The Eleventh Circuit Standard for Determining the Priority Status of Tax Claims Involving Successive Bankruptcy Filings

By Mike E. Jorgensen
and
Frances D. Sheehy

I.          Introduction
In the case of Morgan v. United States, [1] the Eleventh Circuit ruled that  bankruptcy courts have the power under 11 U.S.C. Section 105(a) [2] to toll the three year period of Section 507(a)(8)(A)(i), [3] which controls the priority status and dischargeability of certain tax claims.  The issue of whether successive bankruptcy filings should or should not affect the dischargeability of tax claims has been litigated in bankruptcy courts, United States District Courts, and the United States Courts of Appeals. These courts have used various interpretations of the relationship between the Internal Revenue Code [4] and the Bankruptcy Code, [5] various interpretations of Congressional intent, and thus, have produced inconsistent results for debtors and for the Internal Revenue Service [6] (the “IRS”). [7]

This article will discuss: (1)  the apparent standards set forth in Morgan for determining the dischargeability of tax claims in cases involving successive bankruptcy filings; (2) how lower courts in the Eleventh Circuit have interpreted those standards; and (3) how the criteria for applying equitable tolling could be structured to, in fact, be equitable to debtors, other creditors, and the IRS.

II.         General Principles

A.       The Dischargeability of Taxes

One of the primary purposes of bankruptcy is to give the “honest debtor” a fresh start under the discharge provisions of Section 727, 1141, 1228(a), 1228(b), or 1328(b).  Except as provided in Section 523, a discharge under these sections relieves the debtor of all debts that arose before the date of the order for relief (i.e., usually the date the bankruptcy petition is filed). [8]    Pursuant to the fresh start provisions, exceptions to the discharge are strictly construed in favor of the debtor. See, In re Griffith; [9] and In re Jacobs. [10]     In order to survive the chapter 7 discharge, either the tax debt must be considered a “priority claim” rather than a “general unsecured claim,” or, a secured claim if a federal tax lien has been filed and the debtor owns pre-petition assets to which the tax lien attaches.   Similarly, any priority or secured tax not fully paid within the context of a chapter 13 may survive the bankruptcy discharge, or result in the dismissal of the chapter 13 prior to discharge.

Section 523(a)(1) creates statutory exceptions to discharge. [11]    Section 523(a)(1)(A) provides that taxes that fall within the purview of Section 507(a)(8) are not discharged by operation of the discharge provisions of the bankruptcy code, but survive the bankruptcy discharge as priority claims. [12]   Section 523 provides a total of nine categories of claims [13]   that are excepted from discharge, including income taxes for unfiled returns, for returns that were filed late and within two years of the bankruptcy petition, fraudulent returns, income taxes that have not been assessed for more than 240 days prior to the bankruptcy petition, and  income taxes which are due less than three years prior to the bankruptcy petition. [14]   The assessment date is important since the IRS can not usually commence collecting the tax debts until after an assessment is made. [15]   If the taxes have not been assessed for at least 240 days prior to the bankruptcy petition, they will not be discharged. [16] The statute specifically extends the limitations period, or the “240 day rule,” [17] by an additional thirty days in the case where the debtor has filed an offer in compromise with the IRS prior to the bankruptcy. Congress added the additional thirty days when offers in compromise are tendered to address a potential loophole where taxpayers file offers in bad faith and then use the bankruptcy process to the prejudice of the IRS’s collection efforts. [18]   Other than the offer in compromise extension of the 240 day rule, the statute is silent with respect to any extension of any of the limitation periods for successive bankruptcy filings.

B.           Brief Overview of the Collection Process [19]

Before the IRS can commence collection, the tax must be assessed. [20]   Once the IRS has assessed a tax, it can commence collection. A taxpayer may voluntarily pay the tax, but if the taxpayer fails to make full payment, the IRS can initiate “forced collection” practices.  During the pendency of the bankruptcy, (from the petition date until the discharge date), creditors, including the IRS, are precluded from taking any collection action absent authority from the bankruptcy court. [21]

Under the Bankruptcy Code, Congress requires the IRS be given certain time periods to assess and collect taxes without threat of the taxes being discharged in bankruptcy.    The IRS is concerned that when the debtor files bankruptcy, and the IRS is prevented from taking collection action due to the automatic stay provisions of Section 362, the IRS should be allowed additional time to continue its collection activities without threat of the dischargeability time periods expiring, should the debtor file a successive bankruptcy. If the debtor files a successive bankruptcy soon after the first bankruptcy, the IRS wants to have the debt considered “priority” rather than as a general unsecured claim. In order to accomplish the “tolling of the limitation period” under Section 507(a)(8)(A)(i) and (ii), the IRS suggests that the court read section 108(c) and I.R.C. Section 6503(h) together to suspend the IRS’s dischargeability period for the additional time the debtor is in the prior bankruptcy plus six months, thus making the debt a priority claim.  This allows the IRS to meet the statutory prerequisites of collection and would provide time to perfect its legal remedies and to secure its lien. [22]

Once the Notice of Federal Tax lien is filed, the taxing authority is not prejudiced by successive bankruptcies, unless the debtors have assets available to the taxing authority, either acquired prior to or during the interim pendency of successive bankruptcies. The IRS’s lien rights are preserved against the available assets despite the bankruptcy discharge. [23]    For example, if the debtors possess property that could be attached by the taxing authority, the taxing authority has a perfected choate lien once the Notice of Federal Tax Lien is filed and recorded. The lien is not modified or stripped by the bankruptcy discharge in a Chapter 7. [24]    The IRS may foreclose its lien on pre-petition property after obtaining relief from the stay, or after the chapter 7 discharge.  Similarly, a tax lien filed prior to a chapter 13 bankruptcy provides the IRS claim with secured status to the extent of the pre-petition assets, whether the assets are exempt or non-exempt.  Once the Notice of Federal Tax Lien is filed, the bankruptcy filing will not strip the IRS’s secured or priority position. 

C.      The Consumer Bankruptcy Study

In Turner v. United States, [25] and Gore v. United States, [26] the Bankruptcy court in the northern district of Alabama found the “Consumer Bankruptcy Study” significant in its analysis of balancing the equities of the debtor’s fresh start and the IRS’s collection process needs. [27]   The study indicated that the majority of bankruptcy debtors have little assets for the IRS, or other creditors, to seize. The Consumer Bankruptcy Study found:

. . . . that the median value of assets of, without deduction for liens and mortgages, for consumers in bankruptcy in 1991 was $16,765, while the median secured debt load of the same consumer bankrupts was $10,953. Id. at 128. The study also found that the median net worth of the same group of debtors was ($10,450). Id. at 135. Regarding the latter figure, the study made the following observation:

It is, of course, unsurprising that the debtors’ net worth does not rival that of the average American. After all, bankrupt debtors have declared themselves financial failures. It may be more instructive to compare the poorest Americans from the general population with the debtors who have declared bankruptcy. Here the comparison is equally bleak.. . . .

If assets do not exist, and if a Notice of Federal Tax Lien is filed, then the debtor’s fresh start is strongly balanced ahead of the IRS’ argument that it needs additional time. In cases where the debtors have no available assets to apply towards the tax debt, the IRS has not been prejudiced by having less time to attempt collection since its Notice of Federal Tax Lien protects whatever rights exist against pre-petition property.

III.        The Morgan Decision.

The Morgan case involved two successive Chapter 13 bankruptcy filings. The Morgans filed their first Chapter 13 bankruptcy in August 1990. The IRS filed a proof of claim as a priority creditor in the first Chapter 13 for income taxes owed by the Morgans for the years 1987, 1988, and 1989 in the amount of $29,207, which were treated as priority tax claims under Section  507(a)(8)(A)(i) in the Chapter 13 plan. The plan was confirmed in November 1990.   In October 1994, after approximately four years, when the Morgans were unable to make all of the required plan payments, the bankruptcy court dismissed the Morgans’ first case,

Three months later, in January 1995, the Morgans filed a second Chapter 13 petition.  The IRS again asserted that the unpaid taxes for 1987, 1988, and 1989 were priority claims.   The Morgans treated the unpaid taxes as a general unsecured claim since the tax liabilities were more than three years old, and objected to the IRS’s assertion that its tax claims were “priority claims” and therefore nondischargeable pursuant to Section 507(a)(8)(A)(i).  The objection to priority status focused on the plain reading of the statute, that Section 507(a)(8)(A)(i) only granted priority status to claims less than three years old. [28]

The bankruptcy court disagreed with the Morgans and found that the three-year priority period was tolled during the pendency of the Morgans’ first bankruptcy proceeding and entered an order denying the Morgans’ objection to the IRS’s claim. The district court affirmed the bankruptcy court’s decision and the Morgans appealed to the Eleventh Circuit.

1.         The Issues in Morgan:

The Eleventh Circuit Court framed the issue, as, “whether the three-year priority period of 11 U.S.C. 507(a)(8)(A)(i), which governs income tax claims, may be tolled during the pendency of a prior bankruptcy proceeding.”

On appeal, the Morgans argued that the tax liabilities for 1987, 1988 and 1989 should be treated as general unsecured claims and not as priority claims.  If so treated, the taxes would be discharged in their second Chapter 13 proceeding, because the tax liability was based on tax returns that were filed over three years prior to the second bankruptcy petition. [29]   The Morgans argued that the plain language of Section 108(c) did not allow for tolling the three-year priority period during the pendency of their first bankruptcy proceeding since the tolling provisions applied only to “non-bankruptcy” law. The argument was premised on the principles and arguments adopted by the Court in the Ron Pair Enterprise case under the “Plain Meaning Rule.” [30]

The IRS argued, on the other hand, that the automatic stay provisions of Section 362 prevented the IRS from collecting the tax liability during the Morgans’ first bankruptcy.   The IRS contended that the three-year priority period of Section 507(a)(8)(A)(i) should be tolled during the first bankruptcy.  The IRS then added the days the Morgans were in the first bankruptcy to the three year period, plus six months, thus making the income taxes priority claims, rather than general unsecured claims.  Thus, the taxes, according to the IRS were not dischargeable in the second bankruptcy, unless paid in full. [31]

2.         Discussion of the Morgan Court Decision:

Section 1322(a) requires that “priority claims” be paid in full under a Chapter 13 repayment plan. If the Morgan’s tax claims are priority claims, they are excepted from discharge and the IRS may resume collection efforts to have the taxes paid once the automatic stay is lifted (assuming the priority taxes were not paid in full during the chapter 13 bankruptcy). [32]   Without the tolling provisions, the time periods which determine dischargeability would lapse, and despite the incompletion of the second plan payments, the tax claims would be discharged in the second chapter 13 bankruptcy.

The Eleventh Circuit in Morgan, in determining whether the tolling provisions were applicable, balanced policies that impacted both the debtor and the creditors. While the bankruptcy policy is aimed at providing “an honest debtor” with a fresh start, Congress also “intended to give the government the benefit of certain time periods to pursue its collection efforts.” [33]

As to the first argument, the Eleventh Circuit confirmed the Burns [34] decision that the “plain meaning rule” was controlling and that the language of Section 108(c) did not apply to non-bankruptcy law. Since the discharge provisions are “bankruptcy law,” the plain meaning rule prevented (non-bankruptcy)  I.R.C. Section 6503(h) from “tolling” the bankruptcy provisions.  In Morgan,  “[b]oth parties agree[d] that the plain language of the Bankruptcy Code fail[ed] to provide explicitly for tolling the three-year priority period in [Section] 507(a)(8)(A)(i). [35] “  See also, In re Quenzer. [36]

Absent explicit language in applicable statutes permitting such tolling, the Morgan court reached the conclusion that under certain circumstances, the bankruptcy court, under Section 105, may allow tolling of the dischargeability periods for successive bankruptcy filings.  Therefore, the Eleventh Circuit remanded the Morgan case to the bankruptcy court to consider the second argument of the IRS, with respect to the equitable powers of the bankruptcy courts under Section 105 to extend the priority period.   The bankruptcy court was to determine whether the facts of the case permitted application of equitable tolling, and thus allow the non-dischargeability of income taxes by treating them as priority taxes under Section 507(a)(8)(A)(i).

As in Morgan, the Eleventh Circuit has frequently held that, “[b]ankruptcy courts are indeed courts of equity, and they have the power to adjust claims to avoid injustice or unfairness [and that] . . . Section 105(a) grants the bankruptcy court the power to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions’ of the Bankruptcy Code and take ‘any action or mak[e] any determination necessary to enforce or implement court orders or rules, or to prevent an abuse of process. [37]   Nonetheless, section 105 does not create rights where none exist.  Morgan held that Section 105 was broad enough to grant powers to the bankruptcy court to extend the limitations period when necessary to characterize the claims as “priority,” rather than as general unsecured claims.

In dicta, the court indicated in footnote 8 of its decision that it was defining a “lesser standard” to extend the dischargeability period under the equitable provisions of Section 105.  The court specifically rejected the restrictive standard  found in the Gore/Turner cases for extending the dischargeability period which required evidence of dilatory conduct or bad faith on the part of the debtor.  No equitable criteria were set forth for the lower courts to consider, other than that “the equities will generally favor the [IRS]”, nor did the court discuss whether equity allows any additional time other than the period of the automatic stay to be added to the dischargeability periods.  The court further refrained from deciding whether Section 105 equitable tolling is applicable to penalties and the interest on the penalties.  The new Morgan standard deviates from the standard the Eleventh Circuit has imposed in the “discharge of tax cases” under 523(a)(l), specifically those standards found in In re Haas. [38]

IV.       Subsequent to the Morgan Decision.

On May 24, 2000, in  Odell v. United States, [39] the District Court for the Middle District of Florida, sitting in an appellate capacity, affirmed a decision rendered by the Honorable Judge George L. Proctor [40] prior to the Morgan decision.   The bankruptcy court held that the $113,997 tax debt was discharged under 507(a)(8)(A)(ii) in the Odell’s second “no asset” chapter 7 bankruptcy as a general unsecured claim.

The issues confronted by the court in Odell were: first, whether Congress intended that the IRS have 240 days from the date of the assessment, plus the time the debtor was in the first bankruptcy, plus six months, to collect its taxes and be considered as a priority creditor despite the plain language of Section 108(c).  (Section 108(c) and I.R.C. Section 6503(h) have been interpreted to limit the IRS’s claim period to 240 days).  Alternatively, if the plain language of Section 108(c) did not extend the time period under Section507(a)(8)(A)(ii) to “bankruptcy law,” could the bankruptcy court nonetheless extend the period under the court’s Section 105 equitable powers?

The court found that the IRS’s dischargeability period was not tolled or suspended by the Odell’s first bankruptcy and that the 240 day period expired on the tax claim.  The court’s opinion was based on reasons similar to the principles found in Morgan, notwithstanding the apparent Morgan bias toward application of equitable tolling for the benefit of the IRS.

In the Odell case, the Service had 331 days to collect, not 240 days. The Service argued it needed the additional six months (plus the days pending in the first bankruptcy) provided under I.R.C. Section 6503, because it takes more time administratively to recommence the collection process after the dismissal of the first bankruptcy filing. [41]

Without questioning why the Service should require an additional six months to have the file transferred from the Special Procedures Function-Bankruptcy Unit, to the collection division, the IRS is not harmed in Odell-type cases by not having the tolling period. [42]    In Odell, the IRS had sufficient time to file its “Notice of Federal Tax Lien,” which places its secured position ahead of other creditors. [43]    Once the lien notice was filed, the IRS only lost the benefit of time since there were no assets from which to collect. The Odells filed two “no-asset” chapter 7 bankruptcies. The court apparently recognized that additional time would not have assisted the IRS with collecting additional tax payments. [44]

V.          The Proposed Standard

Pursuant to the principles set forth in the Eleventh Circuit Haas case, [45] in order for the Government to prevail in a tax discharge action under Section 523(a)(1)(C), the taxpayer is required to have bad faith, or to have taken action that amounted to an affirmative act of fraud. Whether the taxpayer is attempting to have taxes discharged and the Government is petitioning to prevent the discharge of tax debt under Section 523(a)(1)(C), or whether the taxpayer is contending that the taxes are unsecured in order to obtain a discharge, the inquiry should be the same, i.e., are the taxes subject to a discharge? With the denial of the discharge of taxes under either procedure having the same effect, the question is, “why then should the standard announced in Morgan for discharge be less under Section 105 than under the Haas’ standard in Section 523(a)(l)(C)?”

The Morgan court correctly held that Section 108(c) and I.R.C. Section 6503(h) should not be read together under the “plain meaning rule” set forth in the Ron Pair Enterprise case. Nonetheless, the Eleventh Circuit left the bankruptcy courts free to extend the limitations period under Section 105 if the circumstances and equities warrant said extension, and apparently weighted the equities to generally favor the IRS.  The Morgan court failed, intentionally or unintentionally, to adopt the Haas’ principles when guiding the bankruptcy courts as to which standard to use in tolling the limitations periods under the 105 applications.  This failure is contrary to the standards applied by the Gore/Turner courts for determining the discharge of taxes under the tolling provisions.  The Gore/Turner standards are similar to the Haas’ standards for tax dischargeability under 108(c) and 523(a), which appear to be the correct standards established by the Eleventh Circuit for tax discharge matters.

Perhaps the correct standard in determining whether to extend the equities under Section 105 should be, in part, based on collectibility and in part on the requisite standards of Section 523(a)(l)(C) standards. The court could consider primarily three different types of situations. The first situation is one in which the debtor has not demonstrated or evidenced any affirmative acts of bad faith or fraud and where there are no assets to seize. In this situation, the IRS would not be able to prove by a preponderance of the evidence, or the clear and convincing standard, that it has been prejudiced by the absence of tolling and the policy balance should clearly fall in the debtor’s favor.

The second situation is one in which the IRS can show the debtor possesses assets potentially subject to collection, but that the IRS did not have time to secure its Notice of Federal Tax Lien due to the successive bankruptcy filings. In this situation, perhaps the IRS will be able to show by the preponderance of the evidence, or the clear and convincing standard, that equity under Section 105 should be extended to allow the IRS time to perfect its position, i.e., lifting the automatic stay during the pendency of the bankruptcy to allow the IRS to file its Notice of Federal Tax Lien to secure its lien position on prepetition assets.

The third situation includes those instances where the debtor has committed affirmative acts showing bad faith or fraud. The acts should be of the types specified in Spies [46]  and Haas, i.e., maintaining more than one set of books, making false entries or alterations, destruction of books or records, concealment of assets or income, or engaging in dubious transfers of assets, and any conduct the likely effect of which would be to mislead or conceal. In the bad faith situations, such affirmative acts do not include merely successive bankruptcy filings, but the discharge provisions of Section 523(a)(1), and specifically Section 523(a)(l)(C), should apply. Basically, in the Eleventh Circuit, the IRS should have to show affirmative acts of bad faith and fraud on the part of the debtor before denying a tax discharge under either sections 523(a) or 105.

The above standards protect the IRS when the Bankruptcy Code as a whole is considered. In egregious cases, the court has discretion to deny the entire discharge, not only the particular claim of one creditor. In the Odell case, and those similarly situated, the IRS has not shown the prerequisite necessity to compel the bankruptcy court to expand the plain meaning of the statute to provide for a remedy that may frustrate Congress’s intent to provide a fresh start and where other adequate safeguards are built into the statutory scheme. The Morgan court may have suggested through footnote 8, an incorrect consideration of the proper legal standard to use when determining whether to deny a discharge of taxes when it expanded the standard set forth in Section 523(a)( 1 )(C), allowing the bankruptcy court discretion to possibly create rights under Section 105 where Congress has not provided for such rights.

Had the Morgan court adopted the standards set forth in the Gore/Turner cases, [47] and held that equity should be extended only in fraud and bad faith cases, the result would have been consistent with the principles found in Haas and already practiced in the Eleventh Circuit. [48]   When Morgan decided to allow an expansion of the discharge provisions for something less than the 523(a)(1)(C) standard, such extensions may be beyond what Congress intended.

V.         Conclusion

Bankruptcy courts should exercise their equitable powers under Section 105(a) by carefully balancing the rights of the debtor, other creditors and the IRS.    If the IRS can not prove affirmative acts of bad faith or fraud, or if there are no assets to seize, the balance of equity will always favor the taxpayer/ debtor. If there are assets but no showing of bad faith or fraud, the court will have to balance the prejudice to the IRS and consider allowing the stay to be lifted so the IRS can perfect its interest by filing a Notice of Federal Tax Lien. If an alternative remedy exists, i.e., allowing the IRS relief from the stay to file a Notice of Federal Tax Lien on prepetition assets, then the tax discharge should not be denied, but the IRS should be able to protect itself and its position. Finally, if there are either affirmative acts showing bad faith or fraud, then the standard under Section 523(a)(1)(C) and Haas should apply to deny a discharge of the taxes by providing for an extension of the dischargeability periods.

[1]            182 F.3d 775 (11th Cir. 1999).

[2]            Section 105, Power of court.  (a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.

[3]            All Code sections will refer to the United States Bankruptcy Code, 11 U.S.C., unless otherwise described.

[4]            I.R.C. Section 6503 reads in part:

(h) Cases under title 11 of the United States Code. – The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and – (1) for assessment, 60 days thereafter, and

(2) for collection, 6 months thereafter.

[5]            Section 108(c) provides:

(c) Except a provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of–

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or  (2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim. 

[6]            In re Montoya, 965 F.2d 554 (7th Cir. 1992)(dischargeability period is tolled by successive bankruptcy filings ); In re Richards, 141 B.R. 751 (Bankr. W.D. Okl. 1992), aff’d, 994 F. 2d 763 (10th Cir. 1993)(successive bankruptcy filings toll the dischargeability period based on 108(c) and I.R.C. Section 6503(h), as well as being allowable under 105(a)); Quenzer v. United States, 19 F. 3d 163 (5th Cir. 1993)(Section 108 does not apply to the 240 day dischargeability period and Section 105(a) was not argued by IRS); In re Taylor, 81 F. 3d 20 (3rd Cir. 1996)(three year period tolled pursuant to 108(c) and I.R.C. Section 6503(h)); Aberl v. United States, 78 F. 3d 241 (6th Cir. 1996)(an offer in compromise filed prior to assessment of tax does not toll the dischargeability period); Waugh v. Internal Revenue Service, 109 F. 3d 489 (8th Cir. 1997)(the dischargeability period is tolled for successive bankruptcy filings, as a matter of law and equitable tolling is not needed); Palmer v. United States, 219 F. 3d 580 (6th Cir. 2000)(dischargeability period is not automatically tolled by successive bankruptcy filings, it can be equitably tolled pursuant to 105(a) and 523(a)(1)(C), if facts require).

[7]            The National Bankruptcy Review Commission submitted a report on October 20, 1997 to the President, Congress, and Chief Justice of the Supreme Court which included the recommendation of the Tax Advisory Committee for amendment to Sections 507(a)(8) and 523(a)(1) requiring tolling of the priority periods.  The pending bankruptcy legislation could render the issues discussed in this article moot.

[8]            Section 727(b) (2000).

[9]            See, In re Griffith, 161 B.R. 727, 730 (Bankr.S.D.Fla.1993), affd, 210 B.R. 216 (S.D.Fla.1997), rev’d, 174 F.3d 1222 (11th Cir.), vacated and reh’g en banc granted, 182F.3d 1297(11th Cir.l999), __ 206 F.3d 1389(11th Cir. 2000); and In re Miller, 39 F.3d 301,304(11th Cir.1994).               

[10]           In re Jacobs, 243 B.R. 836 (Bankr. M.D. Fla. 2000).

[11]           Section 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does

not discharge an individual debtor from any debt-

(1)  for a tax or a customs duty--

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, if required-

(i) was not filed, or

(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax. . . .

[12]           Id.

[13]           Congressional history shows that, “Subsection (A) lists nine kinds of debts excepted from discharge. Taxes that are excepted from discharge are set forth in paragraph (1). These include claims against the debtor which receive priority in the second, third and sixth categories (Sec. 507(A)(3)(B) and (c) and (6)). These categories include taxes for which the tax authority failed to file a claim against the estate or filed its claim late. Whether or not the taxing authority’s claim is secured will also not affect the claim’s nondischargeability if the tax liability in question is otherwise entitled to priority.” H.R.Rep. No. 95-595, 95th Congress, 1st Session 1188-1190(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6495-6496; S.Rep. No. 95-989, 95th Cong., 2nd Sess. 158-159 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5856-5857.

[14]           Section 507. Priorities

(a) The following expenses and claims have priority in the following order:

(1) First, administrative expenses allowed under section 503(b) . . . .

(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for--

(A) a tax on or measured by income or gross receipts-

(i)         for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the                                            petition:

(ii)        assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before                                       the date of the filing of the petition; or

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case; (emphasis added).

[15]           26 U.S.C. 6501(2000).

[16]           This provision applies to additional tax assessed by the IRS as a result of an audit, or otherwise, because all other return assessments would be non-dischargeable as a result of the three year rule or the two year rule.

[17]           Id. at Section 507(a)(8)(A)(ii) (2000).

[18]           H.R.Rep. No. 95-595, 95th Congress, 1st Session 1188-1190 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6495-6496; S.Rep. No. 95-989, 95th Cong., 2nd Sess. 158-159 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5856-5857.

[19]           A brief overview of the IRS collection process is provided to assist the reader in understanding the IRS’ position that tolling of the dischargeability statute is necessary to allow the IRS sufficient time to collect, or attempt to collect, its tax debts.

[20]           26 U.S.C. 6501 (2000).

[21]           Section 362.

[22]           26 U.S.C. 6321 and 6323(f)(2000)(The IRS is required to provide due process notices to the taxpayer prior to filing its Notice of Federal Tax Lien).

[23]           “I..R.C. Section 6325(a)(1) does not require the IRS to release valid tax liens when the underlying tax is discharged in bankruptcy.”  Isom v. United States, 901 F.2d 744 (9th Cir. 1990).  Furthermore, the tax liens remain enforceable against exempt and abandoned property of the debtor. Section 522(c)(2).

[24]           Gore v. United States, 182 B.R. 293 (Bankr. N.D. AL 1995), at 308.

[25]           182 B.R. 317 (Bankr. N.D. AL 1995).

[26]           182 B.R. 293 (Bankr. N.D. AL 1995).

[27]           Sullivan, Warren, and Westbrook, Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts 1981-1991, 68 Am.Bankr.L.J. 121(1994) [hereinafter referred to as the “Consumer Bankrupt Study”]. Id. at 308.

[28]           Morgan discussed the “three year rule” under Section 507(a)(8)(A)(i).

[29]           As set forth above, there are three subsections to Section 507(a)(8)(A). The Morgan court dealt with the three year rule of Section 507(a)(8)(A)(i). Other cases have dealt with the 240-day rule of Section 507(a)(8)(A)(ii). The tolling issue is arguably not applicable in the third subsection and has not been addressed in a case under 507(a)(8)(A)(iii).

[30]           “To the extent that legislative history has relevance, we find that the better sources lend ample support to a plain meaning construction of section 523(a)(7). We resolve the question of how to read the legislative history in a simple fashion: by reading the statute and taking it at face value. Given the several ‘mute intermediate legislative maneuvers through which section 523(a)(7) passed before reaching its present form, we conclude that congressional intent cannot be divined from extrinsic sources.” In re Burns, 887 F.2d 1541, 1552 (11th Cir. 1989).

[31]           Section 1322(a).

[32]           Sections 523(a)(1) and 507(a)(8)(A)(i). In a chapter 13, priority claims are paid through a confirmed plan at their full value, whereas, unsecured general claims receive a pro rata distribution.

[33]           Morgan, 182 F.3d at  778, (quoting In re Richards, 994 F.2d 763, 765 (10th Cir. 1993)).

[34]           In re Burns, 887 F.2d 1541, 1544 (11th Cir. 1989).

[35]           Morgan, 182 F.3d at 778.

[36]           19 F.3d 163, 165 (5th Cir. 1993).

[37]           Morgan, 182 F.3d at 779.

[38]           In re Haas, 173 B.R. 756 (S.D. Ala. 1993), rev’d sub. nom., 48 F.3d 1153 (11th Cir. 1995), rev’d on separate grounds, 162 F.3d 1087 (1998).

[39]           Case No. 3:98-cv-J-21 (May 24, 2000)(unpublished).

[40]           In re Johnny K. Odell, 221 B.R. 1000 (Bankr. M.D. Fla. 1998).

[41]           Government’s brief, page 9, 13.

[42]           Gore, 182 B.R. at 308, stated, “The IRS’s rights in the assets owned by the debtor when bankruptcy is filed, are preserved by the lien, and cannot be effectively assailed, even if the debtor files bankruptcy, and even if the taxes are ultimately discharged in a Chapter 7 case. As to a debtor’s property, therefore, the IRS occupies the same position, whether the debtor is in bankruptcy or not, once assessment has occurred. In either situation, the IRS holds a lien on all of the debtor’s unencumbered assets. Once in bankruptcy, the debtor cannot dispose of the property without the permission of the bankruptcy court, gained only after a hearing upon notice to lien-holders, including the IRS, who would be entitled to adequate protection of its interest in the property to be sold. 11 U.S.C.  363(e). Because of the shortage of property ordinarily owned by consumer debtors that is subject to the IRS’s lien and levy rights, bankruptcy rarely deprives the IRS of actual levy opportunities.”

[43]           26 U.S.C. 6323(2000).

[44]           The levy on the Odell’s bank accounts would be inappropriate if the taxes were held to be discharged in the bankruptcy since the funds in the account that were levied were most likely accumulated after the filing of the petition in the second bankruptcy.

[45]           173 B.R. 756 (S.d. Ala. 1993), rev’d sub.nom., 48 F. 3d 1153 (11th Cirt. 1995), rev’d on separate grounds, 162 F. 3d 1087 (1998).

[46]           Spies v. United States, 317 U.S. 492, 499 (1943).

[47]           The Morgan court alluded in footnote 8 of the opinion that, “. . . there does not appear to be any evidence of dilatory conduct or bad faith on the part of the Morgans. We do not set forth the equitable considerations regarding [Section] 105(a), but we reject the notion espoused in In re Gore, that a finding of dilatory conduct or bad faith is necessary to find the equities in favor of the government.”

[48]           Haas referred to Section 507 and its legislative history as follows: “House Report 595 refers to a proposed provision 11 U.S.C. S 507(6)(A). See H.R.Rep. No. 595, at 190 n. 98, 1978 U.S.C.C.A.N., at 6151 n. 98. This material is currently codified at 11 U.S.C. S 507(a)(8). . . . Section 507(a)(8)(A) creates a priority in bankruptcy for income taxes. . . . (ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; . . . [b]ecause it takes a taxing authority time to locate and pursue delinquent tax debtors, taxes are made nondischargeable if they become legally due and  owing within three years before bankruptcy. An open-ended dischargeability policy would provide an opportunity for tax evasion through bankruptcy, by permitting discharge of tax debts before a taxing authority has an opportunity to collect any taxes due. Id. at 190, 1978 U.S.C.C.A.N., at 6150 (footnote omitted) (emphasis added). Congress enacted section 523(a)(1)(A) and section 507(a)(8) to give taxing authorities time to pursue delinquent income tax debtors and to obtain secured status before the debtor can discharge his tax liability in bankruptcy. . . . Congress did not intend to grant the IRS an absolute priority in bankruptcy for delinquent taxes, however, instead, sections 507(a)(8) and 523(a)(l )(A) except from discharge income and employment tax liabilities only for those taxable years ending within three years of the filing of a debtor’s bankruptcy petition. See SS 507(a)(8), 523(a)(1)(A). Congress imposed this three-year limit on the nondischargeability of income and employment taxes ‘because the taxing authority should not be given priority for taxes that are unassessed or uncollected through a lack of due diligence.’ H.R.Rep. No. 595, at 191, 1978 U.S.C.C.A.N., at 6151.” Haas, 48 F.3d at 1160.