Taxes Not Discharged In Bankruptcy

Taxes are dischargeable in bankruptcy unless they fall into one or more of the following categories of taxes that are not discharged in bankruptcy. For strategies relating to potentially non-dischargeable taxes see Bankruptcy Discharge Taxes Strategies.

( Note: This topic does not yet include an analysis of dischargeability of taxes in Chapter 11 and Chapter 12.)

Table of contents for this topic:

Preliminary Matters

Dischargeability of interest

If a tax claim is not dischargeable then the interest associated with that claim is also not dischargeable.(1) Interest on a non-dischargeable or secured tax claim runs at the non-bankruptcy rate.(2) For the current rate see Taxes Federal Interest Rate#Past due taxes.

Chapter 13. Interest cannot be paid in a Chapter 13 plan on an unsecured tax debt unless (a) the plan provides for full payment of general unsecured creditors(3) or (b) the claim is a secured claim.(4) The result of this general rule is that accruing interest on non-dischargeable tax debt remains due after a Chapter 13 is complete even if the underlying tax is paid in full. On the other hand, if the tax one that is dischargeable but payable in full in a 13 then the plan need not provide for interest and there will be no interest remaining after the case is complete.

Dischargeability of penalties

True penalties. A "non-pecuniary loss" penalty that is imposed in addition to a tax and interest is not dischargeable in a Chapter 7 if:

• the tax is not dischargeable or
• the event upon which the penalty is based occured within three years of the bankruptcy filing.(5)

However, these penalties are dischargeable in a Chapter 13.(6)

Alter ego penalties. A pecuniary loss "penalty" (obligating someone other than the original taxpayer) for a priority tax that would not be dischargeable under 11 USC 507(a)(8) (see the list below) is not dischargeable in Chapter 7.(7) These penalties are dischargeable in a Chapter 13;(8) however, the plan must provide for full payment of the penalty.(9)

Dischargeability of debts incurred to pay taxes

Debt incurred to pay non-dischargeable taxes are not dischargeable.(10) However, these debts are dischargeable in a Chapter 13.(11)

"Return," assessment date, due date, and filing date

"Return" is defined by the Bankrutpcy Code. “Return,” for purposes of determining dischargeability of taxes, is defined in a hanging paragraph following 11 USC 523(a)(19). This provision became effective in 2005 and may overrule cases decided under prior law holding that a return filed after an assessment is not a "return" under the Bankruptcy Code.(12) However, “[b]ankruptcy courts dealing with [this] issue in cases filed after the enactment of BAPCPA have held that … a late filed Form 1040 would never qualify as return for purposes of section 523(a) … unless the debtor consented to and signed a return prepared by the IRS pursuant to 26 U.S.C. § 6020(a).”(13)

State revenue laws often require a taxpayer to file a report or amended return when the taxpayer files an amendment to a federal return or the IRS assess additional taxes. So counsel should determine the status of the filing of state taxes whenever a federal return is amended or the IRS assesses an additional tax.

Return due date. If the debtor received an extension then the return is due on the extension date.Also, if you are cutting it close, be sure to do the math: A return due otherwise due on a weekend or holiday becomes due on the following business day.

Assessment occurs when it is final. A proposed assessment is not an assessment. If the timing is close you should order a tax transcript to determine the date the taxing authority's records give as the final assessment date. And keep in mind that a litigated assessment is not final until after the 90 day appeal period has run following entry of the tax court judgment.

Even if you determine the taxing authority has made a final assessment you should warn your client that there remains the possibility of an additional assessment if, for example, the client files an amended return or the taxing authority does an audit.

Return filing date. Return filing may be calculated as of date of mailing, but only if the return is sent by the United States Postal Service.(14)

Practice pointer. Do not rely on a statement from an IRS agent regarding the status of your client's taxes.(15)

Suspension of time

507(a)(8) taxes. A paragraph hanging from 11 USC 507(a)(8)(G) extends the look back period for taxes that are not dischargeable under 11 USC 523(a)(1)(A) (incorporating 11 U.S.C. § 507(a)(8)) when:

• a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of
  • a request by the debtor for a hearing (plus 90 days) or
  • an appeal of any collection action taken or proposed against the debtor (plus 90 days)
• there has been a stay of proceedings in a prior bankruptcy (plus 90 days) or
• collection was precluded by a confirmed bankruptcy plan (plus 90 days)

Other taxes. The provision suspending 507(a)(8) time periods during a the period a prior bankruptcy is pending codifies Young v. United States, 535 U.S. 43; 122 S. Ct. 1036; 152 L. Ed. 2d 79 (2002) (construing 11 U.S.C. § 507(a)(8)(A)(1)). However, that case may have independent vitality to the extent its reasoning can be extended beyond § 507(a)(8) taxes.

Fact patterns that make any tax non-dischargeable - 523(a)(1)(B)&(C)

No return filed - 523(a)(1)(B)(i)

Any tax for which a return should have been filed but wasn't is not dischargeable.(16) Such a tax is also not dischargeable in a Chapter 13.(17)

Late return filed within two years of bankruptcy - 523(a)(1)(B)(ii)

Any tax for which a return a late return was filed within two years of the filing of the bankruptcy case is not dischargeable.(18) Such a tax is also not dischargeable in a Chapter 13.(19)

Fraudulent return or other willful attempt to evade - 523(a)(1)(C)

Any tax for which a fraudulent return was filed or which the the debtor attempted to defeat or evade is not dischargeable.(20) Such a tax is also not dischargeable in a Chapter 13.(21)

Fact patterns that make priority taxes non-dischargeable - 523(a)(1)(A)

11 USC 523(a)(1)(A) incorporates 11 USC 507(a)(8), which accords priority status to certain "unsecured claims of governmental units" (emphasis added).

Income or gross receipts tax - 507(a)(8)(A)

Return last due within three years of bankruptcy

An income tax is not dischargeable if the return was last due (after factoring in any extension period) within three years of the bankruptcy filing.(22) These taxes are dischargeable in a Chapter 13;(23) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(24)

Assessed within 240 days before bankruptcy

An income or gross receipts tax is not dischargeable if the tax was assessed due within 240 days of the bankruptcy filing.(25) These taxes are dischargeable in a Chapter 13;(26) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(27)

11 USC 507(a)(8)(A)(ii) extends the 240-day look back period if an offer in compromise (plus 30 days) or a bankruptcy stay (plus 90 days) was pending during the 240 day period.

Practice pointer. Before conceding this type of non-dischargeability check to be sure the assessment was made according to the applicable statutes and regulations (including any applicable statute of limitations).

Assessable after bankruptcy

An income or gross receipts tax is not dischargeable if the tax is assessable after the bankruptcy filing.(28) These taxes are dischargeable in a Chapter 13;(29) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(30)

Chapter 12 exception for capital gains

11 USC 1222(a)(2)(A) allows chapter 12 debtors to treat taxes incurred by selling farm assets before the filing of a bankruptcy petition as payable in less than full and dischargeable. However, there is a split in the circuits regarding whether such taxes incurred after the filing are entitled to similar treatment.(31)

Property tax payable within one year - 507(a)(8)(B)

A property tax is not dischargeable if the tax is payable within one year of the bankruptcy filing.(32) These taxes are dischargeable in a Chapter 13;(33) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(34)

Withholding and other trust taxes - 507(a)(8)(C)

Withholding and other taxes "required to be collected or withheld" are not dischargeable.(35) Such a tax is also not dischargeable and must be paid in full in a Chapter 13.(36)

Note that some states do not require that sales taxes be collected from customers. Sales tax obligations in such states do not fall under § 507(a)(8)(C).

Employment tax return last due within three years - 507(a)(8)(D)

An employment tax is not dischargeable if the return relating to that tax fell due within within three years of the bankruptcy filing.(37) These taxes are dischargeable in a Chapter 13;(38) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(39)

Excise tax - 507(a)(8)(E)

Excise taxes are taxes levied on a specific good ( e.g., motor fuel tax) or activity ( e.g., wagering or highway use tax).

Return last due within three years of bankruptcy

An excise tax is not dischargeable if the return relating to that tax fell due within within three years of the bankruptcy filing.(40) These taxes are dischargeable in a Chapter 13;(41) however, the plan must provide for full payment of the tax.(42)

If no return required: transaction within three years of bankruptcy

An excise tax for which no return is required is not dischargeable if the transaction upon which the tax arose occurred within within three years of the bankruptcy filing.(43) These taxes are dischargeable in a Chapter 13;(44) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(45)

Customs duty - 507(a)(8)(F)

Merchandise imported for consumption within one year of bankruptcy

A customs duty is not dischargeable if the merchandise upon which the buty applies was imported for consumption within one year of the bankruptcy. filing.(46) These taxes are dischargeable in a Chapter 13;(47) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(48)

Covered by an entry liquidated or reliquidated within one year pf bankruptcy

A customs duty is not dischargeable if the merchandise upon which the duty applies is covered by an entry liquidated or reliquidated within one year before the date of bankruptcy filing.(49) These taxes are dischargeable in a Chapter 13;(50) however, the plan must provide for full payment of the tax.(51)

Entered for consumption within four years before and entry unliquidated at time of bankruptcy if Secretary certifies

A customs duty is not dischargeable if (a) the merchandise upon which the duty applies entered for consumption within four years before the date of the filing of the petition, (2) the entry was unliquidated on such date, and (c) the Secretary of the Treasury certifies that the failure to liquidate the entry was due to an investigation then pending.(52) These taxes are dischargeable in a Chapter 13;(53) however, the plan must provide for full payment of the tax (but not post-petition interest and penalties).(54)

Liens survive

Chapter 7. A dischargeable tax claim will continue to be collectable following a Chapter 7 to the extent the claim is secured by a valid unavoidable lien.(55)

Chapter 13. A secured tax claim must be paid in full, with interest, in a Chapter 13.(56) Interest runs at the non-bankruptcy rate.(57) For the current rate seeTaxes Federal Interest Rate#Past due taxes.

Because tax liens are so broad this requirement can create real problems in a Chapter 13 where there is substantial secured tax debt and an asset with substantial value. However, keep in mind that spendthrift assets, such as ERISA plans, are not property of the estate and, consequently, liens on such assets do not give rise to secured claims in a bankruptcy proceeding.(58) Thus, a debtor with a lien on an unmatured ERISA plan securing a dischargeable tax debt might be able to file a 13 to discharge the tax debt and thereafter wait out the lien to expire.

Practice pointer - review claims. Taxing authorities with liens will often file claims as fully secured regardless of the actual Debtor equity. So counsel should review such claims carefully and seek an adjustment if the unsecured portion of the tax is dischargeable.

Practice pointer - request lien releases. When the debtor has little or no equity in assets the IRS will, upon request, generally release liens securing dischargeable taxes. Similarly, counsel should verify that taxing authorities have released liens satisfied in a Chapter 11, 12, or 13 case. See 26 USC 6325(b)(2)(B) for more about IRS lien releases.

See also

• Bankruptcy Discharge Taxes Strategies

External links

• Grosenick, Federal Tax Issues in Bankruptcy, January 10, 2012
• Tax Discharg Determinator computer program

Footnotes

Notes

1 : In re Larson, 862 F.2d 112 (7^th Cir. 1988); see also 26 USC 6601(e)(1)(interest on a federal tax treated in the same manner as the tax).

2 , 57 : 11 USC 511.

3 : 11 USC 1322(b)(10).

4 , 56 : 11 USC 1325(a)(5).

5 : 11 USC 523(a)(7) and In re Burns, 887 F.2d 1541 (11th Cir. 1989). A Seventh Circuit decision concludes that true penalties are dischargeable only if both conditions are met. Cassidy v. IRS, 814 F.2d 477 (7th Cir. 1987). However, the Seventh Circuit later described that conclusion as dicta. In re Cassidy, 892 F.2d 637, 641 (7th Cir 1990).

6 , 8 , 11 , 23 , 26 , 29 , 33 , 38 , 41 , 44 , 47 , 50 , 53 : See 11 USC 1328(a)(2) (not among exceptions to Chapter 13 discharge).

7 : 11 USC 523(a)(1)(A) (incorporating 11 USC 507(a)(8)(G)).

9 , 24 , 27 , 30 , 34 , 39 , 42 , 45 , 48 , 51 , 54 : 11 USC 1322(a)(2).

10 : 11 USC 523(a)(14) & (14A).

12 : E.g., In re Payne, case no. 05-1941, 431 F.3d 1055 (7th Cir. 2005) (under § 523(a)(1)(B)(i)). For more, see Sheehy, Is The After-Filed, Late Return Debate Over?, ABI World (November 2011).

13 : [[http://www.nyeb.uscourts.gov/opinions/dte/363386_17_opinion.pdf][In re Casano], 473 B.R. 504 (Bankr.E.D.N.Y. 2012). The IRS asked the Casano court to adopt a rule that untimely returns filed before assessment are dischargeable. The court declined to rule one way or the other because the facts did not render that issue sub judice.

14 : See Smith v. United States, 96 F.3d 800 (6^th Cir. 1966).

15 : See, e.g., In re Larson, 862 F.2d 112 (7th Cir. 1988) ("'The general rule is that reliance on misinformation provided by a government employee does not provide a basis for an estoppel.'').

16 : 11 USC 523(a)(1)(B)(i).

17 , 19 , 21 : 11 USC 1328(a)(2).

18 : 11 USC 523(a)(1)(B)(ii).

20 : 11 USC 523(a)(1)(C).

22 : 11 USC 523(a)(1)(A) (incorporating 11 USC 507(a)(8)(A)(i)).

25 : 11 USC 523(a)(1)(A) (incorporating 11 USC 507(a)(8)(A)(ii)).

28 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(A)(iii)).

31 : See discussion at 11 USC 1222#Commentary.

32 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(B).

35 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(C).

36 : 11 USC 1328(a)(2) (not dischargeable); 11 USC 1322(a)(2) (must be paid in full).

37 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(D).

40 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(E)(i).

43 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(E)(ii).

46 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(F)(i).

49 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(F)(ii).

52 : 11 USC 523(a)(1)(A)(incorporating 11 USC 507 (a)(8)(F)(iii).

55 : Ordinarily, liens pass through bankruptcy unaffected. Dewsnup v. Timm, 502 U.S. 410, 417-420, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (construing 11 USC 506(d).)

58 : In re Snyder, 343 F.3d 1171 (9th Cir. 2003).

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