In re Ryan
| Decision Date | 23 September 1987 |
| Docket Number | Bankruptcy No. 1-86-00711. |
| Citation | 78 BR 175 |
| Parties | In re Marshall Andrew RYAN, Hazella Margarita Ryan, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Harold L. North, Jr., of Ray & North, P.C., Chattanooga, Tenn., for debtors.
Gregory L. Nelson, Dept. of Justice, Tax Div., Washington, D.C., for the U.S.
While the debtors were in an earlier chapter 13 case, the Internal Revenue Service determined that they owed additional income tax for years before they filed the chapter 13 case and for years during the chapter 13 case. The debtors paid some of the additional tax under their chapter 13 plan. After they completed the plan and received a discharge, the IRS informed them that it would try to collect the remaining unpaid taxes. That led the debtors to file this chapter 13 case.
The debtors argue that the additional income tax for the years 1977-1980 was a prepetition debt that was discharged in their earlier chapter 13 case. The IRS argues that since the taxes were not assessed until after the filing of the earlier chapter 13 petition, they could not have been discharged unless the IRS in fact received payments under the plan.
The parties stipulated the facts but the court has restated them below with minor additions.
The debtors filed a chapter 13 petition in September, 1981. The IRS was not scheduled as a creditor, but it was sent notice of the case because the clerk's office routinely sent the IRS notice of all bankruptcy cases. The notice form was different from the form sent to the IRS when it was scheduled as a creditor in a chapter 13 case.
The debtors' chapter 13 plan provided for full payment in deferred cash payments of all allowed claims entitled to priority under Bankruptcy Code § 507 and of all nonpriority unsecured claims. These provisions would have covered all priority and nonpriority unsecured tax claims. The plan was confirmed in October, 1981. About two years later, while the debtors were still carrying out the confirmed plan, the IRS assessed against them 1982 income tax in the amount of $1,401.00. The IRS filed a proof of claim for this amount and it was paid under the debtors' chapter 13 plan.
In 1984, while the debtors were still carrying out the plan, the IRS assessed against them 1978 income tax in the amount of $1,397.00 and 1983 income tax in the amount of $1,469.00. The IRS did not file a proof of claim for either of these amounts and was not paid under the chapter 13 plan.
Also in 1984, the IRS notified the debtors of the following tax deficiencies (additional tax claimed to be owed):
1977 $1,180.00
1979 $1,758.00
1980 $1,563.00
1981 $1,665.00
The IRS did not file a proof of claim for any of these amounts and was not paid under the debtors' chapter 13 plan.
In summary, during the earlier chapter 13 case the IRS assessed and was not paid additional income tax for 1978 and 1983 totaling $2,866. The IRS also notified the debtors of additional tax owed for 1977-1981 but did not assess these taxes against the debtors, did not file a proof of claim, and was not paid.
The IRS determined that the additional taxes were owed by auditing the debtors' tax returns and disallowing deductions for travel and medical expenses. The debtors had filed all the tax returns on time. The IRS has not assessed any penalties for fraud or negligence.
The debtors completed the plan and received a discharge in July, 1985. The IRS later notified them that it intended to collect all the unpaid taxes.
The debtors filed another chapter 13 case on April 1, 1986. They scheduled the IRS as a priority creditor for $5,151.10, which is apparently the total of the assessed taxes for 1978 and 1983 plus interest and penalties. For some reason, they did not include the taxes for 1977-1981 despite having been notified that they were owed. These taxes should have been scheduled even though not assessed. The IRS assessed the taxes shortly after the debtors filed their chapter 13 petition even though this violated the automatic stay of Bankruptcy Code § 362(a)(6). 11 U.S.C. § 362(a)(6). The taxes as assessed reduced the 1977 tax debt to $1,023.03 to take account of payments by the debtors.
The debtors' chapter 13 plan provides for direct payment to all creditors except the IRS. The other creditors are secured by the debtors' car and home, except for an approximate $100 debt to a local department store. The plan provides for full payment in deferred cash payments of all priority claims.
The IRS filed a priority claim for $17,251.06. It adds interest and penalties totaling $8,219.06 to the taxes for 1977-1981 and 1983 totaling $9,032.00. The claim failed to take account of the payments on the 1977 taxes. The IRS amended the claim to reduce the 1977 tax and delete the interest on the 1977 tax. This left the total claim at $15,607.06.
The trustee requested a modification of the plan to increase the amount of payments because the plan was not feasible in light of the amount of the IRS's claim and the proposed payments of $25 per week. The payments were increased to $71.25 per week.
The debtors objected to the IRS's claim on the ground that most of the tax debts were discharged in their earlier chapter 13 case. That is the question now before the court.
The 1977-1980 taxes in question were a prepetition debt in the debtors' first chapter 13 case. The tax years had ended, and the debtors had filed their returns for 1977-1980 before they filed their chapter 13 petition in September, 1981. The taxes were a prepetition debt even though the IRS could not determine that they were owed until it did a postpetition audit of the debtors' tax returns. 11 U.S.C. §§ 507(a)(7), 502(i) & 101(4), (11); In re Easton, 59 B.R. 714 (Bankr.C.D.Ill.1986); In re Overly-Hautz Co., 57 B.R. 932, 14 Coll.Bankr.Cas.2d 360 (Bankr.N.D.Ohio 1986); In re Starkey, 49 B.R. 984 (Bankr. D.Colo.1984); In re Pennetta, 19 B.R. 794, 8 Bankr.Ct.Dec. 1286, 6 Coll.Bankr.Cas.2d 462 (Bankr.D.Colo.1982); S. 2266, 95th Cong.2d Sess. § 346 (1978) (), S.Rep. No. 1106, 95th Cong.2d Sess. 7-8 (1978) (explanation of definition); 124 Cong.Rec. H 11109 (daily ed. Sept. 28, 1978) (Rep. Edwards) (explanation of deletion of definition); 124 Cong. Rec. S.17430 (daily ed. Oct. 6, 1978) (Sen. DeConcini) (explanation of deletion of definition).1
In a chapter 7 liquidation case, certain taxes are specifically excepted from discharge. 11 U.S.C. § 523(a)(1) & § 727. In a chapter 13 case, however, these same taxes may be discharged. Section 1328(a) provides that the discharge after completion of a chapter 13 plan discharges all debts provided for in the plan, except family support debts and long-term debts not intended to be fully dealt with by the plan. 11 U.S.C. § 1328(a).
In order for a debt to be provided for in a plan, the debtor is not required to schedule it exactly. It can be scheduled in a disputed or estimated amount. There are postpetition and postconfirmation procedures for determining the exact amount, including the exact amount of tax claims. The plan itself does not have to specifically name the governmental creditor in order to provide for an unsecured tax claim. It is sufficient if the plan provides for full payment of priority unsecured claims and payment of some percentage on nonpriority unsecured claims. The amounts and classes of the claims will be determined from the proofs of claims that are filed.
In summary, if a governmental unit is scheduled as a creditor holding an unsecured tax claim in an estimated or disputed amount, the claim is effectively provided for in the plan, since the plan will always provide for full payment of priority claims and will make some provision for all general unsecured claims. 11 U.S.C. §§ 1322(a)(2) & 1325(a)(1), (4). The debt will be discharged if the debtor completes the plan.
Furthermore, the debt will be discharged if it is not paid as provided in the plan as a result of the creditor's failure to file a timely proof of claim. Discharge requires only that the debt be provided for in the plan and the debtor complete the plan. Actual payment of the debt as provided in the plan depends on the filing of a proof of claim, which is the creditor's obligation.
This was what happened to the IRS's tax claim in In re Richards, 50 B.R. 339 (E.D. Tenn.1985); accord In re Goodwin, 58 B.R. 75 (Bankr.D.Me.1986). The debt was provided for in the plan as a priority or general unsecured claim or both, but the IRS did not receive payments because it did not file a timely proof of claim. The debtors completed the plan and received a discharge. When the IRS tried to collect the tax debt later, the debtors brought suit. This court held that the tax debt had been discharged and the district court affirmed.
The IRS does not contend that Richards was entirely a wrong decision. The IRS in effect argues that Richards only applies to taxes that the IRS already knows are owed when the debtor files a chapter 13 petition.
In a chapter 7 liquidation case, if the IRS wants to receive payment from the bankruptcy estate, it must file a timely proof of claim. This rule applies to a claim for prepetition taxes that the IRS has not assessed before filing of the chapter 7 petition. The IRS is forced to do an audit in time to file a proof of claim if it wants to share in the assets of the bankruptcy estate. For many years the law has given the government, and only the government, the specific right to an extension of time to file a proof of claim, so that it can complete an audit rather than file an erroneous claim. 11 U.S.C. § 93(n) (1978); Bankr. Rule 302 (1982); 3 L. King, Collier on Bankruptcy § 57.30 (14th ed. 1977); Bankr. Rule 3002(c); In re Butcher, 74 B.R. 211, 16 Bankr.Ct.Dec. 47 (Bankr.E.D.Tenn. 1987).
Of course, in a chapter 7 case the failure to file a proof of claim may be less costly than in a chapter 13 case,...
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