Tax Discharge?
Beware Equitable Tolling!
By Morgan D. King,
of Morgan King Company & Morgan King Law Offices
Dublin, California
3) the tax must have been assessed
over 240 days before filing the petition. 7
But caveat - going strictly by the
calendar may not give you the correct
answers because there are time periods
that may be tolled or suspended, as
discussed below.
What are the “tolling events”?
There are some things the debtor/
taxpayer may do before filing
bankruptcy that toll or stop the clock on
several of these time rules. These are;
W
e have discussed tolling
events in prior articles. 1
However, we need to take
another look in order to avoid being
blind-sided by tolling events we didn’t
anticipate. 2
More specifically, I’m looking at what
the courts call equitable tolling.
What are the time rules for tax
discharge?
There are three time rules 3 that must be
satisfied to discharge state and federal
income taxes in chapter 7.
These are:
1) the due date 4 for filing or giving the
return or equivalent report or notice
must be over 3 years old. 5
2) the taxpayer must have filed his/
her regular 1040 tax return, or its
“equivalent report or notice,” over two
years before filing the BK; 6
18
CONSUMER BANKRUPTCY JOURNAL
1) A prior bankruptcy stay that
prohibits tax collection until the
bankruptcy stay is released,
tolls the 3-year period for the
time the clock is stopped, plus
90 days; 8
2) Similarly, a prior bankruptcy
tolls or suspends the 240-day
period for the time suspended,
plus 90 days.
3) Request for a hearing and an
appeal. 9
Section 507(a)(8)(G) also provides that
the tolling periods for the 3-year and
240-day periods are suspended “… 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 10 . This has
been interpreted as the IRS Collection
Due Process appeal, to which the
taxpayer may be entitled if he/she
reacts quickly to a final notice of Intent
to Levy; the timely request for the CDP
Summer 2017
appeal prohibits tax collection until the
appeal is concluded. And don’t forget to
tack on the additional 90 days provided
by § 507(a)(8)(G).
But it’s readily clear that the Code
nowhere explicitly provides that any of
the tolling events apply to the running
of the 2-year period.
Some courts have applied 11 U.S.C. §
108, extension of time, to toll the 2-year
period. 11
Equitable tolling raises its head
Notwithstanding the lack of any
statutory basis to suspend the running
of the two-year period, several courts
have imposed the theory of equitable
tolling to stop the clock. The author has
found several cases that address this
issue. At least seven of those employed
equitable tolling to stop the clock on the
2-year period. 12
The fundamental basis of anything
“equitable” is ultimately the question
of what is “fair” to the other party, and
several cases employ the term “unfair,”
when ruling that the 2-year period must
be tolled to give the IRS its fair chance
to collect (i.e. two years) the tax.
Equitable tolling was applied by the
Supreme Court in Young v. United
States. 13 Young provided that the
3-year period is tolled by the debtor’s
previous bankruptcy. This is the case
cited most often to apply equitable
tolling. Several cases have said that the
equitable principles arising from Young
were codified by the Bankruptcy Abuse
National Association of Consumer Bankruptcy Attorneys