United States Court of Appeals
For the First Circuit
No. 00-1484
IN RE: CORNELIUS P. YOUNG and SUZANNE P. YOUNG,
Debtors.
__________
CORNELIUS P. YOUNG and SUZANNE P. YOUNG,
Debtors, Appellants,
v.
UNITED STATES OF AMERICA,
Appellee.
__________
VICTOR DAHAR,
Trustee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Steven J. McAuliffe, U.S. District Judge]
Before
Torruella, Chief Judge,
Bownes, Senior Circuit Judge,
and Boudin, Circuit Judge.
Grenville Clark III with whom Gray, Wendell & Clark, P.C.
was on brief for appellants.
Thomas J. Sawyer, Tax Division, Department of Justice, with
whom Paula M. Junghans, Acting Assistant Attorney General, Paul
M. Gagnon, United States Attorney, and Bruce R. Ellisen, Tax
Division, Department of Justice, were on brief for the United
States.
December 1, 2000
BOUDIN, Circuit Judge. Having obtained a filing
extension, Cornelius and Suzanne Young filed their 1992 federal
income tax return on October 15, 1993. Their return showed
taxes due after withholding, but no payment accompanied the
return. Instead, the Youngs made modest payments to the IRS for
a number of months and then, on May 1, 1996, filed for Chapter
13 bankruptcy, 11 U.S.C. § 1321 (1994). This automatically
stayed all IRS efforts to collect taxes from the Youngs. Id. §
362(a)(6).
To complete a Chapter 13 bankruptcy--typically a
proceeding that lasts several years--requires that tax claims be
paid in full. 11 U.S.C. §§ 507(a)(8), 1322(a)(2). At the
outset, the IRS filed a proof of claim for the unpaid 1992
taxes. However, the Youngs did not stay the course; instead, on
October 23, 1996, the Youngs moved to dismiss their petition.
Id. § 1307. The bankruptcy court did so on March 13, 1997,
which would normally terminate the automatic stay.1 Id. §
362(c)(2).
One day before the Chapter 13 proceeding was closed,
the Youngs filed a new "no asset" bankruptcy petition under
1The Youngs argue that the automatic stay was lifted upon
their motion to dismiss rather than when the bankruptcy court
closed the case. Because the choice of dates does not affect
our analysis or outcome, we assume for simplicity's sake that
the closing date controls.
-4-
Chapter 7. This in turn continued the automatic stay pendente
lite. Chapter 7 is usually a brief proceeding to distribute
non-exempt assets to creditors. On June 17, 1997, the Youngs
received a discharge in the Chapter 7 proceeding, generally
discharging their debts "[e]xcept as provided in section 523 [of
title 11]," 11 U.S.C. § 727(b).
After the discharge the IRS sought the unpaid balance
for the Youngs' 1992 taxes, and the Youngs then asked the
bankruptcy court to rule that their remaining 1992 tax liability
had been discharged. The IRS countered that section
523(a)(1)(A) of the Bankruptcy Code precludes the discharge of
any debt "for a tax . . . of the kind and for the periods
specified in section . . . 507(a)(8)," 11 U.S.C. § 523(a)(1),
which includes in pertinent part unsecured government claims for
income tax
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
[bankruptcy] petition . . . .
11 U.S.C. § 507(a)(8)(A)(i).
This convoluted language is commonly understood to
describe claims for taxes for which the return was due three
years or less before the petition was filed. The Youngs' 1992
return was due on October 15, 1993; more than three years before
-5-
their Chapter 7 petition was filed on March 12, 1997. In
response to this computational argument for discharge, the IRS
said that in calculating the three-year period under section
507, the court should exclude the period during which the
Chapter 13 automatic stay had prevented the IRS from collecting
the Youngs' tax debt; if this is done, the elapsed delay is well
under three years.
Following the majority view among the divided
authorities, the bankruptcy court agreed with the IRS that the
three-year period in section 507 should be tolled during the
period of the prior automatic stay. The district court
affirmed, saying that the better reasoned decisions supported
this result. The Youngs now appeal to this court. The issues,
which turn solely on the law, are considered de novo in this
court. Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st
Cir. 1997).
Prior to 1966, no tax debt was discharged by
bankruptcy. 11 U.S.C. §§ 35(a)(1), 104(a)(4) (1964). The
ability of the IRS to recover unpaid taxes was constrained only
by the statute of limitations requiring (exceptions aside)
assessment within three years of the return's filing, and
collection within six years (now ten years) of assessment. 26
U.S.C. §§ 6501-02 (1964 & 1994). In 1966, Congress amended the
-6-
Bankruptcy Code to strike a new balance between government
revenue needs and the "fresh start" objectives of the bankruptcy
laws. Pub. L. No. 89-496, § 2, 80 Stat. 270 (1966) (codified at
11 U.S.C. § 35 (Supp. V 1970)); S. Rep. No. 1158 (1966),
reprinted in 1966 U.S.C.C.A.N. 2468, 2469-72. Taxes were made
dischargeable under Chapter 7 but subject to a three-year
"lookback" provision which, ignoring exceptions not relevant
here, read as follows:
A discharge in bankruptcy shall release a
bankrupt from all of his provable debts . .
. except . . . taxes which became legally
due and owing by the bankrupt . . . within
three years preceding bankruptcy . . . .
11 U.S.C. § 35(a) (Supp. V 1970).
This provision did not affect claims of the government
that were secured by liens that the IRS obtained prior to
bankruptcy through IRS levies or court proceedings to collect
past taxes. S. Rep. No. 1158, reprinted in 1966 U.S.C.C.A.N. at
2470. The new three-year lookback limitation, said Congress,
would "induce taxing authorities to act to prevent large
accumulations of tax claims," curbing the past practice of
allowing them "to accumulate and remain unpaid for long periods
of time." Id. at 2471. Thus, even under the new scheme, the
-7-
government could effectively protect itself as to all tax claims
by acting promptly.2
In the Bankruptcy Reform Act of 1978, Pub. L. 95-598,
92 Stat. 2549 (codified at 11 U.S.C. §§ 101-1330 (1994)),
Congress revised the 1966 amendments in various ways. Notably,
it split the relevant discharge provision into the two sections
described above (sections 727(b) and 523(a)(1)(A)); it fine-
tuned the three-year period to begin with the date of the return
instead of the due date of the taxes, 11 U.S.C. §
507(a)(8)(A)(i); and it added a new exception to
dischargeability for taxes assessed within 240 days before the
filing of a bankruptcy petition, 11 U.S.C. § 507(a)(8)(A)(ii).
But details aside, there is no indication that Congress intended
to alter the three-year lookback compromise struck in 1966.
Against this background, the issue on this appeal is
readily framed. The Youngs rely on the language of the present
Bankruptcy Code and say correctly that a plain language reading
favors their position. The IRS claim for their unpaid 1992
taxes was never secured and so is dischargeable in bankruptcy
2
If the IRS assessed and obtained liens within three years
of a tax due date, taxes due more than three years prior to a
bankruptcy petition would be secured through liens; and although
a bankruptcy petition would automatically stay assessment and
collection of any new taxes, the three-year lookback provision
would prevent discharge as to them.
-8-
unless excepted by the three-year lookback provision. And,
literally read, the three-year lookback provision does not apply
to the Youngs because the tax return in question was filed more
than three years prior to the Youngs' Chapter 7 bankruptcy
petition.
The IRS, by contrast, urges that the three-year
lookback period be tolled--that is to say, extended--by
excluding the period during which the Youngs were in Chapter 13
proceedings. During this period, the IRS could not make
collection efforts based on its prior assessment against the
Youngs for their 1992 taxes; and given the overlap of the two
automatic stays obtained by the Youngs, the IRS never got the
three-year period that Congress intended to provide it to assess
and collect the 1992 taxes. This, says the IRS, frustrates the
original compromise embodied in the statute and opens the way to
taxpayer manipulation.
Congress has adopted tolling provisions to deal with
related problems elsewhere in the Bankruptcy and Tax Codes; 3
indeed, there is a tolling provision of a specialized kind built
311 U.S.C. § 108(c) (extending nonbankruptcy statutes of
limitation for creditors when they are barred by the Bankruptcy
Code from taking action against a debtor); 26 U.S.C. § 6503(h)
(extending the statutes of limitation for the IRS's assessment
and collection of taxes while it is stayed by the Bankruptcy
Code from pursuing a debtor).
-9-
into the companion 240-day assessment period added to section
507(a)(8)(A)(ii) in 1978. But the inferences from the presence
of these express provisions more or less cancel out: the IRS
gets some support from underlying policies in favor of tolling
adopted in these different situations, while the Youngs can say
that Congress's express provisions show that it knew how to add
tolling provisions when it wished to do so, see Keene Corp. v.
United States, 508 U.S. 200, 208 (1993) (using the canon of
inclusio unius).
The truth is that Congress appears never to have
thought about the precise problem posed by the Youngs'
successive petitions. Had it done so, it is a very safe guess
that it would have adopted a tolling provision of some sort to
protect the IRS. The IRS's policy arguments, based on the
original 1966 compromise and the threat of manipulation, are
strong ones, and the Youngs have no serious counter-arguments
based on policy; they rely mainly on literal language and the
impropriety of courts rewriting statutes. This last point is
the nub of the matter.
If Congress imposed a new tax on two classes of
taxpayers and patently omitted a third comparable class only
through oversight, a court could not properly read the third
class into the tax statute, however confident judges might be
-10-
about what Congress would have done if it had thought of the
defect. Yet courts have been far more ready to interpolate
omissions into statutes where the concern is with ancillary
matters such as remedies, exhaustion requirements, time period
calculations, retroactivity, and estoppel. Such matters are
usually subordinate to Congress's main concerns, and courts
often have prior expertise or existing doctrine in point.
The category most apt in this case is that of statutes
of limitations. Ordinarily, such limitations periods are fixed
tersely by statute, but an apparatus of judge-made tolling
doctrine has been superimposed on such statutes. Developments
in the Law--Statutes of Limitations, 63 Harv. L. Rev. 1177,
1220-35 (1950). The three-year lookback provision is akin to a
statute of limitations--it preserves recent claims against
discharge and cuts off older ones--and we think that courts
retain the same freedom here to assure that the underlying aims
of Congress are not frustrated by conduct that thwarts the
compromise enacted in 1966.
Virtually all of the circuit cases dealing with
successive bankruptcy petitions and the three-year lookback
provision have chosen to supplement the statute; the only
difference between the judges is how to do it. The most common
rule, adopted by five circuits, is that the lookback period is
-11-
automatically tolled during a prior bankruptcy.4 These courts
differ only in using different analogies or arguments to support
the rule; four borrow from some combination of tolling
provisions elsewhere in the Bankruptcy and Tax Codes, see note
3 above, while the Tenth Circuit relies on the general equitable
powers of bankruptcy courts under 26 U.S.C. § 105(a).
By contrast, three other circuits have held that the
lookback period is not automatically tolled by a prior
bankruptcy proceeding but that equitable considerations may
permit tolling on a case-by-case basis. The Eleventh Circuit
states that the equities will usually favor the government,
Morgan v. United States (In re Morgan), 182 F.3d 775, 779-80
(11th Cir. 1999); the Sixth seems to require a showing of debtor
misconduct, Palmer v. United States (In re Palmer), 219 F.3d
580, 585 (6th Cir. 2000); and the Fifth agnostically demands a
"[f]ull development and examination of the facts," Quenzer v.
United States (In re Quenzer), 19 F.3d 163, 165 (5th Cir. 1993).
We follow the majority view in favor of automatic
tolling. In some cases, the equities alone might justify
4
Waugh v. IRS (In re Waugh), 109 F.3d 489, 491-93 (8th
Cir.), cert. denied, 522 U.S. 823 (1997); In re Taylor, 81 F.3d
20, 22-24 (3d Cir. 1996); West v. United States (In re West), 5
F.3d 423, 426-27 (9th Cir. 1993), cert. denied, 511 U.S. 1081
(1994); United States v. Richards (In re Richards), 994 F.2d
763, 765-66 (10th Cir. 1993); Montoya v. United States (In re
Montoya), 965 F.2d 554, 557-58 (7th Cir. 1992).
-12-
tolling, but the automatic tolling rule rests on a broader
basis: it preserves for the government the benefit of the 1966
compromise by giving it the full three years to assess and
collect taxes. The taxpayer is faced with "old" tax claims only
if he or she has chosen to make back-to-back bankruptcy filings.
And, as a final, although less important benefit, automatic
tolling is infinitely easier and more predictable to administer.
Some might think that to make up for omissions in
statutes will only encourage careless drafting and that serious
gaps can always be filled by congressional amendment. Others
might argue that in an age of numerous and complex enactments,
lawmakers should expect that common law judges will use their
traditional skills to support legislation. As usual, it is a
matter of striking the right balance, and it comforts us to know
that all circuits that have ruled on the matter agree that some
judge-made tolling adjustment is required for section
507(a)(8)(A)(i).
The judgment of the district court is affirmed. Each
side will bear its own costs on this appeal.
It is so ordered.
-13-