Judge Karlin

13-41499 Martinez (Doc. # 45) - Document Text

SIGNED this 14th day of April, 2014.



In re:

Mary Martinez Case No. 13-41499
Chapter 13


Debtor Mary Martinez (Debtor) objected to Claim #22, a claim for unpaid
taxes filed by the creditor Internal Revenue Service (IRS).1 Debtor argues that the
portion of the claim attributable to the 2009 tax year should be classified as a
general unsecured debt. In response, IRS argues that the 2009 taxes are entitled to
priority status because they fall within the three year “look-back” period between
the day the taxes became due and the day Debtor filed her bankruptcy petition.2
Although more than three years elapsed, IRS argues that it gets the benefit of the

1 Doc. 15.
2 Doc. 19.

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tolling period plus an additional 90-day grace period under 11 U.S.C. § 507(a)(8)(A)
because of the automatic stay imposed due to Debtor’s previous bankruptcy filing
within the look-back period. In response, Debtor urges the Court to exercise “good
conscience and equity” to deny IRS the benefit of part of the tolling period because
she claims it violated the automatic stay during her prior bankruptcy. For the
reasons explained below, the Court overrules Debtor’s objection to IRS’s claim.

The parties have stipulated to certain facts.3 Based on the stipulations, the
Court makes the following findings of fact.

Although Debtor filed a timely 2009 tax return, she failed to report certain
self-employment income. After filing the 2009 return— but before she filed her
current bankruptcy petition on October 25, 2013,4 Debtor filed a chapter 13 petition
(in 2012) that was ultimately dismissed before she received a discharge. Her 2012
bankruptcy created an automatic stay that lasted 184 days.

 IRS timely filed a proof of claim in this bankruptcy for $8,823.55,5 claiming
Debtor owes taxes for the 2009, 2011, and 2012 tax years. The claim indicates
$6,740.59 is entitled to priority status under 11 U.S.C. § 507(a)(8). Debtor filed an
objection to this claim,6 alleging the $4,959 debt claimed for the tax period ending

3 Doc. 33.

4 Doc. 1.

5 Claim 3-1.

6 Doc. 15.


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December 31, 2009 should be classified as an unsecured general claim instead of as

a priority claim.

II. Analysis
This matter is a core proceeding over which the Court has jurisdiction,7 and

the parties do not contest the Court’s jurisdiction. “The burden of proving

entitlement to a priority is on the person claiming priority,”8 and statutory

priorities are construed narrowly.9

IRS bases its claim on 11 U.S.C. § 507(a)(8)(A), which governs the priority of

unsecured tax claims of governmental units. That section allows IRS to maintain

priority status for:

unsecured claims of governmental units, only to the extent

that such claims are for–

(A) a tax on or measured by income or gross receipts for ataxable year ending on or before the date of the filing of thepetition–
(i) for which a return, if required, is last due,
including extensions, after three years before thedate of the filing of the petition;
(ii) assessed within 240 days before the date of thefiling of the petition, exclusive of–
(I) any time during which an offer incompromise with respect to that tax waspending or in effect during that 240-dayperiod, plus 30 days; and
(II) any time during which a stay of
proceedings against collections was in effect ina prior case under this title during that
7 28 U.S.C. § 157(b)(2)(B).

8 Isaac v. Temex Energy (In re Amarex), 853 F.2d 1526, 1530 (10th Cir. 1988).

9 Id.


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240-day period, plus 90 days; or

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523 (a)(1)(C) of this title, not assessedbefore, but assessable, under applicable law or byagreement, after, the commencement of the case.
. . .
An otherwise applicable time period specified in thisparagraph shall be suspended for . . . any time during whichthe stay of proceedings was in effect in a prior case underthis title or during which collection was precluded by theexistence of 1 or more confirmed plans under this title, plus90 days.

The statute provides three possible avenues for the IRS to prove its claim has
priority status. Debtor argues that, although the IRS meets § 507(a)(8)(A)(i), the
statute should be read conjunctively, that is, with an understood “and” between
parts (i) and (ii), such that the IRS would have to meet both parts (i) and (ii) or, in
the alternative, part (iii). Under this reading, satisfying only subsection (i), as the
parties agree the IRS has done, would be insufficient.

The Court finds that, contrary to Debtor’s arguments, § 507(a)(8)(A)(i), (ii),
and (iii) should be read disjunctively—IRS must only show one of these subsections
applies to attain priority status. Although Debtor acknowledges that substantial
case law supports the proposition that these provisions should be read in the
disjunctive, and cites to no Tenth Circuit case law supporting her interpretation,
she nevertheless argues that legislative history suggests Congress might not have
intended to construe the three items disjunctively. In essence, Debtor argues that
because the statute reads “(i), (ii), or (iii),” it is reasonable to place an “and” between

(i) and (ii), which would have the practical effect of requiring IRS to show both (1)

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that the tax became due within three years of the petition and (2) that it assessed
the tax within 240 days of the petition. But this argument is contrary to the plain
language of the statute.

As IRS argues, drafters of statutes commonly use the form (X), (Y), or (Z)
when they mean to say (X) or (Y) or (Z), and this is a generally accepted
formulation.10 “When the term ‘or’ is used, it is presumed to be used in the
disjunctive sense unless the legislative intent is clearly contrary.”11 Debtor’s
argument that the drafters’ use of (X), (Y) or (Z) really means (X) and (Y) or (Z) is
contrary to common sense and common usage, and would certainly depart from
precedent in interpreting this statute. The Court rejects this strained reading of the

Applying the correct reading of § 507(a)(8)(A) to the stipulated facts makes
Debtor’s objection simple to resolve. The tax for the tax year 2009 was due April 15,
2010. Under the three year look-back period, tax debts owing three years from
October 25, 2013—the date of Debtor’s petition—are entitled to priority. One must

10 See, e.g., Hosack v. IRS (In re Hosack), 282 F. App’x. 309, 315 (5th Cir.
2008)(rejecting the disjunctive reading argument); Lastra v. IRS (In re Lastra), No. 121188,
2012 WL 6681739, at *4 (Bankr. D.N.M. Dec. 21, 2012)(Same). See also 4 COLLIER ON
BANKRUPTCY ¶ 507.11[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“A taxmeasured by gross income or gross receipts will be entitled to priority if the tax is for ataxable year ending on or before the date of the filing of the petition and one of three
alternative grounds has been fulfilled.”) (emphasis added); 3 NORTON BANKRUPTCY LAW AND
PRACTICE § 49:50 (3d. ed. 2013) (“Taxes on prepetition income . . . warrant eighth-prioritytreatment in three separate situations. These present alternative bases for obtainingpriority; i.e., a claimant need only qualify under any of the three to receive priority.”)
(emphasis added).

11 United States v. O'Driscoll, 761 F.2d 589, 597–98 (10th Cir. 1985).

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then subtract the 184 days during which the automatic stay was in effect during
Debtor’s first bankruptcy (from July 25, 2012 to January 25, 2013).12 That pushes
the cut-off date back to April 24, 2010. Finally, because the cut-off date is then
pushed back an additional 90 days pursuant to the language at the end of
§507(a)(8),13 the proper cut-off date occurs well before the date when the 2009
return was due.

Debtor makes an additional argument against permitting this priority claim;
she claims this Court should, using its 11 U.S.C. § 105(e) equitable powers, deny
one or both tolling periods. This suggestion is based on her claim that IRS willfully
violated the automatic stay during her first bankruptcy, although she declined to
prosecute such a stay violation during that case. Because IRS needs both the tolling
period from the first bankruptcy and the additional 90-day period to satisfy the
three year look-back rule, denying either tolling period would have the practical
effect of barring IRS from meeting the three year look-back rule. This would result
in IRS not receiving priority treatment for the 2009 taxes.

But the parties agreed to present this objection on stipulated facts, and there
are no stipulated facts, whatsoever, to support Debtor’s claim that IRS willfully
violated the stay in her prior bankruptcy. Fortunately, the Court need not make
any factual findings concerning the considerable discrepancy between Debtor’s

12 United States v. Richards (In re Richards), 994 F.2d 763 (10th Cir. 1993).
13 United States v. Montgomery, 475 B.R. 742 (D. Kan. 2012).

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allegation that IRS levied against Debtor’s wages during her first case and IRS’s
position that Debtor entered into a voluntary payroll deduction before her first
bankruptcy, but then IRS admittedly failed to release that voluntary wage
deduction until Debtor’s counsel demanded it post-filing.

Even assuming Debtor’s version of the facts is accurate—that IRS placed a
lien on Debtor’s pay during her first bankruptcy and collected $50 from each of four
pay periods while the stay was in effect, the Court would not use its equitable
powers to change the tolling period. The alleged harm ($200 of tax collection that
was relatively promptly repaid to Debtor when she brought that fact to the
attention of the U.S. Attorney) is grossly disproportionate to the amount of
sanctions Debtor effectively seeks. If the sanction request were granted, IRS would
lose priority status for $4,959.00 of its claim over what even Debtor admits was a
short-lived period. And the stay violation was apparently so minor that she made no
effort to seek damages for the stay violation when it actually occurred or during the
following months when her bankruptcy was still pending. Further, Debtor’s
description of IRS’s alleged actions does not exhibit any coercion or harassment,
which also militates against sanctioning IRS effectively almost $5,000. Even
Debtor’s version of the events do not justify denying IRS the benefit of this tolling
period. As a result, the Court rejects Debtor’s request for the Court to use its
equitable powers to eliminate the statutory tolling requirements in § 507(a)(8)(A).

Because the Court finds that the IRS has met its burden to show, by a
preponderance of the evidence, that its claim meets the requirements for priority


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required by § 507(a)(8)(A), and because the Court has determined that avoiding the
tolling requirements of this statute would not be a reasonable use of the Court’s
equitable powers, Debtor’s objection to claim #3 is overruled.

It is so ordered.



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