Summary of a Recent
Judicial
Development in
Bankruptcy
Appealing Rejection of Offer in Compromise
Suspends Statute of Limitations
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Hubbard, No. 05-10343, 2007 Bankr. LEXIS 213 (Bankr. D. Kan. Jan. 25, 2007), the United States Bankruptcy Court for the District of Kansas held that the Debtors had failed to provide sufficient evidence that they had not appealed the IRS's rejection of their Offer-in-Compromise; thus, the ten year statute of limitations for the IRS to file a claim on unpaid taxes had been suspended during the appeal and had not yet expired.
Background
In June 1993, the Internal Revenue Service assessed the tax liability for the Debtors' return for period ending December 31, 1992. Id. at *2. In August 2000, the IRS accepted for processing the Debtors' Offer-in-Compromise (OIC) regarding payment of income tax years 1988, 1989, 1990, 1992, 1994, and 1995, which was returned to the Debtors on October 16, 2000. Id. On October 25, 2000, the Debtors resubmitted the OIC, which the IRS rejected on January 19, 2001. Id. According to the IRS, the Debtors appealed the rejection of the OIC on January 31, 2001, by submitting a letter to the IRS requesting an appeal, and that appeal was rejected on January 15, 2004. Id. The IRS supported that claim with a letter from the Debtors' attorney informing the IRS that they planned to protest the rejection, which they claimed initiated the appeals process, and a subsequent letter from an IRS agent rejecting the appeal. Id. at *2-3. The Debtors denied that an appeal was ever filed, and supported the denial by indicating that no appeal was noted on the IRS transcript received by Debtors' counsel. Id. at *3. The Debtors filed for Chapter 7 bankruptcy protection in January 2005, and then converted the case to a proceeding under Chapter 12 in September of 2005. Id. at *4. The Debtors' plan contended that the IRS's secured claim was barred by the ten-year statute of limitations, and the IRS objected to confirmation of the plan. Id.
Arguments
The Debtors argued that the lack of notation of the appeal on the tax transcript amounted to an admission by the IRS that no appeal was ever received, accepted, processed, or rejected, and therefore the statute of limitations was not suspended during that time and expired prior to the IRS bringing its claim. Id. at *3.
The IRS argued that the Debtors did appeal the rejection of their OIC, as evidenced by the letter from their attorney stating that they planned to protest the decision, and so the statute of limitations was suspended during that period and had not yet expired. Id. at *10.
Analysis and Holdings
Pursuant to 26 U.S.C. § 6502(a), collections on federal income taxes are generally limited to ten years from the date of assessment of the tax by the IRS. Id. at *7-8. Under § 3462(b) of the Internal Revenue Service Restructuring and Reform Act of 1998, the IRS was prohibited from levying on a taxpayer's property during the time an offer in compromise was pending, and, in the event of a rejection, during the pendency of any appeal. Id. at *8. In addition, under 26 U.S.C. § 6503(b) and (h), the statute of limitations is suspended during bankruptcy proceedings, and for an additional six months thereafter. Id. The court found that the Debtors had not produced sufficient evidence to overcome summary judgment, since they had shown nothing to support their contention that because the appeal was not noted on the IRS transcript it was never received or processed. Id. at *13. The court found the IRS's evidence to be "extremely compelling" and thus awarded them summary judgment. Id. at *13-14.
The case was decided on January 25, 2007.