Eleventh Circuit Court of Appeals Addresses Effective Date of Plan Impact on IRS Assessment of Taxes after Confirmation Date
by Mychal A. Bruggeman
Mackall, Crounse & Moore PLC; Minneapolis
In United States v. White, 466 F.3d 1241 (11th Cir. 2006), the circuit court held that an “effective date” established for a chapter 11 plan that occurred two months after the date of the plan’s confirmation did not alter the date of the taxpayer’s discharge, and therefore the Internal Revenue Service (IRS) could assess additional taxes immediately after the confirmation date. Such an assessment was not against the property of the estate, but against the taxpayer himself.
The taxpayer was the president and sole shareholder of a corporation that failed to pay U.S. income and trust-fund taxes that were required to be withheld from its employees’ paychecks. The taxpayer filed a petition for reorganization under chapter 11, and the bankruptcy court confirmed his plan on May 18, 1994. The plan had an “effective date” of July 17, 1994, after which time the title and ownership of the estate’s assets would re-vest in the taxpayer. Prior to the effective date, on July 4, 1993, the IRS assessed trust-fund penalties under 26 U.S.C. §6672 against the taxpayer.
The taxpayer argued that because the plan identified an effective date, the automatic stay remained in effect until that date and that the IRS assessment violated the stay. Alternatively, the taxpayer argued that the assessment violated the stay because it was directed against the property of the estate, which would not re-vest in the debtor until the “effective date.” The district court agreed with the taxpayer, but the circuit court reversed.
Under §362 of the Bankruptcy Code, the automatic stay lifts upon the debtor’s discharge. Under the rules existing at the time the taxpayer filed his petition in 1994, a debtor reorganizing under chapter 11 received a discharge on the date of the plan confirmation unless the plan or the order confirming the plan provided otherwise. In White, the taxpayer argued that the plan’s creation of an “effective date” provided a separate date of discharge from the date of confirmation. The court found that the creation of an effective date alone is not sufficient to otherwise change the date of discharge. Most notably, the court found that the Code makes numerous references to the “effective date” of chapter 11 reorganization plans, but does not include the concept of the effective date anywhere in §1141, where the Code states that “the confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation.” The court reasoned that “had Congress intended to condition discharges on a plan’s taking effect, it would have done so explicitly.”
The court also determined that the assessment was against the taxpayer and not against the property of the estate. As opposed to a levy against property, the IRS assessment was “merely a bookkeeping entry noting a taxpayer’s delinquency.” The court held that the IRS could assess debts against the taxpayer because the automatic stay lifts in regards to acts against the debtor under §362(c)(2) after the confirmation of the plan.
The court rejected an additional argument by the taxpayer that the IRS could not assess the tax because it was nondischargeable debt. The court noted that confirmation of a bankruptcy plan grants the debtor a discharge and imposes a permanent injunction against any further collection activities. This injunction, however, only applies to dischargeable debts, and not nondischargeable debts such as trust-fund taxes.
The court acknowledged that two amendments to the Bankruptcy Code enacted since the filing of the taxpayer’s petition in White would affect the analysis. First, in 1994, Congress amended §362 to provide that the automatic stay does not prohibit tax assessments. Second, in 2005, Congress amended §1141 by changing the time of the debtor’s discharge from the date of confirmation to the date the debtor completes all the payments under the plan.