Ripley, In re, 90-5558

• Decision Date: 05 March 1991
• Docket Number: No. 90-5558,90-5558
• Citation: 926 F.2d 440
• Parties: -692, 59 USLW 2618, 91-1 USTC P 50,150, 24 Collier Bankr.Cas.2d 1478, 21 Bankr.Ct.Dec. 683, Bankr. L. Rep. P 73,886 In re James and Dianne RIPLEY, Debtors. UNITED STATES of America, Plaintiff-Appellant, v. James and Dianne RIPLEY, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 440

926 F.2d 440

67 A.F.T.R.2d 91-692, 59 USLW 2618, 91-1

USTC P 50,150,

24 Collier Bankr.Cas.2d 1478, 21 Bankr.Ct.Dec. 683,

Bankr. L. Rep. P 73,886

In re James and Dianne RIPLEY, Debtors UNITED STATES of America, Plaintiff-Appellant, v. James and Dianne RIPLEY, Defendants-Appellees.

No. 90-5558.

United States Court of Appeals Fifth Circuit.

March 5, 1991.

Gary R. Allen, Chief, Janet Kay Jones, Gary D. Gray, Appellate Section, U.S. Dept. of Justice, Tax Div., Washington, D.C., Joseph A. Pitzinger, Linda C. Groves, Tax Div., Dept. of Justice, Dallas, Tex., for plaintiff-appellant.

Paul W. Rosenbaum, San Antonio, Tex., for defendants-appellees.

Appeal from the United States District Court for the Western District of Texas.

Before BROWN, SMITH and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

The government asks us to determine that the bankruptcy and district courts erred in disallowing a proof of claim filed by the Internal Revenue Service (IRS). Those courts held that where a self-employed individual is required to make estimated tax payments periodically throughout the tax year, the IRS's claims "become payable" not at the time the individual is required to file his tax return, but rather when those installment payments are due. The bankruptcy and district courts accordingly held that the IRS had missed the deadline for filing proofs of claims and that its claim thus was disallowed. Because we conclude that the IRS's claim "became payable" when the instant taxpayers were required to file their tax return, we reverse.

I.

The taxpayers are James Ripley, a self-employed oral surgeon, and his wife, Dianne. Self-employed individuals such as Ripley must pay a self-employment tax analogous to the Social Security tax imposed upon employers and their employees. ¹ Income tax obligations, of course, are also imposed upon self-employed individuals.

To collect both income and Social Security taxes, the IRS relies primarily upon employers to withhold certain amounts from employees' paychecks. See 26 U.S.C. Sec. 3102 (1989) (requiring employers to withhold Social Security taxes from employees' wages); 26 U.S.C. Sec. 3402 (1989) (requiring employers to withhold income taxes). However, in the case of a self-employed individual, the withholding mechanism is inapposite. Accordingly, the IRS employs an alternative collection scheme: the estimated tax payment procedure.

Under that scheme, individuals who do not fulfill their income and Social Security tax obligations through withholding ² estimate their tax liability and make four quarterly installment payments. 26 U.S.C. Sec. 6654 (Supp.1990). ³ Such taxpayers include a payment voucher (Form 1040-ES) with each installment. Although required to do so, the Ripleys apparently did not make any installment payments in 1987.

In November of that year, the Ripleys filed a petition in bankruptcy under Chapter 13 of the bankruptcy code. In the schedules accompanying their petition, the Ripleys indicated that the IRS held a priority claim of $21,000, which was to be paid in full under the proposed plan. ⁴ After the deadline for filing claims passed, the court confirmed the plan. The IRS did not file a claim before the deadline. ⁵

In May 1988 the Ripleys filed their tax return, which indicated that they owed $19,039 in taxes and $871 in penalties. At this point, the IRS filed a proof of claim, asserting entitlement to income and self-employment taxes for 1987. The IRS filed its claim pursuant to section 1305 of the Bankruptcy Code, which allows claimants to file proofs of certain claims that "become payable" after the commencement of the case. ⁶

The Ripleys objected to the IRS's claim, arguing that three-fourths thereof "became payable" before the commencement of the case and that thus the claim was presented too late. ⁷ More specifically, the Ripleys contended that the unpaid installment payments due following each of the first three quarters of 1987 were "payable" on those respective dates and thus were prepetition claims that could not be asserted under section 1305. ⁸

The bankruptcy court agreed with the Ripleys and rejected the proof of claim. The government unsuccessfully appealed to the district court pursuant to 28 U.S.C. Sec. 158(a) (Supp.1990).

II.

This matter turns upon the proper construction of Bankruptcy Code section 1305, which allows an entity to file a proof of claim "for taxes that become payable to a governmental unit while the case is pending." 11 U.S.C. Sec. 1305(a)(1) (1979). More specifically, the question is whether the taxes in question "became payable" when the Ripleys were required to file their tax return, or instead when the estimated tax installment payments were due. If the taxes became payable when the Ripleys were required to file their return, the IRS's proof of claim was properly filed under section 1305. If the taxes became payable when the installment payments were due, the claim was barred as untimely under rule 3002. ⁹

As a general rule, bankruptcy proceedings do not address postpetition claims: "The basic scheme of the Bankruptcy Code is to affect claims arising prior to the filing of the petition under title 11." 5 Collier on Bankruptcy p 1305.01 (L. King 15th ed. 1988) (footnotes omitted). ¹⁰ When such a claim arises, the entity possessing it usually will seek satisfaction of the debt outside of the bankruptcy proceedings. ¹¹

However, a certain limited number of such postpetition claims may become part of a chapter 13 plan. Section 1305 states that a proof of claim may be filed by an entity that holds a claim against the debtor (1) for "taxes that become payable to a governmental unit while the case is pending" or (2) that is a consumer debt arising after the order for relief. 11 U.S.C. Sec. 1305(a) (1979). This provision allows parties to satisfy their claims without waiting until the close of the case, when they would resort to non-bankruptcy law. ¹²

This court has never determined when taxes "become payable" for purposes of section 1305. However, the statutory language indicates that Congress intended to refer to those taxes that come due during the pendency of the case; in other words, taxes that have "become payable" are those that must be paid now. One might argue, however, that taxes that have "become payable" are those that are "able to be paid," in the sense that there comes a point at which the taxpayer is permitted (but not necessarily required ) to pay the tax, as if there were a magical date before which the government would not accept one's money but after which it would.

This argument ignores the customary usage of the word "payable" and the context of section 1305. According to a noted authority, "payable" means not only "[c]apable of being paid" but also "justly due" and "legally enforceable." Black's Law Dictionary 1128 (6th ed. 1990). The latter of these is the only reasonable meaning to be affixed to the word as it is used in section 1305. Black's continues, "A sum of money is said to be payable when a person is under an obligation to pay it. Payable ... normally means that the debt is payable at once." Id. ¹³

The use of the word "payable" in the law of commercial paper comports with our construction of that term in the instant context. When a negotiable instrument is "payable" to bearer or to order, the sum therein must be paid to the bearer or to the order of the person therein specified. See U.C.C. Secs. 3-110, 3-111.

The Ripleys do not disagree with our construction of the phrase "become payable" ¹⁴; instead they reject the government's contention that the taxes are not required to be paid until the tax return is required to be filed following the end of the taxable year. The Ripleys argue that the income and self-employment taxes became payable when the quarterly installment payments were due. ¹⁵ Rejecting this contention, we conclude that the Ripleys' 1987 income and self-employment taxes became payable on April 15, 1988, when their tax return was due.

The Internal Revenue Code of 1986 is the appropriate place to look in determining when taxes "become payable." Section 6151 states, "when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return ...." 26 U.S.C. Sec. 6151 (1989) (emphasis added). ¹⁶ This statutory provision reflects the annual nature of income and self-employment taxes. See Commissioner v. Sunnen, 333 U.S. 591, 598, 68 S.Ct. 715, 719-20, 92 L.Ed. 898 (1948) ("[i]ncome taxes are levied on an annual basis"); 26 U.S.C. Sec. 1401 (1988) (imposing self-employment tax "for each taxable year").

In addition, the IRS cannot seek immediate payment of an unpaid quarterly installment: It must wait until after the taxpayer has filed his annual tax return. See 26 U.S.C. Sec. 6201(b)(1) (1989). ¹⁷ Relatedly, the IRS cannot immediately seek collection of the penalty imposed for deficient installment payments.

Under the estimated tax payment procedure, the installment payments must total at least 90 percent of the tax eventually due or 100 percent of the tax paid in the prior year. Accordingly, to determine whether a particular installment payment was deficient (for purposes of calculating any addition to the tax), the IRS must wait until after the tax return is filed. ¹⁸ Moreover, the limitations period within which the IRS must assess a tax deficiency starts when the return is filed, not when the installment payment is due. See 26 U.S.C. Sec. 6501(a) (Supp. 1990) ("the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed").

Furthermore, the courts that have considered the issue have concluded that taxes "become payable" when the tax return is filed. In Pennetta, the...