California Franchise Tax Board v. Kendall

Citation: 657 F.3d 921Docket: No. 10-60000

Court: Court of Appeals for the Ninth Circuit; September 14, 2011; Federal Appellate Court

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An order has been issued to withdraw the opinion filed on July 12, 2011, and replace it with a new opinion. The panel has denied the petition for panel rehearing, with no further petitions for en banc or panel rehearing allowed. 

The case involves a tax debt owed by Brenda Marie Jones to the California Franchise Tax Board (FTB) within her Chapter 7 bankruptcy appeal. The bankruptcy court and the Bankruptcy Appellate Panel (BAP) determined that this tax debt was dischargeable. Generally, debts before a discharge order in Chapter 7 are discharged, but certain tax debts may be excepted under 11 U.S.C. § 523(a)(1)(A) and § 507(a)(8), which includes a 'three-year look-back period' for tax debts related to taxable years ending before the bankruptcy petition is filed, provided the tax return was due no more than three years prior. 

Jones's tax debt arose more than three years before her Chapter 7 filing, which typically would lead to discharge unless the lookback period was suspended. The FTB contended that the lookback period was suspended due to an automatic stay from Jones's prior Chapter 13 bankruptcy. However, the court found that upon confirmation of the Chapter 13 plan, the property revested in Jones, lifting any applicable stay provisions before the tax debt became due. As a result, the FTB was not precluded from collection, and the tax debt was not excepted from discharge. The court rejected the principles of equitable tolling, affirming that the tax debt was discharged and upholding the BAP's ruling.

Background details include that Jones and her husband filed a joint Chapter 13 bankruptcy petition in July 2002, which imposed an automatic stay on collections. Their plan was confirmed in September 2002, and they filed their 2002 tax return in October 2003, reporting approximately $6,000 owed. The Chapter 13 case was dismissed in September 2006, and Jones filed for Chapter 7 in October 2007, receiving a discharge in January 2008.

The Joneses’ tax debt is discharged in Jones's Chapter 7 bankruptcy petition because the tax return was due more than three years prior to the petition's filing, unless the statutory suspension provision or equitable tolling applies to extend the lookback period defined in 11 U.S.C. § 507(a)(8)(A). After the California Franchise Tax Board (FTB) moved to reopen Jones's case to assert that the tax debt was non-dischargeable, the bankruptcy court ruled in favor of Jones, stating that neither the confirmed Chapter 13 plan nor the automatic stay prevented the FTB from collecting the debt when it became due. The Bankruptcy Appellate Panel (BAP) upheld this ruling, clarifying that the three-year lookback period was not suspended and that the suspension provision only related to the previous Chapter 13 case, with equitable tolling not applicable. The appellate review of the BAP's decision is conducted de novo, affirming the BAP but on different grounds. 

The three-year lookback period, defined in relation to the Chapter 7 petition, indicates that tax debts are discharged unless they fall within this period, which is specifically for claims related to taxes for taxable years ending before the petition date, with the last return due after three years prior to that date. The statutory language explicitly refers to "the petition," indicating the Chapter 7 petition, and thus the three-year lookback period prior to Jones’s petition spans from October 2004 to October 2007. Since the debt was due in 2003, it falls outside this period and is therefore discharged unless the court finds applicable statutory suspension or equitable tolling that would extend the lookback period to include the 2003 due date.

The statutory suspension provision does not apply to Jones’s tax debt. According to 11 U.S.C. § 507(a)(8), the look-back period for tax collection is suspended only when a governmental unit is prohibited from collecting due to specific circumstances, which include a debtor's request for a hearing or an appeal, plus certain periods during which a stay was in effect in prior bankruptcy cases. The provision outlines three scenarios, with the first and third scenarios being inapplicable to Jones's case. The relevant scenario is the second, which concerns the time a stay from prior bankruptcy proceedings was in effect. 

The Franchise Tax Board (FTB) interprets the statute broadly, suggesting the look-back period should be suspended whenever a stay is in place against any creditor, while Jones argues for a narrow interpretation, limiting suspension to stays specifically preventing the collection of this tax debt. Both interpretations show that the statute is ambiguous, prompting a review of legislative history for clarification. 

The provision was intended to codify the rule from Young v. IRS, where the Supreme Court ruled that an automatic stay during a Chapter 13 petition equitably tolled the three-year lookback period for subsequent Chapter 7 filings, as the IRS was prevented from collecting the debt during that time. This ruling emphasized equitable tolling principles, which apply when a party cannot act within the limitations period due to obstacles. The conclusion is that the suspension provision applies only if the FTB was indeed precluded from collecting Jones's tax debt by a stay in a prior case.

The FTB is permitted to collect on Jones's tax debt during the three-year lookback period, as it is not affected by the statutory suspension provision. The determination of whether the FTB's collection efforts were hindered by an automatic stay under § 362(a) centers on the nature of the property available for collection. Under 11 U.S.C. § 362(a), collection activities against the bankruptcy estate are stayed, but this does not extend to post-petition creditors collecting from the debtor's property. Property of the bankruptcy estate includes all property owned before filing and any acquired until the case is closed, as defined by § 1306(a)(1). However, § 1327(b) stipulates that upon confirmation of a Chapter 13 plan, all estate property revests in the debtor, complicating the interpretation of property status post-confirmation. The interplay between §§ 1306(a) and 1327(b) regarding property status after plan confirmation is controversial and has prompted various approaches in bankruptcy courts and circuits. The modified estate preservation approach allows for property to vest in the debtor upon plan confirmation while designating property acquired after confirmation as estate property under § 1306(a).

The estate transformation approach interprets § 1327(b) of the Bankruptcy Code as conferring ownership of estate property to the debtor upon confirmation of a plan, retaining only what is necessary to execute the plan. This view is supported by case law, including Telfair v. First Union Mortg. Corp. and Black v. U.S. Postal Serv. Notably, the estate termination approach, which the bankruptcy court and BAP endorsed, asserts that all estate property revests in the debtor at confirmation, along with any property acquired thereafter, unless the plan states otherwise. Under both approaches, estate property vested in Jones upon plan confirmation, making it not subject to an automatic stay.

Conversely, the estate preservation approach posits that while property may 'vest' in the debtor at confirmation, the estate remains intact under the automatic stay until the case's conclusion, a view not adopted by any circuit. The BAP mistakenly interpreted a prior Eighth Circuit decision as endorsing this approach, whereas it merely confirmed that the Chapter 13 estate can exist post-confirmation without holding property.

The court's focus was on whether the Chapter 13 estate remained after confirmation. It concluded that at least some estate property revests in the debtor upon confirmation based on the plain language of § 1327(b), which does not define 'vests' but implies a transfer of ownership. The common understanding of 'vest' indicates a conferral of property ownership. Since Jones did not choose to treat her property otherwise in the plan, she regained ownership upon confirmation, except for amounts allocated to fulfill the plan. Consequently, the FTB was permitted to collect post-petition tax debt from property that revested in Jones after confirmation, as the debt arose subsequently and the limitations period was not suspended.

Equitable tolling is not applicable in this case, as the Franchise Tax Board (FTB) could have pursued debt collection after the tax was due. The principles from Young do not support tolling the lookback period here, leading to the discharge of the debt. The FTB's argument that uncertainty in interpreting §§ 1306(a) and 1327(b) prevented collection is unfounded, as the FTB had alternative options, such as seeking relief from the stay under § 362 or moving to dismiss the case for non-payment of post-petition taxes. The bankruptcy court highlighted that no sanctions have been imposed against a party exploring the viability of its claim through these means. Equitable tolling is inappropriate when a creditor fails to act timely to preserve its claim and is not hindered from asserting it during the limitations period. The principles of statutes of limitations aim to eliminate stale claims and ensure certainty in rights and liabilities. The FTB's assertion that penalties related to the Joneses' non-payment of the 2002 income tax should not be discharged is addressed under § 507(a)(8)(G). The discharge analysis for penalties mirrors that of the tax debt, meaning if the tax is discharged, so are the penalties. The discussion focuses solely on the tax debt, aligning with the interpretation of 'revesting' in § 349(b)(3) as restoring property rights to their original state at the case's commencement.