Cite as: Keith M. Lundin, Lundin On Chapter 13, § 17.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Unsecured debts that would be entitled to priority under 11 U.S.C. § 507 and entitled to full payment in a Chapter 13 plan under 11 U.S.C. § 1322(a)(1)1 are counted as unsecured debts in the eligibility calculation.2 Unsecured claims for taxes, claims by employees of a debtor engaged in business and administrative expenses are examples of priority claims that would be counted as unsecured debts. Priority tax claims typically are not contingent for purposes of § 109(e) because, with respect to prepetition years, all of the acts and events necessary to trigger the debtor’s liability have occurred.3 Most reported decisions also find that prepetition tax debts are liquidated for eligibility purposes in the amount claimed by the IRS.4
On unusual facts, the bankruptcy court in In re Verdunn5 found tax claims to be unliquidated, notwithstanding that the debtor scheduled the IRS with debts totaling $297,170.88 and the IRS filed a proof of claim. In Verdunn, the bulk of the tax debts were based on disputed allegations of tax fraud. The bankruptcy court found the tax liabilities were “not readily determinable from the documents before the court and therefore they are deemed unliquidated.”6 On appeal, the Eleventh Circuit reversed in a gush of deference for IRS practices and procedures:
A liquidated debt is that which has been made certain as to amount due by agreement of the parties or by operation of law. . . . [T]he concept of a liquidated debt relates to the amount of liability, not the existence of liability. . . . Like the relevant state statute in [In re Knight, 55 F.3d 231 (7th Cir. May 3, 1995) (Coffey, Ripple, Skinner)], established Internal Revenue Code criteria were used to calculate Verdunn’s tax debt. Like the demand letter in Knight, the amount of Verdunn’s tax liability was evident from a document, the statutory notice of deficiency. . . . [T]he amount of Verdunn’s $297,000 deficiency was easily ascertainable, i.e., it was computed through the application of fixed legal standards set forth in the tax code. . . . [L]ike the penalties for failing to report traffic offenses in Knight, Verdunn’s federal income tax liabilities and penalties, as asserted, were liquidated unsecured debts to be included in the section 109(e) eligibility calculation.7
Another court, applying the test formulated by the Bankruptcy Appellate Panel for the Ninth Circuit in Loya v. Rapp (In re Loya),8 concluded that some tax debts were liquidated and others unliquidated depending on whether the amounts owed could be determined “without an evidentiary hearing.”9 This court held that tax claims were liquidated and counted toward the debt limitations when the debtor admitted liability, but amounts that could only be determined after an evidentiary hearing were unliquidated and not counted.10
The test for liquidation of tax claims should not be different than for other unsecured claims in a Chapter 13 case. That most tax claims will be based on assessments of deficiencies and other investigations and paperwork by the IRS will be evidentiary matters that bear on whether fixing the amount of the debt is simple or complex. In most situations, the IRS will readily prove the amount it asserts is owed by the debtor, and the debtor will be hard-pressed to prove that the debt is unliquidated. As with all debts, merely listing a tax as disputed will not render the debt unliquidated for eligibility purposes.11
One twist on the counting of tax debt for eligibility purposes in a Chapter 13 case was resolved by the U.S. Supreme Court in early 2004. Discussed above,12 in United States v. Galletti (In re Galletti),13 the United States Court of Appeals for the Ninth Circuit held that the IRS did not have a claim in a Chapter 13 case when the debtor was a general partner in a partnership that was assessed for unpaid employment taxes but the IRS did not assess the debtor individually within the three-year limitations period in 26 U.S.C. § 6501. The Ninth Circuit’s opinion in Galletti made a distinction between the liability (under California law) of an individual partner for taxes owed by the partnership and the IRS’s right to collect those taxes from an individual partner.
Citing the broad definition of claim in § 101(5), a unanimous Supreme Court reversed the Ninth Circuit. The Supreme Court held that assessment of the taxes against the partnership extended the three-year limitation on collection to 10 years. Because the debtor admitted liability for the partnership debt, neither California partnership law nor the Bankruptcy Code required more to establish a claim against the individual partner.
If the debt is also secured—for example, a tax secured by a prepetition tax lien—the claim is treated as a secured debt for eligibility purposes. The same would probably be true for characterization of a secured debt for alimony, maintenance or support that would qualify as both a priority claim and a secured claim but is most logically counted only as a secured debt for eligibility purposes.14
2 Hammers v. IRS (In re Hammers), 988 F.2d 32 (5th Cir. Apr. 13, 1993) (Politz, King, Barksdale) (Tax protestor is ineligible where Tax Court previously determined debtor’s tax liability to be in excess of $100,000. Section 505(a)(2)(A) prohibits relitigation of the amount of a tax already determined by the Tax Court.); In re Nowak, 143 B.R. 154 (Bankr. N.D. Ill. Mar. 20, 1992) (Schmetterer) (Scheduled tax claim of $427,915.44 exceeds eligibility limitations for Chapter 13.); In re Stinchfield, 126 B.R. 251 (Bankr. E.D. Tex. June 12, 1990) (Sharp) ($111,000 unsecured priority claim of IRS for 100% penalty assessment in 26 U.S.C. § 6672 is noncontingent and is counted as an unsecured claim for purposes of § 109(e).). Accord In re Michaelsen, 74 B.R. 245 (Bankr. D. Nev. May 13, 1987) (Thompson); In re Tashman, 13 B.R. 549 (Bankr. D. Vt. July 13, 1981) (Marro).
3 See Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 303–04 (2d Cir. Dec. 3, 1997) (Kearse, McLaughlin, Godbold) (Responsible person liability for withholding taxes for the debtor’s corporation for quarters ending prior to the Chapter 13 petition are noncontingent debts. “A taxpayer’s duty to pay taxes derives from statute and arises upon his nonpayment of the taxes when due. The obligation to pay is not contingent on any extrinsic event. . . . Mazzeo, [Westfield Financial Corporation’s] president, either was a responsible person or he was not; but his status did not depend on any event that had not occurred prior to the time he filed his Chapter 13 petition.”); In re Tucker, 345 B.R. 373 (Bankr. M.D. Ala. May 11, 2006) (Williams) (Applying United States v. Verdunn, 89 F.3d 799 (11th Cir. July 31, 1996) (Kravitch, Carnes, Hill), tax liabilities for years prior to the year in which the Chapter 13 petition was filed are noncontingent because all events giving rise to liability occurred before the petition.); In re Brown, 302 B.R. 913, 916 (Bankr. D. Or. Aug. 13, 2003) (Alley) (100% penalty for trust fund taxes withheld by debtor’s corporation but not remitted is noncontingent. The predicate to the debtor’s liability—“withholding by a corporation controlled by the debtor without remission to the government”—occurred before the petition.); In re Newman, 259 B.R. 914 (Bankr. M.D. Fla. Mar. 5, 2001) (Glenn) (Tax debts are noncontingent because all of the events necessary to establish the debtor’s liability occurred prior to the petition.); In re Ekeke, 198 B.R. 315, 317 (Bankr. E.D. Mo. June 14, 1996) (Schermer) (Applying In re Knight, 55 F.3d 231 (7th Cir. May 3, 1995) (Coffey, Ripple, Skinner), prepetition tax claims are noncontingent because “all events upon which the claim is premised (namely, failure to pay federal income tax) have occurred prior to the filing date.” Debtors’ contention that tax debts were discharged in a prior Chapter 7 case makes the claims disputed but not contingent.); Jones v. United States (In re Jones), 129 B.R. 1003 (Bankr. N.D. Ill. July 29, 1991) (Barliant) (Tax claims are liquidated and not contingent for § 109(e) purposes. Had the IRS challenged eligibility before confirmation, debtors would have been ineligible because of the $650,000 disputed tax claim.); In re Stinchfield, 126 B.R. 251 (Bankr. E.D. Tex. June 12, 1990) (Sharp) ($111,000 unsecured priority claim of the IRS for the 100% penalty assessment in 26 U.S.C. § 6672 is noncontingent.). But see In re Camp, 170 B.R. 610 (Bankr. N.D. Ohio July 7, 1994) (Krasniewski) (Tax claim scheduled as “a disputed and unliquidated priority claim in the amount of $215,000.00” is not counted for eligibility purposes because “a review of the Debtors’ bankruptcy schedules does not indicate that the Debtors have listed the IRS’ claim as contingent [sic] and disputed in bad faith.”). See § 15.1 What Is Noncontingent Debt?.
4 See Mazzeo v. United States (In re Mazzeo), 131 F.3d 295 (2d Cir. Dec. 3, 1997) (Kearse, McLaughlin, Godbold) (Responsible person liability for withholding taxes of the debtor’s corporation was liquidated because the amount was easily ascertainable from a statute and from the tax returns signed by the debtor.); United States v. Verdunn, 89 F.3d 799 (11th Cir. July 31, 1996) (Kravitch, Carnes, Hill) (Federal income tax liabilities and penalties are liquidated unsecured debts for § 109(e) purposes.); Lindsey v. Cohen (In re Lindsey), No. CC-08-1287-PaDMk, 2009 WL 7751414 (B.A.P. 9th Cir. May 14, 2009) (unpublished) (Pappas, Dunn, Markell) (Prepetition district court judgment for unpaid federal income taxes of $9,559,587 renders debtors ineligible under § 109(e) because taxes are neither contingent nor unliquidated; debtors’ contention that banking and monetary system is fundamentally flawed does not impact eligibility determination.); Barcal v. Laughlin (In re Barcal), 213 B.R. 1008, 1013–14 (B.A.P. 8th Cir. Nov. 14, 1997) (Kressel, Schermer, Scott) (“[T]ax liabilities were indeed readily determinable and liquidated because at the time of filing, the liabilities had already been fixed or established by the Service’s Certificates of Assessment. The assessment of a tax liability is essentially a bookkeeping function . . . . [T]he taxes were determined or liquidated through the Service’s process of assessment.”); In re Madison, 168 B.R. 986, 989, 990 (D. Haw. Mar. 8, 1994) (Pence) (Tax claims are liquidated for eligibility purposes where the IRS issued a tax deficiency notice before the debtor filed, and the taxes described in the deficiency notice exceeded the $100,000 unsecured debt limitation for Chapter 13 relief. That the debtor listed the taxes as “unknown—unliquidated” does not change their character because the debtor’s “tax liability and the amounts of the deficiency have already been determined by the IRS. . . . The IRS’ deficiency notice itemized the amounts of the [debtor’s] liabilities. . . . ‘[A] definite sum of money is owed by the debtor to the IRS unless and until the debtor proves otherwise.’”); United States v. Dallas, 157 B.R. 912, 913 (S.D. Ala. Apr. 14, 1993) (Butler) (IRS claim is liquidated and the debtors are ineligible for Chapter 13 where the United States filed a claim for $449,510.21 based on assessments against the debtors under 26 U.S.C. § 6672. That the debtors dispute the validity of the claim but not the amount does not upset the ineligibility determination: “because the amount of the claim made by the United States is readily ascertainable, its claim is liquidated within the meaning of § 109(e).”); United States v. Ahmed (In re Ahmed), 362 B.R. 445 (C.D. Cal. Nov. 13, 2006) (Fischer) (Debtor is ineligible for Chapter 13 due to $2.3 million liquidated tax debt. IRS’s prebankruptcy assessment established debtor’s liability with same force as judgment.); In re Eskanos, No. 11-40292-BKC-AJC, 2012 WL 5182997 (Bankr. S.D. Fla. Oct. 18, 2012) (Cristol) (Assessed federal taxes were neither contingent nor unliquidated.); In re Henne, 359 B.R. 776 (Bankr. D. Ariz. Jan. 8, 2007) (Hollowell) (Disputed IRS claim exceeded unsecured debt limit. Debtor argued that taxes were discharged in prior Chapter 7 case. Under § 523(a)(1), taxes were not discharged since debtor failed to show “honest and reasonable attempt to comply with the tax law.” Disputed submissions to IRS were not “returns” for purposes of § 523(a)(1)(B).); In re Bell, No. 06-12395-NVA, 2006 WL 4547185 (Bankr. D. Md. Sept. 26, 2006) (unpublished) (Alquist) (Taxes assessed prepetition that were subject to filed liens and litigation in Tax Court are noncontingent, liquidated secured debts that render debtor ineligible.); Al-Sedah v. Alabama Dep’t of Revenue (In re Al-Sedah), 347 B.R. 901 (Bankr. N.D. Ala. July 19, 2005) (Mitchell) (That debtor disputes tax liability finally determined by an administrative law judge before the petition does not render the debt contingent or unliquidated.); In re Smith, 325 B.R. 498 (Bankr. D.N.H. Apr. 15, 2005) (Deasy) (Unscheduled taxes for years in which debtor failed to file tax returns are unsecured debts counted toward unsecured debt limitation; because omission of tax claims was not in good faith, amount shown on IRS’s proof of claim is the amount used as unsecured debt for eligibility purposes.); In re Brown, 302 B.R. 913, 917 (Bankr. D. Or. Aug. 13, 2003) (Alley) (100% penalty for trust fund taxes withheld by debtor’s corporation but not remitted is liquidated. The amount of the debt is “easily ascertained by referring to the corporation’s payroll records.”); In re Hounsom, 294 B.R. 399, 401 (Bankr. M.D. Fla. June 2, 2003) (Proctor) (Debtor is ineligible because disputed tax claims exceed limits in § 109(e). “‘[T]hat [a debtor] contests the [IRS’s] claim does not remove it as a claim under section 109(e) or render it unliquidated.’”); In re Newman, 259 B.R. 914, 919 (Bankr. M.D. Fla. Mar. 5, 2001) (Glenn) (Tax debts are liquidated because the amount of the debt can be determined by using information provided by the debtor and specific standards of the Internal Revenue Code. The debtor’s objections to the proofs of claim address classification and the allowance of penalties—defenses or counterclaims that do not render the debt unliquidated. “The question of whether a tax debt is liquidated or unliquidated is not dependent on whether a statutory notice of deficiency has been issued . . . . [F]iling an amended proof of claim does not necessarily create a dispute over such a claim, or result in a change of status from a liquidated debt to an unliquidated debt.”); In re Brooks, 216 B.R. 838, 842 (Bankr. N.D. Okla. Jan. 5, 1998) (Michael) (Prepetition tax debt is liquidated notwithstanding that debtor “vehemently disputes” the claim.); In re Knize, 210 B.R. 773 (Bankr. N.D. Ill. June 17, 1997) (Schmetterer) (Tax claim is liquidated because debtor did not put on evidence to overcome prima facie effect of IRS’s proof of claim.); In re Ekeke, 198 B.R. 315, 318 (Bankr. E.D. Mo. June 14, 1996) (Schermer) (Applying In re Knight, 55 F.3d 231 (7th Cir. May 3, 1995) (Coffey, Ripple, Skinner), prepetition tax claims are liquidated because the IRS has made a “prima facie showing of its Proof of Claim.” Debtors’ assertion that tax claims were discharged in a prior Chapter 7 case does not render the claims unliquidated.); In re Maxfield, 159 B.R. 587, 589 (Bankr. D. Idaho Oct. 27, 1993) (Hagan) (Liability for 100% penalty for failure of the debtor’s controlled corporation to remit withholding taxes is liquidated for eligibility purposes notwithstanding that the debtor’s corporation may pay some or all of the taxes through its Chapter 11 plan. The debt is liquidated because “the debtor was legally liable for the full amount . . . regardless of the possibility of payment by the other obligors.”); In re Nowak, 143 B.R. 154 (Bankr. N.D. Ill. Mar. 20, 1992) (Schmetterer) (Scheduled tax claim of $427,915.44 exceeds eligibility limitations for Chapter 13.); Jones v. United States (In re Jones), 129 B.R. 1003 (Bankr. N.D. Ill. July 29, 1991) (Barliant) (IRS claim for $650,000 was liquidated for § 109(e) purposes notwithstanding that the claim was disputed by the debtors.). See § 136.2 Taxes before BAPCPA and § 137.1 Postpetition Claims before BAPCPA.
5 160 B.R. 682 (Bankr. M.D. Fla. Nov. 4, 1993) (Baynes), aff’d, 187 B.R. 996 (M.D. Fla. Mar. 16, 1995) (Kovachevich), rev’d, 89 F.3d 799 (11th Cir. July 31, 1996) (Kravitch, Carnes, Hill).
6 In re Verdunn, 160 B.R. at 687. Accord United States v. May, 211 B.R. 991, 996–97 (M.D. Fla. Aug. 21, 1997) (Sharp) (Disputed tax claim that is in litigation in the Tax Court is unliquidated notwithstanding that IRS filed proof of claim for $803,401.76. “While not every dispute by a debtor will cause the claim to become unliquidated, the court finds such a result justified in the instant case. . . . The appellees disputed the IRS’s claim and argued that several Tax Court cases involving similar interest deducting tax shelter programs resulted in a verdict in favor of the debtors in which they owed $0 to the government. . . . As a result, the court finds that the appellees’ disputed debt was not certain as to amount or liability and thus . . . it was not liquidated for § 109(e) purposes.”).
7 United States v. Verdunn, 89 F.3d at 802–03. Accord In re Tucker, 345 B.R. 373 (Bankr. M.D. Ala. May 11, 2006) (Williams) (Applying United States v. Verdunn, 89 F.3d 799 (11th Cir. July 31, 1996) (Kravitch, Carnes, Hill), tax liabilities for years prior to Chapter 13 petition are noncontingent because all events giving rise to liability occurred before the petition.).
8 123 B.R. 338 (B.A.P. 9th Cir. Feb. 11, 1991) (Ollason, Jones, Perris). See § 16.1 What Is a Liquidated Debt?.
9 In re Harbaugh, 153 B.R. 54 (Bankr. D. Idaho Mar. 24, 1993) (Hagan).
10 In re Harbaugh, 153 B.R. 54 (Bankr. D. Idaho Mar. 24, 1993) (Hagan). Accord In re Fredricksen, 325 B.R. 302 (Bankr. D. Or. Apr. 11, 2005) (withdrawn from bound volume) (Liability to IRS is liquidated, notwithstanding innocent spouse defense; two components of tax debt are readily determinable in excess of unsecured debt limit: disallowed business losses totaling $252,771.65 and penalty on early IRA withdrawal of $15,333.81.); In re Elrod, 178 B.R. 5, 6–7 (Bankr. N.D. Okla. Feb. 23, 1995) (Covey) (“Estimated” tax claim is unliquidated. Debtors scheduled the IRS with an unsecured claim of $40,780.74. The IRS filed a proof of claim for $657,377.69, with part of that amount listed as “estimated liability.” The parties agreed that the IRS claim was noncontingent. “[A] claim is liquidated when the amount can be readily determined with precision and capable of ascertainment by reference to an agreement or simple mathematical computation. If a determination of the amount requires judgment, discretion or interpretation of applicable statutes, then it is unliquidated. . . . [T]he Court cannot determine the amount of the IRS claim without an evidentiary hearing. At this evidentiary hearing the Court would hear evidence as to income earned by Debtors and deductions claimed. In determining the taxable income of the Debtors, the Court would have to apply various provisions of the Internal Revenue Code. Therefore, the claim of the IRS is not readily determinable by agreement or mathematical computation, but does require the use of judgment, discretion, determination of facts, and construction of the Internal Revenue Code.”).
11 See § 17.1 Disputed Debts.
13 298 F.3d 1107 (9th Cir. Aug. 8, 2002) (Kleinfeld, Graber, Bolton), as amended, 314 F.3d 336 (9th Cir. Nov. 20, 2002) (Kleinfeld, Graber, Bolton), rev’d, 541 U.S. 114, 124 S. Ct. 1548, 158 L. Ed. 2d 279 (Mar. 23, 2004).