Case Information
*1 Before COX, CARNES and HULL, Circuit Judges.
PER CURIAM:
Chapter 13 debtors, Jimmy Roger Morgan and Jamie Lynne Morgan, filed a successive bankruptcy petition in January 1995. They now appeal the district court's order denying their objection to the Internal Revenue Service's claim as a priority claim. The district court held that IRS's claim was a priority claim because the three year priority period of 11 U.S.C. § 507(a)(8)(A)(i) was tolled during the pendency of the Morgans' first Chapter 13 case. We vacate and remand.
I. BACKGROUND
The relevant facts are undisputed. The Morgans first filed for relief under Chapter 13 of the Bankruptcy Code in August 1990. In that case, the Internal Revenue Service ("IRS") filed a proof of claim for income taxes owed by the Morgans for the years 1987, 1988, and 1989 in the amount of $29,207. Shortly after filing their petition, the Morgans filed a repayment plan in accordance with 11 U.S.C. § 1322. The Morgans' Chapter 13 plan proposed to pay in full all claims classified as "priority claims" under 11 U.S.C. § 1322(a)(2), including the IRS claim, and was confirmed in November 1990.
The Morgans, however, failed to make all of the payments required by their Chapter 13 plan. For this reаson, the United States trustee moved to dismiss the Morgans' first bankruptcy case. The bankruptcy *2 judge dismissed the Morgans' first case in October 1994. While the Morgans made some payments to the IRS during their first Chapter 13 proceeding, they did not make all of the payments required and the IRS claim was not satisfied prior to the dismissal.
Soon after, in January 1995, the Morgans filed a second Chapter 13 petition. The IRS again filed a proof of claim for income taxes owed by the Morgans for the years 1987, 1988 and 1989. The IRS asserted that this was a "priority claim" pursuant tо 11 U.S.C. § 507(a)(8)(A)(i) and due to be paid in full. The Morgans objected, arguing that § 507(a)(8)(A)(i) only grants priority status to claims less than three years old. The Morgans argued that because these tax liabilities were over three years old, they were not entitled to priority status. The bankruptcy judge concluded, however, that the three year priority period allowed for unpaid income taxes should be tolled during the pendency of the Morgans' first bankruptcy proceeding. On this basis, the bankruptcy judge entered an order denying the Morgans' objection tо the IRS claim. The district court affirmed the bankruptcy judge's decision. The Morgans appeal.
II. ISSUE & STANDARD OF REVIEW
The narrow issue that we must address is whether the three year priority period of 11 U.S.C. §
507(a)(8)(A)(i), which governs income tax claims, may be tolled during the pendency of a prior bankruptcy
proceeding. This is a question of law involving the interpretation and application of the Bankruptcy Code,
and our review is
de novo. See In re James Cable Partners, L.P.,
III. CONTENTIONS OF THE PARTIES
On appeal, the Morgans contend that their tax liability for 1987, 1988 and 1989 should be discharged in their second Chapter 13 proceeding, because the tax liability is older than the three years allowed under § 507(a)(8)(A)(i). The Morgans argue that the plain language of the Bankruptcy Code does not allow for tolling this three year priority period during the pendency of their first bankruptcy proceeding. Neither party disputes that the IRS tax claims in the Morgans' first Chapter 13 proceeding were entitled to priority status under § 507(a)(8)(A)(i).
The IRS, on the other hand, contends that an automatic stay during the Morgans' first bankruptcy proceeding prevented it from collecting the tax liability. For this rеason, the IRS argues, the three year priority period of § 507(a)(8)(A)(i) should be tolled during the pendency of the Morgans' first Chapter 13 case and the tax liability should not be discharged.
IV. DISCUSSION
Priority claims under 11 U.S.C. § 507(a)(8)(A)(i) are due to be paid in full under a Chapter 13 repayment plan, see 11 U.S.C. § 1322(a), аnd also receive protection against discharge. See 11 U.S.C. § 523(a)(1). Section 507(a)(8)(A)(i) provides that unpaid income taxes are entitled to "priority status" so long as the tax returns were due less than three years before the filing date of the bankruptcy petition. Neither party disputes that the tax liability in question is now more than three years old and normally would be discharged under 11 U.S.C. § 1328(a). [3]
In this case, the IRS was prevented from collecting the unpaid income taxes during the pendency of the first bankruptcy proceeding by the provisions оf the confirmed plan and the automatic stay imposed by Section 507 provides in pertinent part: (a) The following expenses and claims have priority in the following order:
....
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims arе for—
(A) a tax on or measured by income or gross receipts— (i) for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
11 U.S.C. § 507(a)(8)(A)(i) (Supp.1998). Income tax liability that qualifies as a priority claim also receives protection against the general pre-petition discharge provision in 11 U.S.C. § 1328(a). See 11 U.S.C. § 523(a)(1) (Supp.1992) (providing for exceptions to the discharge of certain tax liability, including tax liаbilities that are priority claims under 11 U.S.C. § 507(a)(8)(A)(i)).
11 U.S.C. § 362(a)(6). The IRS contends that in cases like this, the three year priority period should be tolled during the pendency of the first bankruptcy proceeding.
Bankruptcy law aims to serve both the debtor and the creditor. While the law attеmpts to give an
honest debtor a fresh start,
In re Folendore,
Every circuit that has addressed this issue, except for the Fifth Circuit, has concluded that the three year priority period may be tolled during a prior bankruptcy proceeding. The circuits differ in their reasoning as to why tolling is permitted. A majority of the circuits rely upon an interpretation of 11 U.S.C. § 108(c) to answer this question. Section 108(c) extends the statute of limitations for creditors, "if applicable nonbankruptcy law ... fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor" and the creditor is hampered from proceeding outside the bankruptcy court because of the automatic stay. These courts have concluded that § 108(c), considered in In its brief, the IRS states that, "we agree that the literal lаnguage of the above provisions [§ 507(a) ], including Bankruptcy Code § 108(c) and I.R.C. §§ 6503(b) and (h) do not require suspension of the 3- year priority period...." (Appellee Br. at 43). Section 108(c) provides:
(c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respеct to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of— (1) the end of such period, including any suspension of such pеriod occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section
*5
conjunction with 26 U.S.C. § 6503(b) of the Internal Revenue Code (which suspends the limitation period
on tax collеction against a debtor), tolls the three year priority period.
See In re Waugh,
Other courts have held, however, that the plain language of 11 U.S.C. § 108(c) is insufficient to toll
the priority period of § 507(a)(8)(A)(i).
See In re Quenzer,
Although we conclude that § 108(c) is insufficient to toll the three year priority period, we find support for tolling the priority period in 11 U.S.C. § 105(a). The IRS argued in the bankruptcy court that the court's equitable powers under 11 U.S.C. § 105(a) were sufficient to toll the three year priority period. The bankruptcy court and the district court found it unnecessary to reach that question, finding instead that tolling the priority period was mandated.
362, 922, 1201, or 1301 of this title, as the case may be, with respect to such a claim.
11 U.S.C. § 108(c) (1993).
See Bonanni Ship Supply, Inc. v. United States,
We have long held that " '[b]аnkruptcy courts are indeed courts of equity, and they have the power
to adjust claims to avoid injustice or unfairness.' "
In re Empire for Him, Inc.,
"Interprеting [the Bankruptcy Code] literally would allow a debtor to create an 'impenetrable refuge'
by filing a bankruptcy petition, waiting for [§ 507(a)(8)'s] priority periods to expire, and then dismissing the
case and refiling shortly thereafter."
In re West,
11 U.S.C. § 105(a) (Supp.1992). *7 opportunity for tax evasion through bankruptcy, by permitting discharge of tax debts before a taxing authority has an opportunity to collect any taxes due.' ") (quoting H.R.Rep. No. 95-595, at 190 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6150). There may be factual scenarios, hоwever, in which the equities favor the taxpayer.
In this case, the Morgans agreed to pay in full their tax liability in the first Chapter 13 proceeding, but failed to do so. Furthermore, the IRS was prevented from collecting from the Morgans outside of bankruptcy because оf the confirmed plan and the automatic stay.
Since the applicability and use of § 105(a) is a decision that is typically left to the bankruptcy court, we leave the decision to the bankruptcy court in this case. The judgment of the district court is vacated and the case is remanded so that the bankruptcy court may in the first instance consider the issue of tolling under § 105(a).
V. CONCLUSION
The judgment of the district court is vacated, and the case is remanded for further proceedings consistent with this opinion.
VACATED AND REMANDED.
While the record has not been developed fully, there does not appear to be any evidence of dilatory
conduct or bad faith on the part of the Morgans. We do not set forth the equitable considerations
regarding § 105(a), but we reject the notion espoused in
In re Gore,
Furthermore, we do not address the question of whether there may be a difference between the actual tax liability, penalties or interest for the purpose of considering the equities.