Waugh, In re

• Citation: 109 F.3d 489
• Decision Date: 26 March 1997
• Docket Number: No. 95-3928,95-3928
• Parties: -1604, 97-1 USTC P 50,304, 37 Collier Bankr.Cas.2d 1421, Bankr. L. Rep. P 77,331 In re William Winston WAUGH, Debtor. William Winston WAUGH, Plaintiff--Appellant, v. INTERNAL REVENUE SERVICE, Defendant--Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 489

109 F.3d 489

79 A.F.T.R.2d 97-1604, 97-1 USTC P 50,304,

37 Collier Bankr.Cas.2d 1421,

Bankr. L. Rep. P 77,331

In re William Winston WAUGH, Debtor.

William Winston WAUGH, Plaintiff--Appellant, v. INTERNAL REVENUE SERVICE, Defendant--Appellee.

No. 95-3928.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 24, 1996.

Decided March 26, 1997.

Richard H. Bins, Rochester, MN, argued for plaintiff-appellant.

Gary D. Gray, Dept. of Justice, Washington, DC, argued for defendant-appellee.

Before WOLLMAN, FLOYD R. GIBSON, and BEAM, Circuit Judges.

FLOYD R. GIBSON, Circuit Judge.

This appeal concerns the issue of whether the priority period of 11 U.S.C. § 507(a)(8)(A)(i) (1994), ¹ is suspended or tolled during the pendency of a Chapter 7 debtor's prior bankruptcy proceedings. We hold that it is and therefore affirm the district court judgment.

I. BACKGROUND

Appellant William Winston Waugh filed a tax return for the 1987 tax year by the April 15, 1988 deadline. However, Waugh failed to remit the tax due to the Internal Revenue Service (IRS). On July 1, 1988, Waugh filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Western District of Washington. The court converted Waugh's Chapter 13 case to a Chapter 11 case on September 15, 1988. On July 27, 1990, the bankruptcy court revoked Waugh's Chapter 11 plan. Waugh appealed the revocation, but on February 6, 1991, the court finally dismissed his Chapter 11 plan. From July 1, 1988, until February 6, 1991, the automatic stay prevented the IRS from collecting Waugh's 1987 taxes. See 11 U.S.C. § 362(a)(6) (1994).

Waugh filed a Chapter 7 bankruptcy petition on May 9, 1991, and received his discharge on August 27 of the same year. Waugh received a refund of $11,019 for the 1993 tax year, which he directed the IRS to apply to his 1989 tax liability along with a cash payment of $847. However, the IRS applied the refund and the cash payment to Waugh's outstanding 1987 tax liability. On June 8, 1994, the IRS served Waugh with Notices of Intent to Levy upon his outstanding 1987 and 1989 tax liabilities. ² Waugh commenced an adversary proceeding on September 9, 1994, seeking a declaratory judgment that his 1987 tax liability was discharged in his Chapter 7 bankruptcy proceeding. Waugh filed a motion for summary judgment claiming that his 1987 tax liability should have been discharged in his Chapter 7 bankruptcy proceeding because the priority period of section 507(a)(8)(A)(i) was not suspended during his prior bankruptcy cases. The IRS likewise filed a motion for summary judgment contending that because the automatic stay prohibited the IRS from collecting Waugh's 1987 tax during the prior bankruptcy proceedings, the priority period of section 507(a)(8)(A)(i) should have been suspended. The bankruptcy court ³ adopted the majority position on this issue and held that because the priority period of section 507(a)(8)(A)(i) was suspended during Waugh's prior bankruptcy proceedings, his 1987 tax liability was nondischargeable in his subsequent Chapter 7 proceeding. The district court ⁴ affirmed the bankruptcy court's decision, and Waugh appeals. For the reasons set forth below, we affirm.

II. DISCUSSION

This Court sits as a court of second review in bankruptcy cases and therefore applies the same standard of review as the district court. See Southern Technical College, Inc. v. Hood, 89 F.3d 1381, 1383 (8th Cir.1996). We review the bankruptcy court's grant of summary judgment de novo. See id. Therefore, "[i]f the record shows that there is no genuine issue of material fact and that the prevailing party is entitled to judgment as a matter of law, we will affirm the grant of summary judgment." Id. (citations omitted).

On appeal, Waugh contends that his 1987 tax liability was discharged in his Chapter 7 bankruptcy proceeding because the three-year priority period of 11 U.S.C. § 507(a)(8)(A)(i) (1994), and the three-year dischargeability period of 11 U.S.C. § 523(a)(1)(A) (1994), were not suspended or tolled during his prior bankruptcy proceedings. The IRS counters that Waugh's 1987 tax liability was not discharged in his Chapter 7 proceeding because 11 U.S.C. § 108(c) (1994) and 26 U.S.C. § 6503(b) and (h) (1994), operate to suspend the three-year priority period of section 507(a)(8)(A)(i) during the pendency of bankruptcy proceedings.

Ordinarily, in a Chapter 7 proceeding, calculating which tax debts are dischargeable is a relatively simple process. See 11 U.S.C. §§ 523(a)(1)(A), 507(a)(8)(A)(i) (1994). Section 523(a)(1)(A), ⁵ by reference to section 507(a)(8)(A)(i), ⁶ provides that taxes for which the return was due more than three years prior to a bankruptcy filing are dischargeable. Because Waugh's 1987 tax return was due April 15, 1988, Waugh's 1987 tax liability would have become dischargeable on April 15, 1991. Therefore, when Waugh filed his Chapter 7 bankruptcy petition on May 9, 1991, his 1987 tax liability could have been discharged. However, Waugh's previous bankruptcy filings complicate this usually simple calculation. The IRS contends that because the automatic stay prevented the IRS from collecting Waugh's 1987 taxes during his prior bankruptcy proceedings, see 11 U.S.C. § 362(a)(6) (1994), ⁷ the priority period of section 507(a)(8)(A)(i) should have been tolled during those prior proceedings. We agree.

This case illustrates the competing interests Congress sought to balance when drafting the Bankruptcy Code:

A three-way tension thus exists among (1) general creditors, who should not have the funds available for payment of debts exhausted by an excessive accumulation of taxes for past years; (2) the debtor, whose "fresh start" should likewise not be burdened with such an accumulation; and (3) the tax collector, who should not lose taxes which he has not had reasonable time to collect or which the law has restrained him from collecting.

S.Rep. No. 95-989, at 14 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5800. To satisfy the interests of the "tax collector," Congress extended a three-year priority period to tax collecting authorities. Id. Although a debtor is permitted to discharge tax debts which have grown "stale," Congress realized that "[a]n open-ended dischargeability policy would provide an opportunity for tax evasion through bankruptcy, by permitting discharge of tax debts before a taxing authority has an opportunity to collect any taxes due." H.R.Rep. No. 95-595, at 190 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6150.

The Bankruptcy Code does not contain any provisions which explicitly suspend the priority period of section 507(a)(8)(A)(i) while a debtor is engaged in bankruptcy proceedings. However, section 108(c) provides as follows:

(c) Except as provided in section 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 section 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 section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

11 U.S.C. § 108(c) (1994). Subsections 6503(b) and (h) of the Internal Revenue Code provide:

§ 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 section 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 section 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) for assessment, 60 days thereafter, and

(2) for collection, 6 months thereafter.

26 U.S.C. § 6503(b), (h) (1994).

Waugh urges this Court to determine that because section 108(c) applies only to "nonbankruptcy law," the statute does not act to suspend the priority period of section 507(a)(8)(A)(i), which is itself part of the Bankruptcy Code. We recognize that "[t]he 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)(alteration in original)(quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)); accord Missouri v. L.J. O'Neill Shoe Co. (In re L.J. O'Neill Shoe Co.), 64 F.3d 1146, 1150 (8th Cir.1995). However, we conclude that this is such a "rare case." If we applied the plain meaning of section 108(c) and held that the priority period of section 507(a)(8)(A)(i) is not suspended during bankruptcy proceedings, Congress's intent to afford the IRS a three-year priority period for the collection of taxes certainly would be frustrated. Therefore, we conclude that the three-year priority period of section 507(a)(8)(A)(i) is suspended by 11 U.S.C. § 108(c) and 26 U.S.C. § 6503(b) and (h), for the time that the automatic stay prevents the IRS from...