Tax Practice Procedure October–November 2004 For Whom the Tax Tolls Significant Events That Extend IRS Collection Rights Michael a by qkw22587


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									                                 Tax Practice & Procedure/October–November 2004

For Whom the Tax Tolls:
Significant Events That
Extend IRS Collection Rights

                   Michael and Zachary Fried outline the events that
By                 can extend or toll statutes of limitation on IRS
Michael S. Fried   collection actions and analyze the holding of the U.S.
                   Supreme Court in C.P. Young and subsequent IRS
and                pronouncements.
Zachary S. Fried
                   Introduction                             the IRS is permitted to collect a
                                                            delinquent income tax or trust
                   The typical small business owner         fund recovery penalty is 10 years
                   or professional walks into our of-       from the date of its assessment.2
                   fice owing delinquent taxes for a         However, this 10-year collection
                   variety of different years. Often, the   statute of limitations can be ex-
                   liabilities are a mixture of unpaid      tended for additional periods by
                   personal income taxes, including         a number of different events. For
                   penalties and interest, and trust        example, the filing of an offer-in-
                   fund recovery penalties, assessed        compromise3 or bankruptcy,4 an
                   against the client in connection         application for a Taxpayer Assis-
                   with the failure of his or her busi-     tance Order,5 a taxpayer’s absence
                   ness to pay federal income taxes,        from the country for more than six
                   Social Security and Medicare             months,6 a voluntary waiver of the
                   taxes withheld from its employees’       statute of limitations,7 a Collection
                   wages.1 A number of solutions may        due process appeal (appeal of the
                   be available to solve the problems,      filing of a lien filed by the IRS pur-
                   and selecting the best strategy will     suant to Code Section 63208 or a
                   often depend on the various dates
                   that the taxpayer’s tax returns
                   were due, when they were filed             Michael S. Fried is a Member of the
                   and when the delinquent taxes in           law firm of Hodes, Ulman, Pessin,
                   question were assessed.                   & Katz, P.A., in Bethesda, Maryland,
                                                             and focuses his practice on IRS tax
                   Statute of Limitation                    controversy matters and the resolution
                                                                 of delinquent tax liabilities.
                   on Collection
                                                              Zachary S. Fried is a second-year law
                   Pursuant to Code Sec. 6502, the          student at George Washington University
2004 M.S. Fried    statutory period during which                Law School in Washington, D.C.

     IRS Collection Rights

     proposed levy made pursuant to      income tax liabilities. Although             the bankruptcy filing18 (the
     Code Section 63309) will all result slightly different timing rules ap-          three-year look-back rule).
     in extending the collection statute ply to the ability to discharge a       2. The return was filed more
     of limitations, each for different  tax in a Chapter 7 versus a Chap-            than two years before the
     extension, or tolling, periods. The ter 13 bankruptcy, the ability to            bankruptcy filing19 (the two-
     date on which the 10-year IRS col-  discharge a tax in bankruptcy,               year filing rule).
     lection period ends, as extended    and selection of the proper             3. The tax was actually assessed
     by these various tolling events, is bankruptcy chapter, is primarily             more than 240 days before
     referred to as the collection stat- determined by four dates:                    the bankruptcy filing20 (the
     ute expiration date (CSED). Many        The date on which the taxpay-            240-day assessment rule).
     times, particularly in connection       er’s return was due for the year      In a Chapter 13 case, only the
     with the collection of a trust fund     of the delinquent tax12             three-year look-back rule (tax
     recovery penalty, the IRS will          The date the taxpayer filed the     return due date) and the 240-day
     engage in aggressive collection         applicable return13                 assessment rule apply to deter-
     activity close to the CSED.10 It is     The date the tax was assessed       mine if the tax can be discharged
     important to note that trust fund       by the IRS14                        for less than full payment, not the
     recovery penalties are not dis-         The proximity of the foregoing      two-year filing rule (return filing
     chargeable in a bankruptcy,11 and       three dates to the taxpayer’s       date). In a Chapter 13 case, the
     expiration of the collection statute    bankruptcy case filing date         taxpayer’s return for the applicable
     of limitations will sometimes be    These time requirements are             tax year must have been due more
     the only viable solution in con-    found in the Bankruptcy Code.15         than three years before the bank-
     nection with the client’s trust fund  The bankruptcy discharge of a         ruptcy filing, and the tax to be
     recovery penalty problem.           personal income tax liability is        discharged must not have been as-
                                                              governed by the    sessed within the 240-day period
                                                              lapse of certain   prior to the Chapter 13 case filing;
                                                              time periods       however, there is no requirement
           [The] 10-year collection statute of                measured from      that any tax return has been ac-
      limitations can be extended for additional the return due
                                                                    taxpayer’s   tually filed, or that the tax was
                                                                                 assessed, before the bankruptcy
       periods by a number of different events. date, filing date                 filing in order for the delinquent
                                                              or tax assess-     tax to be eligible for discharge in
                                                              ment date, until   a Chapter 13 case.
     Discharge of Taxes                  the date of the taxpayer’s bank-          There are two significant advan-
                                         ruptcy filing. Thus, these periods       tages of Chapter 13 in connection
     in Bankruptcy                       can be thought of as three sepa-        with a tax discharge case: (1) the
                                         rate statute of limitations periods     bad conduct rules do not apply,21
     As opposed to the trust fund        governing the ability to discharge      and a tax can be discharged in a
     recovery penalty, however, in-      a delinquent tax in bankruptcy.         Chapter 13 case even if the tax-
     dividual income taxes are often     Once these periods have expired,        payer engaged in fraud or a willful
     dischargeable in either a Chapter   a delinquent tax will convert from      attempt to evade payment of the
     7 bankruptcy (sometimes referred    a priority 16 (nondischargeable)        tax; and (2) the two-year filing rule
     to as a “straight bankruptcy”) or a tax to a nonpriority (discharge-        is not applicable. In Chapter 13,
     Chapter 13 bankruptcy (an indi-     able) tax that may be abated in         the taxpayer’s return can be filed
     vidual payment plan bankruptcy),    either a Chapter 7 or Chapter 13        at any time, e.g., the day before
     or a combination of the two (the    bankruptcy case. In Chapter 7,          or even the day after, the taxpayer
     serial filing of a Chapter 7 and     an income tax can be discharged         files for Chapter 13 relief. There
     a Chapter 13 is often called a      (subject to certain bad conduct         are only two timing requirements
     “Chapter 20”). Use of these         rules)17 if all of the following time   to discharge a tax in Chapter 13:
     bankruptcy “tools” will often be    periods have expired:                   (1) the taxpayer’s return was due
     the most efficient, most predict-    1. The taxpayer’s return was            more than three years prior to the
     able and least costly alternative       due (including all extensions)      bankruptcy filing; and (2) the tax
     to solve or mitigate delinquent         more than three years before        was not assessed within the 240-

                                                     Tax Practice & Procedure/October–November 2004

day window prior to the Chapter         to solve delinquent tax problems.       1993. However, Dr. Delinquent,
13 filing. The 240-day assessment        The remainder of this article will      like most taxpayers facing IRS
rule will be satisfied if the tax to     focus on these limitation periods       collection pressure, suffered
be discharged was assessed either       and the most significant events          from a lack of clarity concerning
more than 240 days prior to the         that toll their expiration.             the filing and assessment of the
bankruptcy or the assessment                                                    taxes in question and could not
occurred after the bankruptcy                                                   accurately remember prior actions
case was filed. In either case,         Hypothetical Client                     taken personally and through his
assessment occurred outside of          Recently, Dr. Ron Delinquent, a         advisors to solve his tax problems.
the window beginning 240 days           prominent local ophthalmolo-            Accordingly, our first step was to
before the bankruptcy filing and         gist, was referred to our office in      obtain tax transcripts for all years
ending on the date of the filing.        connection with IRS collection ac-      and all taxes owed.
   Akin to the statute of limitations   tivity for taxes owed for the period      Examination of the client’s tax
for collection, the taxpayer’s right    1987 to 2000. After 2000, Dr. De-       transcripts revealed the follow-
to discharge a tax in bankruptcy,       linquent, in his infinite wisdom,        ing facts:
whether in a Chapter 7 or Chap-         sua sponte spontaneously began              The pending trust fund taxes
ter 13 case, and the IRS’s right to     to file returns and pay taxes in             were assessed on July 15,
continue collection of a tax after      a timely manner. At the time of             1989, and the outstanding
bankruptcy, are governed by the         our first meeting on September               balance of these taxes totaled
lapse of time; the running of these     15, 2004, Dr. Delinquent’s tax              $100,000 at the time the
bankruptcy discharge time peri-         obligations totaled $1.5 million,           transcripts were prepared by
ods can be extended, or tolled,         including income tax liabilities            the IRS.
by many of the same events that         for all years 1987 through 2000,            The other delinquency bal-
toll the running of the collection      and trust fund recovery penalties           ance of $1.4 million was for
statute of limitations. For example,    (“trust fund taxes”) assessed in            income tax liabilities for the
a prior bankruptcy stops the clock,     1989 as the result of the failure of        years 1987 to 2000.
or tolls, the running of the two-year   his professional corporation to pay         On May 1, 1994, the client
filing and three-year look back         taxes withheld from employees’              filed a bankruptcy case that
periods22; an offer in compromise       salaries. At the time of our meet-          was not terminated until June
will often, but not always, toll the    ing, Dr. Delinquent’s personal              24, 1997.
running of the 240-day assess-          bank account had been levied by             On December 9, 1998, the
ment period23; and the collection       the IRS, and he was having trouble          client filed an offer in compro-
due process appeal of a proposed        making his mortgage payments.               mise for the trust fund taxes
assessment will toll the commence-         Obtaining accurate information           and all other taxes owed for
ment, and hence, the running of the     about the timing of the various as-         1987 through 1997.
240-day period.24                       sessments, return filing and due             The taxpayer’s offer in compro-
   Substantial amount of litigation     dates, and the intermittent activity        mise was not rejected by the
and attention has recently been         of the client intended to amelio-           IRS until December 9, 2003,
focused on the events that toll         rate IRS collection procedures              five years after it was filed.
or extend these bankruptcy time         was crucial to determining the              Dr. Delinquent filed his 1999
periods, and often, the results have    best strategy to solve the client’s         and 2000 tax returns on March
been favorable to the taxpayer.25       problems. Since Dr. Delinquent              15, 2002.
However, the various time and           “recalled” that the trust fund              On April 29, 2002, the IRS as-
limitation periods controlling the      taxes were assessed against him             sessed a liability of $10,000
collection statute expiration date      in 1988, it appeared that the col-          for 1999 and a liability of
and the ability to discharge a tax in   lection statute of limitations had          $25,000 for 2000.
bankruptcy, and the possible oc-        expired for the trust fund taxes. It        The transcripts contained no
currence of events that may toll        also appeared that the collection           indication of any civil fraud
the running of these limitation         statute of limitations would bar            penalty or problem.
periods, are among the most im-         collection of the taxpayer’s income       Remarkably, Dr. Delinquent had
portant considerations in planning      tax liabilities for the delinquencies   very little recollection of the events
for and implementing strategies         attributable to tax years 1987 to       shown on his the transcripts.

     IRS Collection Rights

                                            1997. The offer in compromise             discharging the nontrust fund
     Collection                             was not terminated until Decem-           tax liabilities in a Chapter 7 or
     Statute Expiration                     ber 9, 2003, exactly five years, or        13 bankruptcy, or a combination
                                            1,825 days later. The collection          of the two. This strategy required
     It was apparent from an examina-       statute of limitations for all liabili-   that we examine the impact of
     tion of the tax transcripts that the   ties covered by Dr. Delinquent’s          the taxpayer’s various activities
     collection statute of limitations      offer in compromise was tolled for        on the running of the applicable
     had not expired for either the trust   the entire 1,825-day period of the        bankruptcy discharge time
     fund taxes or for any of the other     offer, plus an additional 30 days         periods—the three-year look
     delinquent tax liabilities. Although   thereafter.28 As a result of the tax-     back period, the two-year filing
     the trust fund taxes were assessed     payer’s serial bankruptcy and offer       period and the 240-day assess-
     on July 15, 1989, two significant       in compromise filings, the origi-          ment period.
     events resulted in extending the       nal July 15, 1999, trust fund tax
     collection statute expiration date     collection statute expiration date
     for the 1989 trust fund taxes to       was extended for 3,005 days (from         1998, 1999 and
     October 8, 2007. Likewise, the         July 15, 1999, to August 8, 2007).        2000 Tax Liabilities
     collection statute of limitations      The collection statute expiration
                                                               date for the non-      We began by examining the bank-
                                                               dischargeable          ruptcy timing rules in connection
                                                               trust fund taxes       with the client’s 1998, 1999 and
              Substantial amount of litigation                 remained more          2000 tax liabilities. The 1998 tax
        and attention has recently been focused than the future.
                                                                     three years      return was filed on October 15,
                                                                                      1999, and the tax owed for this
             on the events that toll or extend                 The extended           period was nominal. The 1999
      these bankruptcy time periods, and often, tolling of the                        and 2000 tax returns were filed
              the results have been favorable                  collection stat-       on March 15, 2002, and on April
                                                               ute expiration         29, 2002, the taxpayer was as-
                        to the taxpayer.                       date caused by         sessed a liability of $10,000 for
                                                               the taxpayer’s         1999, and a liability of $25,000
                                                               consecutive            for 2000. The taxpayer’s liabili-
     for Dr. Delinquent’s other tax         bankruptcy and offer in compro-           ties for 1998, 1999 and 2000
     liabilities was extended for a sig-    mise applied to almost all of the         were not included in his recently
     nificant time period by the same        delinquent tax liabilities.               terminated offer in compromise.
     two events.                                                                      Since an offer in compromise only
        Dr. Delinquent’s 1994 bankrupt-                                               tolls the bankruptcy time periods
     cy case was filed on May 1, 1994,
                                              Bankruptcy                              for the taxes included in it,29 the
     and terminated on June 24, 1997,         Solutions and                           three-year look back, the two-year
     a total of 1,150 days. During the
     entire 1,150-day bankruptcy case,
                                              Tolling Issues                          filing and the 240-day assessment
                                                                                      periods were not tolled for Dr.
     the clock stopped on the running       As a result of the August 8, 2007,        Delinquent’s 1998, 1999 and
     of the collection statute of limita-   collection statute expiration date        2000 tax liabilities (despite the
     tions for all delinquent taxes owed    for the nondischargeable (infi-            fact that the offer in compromise
     by the taxpayer. It is now settled
                                            nitely “priority”) trust fund taxes       for his other tax liabilities was still
     law that a bankruptcy tolls the col-   (and most of his other tax liabili-       pending when the 1998, 1999 and
     lection statute of limitations for the ties) it was necessary to devise a        2000 taxes were assessed).
     full period of the bankruptcy, but     strategy enabling Dr. Delinquent            Since the taxpayer’s 1998, 1999
     for no additional period. In ad-
                                            to apply his limited resources to         and 2000 tax liabilities were as-
     dition to his bankruptcy, the client   payment of the trust fund tax,            sessed after the client’s bankruptcy
     filed an offer in compromise on         while substantially reducing or           was terminated in 1997 and none
     December 9, 1998, covering the         eliminating his other tax liabili-        were included in his December
     trust fund taxes and all income        ties. Accordingly, we turned our          1998 offer in compromise, no
     taxes owed for 1987 through            attention to the possibility of           tolling events applied to the tax

                                                    Tax Practice & Procedure/October–November 2004

liabilities for those years. Accord-   tax liability was assessed more        was assessed on November 30,
ingly, it seemed as if a straight      than 240 days earlier, satisfying      1998. All of these events occurred
forward calculation of the three-      the 240-day assessment rule.           after, and were unaffected by, the
year look back (return due date),      However, compliance with the           client’s previous bankruptcy case.
the two-year filing and the 240-        three-year look-back rule was          However, assessment of the 1997
day assessment periods would           questionable. The taxpayer’s re-       tax liability occurred before De-
provide the answer to whether the      quest to extend the due date of        cember 9, 1998, and the 1997 tax
1998, 1999 and 2000 tax liabili-       his 2000 tax return from April         liability was included in Dr. Delin-
ties were eligible for Chapter 7 or    15, 2001, to October 15, 2001,         quent’s offer in compromise. Did
Chapter 13 discharge. We were          was denied by the IRS. Therefore,      the offer in compromise toll any
correct about our assumptions          we were hopeful that the original      of the three bankruptcy discharge
concerning the 1998 and 1999           April 15, 2001, due date would         time periods for this tax year?
tax liabilities, but wrong about       apply to our calculation and that
the year 2000 assumptions.             the taxpayer’s liability for 2000
   Examining the three bankruptcy      would qualify for discharge un-        Two Hundred
time periods in connection with        der the three-year look back rule.     and Forty–Day
the taxpayer’s 1998 and 1999           However, in reviewing case law,
liabilities proved simple. Taking      we discovered a problem. Al-
                                                                              Assessment Period
into account all filing extensions,     though the taxpayer’s extension
the tax returns for 1998 and 1999      request was denied by the IRS,         Although tolling of the 240-day
were both due more than three          the cases indicated that taxpay-       period is unsettled if an offer in
years ago, satisfying the three-year   ers cannot rely on the original due    compromise is made prior to the
look-back period. Additionally, the    date for their tax return, April 15,   start of the 240-day assessment
tax returns for these two years were   but rather must use the extended       period,31 Bankruptcy Code Sec-
both filed more than two years          due date shown in their exten-         tion 507(a)(8)(A)(ii)32 requires that
ago, and the taxes for these years     sion requests (even if denied by       an offer in compromise stops the
were both assessed more than           the IRS) for purposes of calcu-        clock on the running of the 240-
240 days ago. Thus, the three-         lating the three-year look back        day assessment period if the offer
year look-back period, two-year        period. 30 Since our client had        in compromise is made during the
filing period and 240-day assess-       requested an extension of the          240-day period. In the case of Dr.
ment period had all expired for Dr.    due date for his 2000 tax return       Delinquent’s 1997 tax liability, as-
Delinquent’s 1998 and 1999 tax         to October 15, 2001, the expira-       sessment of the 1997 tax liability
liabilities, making them eligible      tion of the three-year look back       and commencement of the 240-
for discharge in a Chapter 7 or        period in connection with his          day assessment period occurred
Chapter 13 bankruptcy.                 2000 tax return would not occur        just nine days prior to the day the
   However, the pending 2000           until October 15, 2004, a date re-     taxpayer’s offer in compromise
liability was a bit more trouble-      maining one month in the future.       was accepted for processing by
some. The client wanted us to          For the next 30 days, this problem     the IRS. Pursuant to Bankruptcy
file a bankruptcy immediately to        would disqualify Dr. Delinquent’s      Code Section 507(a)(8)(A)(ii), the
release the levy on his bank ac-       2000 tax liability from discharge      240-day assessment period was
count and end other aggressive         in either a Chapter 7 or Chapter       tolled for the entire time the offer
IRS collection activity. Although      13 bankruptcy.                         was pending, and did not again
we were sure that the 240-day                                                 begin running until the offer in
assessment and two-year filing                                                 compromise was rejected on De-
periods had expired, we were           1997 Tax Liability                     cember 9, 2003.
concerned about the three-year         Working backwards, we turned             Fortunately, by September 15,
look-back period applicable to         our attention to the discharge-        2004, the date of our first ap-
both a Chapter 7 and a Chapter         ability of the taxpayer’s $100,000     pointment with Dr. Delinquent,
13 discharge. The 2000 tax return      1997 income tax liability. The         258 days had expired since the
was filed more than two years           1997 tax return was filed on Oc-        December 9, 2003, offer rejec-
ago, thereby satisfying the two-       tober 15, 1998, the last available     tion date. Despite the tolling
year filing rule, and the related       due date for filing, and related tax    effect of the offer in compromise,

     IRS Collection Rights

     the 240-day assessment period          after his prior bankruptcy was         the IRS is prohibited from engag-
     for the taxpayer’s 1997 liability      terminated, and this prior bank-       ing in collection activity once an
     had already expired. Addition-         ruptcy did not affect the expiration   offer in compromise is accepted
     ally, since termination of the         of the two-year or three-year time     for processing.34 Accordingly, after
     offer in compromise occurred           periods for this tax year. However,    December 31, 1999, commenta-
     more than 240 days ago, the            the 1997 tax liability was included    tors have suggested that the IRS
     240-day assessment period had          in the taxpayer’s offer in compro-     may seek to impose an equitable
     expired for all of the taxpayer’s      mise. If the offer in compromise       tolling period on the running of
     pre-1997 tax liabilities.              tolled the running of the three-       the three-year look back period
                                            year look back and two-year filing      and the two-year filing period
                                            periods, Dr. Delinquent’s 1997         during the pendency of an offer
     Application of                         tax liability would not qualify for    in compromise.35
     Three-Year Look                        discharge under either Chapter           Before January 28, 2004, the IRS
                                            7 or 13. Since the due date and        provided no meaningful guidance
     Back Rule and                          filing date for the 1997 tax pre-       on its position concerning the ef-
     Two-Year Filing                        ceded the commencement of the          fect of an offer in compromise on
                                            offer in compromise by 55 days,        the running of the three-year look-
     Rule to 1997 Tax                       and the offer in compromise was        back or two-year filing periods.
     Although we determined that            terminated for only 258 days by        The Supreme Court, in the case
     the 240-day assessment period          the date of our first appointment       of C.P. Young, held that a prior
     expired in connection with the         with the client, the three-year look   bankruptcy always tolls the three-
     1997 tax liability, it remained nec-   back and two-year filing periods        year look-back period during the
     essary to determine whether the        would be 313 days old if tolled        time of overlap.36 Although Young
     1997 tax liability qualified for dis-   during the pendency of the offer in    was decided in connection with
     charge pursuant to the three-year      compromise, far short of the ages      the affect of a prior bankruptcy
     look back and the two-year filing       necessary to qualify for either a      on the three-year look-back pe-
     rules. The taxpayer’s 1997 tax re-     Chapter 7 or 13 discharge.             riod, not an offer in compromise,
     turn was due and filed on October                                              some commentators felt that the
     15, 1998, more than three years                                               Young opinion would encourage
     ago. Therefore, unless a tolling       LTR 200404049                          the IRS to assert that the rationale
     event stopped the running of the                                              of Young applied to the three-year
     three-year look back period or the  Prior to the IRS Restructuring            look-back period and the two-
     two-year filing period, the 1997     & Reform Act of 199833 (RRA),             year filing period during an offer
                                                          the IRS was              in compromise, and that both of
                                                          not prohibited           these time periods must be tolled
                                                          from pursuing            during an offer’s pendency.
       Prior to Young, a majority of courts held collection activ-                   Notwithstanding           Young,
      that a prior bankruptcy tolled the running ity duringofthe
                                                          pendency       an
                                                                                   on January 5, 2004, the IRS
                                                                                   Chief Counsel issued CCA
           of the three-year look back period             offer in com-            200404049,37 concluding that an
     during the overlap of the look back period promise. Hence,                    offer in compromise does not toll
        and the bankruptcy, plus an additional            under pre-RRA            the three-year look-back period.
                                                          law, there was           Although limited to the three-year
                  six months thereafter.                  no statutory or          look-back period, the rationale of
                                                          equitable basis          the CCA also applies to the two-
                                                          for tolling the          year filing period. Essentially, the
     tax would qualify for discharge     three-year look back period or the        IRS determined that equitable
     under all timing criteria necessary two-year filing period during the          tolling of the three-year look-
     for either a Chapter 7 or Chapter   pendency of an offer in compro-           back period is inconsistent with
     13 discharge.                       mise. However, the RRA changed            the text of applicable Bankruptcy
       As previously described, the      the landscape. Pursuant to the            Code provisions. Furthermore,
     taxpayer’s 1997 tax liability arose RRA, after December 31, 1999,             the IRS concluded that an asser-

                                                    Tax Practice & Procedure/October–November 2004

tion of equitable tolling would not    in the 1998 offer in compromise.        time to the two-year filing period
be upheld by the courts because           Prior to Young, a majority of        or the three-year look-back period
the IRS retained the ability to        courts held that a prior bank-          for the period of the taxpayer’s
protect its claims during an offer     ruptcy tolled the running of the        offer in compromise pursuant to
in compromise by filing a notice        three-year look-back period dur-        CCA 200404049. Based on our
of federal tax lien, using its right   ing the overlap of the look-back        analysis, we concluded that all
of setoff against an overpayment,      period and the bankruptcy, plus         pending 1987–1996 income tax
and asserting levy rights in a jeop-   an additional six months there-         liabilities (other than the trust
ardy situation.                        after.38 In Young, the court held       fund taxes) qualified for discharge
                                       that the three-year look-back pe-       under all three timing rules—the
                                       riod of Bankruptcy Code Section         three-year look-back rule, the
Application to 1997                    507(a)(8)(A)(i)39 is a limitations      two-year filing rule and the 240-
Tax Liability                          period subject to equitable toll-       day assessment rule.
                                       ing, and that equitable tolling           We advised our client of our
After reviewing CCA 200404049,         always applies when the IRS has         opinion and, of course, we
we concluded that the three-year       been prevented by a prior bank-         added the caveat that the law
look-back and two-year filing pe-       ruptcy from collecting. Therefore,      on the tolling of the three-year
riods related to our client’s 1997     the Court ruled that the three-year     look-back and two-year filing
tax liability were not subject to      look-back period of Bankruptcy          periods during an offer in com-
any tolling period during the          Code Section 507(a)(8)(A)(i) is         promise remains unsettled, and
pendency of the offer in compro-       always tolled during the pen-           that risk remains that the IRS or
mise, and that these periods had       dency of a bankruptcy. Applying         the courts could reach a different
expired. Therefore, it was our         the rationale of Young, the IRS         conclusion in the future. If tolling
judgment that this liability is eli-   announced in a chief counsel no-        were applied to these time peri-
gible for discharge in a bankruptcy    tice40 that it would no longer take     ods during the taxpayer’s offer in
case. We conveyed this opinion to      the position that an additional         compromise, in addition to the
our client with the caveat that the    six months must be added to the         tolling time for his bankruptcy
law on the issue is not settled, and   tolling period of Bankruptcy Code       period, many of the 1987–1996
that a risk remains that the IRS or    Section 507(a)(8)(A)(i), stating, “In   tax liabilities for 1987–1996
the courts could reach an opposite     light of the rationale of Young, the    would not qualify under either
conclusion in the future.              three-year look back period of          the three-year look-back rule or
                                       B.C. §507(a)(8)(A)(i) should not        the two-year filing rule.
                                       be computed by including an
1987 to 1996                           additional six months, based on
Tax Liabilities                        I.R.C. § 6503(h).” Equitable toll-      Conclusion
                                       ing would be applied only during        Relying on our conclusions, we
After concluding that the client’s     the bankruptcy and not for any          recommended the following strat-
1997 tax liability is eligible for     additional time thereafter.             egy to Dr. Delinquent:
Chapter 7 or Chapter 13 dis-              Although Young and the chief             File a Chapter 7 bankruptcy
charge, while acknowledging            counsel notice were limited to              on October 16, 2004, seek-
the still unsettled law concerning     the three-year look-back period, it         ing to discharge all of the
the tolling effect of an offer in      was our conclusion that the ratio-          client’s nontrust fund tax
compromise, we applied the prin-       nale contained in Young and the             liabilities.
ciples of the Young case and CCA       chief counsel notice also applies           After receiving the Chapter
200404049 to our evaluation of         in the same way to the two-year             7 discharge, file a Chapter
the eligibility of Dr. Delinquent’s    filing period. Accordingly, we cal-          13 case seeking to pay the
1987–1996 tax liabilities for bank-    culated both of these time periods          remaining $100,000 trust
ruptcy discharge. IRS collection of    for the 1987–1996 liabilities by            fund tax liability in a five-year
all the 1987–1996 tax liabilities      tolling them during the taxpayer’s          Chapter 13 Plan.
was stayed during the client’s         bankruptcy but did not add any            The client accepted our rec-
1994–1997 bankruptcy, and all          additional tolling time thereafter.     ommendations, and we are
of these liabilities were included     Neither did we add any tolling          currently preparing a Chapter

     IRS Collection Rights

     7 bankruptcy to be filed on the                        strategy will reduce our client’s                    ment of the remaining $100,000
     appropriate date. It is our expec-                    tax liabilities by approximately                     trust fund tax liability during his
     tation that implementation of our                     95 percent, and provide for pay-                     Chapter 13 case.

     1                                                          §1; see also note 3, supra, at §3:9.            26
         Code Sec. 6672(a) provides, “Any person                                                                     Young, supra note 22.
                                                           6                                                    27
         required to collect, truthfully account for,           Code Sec. 6503(c).                                   Id.; see also Chief Counsel Notice CC-
         and pay over any tax imposed by this title             Code Sec. 6502(a)(2)(A).                             20020023, supra note 22.
                                                           8                                                    28
         who willfully fails to collect such tax, or            See note 3, supra, at §3:24.                         Code Sec. 6331(k); see note 3, supra, at §3:9.
                                                           9                                                    29
         truthfully account for and pay over such               Id.                                                  KING, supra note 5, at 1.8(c).
                                                           10                                                   30
         tax, or willfully attempts in any manner to            See note 3, supra, at §3:12.                         B.D. Hermann, BC-DC Okla., 221 BR 944,
         evade or defeat any such tax or payment                11 USC §523(a)(1)(A); 11 USC                         BANKR. L. REP. ¶77,758 (1998); J. Brustman,
         thereof, shall, in addition to all other penal-        §507(a)(8)(C).                                       BC-DC Calif., 217 BR 828 (1997). Aff’d,
         ties provided by law, be liable to a penalty           11 USC §507(a)(8)(A)(i).                             BAP-9, 99-1 USTC ¶50,348.
                                                           13                                                   31
         equal to the total amount evaded or not col-           11 USC §523(a)(1)(B).                                See G.E. Aberl, CA-6, 96-1 USTC ¶50,151,
         lected, or not accounted for and paid over.”           11 USC §507(a)(8)(A)(ii).                            78 F3d 241.
                                                           15                                                   32
         Code Sec. 7501(a) provides, “Whenever any              11 USC §§507(a)(8)(A)(i), 523(a)(1)(B) and           11 USC §507(a)(8)(A)(ii).
                                                                507(a)(8)(A)(ii).                               33
         person required to collect or withhold any                                                                  IRS Restructuring and Reform Act of 1998
         internal revenue tax from any person and               11 USC §§507(a)(8)(A)(i) and (ii),                   (P.L. 105-206).
                                                                523(a)(1)(B).                                   34
         to pay over such tax to the United States,                                                                  Code Sec. 6331(k).
                                                           17                                                   35
         the amount of tax so collected or withheld             11 USC §523(a)(1)(C).                                The authors have attended a number of
         shall be a special fund in trust for the United        11 USC §507(a)(8)(A)(i).                             conferences and seminars in which the
         States. The amount of such fund shall be               11 USC §523(a)(1)(B).                                Supreme Court Young decision has been
         assessed, collected, and paid in the same              11 USC §507(a)(8)(A)(ii).                            discussed. Many of the commentators
         manner and subject to the same provisions              11 USC §523 (Exceptions to Discharge) does           and participants at these conferences and
         and limitations (including penalties) as are           not apply in Chapter 13 because 11 USC               seminars have reached different conclusions
         applicable with respect to the taxes from              §1328, governing discharge in a Chapter              concerning the application of equitable toll-
         which such fund arose.”                                13 case, does not except from discharge              ing principles to the three-year look-back
     2                                                          any taxes under 11 USC §523. Therefore,
         Code Sec. 6502(a)(1). Prior to 1990, the                                                                    period and the two-year filing period taking
         statute of limitations for collection was six          the filing of a fraudulent return or a willful        into account the suspension of the IRS right
         years from the date of assessment, plus such           attempt to evade or defeat a tax exceptions          to levy during an offer in compromise.
                                                                to discharge found in 11 USC §523 does not      36
         suspended, extended or postponed period                                                                     Young, supra note 22.
                                                                apply to Chapter 13.                            37
         of time as, by law, may be applicable. The                                                                  CCA 200404049, supra note 25.
                                                           22                                                   38
         Revenue Reconciliation Act of 1990 (P.L.               C.P. Young, SCt, 2002-1 USTC ¶50,257, 535            See W.J. Zecco, BC-DC Mass., 97-2 USTC
         101-508) extended the collection period to             US 43, 122 SCt 1036; IRS Chief Counsel               ¶50,910, 211 BR 109; L. Tibaldo, BC-DC
         10 years.                                              Notice, CC-2002-023, May 9, 2002.                    Calif., 187 BR 673 (1995); D.L. Brickley,
     3                                                     23
         Code Sec. 6331(k); see Robert E. McKenzie,             11 USC §507(a)(8)(A)(ii).                            BAP-9, 87-1 USTC ¶9313, 70 BR 113, BANKR.
         REPRESENTATION BEFORE THE COLLECTION DIVISION          See note 3, supra, at §3:24.                         L. REP. ¶71,703.
                                                           25                                                   39
         OF THE IRS (updated March 2004), at §3:9.              See CCA 200404049, Jan. 5, 2004; Chief               11 USC §507(a)(8)(A)(i).
     4                                                          Counsel Notice CC-20020023, supra note          40
         Code Sec. 6503(b).                                                                                          Chief Counsel Notice CC-20020023, supra
     5                                                          22; see also Young, supra note 22.
         Code Sec. 7811; see MORGAN D. KING, DIS-                                                                    note 22.
         CHARGING TAXES IN BANKRUPTCY (2000 ed.), at

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