In re Palmer
| Decision Date | 02 February 1999 |
| Docket Number | BAP No. 98-8056. |
| Citation | 228 BR 880 |
| Parties | In re James Curtis PALMER, Debtor. James Curtis Palmer, Plaintiff-Appellee, v. Internal Revenue Service, Defendant-Appellant. |
| Court | U.S. Bankruptcy Appellate Panel, Sixth Circuit |
ARGUED AND ON BRIEF: Karen A. Smith, U.S. DEPARTMENT OF JUSTICE, TAX DIVISION, Washington, D.C., for Appellant.
ARGUED AND ON BRIEF: Robert M. Whittington, Jr., ELK, ELK & WHITTINGTON, Akron, Ohio, for Appellee.
Before: RHODES, STOSBERG, and WALDRON, Bankruptcy Appellate Panel Judges.
Among the debts excepted from the discharge in Chapter 7 are tax debts accorded priority for distribution under 11 U.S.C. § 507(a)(8). 11 U.S.C. § 523(a)(1). This includes income tax debts shown on returns due within three years before bankruptcy. 11 U.S.C. § 507(a)(8)(A)(i). The Internal Revenue Service has appealed the bankruptcy court's determination that the Debtor's income tax debts for 1991 and 1992 are dischargeable because the debts were shown on returns due more than three years before the Debtor filed this bankruptcy petition. The bankruptcy court rejected the argument of the Internal Revenue Service that the Debtor's previous bankruptcy case tolled the three-year look-back period in 11 U.S.C. § 507(a)(8)(A)(i).
The Panel follows the overwhelming majority of the courts of appeals that have considered the issue and concludes that although the text of § 507(a)(8)(A)(i) supports the Debtor's position, the text should not be applied because it is at odds with the clear Congressional intent to provide the IRS with a full three-year opportunity to collect a tax debt before that tax debt becomes dischargeable in bankruptcy. Accordingly, the order of the bankruptcy court is REVERSED.
The issue on appeal is whether the threeyear look-back period in 11 U.S.C. § 507(a)(8)(A)(i) for priority income tax debts is tolled during a prior bankruptcy case filed by a debtor.
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. A "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "`ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). "Determinations of nondischargeability under § 523(a) are final orders for appeal purposes." Providian Bancorp v. Shartz (In re Shartz), 221 B.R. 397, 398 (6th Cir. BAP 1998) (citations omitted).
Conclusions of law are reviewed de novo. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629, 631 (6th Cir.1994). "De novo review requires the Panel to review questions of law independent of the bankruptcy court's determination." First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (6th Cir. BAP 1998) (citing In re Schaffrath, 214 B.R. 153, 154 (6th Cir. BAP 1997)). Whether the look-back period in § 507(a)(8)(A)(i) is tolled by a prior bankruptcy proceeding is a question of statutory interpretation and is reviewed de novo. West v. United States (In re West), 5 F.3d 423, 425 (9th Cir.1993), cert. denied, 511 U.S. 1081, 114 S.Ct. 1830, 128 L.Ed.2d 459 (1994).
On February 25, 1993, Palmer ("the Debtor") filed a Chapter 13 bankruptcy case disclosing federal income tax obligations for 1991 and 1992. The IRS filed an amended proof of claim for those taxes, asserting a priority claim of $5,116.30 and an unsecured claim of $79.89. The Debtor voluntarily dismissed that Chapter 13 case on June 1, 1995, before completing plan payments. The IRS received $861 on its priority claim.
On August 27, 1997, the Debtor filed the present case under Chapter 7, again disclosing his federal tax obligations for 1991 and 1992. The IRS again filed a proof of claim for those taxes, asserting a secured claim of $18,024.20, a priority claim of $1,348.45, and an unsecured claim of $180.69.
On September 5, 1997, the Debtor filed an adversary proceeding to determine the dischargeability of his 1991 and 1992 income taxes. The IRS filed a motion for summary judgment, arguing that these income taxes are nondischargeable priority taxes because Palmer's previous Chapter 13 bankruptcy tolled the three-year look-back period in § 507(a)(8)(A)(i). The bankruptcy court denied the motion for summary judgment, holding that the three-year look-back period would not be suspended unless there was misconduct by the Debtor. The bankruptcy court then conducted a trial and determined that there was no misconduct by the Debtor. Accordingly, the bankruptcy court held that the tax debt for 1991 and 1992 is dischargeable. The IRS appealed.
The Debtor argues that his 1991 and 1992 income tax debts are dischargeable because they were shown on returns due more than three years before he filed this Chapter 7 bankruptcy case under a plain meaning analysis of §§ 507(a)(8)(A)(i) and 523(a)(1). Section 507(a)(8)(A)(i) provides:
(a) The following expenses and claims have priority in the following order:
Section 523(a)(1) provides:
There is case authority applying the plain meaning of these provisions to reach the result that the Debtor seeks. See, e.g., Quenzer v. United States (In re Quenzer) 19 F.3d 163, 165 (5th Cir.1993); Nolan v. United States (In re Nolan), 205 B.R. 885, 887 (Bankr.M.D.Tenn.1997); Turner v. United States (In re Turner), 182 B.R. 317, 337 (Bankr.N.D.Ala.1995), adhered to on reconsideration, 195 B.R. 476 (Bankr.N.D.Ala. 1996); In re Macko, 193 B.R. 72, 74-75 (Bankr.M.D.Fla.1996); Clark v. Internal Revenue Serv. (In re Clark), 184 B.R. 728, 730 (Bankr.N.D.Tex.1995); Gore v. United States (In re Gore), 182 B.R. 293, 298-299 (Bankr.N.D.Ala.1995).
Some of these cases recognize that under this literal reading of these two sections, a debtor can file successive bankruptcies in a simple two-step maneuver to pay only a portion of the tax debt and make the balance dischargeable. First, when the IRS begins to collect an income tax debt shown on a return due within three years before filing a bankruptcy, the debtor files a Chapter 13 case to invoke the automatic stay against collecting the debt, and begins to pay the debt as a priority. See 11 U.S.C. § 1322(a)(2). Second, when more than three years have passed after the due date of the return, the debtor causes the dismissal of the Chapter 13 case and thereafter files a new bankruptcy case under Chapter 7. In this scenario, although the debtor may have partially paid the priority tax debt through the uncompleted Chapter 13 plan, the unpaid balance would be dischargeable in the Chapter 7 case under the plain meaning of §§ 507(a)(8)(A)(i) and 523(a)(1). In response to the possibility of manipulation by the debtor, at least some of the courts that apply the plain meaning of these provisions nevertheless hold the tax debt nondischargeable as a remedy for the debtor's abuse of process under 11 U.S.C. § 105. See, e.g., Nolan v. United States (In re Nolan), 205 B.R. 885, 887 (Bankr.M.D.Tenn.1997). The analysis in the above cases was followed by the bankruptcy court in this case.
A majority of courts have held that the plain meaning of the applicable provisions leads to an absurd result that is inconsistent with the clear Congressional intent to allow the IRS a full three years to collect an income tax debt before it become dischargeable. Waugh v. Internal Revenue Serv. (In re Waugh), 109 F.3d 489, 493 (8th Cir.) (collecting cases), cert. denied, ___ U.S. ___, 118 S.Ct. 80, 139 L.Ed.2d 38 (1997). Four other courts of appeals have also reached this result. In re Taylor, 81 F.3d 20, 25 (3rd Cir.1996); West, 5 F.3d at 426; United States v. Richards (In re Richards), 994 F.2d 763, 765-66 (10th Cir.1993); Montoya v. United States (In re Montoya), 965 F.2d 554, 558 (7th Cir.1992). See also Pagnac v. Minnesota Dept. of Revenue (In re Pagnac), 228 B.R. 219 (8th Cir. BAP 1998). These courts toll the three-year look-back period during the pendency of any previous bankruptcy. See also Hon. William H. Brown & Daniel A. Hawtof, Tolling the Three-Year Period for Discharge of Income Taxes: Is There Plain Meaning in § 507(a)(8)(A)(i)?, 18 Miss. C.L.Rev. 483 (1998).
The Supreme Court has stated that "the plain meaning of legislation should be conclusive, except in the `rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982), ...
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