 8 than 50 percent of such individual s . . . gross income for (i)the 9 taxable year preceding; or (ii) each of the 2d and 3d taxable years 10 preceding the taxable year in which the case concerning such 11 individual . . . was filed. 11 U.S.C. § 101(18)(A). 12 The Bankruptcy Code does not define the term gross income. 13 Several courts have equated the Bankruptcy Code term gross income 14 with the tax code definition of the term. In re Lewis, 401 B.R. 15 431, 441 (Bankr.C.D.Cal. 2009) (citing In re Wagner, 808 F.2d 542, 16 549 (7th Cir. 1986) ( [T]he interpretation that will best carry out 17 Congress s purpose in the Bankruptcy Code is that gross income for 18 the purposes of the farmer s exemption has the same meaning as in 19 the Internal Revenue Code. )); In re Lamb, 209 B.R. 759, 760-61 20 (Bankr.M.D.Ga. 1997); In re Pratt, 78 B.R. 277, 279 (Bankr.D.Mont. 21 1987) (citing Wagner, 808 F.2d at 549). 22 23 1. Social Security Benefits The Internal Revenue Code states that gross income includes 24 Social Security benefits in an amount determinable by the formula 25 set out in 26 U.S.C. § 86.2 In some cases, the Section 86 formula 26 excludes all Social Security benefits from gross income. See, e.g. 27 2 28 Fuentes does not describe whether or how 26 U.S.C. § 86 applied to the social security benefits he received. 4 1 In re Koenegstein, 130 B.R. 281 (Bankr.S.D.Ill 1991); In re 2 Southard, 337 B.R. 416, 422 (Bankr.M.D.Fla. 2006). As the 3 bankruptcy court observed here, some courts, in applying the tax 4 code definition of gross income for purposes of determining 5 Chapter 12 eligibility, have refused to look beyond the tax return 6 itself.3 See, e.g. In re Bergman, 78 B.R. 911 (Bankr.S.D.Ill. 7 1987); In re Nelson, 73 B.R. 363, 365 (Bankr.D.Kan. 1987). The 8 bankruptcy court, citing In re Koenegstein, 130 B.R. at 286, went 9 on to hold that Social Security payments are included in gross 10 income. 11 As the Seventh Circuit observed, the language and background 12 of [the farmer s exemption] show that Congress wanted a mechanical, 13 which is to say an easily applicable, test for farmer . . . . 14 Wagner, 808 F.2d at 547. Koenegstein, however, diverged from the 15 principle that gross income under the Bankruptcy Code has the 16 same meaning as gross income under the tax code. Finding Chapter 17 12's definition of family farmer to be arbitrary at best, the 18 Koenegstein court concluded that strict adherence to the tax code 19 meaning and exclusion of Social Security benefits bore no relation 20 to Chapter 12's purpose of providing relief to family farmers in 21 need of financial rehabilitation. 22 Koenegstein, 130 B.R. at 286. This court agrees with the principle that strict adherence to 23 the tax code is not required where such rigidity would lead to 24 absurd results. Koenegstein, 130 B.R. at 284-285. In Matter of 25 Armstrong, for example, the Seventh Circuit held that it would be 26 3 27 28 Though Fuentes argues that courts should look to the tax return rather than conduct a fairly complicated § 86 analysis, the tax return figure will necessarily reflect the product of the § 86 calculation. 5 1 contrary to legislative purpose and illogical to exclude proceeds 2 from the sale of farm equipment from farming income. Matter of 3 Armstrong, 812 F.2d 1024, 1026-1027 (7th Cir. 1987). Similarly, 4 the bankruptcy court in In re Way found that the logical 5 consideration of farm subsidy payments as farm income would further 6 congressional intent, and therefore applied a narrow exception to 7 the strict tax code approach. In re Way, 120 B.R. 81, 83 8 (Bankr.S.D.Tex. 1990). 9 Here, however, this court cannot conclude that the inclusion 10 of Social Security benefits in gross income would in any way 11 further Congress intent to prevent high income, low non-farm debt 12 tax shelter investors from qualifying for relief under Chapter 12. 13 In re Pratt, 278 B.R. at 278. Nor is the court aware of any case 14 within this circuit, or any other, that applies Koenegstein s 15 reasoning with respect to Social Security benefits. Accordingly, 16 for Chapter 12 eligibility purposes, Social Security benefits are 17 afforded their ordinary tax code meaning. 18 19 2. See 26 U.S.C. § 86. Military Benefits According to the Internal Revenue Code, certain qualified 20 military benefit[s] are excluded from gross income. 21 134(a). 26 U.S.C. § A qualified military benefit is one which is (1) 22 received by any member or former member of the uniformed services 23 of the United States or any dependent of such member by reason of 24 such member s status or service as a member of such uniformed 25 services and (2) was excludable from gross income on September 9, 26 1986 . . . . 26 U.S.C. § 134(b). 27 benefit [is] excludable. The code is clear that no other 26 U.S.C. §§ 134(b)(2). 28 6 1 Fuentes asserts that the Military benefits are categorized 2 under 26 U.S.C. Part III § 134 [as] Items specifically excluded 3 from gross income, thus including military benefits as gross income 4 directly contradicts the Tax Code as it is written. 5 (Opening Brief at 10.) However, only qualified military benefits 6 are exempt from inclusion in the gross income calculation. 7 Fuentes opposition below referred to the benefit as a pension. 8 (ER 3.) The Internal Revenue Code includes pensions as a source of 9 gross income. 26 U.S.C. § 61(a)(11). Fuentes has not provided any 10 evidence that his military benefits are qualified military benefits 11 excludable from gross income. 12 III. Conclusion 13 For the reasons set forth above, Social Security benefits 14 constitute gross income for Chapter 12 eligibility purposes only to 15 the extent provided in the tax code. Only qualified military 16 benefits are excludable from gross income. Here, there is no 17 evidence that Fuentes has received excludable qualified military 18 benefits. Furthermore, it appears to the court that, even 19 excluding Fuentes average monthly Social Security income of 20 $1803.40 from gross income, Fuentes does not meet the definition of 21 a family farmer under 11 U.S.C. § 101(18).4 Consequently, the 22 bankruptcy court s dismissal of Fuentes Chapter 12 petition is 23 AFFIRMED. 24 IT IS SO ORDERED. 25 Dated: December 16, 2011 DEAN D. PREGERSON United States District Judge 26 27 28 4 See n.1, supra. 7

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