Young, Cornelius, et ux. v. U.S. (03/04/2002)

Questions presented: (1) Was the Youngs' 1992 income tax obligation discharged by the entry of discharge in their 1997 Chapter 7 bankruptcy case when the three-year period set forth in Section 507(a)(8)(A)(i) of the Bankruptcy Code had elapsed between the due date of their tax return and the filing of their Chapter 7 bankruptcy case? (2) Was the three-year period tolled or extended by the length of time that the Youngs were debtors in their prior Chapter 13 bankruptcy?

BY SARA BROCKDORF, MEDILL NEWS SERVICE

Cornelius and Suzanne Young have not fully paid their 1992 federal income taxes.

The original tax obligation was around $13,000 - $14,000, according to the Youngs' lawyer, Grenville Clark III. However this is not the case anymore.

"As time goes on, the IRS keeps tacking on interest and penalties, so were well over $20,000 now," Clark said.

Though they filed on Oct. 15, 1993 after receiving an extension, the Youngs made only a few monthly payments, from $50 to $300, according to Clark. The pair filed for Chapter 13 bankruptcy in 1996, which forced the IRS had to cease collection efforts from them for a time.

However, Chapter 13 bankruptcy does require taxes to be paid in full by the end of the proceedings. Nearly a year passed, and on March 12, 1997, one day before the Chapter 13 proceeding was to be closed, the Youngs filed for Chapter 7 bankruptcy. This action not only continued the stay in tax collection but also granted a discharge of debt accumulated more than three years prior to filing.

The Youngs asked the court to relieve them of their 1992 tax debt under the blanket discharge of debt received under Chapter 7. The IRS contested.

The Bankruptcy Code says all taxes must be paid that were acquired three years or less before the day Chapter 7 bankruptcy is filed. Technically, the Youngs return was due Oct. 15, 1993, which is clearly more than three years earlier than March 1997, when they filed for Chapter 7 bankruptcy.

The IRS countered that though this is true, the government was not always able to collect taxes from the Youngs during those years, as the Chapter 13 filing entitled them to a stay. The IRS argued that this time should be added to the three years or "tolled." If not, the government would be taken advantage of, the IRS claimed.

This case would have never happened before 1966 because until then, tax debt was never discharged. However, the Congress that year added what is now called the three-year lookback limitation to the Bankruptcy Code. One can be discharged of tax debt, but not debt gained within the three years preceding filing for bankruptcy.

"The truth is that Congress appears never to have thought about the precise problem posed by the Youngs successive petitions," Judge Michael Boudin said in his brief opinion for a unanimous 1st Circuit Court of Appeals panel. "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."

In rejecting the Youngs argument that the statutory language is literal and it is improper for courts to be rewriting statutes, Boudin noted that virtually all courts that have addressed the issue of the three-year lookback provision have chosen to supplement the statute; "the only difference between the judges is how to do it."

In this case, the 1st Circuit opted for the majority view, that used by five circuits (the 3rd, 7th, 8th, 9th and 10th), in favor of "automatic tolling." Boudin reasoned that the automatic tolling rule "preserves for the government the benefit of the 1966 compromise by giving it the full three years to assess and collect taxes."

In conclusion, Boudin wrote, "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."

In seeking review by the U.S. Supreme Court, Clark argues on behalf of the Youngs, "Do you allow courts to sort of tinker with the statute and write something in the statute because they think its the right thing to do?"

On Sept. 25, 2001, six days before the opening of the Court's 2001-02 term, the Court granted certiorari in the case.

On March 4, 2002, a unanimous Court affirmed, holding, as the consensus of federal circuits had, that the lookback period is tolled during the pendency of a prior bankruptcy petition.

Justice Antonin Scalia wrote the opinion for the Court.