Judge Mashburn yesterday issued a written opinion on equitable tolling of the lookback period under § 523(a)(1)(B)(ii), which affects the dischargeability of tax debt. The opinion holds that equitable tolling does apply, expanding the debt excepted from discharge.
Section 523(a) sets out three types of tax debt excepted from discharge:
Debt that would be entitled to priority;
Debt for which the debtor failed to file a return or filed a late return within two years before filing the petition; or
Debt for which a debtor made a fraudulent return or willfully attempted to evade or defeat the tax.
Judge Mashburn’s opinion relates to the second exception, codified in § 523(a)(1)(B)(ii). The question was whether equitable tolling applied to extend the two-year lookback period for nondischargeability. The debtor in the case had filed several late tax returns just before filing an earlier, unsuccessful Chapter 13 case in 2011. That case lasted a little more than two years before being dismissed. The debtor filed another Chapter 13 case in 2014. At that point, more than two years had passed since the debtor had filed the late returns. Without tolling of the lookback period, the discharge exception under § 523(a)(1)(B)(ii) would not have applied (and the debt would presumably have been subject to discharge).
The equitable concern is that the automatic stay in the prior case prohibited the IRS from collecting the debt during nearly all of the two-year lookback period. Judge Mashburn reviewed Supreme Court precedent relating to equitable tolling, especially Young v. United States, 535 U.S. 43 (2002), and concluded that equitable tolling would apply, meaning that the clock on the two-year lookback under § 523(a)(1)(B)(ii) stopped during the time the debtor was in the earlier Chapter 13 case.
The case is an interesting look at the question of equitable tolling. It’s also a good reminder that it’s not safe to assume that a Chapter 13 plan deals with all nondischargeable tax debt just because it provides for all priority tax debt. The Code provides some exceptions to discharge for nonpriority tax debt as well.