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Reporter # 3 Feb. 21 2018
From King’s Discharging Taxes in Consumer Bankruptcy Cases 2018
Emerging issue – Equitable Tolling of the 2-year period
The author is informed that the IRS position is that a prior bankruptcy or CDP appeal stops the clock on the running of the two-year period in the same manner as the 3-year or 240-day periods.
CAVEAT: An emerging issue: Keep an eye out for any case where a prior bankruptcy or CDP hearing overlaps the running of the 2-year period; the IRS now takes the position that those prior events, described in the hanging paragraph attached to § 507(a)(8)(G), toll the running of the 2-year period, based on equitable tolling.
The author is aware of only a handful of cases that have imposed tolling of the 2-year period.
The court in Putnam v. I.R.S. held that a prior bankruptcy suspends the running of the 2-year period, based on the principle of equitable tolling. In other words, it is unfair to the IRS to lose their full two years to collect before the taxpayer files bankruptcy, while not being able to collect during that full period because of the automatic stay of the prior bankruptcy.
In 2005 Congress adopted BAPCPA which explicitly codified the Young principles into its tolling provisions as to the 3-year and 240-day periods. The Bankruptcy Code, however, does not include the 2-year tax return filing date in its tolling provisions prescribed at 11 U.S.C. § 507(a)(8)(G)
Equitable tolling was the theory behind the Supreme Court’s decision in Young v. United States which held that a prior bankruptcy tolls the running of the 3-year period based on equitable tolling principles.
Putnam addressed several issues, including whether or not the 3-year period prescribed at § 507(a)(8)(A) was a statute of limitations (only a statute of limitations is subject to equitable tolling), and whether the equities favored the IRS such that a prior bankruptcy would suspend the running of the 32-year period.
The court held “yes” to both questions.
“Petitioners point to two provisions of the Code, which, in their view, do contain a tolling provision. Its presence there, and its absence in § 507, they argue, displays an intent to preclude equitable tolling of the lookback period.”
“Whereas the three-year lookback period contains no express tolling provision, the 240-day lookback period is tolled “any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending.” § 507(a)(8)(A)(ii). Petitioners believe this express tolling provision, appearing in the same subsection as the three-year lookback period, demonstrates a statutory intent not to toll the two-year lookback period.”
“If anything, § 507(a)(8)(A)(ii) demonstrates that the Bankruptcy Code incorporates traditional equitable principles.”
Another North Carolina case, In re Ollie-Barnes cited both Putnam, Hollowel, Tibaldo, and Teeslink as precedential and persuasive and invoked equitable tolling in that case, with no analysis. The debtor in that case had been in two previous bankruptcy cases, all of which appear to have overlapped into the two-year period.
In most non-tax situations where equitable tolling is applicable it must be shown that the individual was guilty of some kind of bad faith conduct.
But not only did Young adopt equitable tolling in cases of prior bankruptcy, it also stripped from it the necessity to demonstrate some kind of bad faith or wrongdoing on the part of the debtor:
“Tolling is in our view appropriate regardless of petitioners’ intentions when filing back-to-back Chapter 13 and Chapter 7 petitions – whether the Chapter 13 petition was filed in good faith or solely to run down the lookback period. In either case, the IRS was disabled from protecting its claim during the pendency of the Chapter 13 petition, and this period of disability tolled the three-year lookback period when the Youngs filed their Chapter 7 petition.”
Some courts hold onto the principle that to impose equitable tolling good or bad faith conduct applies and the court must consider both the debtor’s and the taxing entity’s conduct.
What is not clear yet is whether courts suspending the clock on the 2-year period due to equitable tolling will also add the 90 days prescribed at § 507(a)(8)(G).
If you have a potential tolling issue in connection with the 2-year period and wish to play it safe by assuming a prior bankruptcy tolls the period, to be really safe add 90 days on to the time the bankruptcy stay stopped the clock.
Another Caveat:In theory, the doctrine of equitable tolling could be applied to things other than a prior bankruptcy if they automatically prohibit collection while the action is pending, such as request for an installment plan or request for innocent spouse relief where the period the application is pending overlaps the 2-year period (or any other time rule).
The other case, In re Hollowell, cited the court’s equitable powers under § 105(a) (power of the court) to the effect that the debtor had deliberately manipulated his bankruptcy cases to try to satisfy the two year rule:
“This court is of the opinion that the facts of this proceeding warrant invocation of the § 105(a) equitable power. As such, the court concludes that the two-year period of § 523(a)(1)(B)(ii) was tolled or suspended for the time that the debtors’ previous bankruptcy case was pending, plus an additional six months after the dismissal …”
The court in In re Tibaldo:
“It is unlikely that Congress intended the exception from discharge period to run during a bankruptcy when the IRS is automatically stayed from collecting taxes. This court, therefore, finds that the two year period for dischargeability is suspended as long as the automatic stay precludes the IRS from proceeding against a debtor in bankruptcy.”
In addition to § 105(a) (Hollowell), some courts cite § 108(c) (Extension of time) (Tibaldo).
Arguments can be made against the 2-year tolling rule. One, for example, is that since Congress explicitly codified Young’s equitable tolling to suspend the 3-year and 240-day periods, they obviously had tolling on their minds, but did not apply tolling to the 2-year period. A tenet of statutory construction is that where Congress includes particular language in one section of a statute but omits it in another, it is generally presumed that Congress Acts intentionally and purposely in the disparate inclusion or exclusion.” In BAPCPA Congress included explicit tolling language into § 507 (the 3-year and the 240 day periods prescribed at §507(a)(8)(A)), but not in § 523(a)(1)(B) (the 2-year rule).
Where stay expired or did not arise in prior bankruptcy
One of the quirks of BAPCPA may, in some cases, result in a benefit for a debtor by not tolling the 3-year or 240-day period on account of one or more prior bankruptcies;
The precise wording of the tolling section of the Code provides that a § 507(a)(8)(A) time period is tolled for the time ” … during which a governmental unit is prohibited … from collecting a tax as a result of … a prior case under this title … or during which collection was precluded by … 1 or more confirmed plans … plus 90 days.” (hanging paragraph following subsection “G”). Thus, it is not the existence of an open bankruptcy case that tolls the period, but only the existence of the automatic stay, if any.
In the case of a one-time serial filer who had a prior bankruptcy case pending within the year leading up to filing bankruptcy again, the stay expires on the 30th day following the filing of the petition, unless the debtor both files and has heard a motion to extend within the 30 days, based on justifiable circumstances.
Thus, if the prior bankruptcy was pending during one of the § 507 time periods, unless extended by the court, the stay in that case will toll the period for the duration of the stay (only 30 days) plus 90 days. The remainder of the time that the bankruptcy case is open will not extend the tolling of the discharge time-period.
Likewise, in the case of a multiple serial filer who had two or more prior bankruptcy cases pending in the year before filing the new bankruptcy, the stay never arises at all, unless imposed by the court pursuant to a timely motion under Code § 362(c)(3)(B), or 362(c)(4)(B). Where the automatic stay was not imposed in such a case, it appears the case would have no tolling effect of either § 507 time period.
TIP: If there has been a prior bankruptcy case which overlapped the running of either the 3-year or 240-day period, the respective time period may not necessarily have been tolled; the prior case or cases may have had the stay in effect for only 30 days, or not at all. See discussion at “6” above.
Notwithstanding the above, however, BAPCPA case law has raised a fine point about the expiration of the stay; the majority of published opinions hold that the termination of the stay after 30 days pursuant to 11 U.S.C. § 362(c)(3) applies only to the debtor and property of the debtor, but not property of the estate. Property of the estate continues to be protected by the stay, at least as long as it remains property of the estate.
It would appear, therefore, that collection by the taxing entity may have been prohibited as against property of the estate, but not as to the debtor personally or his or her property (such as, for example, an ERISA qualified retirement plan, which has been held to be not property of the estate). So, the question is, against what, exactly, was the taxing entity prohibited from collection, and how might this affect tolling? An argument can be made that, since the taxing entity was prohibited from collection as against the property of the estate only, the tolling only affects the estate, but since the stay expired as to the debtor and property of the debtor, the § 507 time periods were not tolled, or were tolled only for 30 days, plus 90 days.
Furthermore, keep in mind that the automatic stay does not protect a non-filing spouse or other 3rd party under the co-debtor stay provision of Code § 1301 (the co-debtor stay only applies to consumer debts, and the majority of opinions hold that tax liabilities are not consumer debts). Accordingly, in such a co-debtor situation the § 507 time periods appear not to have been tolled at all as against the non-filing, co-liable individual.
Putnam v. I.R.S. _ B.R. _ (Bankr.E.D.N.C. 2014). Putnam cited two pre-BAPCPA opinions that apparently ruled the same way; Hollowel v. IRS 222 B.R. 790 (Bankr.N.D.Miss 1998), Tibaldo v. U.S. 187 B.R. 673 (Bankr.C.D. Cal 1995).