The case of Lufkin v. Commissioner, T.C. Memo 2021-71, puts the Tax Court in a position to rule on the impact of filing bankruptcy on the statute of limitations. The taxpayers raise arguments not only regarding the collection statute of limitations but also the validity of the underlying assessment, which gives me the opportunity to discuss the impact of bankruptcy on the collection statute, which is significant, and on assessment, which after 1994 is rather small. Bryan Camp wrote about the case as part of his Lessons from the Tax Court series which alerted me to the decision. He provides some general background on bankruptcy which may also be helpful.
The important IRC sections when working out these statute of limitations issues are (1) §6501(a) which provides the general three year time period for assessment after the return filing date; (2) §6502(a) which provides the general rule that the IRS has 10 years to collect after assessment: and (3) §6503(h) which “suspend[s] [the period of limitations] for the period during which the Secretary is prohibited by reason of such case [a bankruptcy case and the automatic stay] from making the assessment or from collecting and—(1) for assessment, 60 days thereafter, and (2) for collection, 6 months thereafter.”
Before 1994, the tolling in 6503(h) created a significant issue. BC 362(a)(6) prohibits assessment during the period that the automatic stay is in effect. A literal reading of this provision prohibits the IRS from assessing a self-reported tax on a return which would also prohibit the IRS from issuing refunds to debtors in bankruptcy while the automatic stay remained in effect. This could prevent a debtor in a chapter 13 case from receiving a refund for five years absent a court order lifting the stay. The language of BC 362(a)(6) provides an example of legislation that fails to consider the functional role of assessment.
For the 16 years from the passage of the Bankruptcy Code in 1978 until the change to 362(b) in 1994, the IRS arguably violated the automatic stay millions of times because it decided that Congress could not have intended to keep it from assessing returns where an overpayment existed. So, it made the assessment of tax shown on the return and refunded to the taxpayer the overpayment resulting from the excess credits. After almost two decades, the IRS, with significant assistance from the Tax Division of the Department of Justice, which had contacts in the Judiciary Committee, persuaded Congress to allow it to assess. Congress did not, however, remove the restriction on assessment from 362(a)(6). It still exists. Instead, it neutered it by expanding the exception to the stay in 362(b)(9).
There exists one remaining area in which bankruptcy can suspend the statute of limitations on assessment. It results from BC 362(a)(8), which prohibits taxpayers from commencing or continuing a Tax Court proceeding while the stay is in effect. This provision can suspend the statute of limitations on assessment if the taxpayer has received a notice of deficiency and files a bankruptcy petition prior to the 90th day and prior to filing a Tax Court petition. In this situation, the combination of the prohibition on filing the Tax Court petition, which suspends the 90-day period for timely filing a Tax Court petition, and the suspension of the statute of limitations on assessment caused by the notice of deficiency suspends the statute of limitations on assessment. The suspension could be lengthy. This suspension can also easily cause confusion since it operates through the intermediary of the notice of deficiency suspension.
For bankruptcy petitions filed after October 20, 1994, when the amendments to the bankruptcy statute occurred, the only way the automatic stay suspends the statute of limitations on assessment is through this two-step procedure triggered by the notice of deficiency.
The suspension of the statute of limitations on collection operates in a much more straightforward manner. BC 362(a)(6) stays collection of pre-petition liabilities as well as assessment. This prohibition on collection triggers the suspension of the statute of limitations on collection and lasts for the period during which the automatic stay exists plus, pursuant to IRC 6503(h), an additional six months. To calculate the impact of the stay on collection, you must know when the stay begins and when it ends. The beginning part is easy. The stay begins the moment the debtor files the bankruptcy petition. The ending of the stay creates more challenges. It depends on the type of bankruptcy. Generally, the stay will come to an end when the debtor receives a discharge or when the bankruptcy case comes to an end. This could be several years in a chapter 13 case with a five-year plan. Some debtors, like the Lufkins, file multiple bankruptcy cases, which can make the calculation trickier.
Before getting to the facts of the case, note that the docket here was interesting and different from the typical pro se case. This was Mr. Lufkin’s second Tax Court CDP case. He filed one in 2013 which he settled on a basis not available to see on the electronic Tax Court docket sheet. He filed the current case in 2017. In both cases, he took the offensive, filing his own motions for summary judgment and for other reasons. Unlike his first case, which resulted in a settlement of some type, in this case, he went to trial. The trial occurred before Judge Ruwe in June of 2019; however, Judge Ruwe retired in November 2020 before rendering an opinion. So, the case was reassigned to Judge Greaves.
The taxes at issue in this case were employment taxes filed on Form 941. Mr. Lufkin is a lawyer and the taxes arose from his law practice for the third and fourth quarters of 1998. With taxes that old, which were assessed in 1998 and 1999, it’s easy to understand why Mr. Lufkin would argue that the statute of limitations had expired. He also argued that he was not liable for these taxes.
Applying the assessment and collection statute suspensions to the Lufkin’s facts, Judge Greaves found that because Mr. Lufkin filed multiple bankruptcy petitions between 2000 and 2011, the statute of limitations on collection was suspended for a sufficiently long period to allow it to remain open when the IRS issued the notice of intent to levy. Since Mr. Lufkin responded to that notice by requesting a Collection Due Process (CDP) hearing, he further suspended the statute of limitations on collection.
Mr. Lufkin made two arguments in the CDP hearing. First, he argued that he was not liable for the taxes because another entity had assumed the debt. The court does not spend much time with this argument and it shouldn’t. Even if another entity assumed the debt, it would not relieve Mr. Lufkin of his liability for the debt. Since he offered no evidence on this issue, the decision was easy. It’s worth noting that the court did allow him to raise the merits of his employment tax liability since it would have been assessed without the issuance of a notice of deficiency. The court did not perform any analysis regarding his ability to raise the merits. So, I assume that the IRS did not object to the procedural issue of his raising this debt.
With respect to the statute of limitations argument, the court notes that its precedent regarding review of this type of challenge is ambiguous. This might be considered a merits challenge in which the court would review the evidence de novo or it might be considered something the court reviews on an abuse of discretion standard. Because the court finds it does not matter here which standard applies, it does not stop to sort out the correct answer.
The court does not perform an analysis of the impact of each of Mr. Lufkin’s bankruptcy petitions during the 11-year period between the assessment and the notice of intent to levy but states “even under a conservative calculation, more than 10 years had not elapsed” on the statute. Probably, the IRS brief performed the analysis based on each bankruptcy petition. It’s easy to believe that the court was correct if there were multiple petitions and this is one downside of going into bankruptcy repeatedly, since each filing triggers, at a minimum, a six-month extension of the statute of limitations on collection, even if the stay in bankruptcy is quite short.
In addition to challenging the statute of limitations, Mr. Lufkin challenged the verification by Appeals. He argued that they had destroyed records regarding the assessment and this “amounted to a violation of procedural due process under the Thirteenth Amendment to the Constitution.” For those of you who specialize in tax and not constitutional law, the Thirteenth Amendment abolished slavery and involuntary servitude. It will not surprise you to learn that this argument failed with the court, which stated that Mr. Lufkin had failed to establish a nexus between the Thirteenth Amendment and his tax case.
As Bryan mentions in his post, the primary lesson here regards the impact of filing bankruptcy petitions on the statute of limitations. Several actions can suspend the statute of limitations on collection. I wrote recently that the IRS is having trouble correctly calculating the statute of limitations on collection primarily related to installment agreements. Here, the IRS has plenty of cushion and easily turns back an argument based on the limitations period.