by Because of the IRS’s inability to levy against the debtor’s property, bankruptcy’s three-year look-back period for tax debts is tolled while a tax debtor pursues a collection due process action. Tenholder v. United States of Amer., No. 17-1310 (S.D. Ill. Sept. 17, 2018).
Angela and Randy Tenholder reopened their chapter 7 case to challenge the IRS’s post-discharge efforts to collect tax debts the Tenholders asserted were outside the three-year look-back period and had therefore been discharged. The bankruptcy court found the tax liabilities were non-dischargeable under section 523(a)(1)(A) because the three-year limitations period was tolled during the Tenholder’s pursuit of a “collection due process” (CDP) action.
The hanging paragraph to section 507(a)(8) provides for tolling the limitations period for nondischargeability of tax debts “for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax 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.” Under 26 U.S.C. section 6330, when a tax debtor seeks a CDP hearing, the IRS is prohibited from levying against his property but may proceed with other tax collection activities.
The parties disagreed as to whether tolling the limitations period required that the government be prohibited from all collection activity, or if it is enough that the government is prohibited from collection by levy but still has other collection avenues open to it.
While the court found the language of section 507(a)(8)’s hanging paragraph to be amenable to both parties’ interpretations, it ultimately came down on the side of the IRS’s broader reading. In finding that the CDP action tolled the time limitations, the district court relied on Black’s Law Dictionary definition of “prohibited” as “forbid, prevent, preclude or severely hinder.” Noting that levying of a tax debtor’s property is a primary collection tool for the IRS, the court found that eliminating the ability to levy “severely hindered” its collection efforts. The legislative history of the hanging paragraph, which specifically referred to tolling based on a debtor’s pursuit of a CDP action, reinforced the court’s conclusion. In so holding, the court agreed with the similar conclusions in Console v. C.I.R., 291 Fed. Appx. 234 (11th Cir. 2008), which based its decision on the language of section 507’s hanging paragraph, and In re Lastra, No. 12-1188, 2012 WL 6681739 (Bankr. D. N.M. Dec. 21, 2012), which found the hanging paragraph to be ambiguous and based its conclusion on congressional intent.
The court affirmed the bankruptcy court’s order granting summary judgment in favor of the IRS.