Dixon v. IRS, No. 2:18-cv-00274 (N.D. Ind. July 24, 2019) presents the issue of whether filing a bankruptcy petition extends the time within which a taxpayer can file a claim for refund. In re Long, No. 19-20186 (Bankr. E.D. Wis. July 29, 2019) raises the issue of whether a debtor in a bankruptcy case must accelerate the time for filing their income tax return because of filing bankruptcy. The answer to both questions is no. Details and explanation below.
Charles Dixon filed a chapter 13 bankruptcy petition on September 2, 2010. As with most chapter 13 cases, it took time before his bankruptcy case came to an end on July 22, 2016. While his bankruptcy cases was pending Mr. Dixon filed an amended return for tax year 2012 on April 13, 2015. The IRS notified him by Letter 105C, a statutory notice of claim disallowance, on January 21, 2016, that it would not allow his claim. For some reason he filed another amended return for 2012 in June of 2016 and the IRS sent him a statutory notice of claim disallowance with respect to that claim on August 3, 2016.
On July 26, 2018, Dixon filed a complaint alleging that the IRS improperly denied his first claim. The IRS filed a motion to dismiss because of the filing of the complaint more than two years after the notice of claim disallowance. Though the court couches the dismissal discussion in jurisdictional terms, readers of this blog know that the timing of filing of the complaint vis a vis the sending of the claim disallowance issue may not present a jurisdictional issue though the time frame for filing provided in IRC 6532(a)(1) does represent an important time frame that a taxpayer must meet or show reasons for the failure to meet the time frame.
The statute requires that the taxpayer file the refund suit within two years of the sending of the statutory notice of claim disallowance. Here, Mr. Dixon filed suit more than two years after the notice. To overcome this timing problem, Mr. Dixon argues that his bankruptcy case tolled the time for filing the refund suit. In support of this argument he cites to IRC 6503(h). This section provides a tolling of “the period of time in which the United States can collect a tax against a taxpayer/debtor.” But it does not mention tolling the time within which to bring a refund suit. The bankruptcy court declined to extend the tolling provision to the refund situation. Doing so would have created a shocking result. The tolling statute that he cited in support of the timeliness of his claim seeks to give the IRS more time to collect a liability in situations in which the automatic stay of bankruptcy prevents it from collecting. The statute has nothing to do with extending the time for a taxpayer to file bankruptcy.
Next he argued essentially that his second refund claim gave him more time; however, the second claim mirrored the first claim. It did not raise new grounds for recovery. The court found that a second claim could only extend the time within which to bring suit if the second claim raised new legal arguments. Since it did not, the filing of the second claim here had no meaning. (The IRS pointed out that even if the second claim had contained a second ground for recovery it would have done no good here because Mr. Dixon filed it after the statute of limitations for filing a refund claim.) Although Mr. Dixon did not argue that the statute of limitations for filing his refund claim did not create a jurisdictional bar to filing a claim after that date, he presented no evidence that appeared in the opinion which would have allowed him to miss the due date.
As a result of making arguments on which he achieved little traction, the court grants the motion to dismiss filed by the IRS with relatively little discussion. He does not appear to have made the argument that the time frame for filing a refund suit is not a jurisdictional time frame. The facts available in the published opinion do not suggest that he would succeed in an equitable tolling argument.
The second case pits the taxpayer/debtor against the chapter 13 trustee rather than the IRS. Here, the trustee argues that the taxpayer should have filed his return prior to the first meeting of creditors in his chapter 13 bankruptcy case. The opinion parses the interpretation of a statute designed to require taxpayers to file their tax returns in order to obtain chapter 13 relief.
Before the passage of the relevant statute in 2005, at almost every chapter 13 confirmation hearing day across the country, the IRS routinely sent attorneys who objected to the confirmation of a debtor’s plan because the debtor had unfiled returns which prevented the IRS from knowing whether, and how much, to claim against the estate. Bankruptcy judges got tired of postponing hearings so that delinquent debtors could file these returns. I made the objections in the 1980s and 1990s in the bankruptcy court in Richmond. When we first started making them, the bankruptcy judge would give a stern lecture to the debtor about their criminal behavior in not filing returns. It didn’t take too long before the judge realized that far more people failed to file their returns than he thought possible. So, he stopped making the lectures but he still denied confirmation. Stopping confirmation wastes the time of the court which must reschedule the hearing, prevents creditors from getting paid, costs the debtor’s attorney money to fix the plan and reappear and costs the trustee time and effort. In 1994 when Congress appointed a bankruptcy commission to assist it in revising the bankruptcy laws to fix problems stemming from the Bankruptcy Code’s passage in 1978, the commissioners quickly identified this as a problem that needed to be fixed. It took about eight years after the commission presented its findings before Congress got around to passing the correctively legislation but now anyone going into bankruptcy must be up to date on their return filing (the same basic rule that applies to anyone seeking an installment agreement or offer in compromise from the IRS).
The Long case looks at the meaning of the statute requiring chapter 13 debtors to be current in their tax filing. The bankruptcy case here was filed on January 8, 2019, during the filing season. Usually the first meeting of creditors is scheduled within 20 to 40 days of the bankruptcy petition. So, the debtor had more time to file their return according to the Internal Revenue Code than the date scheduled for the first meeting of creditors. The issue before the court was whether the bankruptcy code accelerates the return filing date in this situation. Here’s how the bankruptcy court framed the question at the outset of its opinion:
“Shortly after a debtor commences such a case, the United States trustee (or a designee) must “convene and preside at a meeting of creditors.” Id. §341(a); Fed. R. Bankr. P. 2003(a). By no later than “the day before the date on which the meeting of the creditors is first scheduled to be held”, the debtor must file with appropriate tax authorities the prepetition tax returns specified in 11 U.S.C. §1308(a), unless the chapter 13 trustee gives the debtor more time, see §1308(b). If the debtor does not file “all applicable Federal, State, and local tax returns as required by section 1308”, the court cannot confirm the debtor’s plan. Id.§1325(a)(9). The issue presented here is whether the prepetition tax returns specified in §1308(a) include returns that are not due to be filed with the appropriate tax authority before the date on which the meeting of creditors is first scheduled to be held.”
The bankruptcy court in Wisconsin was not working with a clean slate. This issue, at least in that jurisdiction had been bubbling for quite a long time. The court described the situation:
“This provision [Section 1308] may simply require the debtor to file, before the date on which the meeting of creditors is first scheduled to be held, all tax returns for the specified prepetition taxable periods that the debtor was otherwise required to file — i.e., that were due to be filed — before that date. But In re French, 354 B.R. 258 (Bankr. E.D. Wis. 2006), offers a competing construction: that §1308(a) requires “debtors who file for Chapter 13 protection . . . to have their return for the prior year filed by the date first scheduled for the meeting of creditors, even if the return is not yet delinquent under [applicable nonbankruptcy law].” Id. at 263.”
The opinion is lengthy and goes into some depth in seeking to find the meaning of Section 1308 and how it interacts with other provisions of the bankruptcy and tax codes. The court expresses concern that following French really puts debtors filing early in the calendar year into a near impossible bind and allows the trustee to stop their bankruptcy cases by the simple act of refusing to extend the time of the first meeting of creditors. After balancing the competing provisions, the court decides that the French case reaches the wrong conclusion and allows the debtor here to confirm a plan without filing the return not yet due under the tax code.
I agree with this result as a logical reading of the code and the intent of the statute. The statute seeks to require debtors to file past due returns. The IRS or the debtor have a mechanism to add the debt for the 2018 year into the plan if they choose to do so. Adding in the debt for the prepetition year after plan confirmation is a bit messy and expensive but denying confirmation to someone for not filing a return by the end of January also presents problems. On balance the court reaches the logical result, but debtors who know they will owe taxes for the immediately past year do themselves no favors by failing to address the year in their plan. Perhaps chapter 13 debtors should consider, as one of the factors in deciding the timing of filing a bankruptcy petition, postponing if possible to avoid filing at the very beginning of a calendar year. If they can wait a few weeks or months before filing, they can avoid this problem. Such a delay, however, is not always possible and taxes should not drive this timing.