California Franchise Tax Board v. Kendall (In re Jones)

Summarized by Sarah Smegal , Bartlett Hackett Feinberg PC
14 years 7 months ago

Citation:

--- F.3d ---- (9th Cir. 2011); Case No. 10-60000 (July 12, 2011)

Tag(s):

9th Circuit

Ruling:

The Ninth Circuit Court of Appeals (the “Circuit Court”) affirmed, on other grounds, the Ninth Circuit Bankruptcy Appellate Panel’s ruling that a tax debt owed by Brenda Marie Jones (the “Debtor”) and her husband to the California Franchise Tax Board (the “FTB”) was not excepted from the Debtor’s Ch. 7 discharge where the FTB was not precluded by the Debtor’s previous Ch. 13 filing from collecting on the debt and the three-year lookback period under section 507(a)(8)(A) was not suspended. The tax debt arose after the Debtor’s Ch. 13 plan confirmation, so property had revested in the Debtor, the applicable stay provisions of section 362(a) were lifted, and the FTB was able to collect on the debt up until the Debtor’s Ch. 7 filing approximately four years later. The Circuit Court declined to apply the principles of equitable tolling to extend the lookback provision of section 507(a)(8)(A). The three-year look-back period provided for by section 507(a)(8)(A) “functions as a statute of limitations.” (citing Young v. United States, 535 U.S. 43, 46-47 (2002)). It excepts a tax debt from discharge under section 727, “only to the extent that such claims are for—(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition[.]” (citing 11 U.S.C. § 507(a)(8)(A)(i)). The Ninth Circuit Court of Appeals (the “Circuit Court”) determined that under the plain language of the statute, the relevant “petition” for purposes of calculating the three-year period in the Debtor’s case was her Ch. 7 petition. Accordingly, the three-year look-back period was October 2004 through October 2007. As the tax debt came due in 2003, the debt would be discharged unless the “statutory suspension or equitable tolling appl[ied] to extend the lookback period to encompass the 2003 due date.” The suspension provision of section 507(a)(8) “contemplates three scenarios in which the [three-year] lookback period is suspended,” the second of which is relevant to the Debtor’s case: “any time during which the stay of proceedings was in effect in a prior [bankruptcy] case.” (citing 11 U.S.C. § 507(a)(8)). The Circuit Court consulted the legislative history of the relevant portion of section 507(a)(8), which “Congress intended to codify the rule established in Young v. United States, 535 U.S. 43 (2002),” and concluded that “the suspension provision applies here only if the FTB was precluded from collecting the debt by a stay of proceedings” during the Debtor’s prior Ch. 13 case. The Circuit Court then analyzed whether the Debtor “had property outside of the bankruptcy estate from which the FTB could collect the tax debt” during the Ch. 13 bankruptcy proceeding. Noting the need to harmonize sections 1306(a) (defining property of the Ch. 13 estate) and 1327(b) (vesting all property of the Ch. 13 estate in the debtor upon confirmation of a plan, unless otherwise provided in the plan or confirmation order), the Circuit Court gave a brief overview of four approaches developed by other bankruptcy and circuit courts in “determining whether and to what extent property of the estate revests in the debtor at plan confirmation.” The Circuit Court squarely rejected one approach and, of the remaining three, declined to adopt one in particular because under any of the three approaches, “at the very least, some estate property revests in the debtor at confirmation.” The bankruptcy court and the Ninth Circuit Bankruptcy Appellate Panel had specifically adopted one of the three approaches in reaching their conclusions. The Circuit Court held that the Debtor “did not elect otherwise, [so] she once again became the owner of her property at confirmation, except as to those sums specifically dedicated to fulfillment of the plan. Accordingly, the FTB was not precluded from collecting the post-[Ch. 13] petition tax debt from property that revested in [the Debtor] upon plan confirmation.” (citing 11 U.S.C. § 362(c)(1)). The Circuit Court further ruled that the FTB could have collected on the tax debt between the due date of the debt (October 2003) and the Debtor’s filing of the Ch. 7 petition (October 2007) and that the lookback period was not statutorily suspended. Therefore, the tax debt was discharged. Finally, the Circuit Court noted that equitable tolling was not appropriate where the FTB took no “action to protect its claim until 2009, six years after the debt arose. This inaction creates the appearance that, rather than exercising caution in light of uncertainty [of the interplay of sections 1306(a) and 1327(b)], the FTB simply did not pursue its claim until the opportunity to do so had passed.”

Procedural context:

Appeal from decision of the Ninth Circuit Bankruptcy Appellate Panel, which declined to except from Ch. 7 discharge a tax debt owed by the Debtor to the California Franchise Tax Board because: the Debtor’s prior Ch. 13 case did not prevent the FTB from collecting the debt; the three-year lookback period under section 507(a)(8)(A) was not suspended; and equitable tolling did not apply to extend the lookback period.

Facts:

Brenda Marie Jones (the “Debtor”) and her husband filed a joint voluntary Ch. 13 bankruptcy petition in July 2002. The bankruptcy court confirmed the Joneses' plan in September 2002. Thirteen months later in October 2003 and pursuant to an extension, the Joneses filed their joint income tax return for the year 2002. The Joneses owed approximately $6,000 in reported taxes to the California Franchise Tax Board (the “FTB”), which tax debt the Joneses did not pay. The bankruptcy court dismissed the Joneses' Ch. 13 case in September 2006. In October 2007, the Debtor (individually) filed a voluntary Ch. 7 bankruptcy petition. She received a discharge of her existing debts in January 2008 and the FTB (after successfully reopening the case) requested a determination that the tax debt was excepted from discharge.

Judge(s):

Nelson, McKeown, Gould

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