Bankruptcy Debtor’s Income Tax Liabilities Held Not Dischargeable

Bankruptcy Debtor’s Income Tax Liabilities Held Not Dischargeable

Few issues are more misunderstood than the interplay between the taxing authorities and the bankruptcy court.  Congress is no help here because the language of the Bankruptcy Code is second only to the Internal Revenue Code in obtuseness.  These Codes give the most gifted lawyers fits in attempting to decipher them. 

 

Income tax obligations that are too new are not dischargeable while older taxes can be.  The theory seems to be that the Internal Revenue Service should get a fair chance to collect income taxes before losing that ability entirely to bankruptcy. 

11 U.S.C. 1328(a)(2) excepts from discharge the kind of debt specified in 11 U.S.C. 507(a)(8)(C) (withholding taxes) or 11 U.S.C. 523(a) (all other taxes), including specifically 11 U.S.C. 523(a)(1)(B) debt. 11 U.S.C. 523 (a)(1)(B)(ii) denies discharge of taxes for which a late return was filed after two years before the date of the filing of the bankruptcy petition.  Via 11 U.S.C. 507(a)(8)(A)(i), taxes for which a return is last due including extensions after three years before the date of the filing of the bankruptcy petition are not discharged. Via 11 U.S.C. 507(a)(8)(A)(ii), taxes assessed within 240 days before the date of the filing of the bankruptcy petition are also not discharged.  If any of these three are met, there is no discharge.

In In re Ollie-Barnes, 114 AFTR 2d ¶ 2014-5413 (Bktcy Ct 11/06/2014) the bankruptcy court ruled that the filing date was less than two years from the late tax return filing and therefore  the taxes were not dischargeable.  One of the issues in Ollie-Barnes was whether her prior bankruptcies tolled the two year period.  The bankruptcy court held that the earlier bankruptcy filings tolled the running of the two year period and therefore the two year period had not expired and thus the taxes were not discharged.

Moral of the case: when dealing with taxes and bankruptcy, engaging counsel familiar with the interplay between taxes and bankruptcy is key.