Where Chapter 13 Debtors Plan Did Not Provide for Discharge of Priority Tax Claim, Due Process Prevented Debtors from Relying on Espinosa to Discharge the Claim

Where Chapter 13 Debtors Plan Did Not Provide for Discharge of Priority Tax Claim, Due Process Prevented Debtors from Relying on Espinosa to Discharge the Claim

At issue was whether the Internal Revenue Service (IRS) May Collect any Interest on the Responsible Officer Assessment of 941 Taxes Post-Discharge.

In 2009, the Debtors petitioned for relief under Chapter 13 of the Bankruptcy Code. Husband owned and operated two construction remodeling businesses prior to the petition. He sold the businesses on May 26, 2007. On August 12, 2009, the IRS filed a Proof of Claim, pursuant to 11 U.S.C. § 507(a)(8) instituting a priority tax claim.  Claim No. 8 asserts individual liability against the Debtors for unpaid trust fund taxes for the periods ending on March 31 and June 30, 2007, in the amount of $34,797.75, collectively $69,595.50.  By Agreed Order, dated September 22, 2009, the parties stipulated to joint liability of one allowed priority tax claim totaling $34,797.75, payable to the Service. The Agreed Order clarified the Service’s intent to collect the unpaid taxes only once while also reflecting that the Debtors were jointly and severally liable on the obligation.

Absent objection, the Amended Chapter 13 Plan was confirmed by Order on July 8, 2011. The Confirmation Order provided for payment in full of the IRS’ $34,797.75 allowed priority tax claim. Monthly payments were made by the Chapter 13 Trustee in the amount of $579.39 over the 60-month life of the plan and ensured full payment of Claim No. 8. Consistent with §502(a)(2), the Confirmed Amended Chapter 13 Plan did not include post-petition interest on Claim No. 8.

The Debtors made all required payments under the confirmed Amended Chapter 13 Plan and filed affidavits of plan completion and requests for discharge in March 2016. Absent objection, the Court entered an Order of Discharge on April 5, 2016. On June 1, 2016, the Chapter 13 Trustee submitted the Final Report and Account of Completed Case, identifying Claim No. 8 as paid in full and attesting that “the estate has been fully administered.”

On May 2, 2016, the IRS mailed Husband two Notices of Intent to Levy. The first notice stated “[a]s [the Internal Revenue Service] notified you before, our records show you have unpaid taxes for the year ending March 31, 2007” in the amount of $590.43.  The second notice stated “[a]s [the Internal Revenue Service] notified you before, our records show you have unpaid taxes for the year ending June 30, 2007” in the amount of $3,057.76. The notices contained the following language: “If you don’t pay by May 12, 2016, we may seize (“levy”) your property or rights to property (including any state tax refunds).” The IRS did in fact levy Husband’s 2015 state tax refund. By letter dated May 2, 2016, the Service informed Husband that $1,660 of his 2015 tax return was applied to the balance of his outstanding 2007 taxes.

On August 18, 2016, the Debtors moved for a determination of whether the Service may collect interest on the responsible officer assessment of 941 taxes post-discharge. They argue that the IRS’ priority tax claim, Claim No. 8, was paid in full upon completion of the Chapter 13 Plan, as signified by the Order of Discharge. The Debtors emphasize the predecessor judicial officer’s statement during the confirmation hearing that the Debtors’ proposed plan treated the Service as “fully paid.” The  responds that trust fund recovery penalty taxes, and certainly post-petition interest accruing thereon, are nondischargeable, even upon successful completion of a Chapter 13 plan.

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