Income taxes are dischargeable in bankruptcy three years after the tax return “due date.” 11 U.S.C. §523(a)(1)(A) incorporating 11 U.S.C. §507(a)(8)(A)(i). But that 3-year period can be extended or “tolled” if the taxing authority was prohibited from collecting against the taxpayer as a result of a pending bankruptcy case. For example, consider a tax payer who files chapter 13 bankruptcy because he owes significant tax debts and seeks protection from the IRS’ collection efforts, liens, levies, etc. The tax debts owed prior to a bankruptcy filing are scheduled to be repaid in a chapter 13 bankruptcy case; the IRS would be prohibited from collecting against the taxpayer during the life of the chapter 13 because of the automatic stay protections granted to the taxpayer. If the taxpayer does not complete the full repayment plan, then the case could be dismissed and the IRS would be afforded time to collect those prepetition tax debts, including the 3-year period, plus anytime the taxpayer was in bankruptcy, plus 90 days. See 11 U.S.C. §507(a)(8)(*).
But what happens if the tax obligations related to tax years ending AFTER the chapter 13 bankruptcy case was filed? That issue was address in Kolve v. IRS (In re Kolve), 459 B.R. 376 (Bankr. W.D.WI 2011). In Kolve, a taxpayer’s prior chapter 13 bankruptcy case lasted more than two years. During those two years, the taxpayer failed to pay the tax obligations coming due after the bankruptcy filing but while the case was still pending. The prior bankruptcy case was ultimately dismissed and these postpetition tax debts were never paid.
The taxpayer waited just longer than three years after the dismissal of the chapter 13 bankruptcy case to file a chapter 7 bankruptcy case. The taxpayer sought to discharge the taxes incurred after the filing of the prior bankruptcy case (but while the prior bankruptcy case was still pending). The taxpayer argued a discharge was appropriate because the tax obligations related to tax returns whose “due date” was more than three years prior to the subsequent bankruptcy filing date. The IRS objected to the discharge stating that the 3-year “due date” period was tolled while the prior bankruptcy case was pending since the tax returns came due while the prior bankruptcy case was active. The IRS cited the 90-day tolling provision of 11 U.S.C. §507(a)(8)(*).
The Kolve court ruled in favor of the taxpayer. It found the tolling provision inapplicable because the IRS had not been prohibited by the automatic stay protections from collecting the tax obligations incurred while the prior bankruptcy case was pending. The court distinguished between tax obligations incurred prior to the original bankruptcy case (prepetition taxes) and the tax obligations incurred after the original case was filed (postpetition taxes). The IRS was estopped from collecting prepetition taxes by the bankruptcy, but was not prohibited from collecting the postpetition taxes. Therefore, the “tolling” provision that grants the IRS an additional 90 days was not applicable. The tax debts were deemed dischargeable.
Practice Pointer: The tolling period appears to be dependent upon the taxing authority being actually prohibited from collecting. The mere existence of a bankruptcy case is not sufficient. The taxing authority must be denied the right to exercise its collections rights, including garnishments, liens, and levies.
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