In re Nolan
| Decision Date | 20 February 1997 |
| Docket Number | Adv. No. 96-0092A.,Bankruptcy No. 95-05708-KL3-7 |
| Citation | 205 BR 885 |
| Parties | In re Francis V. NOLAN, Jr., Debtor. Francis V. NOLAN, Jr., Plaintiff, v. UNITED STATES of America INTERNAL REVENUE SERVICE, Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Tennessee |
Isham B. Bradley, Brentwood, TN, for Debtor.
Martha J. Weber, Special Assistant United States Attorney, Nashville, TN, for Defendant.
The issue is whether the three year "look back" for the nondischargeability of taxes under 11 U.S.C. § 523(a)(1)(A)1 (incorporating 11 U.S.C. § 507(a)(8)(A)(i)2) is presumed or supplied by this debtor's prior bankruptcy case during the three year period. It is not. To prepare the government's equitable arguments for trial, it is also determined that federal income taxes for 1986 were a prepetition claim in the bankruptcy case filed by this debtor on February 9, 1987. The following are findings of fact and conclusions of law. FED.R.BANKR.P. 7052.
Francis V. Nolan, Jr. filed his first Chapter 7 petition on February 9, 1987. Nolan's 1986 tax return was due April 15, 1987. Nolan received an extension and eventually filed his 1986 tax return on October 19, 1989. The IRS made an assessment on December 4, 1989.3 On May 25, 1993, Nolan received a discharge.4
On August 18, 1995, Nolan filed his second Chapter 7 petition. In this adversary proceeding, Nolan argues for summary judgment that his federal income taxes for 1986 are dischargeable because 1986 taxes are now outside the three year "look back" in 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)(i). The government moved for summary judgment that the three year look back is tolled or extended by 11 U.S.C. § 108(c)5 for the period (and then some) during which Nolan was a debtor in the prior bankruptcy case or is enlarged by "equitable tolling" under 11 U.S.C. § 105(a).6
This complicated interaction between bankruptcy and tax law is now well worn by reported opinions. Two schools of thought have emerged:
1. A majority, including courts of appeals in the Third7, Seventh8, Ninth9 and Tenth10 Circuits toll or enlarge the time periods for the nondischargeability of taxes in § 507(a)(8)(A) based on a prior bankruptcy. Among these courts there are two theories — some rely on the extension of time provisions in § 108(c) of the Bankruptcy Code11; others invoke the equitable powers of bankruptcy courts under § 105(a).12
2. A minority of courts led by Bankruptcy Judge Benjamin Cohen in the Northern District of Alabama hold that the time periods in § 507(a)(8)(A) are statutory elements of the cause of action in § 523(a)(1) and are not automatically enlarged or tolled by a prior bankruptcy case.13 These courts recognize that equitable principles may supply or raise a presumption with respect to a timeliness element of the government's cause of action under § 523(a)(1), but only upon proof of debtor misconduct or abuse.
For the many reasons discussed by Judge Cohen in In re Turner, 182 B.R. 317 (Bankr.N.D.Ala.1995), adhered to on reconsideration, 195 B.R. 476 (Bankr.N.D.Ala. 1996), and In re Gore, 182 B.R. 293 (Bankr. N.D.Ala.1995), and by Judge Graves in In re Pastula, 203 B.R. 941 (Bankr.E.D.Mich. 1997), the three year look back for nondischargeability of taxes in § 507(a)(8)(A)(i) is not tolled or extended merely because the debtor had a prior bankruptcy case during that three year period. The arguments are summarized below.
The three year look back in § 507(a)(8)(A)(i) is a substantive element of the government's cause of action under § 523(a)(1)(A), not a statute of limitations.14 Ordinary principles of "equitable tolling" employed by many of the reported decisions are not applicable.15 This element of the government's cause of action can be supplied by a court applying equitable principles only upon proof of substantial debtor misconduct.16 The courts that have allowed "equitable tolling" without proof of debtor misconduct have mistaken the three year look back for a statute of limitations. If this debtor committed wrongful acts justifying the equitable relief sought by the IRS, 11 U.S.C. § 105 provides a remedy.17 Nothing in § 105 provides that remedy based only on a permitted bankruptcy filing18 during the three year period in § 507(a)(8)(A)(i).
Sections 523(a)(1)(A) and 507(a)(8)(A)(i) are not ambiguous. Resort to legislative history to support exceptions to or extensions of the three year look back is not appropriate. These fundamental bankruptcy tax provisions are the result of "`a series of carefully crafted compromises.'" In re Turner, 195 B.R. at 486 (quoting Community for Creative Non-Violence v. Reid, 490 U.S. 730, 748 n. 14, 109 S.Ct. 2166, 2177 n. 14, 104 L.Ed.2d 811 (1989)). Enlargement or tolling of the three years based on legislative history is not indicated because the statute as written leads to no absurd results.19
11 U.S.C. § 108(c) is not applicable by its own terms to this action under § 523(a)(1). Section 108(c) affects the expiration of some time periods under applicable "nonbankruptcy law." 11 U.S.C. § 523(a)(1) is not "nonbankruptcy law."20 The three year look back in § 507(a)(8)(A)(i) is not extended or tolled by § 108(c). That provisions of the Internal Revenue Code such as 26 U.S.C. § 650321 may be extended by 11 U.S.C. § 108(c)22 says nothing about the dischargeability in bankruptcy of taxes that have aged beyond the three years in § 523(a)(1) and § 507(a)(8)(A)(i).23
11 U.S.C. § 523(b)24 is unambiguous proof that Congress contemplated and empowered debtors to discharge taxes in successive bankruptcy cases. Notwithstanding the ruminations in some reported decisions,25 it is not plausible that Congress overlooked the possibility that debtors would file successive bankruptcy cases in which the automatic stay would interrupt the collection efforts of the IRS. Section 523(b) states that non-fraud taxes26 declared nondischargeable in a prior bankruptcy case can be discharged in a subsequent bankruptcy case. Section 523(b) necessarily contemplates more than one bankruptcy case and more than one automatic stay.
Section 523(b) is part of the complex balance of interests in the tax provisions of the Bankruptcy Code.27 The cross-reference in § 523(b) to § 523(a)(1) incorporates the cross-reference in § 523(a)(1) to § 507(a)(8)(A)(i). Put another way, the three year characteristic of a nondischargeable tax claim under § 523(a)(1) is directly implicated in § 523(b) analysis — when a taxpayer files successive bankruptcy cases, the three year look back is an element the government must prove to establish the nondischargeability of taxes in the last filed case. Courts that have been quick to find "equitable" exceptions to the counting of the three year look back in § 507(a)(8)(A)(i) have not addressed the conflict this creates with the logic and plain language of § 523(b).
If Congress intended to except the duration of a prior bankruptcy case from the three year period in § 507(a)(8)(A)(i) and yet to allow the discharge of (non-fraud) taxes in a subsequent bankruptcy case based on the passage of time — a clear legislative statement of this intent would be found somewhere in §§ 523(b), 523(a)(1) or 507(a)(8)(A)(i). The government's position that a bankruptcy filing during the three year period defeats § 523(b) without regard to taxpayer fraud or misconduct is materially inconsistent with the statutory scheme that the passage of time changes nondischargeable (non-fraud) taxes into dischargeable claims in successive bankruptcy cases.
11 U.S.C. § 507(a)(8)(A)(i) specifically states the circumstances under which the three year look back is tolled or extended; it is inappropriate for courts to read a different extension provision into a statute that already contains an extension rule. The three year period in § 507(a)(8)(A)(i) is counted from the "last due date . . . including extension." This debtor received an extension of the due date for his 1986 tax return in 1987. The three year counting for priority and nondischargeability was accordingly shifted in time by the statute itself. If Congress also intended to automatically suspend the three year look back for any period during which the taxpayer was a debtor in a prior bankruptcy case it would have said so.
The immediately adjoining subsection of the Bankruptcy Code — § 507(a)(8)(A)(ii)28 — also contains a special statutory rule for the counting of the 240 day period in that section. The 240-days in § 507(a)(8)(A)(ii) are suspended for any period during which "an offer in compromise" is pending between the taxpayer and the IRS. The proximity of this specific counting rule demonstrates again that Congress focused on the need for some extensions and tolling of the time periods in § 507(a)(8). The precision with which Congress crafted the balance between the dischargeability of taxes and the collection needs of the government in § 507(a)(8)(A)(i) and (ii) argues strongly against judicial tinkering with the counting rules in these subsections.
There is evidence elsewhere in § 523 that Congress knows how to build precise extension provisions into the definitions of nondischargeable claims that include time periods. In 11 U.S.C. § 523(a)(8) Congress declared nondischargeable student loans that were first due within seven years before a bankruptcy filing. Excluded by law from the counting of this seven year period is any "suspension of the repayment period." 11 U.S.C. § 523(a)(8)(A). See also 42 U.S.C. § 292f(g) (HEAL loans). The courts have recognized that the broad suspension language in § 523(a)(8)(A) extends or tolls the seven year period for time spent by the borrower in a prior bankruptcy case.29
There is no analog to the broad extension provision in § 523(a)(8)(A) in § 523(a)(1) or in § 507(a)(8)(A)(i). Instead there is only the narrow expansion of the three years in § 507(a)(8)(A)(i) to reflect...
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