Collection Due Process Request Tolls Statute and Prevents Bankruptcy Discharge

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Job Announcement: The Temple University Beasley School of Law was recently notified that it will receive funding from the IRS to open and operate a Low Income Taxpayer Clinic (LITC) on its Main Campus in North Philadelphia which will also serve taxpayers in northeastern Pennsylvania. It is therefore soliciting applications for the position of Visiting Practice Professor of Law and Director of the LITC, which is expected to operate on a part-time basis during 2021. The position will begin on January 15, 2021 or as soon thereafter as practicable, and will run through the end of the calendar year. The Clinic Director will be expected to establish and operate the LITC, including developing a panel of pro bono attorneys and performing community outreach, and to take a leadership role in applying to the IRS for a multi-year grant, which will likely need to be submitted in June, 2021. In addition, the Clinic Director will be expected to develop and teach a course through which students can enroll to participate in the LITC for academic credit in 2021.

It is anticipated that this part-time, visiting position will be enhanced and converted into a clinical faculty position upon receipt of a multi-year grant from the IRS. A national search for an individual to fill the clinical faculty position will be conducted if the multi-year grant is received; the individual selected to fill the part-time visiting position will be eligible for consideration for the clinical faculty position. 

Minimum Qualifications: Candidates must have an excellent academic record and a J.D. degree, as well as experience working in an LITC or equivalent organization, either as a student or practicing lawyer, or other tax practice experience. Candidates must have sufficient tax law expertise to perform and oversee the substantive and procedural aspects of client representation, and be either admitted to practice before the U.S. Tax Court or eligible for such admission.

Temple University values diversity and is committed to equal opportunity for all persons regardless of age, color, disability, ethnicity, marital status, national origin, race, religion, sex, sexual orientation, gender identity, veteran status, or any other status protected by law; it is an equal opportunity/affirmative action employer, and  strongly encourages veterans, women, minorities, individuals with disabilities, LGBTQI individuals, and members of other groups that traditionally have been underrepresented in law teaching to apply.

To Apply: Potential candidates are encouraged to contact the selection committee’s Chair, Professor Alice Abreu, at lawfsc@temple.edu with the following: 1) cover letter and/or statement of interest; 2) resume or CV; 3) the names, affiliations, and contact information for at least three individuals who can serve as professional references; and 4) any other material that demonstrates the candidate’s ability to succeed in the position, such as a publication, brief, or similar document.

Applications should be submitted as soon as possible; interviews, which will be conducted online, could begin as early as January 4, 2021. The position will remain open until filled. Keith.

I have written on more than one occasion about the importance of timing when filing a bankruptcy in order to discharge taxes.  The debtor, or her lawyer, in today’s case, In re Alexander, Dk. No. 19-05033, Adv. Pro No. 19-5033 (D. Conn. 2020) appears to have considered the timing of the filing of the bankruptcy and may have filed bankruptcy primarily for the purpose of discharging the taxes.  Unfortunately for the debtor, a request for a Collection Due Process (CDP) hearing filed before bankruptcy extended the period during which an income tax liability could receive priority status under BC 507(a)(8)(A)(i) and that knocks one of the periods out of alignment with the discharge provisions.  The general rules regarding priority status have a few exceptions designed to protect the IRS and this is one.  Since cases addressing this exception rarely arise, it’s worth a look at how the exception works and why Ms. Alexander continues to owe taxes for 2015.

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Ms. Alexander owed taxes for 2011, 2012, 2013, 2014 and 2015.  She timely filed her returns for these years.  For the last of these years, 2015, she timely filed her return on October 17, 2016 based on an extension and the weekend rule. 

At the time Ms. Alexander filed her bankruptcy petition she was represented; however, her attorney passed away during the adversary proceeding and she did not replace her attorney nor did she really participate after that point.  The bankruptcy petition was filed on October 31, 2019.  Absent the exception for CDP hearings, the timing of the filing of the bankruptcy could not have been more perfect.  It comes slightly more than three years after the due date of the return, as extended, for the most recent tax year.  Under the provisions of BC 507(a)(8)(A) all five of the years at issue would have failed the tests to become priority claims.  Having failed that test and having become general unsecured claims, the taxes for these periods would not fit the discharge exception in BC 523(a)(1) and the IRS would write them off once the bankruptcy court granted the discharge.

One reason I believe that taxes motivated the filing of this bankruptcy provision results from the fact that Ms. Alexander filed an adversary proceeding on December 15, 2019, only six weeks after filing the bankruptcy petition.  I pause here to note that Ms. Alexander’s chapter 7 case was a no asset case which is common.  The IRS and other creditors would have received instructions from the bankruptcy court not to bother submitting a proof of claim because it would have been a waste of time and effort.  She would receive a discharge very quickly and go on her way with many of her debts removed without any payment.

Ms. Alexander did not need to file an adversary proceeding to obtain a declaration regarding the discharge of her taxes.  After the granting of a discharge the IRS abates any taxes discharged by a debtor’s case without the need for the debtor to affirmatively bring such a proceeding.  At that point if the IRS fails to discharge a debt the debtor believes the IRS should have discharged, then the debtor could bring an adversary proceeding seeking a determination regarding the discharge.  Her affirmative effort to do so even before the IRS would make its own determination shows that getting rid of the taxes may have served as a primary motivator for the filing of the bankruptcy case.  In a case such as this the filing of the adversary proceeding may have disadvantaged Ms. Alexander.  If she had waited to see what the IRS did the possibility, arguably remote, exists that the IRS would have written off all of the periods.  By bringing the adversary proceeding she insured that her taxes would be scrutinized by the bankruptcy unit, the IRS attorneys and the Department of Justice attorneys.

Whether the IRS might have mistakenly written off 2015 we will never know.  In response to the adversary proceeding, the IRS filed a motion to dismiss the first four years agreeing that they were dischargeable and removing the need to argue about them in the adversary proceeding.  With respect to 2015, however, the IRS filed a motion for summary judgment setting forth why the taxes for that year achieved priority status and because of that status were excepted from discharge by BC 523(a)(1)(A).  This post will focus on the issues raised in the motion for summary judgment.

As discussed above, she filed her 2015 return on October 17, 2016 and her bankruptcy on October 31, 2019.  Because she timely filed her return and because the bankruptcy filing is more than three years after the due date, under the general rule of 508(a)(8)(A)(i) the tax for 2015 fails the test.  However, the priority rules have exceptions.  One of the exceptions, added in the bankruptcy code changes of 2005 after the adoption of CDP in 1998, suspends or tolls the time period in BC 508(a)(8)(A)(i) for the time during which a CDP case is pending.  The language of the statutory exception appears at the end of the three rules for priority claims set out in 507(a)(8)(A) and provides:

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.

The exception exists to give the IRS the full three-year period.  Without this rule a taxpayer could sit in a CDP case for a long time (a real possibility, especially if the taxpayer goes to Tax Court) running out the three-year period while the IRS has no opportunity to engage in enforced collection.  The exception preserves for the IRS the full period of time for a year to receive priority status in bankruptcy, which not only increases its chances of receiving payout in the bankruptcy case but also protects it from discharge under BC 523(a)(1)(A).

Ms. Alexander requested a CDP hearing on February 10, 2017 and remained in CDP status until October 28, 2017.  This period plus the additional 90-day period must be added to the three year period after the due date of filing the return that would normally apply to the determination of priority status in this situation.  When these additional days get added into the picture, the filing of the bankruptcy case occurred too soon to allow the 2015 year to avoid the priority designation.  The bankruptcy court does the math:

At first glance, the Plaintiff’s 2015 tax return date of October 16, 2016 falls outside of the three-year look-back period; given the October 31, 2019 petition date, three years prior would be October 31, 2016. However, the time period the Plaintiff was in Collection Due Process must be extracted from the three years pursuant to section 507(a)(8). The Plaintiff was in Collection Due Process from February 10, 2017 to October 28, 2017. Accordingly, the three-year look-back period did not run consecutively from October 31, 2016 to October 31, 2019, but rather was tolled by the Collection Due Process.

There are 1095 days in the three-year period. The number of days from October 31, 2019 (the petition date) to October 28, 2017 (the end of the Collection Due Process period) is 733 days. 362 days remain of the three-year look-back period (1,095 days minus 733 days equals 362 days). The remaining 362 days, by virtue of the Collection Due Process tolling period, is counted back from February 10, 2017 (the start of the Collection Due Process period), which results in February 14, 2016 as being the end of the three-year look-back period. The Plaintiff’s tax return due date of October 16, 2016, therefore, fell within the three-year look-back period, making her 2015 tax liability a priority claim under section 507(a)(8)(A)(i) that is an exception to discharge under section 523(a)(1)(A).

The case does not break new ground or present an especially difficult legal issue.  It does demonstrate the care that must be taken when choosing the moment for filing bankruptcy if taxes drive that moment.  Here, it appears they did.  So, this is a sad outcome for Ms. Alexander who apparently went into bankruptcy thinking that it would take care of her back taxes.  The good news for her is that bankruptcy did discharge four of the five years for which she owed.

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