In re Clark

• Decision Date: 14 June 1995
• Docket Number: Bankruptcy No. 394-31480 RCM-7. Adv. No. 394-3323.
• Citation: 184 BR 728
• Parties: In re Michael W. CLARK and Vera L. Clark, Debtors. Michael W. CLARK and Vera L. Clark, Plaintiffs, v. INTERNAL REVENUE SERVICE, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

184 B.R. 728 (1995)

In re Michael W. CLARK and Vera L. Clark, Debtors.

Michael W. CLARK and Vera L. Clark, Plaintiffs, v. INTERNAL REVENUE SERVICE, Defendant.

Bankruptcy No. 394-31480 RCM-7. Adv. No. 394-3323.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

June 14, 1995.

LaDonna K. Ockinga, Dallas, TX, for plaintiffs.

Manuel P. Lena, Jr., Atty., Tax Div., U.S. Dept. of Justice, Dallas, TX, for defendant.

AMENDED MEMORANDUM OPINION

ROBERT McGUIRE, Chief Judge.

Pursuant to Bankr.R. 7052, following are the Court's findings of fact and conclusions of law from the hearing on January 3, 1995 and June 9, 1995. The relief prayed for by Plaintiffs is denied.

This is a Chapter 7 proceeding. The facts contained in the Stipulation of Evidence, attached hereto as Exhibit "1", are adopted as findings by the Court.

This is a core proceeding over which the Court has jurisdiction. 28 U.S.C. § 157(b)(2)(I).

Michael W. Clark ("MWC") and Vera L. Clark (collectively "Plaintiffs" or "Debtors") ask the Court to determine that their federal income (1040) tax liability for tax years 1987 and 1988 is not a priority claim of the Internal Revenue Service ("Defendant") and is therefore discharged. Defendant requests the Court to utilize 11 U.S.C. § 105(a) to determine that both the "three year period" and the "240-day period" for determining priority status pursuant to 11 U.S.C. §§ 507(a)(7)(A)(i) and (ii)¹, respectively, were tolled during the time Plaintiffs were protected by the automatic stay of 11 U.S.C. § 362, and for a period of six months after the date the stay was lifted, for each prior bankruptcy filing, pursuant to 26 U.S.C. §§ 6503(b) and (h). Consequently, Defendant requests the Court to hold that Plaintiffs' unpaid federal income (1040) tax liability for tax years 1987 and 1988 is a priority claim of Defendant and is therefore excepted from discharge under 11 U.S.C. § 523.

11 U.S.C. § 523(a)(1)(A)² excepts from discharge taxes described in 11 U.S.C. § 507(a)(7). 11 U.S.C. § 507(a)(7)(A)(i) grants the government priority for unpaid income taxes if the due date of the return, including any extensions, is less than three years from the date of filing of the petition in bankruptcy. A government claim for unpaid income taxes is also entitled to priority under 11 U.S.C. § 507(a)(7)(A)(ii) if the taxes at issue were assessed within 240 days of the commencement of the bankruptcy petition.

In this case, it is undisputed that, absent tolling, the 1987 and 1988 taxes were due more than three years and assessed more than 240 days before the March 8, 1994 date of the filing of Plaintiffs' current Chapter 7 petition.

Defendant contends that the Court should use its equity power to toll the statutory time periods in 11 U.S.C. §§ 507(a)(7)(A)(i) and (ii) for the time that Plaintiffs were in each of their four prior bankruptcies, and tack on a period of six months after the date the stay was lifted, for each prior bankruptcy filing, pursuant to 26 U.S.C. §§ 6503(b) and (h).³

In Solito v. U.S., 172 B.R. 837, 839 (W.D.La.1994), the court stated:

There are no sections of the Bankruptcy Code which expressly provide that in the case of successive petitions in bankruptcy the three year period for the IRS to assess and collect accruing tax liabilities imposed by 523(a)(7) or 507(a)(7)(A)(i) might be suspended during the pendency of previous bankruptcy cases. However, 11 U.S.C. § 105(a) grants the Bankruptcy Court the power to "issue any order, process or judgment that is necessary to carry out the provisions" of the Bankruptcy Code and take "any action or make any determination necessary to enforce or implement court orders or rules or to prevent the abuse of process." See United States v. Energy Resources Company, 495 U.S. 545, 549, 110 S.Ct. 2139, 2142, 109 L.Ed.2d 580 (1990) ("traditional understanding" that Bankruptcy Courts are courts of equity and, under 11 U.S.C. § 105(a), they may "issue any order, process or judgment necessary or appropriate to carry out the provisions" of the Bankruptcy Code).

In In re Western Real Estate Fund, Inc., 922 F.2d 592, 601 (10th Cir.1990), modified on other grounds, Abel v. West, 932 F.2d 898 (10th Cir.1991), the Tenth Circuit recognized the "supplementary equitable powers" granted bankruptcy courts under 11 U.S.C. § 105(a) but went on to state such powers "may not be exercised in a manner that is inconsistent with the other, more specific provisions of the Bankruptcy Code."

(Footnotes omitted).

In Matter of Quenzer, 19 F.3d 163 (5th Cir.1993), the court pointed out that 11 U.S.C. § 108(c) suspends only those limitation periods imposed under non-bankruptcy law and non-bankruptcy proceedings. Thus, § 108(c) does not toll the provisions of §§ 523(a)(1) and 507(a)(7)(A)(i) and (ii).

In Matter of Quenzer, supra, the Fifth Circuit refused to consider the government's request, raised on appeal for the first time, to exercise the Bankruptcy Court's equitable tolling powers under 11 U.S.C. § 105(a) to sustain the Bankruptcy and District Courts' conclusion that neither the three-year period provided for in 11 U.S.C. § 507(a)(7)(A)(i), nor the 240-day period provided for in 11 U.S.C. § 507(a)(7)(A)(ii) runs during the pendency of the first of two successive bankruptcies. Id. at 165.

Defendant further contends:

While no explicit statutory provisions may require the suspension of the priority periods for the time during which Plaintiffs and their assets were protected in the four prior bankruptcy cases, the Court should use its equity power under 11 U.S.C. § 105(a) to implement those provisions of the Code which make certain claims priority.

Defendant had the burden of proof factually to show that § 105(a), if available, should be applied to make its claims priority. Matter of Quenzer, supra, 19 F.3d 163, 165. The undisputed facts in Quenzer showed that the Quenzers filed a Chapter 13 petition in September 1986 which was converted to Chapter 7 and voluntarily dismissed in March 1988. In March 1990, the Quenzers filed a Chapter 7 petition and their discharge was entered in July 1990. At issue were tax deficiencies for 1984 and 1985. While acknowledging previously mentioning such undisputed facts, the Fifth Circuit stated:

Equitable considerations are largely fact-driven. "The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mould each decree to the necessities of the particular case." Full development and examination of the facts and the relative positions of the parties are imperative in the exercise of the court\'s equitable powers. Necessarily, "in shaping equity decrees the trial court is vested with broad discretionary power, appellate review is correspondingly narrow." Determining equities in the first instance is seldom fit grist for the appellate mill.

The record before us is devoid of any factual findings by the bankruptcy or district courts which would justify the exercise of equitable powers to extend the time for the government\'s tax collection efforts.

Id. (Emphasis added). (Footnotes deleted).

In this case, Stipulated Fact "e." shows that Debtors had short-lived petitions in 1991 and part of 1992; thus, Debtors were in Chapter 13 for 134 days during July 7 through November 17, 1992, and then 224 days during the period of January 5 through August 16, 1993. Then Debtors were out of bankruptcy for 203 days before filing the last bankruptcy on March 8, 1994. Exhibit "2" hereto accurately shows what happened to the prior bankruptcies, e.g., the first one being dismissed for failure to file a plan; the second one for failing to file a matrix, schedules and statement of financial affairs; the third one for failing to attend a § 341 meeting and make plan payments; and the fourth one for failure to make plan payments. See, copy of Defendant's chart attached as Exhibit "2".

During the period of November 4, 1991 through August 16, 1993, Debtors spent twenty-one out of thirty-three months in bankruptcy. MWC was employed the great majority of this time.

By original opinion entered January 23, 1995, this Court found that Defendant failed to meet its burden of proof to show that, under § 105(a), the Court should exercise its equitable powers to extend the time for Defendant's tax collection efforts, finding that Defendant could have attempted to show what, if anything, was collected on the priority debt through the previously-charted dismissed Chapter 13's; what collection efforts, if any, it undertook; how it was thwarted, if it was; when it was close to collection; what Debtors' employment status was during all pertinent times; etc.

Defendant filed a motion to alter or amend judgment, or for new trial, asking the Court for further opportunity to, in effect, reopen the record to address the proof deficiencies mentioned in the prior opinion. Such new trial was granted and additional evidence was taken on June 9, 1995. The additional evidence revealed the following.

In the four prior bankruptcies, Debtors made no payment on their 1987-88 IRS tax debt. With respect to the tax year 1987, the only credits reflected are either withholding tax credits in 1987 or 1988, or a $2,012 credit on February 24, 1992, which was an offset from Debtors' 1040 for 1991 (Exhibit "1"). With respect to the tax year 1988; the only credits are attributable to either withholding tax credit in 1988, or a $4,837.67 credit for April 15, 1988, as an offset from Debtors' 1040 for 1987, which was subsequently eliminated after the 1991 audit (Exhibit "2"). The Debtors' 1987-88 substantial tax liability arose from audit deficiencies for constructive dividends paid to MWC for which taxes were not paid, and which deficiencies were revealed by an IRS audit. Exhibit "12" shows the chronology of IRS notices to the Debtors. Debtors contend their bankruptcies were primarily motivated by attempts to save their home from foreclosure. However, Exhibit 12 shows that, likewise, on four...