In re Jividen

646 B.R. 257

IN RE: Douglas Ernest JIVIDEN and Cathy Sue Jividen, Debtors.

Case No. 17-90605

United States Bankruptcy Court, C.D. Illinois.

SIGNED October 27, 2022

Marsha L. Combs-Skinner, Newman, IL, Trustee, Pro Se.

Kevin Hays, Office of Chapter 13 Standing Trustee, Newman, IL, for Trustee Marsha L. Combs-Skinner.

Cristina M. Manuel, Manuel & Associates, Inc., Urbana, IL, for Debtors.

OPINION

Thomas L. Perkins, United States Chief Bankruptcy Judge

This Chapter 13 case is before the Court on the motion to modify the confirmed plan or to dismiss the case filed by the Chapter 13 Trustee, Marsha Combs-Skinner, seeking modification of the confirmed plan to include a priority tax claim filed by the Internal Revenue Service more than four years after confirmation of the plan, and on the Debtors’ objection to that claim.

FACTUAL BACKGROUND

The Debtors have filed three bankruptcy petitions, all under chapter 13 of the Bankruptcy Code. The first petition was filed by the Debtors on July 6, 2006 (Case No. 06-90664, the "First Case"). The IRS filed Claim #8-2 on November 14, 2006, for priority taxes of $5,166.21, for 2004 and 2005. The plan was confirmed on December 13, 2006 and the IRS's priority claim was paid in full by the Trustee. The plan payments were completed by September 1, 2011, but the first case wasn't closed until December 13, 2011, without the Debtors receiving a discharge due to their failure to file Certifications of Domestic Support Obligation.

The second petition was filed by the Debtors on January 30, 2012 (Case No. 12-90108, the "Second Case"), forty-eight days after the closure of the First Case. The IRS filed Claim #6-3, asserting a priority claim in the amount of $11,259.35, for taxes for years 2008 through 2011, and a general unsecured claim for interest of $304.39 for 2005, and the same amount of $304.39 as interest for 2007. The plan was confirmed on August 16, 2012 and the IRS's priority claim amount was paid in full through the plan thereby satisfying the assessed income taxes and prepetition interest for 2008, 2009, 2010 and 2011. The Debtors received a discharge on May 23, 2017 and the case was closed on June 28, 2017.

On May 30, 2017, seven days after issuance of the discharge in the Second Case, the Debtors filed their third Chapter 13 petition, which remains pending before this Court (Case No. 17-90605, the "Third Case"). When the Debtors’ plan was confirmed on Sept. 27, 2017 the IRS had not filed a claim and the plan provided for no payment to the IRS. Although the original schedules indicated that there were no priority claimants, the Debtors filed amended schedules on December 6, 2017, reflecting that the IRS held a priority claim in an "unknown" amount. On that date, the Debtors filed Claim 2-1 on behalf of the IRS in the amount of $1.00. The IRS filed Claim 3-1 on Dec. 11, 2017, asserting priority status under § 507(a)(8) in the amount of $2,577.23 for a tax due of $535 plus prepetition interest for 2007, and for interest-only amounts for 2005, 2008, 2009, and 2010. Initially, no action was taken to address the priority claim of the IRS that was not provided for in the confirmed plan.

It was not until Sept. 13, 2021, nearing the end of the plan, that the Trustee filed a motion to modify the plan or to dismiss the case, based on the Debtors’ failure to modify the plan to provide for the IRS priority claim or to object to that claim. The Debtors filed an objection to Claim 3-1 on November 22, 2021. Several amended claims were filed by the IRS early in 2022, with the last one, Claim 3-4, filed on May 3, 2022, asserting a priority amount totaling $931 for interest accrued on taxes due for 2008, 2009 and 2010. That claim also asserts non-priority unsecured debts totaling $1,479.82 that includes $734.50 for interest on 2005 taxes and $535 of tax due for 2007 plus interest thereon of $210.32. Numerous hearings have been held and briefs have been submitted by the parties.

ANALYSIS

The Debtors challenge the propriety of the IRS's continued accrual of interest on tax debts that were allowed as priority claims and fully paid through the Debtors’ prior Chapter 13 plan and were discharged in the Second Case. The Debtors request that the priority amounts claimed for tax years 2008, 2009 and 2010 in Claim 3-4, totaling $931.00, be disallowed as having been paid in full and/or discharged in the Second Case. The IRS does not dispute that the assessed tax amounts for tax years 2008, 2009 and 2010, plus the interest that accrued on those assessments up to the filing date of the Second Case were paid in full through the confirmed plan in the Second Case. The priority amounts attributable to tax years 2008, 2009 and 2010 asserted in Claim 3-4 filed in the Third Case consist entirely of interest that accrued after the filing of the Second Case.

The effect of § 502(b)(2), which excludes unmatured interest from being allowed as part of a creditor's claim for an unsecured debt, means that debtors are not permitted in a Chapter 13 case to pay post-petition interest on any unsecured debt even if the debt is not dischargeable. An exception to that restriction is provided in § 1322(b)(10) in cases where all allowed claims are to be paid in full and the debtor has sufficient disposable income available to pay the additional interest. The Debtors were unable to take advantage of § 1322(b)(10) in any of their three Chapter 13 cases.

The IRS takes the position that if a tax debt is not dischargeable in a particular bankruptcy case, the taxing body may continue to accrue post-petition interest which may then be collected after the automatic stay terminates or the bankruptcy case is concluded or dismissed. The IRS also contends that in a bankruptcy case where the debtor was a debtor in one or more prior bankruptcy cases, the Court should apply the doctrine of equitable tolling to the time periods referred to in the Bankruptcy Code that define when income tax debts are not dischargeable — specifically § 507(a)(8)(A) as incorporated into § 523(a)(1).

The Debtors received a discharge under § 1328(a) in the Second Case. To the extent the parties are asking this Court to determine the dischargeability under § 523(a)(1) of the Debtors’ liabilities for taxes assessed for years 2008, 2009 and 2010 and the interest that accrued on those tax debts after the filing of the Second Case, the Court notes that no adversary proceeding has been filed seeking such a determination. Since an adversary proceeding is required to determine the dischargeability of a debt, Fed. R. Bankr. Pro. 7001(6), that issue is not properly before the Court. In this Court's view, however, it is not necessary to address the question of dischargeability in order to resolve the issue of the priority status of Claim 3-4, which will resolve the Trustee's motion and allow the Third Case to be discharged and closed.

The rule in the Seventh Circuit is that to the extent taxes owed by the debtor are excepted from discharge under § 523(a)(1), prepetition interest that accrues on such tax debts is also not dischargeable. In re Larson, 862 F.2d 112, 119 (7th Cir. 1988). The interest that accrues on a tax debt after a bankruptcy case is filed, where that debt is excepted from discharge for purposes of that case, may or may not be dischargeable in a subsequent bankruptcy case. Pursuant to § 523(b), discharge determinations in one case that hinge on the look-back periods set forth in §§ 523(a)(1) and 507(a)(8) are not binding in a later case. Those look-back periods must be applied anew based upon the petition date of a subsequently filed bankruptcy case. In re McCoy, 2020 WL 718266, *12 (Bankr. S.D. Miss.) ; In re Saler, 205 B.R. 737, 749 (Bankr. E.D. Pa. 1997) ; In re Szafranski, 147 B.R. 976, 988 (Bankr. N.D. Okla. 1992).

A similar principle applies to the issue of priority status under § 507 in the context of serial bankruptcy filings. Priority status is determined in each case by applying the statutory look-back periods using that case's petition date. A priority determination in a prior case has no binding effect in a later case. The applicable look-back periods are to be applied anew in each case subject only to the statutory suspension provisions contained in § 507(a)(8). Where a taxing body files a priority claim for "interest only" because the assessed tax amount itself has been paid in a prior bankruptcy case, the priority status of the interest is based upon the due date of the return or the date the tax was assessed. 11 U.S.C. § 507(a)(8)(A)(i) and (ii). If those dates precede the applicable look-back periods, the interest is not entitled to priority status notwithstanding that the interest continued to accrue during the look-back periods.

Generally, if an assessed income tax is excepted from discharge, the IRS may continue to accrue post-petition interest on such taxes from and after the petition date, subject to proper credit for interim payments from the bankruptcy trustee or from the debtor, and with interest continuing to accrue only on the remaining principal balance. Johnson v. Internal Revenue Service, 146 F.3d 252, 260-61 (5th Cir. 1998). The Debtors express uncertainty about the method by which the IRS calculated the interest claimed on Claim 3-4, pointing out that the IRS filed several amended claims with differing amounts. In light of this Court's determination herein denying the priority status asserted by the IRS, it is not necessary to address the correctness of the IRS's interest accrual methodology used to calculate the amounts claimed in Claim 3-4.

The primary issue before the Court is whether the IRS has correctly asserted the priority status of the amounts included in Claim 3-4. This issue turns on the application of § 507(a)(8)(A) and the hanging paragraph appended to that section as part of the 2005 amendments to the Bankruptcy Code. Under § 507(a)(8)(A), priority status is accorded to certain unpaid income taxes if (1) the return was due...