Matter of Pastula

• Decision Date: 07 January 1997
• Docket Number: Bankruptcy No. 95-49865-G.
• Citation: 203 BR 941
• Parties: In the Matter of Mark E. PASTULA and Pamela Pastula, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

203 B.R. 941 (1997)

In the Matter of Mark E. PASTULA and Pamela Pastula, Debtors.

Bankruptcy No. 95-49865-G.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

January 7, 1997.

Terri M. Weik, Birmingham, MI, David Einstandig, Thav, Gross, Steinway & Bennett, P.C., Birmingham, MI, for Debtors.

Joan J. Fahlgren, Special Assistant U.S. Attorney, Detroit, MI.

David Ruskin, Chapter 13 Trustee, Southfield, MI.

MEMORANDUM OPINION FINDING DEBTORS' TAX DEBT DISCHARGEABLE

RAY REYNOLDS GRAVES, Bankruptcy Judge.

Introduction

This matter comes before this court upon the objection of debtors Mark E. Pastula and Pamela Pastula (debtors) to a particular proof of claim filed by the Internal Revenue Service (IRS). At issue is whether the pendency of debtors prior Chapter 13 bankruptcy served to suspend the running of the three year look-back period within which the IRS must collect overdue taxes under 11 U.S.C. § 507(a)(7)(A)(i) and 11 U.S.C. § 523. The debtors first bankruptcy case was dismissed after the expiration of the three year period. The proof of claim filed by the IRS in the instant Chapter 13 bankruptcy proceeding includes unpaid tax liabilities due and owing prior to the three year look-back period. It is the inclusion of this tax claim that is the gravamen of the dispute before this court.

In May of 1992, the debtors filed their 1989, 1990 and 1991 federal income tax returns. The debtors' taxes for the aforementioned years were assessed during the months of May and June of 1992 and amounted to more than $11,000.00 in tax liabilities and penalties.

Facts

On July 21, 1992 the debtors filed for bankruptcy protection pursuant to Title 11, Chapter 13 of the Bankruptcy Code,¹ (the "first bankruptcy case"). Under the plan, the debtors were ordered to submit 60 monthly payments of $546.01 to the Trustee which would have eventually totaled $33,840.60. In the first bankruptcy case, the debtors regarded the IRS as a creditor entitled to a $10,000 priority claim and a general unsecured claim of $3,297.66.² In that same month, three years later, on July 26, 1995 the debtor's first bankruptcy case was dismissed. Upon dismissal, the debtors had only paid $11,195.28 of the total claim of $33,840.60.

By September 15, 1995 the debtors had filed a subsequent Chapter 13 bankruptcy petition and plan (the "second bankruptcy case"). In the second bankruptcy case, the debtors regarded the IRS as a creditor entitled to a priority claim amounting to $11,837.00 for tax years 1992, 1993 and 1994; and an unsecured claim amounting to $20,386.00 for tax years 1989, 1990 and 1991. On December 11, 1995 the IRS filed a proof of claim in the second bankruptcy case asserting a priority claim of $34,747.01 for tax years 1989 through 1994. The 1989 through 1991 tax liability represents $11,059.18 of the asserted priority claim in the case at bar, exclusive of interest (the "disputed claim").

On January 5, 1996 the debtors filed an objection to the IRS's December 11, 1995 proof of claim asserting that the disputed claim is dischargeable and does not fall under the purview of 11 U.S.C. § 523(a)(7)(B) of the Bankruptcy Code. Therefore, Debtors argue that the claim should be relegated to a Class VIII general unsecured claim status pursuant to 11 U.S.C. § 507(a)(8)(A)(i) of the Bankruptcy Code. Subsequently, on February 15, 1996 the IRS reduced the debtors 1994 tax liability from $10,000.00 to $251.00,³ this reduction has no impact upon the case sub judice. Moreover, on that same date, the debtors second bankruptcy case was confirmed. The Order Confirming Plan indicated that the IRS is to be regarded by the debtors as having an unsecured priority claim in the amount of $11,837.00 and that any surplus amount determined to be a priority claim will not be discharged and will survive the plan.

The IRS seeks to determine whether the three year look-back period of both § 523(a)(7)(B) and § 507(a)(8)(A)(i) is tolled during the pendency of debtors' first bankruptcy case with regard to the disputed claim, when the debtors' second bankruptcy case was filed after the expiration of the three year period. It is the IRS' contention that Internal Revenue Code § 6503(b) and (h) in cooperation with Bankruptcy Code § 108(c), serve to toll and extend the priority period beyond the three year period set forth in 11 U.S.C. § 507, thus, the disputed claim is not dischargeable.

Discussion

The interpretation of Bankruptcy Code Sections 11 U.S.C. 108(c), 507(a)(8)(A)(i), and 523(a)(7)(B) along with Internal Revenue Code (I.R.C.) § 6503(b) and (h), is the issue of primary dispute. A three year priority period for collecting delinquent taxes is established pursuant to 11 U.S.C. § 507(a)(8)(A)(i). After the expiration of the three year priority period, taxes remaining uncollected are discharged under § 523(a)(7)(B), which sets forth a three year period of limitation on tax collection. Both periods run concurrently. These provisions together, provide for the discharge of tax obligations where the last date on which the tax return could have been filed, lies outside the three years of the filing date for bankruptcy. In re Brickley, 70 B.R. 113, 114 (9th Cir. BAP 1986). Often working in conjunction with the aforementioned Code provisions is § 108(c) which suspends certain nonbankruptcy statutes of limitation on actions against a debtor engaged in a bankruptcy proceeding.

In the same vein, section 6503(b) and (h) of the Internal Revenue Code (I.R.C.) suspends the limitation period contained in § 6502 (a non-bankruptcy limitation period), within which the IRS must collect overdue tax obligations, against a debtor in bankruptcy, during the pendency of the debtors bankruptcy case and for six months after the debtor's Bankruptcy case is dismissed or otherwise ended. In re West, 5 F.3d 423, 424 (9th Cir.1993).

I.

The IRS first argues that this court should incorporate the meaning of the tolling provision contained in I.R.C. § 6503(b) or (h) into the Bankruptcy Code tolling provision of § 108(c), resulting in the suspension of the three year priority period during the pendency of the debtors' first bankruptcy case.⁴

The relevant portions of the Bankruptcy Code state as follows:

108. Extension of Time . . .

(c) Except as provided in § 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under § 1201 or § 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of —

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) 30 days after notice of the termination or expiration of the stay under §§ 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

507. Priorities

(a) The following expenses and claims have priority in the following order . . .

(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for —

(A) a tax on or measured by income or gross receipts —

(i) for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or . . .

523. Exceptions to discharge.

(a) A discharge under §§ 727, 1141, 1228a, 1288(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

. . . . .

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty —

. . . . .

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;

The bankruptcy related provisions at issue of the I.R.C. are 26 U.S.C. 6503(b) and (h) which state in relevant part:

6503. Suspension of running of period of limitation . . .

(b) Assets of taxpayer in control or custody of court. — The period of limitations on collection after assessment prescribed in § 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States or of any State or of the District of Columbia, and for 6 months thereafter.

(h) Cases under title 11 of the United States Code — The running of the period of limitations provided in §§ 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and —

(1) from assessment, 60 days thereafter, and

(2) for collection, 6 months thereafter.

II.

In the alternative, the IRS argues that although the relevant Code provisions do not explicitly state that the look-back periods are suspended during a prior bankruptcy case, but rather the court must go beyond the plain language of the statutes in order to comply with the Legislative intent underlying the Bankruptcy Code. The IRS maintains that the legislative history of the Bankruptcy Code implies that Congress intended for the IRS to have a full and unimpeded three years within which to collect due and owing taxes.

III.

The Debtors, on the other hand, maintain that the three year period has continuously run against the government even during their first...