                                                                                                                           Opinions of the United
1996 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-1-1996

In Re: Ralph E Taylor
Precedential or Non-Precedential:

Docket 95-1500




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Recommended Citation
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                   UNITED STATES COURT OF APPEALS
                       FOR THE THIRD CIRCUIT
                               ______

                               No. 95-1500
                                  _____

                      IN RE:    RALPH E. TAYLOR,

                                                     Debtor

                          Ralph E. Taylor,

                                                     Appellant

                                  _____

           On Appeal from the United States District Court
              for the Eastern District of Pennsylvania
                        (D.C. Civ. 94-06521)

                                  _____

                      Argued January 30, 1996

      BEFORE:    GREENBERG, NYGAARD, and LAY,0 Circuit Judges

                       (Filed: April 3, 1996)

                                  _____

                                          John      A.    DiGiamberardino
(argued)
                                          Suite 102
                                          833 Park Road North
                                          Wyomissing, PA 19610

                                                 Attorney for Appellant

                                          Sarah Holderness (argued)
                                          Gary R. Allen
                                          Gary D. Gray
                                          Annette M. Wietecha
                                          United States Department
                                             of Justice
                                          Tax Division
                                          P.O. Box 502
                                          Washington, D.C. 20044

0
     *Honorable Donald P. Lay, Senior Judge of the United States
Court of Appeals for the Eighth Circuit, sitting by designation.


                                  -1-
                                                 Attorneys for Appellee


                                   _____

                          OPINION OF THE COURT

                                   _____


LAY, Circuit Judge.


             Robert   Taylor   filed    a    Chapter    13   petition   in   the

Bankruptcy Court for the Eastern District of Pennsylvania on

November 19, 1992.      He had previously filed a Chapter 13 petition

in Michigan.     The Michigan bankruptcy petition was dismissed on

August 26, 1991.       In the Pennsylvania proceedings, the Internal

Revenue Service filed an amended proof of claim for taxes from

1987 and 1988,0 to which Taylor objected on the ground that the

taxes at issue were not entitled to priority status because his

petition in bankruptcy was filed more than three years after the

due date of the relevant tax returns.0

             The IRS replied that the three-year lookback period

under   11   U.S.C.    § 507(a)(7)(A)(i)       was     suspended   during    the

pendency of Taylor's Michigan bankruptcy,0 when an automatic stay

0
 The claim was comprised of a secured claim of $600, an unsecured
priority claim of $10,526.54, and an unsecured general claim of
$4,189.43.
0
 Taylor's 1987 and 1988 tax returns were the subject of this
dispute. His 1987 tax return was due, by virtue of an extension,
on August 15, 1988.    Thus, four years, three months, and three
days lapsed between the due date of Taylor's 1987 return and the
filing of the Pennsylvania bankruptcy. Taylor's 1988 tax return
was due on April 15, 1989. Thus, three years, seven months, and
four days lapsed between the due date of the 1988 tax return and
the filing of the Pennsylvania bankruptcy.
0
 Section 507 provided in relevant part:

                                       -2-
prevented the government from collecting his tax debt.      See 11

U.S.C. § 362(a). The IRS argued that, excluding the period of the

Michigan bankruptcy proceeding, less than three years had lapsed

between the due dates of Taylor's returns and the filing of

Taylor's bankruptcy petition in Pennsylvania.0

            The Bankruptcy Court issued an order adopting the IRS's

position.    The court held that the pendency of Taylor's Michigan

bankruptcy proceeding tolled the three-year nondischargeability

period for unpaid taxes.   The district court affirmed, and Taylor

appeals.




     (a) The following expenses and claims have priority in the
     following order:

                            * * * * * *

     (7) Seventh, allowed unsecured claims of governmental units,
     only to the extent that such claims are 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; . . . .

The 1994 amendments to § 507 assign the government eighth
priority, but this change is not relevant to our appeal. See 11
U.S.C. § 507(a)(8).
0
 Excluding the period of the Michigan bankruptcy proceeding,
roughly two years and seven months had lapsed between the due
date of the 1987 return and the Pennsylvania filing; roughly one
year and ten months had lapsed between the due date of the 1988
return and the Pennsylvania filing.

                                -3-
                                    DISCUSSION

             The parties do not dispute that, but for the suspension

of the three-year lookback period during the pendency of Taylor's

Michigan     bankruptcy   proceeding,        the   IRS's    tax   claims     are   no

longer entitled to priority under § 507(a).                 Taylor contends that

a   strict    construction     of     11   U.S.C.    § 507(a)        warrants      the

conclusion that his earlier bankruptcy proceeding in Michigan did

not suspend the three-year lookback period.                   Section 108(c) of

the Bankruptcy Code suspends the limitations periods of certain

nonbankruptcy statutes which create claims against a debtor in

bankruptcy.      11   U.S.C.   § 108(c).0          Taylor    urges    that   it    is

erroneous to apply § 108(c) and 26 U.S.C. § 6503(h)0 to a concept

0
Section 108(c) provides in relevant part:

          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, . . . 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 period 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 362, 922, 1201, or
      1301 of this title, as the case may be, with respect to
      such claim.
0
 26 U.S.C. § 6503(h) provides:

     Cases under Title 11 of the United States Code.     --
     The running of the period of limitations provided in
     section 6501 or 6502 on the making of assessments or
     collection shall, in a case under title 11 of the
     United States Code, be suspended for the period during
     which the Secretary is prohibited by reason of such

                                       -4-
other    than   collection    or   assessment     and    notes   that    § 507(a)

solely addresses priority among claims.                 He suggests that, had

Congress intended to grant governmental tax claims preferential

treatment, it would have done so explicitly, because suspending

the lookback period solely for the government creates inequities

among    unsecured   creditors.      Sections     507(a)(3)      and    (4),    for

instance, grant priority status to certain unsecured claims for

wages or benefits earned or arising within 90 or 180 days prior

to filing, respectively.           But if a bankruptcy were dismissed,

Taylor    asserts,   those    expenses      yet   unpaid    would      lose    their

priority status upon the debtor's subsequent filing of a second

bankruptcy petition.0        It is asserted that the government should

enjoy no such advantage.

            We disagree.      First, the fact that there is no explicit

provision   within   § 507(a)(7)(A)(i)        which     tolls    the   three-year

lookback provision during a period when an automatic stay is in

effect under § 362 cannot defeat the statutory purpose of either

the Bankruptcy Code or the Internal Revenue Code.                        To limit

§ 507(a) in this regard would lead to absurd results, as the

government would lose its priority claim to back taxes as a

result of the taxpayer's abuse of the bankruptcy process.



     case from making the assessment or from collecting and
     --

            (1) for assessment, 60 days thereafter, and

          (2) for collection, 6 months thereafter.
0
Taylor makes this assumption without citing any authority. To
our knowledge, this issue has never been litigated.

                                      -5-
             Taylor's       proposed      interpretation             also    ignores     the

overall    statutory        scheme   behind     a   Chapter      13     proceeding.        A

bankruptcy court may not confirm a Chapter 13 plan unless it

provides    for     "full     payment     . . .     of   all     claims      entitled     to

priority under section 507" of the Code.                   11 U.S.C. § 1322(a)(2).

Under   the    then    controlling        applicable        terms       of    § 507,    tax

liabilities due not more than three years prior to the debtor's

filing for bankruptcy were given seventh priority.                                 § 507(a).

The   filing   of     the    debtor's     petition       for    relief       triggers the

automatic stay as to "any act to collect, assess, or recover a

claim against the debtor that arose before the commencement" of

the bankruptcy proceeding. § 362(a)(6).                        The stay remains in

effect until the debtor obtains a discharge or the case is closed

or dismissed.         § 362(c)(2).         No discharge can be issued in a

Chapter 13 case until the debtor completes payments or is granted

a hardship discharge. § 1328(b)(1).0

            The IRS was completely barred from collecting its pre-

bankruptcy tax claims during the pendency of the automatic stay

under § 362(a).        No discharge occurred in the earlier Michigan

bankruptcy     proceeding.           By     excepting          tax     priorities       from

discharge,     Congress        intended       to     "discourage             recourse    to

bankruptcy as a facile device for evading tax obligations."                              S.

Rep. No. 1158, 89th Cong., 2d Sess. 3 (1966), reprinted in 1966

U.S.C.C.A.N.      2468,      2470    (describing         the     effect       of     similar

provisions under former Bankruptcy Act).                       It would be an absurd

0
A hardship discharge does not absolve the debtor of priority tax
obligations. §§ 1328(c)(2), 523(a)(1)(A).


                                          -6-
result if a debtor, rather than obtaining a complete discharge by

paying a priority claim, could avoid the three-year lookback

period    by    voluntarily    dismissing      a    bankruptcy   proceeding       and

thereafter urging that a portion of the three-year period has

lapsed.      Surely Congress did not intend to tie the government's

hands and then chide it for not throwing its stone.

               Federal   tolling      provisions      in   general    reflect       a

congressional      concern     that    both    creditors   generally        and   the

government in particular have adequate time to collect their

debts. Section 108(c) of the Bankruptcy Code "extends the statute

of limitations for creditors in actions against the debtor, where

the creditor is hampered from proceeding outside the bankruptcy

court due to the [automatic stay] provisions of 11 U.S.C. § 362."

In   re   Brickley,      70   B.R.    113,    115   (Bankr.   9th    Cir.    1986).

Likewise, § 6503(h) of the Internal Revenue Code suspends the tax

collection limitation period while the debtor's assets are in the

custody or control of any court and for an additional six months

after dismissal of the debtor's case.

               The House Report's discussion of § 507 clearly assumed

that   the     government's     priority      would   apply   even    though      the

collection of taxes was stayed. The Report reads:
     This priority replaces a similar priority provision now
     found in the Bankruptcy Act; the requirement that the
     taxes not have been reported is dropped and a time
     limit is imposed.      The priority should apply if
     assessment or collection is stayed whether or not the
     debtor reported the taxes.     Creditors are on notice
     that the taxes are being disputed, and the taxing
     authority has not had an adequate opportunity to assess
     or collect the taxes.      The time limit is imposed
     because the taxing authority should not be given



                                        -7-
       priority for taxes that are unassessed or uncollected
       through a lack of due diligence.

H. Rep. No. 595, 95th Cong., 1st Sess. 191 (1977), reprinted in
1978    U.S.C.C.A.N.   5963,   6151    (emphasis   added)   (footnote

omitted).0

             The legislative history of § 507 also sets forth the

reasons the government enjoyed priority status under the former

Bankruptcy Act:
     A taxing authority is given preferred treatment because
     it is an involuntary creditor of the debtor. It cannot
     choose its debtors, nor can it take security in advance
     of the time that taxes become due. The Bankruptcy Act
     gives the taxing authority three years to pursue
     delinquent debtors and obtain secured status.     If a
     debtor files bankruptcy before that three-year period
     has run, the taxing authority is given a priority in
     order to compensate for its temporarily disadvantaged
     position.

H. Rep. No. 595, 95th Cong., 1st Sess. 190 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6150.0




0
 Taylor does not contend his taxes were "uncollected through a
lack of due diligence." Id.
0
 Significantly, the House Report continues:

       There is an additional reason for the priority.
       Because it takes a taxing authority time to locate and
       pursue   delinquent  tax   debtors,   taxes  are   made
       nondischargeable if they become legally due and owing
       within three years before bankruptcy.     An open-ended
       dischargeability policy would provide an opportunity
       for tax evasion through bankruptcy, by permitting
       discharge of tax debts before a taxing authority has an
       opportunity to collect any taxes due. The priority is
       tied to this nondischargeability provision, in order to
       aid the debtor's fresh start.         By granting the
       nondischargeable tax a priority, more of it will be
       paid in the bankruptcy case, leaving less of a debt for
       the debtor after the case.

Id. (footnotes omitted).

                                 -8-
            Section 507 grants a priority for taxes on income that

was taxable before bankruptcy and for which a return is last due

within    three   years    prior    to   the    date   of       the   filing    of    the

petition.    This    section       simply      replaced     a     similar      priority

provision    under   the   old     Bankruptcy     Act.      Bankruptcy         Act,   §§

17(a)(1)(c), 64(a)(4) (then codified, respectively, at 11 U.S.C.

§§ 35(a)(1)(c), 104(a)(4) (1970)).

            The time limitations within § 507 merely reflect the

existing limitation periods in income tax cases under 26 U.S.C.

§§ 6501     and   6502,     which     are      suspended        during      bankruptcy

proceedings by § 6503(h).           Congress need not provide an explicit

stay period under § 507 when the three-year limitation period is

otherwise stayed under other provisions of the Act.                            Priority

status is directly tied to payment of the government's unsecured

claims and the debtor's discharge.                 The three-year limitation

period, stayed under §§ 108(c) and 6503(h) as to assessment and

collection, cannot affect the priority status provided to the

government during a bankruptcy proceeding which did not otherwise

culminate in payment of the government's claims and the attendant

discharge of the debtor.            To hold otherwise would defeat long-

standing congressional concerns over nondischargeability and the

disadvantaged status of the government as to unpaid taxes which

led to enactment of the priority status in the first place.

            In enacting § 507(a)(7)(A), Congress sought to strike a

balance between three competing interests:
     (1) general creditors, who should not have the funds
     available for payment of debts exhausted by an
     excessive accumulation of taxes for past years; (2) the


                                         -9-
     debtor, whose       "fresh start" should likewise not be
     burdened with       such an accumulation; and (3) the tax
     collector, who      should not lose taxes which he has not
     had reasonable       time to collect or which the law has
     restrained him      from collecting.

S. Rep. No. 989, 95th Cong., 2d Sess. 14 (1978), reprinted in
1978 U.S.C.C.A.N. 5787, 5800.             On the one hand, an accumulation

of stale tax claims would defeat the purpose of rehabilitating

the debtor with a fresh start.            Accordingly, Congress limited the

lookback     period    to     three    years.         On    the     other     hand,    the

government    is     unable    to     choose    its      debtors     or   otherwise     to

protect itself as would a secured creditor, and an open-ended

dischargeability policy would permit the discharge of tax debts

before the government has time to collect.

             We deem it obvious that these sections, read together,

evidence a congressional concern to preserve the collectability

of tax claims.        Section 507(a)(7)(A)(i) simply provides priority

as to those taxes which fall within the three-year limitation

period. The extension of time provided within § 108(c) of the

Bankruptcy Code and § 6503(h) of the Internal Revenue Code would

be meaningless if debtors could discharge their tax liability by

filing     successive       bankruptcies.           As     the    Ninth   Circuit      has

observed,    § 108's     incorporation         of   § 6503        "reflects    a   policy

determination that it would be unfair to allow the statute [of

limitations] to run against the government's right to enforce a

tax lien when, even if the government did bring suit, it couldn't

collect because it couldn't get at the taxpayer's assets."                            In re

West,    5    F.3d      423,     426     (9th       Cir.         1993)    (interpreting

§ 507(a)(7)(A)(ii)) (quotations omitted), cert. denied, 114 S.


                                         -10-
Ct. 1830 (1994); see also In re Richards, 994 F.2d 763, 765 (10th

Cir. 1993) (noting that "Congress intended to give the government

the benefit of certain time periods to pursue its collection

efforts") (interpreting § 507(a)(7)(A)(ii)); In re Montoya, 965

F.2d 554, 556 (7th Cir. 1992) (approving Brickley's conclusion

that "such a result would sanction tax avoidance schemes since

debtors could simply file a subsequent bankruptcy petition after

three years had passed and deliberately avoid paying their tax

debts"); Brickley, 70 B.R. at 116 ("Congress did not intend to

allow     tax    avoidance       through     bankruptcy          by    permitting       the

discharge of the debtor before the taxing authority has had a

fair    opportunity      to    collect     taxes    due.").           Federal    law    was

designed to safeguard against tax avoidance.

            In summary, it seems clear that Congress intended to

provide    the    government      a   full   and        unimpeded      three    years    to

collect income taxes; it did not intend to leave a loophole for

debtors to engage in tax avoidance, as "the burden of making up

the revenues thus lost must be shifted to other taxpayers."                             S.

Rep. No. 989, 95th Cong., 2d Sess. 14 (1978), reprinted in 1978

U.S.C.C.A.N.      5787,       5800; see    also    United        States   v.    Ron    Pair

Enters., Inc., 489 U.S. 235, 243 (1989) (departure from strict

construction       of    Bankruptcy       Code     is    warranted        if    it    would

"conflict       with    any   other   section      of     the    Code,    or    with    any

important       state    or    federal     interest,"       or    "a     contrary      view

suggested by the legislative history") (footnote omitted).0

0
Taylor also contends the government could have protected its
interests during the pendency of the Michigan bankruptcy by


                                          -11-
         The judgment of the district court is affirmed.

                                                      AFFIRMED.




filing a Motion for Relief from the Automatic Stay, which, he
notes, would have been granted upon a showing of cause.        11
U.S.C. § 362(d)(1). As the Ninth Circuit has noted, although in a
different context, this argument "assumes relief from the stay
would have been granted," In re Hunters Run, Ltd. Partnership,
875 F.2d 1425, 1428 (9th Cir. 1989), and would require the
government to do something to perfect its tax lien which the Code
does not require, id.         It is unreasonable to suggest,
particularly after the fact, that the bankruptcy court could have
been expected to grant relief beyond that contemplated by payment
of the government under the installment plan.


                              -12-
