In re Brustman

• Decision Date: 19 December 1997
• Docket Number: Bankruptcy No. SA 93-17269 JR,Adversary No. SA 96-2241 JR.
• Citation: 217 BR 828
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re James BRUSTMAN, Debtor. James BRUSTMAN, Plaintiff, v. UNITED STATES of America, Defendant.

217 B.R. 828 (1997)

In re James BRUSTMAN, Debtor.

James BRUSTMAN, Plaintiff, v. UNITED STATES of America, Defendant.

Bankruptcy No. SA 93-17269 JR, Adversary No. SA 96-2241 JR.

United States Bankruptcy Court, C.D. California.

December 19, 1997.

A. Lavar Taylor, Law Offices of A. Lavar Taylor, Santa Ana, CA, for Plaintiff.

Darwin Thomas, Asst. U.S. Atty., Los Angeles, CA, for Defendant.

MEMORANDUM OPINION

JOHN E. RYAN, Bankruptcy Judge.

I. INTRODUCTION

Plaintiff, James Brustman ("Debtor"), reopened his chapter 7 case and commenced an adversary proceeding to determine the dischargeability of his 1989 federal income tax liability assessed against him by the Internal Revenue Service (the "IRS"). Debtor brings a motion for summary judgment (the "Motion") seeking to have the federal income tax liability discharged under Bankruptcy Code (the "Code")¹ § 727(b).

Income taxes are entitled to priority status under Code § 507(a)(8)(A)(i) if the last date for the timely filing of the return, including extensions, occurs within three years of the date of the bankruptcy petition. However, Debtor argues that the tax liability is not entitled to priority status for two reasons: (1) the three-year period set forth in that section was not extended as a result of Debtor's first bankruptcy filing, thereby causing the IRS' claim to fall outside the three-year period; and (2) even though Debtor's extension requests were granted by the IRS, the extensions were void under the Internal Revenue Code ("I.R.C.")² and are not valid for purposes of Code § 507(a)(7). After a hearing on September 3, 1997, I took the matter under submission.

II. JURISDICTION

The Court has jurisdiction over this case pursuant to 28 U.S.C. § 157(b)(1) (bankruptcy courts may hear cases arising under title 11) and 28 U.S.C. § 1334(b) (district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).

III. STATEMENT OF FACTS

The parties stipulated to the material facts. On or about October 16, 1990, Debtor filed his 1989 federal tax return on a form 1040 (the "Return") with the IRS. The Return reflected taxable income in the amount of $176,282, including a capital gain of $123,227 from the sale of an office building in March 1989. The total amount of income tax debt reflected on the Return, exclusive of interest and penalties, was $59,301. Prior to filing the Return, Debtor submitted two separate requests for extension of time to file the Return, and both requests were approved by the IRS. On November 19, 1990, the IRS assessed Debtor's tax debt at $59,301, and no penalty was issued under I.R.C. § 6651(a)(1) for Debtor's failure to file a timely return.

On August 5, 1992, Debtor filed a voluntary chapter 7 bankruptcy petition (the "First Case"). However, the First Case was dismissed on December 11, 1992. On July 2, 1993, Debtor filed a second voluntary chapter 7 petition (the "Second Case"), and Debtor received a discharge on November 5, 1993. The Second Case was closed on November 17, 1993 and later reopened on December 16, 1996 to determine the dischargeability of Debtor's 1989 federal income tax liability (the "1989 Taxes").

Debtor filed an adversary proceeding on January 6, 1997, and on August 13, 1997, Debtor filed the Motion to have the 1989 Taxes discharged under Code § 523(a)(1). The United States of America ("Defendant") filed an opposition to the Motion on behalf of the IRS. After a hearing on September 3, 1997, I took the matter under submission.

IV. DISCUSSION

In determining whether or not any genuine issues of material fact exist for summary judgment purposes, the court must view the evidence in the light most favorable to the nonmoving party. Kowalski-Schmidt v. Forsch (In re Giordano), 212 B.R. 617, 621 (9th Cir. BAP 1997) (citing Hansen v. United States, 7 F.3d 137, 138 (9th Cir.1993) and Hughes v. United States, 953 F.2d 531, 541 (9th Cir.1992)). "The party moving for summary judgment must show by the `pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits . . . that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Id. (quoting Fed.R.Civ.P. 56(c)).

Debtor argues that his 1989 Taxes were not excepted from discharge under Code § 523(a)(1)(A)³ for two reasons. First, the 1989 Taxes were not entitled to priority treatment under Code § 507(a)(8)(A)(i) because the three-year period had expired prior to the Second Case and this period was not tolled by reason of the First Case. Second, the extensions granted by the IRS were invalid, thereby resulting in the expiration of the three-year period.

A. Noland Does Not Necessitate A Rejection Of West.

Addressing Debtor's first reason, the Motion raises the issue of whether the three-year period under § 507(a)(8)(A)(i)⁴ can be tolled for the period of the First Case plus six months, in light of the Supreme Court's decision in United States v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996).

Debtor contends that based on Noland, the three-year period for dischargeability set out in § 507(a)(8)(A)(i) cannot be tolled because of an intervening bankruptcy case. Defendant, on the other hand, maintains that the Supreme Court's decision in Noland does not overrule the controlling law in the Ninth Circuit that suspends the three-year period during an intervening bankruptcy case and for six months thereafter.

Prior to Noland, in Brickley v. United States (In re Brickley), 70 B.R. 113 (9th Cir. BAP 1986), the Bankruptcy Appellate Panel ("BAP") held that § 108(c)⁵ in conjunction with I.R.C. § 6503(b)⁶ suspended the three-year tax collection period under § 507(a)(7)(A)(i)(predecessor to § 507(a)(8)(A)(i)) while the automatic stay was in effect during a prior bankruptcy case. The BAP concluded that a literal reading of § 108(c) "would render the extension of the statute of limitations . . . without meaning, since tax collectability is obviously useless if the tax debt has been discharged." Id. at 115. Since then, the majority of the courts that have analyzed the issue have followed Brickley. In fact, Defendant's position is supported by the Tenth,⁷ Ninth, Eighth, Seventh, and Third Circuits.⁸

The Ninth Circuit in West adopted the Brickley rationale, noting that although generally an analysis begins with the statutory language, "rare cases" arise where a literal application of the statute will produce a result at odds with the drafters' intentions. West, 5 F.3d at 425. In those rare cases, the drafters' intent rather than a strict construction of the language should control. Id.⁹ In West, the Ninth Circuit found that the literal interpretation of § 108(c) would defeat the Code's "intricate scheme for the payment of tax claims." Id. at 426. Although the Code does not contain any provisions that explicitly suspend the priority period of § 507(a)(8)(A)(i) while a debtor is engaged in bankruptcy proceedings, the Ninth Circuit reasoned that incorporating the suspension provisions of the I.R.C. would further Congress' intent to give the government "the benefit of certain time periods in which to pursue its collection efforts."¹⁰Id., at 426 (quoting Richards, 994 F.2d at 765); see also S.Rep. No. 95-989, 95th Cong., 2d Sess. 14 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5800.

Debtor responds that the recent Supreme Court decision in Noland undercuts West. In Noland, the Supreme Court held that "bankruptcy courts may not take it upon themselves to make that categorical determination to subordinate postpetition tax penalties under the guise of equitable subordination." Noland, at 541-42, 116 S.Ct. at 1528. Such a determination runs "counter to Congress's policy judgment that a postpetition tax penalty should receive the priority of an administrative expense. . . ." Id. at 541, 116 S.Ct. at 1527-28. Debtor asserts that when a court tolls the three-year period pending bankruptcy proceedings, it engages in "judicial legislation," which is contrary to the wishes of the Supreme Court's view as expressed in Noland. Based on Noland, Debtor argues that the majority view wrongly sought to correct what is perceived to be an unfair result for the IRS if intervening bankruptcies do not operate to suspend the running of the periods in § 507(a)(8). Debtor points out that § 507(a)(8)(A)(i) does not expressly provide for any tolling of the three-year period.¹¹

Defendant responds that Noland does not overrule West. Defendant argues that although the Noland Court rejected the Sixth Circuit's attempt to use equitable powers to contravene a statutory command, West only involves an issue of statutory interpretation.

Noland does not necessitate a rejection of West.¹² In Noland, the IRS filed claims for taxes, interest, and penalties that accrued after debtor filed bankruptcy under chapter 11, but before the case was converted to chapter 7. Although the IRS' claims were entitled to first priority as administrative expenses under §§ 503(b)(1)(C) and 507(a)(1), the bankruptcy court "equitably subordinated"¹³ the penalty claim pursuant to § 510(c).¹⁴ The bankruptcy court found that § 510(c) gave it the authority to deal not only with inequitable government conduct, but also to adjust the statutory priority of claims. Noland, at 535-36, 116 S.Ct. at 1525-26. Later, in affirming the bankruptcy court's decision, the Sixth Circuit concluded that postpetition, nonpecuniary loss tax penalties were vulnerable to subordination by their very disposition. Id. at 535, 116 S.Ct. at 1524. The Supreme Court reversed, holding that "bankruptcy courts may not equitably subordinate claims on a categorical basis in derogation of Congress' scheme of priorities." Id. at 536, 116 S.Ct. at 1525. The Court specified that although § 510(c...