When Are Taxes Payable in Chapter 13 Cases

By: Katarina Galic
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 

When do state income taxes become “payable” to taxing authorities for purposes of chapter 13 bankruptcy? This was the precise question the Ninth Circuit recently answered in Joye v. Franchise Tax Bd. (In re Joye).[1] Disagreeing with the Fifth Circuit, the Ninth Circuit Court of Appeals adopted a liberal view and held that taxes become due when they are “capable of being paid.”[2]

The debtors in this case, Shelli Rene Joye and Teresa M. Joye, successfully completed their bankruptcy plan in three years and were discharged from bankruptcy.[3] However, after the Joyes were discharged, the Tax Board tried to collect outstanding state income taxes owed to it.[4] The Bankruptcy Court for the Northern District of California found that the Tax Board failed to file a proof of claim in the Joyes’ case despite receiving notice of the bankruptcy proceedings and that the bankruptcy discharge was a final order.[5] The court noted that the Tax Board could not file a post-petition claim under 11 U.S.C. § 1305(a)(1)—which states that a proof of claim can be filed for “taxes that become payable to a governmental unit while the case is pending”[6] — because that section had “nothing to do with discharge.”[7]

On appeal, the district court agreed that the Joyes’ state income taxes were “technically discharged” through the chapter 13 proceeding since the board did not file a proof of claim, but nevertheless reversed and granted a summary judgment in favor of the Tax Board because it found that barring collection of outstanding taxes would constitute a denial of fairness.[8] The district court found that the Joyes’ act of scheduling the Tax Board as a creditor in their bankruptcy petition was not sufficient to put the Board on notice.[9]

The Ninth Circuit, on a case of first impression, reversed the district court’s findings and decided that for purposes of section 1305(a)(1) taxes become payable when they are “capable of being paid.”[10]

In determining whether the Joyes’ outstanding income taxes gave rise to a post-petition claim pursuant to section 1305(a)(1), the Ninth Circuit noted that the outcome depended on when their taxes became “payable” and looked to prior decisions of the Fifth Circuit and the Tenth Circuit Bankruptcy Appellate Panel (“BAP”), which had reached differing results on the question in similar circumstances. In United States v. Ripley (In re Ripley),[11] the Fifth Circuit concluded that a debtor’s income and self-employment taxes do not become payable until the tax return for the calendar year was required to be filed.[12] As such, a post-petition claim for taxes could be filed under section 1305(a)(1) only if the debtor’s tax return was not due until after the chapter 13 petition was filed.[13] However, in Dixon v. IRS (In re Dixon),[14] the Tenth Circuit BAP held that a tax becomes “payable” when it can be ascertained, which is generally at “a time before the last permissible day for paying taxes.”[15] At that point, the court noted, the tax clearly became a claim and was payable at the end of the tax year which was before the beginning of the debtor’s case, so that the claim was pre-petition.[16] If that tax claim is pre-petition, it is ineligible as a tax claim on post-petition income and does not fall within the language of section 1305(a)(1).[17]

The Ninth Circuit distinguished the Joyes’ case from In re Ripley in that the Joyes’ tax return was due before the chapter 13 petition was filed.[18] Thus, the Ninth Circuit found that, like in In re Dixon, the Joyes’ outstanding taxes could be ascertained before they filed for chapter 13 bankruptcy and that those taxes were therefore payable before the beginning of their case.[19]

Since the term “payable” in section 1305(a)(1) was susceptible to more than one interpretation by the courts, the Ninth Circuit also reviewed the statutory scheme of the Bankruptcy Code and the relevant legislative history, which explicitly indicated Congress’ intent that “section 1305(a) provides for the filing of a proof claim for taxes and other obligations incurred after the filing of the chapter 13 case.”[20] Since section 1305(a)(1) was intended to address taxes incurred after a debtor filed his chapter 13 petition,[21] the court concluded that the Joyes’ outstanding income taxes did not give rise to a section 1305(a)(1) post-petition claim as their tax liability to the state was capable of being paid prior to when they filed under chapter 13.[22]

The Ninth Circuit’s ruling thus places a greater burden on state taxing authorities attempting to collect outstanding taxes from chapter 13 debtors in that state tax authorities will have to determine whether a debtor’s unpaid taxes for a given year were ascertainable and incurred before or during the bankruptcy case. Although some courts, like the Fifth Circuit, allow state tax authorities to file post-petition claims for outstanding taxes because they interpret the term “payable” to include taxes incurred during the pendency of the bankruptcy case, other courts, like the Ninth and Tenth Circuits, limit such claims to taxes incurred post-petition.