August 23, 2009
9th Circuit Rules that Tax Assessed on a Post Chapter 13 Filed Tax Return for a Prepetition Year is a Prepetition Debt
Joye v. Franchise Tax Board (In re Joye), ---- F. 3d ----, 2009 WL 2568649 (9th Cir. Aug, 2009)
Issue: When a tax return for a prepetition year has not been filed prior to chapter 13 petition and plan, is the resulting tax a prepetition or a postpetition debt?
Appeal from the district court
Judge Wallace (Dissent by Judge Graber)
The debtors filed chapter 13 on Mar 7, 2001. They had not yet filed their 2000 tax return. They estimated their 2000 state income taxes at $10,000 and provided for that in their plan which was confirmed. The FTB did not object or file a proof of claim. The debtors filed their 2000 return on October 15, 2001 showing a tax owed of $28,000. The debtors later completed their plan and received a discharge. The FTB then began collection of the remaining 2000 tax. The debtors filed an adversary proceeding seeking to stop the FTB from trying to collect the tax. The FTB argued that it was a postpetition tax or that they did not receive adequate notice. The parties agreed that if it is a postpetition tax, it is not discharged. The bankruptcy court agreed with the debtors. The district court ruled that the tax was technically discharged but reversed holding that the FTB did not receive adequate notice.
The 9th Circuit reversed the district court agreeing that the tax was discharged. The chapter 13 discharge provides that debts "provided for under the plan" are discharged. Section 1305 provides that "[a] proof of claim may be filed by any entity that holds a claim against a debtor . . . (1) for taxes that become payable to a governmental unit while the case is pending." The issue then is whether the taxes "became payable" while the case was pending. The 9th Circuit went through a nice analysis of the meaning of payable. Generally in "'customary usage'" [it] means … `[c]apable of being paid' [and] `justly due' and `legally enforceable.' " But this is bankruptcy. We have to look to Section 502(i) which "addresses tax claims held by governmental entities. This section provides that `[a] claim [for certain tax liabilities owed to governmental units] that does not arise until after the commencement of the case . . . shall be determined, and shall be allowed . . . the same as if such claims had arisen before the date of the filing of the petition.'" Therefore the tax due for 2000 was a claim which "arose" before the filing and is "payable" before the filing, especially since is certainly could have been computed and paid before the filing. The opinion rejects the notion that "payable" means what the FTB rulings and manuals say (and even the IRS rulings and manuals) as this is bankruptcy law.
As to the notice issue, the opinion says "[w]hen the holder of a large, unsecured claim [in bankruptcy] . . . receives any notice from the bankruptcy court that its debtor has initiated bankruptcy proceedings, it is under constructive or inquiry notice that its claim may be affected, and it ignores the proceedings to which the notice refers at its peril." Citing Matter of Gregory, 705 F.2d 1118 (9th Cir. 1983). The FTB argued that it did not know how much was owed and could not file a proof of claim until the debtor filed the tax return. The 9th Circuit said that the FTB could have estimated the claim or asked for an extension of time to file the POC. "We acknowledge that the Board has the unenviable task of maintaining complete and accurate records for the millions of taxpayers in the State of California. But we are not at liberty to rework the Bankruptcy Code in order to lighten its burden."
The dissent argued that Section 502(i) is not relevant because it deals with claims "that arise" and 1305 deals with "taxes that become payable." She also says that the 9th Circuit should follow the 5th Circuit "because of the importance of national uniformity in administering the Bankruptcy Code." Now, she says, there is a split between the circuits.
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