Unassessed Taxes and

 Chapter 13 Bankruptcy

      Hold onto your hats, because this issue is very difficult to understand. It is sometimes possible to discharge a tax that has not been assessed in a Chapter 13 Bankruptcy.  Section 507(a)(8)(iii) states that a tax that has not been assessed but still may be assessed is a priority tax unless it falls in an area of exception.  These exceptions are tax claims that are nondischargeable under Section 523.  If they are not assessed and are nondischargeable under Section 523, they are dischargeable in a Chapter 13 because the non dischargeability sections of Section 523 do not apply in a Chapter 13: only priority taxes are nondischargeable in a Chapter 13.  Therefore it may be possible to discharge unassessed taxes even though the 240 day rule regarding the date of assessment has not been met.  This loophole may be used when the income tax claim meets the three year rule (The taxes are over three years old) but no return has been filed.  Since the statute of limitations on assessment doesn't start to run until a return has been filed, the claim is still assessable.  In this situation, the tax is not dischargeable in a Chapter 7 because of Section   523(a)(1)(B) since no return was filed.  But Section 507(a)(8)(A)(iii) makes this a non-priority tax.  Since it is a non-priority tax,it is dischargeable in a Chapter 13 without full payment.  See In re Edwards 74 B.R. 661 (Bkrtcy.N.D.Ohio 1987).  So, the fact is that if you wait till the Chapter 13 is filed to file tax returns that are over three years old, you can discharge the taxes without a full payment because of this loophole.

General Chapter 13 Tax Issues

      If you wish to discharge personal income taxes in a Chapter 13, you must be aware of various issues.  First of all, a Chapter 13 is a bankruptcy that involves a payment plan.  It is not a complete bankruptcy.  For a tax to be dischargeable in a Chapter 13 with less than full payment, it must be three years old.  You must be very careful about tolling events that may toll the three year statute.  For example, the three year period is tolled during any period of time that (1) an extension to file was in effect, (2) a taxpayer assistance order is pending, (3) any other bankruptcy case was pending.

      Also, the tax must be assessed 240 days before the filing of the petition (with the possible exception of the argument in the previous article).  The 240 day statute is tolled during the period of time in which an offer in compromise was pending plus 30 days or any period in which the debtor was in bankruptcy plus six months. 

      If your taxes are unsecured, and they meet the two requirements above, they are dischargeable with less than full payment in a Chapter 13.  Your taxes are unsecured if no tax lien was recorded or if the tax lien was recorded but the debtor owns no property or insufficient property, or if the lien is defective for other reasons. 

Voluntary Payments

      Please pay very careful attention to this issue.  Voluntary payments that are made outside of a bankruptcy may be applied according to your wishes.  This issue is very important because if you have a voluntary payment agreement with the IRS, you can designate how your payments should be made.  That means that you can designate your payments to pay the current years and the discharge the earlier years.  See Muntwyler v. United States F.2d 1030 (1983).  See Revenue Ruling 73-305, 1973-2 CB 43; and 79-284, 1979-2 CB 83. Be sure that when you work out a payment plan with the IRS on a 433A Voluntary Payment Agreement, that you designate your payments to your benefit.

The Tax Protester and Chapter 13

      How are the Bankruptcy Courts looking at alleged tax protesters in Chapter 13 bankruptcies?

      There is different thinking in the courts. Some judges allow a plan that contains only one claim or a claim that would be nondischargeable in a Chapter 7.  Some judges think the position that a plan that provides for the payment of only one debt is bad faith and they only confirm plans that have a variety of debts.  See In re Coburn 1994 Bankr. LEXIS 1875 (Bkrty D. Or 1994).

      Most cases hold that a Chapter 13 plan which includes a claim that would be nondischargeable in Chapter 7, is not, in and of itself a bad faith plan.  In re Street, 55 B.R. 763 (1985): In re Terry 9 B.R. 314 (1981); In re Ali, 33 B.R. 890 (1983); Mattr of Smith, 848 F.2d 813 (1988).

      In Matter of Belt, 106 B.R. 553 (Ind. 1989) the court held that a Chapter 13 plan may be confirmed as having been filed in good faith, even though the debtor's only reason for filing the Chapter 13 was to discharge a claim that would not be dischargeable under Chapter 7.

      When the plan includes only one or several debts and the principal tax is nondischargeable under Chapter 7, the court's scrutiny is tougher.  Tax cases are: In re Diego 6 B.R. 468 (1980); In re Goeb, 4 B.R. 735 (1980) (reversed, 675 F.2d 1386 (1982).

      Some individuals identified by the IRS as tax protesters have faired poorly.  The Court in Matter of Hazel, 95 B.R. 481 (Mich. 1986) found the plan in bad faith where the debtor willfully failed to report any tax liabilities, purposefully prevented collection of any taxes by the IRS, and then filed a Chapter 13 in an effort to discharge the unreported, unpaid liabilities.  In Matter of Love, 957 F.2d 1350 (7th Cir. 1992), the court rejected a plan for bad faith in view of the fact that the debtor had been  involved in prepetition tax protest activity which lead to his tax debt.  Some opinions have stated that Chapter 13 may not be used by individuals who were members of tax protestor groups.  See In re Paulson, 170 B.R. 496 (Bkrtcy.D.CT 1994): In re Hammers 988 F.2d 32 (5th Cir. 1993): Schaffner v. IRS 95 B.R. 62 (Bkrtcy. E.D. Mich 1988).  In the case of In re Morimoto, 171 B.R. 85 (9th Cir. BAP 1994), the debtor didn't file returns for 28 years.  The court, observing that the debtor was involved in tax protest activities, denied the confirmation on the basis of bad faith.

            Dear Willie:

I was hit with a Civil Fraud penalty by the IRS, can I discharge it in a Chapter 7?

Sincerely,

Penalized

_______________________

Dear Penalized:

            Section 523(a)(1) deals with this issue and it is really confusing. Tax is not dischargeable in a Chapter 7 if there is fraud involved; but the courts that have stated that the penalty is dischargeable in the Chapter 7 even if the tax is not.  Therefore, you could file the Chapter 7 first and then follow it up with a 13.  You should read the following cases which further define and discuss the meaning of the statute: Roberts v. United States, 906 F.2d 1440 (10th Cir. 1990; Byrum v. Internal Revenue Service, 91-1 U.S.T.C. 50,275 (D.. Cal. Jan. 17, 1992).  The third is In Re Burns, 887 F.2d 1541 (11th Cir. 1989.  The only time that filing both a Chapter 7 and a Chapter 13 would be useful is if you owe too much to get into a Chapter 13.  If you owe more than $250,000 in unsecured general claims and $1,000,000 in secured claims, you can't stick in a Chapter 13.  Go to the law library and get those cases before you decide what to do.  Thanks for writing.

Sincerely,

Willie