Cite as: Keith M. Lundin, Lundin On Chapter 13, § 159.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Prior to BAPCPA, all tax debts were dischargeable at the completion of payments under a Chapter 13 plan. Many tax debts were and still are priority claims entitled to full payment as a condition for confirmation under § 1322(a)(2).1 Full payment through the Chapter 13 plan has always meant payment without interest over the life of the plan.2 Also, prior to BAPCPA, if the holder of a priority tax claim failed to timely file a proof of claim, the tax debt would be dischargeable at the completion of payments without regard to whether any portion of the debt was paid through the plan.
BAPCPA changed the treatment of tax debts by selectively making taxes nondischargeable at the completion of payments under a Chapter 13 plan. There are three classes of tax debts that are now nondischargeable:
Section 507(a)(8)(C). A tax required to be collected or withheld “for which the debtor is liable in whatever capacity.”3 This would include trust fund taxes such as state and federal withholding taxes and most sales taxes.
Section 523(a)(1)(B). A tax or custom duty with respect to which a return “or equivalent report or notice” was not filed or given or, if filed or given, was filed or given after the date on which the return, report or notice was last due and within two years before the filing of the Chapter 13 petition.4
Section 523(a)(1)(C). A tax or custom duty with respect to which the debtor “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”5
Although not specifically cross-referenced by § 1328, BAPCPA added a hanging paragraph at the end of § 523(a) that may be relevant to the second and third new exceptions to discharge listed above:
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.6
The hanging paragraph at the end of § 523(a) applies to “this subsection,” which would be § 523(a). Section 523(a) contains two of the cross-referenced new exceptions to discharge for taxes in Chapter 13 cases—§ 523(a)(1)(B) and (1)(C). For purposes of those subsections, “return” includes returns prepared by the IRS under IRC § 6020(a)—returns signed or acknowledged by the taxpayer—but does not include a return by the Service under IRC § 6020(b), which is prepared without the cooperation or approval of the taxpayer. It is perhaps only interesting that, for purposes of the new prepetition tax-return-filing requirements in § 1308, “return” is defined to include both § 6020(a) and § 6020(b) returns.7
BAPCPA did not make all tax debts nondischargeable at the completion of payments in a Chapter 13 plan. Significant tax debts that are still dischargeable at the completion of payments under a Chapter 13 plan are: taxes due within three years before the petition or within the 240-day assessment rule if returns were timely filed as described in § 507(a)(8)(A); pecuniary loss penalties related to taxes as specified in § 507(a)(8)(G); and excise taxes described in § 507(a)(8)(E). The 100 percent penalty assessed by the IRS against responsible persons when a corporation fails to pay withholding taxes under IRC § 6672 typically falls within pecuniary loss penalties under § 507(a)(8)(G) and would be dischargeable in a Chapter 13 case at the completion of payments under the plan.
But keep in mind that all of the taxes listed above—whether dischargeable or nondischargeable at the completion of payments in a Chapter 13 case—are priority claims that must be paid in full to confirm a Chapter 13 plan. The nondischargeable taxes listed above will now continue to accrue nondischargeable postpetition interest during a Chapter 13 case. The taxes that remain dischargeable can be paid in full through the plan without payment or accrual of postpetition interest.
The tax debts that are now nondischargeable in all Chapter 13 cases are not included in § 523(c), and thus there is no statutory requirement that the dischargeability of these taxes be determined by the bankruptcy court during the Chapter 13 case. The IRS is not compelled by the Bankruptcy Code or Rules to file a complaint to determine the dischargeability of taxes during the Chapter 13 case. But because the Chapter 13 plan must provide for full payment of all priority claims, including taxes,8 the priority status of a tax debt typically is either agreed upon or litigated at or before confirmation in a Chapter 13 case. Because the priority of taxes is coextensive with the nondischargeability of taxes within the classes described, the priority determination is conclusive of the nondischargeability determination with respect to priority tax debts that are also now nondischargeable in a Chapter 13 case. Put another way, the Chapter 13 debtor who wishes to contest the nondischargeability of a tax must litigate the priority of that tax because a finding of priority may be preclusive of nondischargeability.
The principal impact of adding nondischargeability to the priority status of some tax debts will be at confirmation when savvy Chapter 13 debtors separately classify the nondischargeable tax claims for full payment with postpetition interest. Priority status has long been recognized as a basis for the separate classification of unsecured debt when a Chapter 13 debtor is financially unable to pay all unsecured claims in full. Because priority debts have to be paid in full to accomplish confirmation under § 1322(a)(2), most courts allow the separate classification of priority debts for payment in full, notwithstanding that other unsecured creditors are not being paid in full through the plan.9 Nondischargeability by itself has rarely been accepted as a basis for classification and more favorable treatment of unsecured debt in Chapter 13 cases.10 The combination of priority and nondischargeable status would support the fairness of discrimination to pay a tax debt in full but adds little of substance to the argument that a nondischargeable tax debt can be separately classified for payment of postpetition interest. The unfair discrimination standard in § 1322(b)(1) stands as a barrier to the payment of postpetition interest to the holder of a priority tax claim that became nondischargeable after BAPCPA.
Detailed elsewhere,11 BAPCPA added a new subparagraph (10) to § 1322(b) that permits the Chapter 13 plan to provide for the payment of postpetition interest on unsecured claims that are nondischargeable “to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims.”12 The full-payment predicate for this new permissive plan provision makes it unlikely that Chapter 13 debtors flock to its use. It also suggests that in the absence of full payment of other unsecured claims, Chapter 13 debtors are not likely to survive a fair discrimination challenge when the plan separately classifies a nondischargeable tax debt for payment in full with postpetition interest.
What this means for many Chapter 13 debtors is that at the completion of payments under the plan, there will be a surviving debt for nondischargeable postpetition interest on the tax claims that are now nondischargeable under § 1328(a). The debtor will be able to pay those priority tax debts in full through the plan even when other unsecured debts are not being paid in full, but it is unlikely that the debtor will be allowed to pay postpetition interest on a nondischargeable tax claim when the plan does not pay all unsecured debt in full. Postpetition interest will accrue and be nondischargeable at the completion of payments under the plan.
3 11 U.S.C. § 1328(a)(2) (incorporating 11 U.S.C. § 507(a)(8)(C)).
4 11 U.S.C. § 1328(a)(2) (incorporating 11 U.S.C. § 523(a)(1)(B)).
5 11 U.S.C. § 1328(a)(2) (incorporating 11 U.S.C. § 523(a)(1)(C)).
6 11 U.S.C. § 523(a).
7 See 11 U.S.C. § 1308(c), discussed in § 391.1 [ Tax Return Duties One Day before First Scheduled Meeting of Creditors ] § 42.6 Tax Return Duties One Day before First Scheduled Meeting of Creditors.
8 See 11 U.S.C. § 1322(a)(2), discussed in § 98.1 [ Plan Must Provide Full Payment ] § 73.1 Plan Must Provide Full Payment.
9 See § 151.1 [ Priority Claims ] § 87.4 Priority Claims.
10 See discussion beginning at § 88.1 In General.
11 See § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3 Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).
12 11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3 Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).