Case No. 00-34046-13
Shortly before debtor filed for bankruptcy he filed his federal income tax return for the previous year and was entitled to a refund. Approximately one month after the tax return was filed, the IRS applied the refund to debtor's 1993 federal income tax deficiency. The IRS filed a proof of claim for unsecured priority (for 1995 and 1996) and non-priority ( for 1993 and 1994) taxes due. Debtor then brought this adversary proceeding seeking to reallocate the funds set off by the IRS and objecting to its claim of priority for the 1995 taxes. The parties agreed tht the IRS had a valid right to setoff under § 553(a). Debtor contends that it is inequitable to permit the IRS to setoff against non-priority debts, rather than priority debts, because this gives teh IRS a preference over other general creditors. However, a setoff under § 553 is a preference condoned under the Code and an exception to the bankruptcy principle of equal distribution among creditors. It was determined that the IRS had properly exercised its ability to offset in this case. It was further determined that because the due date for the debtor's 1995 tax return fell outside the three year period preceding his bankruptcy case, the 1995 taxes would ordinarily not be entitled to priority under § 507(a)(8). There was an added wrinkle in the case, however, since the debtor had previously filed bankruptcy in 1996 and was discharged in 1997. The IRS argued that the three-year period of § 507(a)(8) was tolled during the period of the prior bankruptcy case and for an additional six months thereafter. It was determined that § 6503(h) is given effect by § 108(c) and that the two provisions operate jointly to toll the three-year period in § 507(a)(8) when the taxpayer's assets are tied up in a court proceeding. It was further determined that the 1995 taxes are entitled to priority under § 507(a)(8).
11 U.S.C. § 108(c)
11 U.S.C. § 507(a)(8)
11 U.S.C. § 523(a)(1)(A) -- Nondischargeability - taxes
11 U.S.C. § 553 -- Setoff
26 U.S.C. § 6402(a) -- General Rule
26 U.S.C. § 6503(h) -- Cases under title 11 of the United States Code