Immediately’s lesson is about tips on how to maximize the discharge of tax liabilities via chapter. It is a lesson on timing. Final 12 months I blogged two circumstances displaying how a chapter tolls each the gathering and evaluation limitation durations within the Tax Code. See Lesson From The Tax Court docket: For Whom The Chapter Tolls, TaxProf Weblog (July 19, 2021). Immediately’s lesson is the flip aspect: we find out how taxpayers who wish to discharge previous tax liabilities via chapter should be cautious about how the two-year lookback exception to discharge could also be tolled by provisions within the Tax Code.
I provide in the present day’s lesson in honor of Bob Pope, who died on April twenty ninth. Bob was a type of exceptional attorneys who may navigate the complicated interaction of chapter and tax legislation. He was one of many founders of the Tax Collections, Chapter and Exercises Committee within the ABA Part of Taxation, together with Paul Asofsky, Fran Sheehy, Ken Weil, and Mark Wallace. He shall be missed.
Bob would admire in the present day’s lesson. In Robert J. Norberg and Debra L. Norberg v. Commissioner, T. C. Memo 2022-30 (Apr. 5, 2022) (Decide Lauber), the taxpayers filed their 2016 return in February 2019 with out paying the tax they reported due. When the IRS began assortment, the Norbergs requested for a CDP listening to. Once they received to Tax Court docket in September 2020 they filed a chapter petition, hoping to wipe out the legal responsibility. They failed as a result of they mis-timed their chapter petition. An irony is that these taxpayers may have doubtless gotten their desired discharge if that they had ignored the siren track of CDP. Bob may have taught them that. And, in case you click on under the fold, you can also study this lesson on tips on how to maximize the discharge of tax liabilities in chapter.
Regulation: The Fundamental Guidelines for Discharging Tax Liabilities in Chapter
Debtors need discharge of their delinquent tax liabilities. On the whole, the Chapter Code (BC) could be very beneficiant with giving sincere however unlucky debtors important reduction by discharging them from private legal responsibility for a big selection of pre-bankruptcy money owed together with tax money owed. However there are limits. These are referred to as exceptions to discharge. For extra particulars on the stress behind generosity in the direction of debtors and equity in the direction of collectors, I like to recommend studying Grogan v. Garner, 498 U.S. 279 (1991).
The scope of discharge varies, relying on which chapter chapter the debtor has invoked. All debtors, nonetheless, are topic to the identical set of exceptions to discharge present in BC §523. Particularly as to taxes, BC §523(a)(1) prohibits discharge of three sorts of taxes.
First, BC §523(a)(1)(A) doesn’t allow discharge of taxes “described in BC §507(a)(8).” These are referred to as “precedence taxes” as a result of BC §507 is titled “Priorities” and §507(a)(8) offers the overall guidelines for which tax claims towards the debtor get precedence over the claims of different collectors. The final rule is that taxes with precedence standing are additionally non-dischargeable. Id. One of many essential sorts of taxes that get precedence standing (and thus will get exempted from discharge) are these taxes for which a return was filed inside the three years earlier than the date of the chapter petition.
Second, BC §523(a)(1)(C) doesn’t allow discharge of these taxes that outcome from a fraudulent return or willful evasion of tax.
Lastly, as related to in the present day’s lesson, BC §523(a)(1)(B) doesn’t allow discharge of these taxes that have been presupposed to be reported on a return however the return was both unfiled as of the chapter petition date or was filed inside the two 12 months interval trying again from the chapter petition date. That’s the two-year lookback rule and in the present day we see how that works.
Regulation: Tolling The two-Yr Lookback Interval
Courts have lengthy acknowledged that the aim of the two-year lookback rule in BC §523(a)(1)(B) is similar to the aim of the three-year lookback rule for precedence standing in BC §507(a)(8): to present the IRS time to gather the tax debt. See e.g. In re Greenstein, 95 B.R. 583, 585 (Bankr. N.D. Ailing. 1989) (“The impact of the 2 12 months limitation interval is to permit the taxing authorities an affordable time to gather the tax or create a lien on property of the debtor.”)
There has all the time been a priority that taxpayers would use chapter to attempt to stave off assortment till a tax aged out. The Home Judiciary Committee’s report the on the seminal Chapter Reform Act of 1978, Pub.L. 95–598, 92 Stat. 2549, explains that the discharge provisions ought to give the federal government enough time to gather exterior of chapter. See H. Rep. No. 95–595, ninety fifth Cong., second Sess. at 190 (sorry, I couldn’t discover a free hyperlink; I used USCAAN). Many of the dialogue in that report considerations the §507 guidelines for giving tax claims precedence standing, however do not forget that these guidelines additionally have an effect on discharge. As well as, the report additionally famous how the two-year lookback rule in §523(a)(1)(B) was likewise meant to supply taxing authorities with an affordable time during which “to pursue delinquent debtors and procure secured standing.” Id.
The main case on equitable tolling in chapter rests firmly on this concept that the federal government deserves some minimal time to gather taxes exterior of chapter. In Younger v. United States, 535 U.S. 43 (2002) the query was whether or not a previous chapter tolled the three-year precedence interval in §507(a)(8). The debtors argued that the three-year lookback interval was a substantive definition of a precedence tax declare. The Supreme Court docket disagreed. First, it mentioned the lookback interval was like a statute of limitations and may very well be equitably tolled. Second, it mentioned that the lookback interval may very well be tolled “no matter petitioners’ intentions when submitting back-to-back Chapter 13 and Chapter 7 petitions—whether or not the Chapter 13 petition was filed in good religion or solely to run down the lookback interval.” Id. at 50. That’s, whereas equitable tolling is usually linked to the habits of the get together towards whom it’s asserted, there could also be different causes for tolling. In chapter, tolling was not restricted to punishment for dangerous habits by the debtor. No. Tolling was acceptable in Younger as a result of “the IRS was disabled from defending its declare throughout the pendency of the Chapter 13 petition.” Id. at 50.
Congress reaffirmed this motive for tolling—the necessity for enough time to gather exterior of chapter—in 2005 when it modified §507(a)(8) to explicitly allow tolling the three-year lookback rule for precedence functions the place the federal government was prohibited from gathering the debt throughout that point by non-bankruptcy legislation. The Chapter Abuse Prevention and Shopper Safety Act (BAPCPA), P.L. 109-8, 119 Stat. 23, added this flush language to the tip of the §507(a)(8) precedence provision:
“An in any other case relevant time interval specified on this paragraph shall be suspended for any interval throughout which a governmental unit is prohibited beneath relevant nonbankruptcy legislation from gathering a tax on account of a request by the debtor for a listening to and an enchantment of any assortment motion taken or proposed towards the debtor, plus 90 days….”
Discover this was a modification to the precedence provisions in §507(a)(8) and thus solely not directly affected the discharge provisions in §523. Nevertheless, whereas Congress made no comparable statutory modification to the discharge provisions over in §523, some courts have utilized the identical rationale to equitably toll the two-year lookback interval in §523(a)(1)(B) (with out the 90 further days). See e.g. In Re Putnam, 503 B.R. 656 (Bankr. E.D.N.C. 2014) (allowing the two-year lookback interval to be equitably tolled throughout the durations the place the IRS was barred from gathering due to prior chapter computerized stays).
Given the similarity between the aim of the §507 three-year lookback interval and the aim of the §523—to present the federal government a minimal time to behave on its tax declare exterior of chapter—it is sensible to reach at an identical outcome: simply as a debtor shouldn’t be rewarded with a chapter discharge after they use a number of chapter filings to bar assortment throughout the three-year lookback interval (even assuming good religion), so ought to a debtor not be rewarded with a chapter discharge when, by exercising their rights beneath the Tax Code, they bar assortment throughout the two-year lookback interval.
No less than I positive wouldn’t wish to so advise my purchasers, particularly when there’s a higher method that considerably decreases any potential equitable tolling argument by the federal government.
Let’s see what we study from this case.
Information
Mr. and Mrs. Norberg filed their 2016 return on February 11, 2019 however didn’t absolutely pay the reported legal responsibility. They owed about $9,000 together with some $4,000 in penalties for failure to file and failure to pay beneath §6651. The IRS assortment machine went into motion and in September 30, 2019 despatched them a levy CDP discover. They well timed requested and obtained a CDP listening to asking for CNC standing. (That was their first mistake.) They offered all of the requested monetary data. It was not sufficient to get them into CNC. The Settlement Officer (SO) determined that the Norbergs may really pay $62 per thirty days and provided a Partial Pay Installment Settlement. Below the essential guidelines of PPIAs they might pay the $62 per thirty days and the IRS would reassess their skill to pay each two years. See IRM 5.14.2.2.1. The Norbergs refused the PPIA. That was their second mistake.
Reasonably than taking the PPIA the Norbergs determined to spend their cash in a different way. After receiving their Ticket to the Tax Court docket within the type of a September 30, 2020 Discover of Dedication, they filed a petition (they paid the submitting price). Apparently that they had the cash to do this. Then, in October 2020, they filed a Chapter 7 chapter. That was their third, and largest mistake.
The chapter submitting robotically stayed the the Tax Court docket case pending decision of the chapter petition. BC §362(a)(8). As soon as the Norbergs obtained their chapter discharge, the Tax Court docket resumed consideration of their CDP case in November 2021.
Some readers could not know {that a} chapter discharge order doesn’t specify what explicit money owed are discharged. Nope. The order is only a actually quick assertion to the impact that “Congratulations! You at the moment are freed from all of the money owed which were discharged!” Debtors and collectors are left to their very own gadgets to determine which money owed are coated and which aren’t. Later disagreements should resolved in courtroom, typically within the chapter courtroom that granted the discharge.
On this case, the IRS agreed that the penalties for failure to file and failure to pay have been discharged (as a result of they weren’t taxes for chapter discharge functions). However the IRS disagreed that the precise 2016 tax legal responsibility had been discharged. Fortuitously, the events have been already in Tax Court docket. In order that’s why we get the lesson from the Tax Court docket.
The Fundamental Lesson: The two-Yr Lookback Interval Prevents Discharge
Again in Tax Court docket the Norbergs claimed that their 2016 tax liabilities had been discharged. They centered on the precedence provisions in §507. They argued the 2016 liabilities weren’t precedence claims beneath §507 as a result of their return had been due in April 2017 they usually had filed chapter greater than three years later. True sufficient. However they confused precedence with discharge. As you realized above, the discharge guidelines in BC §523 go additional than piggybacking on precedence tax claims. The foundations additionally stop the discharge of liabilities reported on a return filed inside the two 12 months lookback interval. Right here, that interval ran from October 2020 two years again to October 2018. And the Norbergs had filed their return inside that two years, in February 2019.
Properly, that takes care of that! They lose on a brief and candy and direct software of the two-year lookback rule.
Variation 1: What if the Norbergs Had Waited To File Chapter?
My first response once I learn this case was doubtless the identical as many readers: If solely the Norbergs had waited till February 12, 2020 to file their chapter! Doing that would definitely have given them a greater probability at discharge. Their 2016 return would then not have been filed inside the two 12 months lookback interval. Why did not they simply wait these 3+ months? They might now win on a brief and candy and direct software of the two-year lookback rule.
Equitable tolling, nonetheless, would doubtless nonetheless make them losers. Whereas the textual content of BC §523(a)(1)(B) admits of no exceptions, do not forget that courts routinely apply equitable tolling to each this and comparable lookback durations within the Chapter Code, and achieve this for comparable causes: to make sure that the federal government receives the minimal time interval to gather tax liabilities given by Congress. BC §523(a)(1)(B) says that minimal interval is 2 years. When the Norbergs filed their CDP request with the IRS, that triggered a keep of assortment of their 2016 legal responsibility. §6330(e). That keep continued “for the interval throughout which such listening to, and appeals therein, are pending.” Id. And the Tax Court docket may implement the keep by courtroom order if want be. Id. Accordingly, it could be cheap then for a courtroom to toll the two-year lookback interval to account for the time the IRS is prevented from utilizing its main assortment software, the levy, to implement the tax legal guidelines.
However nonetheless, submitting the chapter petition earlier than the two-year interval had expired was an enormous mistake.
Variation 2: What if the Norbergs had foregone the CDP Listening to?
My second response after studying the case was to marvel why the heck did the Norbergs ask for a CDP listening to and never an Equal Listening to? When taxpayers miss catching the CDP butterfly, the IRS will nonetheless give them a possibility to work out assortment options with Appeals in an Equal Listening to. IRM 8.22.4.3 (08-26-2020). And that may take nearly as lengthy. Whereas the IRS isn’t statutorily prohibited from gathering, it suspends assortment as a matter after all. Id. Thus, per the reasoning in In Re Younger, supra, courts are extremely unlikely to equitably toll the chapter lookback durations. 535 U.S. at 53 (“tolling is inappropriate when a claimant has voluntarily chosen to not defend his rights inside the limitations interval.”).
Right here, for instance, if the Norbergs had obtained an Equal Listening to, they might not have been in a position to petition Tax Court docket. Assuming the Equal Listening to took the identical period of time, they must robust it out from the Dedication Letter (September 30, 2020) till February 12, 2021 after they may safely file their petition.
That may have been the cleanest technique, It’s why I feel that going for the CDP listening to was a mistake.
Variation 3: What If the Norbergs Had Taken the PPIA of $62?
My remaining response was to marvel why the Norbergs didn’t simply take the PPIA to finish the CDP listening to, after which file chapter after accounting for the time the CDP listening to doubtless tolled the two-year lookback interval. In the event that they have been paying the Tax Court docket submitting price and (presumably) paying the charges for chapter, it positive appears they might get the cash to pay $62 a month for the time essential to run out the BC §523(a)(1)(B) two-year clock, at the same time as tolled by the CDP listening to. The IRS won’t accumulate throughout the pendency of an installment settlement, however not like the CDP provisions, it’s the IRS’s voluntary act to enter right into a PPIA and so the reasoning from Younger makes any equitable tolling far much less doubtless.
As normal, I welcome substantive feedback on any side of in the present day’s Lesson. That’s the reason Paul and I preserve the feedback open. It might curiosity readers to know that I repeatedly obtain some weird and irrelevant feedback from of us who use faux names and emails from which to launch their invective. I don’t publish them. They make me unhappy. Life is simply too quick for such nonsense, as Bob’s passing reminds us.
Bryan Camp is the George H. Mahon Professor of Regulation at Texas Tech College of Regulation. He invitations readers to return every week to TaxProf Weblog for an additional Lesson From The Tax Court docket.
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