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A bankruptcy court recently ruled on a seeming conflict between two sections of the Bankruptcy Code dealing with proofs of claim (POCs) for tax debts. In re DeVries, No. 13-bk-41591, mem. dec. (Bankr. D. Id., Apr. 28, 2015). The Chapter 13 trustee objected to a POC filed by the debtors on behalf of the Internal Revenue Service (IRS) for their 2013 federal income tax. The court ruled that only a creditor may file a POC for tax debts incurred after the date the debtors file their petition, drawing on multiple precedent cases to determine precisely when tax debt is “incurred.”

The debtors filed a Chapter 13 petition in December 2013, and the court set a deadline in June 2014 for creditors, including the IRS, to file POCs. The IRS timely filed POCs for tax debts from 2011 and 2012. The debtors filed their 2013 federal income tax return in April 2014, which showed that they owed $1,021 to the IRS. The bankruptcy court confirmed the debtors’ Chapter 13 plan that May. The plan included full payment of all allowed tax claims.

The IRS did not file a POC for the 2013 tax debt by the June 2014 deadline. The debtors therefore filed a POC on behalf of the IRS the following month. The Bankruptcy Code generally allows a debtor to file a POC for a creditor if the creditor misses the filing deadline. 11 U.S.C. § 501(c), Fed. R. Bankr. P. 3004. The trustee objected to the debtors’ POC, however, arguing that only creditors may file “for taxes that become payable to a governmental unit while the case is pending.” 11 U.S.C. § 1305(a)(1).

In response to the trustee’s objection, the debtors argued that they could file a POC for income tax debt that “arise[s]…after the commencement of the case.” 11 U.S.C. §§ 502(i), 507(a)(8). Since their 2013 tax return was not due until after they had filed their petition, they claimed, they could file a POC for that year’s tax debt. The question for the bankruptcy court was therefore whether § 502(i) or § 1305(a) applied.

The bankruptcy court ruled in the trustee’s favor, finding that § 502(i) did not apply in the debtors’ circumstances. It identified two possible scenarios in which § 502(i) would apply, based on Ninth Circuit precedent:

1. Section 502(i) is based on § 507(a)(8), which addresses taxes due during a three-year “lookback period” prior to the petition date. In re Jones, 420 B.R. 506, 510 (BAP 9th Cir. 2009). The debtors’ 2013 tax return, however, was due after they filed their petition.

2. Section 502(i) could also apply to taxes incurred before a debtor files a petition, but payable afterwards. In re Joye, 578 F.3d 1070, 1076 (9th Cir. 2009). Federal income tax is considered to be “incurred” on the last day of the tax year. In re Pacific-Atlantic Trading Co., 64 F.3d 1292, 1299-1300 (9th Cir. 1995). The debtors therefore incurred their 2013 income tax debt on December 31, 2013, several days after they filed their Chapter 13 petition.

For over 20 years, bankruptcy attorney Devin Sawdayi has helped Los Angeles individuals and families repair their finances through the Chapter 7 and Chapter 13 bankruptcy processes. Contact us today online or at (310) 475-939 to schedule a free and confidential consultation with an experienced and knowledgeable financial advocate.

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