T.C. Memo. 2008-137
UNITED STATES TAX COURT
JOSEPH E. AND CHANTAL M. IMARAH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19737-05L. Filed May 20, 2008.
Brian C. Harpst and Joseph E. Mudd, for petitioners.
Patricia P. Wang, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Pursuant to section 6330(d),1 petitioners
seek review of respondent’s determination to proceed with the
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, all Rule references are to the Tax
Court Rules of Practice and Procedure, and all references to
sections and chapters of the Bankruptcy Code are to tit. 11 of
the United States Code.
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collection of petitioners’ 1995, 1996, 1997, and 1998 Federal
income tax liabilities. After concessions,2 the issue for
decision is whether petitioners’ income tax liabilities for 1996
and 1998 were discharged in bankruptcy.
Background
The parties submitted this case fully stipulated under Rule
122. The stipulation of facts is incorporated herein by this
reference.
Petitioners resided in California when they filed their
petition.
On November 13, 1996, petitioners filed a petition under
chapter 7 of the Bankruptcy Code (case No. 1).3 On March 10,
1997, the bankruptcy court entered an order of discharge in case
No. 1. However, case No. 1 remained open until its conversion to
chapter 11, discussed below.
On April 15, 1997, petitioners filed their joint Federal
income tax return for 1996 reflecting tax due of $55,320.
Petitioners did not submit a payment with their return.
Respondent subsequently assessed petitioners’ 1996 income tax
2
Petitioners concede that their 1995 liability was not
discharged. Respondent concedes that petitioners’ income tax
liability for 1997 was discharged by the discharge order entered
on Sept. 2, 2003.
3
Petitioners filed all bankruptcy petitions discussed
herein with the U.S. Bankruptcy Court for the Central District of
California.
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liability (including applicable interest and penalties) and sent
petitioners a demand for payment of the balance owed.
On July 13, 1997, petitioners filed a petition under chapter
13 of the Bankruptcy Code (case No. 2). On September 4, 1997,
the bankruptcy court confirmed petitioners’ plan under chapter
13.
On April 15, 1999, petitioners filed their joint Federal
income tax return for 1998 reflecting tax due of $89,650.4
Petitioners paid only $15,000 towards their 1998 tax liability
when they filed their return.5 Respondent subsequently assessed
petitioners’ 1998 income tax liability (including applicable
interest and penalties) and sent petitioners a demand for payment
of the balance owed.
On May 24, 1999, petitioners filed a motion to vacate the
order of discharge entered in case No. 1 and to convert case No.
1 from chapter 7 to chapter 11. Petitioners argued that because
of a change in their financial circumstances, they believed they
could carry out a plan of reorganization under chapter 11. On or
around that date, petitioners also moved to dismiss case No. 2.
On July 8, 1999, the bankruptcy court vacated the order of
discharge entered in case No. 1 and converted case No. 1 from
4
Petitioners were granted an extension to file their 1998
tax return until Oct. 15, 1999.
5
Petitioners also showed a withholding credit of $1,200 on
their 1998 return.
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chapter 7 to chapter 11. On the same date, the bankruptcy court
dismissed case No. 2.
On October 13, 2000, pursuant to a motion by the U.S.
Trustee, the bankruptcy court converted case No. 1 from chapter
11 back to a case under chapter 7. On January 22, 2002, the
bankruptcy court entered another discharge order in case No. 1.
On May 21, 2003, petitioners again filed a petition under
chapter 7 of the Bankruptcy Code (case No. 3). On September 2,
2003, the bankruptcy court entered an order of discharge in case
No. 3.
On September 29, 2004, respondent advised petitioners that
their unpaid tax liabilities for the years 1996 and 1998 were not
discharged in case No. 3. On or about October 5, 2004,
respondent filed a notice of Federal tax lien with respect to
petitioners’ 1995 through 1998 unpaid tax liabilities. On
October 12, 2004, respondent issued to petitioners a Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under IRC
6320. Petitioners timely submitted a Form 12153, Request for a
Collection Due Process Hearing.
On August 26, 2005, the Internal Revenue Service (IRS)
Appeals Office conducted petitioners’ section 6320 hearing by
phone. Petitioners asserted that the tax liabilities at issue
were discharged by the discharge order entered in case No. 3.
The Appeals officer stated that the dischargeability of
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petitioners’ tax liabilities was not an administrative issue but
a legal dispute that had to be decided by a judge in a court of
law, not by Appeals.6 On September 23, 2005, the Appeals officer
issued to petitioners a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 upholding the
validity of the notice of Federal tax lien.
On October 21, 2005, petitioners timely filed their petition
in this case challenging respondent’s determination. Petitioners
argue that the Appeals officer improperly refused to make a
determination regarding the dischargeability of their tax
liabilities. Petitioners assert that their 1996 and 1998 tax
liabilities were discharged by the discharge order entered in
case No. 3 on September 2, 2003, and therefore respondent’s lien
is improper.
Discussion
I. Section 6320 Hearing
Section 6321 imposes a lien on all property and property
rights of a taxpayer liable for taxes where a demand for the
payment of the taxes has been made and the taxpayer fails to pay
those taxes. Section 6320(a) requires the Secretary to send a
written notice to the taxpayer of the filing of a notice of lien
6
In a letter dated July 19, 2005, the Appeals officer also
informed petitioners that they were unable to dispute their tax
liabilities because they were given a prior opportunity to
address the dischargeability issue with the bankruptcy court.
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and of his right to an administrative hearing on the matter.7
Section 6320(b) affords the taxpayer the right to a fair hearing
before an impartial Appeals officer. Section 6320(c) requires
that the administrative hearing be conducted pursuant to section
6330(c), (d), and (e). At the hearing, a taxpayer may raise any
relevant issue, including appropriate spousal defenses,
challenges to the appropriateness of the collection action, and
collection alternatives. Sec. 6330(c)(2)(A). Taxpayers are
precluded, however, from contesting the existence or amount of
the underlying tax liability unless the taxpayer failed to
receive a notice of deficiency for the tax in question or did not
otherwise have an opportunity to dispute the tax liability. Sec.
6330(c)(2)(B); see also Sego v. Commissioner, 114 T.C. 604, 609
(2000).
Following a hearing, the Appeals officer is required to
issue a notice of determination regarding the disputed notice of
Federal tax lien. In making this determination, the Appeals
officer is required to take into consideration: (1) The
7
Sec. 6323(a) requires the Secretary to file notice of a
lien if it is to be valid against any purchaser, holder of a
security interest, mechanic’s lienor, or judgment lien creditor.
Generally, a notice of Federal tax lien is filed with an
appropriate local government entity and gives public notice of
the Federal Government’s lien on the taxpayer’s property. See
Lindsay v. Commissioner, T.C. Memo. 2001-285, affd. 56 Fed. Appx.
800 (9th Cir. 2003). A Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 is then sent to the
taxpayer. Id.
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verification presented by the Secretary that the requirements of
applicable law and administrative procedures have been met, (2)
the relevant issues raised by the taxpayer, and (3) whether the
proposed collection action appropriately balances the need for
efficient collection of taxes with a taxpayer’s concerns
regarding the intrusiveness of the proposed collection action.
Sec. 6330(c)(3). If the taxpayer disagrees with the Appeals
officer’s determination, the taxpayer has the right to seek
judicial review by appealing to this Court. Sec. 6330(d). Where
the underlying tax liability is properly at issue, the Court
reviews any determination regarding the underlying tax liability
de novo. Sego v. Commissioner, supra at 610. The Court reviews
all other administrative determinations regarding the proposed
collection action for abuse of discretion. Id.
Petitioners’ contention that their 1996 and 1998 income tax
liabilities were discharged in bankruptcy raises an issue
relevant to the appropriateness of the collection action, not
petitioners’ underlying tax liability. See Swanson v.
Commissioner, 121 T.C. 111, 118-119 (2003); Washington v.
Commissioner, 120 T.C. 114, 120 n.9 (2003); Richardson v.
Commissioner, T.C. Memo. 2003-154. However, the Appeals officer
did not consider petitioners’ discharge argument during the
section 6320 hearing. Instead, the Appeals officer stated that
the question of whether petitioners’ tax liabilities were
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discharged in bankruptcy was a legal dispute to be resolved by a
judge in a court of law rather than by the Appeals Office. By
electing to defer judgment on whether petitioners’ tax
liabilities were discharged, the Appeals officer failed to take
into consideration a challenge by petitioners to the
appropriateness of the collection action. Because the Appeals
officer was required to take petitioners’ challenge to the
appropriateness of the collection action into consideration in
making his determination under section 6330(c)(3)(B) and did not,
petitioners did not receive a valid section 6320 hearing.
Notwithstanding the Appeals officer’s failure to grant
petitioners a valid section 6320 hearing, we do not believe that
it either is necessary or would be productive to remand this case
to respondent's Appeals Office to grant petitioners a proper
section 6320 hearing. See Lunsford v. Commissioner, 117 T.C.
183, 189 (2001); Woods v. Commissioner, T.C. Memo. 2006-38. As
discussed below, the record demonstrates that petitioners’ 1996
and 1998 tax liabilities were discharged in bankruptcy and that
respondent’s collection action was inappropriate.8
8
Respondent does not argue that he has the right to proceed
in rem with respect to the 1986 and 1988 liabilities, see Iannone
v. Commissioner, 122 T.C. 287, 292-294 (2004); Woods v.
Commissioner, T.C. Memo. 2006-38, and the stipulated record
contains no evidence to support such an argument.
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II. Jurisdiction To Determine Dischargeability
Before we begin our discussion, we must address whether our
jurisdiction under sections 6320 and 6330(d) includes the ability
to rule on the dischargeability of petitioners’ tax liabilities
or, alternatively, whether the issue is more appropriately left
to the bankruptcy court. In Washington v. Commissioner, supra at
120-121, in deciding whether we could rule on the
dischargeability of a liability in a lien proceeding brought
under section 6330(d)(1), we stated:
a lien proceeding commenced in the Court under section
6330(d)(1) * * * is closely related to and has
everything to do with collection of a taxpayer’s unpaid
liability for a taxable year. We must determine in the
instant lien proceeding whether respondent may proceed
with the collection action * * *. Whether the * * *
[bankruptcy court] discharged petitioners from their
respective unpaid tax liabilities for those years is an
issue that has a direct bearing on whether respondent
may proceed with the lien at issue. We hold that in
the instant lien proceeding commenced under section
6330(d)(1) the Court has jurisdiction to determine
whether the * * * [bankruptcy court] discharged
petitioners from such unpaid liabilities. [Fn. ref.
omitted.]
Accordingly, we conclude that we have jurisdiction to determine
whether the bankruptcy court discharged petitioners from their
unpaid tax liabilities for 1996 and 1998.
III. Discharge of Taxes in Chapter 7 Bankruptcy
Entry of a discharge order in a chapter 7 bankruptcy case
generally discharges all debts of an individual debtor that arose
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before the date of the order for relief.9 11 U.S.C. sec. 727(b)
(2000). However, under 11 U.S.C. section 523(a)(1)(A), certain
individual debts are excepted from discharge, including any tax
“of the kind and for the periods specified in section * * *
507(a)(8) of this title, whether or not a claim for such tax was
filed or allowed”. Title 11 U.S.C. section 507(a)(8)(A)(i)
describes unsecured claims of the IRS to the extent such claims
are for “a tax on or measured by income or gross receipts * * *
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”.10 Thus, if the IRS has a claim for
taxes for which a return was due within 3 years before the
bankruptcy petition was filed (the 3-year lookback period), the
claim is not dischargeable in a chapter 7 bankruptcy case under
11 U.S.C. section 523(a)(1)(A).
The 3-year lookback period of Bankruptcy Code section
507(a)(8)(A)(i), however, is a limitations period subject to
traditional principles of equitable tolling. In Young v. United
9
In a voluntary bankruptcy case, 11 U.S.C. sec. 301
provides that the date of the order for relief is the date that
the bankruptcy petition is filed.
10
Tit. 11 U.S.C. sec. 507(a) provides for the priority of
certain claims in the distribution of the debtor’s estate. Tit.
11 U.S.C. sec. 507(a)(8) gives eighth priority to unsecured
claims of the IRS, including claims for the type of tax discussed
above.
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States, 535 U.S. 43 (2002), the Supreme Court held that the 3-
year lookback period is tolled during the pendency of a prior
bankruptcy petition. In that case the taxpayers initially filed
a bankruptcy petition under chapter 13. Id. at 45. During the
pendency of their chapter 13 case, the automatic stay of 11
U.S.C. section 362(a)11 prevented the IRS from taking the steps
necessary to collect the taxpayers’ unpaid tax liabilities. Id.
at 50. Subsequently, the taxpayers moved the court to dismiss
their chapter 13 case;12 and 1 day before the bankruptcy court
granted their motion, the taxpayers filed a new petition under
chapter 7. Id. at 45. Because the taxpayers’ unpaid tax
liabilities did not fall within the 3-year lookback period with
respect to the newly filed chapter 7 petition, the taxpayers
argued that the unpaid taxes were discharged. Id. The Supreme
Court disagreed and held that because the IRS was precluded from
protecting its claim during the pendency of the chapter 13 case,
this period of disability tolled the 3-year lookback period when
11
The automatic stay of 11 U.S.C. sec. 362(a) generally
prohibits all collection actions against a debtor for any debts
that arose before the commencement of the case; i.e., the filing
of the bankruptcy petition.
12
Under 11 U.S.C. sec. 1307(b), the court shall dismiss a
case under ch. 13 at the request of the debtor if the case has
not been converted under 11 U.S.C. sec. 706, 1112, or 1208.
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the taxpayers filed their chapter 7 petition. Id. at 50-51.
Consequently, the taxpayers’ debts were not discharged. Id. at
54.
Petitioners agree that equitable tolling is applicable in
this case, but they maintain that their 1996 and 1998 tax
liabilities nevertheless fall outside the 3-year lookback period
calculated from May 21, 2003, the date the chapter 7 petition in
case No. 3 was filed. To assess petitioners’ contention, we must
determine the proper date to which the 3-year lookback period
extends for each contested year. To calculate the correct date,
we must take into account the periods in which prior bankruptcy
petitions prevented respondent from collecting petitioners’ 1996
and 1998 tax liabilities.13
Petitioners’ 1996 tax liability arose14 after petitioners
filed their petition in case No. 1 but before they filed their
petition in case No. 2. The 3-year lookback period is thus
13
The bankruptcy court’s decision on July 8, 1999, to
vacate the discharge order in case No. 1 and convert the case
from ch. 7 to ch. 11 does not affect our tolling analysis with
respect to petitioners’ 1996 and 1998 tax liabilities because
both claims arose after petitioners filed their ch. 7 petition in
case No. 1. See infra pp. 17-18.
14
Under sec. 6151, a taxpayer is required to pay the tax
owed for a given tax year by the due date of his Federal income
tax return for that year, without regard to extension of time to
file. Petitioners’ 1996 tax liability thus arose on Apr. 15,
1997, the date their 1996 tax return was due. Similarly,
petitioners’ 1998 tax liability arose on Apr. 15, 1999, the date
their 1998 return was due, even though they were granted a 6-
month extension of time to file.
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tolled by the pendency of case No. 2 because respondent was
prohibited from collecting petitioners’ 1996 tax liability, a
prepetition claim in case No. 2, by virtue of the automatic stay
imposed by Bankruptcy Code section 362(a). Adding the tolling
period of 1 year, 11 months, and 25 days (July 13, 1997, the date
the petition in case No. 2 was filed, to July 8, 1999, the date
case No. 2 was dismissed) to the 3-year period preceding May 21,
2003 (the date the petition in case No. 3 was filed), we
determine the 3-year look back period extends to May 27, 1998.
Because the due date of petitioners’ 1996 return, April 15, 1997,
falls outside the 3-year lookback period, we conclude that
petitioners’ 1996 tax liability was discharged in case No. 3.
With regard to petitioners’ 1998 tax liability, we need not
apply the principle of equitable tolling to determine the date to
which the 3-year lookback period extends because petitioners’
1998 tax liability arose after the filing of the petitions in
both case No. 1 and case No. 2. Respondent thus was at no time
barred by the automatic stay from collecting petitioners’ 1998
tax liability. Looking back 3 years from the date the petition
in case No. 3 was filed, May 21, 2003, to May 21, 2000, we
determine that the due date of petitioners’ 1998 return, October
15, 1999 (taking into account extensions of time to file), falls
outside the 3-year lookback period. Accordingly, petitioners’
1998 tax liability was discharged.
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Respondent asserts that the calculation of petitioners’ 3-
year lookback period is affected by 11 U.S.C. section 348(d),
which provides:
(d) A claim against the estate or the debtor that
arises after the order for relief but before conversion
in a case that is converted under section 1112, 1208,
or 1307 of this title * * * shall be treated for all
purposes as if such claim had arisen immediately before
the date of the filing of the petition.[15]
Respondent argues that Bankruptcy Code section 348(d) requires
petitioners’ 1996 and 1998 tax liabilities to be treated as
prepetition claims with respect to case No. 1 upon the October
13, 2000, conversion of case No. 1 from chapter 11 to chapter
7.16 According to respondent, petitioners’ 1996 and 1998 tax
liabilities arose after the order for relief in case No. 1,
November 13, 1996 (the date petitioners filed their original
chapter 7 petition), but before case No. 1 was converted from
chapter 11 back to chapter 7 on October 13, 2000. Thus, even
though the 1996 and 1998 liabilities arose after the filing of
the petition in case No. 1, respondent contends that 11 U.S.C.
section 348(d) mandates that these liabilities be treated as if
15
Tit. 11 U.S.C. sec. 348(d) is an exception to the general
rule contained in 11 U.S.C. sec. 348(a), which provides that a
conversion of a case from one chapter to another does not effect
a change in the date of the filing of the petition or the
commencement of the case.
16
Respondent points out that 11 U.S.C. sec. 348(d) applies
specifically to conversions made under 11 U.S.C. sec. 1112. Tit.
11 U.S.C. sec. 1112 authorizes the debtor to convert a case in
ch. 11 to another chapter of the Bankruptcy Code.
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they were incurred before case No. 1 commenced. Respondent
argues that as a result of the treatment of the 1996 and 1998
liabilities as prepetition claims, the automatic stay operated to
bar respondent from collecting petitioners’ 1996 and 1998 tax
liabilities beginning October 13, 2000, the date case No. 1 was
converted from chapter 11 to chapter 7, until January 22, 2002,
the date the second discharge order in case No. 1 was entered.
Respondent concludes that equitable tolling requires the 3-year
lookback period to be tolled during this additional period,
making petitioners’ 1996 and 1998 tax liabilities
nondischargeable.
Respondent’s argument is not persuasive. A similar argument
was rejected by the U.S. Bankruptcy Court for the Western
District of Texas, San Antonio Division, in In re Morris, 155
Bankr. 422 (Bankr. W.D. Tex. 1993). In that case the debtors
filed a petition for bankruptcy under chapter 7, converted their
case to chapter 11, and then converted their case back to chapter
7. Id. at 423-424. The debtors incurred debts after the initial
filing of their chapter 7 petition but before the conversion of
their case to chapter 11. Id. at 424. The debtors argued that
the incurred debts were dischargeable in their chapter 7 case
because 11 U.S.C. section 348(d) required that the debts be
treated as if they had arisen immediately before the date of the
filing of the original chapter 7 petition. Id. While the court
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acknowledged that the plain language of 11 U.S.C. section 348(d)
may have supported this result, the court found that the debtors’
interpretation did not serve the intended purpose of the statute.
Id. at 425. The House and Senate reports accompanying the
enactment of 11 U.S.C. section 348(d) stated that the section was
intended to provide “‘for special treatment of claims that arise
during chapter 11 or 13 cases before the case is converted to a
liquidation case.’” Id. (quoting S. Rept. 95-989, at 48 (1978)
and H. Rept. 95-595, at 337 (1977)). The court also cited
decisions by other bankruptcy courts that found that 11 U.S.C.
section 348(d) was intended “‘to give chapter 11 administrative
claimants priority over unsecured claims when a case is converted
from chapter 11 to chapter 7.’” Id. (quoting White Front Feed &
Seed v. State Natl. Bank (In re Ramaker), 117 Bankr. 959, 963
(Bankr. N.D. Iowa 1990)). The court concluded that 11 U.S.C.
section 348(d) was inapplicable because the debts arose during
the pendency of the initial chapter 7 case, before conversion to
chapter 11.17 Id. Because the debts at issue were not incurred
17
The court in In re Morris, 155 Bankr. 422 (Bankr. W.D.
Tex. 1993), also quoted 1 Collier Bankruptcy Manual par.
348.03[2] (Lawrence P. King, et al. eds., 3d ed. 1993) in support
of its conclusion:
“[Section 348(d)] applies only with respect to a claim
arising in a chapter 11, 12 or 13 case before the case
is converted into a chapter 7 case. It does not apply
with respect to claims arising in the context of a
chapter 7 case which is later converted into a case
(continued...)
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in the chapter 11 case, the court determined that treating the
debts as prepetition claims did not serve the purpose for which
11 U.S.C. section 348(d) was enacted. Id.
In the present case the 1996 and 1998 tax liabilities arose
after November 13, 1996, the date the chapter 7 petition in case
No. 1 was filed and before July 8, 1999, the date case No. 1 was
converted to a chapter 11 case. Under In re Morris, supra, and
consistent with the legislative history of 11 U.S.C. section
348(d), the liabilities for 1996 and 1998 cannot be treated as
prepetition claims with respect to case No. 1 because these
liabilities did not arise during the pendency of the chapter 11
case. Respondent was not barred from collecting petitioners’
1996 and 1998 tax liabilities following the conversion of case
No. 1 back to a chapter 7 case. Accordingly, we reject
respondent’s argument regarding the application of 11 U.S.C.
section 348(d).
Because we reject respondent’s argument with respect to the
application of 11 U.S.C. section 348(d), we need not rule on the
issue of whether the bankruptcy court’s decision to vacate the
original order of discharge entered in case No. 1 reinstated the
17
(...continued)
under chapter 11, 12, or 13.”
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automatic stay with respect to that case.18 Whether or not the
automatic stay in case No. 1 was reinstated is significant only
if petitioners’ 1996 and 1998 tax liabilities are treated as
prepetition claims. As we discussed above, petitioners’ 1996 and
1998 tax liabilities are postpetition claims with respect to case
No. 1. Consequently, even if we held that the court’s vacatur of
the order of discharge reinstated the automatic stay in case No.
1, the stay would not prohibit respondent from seeking collection
from petitioners and thus would have no impact on our equitable
tolling analysis.
We conclude that petitioners’ 1996 and 1998 tax liabilities
fall outside the 3-year lookback period and were discharged by
the discharge order entered in case No. 3. Consequently, we do
not sustain respondent’s determination to proceed with collection
of petitioners’ 1996 and 1998 tax liabilities.
18
Under 11 U.S.C. sec. 362(c)(2), the automatic stay
continues until the earliest of (1) the time the bankruptcy case
is closed, (2) the time the bankruptcy case is dismissed, or (3)
if the case is a case under ch. 7 concerning an individual, the
time a discharge is granted or denied. The automatic stay in
case No. 1 was thus lifted on Mar. 10, 1997, when the bankruptcy
court entered the original order of discharge. Respondent
argues, however, that the bankruptcy court’s subsequent decision
to vacate the original discharge order in case No. 1 reinstated
the automatic stay in that case, which remained in effect upon
the subsequent conversions of case No. 1 to ch. 11 and back to
ch. 7.
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We have considered all the other arguments and to the extent
not discussed above, conclude those arguments are irrelevant,
moot, or without merit.
To reflect the foregoing,
An appropriate decision
will be entered.