YOUNG v. UNITED STATES
Cornelius and Suzanne Young failed to include payment with their 1992 income tax return, which was due and filed on October 15, 1993. Subsequently, the Internal Revenue Service (IRS) assessed a tax liability against them. After filing a Chapter 13 petition, the Youngs ultimately filed a Chapter 7 petition and were granted a discharge, meaning that Youngs had no assets available to satisfy unsecured creditors, including the IRS. If the Internal Revenue Service (IRS) has a claim for certain taxes for which the return was due within three years before the individual taxpayer files a bankruptcy petition, its claim enjoys eighth priority under 11 USC section 507(a)(8)(A)(i), and is nondischargeable in bankruptcy under section 523(a)(1)(A). When the IRS subsequently demanded that they pay the tax debt, the Youngs asked the Bankruptcy Court to reopen the Chapter 7 case and declare the debt discharged under section 523(a)(1)(A), claiming that it fell outside section 507(a)(8)(A)(i)'s "three-year lookback period" because it pertained to a tax return due more than three years before their Chapter 7 filing. The District Court held that the "lookback period" is tolled during the pendency of a prior bankruptcy petition and concluded that the 1992 debt had not been discharged when the Youngs were granted a discharge under Chapter 7. The Court of Appeals affirmed.
Is the Bankruptcy Code's "three-year lookback period," under which a discharge does not extinguish certain tax liabilities for which a return was due within three years before the filing of an individual debtor's petition, tolled during the pendency of a prior bankruptcy petition?
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Yes. In a unanimous opinion delivered by Justice Antonin Scalia, the Court held section 507(a)(8)(A)(i)'s lookback period is tolled during the pendency of a prior bankruptcy petition. The Court reasoned that the three-year lookback period is a limitations period subject to traditional principles of equitable tolling and that nothing in the Bankruptcy Code precluded the equitable tolling of the lookback period. The Court reject the Youngs' argument that the Bankruptcy Code permitted the filing of a Chapter 13 petition and the subsequent filing of a Chapter 7 petition after the lookback period has expired. Under such a loophole, certain unpaid taxes would be dischargeable.
Argument of Grenville Clark, III
Chief Justice Rehnquist: We'll hear argument now in No. 00-1567, Cornelius P. Young v. the United States.
Mr. Clark: Mr. Chief Justice, and may it please the Court: This is a case about discharging taxes in a bankruptcy proceeding.
The Bankruptcy Code provides that income taxes that are more than 3 years old are discharged in a bankruptcy proceeding.
In the petitioner's case, the Youngs filed a Chapter 7 bankruptcy proceeding in March of 1997, some 3 years, 5 months after they had filed their 1992 income tax return in October of 1993.
The Bankruptcy Code provides, on this simple set of facts, that the Youngs' 1992 income tax obligation is discharged.
The operative code sections are 727, 523, and 507, which I set out at pages 10 and 11 of my brief.
Chief Justice Rehnquist: Well, they also filed an earlier bankruptcy petition, didn't they?
Mr. Clark: They did indeed, Your Honor.
That was filed in May of 1996.
It was a Chapter 13 proceeding.
It lasted just short of 6 months, and the... the argument that the IRS has tendered in this case and below is that you subtract out the 6 months they are in the prior proceeding from the calculation of the 3 years, 5 months, and when you do that, you come out with the Youngs ending up with being only 2 years 11 months away from the 3-year mark--
Chief Justice Rehnquist: Well, why was the first Chapter 13 petition dismissed?
Mr. Clark: --It was dismissed at the behest of the Youngs for a variety of reasons that did not appear in the record.
During the Chapter 13 proceeding, they had succeeded in selling their house and paying off mortgages on the house that had... they had placed on there.
Later on in the proceeding, they had gone through the trouble of engaging special counsel, an attorney Noreen Farr, to do something which does not appear in the record.
But they finally decided that they would dismiss the case rather than go forward with it.
The reasons that they did not... do not appear in the record.
They dismissed the case about 3 weeks before they would have gotten to confirmation of their plan, which they had submitted earlier in the case.
Justice Ginsburg: But there was also the fact that they... in addition to dismissing the Chapter 13, the day before that order was entered granting the dismissal at their request, they started a new bankruptcy proceeding.
They started a Chapter 7 proceeding, and that way they were able to stretch out the stay of any effort the Government might have made to collect the tax.
Mr. Clark: The... the bankruptcy... the Chapter 13 bankruptcy proceeding was dismissed.
The final closing order in the case was entered in March of 1997.
The motion that... or the request, I think, that the Youngs had filed was in October of 1996, October 23, 1996.
It is our position that the automatic stay expired as soon as the case was dismissed and not later when the case was closed a number of months later.
And I think that is significant because in our view the IRS was entitled to restart their enforced collection efforts against the Youngs--
Justice Ginsburg: Do you have authority for that, for saying that... that it's not the date that the bankruptcy was closed, but some... the earlier date when they... when they made that motion?
Mr. Clark: --Yes.
It's in the Bankruptcy Code itself, section 320... yes... I'll have to get the--
Justice Kennedy: Is the filing of the notice of dismissal, which was October 23?
Mr. Clark: --Yes.
It's the filing of the notice of dismissal, and that we contend is the dismissal.
What happened subsequent to the... the filing of that notice is the Chapter 13 trustee held some funds that had been paid in.
He sought to apply for an administrative expense, and that was put on for a hearing and eventually it was granted.
And then thereafter the clerk's office closed the case in March of 1997.
Justice Kennedy: Did anyone object to the notice of dismissal?
Mr. Clark: Not in a... not in a Chapter 13 where the debtor seeks dismissal.
The debtor has the absolute right to seek dismissal of his Chapter 13 case because it's a voluntary proceeding.
Chief Justice Rehnquist: You used the term seek dismissal, move to dismiss in October, and then the proceeding was actually dismissed in March.
Are you saying that your simple motion to dismiss is the same thing as having it dismissed?
Mr. Clark: Yes, I am in this situation, Mr. Chief Justice, because of... the bankruptcy rules are a little... were a little vague at that point in time.
Whether you seek a dismissal by simply filing a, quote, request or moving for a dismissal, the rule says that upon a request for dismissal, the judge shall dismiss it.
In this particular case, the judge did not actually enter an order of dismissal.
It simply accepted the dismissal as entered or requested in October of 1996.
Chief Justice Rehnquist: Well, this whole sequence of events seems a bit gimmicky.
Mr. Clark: Well, if... if there are gimmicks, if somebody is trying to manipulate the system, to game the system, certainly the Government... any party in interest who was affected by the gaming, the manipulation... can object, can take... can move to dismiss... to convert the case, for example, which--
Justice Kennedy: I thought there was a finding of good faith here, wasn't there?
Mr. Clark: --Yes, there was, Your Honor.
Justice Souter: Was it a finding of good faith or... or a finding that he was making no finding of bad faith?
Mr. Clark: No.
The... the judge below, Judge Vaughn in the Bankruptcy Court, found in favor of the Government, suggesting that there was a potential, in similar cases such as this, for abuse or manipulation by debtors in general.
But in this case, Judge Vaughn had found that he attributes no bad faith to the Youngs in this particular situation, and I think that's an important fact.
The Government, when it objected to--
Justice Kennedy: Is it bad faith to look for a tax loophole?
I think thought that's what all the tax attorneys always did.
Mr. Clark: --It's certainly not in our view bad faith to look for a tax... for a way to get a grant of a discharge of an obligation that you formerly owed.
Justice Scalia: Do you think that that's what the judge meant... meant by not attributing bad faith?
He didn't even think that your client was legitimately trying to take advantage of a tax loophole?
That... that's what I took it to mean.
Mr. Clark: The case... Justice Scalia, the case came before the court, before the Bankruptcy Court, on a motion for summary judgment by the motion... by the Government.
The... there was no findings of fact as such other than those that were on summary judgment.
The... what the... I see Judge Vaughn has... as finding is that he sees no evidence before the court from which he would infer any manipulative or abusive scheme.
Justice Kennedy: Well, would it be manipulative or abusive just to take advantage of the provision of the statute?
Mr. Clark: No, Your Honor, it would not be.
Justice Kennedy: So, the finding doesn't make any difference one way or the other, does it?
Mr. Clark: When bankruptcy... bankruptcy debtors take advantage--
Justice Kennedy: You're just saying you have a statutory right to do what you did.
Mr. Clark: --That's exactly right, Justice--
Justice Breyer: Why should we read the statute regardless, when it's good faith or bad faith, as allowing the following?
We look back 3 years to see how much money a bankrupt filer owes the Government.
He's going to have to pay it.
Let's say it's $100,000.
He dismisses that after a number of years, the first bankruptcy, then brings the second bankruptcy proceeding and says, well, if we look back 3 years from the second one, this $100,000 I owned... I owed falls outside that period.
It's simply a windfall to him because he brought two bankruptcy proceedings rather than one, and it's a loss to the Government for no reason other than his having brought two bankruptcy proceedings rather than one.
It serves no purpose whatsoever that I can fathom in the bankruptcy statute, and what purpose is there in reading the statute to permit such a result?
Mr. Clark: --Justice Breyer, you would have to look at what happened in the prior bankruptcy I think to see why the debtor was able to stay in bankruptcy for the length of time that the debtor did and thereby supposedly prevent the Government from collecting taxes from the debtor.
A chapter... usually the prior bankruptcy is a reorganization bankruptcy, a Chapter 13, possibly a Chapter 11.
During the Chapter 13 proceeding, that had... had a long life, the debtor had to propose a plan that had to pay the taxes that the debtor owed in full over the life of a plan, whether that be 3 years, 4 years, 5 years, whatever it was.
The plan has to go to confirmation.
If the plan is confirmed, all the plan payments that have accumulated to that point are now paid out to the Government and to other creditors in accordance with the plan.
Plan payments that follow on still go to the Government and to other creditors as designated in the plan.
The Government is getting money here during the... during the prior bankruptcy proceeding.
Yes, a person can file for bankruptcy, submit a plan.
It might be a 5-year plan.
They get the plan confirmed.
They make payments for 3 years and then they elect to dismiss.
That is their right to... to dismiss.
Justice Ginsburg: Do they get the payments back if they--
Mr. Clark: No.
No, Your Honor, they do not.
The... the plan payments have been paid to the Government all throughout the 3-year period.
They have a confirmed plan.
Once you have confirmation, the confirmation order releases the money to the... the payees, the creditors, including the Government.
Justice Ginsburg: --How much of the... how much of the tax liability did the Government receive during the course of the first bankruptcy?
Mr. Clark: In the Youngs' case, the Government did not receive any payments whatsoever.
The Youngs' Chapter 13 lasted about... just short of 6 months.
They had not filed that tax case, that Chapter 13 until 2 and a half years after they had filed their tax return.
They... but they did not receive any payment because we did not get to confirmation in the Youngs' case.
Justice Ginsburg: Did you... did you seek confirmation?
Mr. Clark: The confirmation hearing had been set by the court at the outset of the case, and it was scheduled for November 15 of--
Justice Ginsburg: But it was... it was the debtors' voluntary action that stopped the Government from getting any payments under that plan.
Mr. Clark: --It was... in this particular case, yes, Your Honor--
Justice Ginsburg: Could the judge--
Mr. Clark: --for the... because they had not gotten to confirmation.
Justice Ginsburg: --When the debtor asked to have the Chapter 13 dismissed, could the judge have said, I will enter the dismissal order, the closure order, but only on condition that you do not attempt to assert a time bar, should you... as everybody knew was... that was going to happen, go into a successive bankruptcy proceeding?
Did... would the judge have any authority to do that?
Mr. Clark: Yes, Justice Ginsburg.
Under, I think it's section 349 of the Bankruptcy Code which governs dismissals, the judge certainly has the authority to put conditions upon the issuance of the dismissal.
Justice Breyer: Well, then why is the dismissal automatic, which is what we talked about at the very first?
Mr. Clark: Well, because the debtor... I think the procedural problem here is because the request... the rules, at least at the point of this request for dismissal was... was made, were a little vague as to how you request or move for a dismissal.
Justice Breyer: All right.
Mr. Clark: But the debtor has the absolute right to request the dismissal.
The effect of the dismissal the judge can impose a condition on to say, well, yes, we're going to dismiss the case, but we're going to enter an order that says you cannot count the 6 months that the Youngs were in bankruptcy.
Justice Scalia: Well, the debtor... the debtor has a right to reject that condition and say, if that's the condition, I don't want to dismiss, I assume.
And if that's so, then the dismissal is not automatic.
I mean, you can't have it both ways.
Mr. Clark: I don't... I think the--
Justice Scalia: If he has a right to reject that condition, then once you say the judge may impose a condition, you have to say that... that dismissal does not occur automatically once you request it.
Mr. Clark: --I think in that--
Justice Scalia: You can't have it both ways.
Mr. Clark: --I... I'm not saying it's... I think what I'm saying is that the court has the ability to put a condition on it.
If the judge... if the debtor doesn't wish to accept it, it's going to have to withdraw the motion to dismiss.
Justice Scalia: Right, and we don't know, until the judge enters an order of dismissal, whether he's going to put a condition on it.
So, how can you say the dismissal is automatic as soon as you request it?
Mr. Clark: I'm saying it's... Justice Scalia, I'm saying it's automatic in the sense that the... the debtor has an absolute right, quote/unquote... and that's not an absolutely absolute, but the debtor has a right under Chapter 13 to have his case dismissed.
Justice Scalia: No, but... no, but you say he doesn't because the judge can say, I'll let you dismiss it if.
Whereupon, the debtor can say no... no deal.
So, it's not an absolute right.
Mr. Clark: Well, it's... I think it is an absolute right or nearly so.
I don't think that putting a condition on it makes it less of... of an absolute right to dismiss.
Justice Ginsburg: But it doesn't mean that you can't equate the date that you file the motion to dismiss with the termination of the Chapter 13.
It can't be.
If the judge could put a condition on it, then the... the 13 proceeding doesn't terminate until the closure order is entered.
Mr. Clark: I think the... well, I don't know that the judge could withhold or... or delay the entry of a dismissal order.
It could put a condition on it that the time in Chapter 13 won't count against the--
Justice Scalia: Let's say we disagree with you and we find--
Justice Stevens: --Have you cited any cases in which this kind of condition was imposed?
Mr. Clark: --I do not know of any cases where, in a Chapter 13, a condition has been imposed.
Justice Kennedy: So, this is totally speculative, really, I think.
I would assume if the... if this problem has occurred as many times as the Government says it has, and if the solution that you suggest is available, I would have thought some judge would have thought of it.
Mr. Clark: Well, I think no... no judge is going to impose the condition I think under section 349 unless the IRS comes in and makes a motion or brings it to the attention of the court that--
Justice Kennedy: But then the lawyers have never had enough sense to do this, as I understand it.
Unknown Speaker: [Laughter]
Mr. Clark: --Well, they've gone a... the Government I think has gone on a different track on... on this issue.
Justice Kennedy: The answer is no.
Mr. Clark: The answer is no, Your Honor.
Justice Kennedy: In... in all events, let's assume that we think that the dismissal occurs in... it would be March 13.
Does the difference between October and March make a difference in this case?
Mr. Clark: No, it does not, Your Honor.
Justice Kennedy: All right.
So, it doesn't make any difference.
Mr. Clark: This... we got into this in the court of appeals a little bit, but it really makes no difference whatsoever in the computation.
Justice Scalia: Mr. Clark, can I get your understanding of what you think would be manipulation?
Because it may have something to do with my view of... of this case.
You don't assert that... that somebody can go into a Chapter 13 proceeding with the... with the avowed intent of not carrying it through to completion and of dismissing it in order to get the benefit of... of the... the shorter lookback.
Suppose... suppose I open a 13 proceeding and I have no intention... I propose a plan.
I have no intention of completing that plan.
I ask the court to approve it.
From the beginning, I have no intention of... of going through to the end of it.
Isn't that a fraud on the court?
Mr. Clark: I would... I would never... I would... I agree with you, Judge Scalia.
It would be a... an abuse of the bankruptcy process.
Justice Scalia: And if that were shown, I suppose there's no doubt that the... that the Bankruptcy Court in the later proceeding could disallow the... the shortening of the lookback period because of that fraud.
Mr. Clark: Yes, Your Honor.
Justice Scalia: Okay.
So, we're talking here only about cases in which someone in good faith, at least as far as the IRS can approve, commences a 13 proceeding, and then for... for some... some plausible, good reason, before it is concluded, dismisses.
Is that how you--
Mr. Clark: Yes.
Justice Scalia: --understand the situation?
Mr. Clark: Yes, it is.
Justice Kennedy: Whose burden is it to show that there was some reason other than just getting advantage of the automatic stay?
Do you have to put in any evidence to show that?
I mean, you're suggesting... I guess Justice Scalia's question... that there should be a fact question in every case as just what was the motivation of the petitioner who file the Chapter 13 proceeding.
Mr. Clark: I think there has to be... if... if somebody is charging that there is an abuse, there has to be some factual determination that there's an abuse.
The... under section 105, even the bankruptcy judge himself, sua sponte, can look at this and enter orders if he detects abuse.
And bankruptcy judges happen to be rather good at this.
They... they see cases that emit an odor, if you will, and they are not reluctant to get involved in that.
Justice Kennedy: So, suppose the bankruptcy proceeding is commenced with the intent ultimately of getting the discharge, but there's also the intent to do it in two steps.
You say, I'm going to... I want... I want to get Chapter 13 or Chapter 13... 11, but I'm just going to do it in two steps.
Is... is that... that abuse of process?
Mr. Clark: No, I don't believe so, Justice Kennedy.
Here's what happened--
Justice Scalia: I don't understand the question.
Justice Kennedy: The hypothetical is I... the bankrupt intends to get a bankruptcy discharge, but he also intends to do it in two steps.
He intends to have a Chapter 13, wait for 3 years, and then after a very short interval, refile under 7.
And then hypo two is under 13.
I take it you can do it under 13?
Couldn't you have two successive 13?
Mr. Clark: --You could have... you could have--
Justice Kennedy: And your argument would be the same.
Mr. Clark: --Yes, Your Honor, it would--
Justice Kennedy: In either of those cases, would that... would that be abuse of process in your view?
Mr. Clark: --Not in my view, Justice Kennedy, and here... here is why.
If you're going to go... if you're going to go into Chapter 13 and stay there for 3 years, you're going to get a plan confirmed during the course of those 3 years.
You better, sure as heck, get a plan confirmed during those 3 years.
And you will be... once the plan is confirmed, payments are going to be made to the IRS for those 3 years.
It may or may not pay off the debt to the IRS in full during the 3 years, but it is the debtor's best effort, according to the Chapter 13, to be paying those dollars.
So, it's not as though the IRS is getting nothing in this... in that hypothetical situation.
Justice O'Connor: But if... if taxes had been paid during the Chapter 13 proceeding, wouldn't they have to have been returned on the dismissal of that proceeding?
Mr. Clark: If there... Justice O'Connor, if there were no confirmation order entered prior to the dismissal--
Justice O'Connor: Right, as was the case here.
Mr. Clark: --which was the Youngs' case.
Justice O'Connor: As was the case here.
So, presumably even if something had been paid in for the taxes, they would have been given back on the dismissal.
Mr. Clark: Yes.
The magic moment in Chapter 13 is the entry of the confirmation order, and once the confirmation order is entered, whatever plan payments the trustee has already accumulated, because the--
Justice O'Connor: Well, why... why do you think it's improper to equitably toll that lookback period for this situation?
Mr. Clark: --I... I do not think it is proper at all to... I... there are several reasons why I think it's improper.
First of all, the language of the statute itself is very plain and straightforward and has no provision for equitable tolling or any tolling.
Chief Justice Rehnquist: We have held that equitable tolling applies in similar statutes which have no provision for equitable tolling.
Mr. Clark: Yes, I'm... I... I know that the... I know that you have, Mr. Chief Justice.
Justice Kennedy: Well, I... I thought your point is... one of your points was that statutes of limitations are different from this, that this is not a statute of limitations.
Mr. Clark: It's... my point is that it is... this is a part of the definition of which taxes can be discharged in bankruptcy.
There are several time elements to defining which taxes can be discharged in bankruptcy.
There is this 3-year lookback period.
There is a 2-year period where a taxpayer has filed a return late and then we go to a 2-year lookback.
And then there's a third 240-day period that the taxpayer/debtor must satisfy and that is 240 days from the date of assessment.
Now, the debtor must meet all three of these to be able to discharge the taxes.
In the Youngs' case, the taxes were assessed promptly, about 2 and a half months after they filed their tax return.
They clearly met that one.
The... they did not file a late return because they got extensions to file their return in October of 1993.
So, they... that one doesn't apply.
And the only one in question in this particular case then is the 3-year, and how do you measure 3 years and do you toll the 3 years for the period of the prior Chapter 13.
Justice Souter: Mr. Clark, is the Government correct in... in pointing out that the debtor here could, instead of seeking dismissal of the 13 and starting a 7, simply have moved to convert the 13 into a 7?
Is that correct?
Mr. Clark: That is correct, Your Honor.
Justice Souter: If... if the debtor had done that, the 3-year period would continue to have been calculated as it originally was under the Chapter 13 proceeding.
Mr. Clark: Yes, Justice Souter, that is correct.
Justice Souter: Would... would it have been error if... if the judge or any judge in a case like this, when... when confronted with a motion or a request to dismiss, simply questioned the debtor whether it was the debtor's intent to start a Chapter 7 proceeding, and if the answer was yes, for the judge simply to say, well, I will treat your motion as a motion for a conversion and we'll grant that?
Would that have been error on the judge's part?
Mr. Clark: I think it would be error for a judge to take a motion to dismiss a Chapter 13 and make it a chapter... and say, we are going to make it instead a Chapter 7 case.
Justice Souter: Even when the debtor says, yes, my plan, my intent is to... is to initiate Chapter 7 proceedings.
Mr. Clark: Yes.
Justice Souter: The... I take it the only harm to the debtor in that case would simply be the... the argument about the 3-year lookback because the debtor would be getting exactly otherwise exactly what the debtor wanted, i.e., a Chapter 7 filing.
Mr. Clark: --Yes, Justice Souter.
But keep in mind in the... in the case of either dismissal or conversion, in the example in the Government's brief, the... it does not do any good to seek conversion... I'm sorry... to dismiss and then refile unless you're toward the end of the 3-year period in any event.
So that when the case is dismissed, now the 3-year period has expired, and now you go the next day and you file your Chapter 7, saying, well, I've been... it's been now more than 3 years since the filing of the return.
Justice Souter: Yes.
Mr. Clark: But in the meantime, of course, the plan payments are being made, hopefully, to the Government and to other creditors for the 2 years and however many months.
Justice Souter: Well, that... that's so.
But, I mean, even in the case in which there has been a confirmation under... under the Chapter 13 and plan payments have been made, it may very well be that the amount of tax liability that has actually been paid could be minuscule, so that it would be very much in the debtor's interest to... to start a new Chapter 7 and save whatever the balance due is on the taxes.
Mr. Clark: Well, except that, Justice Souter, the problem is that the tax payments are not going to be minuscule during the Chapter 13.
Justice Souter: Well, whether they're minuscule or not, if they're not 100 percent, the debtor still gains something by going... so far as the Federal taxes are concerned, by dismissing and starting a Chapter 7 because whatever the balance due is, in... on the facts of a case like this, the... the debtor is going to... going to obtain.
Mr. Clark: That is correct, Justice Souter.
But again, I would point to the fact that the Government is getting something.
It may not get the whole amount.
And in tax collection in general, apart from bankruptcy, even when bankruptcy is not in the picture at all, the way the Government is trying to collect taxes is through installment payments as the Youngs--
Justice Souter: Well, that's right.
But I think the Government's answer to that is unless we, in fact, make a compromise agreement, we're entitled to 100 cents on the dollar.
And the... the fact that... that the Government may get 50 cents on the dollar before you go from 13 to 7 I... I don't think really disparages the Government's argument any.
Justice Ginsburg: Or it can be, as it was here, the Government got nothing.
Chief Justice Rehnquist: The Government got nothing.
Mr. Clark: --The Government did get nothing in this situation, Justice Ginsburg, for the 6 months.
Justice Ginsburg: And would there... in... in this very case where the Chapter 7 was started the day before the Chapter 13 was closed, was there any advantage, other than wiping out the lookback period, to instituting two proceedings rather than having the 13 converted to a 7?
Mr. Clark: Well, the reason the Chapter 7 was filed was because I think other creditors were descending upon the Youngs.
They had dismissed their Chapter 13 back in October, and that, of course, put everybody back into the status quo ante, except with respect to the sale of their house, of course.
But the creditors now were free, once the case has been dismissed, to come forward again.
Justice Ginsburg: Well, we're getting into filing versus dismissal.
Mr. Clark: Yes.
Justice Ginsburg: But if... if we take the order of the court as what counts, there wouldn't have been any period in which other creditors could have jumped in because the Chapter 13 hadn't yet been closed.
So, from the point of view of the debtors here, was there any advantage that they gained other than wiping out the lookback period?
Mr. Clark: With... with the filing of the Chapter 13, they obviously gained the advantage also of eliminating their other debts.
Justice Ginsburg: I mean, when they got to the point of saying we're not going to make it under this plan, so we're going to have to quit the 13, at that point they could have done... either asked for conversion to 7 or started a new proceeding.
Is there any difference from their viewpoint other than they'd get the benefit under a reading of the statute of putting the Government out of the picture because the 3-year lookback has run?
Mr. Clark: I'm not quite sure I understand the question, that they... Justice Ginsburg.
I think they... they get the... when they... when they dismiss and then refile, they obviously get the benefit of discharging their other taxes in... their other debts, non-tax debts.
Argument of Patricia A. Millett
Chief Justice Rehnquist: Thank you, Mr. Clark.
Ms. Millett, we'll hear from you.
Ms Millett: Mr. Chief Justice, and may it please the Court: I would like to address first the... there's been some discussion about protections that maybe or maybe could not occur in a Chapter 13 proceeding to prevent the... the Government from losing its claim.
And in fact, that rarely, if ever, is capable of happening because we don't know... debtors don't telegraph to us at the time they're in Chapter 13 or dismissing their Chapter 13... that they plan to file a second bankruptcy.
And if you don't know that's going to happen, you can't prove bad faith.
You can't ask for conditions, or it would be virtually impossible to do that.
Justice Scalia: Well, sure you can.
You can ask the bankruptcy judge to inquire and... and say if... if that is the plan, Your Honor, we... we request that it not be dismissed but rather converted.
Ms Millett: I think--
Justice Scalia: Or that that be a condition of... of the dismissal that you not... that you not refile.
Ms Millett: --I think there's two difficulties with that approach, and the first that it would be an enormous burden in every Chapter 13 case that is filed and then sought to be dismissed... and an awful lot... the vast majority are... to have that inquiry undertaken.
And secondly, there is... there is no authority under the code that we're aware of that allows a court to condition... a voluntary dismissal, which they have as of right, on willingness to forego a discharge in a future bankruptcy proceeding.
Justice Scalia: But, I mean, let's assume someone has in all good faith commenced a Chapter 13 and has in all good faith dismissed it because, part the way through it, said, you know, I think I can make it on my own now, and... and then, you know, sometime after that, decides, no, I can't make it and... and files another bankruptcy proceeding under 7.
No bad faith.
You would still want to alter the 3-year lookback in the statute to make it... to make it what?
5 years or whatever.
Ms Millett: We would... we would want the 3-year lookback period to tolled during the time the automatic stay prevented us--
Justice Scalia: That's not what the statute says.
There's no fraud here.
There's... there's nothing going on.
You're just saying here's a loophole in the tax law or the bankruptcy law, that aspect of the bankruptcy law dealing with taxes.
I'll call it a tax loophole.
And you're saying, you know, courts, repair this loophole.
That's not what courts normally do.
Ms Millett: --Well, as the Chief--
Justice Scalia: I mean, that's the fun of practicing tax law.
Unknown Speaker: [Laughter]
Justice Ginsburg: Bankruptcy law.
Justice Scalia: You take all the joy out of it.
Unknown Speaker: [Laughter]
Ms Millett: --That's what we do.
As the Chief... as the Chief Justice pointed out, in fact, equitable tolling... in virtually every case that I'm aware of, equitable tolling is applied when the statute is silent, and in fact when it may provide specifically for tolling in other circumstances, as occurred in Bowen v. City of New York and American Pipefitters v. Utah.
And equitable tolling has not... never been held to turn upon the existence of bad faith.
Justice Scalia: This is not equitable tolling in... in the statute of limitations sense.
What is involved here is not the termination period for bringing a cause of action, but rather the quite different question of when taxes will be discharged and when they don't.
Congress provided for, you know, a 3-year lookback.
In some circumstances, they get the benefit of... of less than that if... if they brought the two... but at least, where there's been no fraud, at least where you haven't been able to show that... that they were gaming the system intentionally, I don't see why equity should... should come... there is legislation pending to close this gap, isn't there?
Ms Millett: There is and there has been for a number of--
Justice Scalia: Well, I don't know why we don't leave it to Congress.
Ms Millett: --Well, Your Honor, there's... there's a number of responses to that.
And the first is we would respectfully disagree that this is not sufficiently analogous or akin to a statute of limitations that the First Circuit described in this case to merit equitable tolling.
A time period does not have to be a statute of limitations to be tolled.
In Zipes v. TWA, in Honda v. Clark, this Court has applied equitable tolling to other types of time limitations, and within the bankruptcy context, which is a specialized context, this lookback period has the same operation and effect as a traditional statute of limitations.
It prevents the assertion of stale claims, stale claims defined as ones that the Government has allowed to linger.
It... it extinguishes a claim if the period does lapse as effectively as a bar on the time limitations.
Justice Scalia: It doesn't extinguish it.
The... the Government is just thrown in with the other... with the other creditors, isn't it?
Ms Millett: Well, this--
Justice Scalia: --they may come out without any money, but it's just... the... the question is whether the Government is going to have the preferred position of not having its debt discharged.
It will be thrown in with the other general creditors.
Ms Millett: --That's not entirely correct, Justice Scalia, for... for... in two ways.
First of all, there are two... there are two aspects to the priority.
There's a priority as against other creditors, but what is at issue here, and again what is at issue in virtually all of these Chapter 7 cases, or these no... no-asset Chapter 7 cases, is the discharge.
That's what's at issue here, and the discharge is... does extinguish a claim as much as a bar on... on filing.
Justice Scalia: Well, I know, but it... but it discharges the Government's claim just the way it discharges the general creditors' claims.
The Government is thrown into that pot instead of having the preferred position that you can pay off everybody else 3 cents on the dollar, but not the Government.
All that happens is the Government goes in with the other creditors.
Ms Millett: Taxes have always been different.
And the... the treatment of this is simply a 3-year... 3-year period that... that the debtor has to run out, and it doesn't afford the Government any capacity to enforce the claim would be, I think, an extraordinary assumption on the part of Congress.
Justice O'Connor: --Well, what is your... what is your main argument?
Is it to ask us to apply the principle of equitable tolling to this section 105 lookback provision?
Ms Millett: Section 507.
Justice O'Connor: Yes.
Ms Millett: Yes, that is... that is our... that is our submission.
Justice Scalia: And what's your best case for that?
Ms Millett: --The body of equitable tolling cases, but the most analogous one I think is Honda v. Clark... Clark and Burnett v. New York Central Railroad, both of which are cited in our brief.
Honda v. Clark involved not a traditional statute of limitations, but the time for filing proofs of claim under the Trading with the Enemy Act, which was specifically modeled on the Bankruptcy Act.
And there... there the Court held that it would be equitably... equitably... the time period would be equitably tolled--
Justice Scalia: Why isn't that a traditional statute of limitations?
Ms Millett: --I'm sorry?
Justice Scalia: Why isn't that a traditional statute of limitations?
Your claim is invalid unless you file it within a certain period.
Ms Millett: Well, within the bankruptcy context, in fact a claim can still be paid as long as it's on the schedules.
The filing of a proof of claim does not--
Justice Scalia: No, I'm not talking about this case.
I'm talking about the case you're citing us as... as being analogous to this one.
You said it didn't involve a traditional statute of limitations.
Why did that not involve a traditional--
Ms Millett: --The... the reasoning of the Court in Honda v. Clark was... was that Congress modeled... the proof of claim there may have been closer to an actual statute of limitations, but the rationale the Court applied was looking to the treatment of proofs of claim in the Bankruptcy Code, and that was the analogy that Congress was drawing at the time it enacted the Trading with the Enemy statute, and that those proofs of claim... it was in the bankruptcy context--
Justice Scalia: --Maybe, but Trading with the Enemy statute itself contained what was a statute of limitations, and in the case at hand, we were equitably tolling what was effectively a statute of limitations.
What's your other best case?
Ms Millett: --And Nassau Smelting v. Refining Works, which is discussed in Honda v. Clark, was a bankruptcy case where the proof of claim was not filed until a year after the deadline and the Court allowed participation nonetheless.
And again, it's the nature of the proof of claim that's--
Justice Breyer: Those are also... the difficult issue I think in this case is exactly what Justice Scalia has been saying, that this isn't a traditional statute of limitations.
You have to do one of two things.
You either have to say the word 3 years shall be read 3 years plus days tolled.
That's one thing you could do.
Or the second thing you could do is you could look to 105(a) and you could say that the order that can be issued is an order pay money... this is in the section 7... pay money as if this were the section 13 that hadn't been dismissed.
Now, both of those, the question would be, does... does the judge have the authority to do that?
And looking simply to statute of limitations provisions doesn't answer that question.
It... it provokes the question.
It proves you might be right, but... but the worrying thing is whether you can just stick those words in, either plus days tolled, or read 105(a) in so broad a manner.
So, those are the... I'd like to know what should we do and what's the authority for that.
Ms Millett: --To take the first... the first... first scenario first, the proposition for reading the 3-year lookback period as 3 years plus--
Justice Breyer: Plus days tolled.
Ms Millett: --3 years plus.
In deciding what the character of the lookback period is, whether it's akin to the statute of--
Chief Justice Rehnquist: Could you speak up a little bit, Ms. Millett?
Ms Millett: --In deciding what the... the character of the lookback period is, equitable tolling does apply in Zipes in filing a proof of... filing of a claim with the Equal Employment Opportunity Commission.
There the Court described it as similar to a statute of limitations, but it was not a statute of limitations.
So, equitable tolling does not require--
Justice Scalia: Which case was that?
Ms Millett: --Zipes v. TW... Trans World Airlines.
That does not require the presence in the actual statute of limitations.
It has to be a time limit.
If the question is whether Congress would have intended that type of time limit to be subject to tolling principles.
And the... we can either assume the lookback period would have for many of the policy reasons that have been discussed... the... the conclusion that results if we decide that it is not something that Congress would have intended to be subject to equitable tolling is that the 3-year lookback period is an empty gesture as far as protecting the Government.
Justice Breyer: You have no problem convincing me about what I'd call the equitable merits of your side.
The problem you have, as far as I'm concerned, is how to work, which route do we take and what's the authority for doing it, just what I asked in the first place.
Ms Millett: --And that is I think... and it's both prongs of your... of your question.
It is... we think that the nature of the time limitation is sufficiently similar within the bankruptcy context.
This is how you enforce claims within the bankruptcy context.
Justice Scalia: Well, I don't think it is similar.
I... I... I mean, the only thing... the only respect in which it's similar is that it involves time, but all of the other cases that... that you refer us to, the statute of limitations proper, Zipes, they're all cases in which action by the party seeking to enforce something is limited by a period of time.
He has to do it within a certain time or else it's no good.
Now, whether you call it proof of claim or anything else, that's... that's the scenario.
In this case, it's... it's not a matter of whether the Government has filed in time at all.
This lookback is quite a... quite a different animal.
It's how far back you... you can go in... in deciding which claims cannot be discharged in bankruptcy.
Now, it involves time.
I guess, if you think that's enough of a commonality, then... then I'd agree, but gee, I... I don't think that's enough to... to make me think that we have the... the authority by long tradition to rewrite a statute so that where it says 3 months, it's going to be 3 months... 3 years, it's going to be on our authority 3 years plus some other period of time.
Ms Millett: I think this is exactly the situation that you described.
It's like a typical statute of limitations, and that is unless the Government takes action within 3 years to enforce its claim, unless it acts within those 3 years, it will, for all intents and purposes and all practical purposes, within the unique context of bankruptcy proceedings, have no claim left.
It will be discharged.
Justice Scalia: But it's not a limitation on the Government's action within 3... it doesn't say the Government has to act within 3 years.
It says when you have a bankruptcy proceeding, you look back only 3 years.
It has nothing to do with how soon the Government has to come forward.
The Government has absolutely no control over that lookback.
Chief Justice Rehnquist: If the Government comes forward after 3 years, it loses.
Ms Millett: --That's right.
It eliminates... and the legislative history describes this quite... from Congress' vantage point that this was an enforcement period, a collection time, and that... that if the... it would eliminate stale claims, which this Court said in Zipes is one of the purposes of a statute of limitations.
It would... it would extinguish liability if the Government doesn't act within the particular period of time, which again is akin to a traditional statute of limitations.
Justice Kennedy: I have one... one technical question.
I should know the answer.
Suppose before the Chapter 13 proceeding is commenced, the Government says, oh, we've got a lot of taxes here and this debtor may file Chapter 13.
Can you file a lien against his property which somehow protects you?
Ms Millett: --If we... if we have assessed the taxes, which in itself requires a 90-day period as a matter of law, but if we have assessed the taxes, which we had here, we can go file a notice of federal tax lien which would protect us.
What happened in this case--
Justice Kennedy: And that would protect you.
Ms Millett: --That would protect us, but it's important to keep in mind how tax collection works.
The IRS, as a matter of policy and as a matter of some statutory provisions, tends not to descend immediately upon taxpayers the second there's a liability.
In this case, we had been working with the Youngs, and they had been making some payments.
And it's routine for us to try voluntary compliance.
It's good policy and that's what we do, and it wasn't... we tried to--
Justice Kennedy: If you... if you imposed a lien, could you still work with the taxpayer?
The lien doesn't prohibit you from trying to work it out, does it?
Ms Millett: --We... we could have, but it certainly has some consequences for... for the taxpayer.
And... and again we... we try... we try to work these things out without going to that sort of adversarial level of proceedings.
And there had been payments being made here.
But if I could get back to Justice Breyer's--
Justice Kennedy: And just... just so I get the technical--
Ms Millett: --Sure.
Justice Kennedy: --But once the Chapter 13 proceeding commences, you--
Ms Millett: We cannot impose--
Justice Kennedy: --cannot impose a lien.
Ms Millett: --Absolutely not.
That's part of the automatic stay.
If I could get back to Justice Breyer's question.
What we think is important here is... is the... the combination of the two factors that you discussed is that this is sufficiently like a statute of limitations, and Congress intended it to operate like a statute of limitations, and it does operate like a statute of limitations within the bankruptcy context.
And we've combined that with the unique equitable powers the bankruptcy courts have and the unique operation of equitable principles within the bankruptcy context.
So, it's not an either/or.
I think the combination of those is a sufficient reason as to why tolling of this lookback period would be appropriate.
Justice Ginsburg: Ms. Millett, Mr. Clark said in his brief that, well, if you're going to do this for taxes, the same logic would apply to wage claims that have a priority.
What else did he say?
Employee benefit claims.
Is that... is that so?
Ms Millett: Those are the only two nontax provisions that have these type of--
Justice Ginsburg: So, could you--
Ms Millett: --lookback periods.
And I... I'm assuming that it would, in fact, apply.
I... I haven't analyzed... the same analysis would apply and assuming that the same congressional purpose would be shown and the consistency of congressional purpose to apply equitable tolling... it would apply there.
It doesn't actually happen to be a problem in that area because those... for two reasons.
Those types of... those two claims involve very, very short time limits, 90 and 180 days, not 3 years.
And so, in order to avail themselves of this procedural roundabout, they would have to file two bankruptcy proceedings very closely on top of each other, and that just doesn't happen.
Justice Ginsburg: --Well, as they did here.
Ms Millett: No.
I mean, they would have to file their first one, and then within 3 months to get out of the 90 days, you'd have to file another one.
This... the first one lasted I guess approximately 6 months.
Justice O'Connor: Ms. Millett, there is legislation pending to do what?
How is it drafted?
Ms Millett: It... it is drafted to provide for tolling of the lookback period during the pendency of... during the time an automatic stay in a prior bankruptcy case.
Justice O'Connor: As an amendment to section 105 or what?
Ms Millett: I think it's to section 507, which is... 507(a)(8), which is what provides the lookback period itself.
But that legislation--
Justice O'Connor: Is it part of the overall Bankruptcy Code revision?
Ms Millett: --It is.
It has not been--
Justice O'Connor: You know, the big bill.
Ms Millett: --The big bill.
Justice O'Connor: Which may or may not go anywhere.
Ms Millett: Which may or may not go.
There are... there is... there are, you know, different bills before Congress.
They've both been passed.
Conferees have been appointed.
They aren't fighting over this provision, but there are lots of other provisions that they are in disagreement over.
I also think it's important to keep in mind what... what we would have to assume Congress intended were we to read the lookback period as something not subject to tolling.
Now, there have been some suggestions that people like to avail themselves of tax loopholes.
That's usually done to decide how much taxes you owe.
What we're talking about here is an admitted acknowledged tax liability that they want to get out of paying and that... that we want to hold that... that debtor--
Justice O'Connor: Well, if you were the lawyer for the Government faced with a taxpayer that had a big tax liability and it looked like bankruptcy might be looming, what would you advise the Government to do?
Ms Millett: --Depending on this Court's holding, there... I have to say in all candor the volume... the sheer volume of cases that the IRS handles in bankruptcy makes much... and it's handled often at the initial stages, as it was here, not by lawyers, but by special agents in the bankruptcy proceeding.
I think we would have to go to a system where we would go to the tax liens immediately, but that's not what--
Justice O'Connor: No doubt, but absence that, what is the best way for the Government to protect itself, do you think?
Ms Millett: --To immediately as soon... as soon as they assess, immediately file a tax lien.
And... and that's... normally we go... there are administrative... other administrative means of collection.
We try to work things out.
We have offers in compromise, and there's no reason that Congress would have intended our tax system to go that way and to be driven by these bankruptcy procedures.
Again, to get back, we're talking about whether the lookback period--
Justice Scalia: Well, that's how they wrote it.
I... I mean, you say... Congress often does not enact perfect statutes.
It... it leaves some holes that it should have thought about and... and we don't normally think it's our job to patch it up.
I... I agree with you.
I... I find it unlikely that Congress intended this to work this way, but it is just one of the eventualities that they didn't have in mind, and that's why we have things called statutory amendments.
We... we don't run to the courts and ask the courts to fix them.
And... and I'm just very leery of extending our... our powers, the equitable powers that we've used in the past, for extending statute of limitations, tolling statute of limitations to this quite different situation of a lookback.
I... and there are other lookbacks in the Internal Revenue Code and there are other time provisions, and I... I'm not willing to say whenever there's a time provision, it's an invitation to us, if... if Congress hasn't foreseen every problem, to adjust it.
Ms Millett: --I think... I think that given the equitable powers of bankruptcy courts, most of those... many of those time limits are in fact considered to be subject to equitable tolling that are in the Bankruptcy Code, although I don't know that this Court, other than the proof of claim context, has ruled on the question.
But in deciding... Congress legislated against backdrop principles of equitable tolling.
In deciding whether this is the type of thing that should be subjected to equitable tolling, this Court made clear in American Pipe & Construction v. Utah that it's a question of... of congressional intent, not whether you think the provision is substantive or procedural.
And we think congressional intent drawn from the structure of the statute, the network of tolling provisions, limitations on filings, conversion rules, to think that all of those were put in by Congress not to protect the Government's enforcement period but simply to channel debtors into one particular procedural route for not paying taxes is a highly unlikely assumption.
And to think that Congress would... to read the lookback period as intentionally empowering debtors not to fight about how much taxes they owe, but to take an admitted tax liability and say that because of what we do in bankruptcy, not because of anything the Government did in becoming a creditor or in enforcing its claim, we get to decide that you will not have prioritized status.
You will have, in some cases, not a minute of enforcement activity, and we don't have to pay our taxes.
That makes the Government not like other creditors at all, not at the same level, but in the... the States and Federal Governments will be in the worst position of anyone in bankruptcy.
We don't get to choose our debtors.
We don't get to seek the security in advance, and we will have no capacity to enforce, other than at the mercy of the debtor who initiates these proceedings.
And I think... I understand this isn't a perfect fit with the statute of limitations, but I think taking those considerations and the... the consequences of accepting the alternative view of the lookback period, the implausible assumptions that would assume Congress made and the implausibility of this operation of the statute as a whole combined with the traditional equitable powers of Bankruptcy Court and the role of equity in these proceedings, all of that packaged together is sufficient to allow this Court to toll a lookback period and effectuate Congress' intent, which... which is--
Justice Kennedy: May I ask you a question about your view of the automatic tolling statute?
As I understand this case, the notice of dismissal of the Chapter 13 proceeding was filed in October, and the actual dismissal was not until March 13 of the following year.
And it was the day before that that they filed the Chapter 7 so there--
Ms Millett: --That's right.
Justice Kennedy: --was the base of their changing their mind or something like that.
Is it your view that the automatic stay was in effect between October and March?
Ms Millett: Absolutely, and--
Justice Kennedy: Because I think your opponent seemed to suggest maybe that wasn't so.
Ms Millett: --Right.
In 1307(b), which is the provision that allows automatic... it's 11 U.S.C.... that allows voluntary dismissal by the debtor, provides that the... that the debtor may... may ask the court, but that the court shall dismiss the case.
And so, until a case has been dismissed or closed, neither of which would have happened under this provision until March, or a discharge has been granted, which obviously did not happen in this case, the automatic stay remains in effect.
And we were unable to do any... take any steps to enforce our claim.
Justice Kennedy: And is it true that in this case there was some kind of report filed on February 2?
So, there was activity in the case.
Ms Millett: There was.
A trustee had filed a report, and there had been... the court set time when it got the... the notice, it set the time for the hearing on this or time for action on this.
So, it was in fact... and again, if... if we're going to suppose that courts can impose conditions on these dismissals, that would again require... assume that the case is alive and is still before the court.
But I think the statute is quite clear that it... that the debtor doese not dismiss the case; the court does.
And that didn't happen until March.
Justice Kennedy: Are you aware of any cases of this kind in which the court has imposed a condition relating to this problem?
Ms Millett: --No, and again because I think the statute doesn't--
Justice Kennedy: Doesn't authorize.
Ms Millett: --I don't want to say it doesn't in case we get to some situation where we might want to try, but it doesn't seem to... clearly to allow that and I think it would be extraordinary reading of the Bankruptcy Code to think that a court can impose, as a condition on a voluntary dismissal that's entirely within the discretion of the debtor to seek.
Justice Kennedy: Well, that--
Ms Millett: We do not accept--
Justice Kennedy: --That... that brings me to this question.
Suppose I thought that section 105(a) was the best basis for an authority for a tolling rule under the abuse of process.
Would it follow that the tolling rule has to be on a case-by-case basis to determine if they're good faith, or can I say because of abuse of process, we're going to have a general tolling rule?
Ms Millett: --The Court has the authority to impose uniform rules of equitable tolling.
It did that in the Burnett v. New York transportation case.
That was a Federal employer liability action--
Justice Kennedy: But is that consistent with my assumed approach of just hinging the rule on the abuse of process?
Ms Millett: --I think what it would be consistent... equitable tolling as... equitable estoppel tends on the behavior of bad faith of the person who's--
Justice Kennedy: Yes.
Ms Millett: --here the... the debtor.
Equitable tolling turns upon the legal disabilities imposed on the person who wants to enforce their claim.
And that isn't going to change from case to case, as in Bowen v. City of New York where this Court again applied a class-wide rule of tolling because the Government's actions with the Social Security plaintiffs in that case had been the same.
Justice Breyer: Your argument doesn't hinge on bad faith, anyway, as I understand it.
Ms Millett: No.
No, it doesn't.
Justice Breyer: You... you assert that... that without the tolling, we would frustrate Congress' intent even where there has been no bad faith, that Congress would not have intended where there's good faith to give the person an added... an added couple of years of... of no taxes.
Ms Millett: Of no taxes or to get out of paying their taxes or to relegate the Government to this lowest subsidiary position within the bankruptcy process.
But uniform rules have been applied by this Court when that circumstance doesn't change, and in this case for purposes of equitable tolling, what's not going to change is that the Government hasn't had the time Congress gave it in the statute.
That's going to be the same.
Beyond that, amount of tax liability shouldn't matter.
That's a judgment for... for Congress and the Government to take.
It's not... it shouldn't... equitable tolling shouldn't turn upon that, and the bad faith or good faith of the taxpayer wouldn't be determinative.
And in that regard, I think it's important to keep in mind that if we had a test where we had to show bad faith in every one of these cases, again we're talking about an enormous volume of bankruptcy cases.
And... and showing... in those... in those circuits where they have applied this sort of case-by-case equitable tolling, the Government has had to be very selective in which cases it decides to make that showing, giving a lot of people a pass on taxes.
And those proceedings can take 9 to 12 months.
You have to have discovery and full-blown hearings on people's faith and intentions and that really is not what the purpose of the Bankruptcy Code is for.
Justice Ginsburg: Ms. Millett, would you remind me?
I think that Congress wanted the Government to have 3 years, and that was a cutting back on what the Government had before.
Ms Millett: Absolutely.
Justice Ginsburg: They said, we gave you too much.
We're now giving you 3 years.
Ms Millett: Absolutely, and that's why I think it... it's extraordinary to think that Congress... Congress went to the steps that you would have to decide, if you decide this is not a collection period and akin to a statute of limitations, because prior to 1966, these tax claims, regardless of age, were all entitled to priority and were all nondischargeable.
And what Congress did in 1966 was decide it was going to balance competing interests within the bankruptcy process and condition the Government's entitlement to that special status on its diligent enforcement of those tax claims.
And that is why it's like a statute of limitations.
But to hold otherwise is to say that what Congress went to in 1966 was a situation where everything was protected to where nothing is protected except at the sole discretion and choice of the debtor proceeding in bankruptcy.
The Government will be left with no capacity.
We can't choose our... we can't choose our debtors, and we will... and they have the entire authority to prevent any enforcement.
And we're not just talking about enforcement of claims that arose before they filed bankruptcy.
If you have bankruptcy proceedings that go on for more than 3 years, as many do, this... this rule would apply to tax claims that arose while the case was in bankruptcy and the 3 years ran.
And that in fact is what has happened in a case we have pending in the Fifth Circuit.
If they can discharge not just the things that you may have had a few months before... or a year before the bankruptcy was filed, tax claims that we have never had a millisecond outside the freedom of the automatic stay to enforce will be extinguished, not because of anything the Government did or did not do, but solely because of the procedural steps taken by the debtor in Bankruptcy Court.
And we think it's extraordinary to think that that's what Congress did and intended to do in 1966.
The... it went for that transformation.
And statutes aren't to be construed to assume that Congress would imperil State or Federal revenues.
Justice Scalia: Of course, I don't think anybody suggests that Congress intended the result.
The question really is whether... assume we know exactly what Congress intended.
Do we have the authority to fill a gap in the statute anyway without, you know, the express text?
Ms Millett: And I think equitable tolling, particularly in the context of traditional equity courts like bankruptcy and traditional equity proceedings, is appropriate.
Again, in American Pipe, this... thank you.
Chief Justice Rehnquist: Thank you, Ms. Millett.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 00-1567, Young against the United States will be announced by Justice Scalia.
Argument of Justice Scalia
Mr. Scalia: This case comes to us on writ of certiorari to the United States Court of Appeals for the First Circuit.
The Bankruptcy Code provides that income tax indebtedness has eighth priority in bankruptcy and is non-dischargeable.
This provision applies however only to tax indebtedness pertaining to returns due within three years before filing of the bankruptcy petition.
This is commonly known as a three-year lookback period.
The Internal Revenue Service assessed the tax liability against petitioner's Cornelius and Suzanne Young for their failure to include payment with their 1992 income tax return filed on October 15, 1993.
They have gotten an extension from the normal filing date.
On May 1, 1996, slightly less than three years later, the Young’s filed a Chapter 13 Bankruptcy Petition which looks to reorganization of indebtedness.
They move to dismiss this petition however before a reorganization plan was approved.
On March 12, 1997, the day before the Bankruptcy Court dismissed the Chapter 13 petition; the Young’s filed another Bankruptcy petition, this time under Chapter 7.
A discharge was ultimately granted and the case was closed.
When the IRS subsequently demanded that they pay the tax debt, petitioners asked the Bankruptcy Court to reopen the Chapter 7 case and declare the tax debt discharge.
Since the debt pertain to a tax return due more than three years before their Chapter 7 filing, petitioners argue that it fell outside the Bankruptcy Code three-year lookback period and therefore had been discharged.
The Court reopened the case but sided with the IRS.
Petitioner’s tax return was indeed due more than three years before their Chapter 7 filing but it was also due less than three years before their earlier Chapter 13 filing.
Holding that lookback period is tolled suspended during the pendency of a prior bankruptcy petition, the court concluded that 1992 debt had not been discharged.
The District Court and the First Circuit agreed.
The lookback period we conclude is a limitations period subject to traditional equitable tolling principles.
Petitioners contend it is a substantive component of the Bankruptcy Code not a procedural limitations period for two reasons: first, because it defines a subset of claims that received special priority in bankruptcy; and second because the IRS may discover an unpaid tax after the three-year lookback period has commenced.
We find these arguments unpersuasive.
All limitations periods define a subset of claims that are eligible for certain remedies and it is not uncommon for limitations period to commence before claimant is aware that he has a complete and present cause of action.
Congress is presumed to draft limitations periods in light of the principle that such periods are subject to equitable tolling unless tolling would be inconsistent with statutory text.
We believe tolling is appropriate here.
Petitioner’s Chapter 13 petition are acted on automatic stay under Section 362(a) of the Bankruptcy Code which prevented the Internal Revenue Service from taking any steps to collect the unpaid taxes.
When petitioners later filed a Chapter 7 petition, the three-year lookback period therefore excluded time during which their Chapter 13 was pending.
Because their 1992 tax return was due within the three-year lookback period after accounting for tolling the lower courts properly held that petitioner’s tax debt was not discharged when they were granted a Chapter 7 discharge.
The Court’s decision is unanimous.