SUSPENSION OF TIME UNDER SECTION 507(a)(8) OF THE BANKRUPTCY CODE DURING PERIOD OF PREVIOUS BANKRUPTCY CASES

(COMMISSION TRACK NUMBER 311)

Present Law

The Bankruptcy Code affords priority status to "recent" taxes, i.e., those which arose within certain specified periods of time prior to the commencement of the bankruptcy case (the "Priority Time Period"), most commonly approximately three years (fn. 105). The Code further provides that taxes entitled to priority are not dischargeable (fn. 106).

Taxpayers have attempted to prevent collection during the Priority Time Period and then to discharge the tax debt immediately after the conclusion of the Priority Time Period. Where taxpayers avail themselves of the suspension of collection efforts associated with the filing of an Offer in Compromise, the Bankruptcy Code calls a "time out" on the shortest Priority Time Period: the "240 days after assessment" Priority Time Period is extended by the time that an Offer in Compromise is under consideration, plus 30 days. See our reponse to Commission Track Number 313, infra.

No similar provision exists with respect to prior bankruptcy cases. Thus, taxpayers have filed cases, commonly under Chapter 13 or Chapter 11, availed themselves of the automatic stay to prevent collection efforts during some substantial portion of the Priority Tax Period, then obtained dismissal of the case and re-filed as a Chapter 7 case immediately upon the conclusion of the Priority Tax Period in an attempt to discharge the tax obligation. Under current law this device is generally unsuccessful (fn. 107), but there is no clear statutory "time out" for prior bankruptcy cases.

Proposals Before the Commission

Commission Track Number 311. Several proposals before the Commission would provide for a statutory suspension of the running of the Priority Tax Periods during prior bankruptcy cases. The Department of Justice and the IRS would add six months to this time period. See Santa Fe Discussion Issues, p. 7, Item IIA3; Report of Department of Justice Bankruptcy Working Group, p. 82; IRS Proposal, p. 41, see also unnumbered Government Working Group Proposal.

Task Force Position

The Task Force generally supports these proposals, but would limit the add-on to 30 days.

Reasons for Position

The impetus for the pending proposals is an attempt to prevent taxpayers from manipulating the automatic stay so as to obtain a discharge of a tax debt that would not be available in the first instance.

On balance, we agree with the proposals, although we note that this is not a black and white case. Priority provisions govern the rights of creditors inter sese. The existence of a priority tax ordinarily results in a substantial diminution, if not a complete elimination, of the distribution available to general unsecured creditors. As the law currently exists, the rights of general unsecured creditors are subordinated to the rights of the taxing authorities (by means of the priority provisions) only with respect to recent taxes. It may be argued that there is no reason to further reduce the recovery to general unsecured creditors by extending priority status to old claims on account of the debtor's misconduct. Compare section 523(a)(1)(B), which limits the dischargeability of taxes as to which a timely return was not filed, but does not afford those taxes a priority. Therefore, the proposals may be overbroad, since they would expand the scope of taxes entitled to priority, rather than expanding the scope of taxes which cannot be discharged.

Nevertheless, since the tax claim would take priority over unsecured claims in the first case, it seems the better result to afford the government the same priority in the second case rather then divest the priority as a result of tying the government's hands in the first case.

In the cognate case where a debtor avails himself of the cessation of collection efforts associated with the pendency of an offer in compromise, the statutory time out is limited to the Offer in Compromise period plus 30 days. Bankruptcy Code Section 507(a)(8)(A)(ii). Here, the Department of Justice proposes a time out for the term of the prior bankruptcy case plus 6 months. The Task Force can see no reason for this disparity. If the Commission's Proposal is to be adopted, the "extra time" should be limited to 30 days, consistent with the existing rule for offers in compromise.

***************************FOOTNOTES********************************

fn. 105: Bankruptcy Code Section 507(a)(8)(A)(i).

fn. 106: Bankruptcy Code Section 523(a)(1)(A).

fn. 107: Compare In re Waugh, ___F.3d___ (8th Cir. 1997); In re Taylor, 81 F.3d 20 (3d Cir. 1996); Montoya v. United States, 965 F.2d 554 (7th Cir. 1992) (all holding that time periods in BC Section 507(a)(8)(A)(i) were suspended during prior bankruptcies) with Quenzer v. United States, 19 F.3d 163 (5th Cir. 1993) (plain language of the statute compels contrary result).

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Last updated June 1, 1997