Kolve v. Internal Revenue Serv. (In re Kolve)

• Decision Date: 22 September 2011
• Docket Number: Bankruptcy No. 10–18348–7.,Adversary No. 11–63.
• Citation: 2011 USTC P 50639,108 A.F.T.R.2d 2011,459 B.R. 376
• Parties: In re Duane Joseph KOLVE and Angela Susan Kolve, Debtors.Duane Joseph Kolve and Angela Susan Kolve, Plaintiffs, v. Internal Revenue Service, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

108 A.F.T.R.2d 2011-6415

2011-2 USTC P 50,639

459 B.R. 376

In re Duane Joseph KOLVE and Angela Susan Kolve, Debtors.Duane Joseph Kolve and Angela Susan Kolve, Plaintiffs,

v.Internal Revenue Service, Defendant.

Bankruptcy No. 10–18348–7.

Adversary No. 11–63.

United States Bankruptcy Court, W.D. Wisconsin.

Sept. 22, 2011.

Peter E. Grosskopf, Eau Claire, WI, for Plaintiffs.

LaQuita Taylor–Phillips, Washington, DC, for Defendant.

DECISION AND ORDER

THOMAS S. UTSCHIG, Bankruptcy Judge.

This is an action to determine whether certain tax obligations are dischargeable. The plaintiffs seek judgment on the pleadings and the parties have fully briefed the matter to the Court. Based upon the submissions, the Court shall treat the matter as one for summary judgment.¹ Summary judgment is appropriate where there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). The existence of a minor factual dispute or discrepancy does not render a summary judgment motion deficient; instead, summary judgment is to be denied only if there is a “ genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When deciding whether there is a genuine issue of material fact, all facts are construed in the light most favorable to the non-moving party, and all reasonable inferences are drawn in favor of that party. Heft v. Moore, 351 F.3d 278, 282 (7th Cir.2003); see also Schuster v. Lucent Techs., Inc., 327 F.3d 569 (7th Cir.2003). The Court conducted a telephonic hearing on August 15, 2011. Peter E. Grosskopf appeared on behalf of the plaintiffs, and LaQuita Taylor–Phillips appeared on behalf of the defendant. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.

The debtors filed this case on November 12, 2010. They had previously filed a chapter 13 case in October of 2005. Their plan in that case was confirmed in February of 2006. Unfortunately, the case was subsequently dismissed in October of 2007 prior to the completion of the plan payments. The debtors concede that they still owe individual income taxes for 2005, 2006, and 2007, as well as so-called “trust fund” taxes. The debtors acknowledge that the trust fund taxes and the 2007 income taxes are nondischargeable. However, they seek to discharge the income taxes for 2005 and 2006. Those claims amount to approximately $61,000.00.

Section 523(a)(1) of the bankruptcy code provides that taxes which are afforded priority status under § 507(a)(8) are nondischargeable in a chapter 7 case. As a result, a chapter 7 debtor cannot discharge tax liabilities owed in connection with a tax return that was due within three years of the bankruptcy petition. See 11 U.S.C. § 507(a)(8)(A)(i). This period is typically referred to as the “three-year lookback period.” See Young v. United States, 535 U.S. 43, 46, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002). The lookback period essentially functions as a statute of limitations. Id. at 47, 122 S.Ct. 1036 (“The lookback period is a limitations period because it prescribes a period within which certain rights (namely, priority and nondischargeability in bankruptcy) may be enforced.”). The provision “encourages” the IRS to take action, whether it be to collect the debt or perfect a tax lien, and if the government sleeps on those rights, they are lost. Id.

Because the debtors initially requested extensions of time to file both their 2005 and 2006 returns, those returns were due on October 15, 2006, and October 15, 2007, respectively. The lookback period of 507(a)(8)(A)(i) is defined by the filing of “the” petition, which in this case occurred in November of 2010. See Cal. Franchise Tax Board v. Kendall (In re Jones), No. 10–60000, 2011 WL 2685582, at *2 (9th Cir. July 12, 2011) (the three-year lookback period “must be the period preceding [the debtor's] Chapter 7 petition”). Even taking into account the requested extensions, the 2005 and 2006 returns were due more than three years before the filing date; as such, the debtors contend that the tax claims are dischargeable. The IRS disagrees. The IRS believes that the debtors' prior chapter 13 case operates to alter the calculation of the lookback period and precludes the discharge of its claims in this case.

The essential point of disagreement is the application of an unnumbered tolling provision found at the end of § 507(a)(8). This provision suspends the lookback period under certain circumstances, more particularly described as follows:

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title

or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days (emphasis added).

The parties agree that Congress added this provision to the code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 in order to statutorily codify the Supreme Court's decision in Young that the lookback period was subject to equitable tolling during the pendency of a debtor's previous bankruptcy. The IRS believes that under this tolling provision, the lookback period must be extended because the taxes came due during the pendency of the prior case. Specifically, the IRS contends that the lookback period for the 2005 taxes should be tolled for 459 days (for the period from October 15, 2006, until the dismissal of the case, plus 90 days), while the lookback period for the 2006 taxes should be tolled for 94 days. According to the IRS, this means that the three-year lookback period begins on January 17, 2008, and this case was filed within three years of that date, rendering the taxes nondischargeable.

The debtors do not appear to take issue with these calculations per se. However, they dispute the applicability of the tolling provision itself. The debtors read the statute as authorizing tolling only if the automatic stay was in fact in effect as to a particular claim. The debtors argue that because the taxes came due after the filing of the prior case, the automatic stay did not preclude the IRS from attempting to collect the taxes. In this regard, they note that § 362(a)(8) only prohibits the commencement or continuation of a proceeding for taxes “for a taxable period ending before the date of the order for relief.” This does raise an interpretive question, in that in Young the Court was clearly concerned about the effect of the prior case on the IRS's ability to pursue its claim. As the Court stated:

The Youngs' Chapter 13 petition erected an automatic stay under § 362, which prevented the IRS from taking steps to protect its claim. When the Youngs filed a petition under Chapter 7, the three-year lookback period therefore excluded time during which their Chapter 13 petition was pending. The Youngs' 1992 tax return was due within that three-year period. Hence the lower courts properly held that the tax debt was not discharged when the Youngs were granted a discharge under Chapter 7.

535 U.S. at 50, 122 S.Ct. 1036. The notion of equitable tolling contemplated by Young is clearly limited to instances in which the IRS was actually “disabled” from protecting its claim, as it was the “period of disability” which tolled the lookback period. Id. at 50–51, 122 S.Ct. 1036.

Determining if the statutory provision is similarly limited depends upon the language of the statute itself. As anyone familiar with statutory interpretation likely knows by heart, courts are obligated to apply statutes in accordance with their “plain meaning.” See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 112 S.Ct. 1146, 117 L.Ed.2d 391, 397–98 (1992) (“courts must presume that a legislature says in a statute what it means and means in a statute what it says there”); United States v. Ron Pair Enters., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (“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.’ ”). The IRS offers a reading of the statute which simply tolls the lookback period for any amount of time there was “a” stay of proceedings in a prior case, whether that stay applied to preclude collection by the IRS or not.

Parsing the tolling language of § 507(a)(8) does raise some interesting linguistic issues. For example, in its briefs the IRS suggests that the lookback period should be deemed to have “begun” in January of 2008. But the lookback period is calculated backwards from the petition date. See 11 U.S.C. § 507(a)(8)(A)(i) (which focuses on taxes for which returns were last due “after three years before the date of the filing of the petition ” (emphasis added)). The tolling provision applies to “an otherwise applicable time period” specified in the section, and says that such periods are “suspended” for the referenced reasons. Perhaps a better word might have been “extended,” as that is the intended effect of the provision: it extends the lookback period on specific grounds, allowing the priority and nondischargeability of tax claims to reach further and further into the past. ²

When focusing on only those portions of the tolling provision which are relevant to this case, the statutory language essentially reads as follows: an otherwise applicable time period shall be suspended for any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of one or...