Tenholder et al v. USA et al

Filing 13

ORDER AFFIRMING decision of the bankruptcy court. See Order for details. Signed by Judge David R. Herndon on 9/17/2018. (jer)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS

ANGELA L. TENHOLDER and
RANDY C. TENHOLDER,
Debtor-Appellants,

Case No. 17-cv-1310-DRH

Advisory Case No. 17-3021-WVA
Bankruptcy Case No. 15-32093-LKG

vs.
UNITED STATES OF AMERICA,
INTERNAL REVENUE SERVICE,
Claimant-Appellee.

MEMORANDUM & ORDER
HERNDON, District Judge:
I. Introduction
This is an appeal from the bankruptcy court’s November 20, 2017 Order
granting summary judgment in favor of Plaintiff United States of America, Internal
Revenue Service (hereinafter “IRS”) and against Angela L. Tenholder and Randy C.
Tenholder (hereinafter “Debtors-Appellants”) on the parties’ cross-motions for
summary judgment. The bankruptcy court determined in its November 20 Order
that the Debtors-Appellants’ federal income tax liability for 2011 falls within the
three-year statutory lookback window and is thus non-dischargeable under 11
U.S.C. § 523(a)(1)(A). In reaching its decision, the bankruptcy court reasoned that
the IRS’ collection of a tax by levy is tolled during the pendency of a collection due
process hearing and thus the three-year statutory lookback applies to DebtorsPage 1 of 13

Appellants’ 2011 federal income tax liability. For the reasons set forth below, the
Court AFFIRMS the bankruptcy court’s Order.
II. Background
On December 30, 2015, the Debtors-Appellants filed a bankruptcy petition
under Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. §§ 101, et seq.
(the “Bankruptcy Code”). On March 15, 2017, the bankruptcy court entered a
final decree and the underlying bankruptcy case under Case No. 15-32093-LKG
was closed. On April 28, 2017, the bankruptcy case was reopened solely for the
purpose of commencing an adversary proceeding against the IRS to determine the
dischargeability of the Debtors-Appellants’ certain tax debts and on May 4, 2017
the Debtors-Appellants filed their advisory complaint against the IRS. (Adv. Case,
Doc. 1). 1 On May 30, the IRS filed its answer. (Adv. Case, Doc. 4).
Thereafter, on July 7, 2017 the IRS filed a motion for summary judgment
(Adv. Case, Doc. 9) arguing that the “flush paragraph” 2 found at the end of 11
U.S.C. § 507(a)(8) applies to a collection due process (hereinafter “CDP”) hearing
request and thus tolls the three-year lookback period. 3 (Adv. Case, Doc. 9). The
unnumbered paragraph containing the flush language provides that:
An otherwise applicable time period specified in this paragraph shall
be suspended for any period during which a governmental unit is
1

The designation of “Adv. Case” refers to documents related to Advisory Case No. 17-3021-WVA.
The paragraph is referred to in the cited cases as the “unnumbered paragraph,” the “flush
paragraph,” the “suspension paragraph,” and the “hanging paragraph.” The Court will use “flush
language.”
3
Relevant dates in this case: (1) December 30, 2015 – Bankruptcy Case No. 15-32093 filed; (2)
December 30, 2012 – the statutory three-year lookback deadline for dischargeability of DebtorsCreditors tax obligations; (3) October 15, 2012 – Debtors-Creditors’ 2011 income tax return was
due; (4) March 8, 2012 – the three-year lookback deadline that the IRS argues should apply under
§ 507(a)(8)’s flush language.
2

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prohibited under applicable nonbankruptcy law from collecting a tax
as a result of a request by the debtor for a hearing and an appeal of
any collection taken or proposed against the debtor, plus 90 days.
11 U.S.C. § 507(a)(8) (emphasis added). (Adv. Case, Doc. 9).
Applying the above language to the present case, the IRS argues that the threeyear lookback period tolled once the Debtors-Appellants filed with the IRS a CDP
hearing request on July 22, 2013 and the CDP matter remained pending until
February 14, 2014 for a total of 207 days. The flush language of § 507(a)(8) adds
another 90 days to the tolling period for a period of 297 days. The IRS argues that
under § 507(a)(8) this 297 days must be excluded from the three-year lookback
period which then extends the period from December 30, 2012 back to March 8,
2012. Thus, the Debtors-Appellants’ 2011 income tax return due on October 15,
2012 is within the extended lookback period making it non-dischargeable under §
523(a)(1)(A).
Thereafter, on August 15, 2017, Debtors-Appellants filed a cross-motion for
summary judgment (Adv. Case, Doc. 16) arguing in their memorandum (Adv.
Case, Doc. 17) that § 507(a)(8)’s flush language unambiguously states that the
three-year lookback period is suspended only for that period which a
governmental unit is prohibited from collecting a tax. Debtors-Appellants further
contend that § 507(a)(8)’s tolling provision does not apply in the present case
because, during the pendency of Debtor-Appellants’ CDP matter, the IRS was not
completely prohibited from collecting tax obligations. Rather, the IRS temporarily
relinquished its ability throughout the 207-day CDP period to levy upon Debtors-

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Appellants’ property, however, other collection methods such as collection by
offset and the initiation of a judicial proceeding were still permissible. More
specifically, the Debtors-Appellants argue that the plain meaning of “prohibited
from collecting a tax” means that § 507(a)(8)’s tolling of the three-year lookback
period only applies when the IRS is prohibited from all collection activity, not just
a prohibition from levying. Thus, the three-year lookback period should not be
tolled during the pendency of a CDP matter because the IRS is not prohibited
under 26 U.S.C. § 6330 4 from all collection activity. Therefore, the DebtorsAppellants’ 2011 income tax return due on October 15, 2012 is not within the
lookback period making it dischargeable under § 523(a)(1)(A).
Thereafter, on November 20, 2017, the bankruptcy court entered its Order
granting summary judgment in favor of the IRS and against the DebtorsAppellants on the parties’ cross-motions for summary judgment. The bankruptcy
court determined that the Debtors-Appellants’ federal income tax liability for 2011
falls within the three-year statutory lookback window and is thus nondischargeable under § 523(a)(1)(A).
III. Applicable Law
1. Dual Standard
Pursuant to 28 U.S.C. § 158, a federal district court has jurisdiction to hear
appeals from the rulings of the bankruptcy court. District courts apply a dual

4

The “non-bankruptcy law” referenced in § 507(a)(8) can be found in § 6330 of the Internal
Revenue Code, 26 U.S.C. § 6330, and Internal Revenue Regulation 301.6330-1, 26 C.F.R. § 3016330-1. Section 6330 of the Internal Revenue Code and regulation prohibit a levy to collect a tax if
a taxpayer has requested a CDP.

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standard of review in bankruptcy appeals. The bankruptcy judge's findings of fact
are reviewed for clear error, while conclusions of law are reviewed de novo. First

Weber Group, Inc. v. Horsfall, 738 F.3d 767, 776 (7th Cir. 2013); Stamat v.
Neary, 635 F.3d 974, 979 (7th Cir. 2011); Wiese v. Cmty. Bank of Cent. Wis., 552
F.3d 584, 588 (7th Cir. 2009) In re ABC-Naco, Inc., 483 F.3d 470, 472 (7th Cir.
2007). “A finding is ‘clearly erroneous' when although there is evidence to support
it, the reviewing court on the entire evidence is left with a definite and firm
conviction that a mistake has been committed.” Anderson v. Bessemer City, 470
U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v.

U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). The
Court reviews mixed questions of fact and law de novo. Mungo v. Taylor, 355 F.3d
969, 974 (7th Cir. 2004).
2. Summary Judgment Standard
Summary judgment is appropriate only if the admissible evidence
considered as a whole shows there is no genuine issue as to any material fact and
the movant is entitled to judgment as a matter of law. Archdiocese of Milwaukee v.

Doe, 743 F.3d 1101, 1105 (7th Cir. 2014) (citing Fed. R. Civ. P. 56(a)). The party
seeking summary judgment bears the initial burden of demonstrating – based on
the pleadings, affidavits and/or information obtained via discovery – the lack of
any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986). A genuine issue of material fact remains “if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Anderson v.

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Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); accord Bunn v. Khoury Enterpr.
Inc., 753 F.3d 676 (7th Cir. 2014).
In assessing a summary judgment motion, the district court normally views
the facts in the light most favorable to, and draws all reasonable inferences in
favor of, the nonmoving party. Anderson v. Donahoe, 699 F.3d 989, 994 (7th Cir.
2012); Righi v. SMC Corp., 632 F.3d 404, 408 (7th Cir. 2011); Delapaz v.

Richardson, 634 F.3d 895, 899 (7th Cir. 2011).

As the Seventh Circuit has

explained, as required by Rule 56(a), “we set forth the facts by examining the
evidence in the light reasonably most favorable to the non-moving party, giving
[him] the benefit of reasonable, favorable inferences and resolving conflicts in the
evidence in [his] favor.” Spaine v. Community Contacts, Inc., 756 F.3d 542, 544
(7th Cir. 2014).
IV. Analysis
In this case, Debtors-Appellants present one issue as the basis for their
appeal of the bankruptcy court’s Order concerning the IRS’ motion for summary
judgment and the Debtors-Appellants’ cross motion for summary judgment:
whether the bankruptcy court erred in granting summary judgment in favor of the
IRS on the basis that as a matter of law the Debtors-Appellants’ 2011 income tax
is non-dischargeable because the IRS’ inability to collect the tax by levy during the
pendency of the CDP hearing was sufficient to toll the three-year lookback period
of § 507(a)(8).
The bankruptcy court did not err when determining Debtors-Appellants’
2011 federal income tax is non-dischargeable.
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Debtors-Appellants argue that the bankruptcy court committed reversible
error by granting summary judgment for the IRS on the basis that DebtorsAppellants’ 2011 federal income tax is non-dischargeable. Specifically, DebtorsAppellants argue that the bankruptcy court erred by relying on the holdings in

Console v. C.I.R., 291 Fed. Appx. 234 (11th Cir. 2008) and In re Lastra, No. 121188, 2012 WL 6681739 (Bankr. D.N.M. Dec. 21, 2012). The IRS argues that the
bankruptcy court correctly granted summary judgment in its favor because the
IRS is entitled to judgment as a matter of law regarding the dischargeablility of the
Debtors-Appellants’ federal income tax liability for 2011.
A determination of the sole issue on appeal involves the interaction of
several sections of the Bankruptcy Code, 6330(e) of the Internal Revenue Code
and Internal Revenue Regulation 301.6330-1, as well as an application of the
flush language found in § 507(a)(8) of the Bankruptcy Code.
Section 523(a)(1)(A) of the Bankruptcy Code, excepts from discharge a tax
“of the kind and for the periods specified in . . . § 507(a)(8) . . . .” Section
507(a)(8) references a tax for which a return is last due after three years before
the date of the filing of a bankruptcy petition. At the end of § 507(a)(8), there is an
unnumbered paragraph that contains flush language which tolls the three-year
lookback period for any period which “a governmental unit is prohibited under
applicable nonbankruptcy law from collecting a tax as a result of a request by the
debtor for a hearing and an appeal of any collection taken or proposed against the
debtor, plus 90 days.” Id.
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The “non-bankruptcy law” referenced in § 507(a)(8) can be found in § 6330
of the Internal Revenue Code, 26 U.S.C. § 6330, and Internal Revenue Regulation
301.6330-1, 26 C.F.R. § 301-6330-1. Section 6330 of the Internal Revenue Code
and regulation prohibit a levy to collect a tax if a taxpayer has requested a CDP.

Id.
In Console v. C.I.R, a debtor requested a CDP hearing. 291 F. App'x 234,
238 (11th Cir. 2008). Under § 6330(e), a CDP hearing request prohibits the IRS
from collecting tax by levy from the time the request is filed until the CDP matter
is resolved. 26 U.S.C. § 6330. The Eleventh Circuit held that:
A CDP hearing request prohibits the IRS from collecting tax by levy
from the time the request is filed until appeals from the hearing are
resolved, 26 U.S.C. § 6330(e), and is therefore a tolling event under
11 U.S.C. § 507(a)(8)'s flush paragraph. Thus, the three year period
of 11 U.S.C. § 507(a)(8)(A)(i) has been suspended since February 14,
2005. And because February 14, 2005 is less than three years after
Console's 2001 return was due, Console's 2001 tax liability is nondischargeable under 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8).

Console, 291 F. App'x at 238.
In In re Abir, a debtor requested a CDP hearing. No. 08-70566-478, 2010
WL 421124, at *5 (Bankr. E.D.N.Y. Feb. 1, 2010). The bankruptcy court held that
the CDP period of 790 days for tax years 2000-03 tolled the three-year lookback
period making the debtors’ tax liabilities for those years nondischargeable. Id. at
*1-3.
Similarly, in In re Lastra, a debtor again requested a CDP hearing. No. 712-10560 TA, 2012 WL 6681739, at *3 (Bankr. D.N.M. Dec. 21, 2012). When
determining whether the debtor’s CDP hearing tolled the three-year lookback
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period, the bankruptcy court found that § 507(a)(8)’s flush language is ambiguous
by stating:
The hanging paragraph does not make clear whether Defendant must
be prohibited from all collection activities, or just some collection
activities, before the three-year lookback period is tolled. When a
statutory term is ambiguous, the Court should examine the legislative
history to determine and give effect to Congress's intent. Branson
School Dist. RE–82 v. Romer, 161 F.3d 619, 637 (10th Cir.1998).
The legislative history associated with the hanging paragraph shows
clearly that Congress intended the paragraph to apply to CDP hearing
requests. The hanging paragraph was added to “include[ ] tolling
provisions to adjust for the collection due process rights by provided
by the Internal Revenue Service Restructuring and Reform Act of
1998.” Public Law 109–8, 119 Stat. 126 (2005).

Id.
After reviewing Congressional intent behind § 507(a)(8)’s flush language, the
bankruptcy court held that “Congress intended to toll the three-year lookback
period if a taxpayer filed a CDP hearing request and later filed for bankruptcy
relief.” Id.
Here, Debtors-Appellants take issue with the bankruptcy court’s reliance on

Console and In re Lastra. Specifically, Debtors-Appellants strongly take issue with
the In re Lastra court’s conclusion that § 507(a)(8)’s flush language is ambiguous.
As previously stated, the flush language at issue is as follows: “a governmental
unit is prohibited under applicable nonbankruptcy law from collecting a tax.” §
507(a)(8). The Debtors-Appellants contend that the above language is not
ambiguous and interpret it to mean that the IRS is only prohibited under
applicable non-bankruptcy law from collecting a tax if there is a complete
prohibition on all collection activity. Section 6330 and regulation prohibit a levy
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to collect a tax if a taxpayer has requested a collection due process hearing but it
does not prohibit other means of collection (e.g. offsetting overpayments from
other periods). Therefore, Debtors-Appellants contend that § 507(a)(8)’s tolling
provision does not apply in the present case because the IRS was not completely
prohibited from collecting tax obligations during the pendency of DebtorAppellant’s CDP matter.
The IRS contends that the plain meaning of the statutory text of § 507(a)(8)
and § 6630 support its position that the tolling provision does not require a
prohibition on all collection activity. The statutory text of § 507(a)(8) does not
state that the IRS must be prohibited from using all methods of tax collection for
the provision to apply. Rather, the IRS is prohibited under § 6630(e) from
collecting a tax through levy which satisfies § 507(a)(8) because § 6630(e) is a
non-bankruptcy law prohibiting the collection of a tax.
The

parties

have

provided

two

interpretations

of

the

phrase

“a

governmental unit is prohibited under applicable nonbankruptcy law from
collecting a tax.” Therefore, it necessary to determine whether the flush language
of § 507(a)(8) is ambiguous.
The term “prohibited” contained within 11 U.S.C. § 507(a)(8)’s flush
language is ambiguous.
It is well settled that “when the statute's language is plain, the sole function
of the courts—at least where the disposition required by the text is not absurd—is
to enforce it according to its terms.” Hartford Underwriters Ins. Co. v. Union

Planters Bank, N. A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000)
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(internal quotation marks omitted) (quoting United States v. Ron Pair

Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), in
turn quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61
L.Ed. 442 (1917)).
Debtors-Appellants argue that “As is clearly evident in the construction of
this statutory provision, only a prohibition on collection efforts will trigger the
suspension of the look back period. The term “prohibit” is defined by Black’s Law
Dictionary as: “(1) to forbid by law; (2) to prevent, preclude, or severely hinder.”

Black’s Law Dictionary (10th ed. 2014).” (Adv. Case, Doc. 9). Debtors-Appellants
further argue that:
There is no evidence on that on its face Congress intended to forbid,
prevent, preclude or even severely hinder the IRS’ collection efforts
during the CDP investigation under this Code provision. While,
inarguably, the IRS may not have been permitted to levy upon the
Tenholders’ property during the CDP investigative period, it was
undoubtedly authorized to proceed with other forms of collection.
See 26 C.F.R. § 301.6330-1(g)(2). Accordingly, the In re Lastra
court’s blanket conclusion that the CDP is a collection mechanism
that fits within this tolling provision was not well-founded, it is not
binding precedent, and its holding should not be applied in the
instant case.
(Adv. Case, Doc. 9).
The Court disagrees with Debtors-Appellants previous contentions for several
reasons. First, as defined by Black’s Law Dictionary, the term “prohibited” can
mean forbid, prevent, preclude, or severely hinder. On its face, § 6330 clearly
prohibits a levy to collect a tax if a taxpayer has requested a CDP hearing. Next,
levying is one of the IRS’ primary forms of collection activity because it is a

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method to legally seize a taxpayer’s property. 5 By prohibiting all levying during the
pendency of a CDP matter, it is reasonable to interpret § 6330 as severely
hindering the IRS’ ability to collect a tax as it relates to § 507(a)(8). Finally, it
would lead to an absurd result for the term “prohibited,” as used in § 507(a)(8), to
mean both forbidding, precluding, preventing all collection activity and severely
hindering collection activity; it is one or the other based on Black’s Law
Dictionary definition of “prohibited.” However, it is unclear on the face of §
507(a)(8) how Congress intended to use the term “prohibited.” Therefore, both
parties’ interpretations of the flush language are reasonable, and the Court holds
that the flush language of § 507(a)(8) is ambiguous.
Having found the flush language to be ambiguous, the Court should
examine the legislative history to determine and give effect to Congress’ intent
behind the term “prohibited.” As the In re Lastra court found, the legislative
history associated with the flush language shows that Congress intended the
language to apply to CDP matters. See H.R. REP. 109-31(I), 101, 2005
U.S.C.C.A.N. 88, 165 (“It also includes tolling provisions to adjust for the
collection due process rights provided by the Internal Revenue Service
Restructuring and Reform Act of 1998.”). Therefore, the bankruptcy court did not
err in granting summary judgment in favor of the IRS on the basis that as a
matter of law the Debtors-Appellants’ 2011 income tax is non-dischargeable. The
IRS’ inability to collect the tax by levy during the pendency of the CDP hearing was
sufficient to toll the three-year lookback period of § 507(a)(8).
5

See The IRS Collection Process, I.R.S. Pub. 594 (2018), https://www.irs.gov/pub/irs-pdf/p594.pdf.

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As a practical matter, the interaction between § 507(a)(8) and § 6630(e)
makes sense because it reasonably balances the interests for both the taxpayer
and the IRS. Once a taxpayer files a CDP request regarding a specific tax
obligation, they receive a benefit under § 6630(e) because during the pendency of
the CDP matter the IRS is prohibited from collecting by levy the tax obligation at
issue. It is reasonable then for § 507(a)(8) to toll the three-year lookback window
during the time the IRS is prevented from using one of its primary forms of
collection methods to legally seize a taxpayer’s property.
V. Conclusion
Accordingly, the bankruptcy court’s Order granting in favor of the IRS and
against the Debtors-Appellants in the parties’ cross-motions for summary
judgment is AFFIRMED.
IT IS SO ORDERED.

Judge Herndon
2018.09.17 11:00:03
-05'00'
United States District Judge

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