BANKRUPTCY AND THE GOVERNMENT'S

MOTION TO DISMISS FOR BAD FAITH

 

 

     Many individuals have been attacked by the IRS and have been placed in a position that makes it impossible for them to live. Certain of these individuals have realized that it is important for them to use bankruptcy as a means of self-defense.

 

     It is commonplace for the IRS to ask for a dismissal for bad faith.  Recently in Denver, I watched a judge dismiss a Chapter 11 Bankruptcy by declaring that he agreed that the bankruptcy filing was in bad faith.  The judge made the decision in spite of the fact that the debtors had filed all their back returns and had come forth with all income information.  I was absolutely astounded at the court's decision in view of the intended purpose for a bankruptcy court.

 

     The dismissal of your case for bad-faith is a definite risk; however, there is light at the end of the tunnel.  I have come into possession of a Bankruptcy Court Order filed on October 31, 1988, which deals with the issue of bad-faith.  The court stated:

 

     "The debtor filed bankruptcy to escape the consequences of an IRS tax levy which resulted in seizure of a van he drove and garnishment of all his wages except $75.00.  This filing is not an abuse of the bankruptcy system.  As far as I know, no one can live on $75.00 per paycheck and this alone would necessitate for most individuals a bankruptcy filing.

 

     The debtor's plan proposes to pay the Internal Revenue Service's entire priority claim (as the debtor calculates it at least) and to pay 3.3 percent of the IRS's unsecured claims.  The IRS argues that a one creditor Chapter 13 which pays a de minimus amount to the creditor violates the good faith plan requirement of 11 U.S.C. 1325(a) (3).  I do not find that this filing is outside the purposes of the Bankruptcy

Code. There is no preclusion of one-creditor Chapter 13 plans, In re March, Id., at p. 276.  The fact that some or all of the IRS's claim would be nondischargeable in a Chapter 7 case does not make the filing of a plan in Chapter 13 a "bad faith" filing.  In re Owens, 82 B.R. 960, 963 (Bankr. N.D. Ill. 1988)."

 

     As you can see, at least this Bankruptcy judge realizes that the protection of the Bankruptcy Court is necessary for the protection of debtors.

 

Bankruptcy Issues

 

      Remember that the Offer in Compromise tolls the period during which the 240-day period is tolled.  The Bankruptcy Code 507(a)(A)(8)(ii) provides that the 240-day period is tolled during "... any time plus 30 days during which an offer in compromise with respect to such tax...was pending."  The Offer in Compromise is pending during the appeal for purposes of the Bankruptcy Code.  If you have filed an offer in compromise with an appeal, be careful because the appeal is included in the time that the offer in compromise is pending.

 

      There is substantial case authority that a previous bankruptcy extends the time periods for dischargeability of taxes during the time that the bankruptcy is pending plus six months.  Remember that a tax lien survives bankruptcy on exempt assets. See In re Forrest 220 B.R. 411 (Bkrtcy.W.D.Okla.1997).  In the case of In re Genung, 220 B.R. 505 (Bkrtcy.N.D.N.Y. 1998), the court ruled that the debtor's appeal of IRS' rejection of the offer in compromise tolled the 240-day priority period for purposes of discharge.  In the case of In re Odell, 221 B.R. 1000 (Bkrtcy.M.D.Fla. 1998), the court held that the suspension provision of 11 U.S.C. 108(c) operates to extend only nonbankruptucy periods of limitations and cannot be used to extend the 240-day priority/nondischargeability period for tax debts.  In the case of In reBurke, 146 F.3d 1313 (11th Cir. 1998), the court ruled that the state waived sovereign immunity by filing a proof of claim in a Chapter 7 case.  In the case of In re Holowell, 222 B.R. 790 (Bkrtcy.N.D. Miss 1998), the court ruled that the two-year period for tax return filing for purposes of the discharge of the tax was tolled during the debtor's prior Chapter 7 case.  The ten-year statute of limitations for collection of income tax was tolled for the period debtor was in Chapter 7, plus additional time, notwithstanding an agreement signed by the taxpayer extending the limitations period to a certain date.  See In re Klingshirn, 147 F.3d 526 (6th Cir. 1998).

 

      In the case of In re Pascoe, 223 B.R. 574 (Bkrtcy.D.Wyo. 1997), the debtor failed to file tax returns, the assessments against the debtor were based on the BLS Statistics.  The burden of proof is on the taxpayer to show that the amount which is sought by the IRS in its deficiency assessment is erroneous in order to overcome the presumption of correctness.

 

      Here is an interesting case: In U.S. v. Ashe, 98-2 USTC 85,695, the court ruled that the debtor's furnishing of schedules contained sufficient information upon which the IRS could make an assessment constituted a tax return for purposes of dischargeability. 

 

      A prior bankruptcy stops the clock on 3-year, 2-year and 240-day rules.  See In re Brickley, 70 B.R. 113 (9th Cir. BAP 1986); Matter of Ross, 130 B.R. 312 (Bkrptcy (Neb. 1991), U.S. Worthen 137 B.R. 1016 (DC Ore. 1992), In re Deitz, 116 B.R. 792 (Bkrptcy D. Colo 1990), Matter of Stoll 132 B.R. 782 (N.D.Ga. 1990), In re Tibaldo 187 B.R. 673 (Bkrtcy.C.D.Cal. 1995), In re Tesslink, 165 B.R. 708 (Bkrtcy.S.D.Ga. 1994), In re Zecco, 211 B.R. 109 (Bkrtcy.D.Mas. 1997), Montoya v. United States, 965 F.2d 554 (7th ir. 1992), In re Waugh, 109 F.3d (3rd Cir. 1997), In re Taylor, 81 F.3d 763 (10th Cir. 1993) (relying on equitable tooling), In re Genung, 220 B.R. 505 (Bkrtcy.N.D.N.Y. 1998), In re Thomas, 222 B.R. 742 (Bkrtcy.E.D.Pa. 1998), In re Affiliated Food Stores, 222 B.R. 799 (N.D.Tex. 1988), In re Hollowell, 222 B.R. 602 (Bkrtcy.S.Fla. 1998), In re Collins, 223 B.R. 372 (Bkrtcy.M.D.Fla. 1998).