Consumer Bankruptcy Journal Summer 2017 - Page 18

Tax Discharge? Beware Equitable Tolling! By Morgan D. King, of Morgan King Company & Morgan King Law Offices Dublin, California 3) the tax must have been assessed over 240 days before filing the petition. 7 But caveat - going strictly by the calendar may not give you the correct answers because there are time periods that may be tolled or suspended, as discussed below. What are the “tolling events”? There are some things the debtor/ taxpayer may do before filing bankruptcy that toll or stop the clock on several of these time rules. These are; W e have discussed tolling events in prior articles. 1 However, we need to take another look in order to avoid being blind-sided by tolling events we didn’t anticipate. 2 More specifically, I’m looking at what the courts call equitable tolling. What are the time rules for tax discharge? There are three time rules 3 that must be satisfied to discharge state and federal income taxes in chapter 7. These are: 1) the due date 4 for filing or giving the return or equivalent report or notice must be over 3 years old. 5 2) the taxpayer must have filed his/ her regular 1040 tax return, or its “equivalent report or notice,” over two years before filing the BK; 6 18 CONSUMER BANKRUPTCY JOURNAL 1) A prior bankruptcy stay that prohibits tax collection until the bankruptcy stay is released, tolls the 3-year period for the time the clock is stopped, plus 90 days; 8 2) Similarly, a prior bankruptcy tolls or suspends the 240-day period for the time suspended, plus 90 days. 3) Request for a hearing and an appeal. 9 Section 507(a)(8)(G) also provides that the tolling periods for the 3-year and 240-day periods are suspended “… as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor …”, plus 90 days 10 . This has been interpreted as the IRS Collection Due Process appeal, to which the taxpayer may be entitled if he/she reacts quickly to a final notice of Intent to Levy; the timely request for the CDP Summer 2017 appeal prohibits tax collection until the appeal is concluded. And don’t forget to tack on the additional 90 days provided by § 507(a)(8)(G). But it’s readily clear that the Code nowhere explicitly provides that any of the tolling events apply to the running of the 2-year period. Some courts have applied 11 U.S.C. § 108, extension of time, to toll the 2-year period. 11 Equitable tolling raises its head Notwithstanding the lack of any statutory basis to suspend the running of the two-year period, several courts have imposed the theory of equitable tolling to stop the clock. The author has found several cases that address this issue. At least seven of those employed equitable tolling to stop the clock on the 2-year period. 12 The fundamental basis of anything “equitable” is ultimately the question of what is “fair” to the other party, and several cases employ the term “unfair,” when ruling that the 2-year period must be tolled to give the IRS its fair chance to collect (i.e. two years) the tax. Equitable tolling was applied by the Supreme Court in Young v. United States. 13 Young provided that the 3-year period is tolled by the debtor’s previous bankruptcy. This is the case cited most often to apply equitable tolling. Several cases have said that the equitable principles arising from Young were codified by the Bankruptcy Abuse National Association of Consumer Bankruptcy Attorneys