Appropriate Statute of Limitations Must Be Determined before Considering Discharge of Tax Debts. (Parker Tax Publishing January 2014)

Because a bankruptcy court did not determine whether a debtor sufficiently underreported his income to extend the statute of limitations from three years to six years, the priority and nondischargeability of the debtor's tax liability could not be resolved until additional information was obtained. In re Winters, 2013 PTC 389 (B.A.P. 6th Cir. 12/12/13).

Mark Winters filed his 2004 federal income tax return in September 2005, his 2007 return in November 2008, and his 2008 return in November 2009. In December 2009, the IRS sent a notice of deficiency to Mark for the 2004 tax year, asserting over $143,000 in additional taxes plus penalties. In 2010, Mark filed a petition in the Tax Court challenging the notice of deficiency and, in 2011, he filed a Chapter 7 bankruptcy petition. In the bankruptcy proceeding, Mark sought a determination of the amount of the tax liability owed. The IRS moved for summary judgment, alleging that, because the tax liabilities had not yet been assessed but would have been accessable after the petition date, the liabilities were entitled to priority status under Bankruptcy Code Section 507. In granting the IRS's motion, the bankruptcy court concluded that the IRS claim for 2004 taxes was a nondischargeable priority claim. Mark appealed the bankruptcy court order and his case in the Tax Court was stayed.

Code Sec. 6501 provides generally that a deficiency against a taxpayer must be assessed within three years after the due date of the return or the date the return was filed, whichever is later. However, when a taxpayer omits from gross income an amount that is in excess of 25 percent of the gross income stated on the return, the three-year statute of limitations period is extended to six years.

Bankruptcy Code Section 507 provides for the prioritization of unsecured IRS tax for a tax year ending on or before the date of the filing of a bankruptcy petition.

OBSERVATION: The IRS has the authority to collect outstanding federal taxes for 10 years from the date a taxpayer's liability is assessed. The 10-year collection period is suspended for tax periods included in a bankruptcy while an automatic stay is in effect, plus an additional six months.

Mark argued that the 2004 tax debt was dischargeable because the three-year statute of limitations had run before the IRS issued its notice of deficiency.

The IRS contended that the three-year period was extended to six years because Mark omitted more than 25 percent of his gross income from his return.

The bankruptcy trustee argued that the case should go back to the bankruptcy court because neither the bankruptcy court nor the Tax Court had determined the amount of Mark's 2004 tax debt.

The Bankruptcy Appellate Panel for the Sixth Circuit reversed the bankruptcy court holding that the IRS claim for 2004 taxes was a nondischargeable priority claim. The appellate court found that the bankruptcy court failed to determine whether the statute of limitations had run on the 2004 tax liabilities before the IRS issued its notice of deficiency in 2009. The court noted that the IRS motion for summary judgment in the instant case only sought a determination regarding the priority and dischargeability of the 2004 tax debt, not the amount of the debt. Whether the Mark's 2004 tax liability was ultimately nondischargeable depended on the amount by which he underreported his 2004 income. The court concluded that, until that amount has been determined, the issues of the applicable statute of limitation, priority, and dischargeability could not resolved. Accordingly, the court remanded the case to the bankruptcy court to determine the amount of the 2004 tax debt.

For a discussion of the statute of limitations, see Parker Tax ¶260,130. (Staff Contributor Parker Tax Publishing)

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.