While everyone is aware that cram-downs as we knew them prior to BAPCPA took a beating with the “new law,” some of the changes affecting taxes and tax returns apparently slid under the radar.

 

Some 15 years after BAPCPA’s passage, most attorneys know that tax returns are due to the trustee no later than 7 days in advance of the first meeting of creditors.  WE WILL CONTINUE THE 341 IF WE DON’T HAVE THE TAX RETURNS. 11 U.S.C. 1308 requires that the last 4 tax returns due be filed before the first meeting of creditors.  The Code allow the trustee to hold the 341 open to allow the filing of the returns.  We tried that early on.  Returns didn’t get filed any sooner.  In fact, we have recently filed cases in which tax returns still haven’t been filed and those cases have been set for multiple confirmation hearings.  We don’t confirm without the tax returns being filed or an agreement as to payment.  We used to—learned the lesson.

 

An issue which is affecting debtors’ fresh start has surfaced in cases in which the debtors don’t keep the post-petition taxes current.

 

From the Internal Revenue Manual:

5.9.10.5.2.1(3):

 

Interest on Unsecured Claims. Generally, the Bankruptcy Code has no provision for the payment of accrued interest on dischargeable unsecured liabilities.

 The plan may provide for interest on nondischargeable unsecured liabilities when the debtor has disposable income available to pay such interest after providing for full payment of all allowed claims. (See 11 USC § 1322(b)(10).)  If the plan provides for interest on the unsecured claim, the Service will not litigate the interest rate. If the plan provides for interest but does not specify if the plan interest is “simple” or “compound” interest, treat the interest rate as “Daily Compounded.”

 

If the plan does not provide for interest on the nondischargeable unsecured claim, interest will be calculated at the normal statutory rate.  Interest will not be included on the proof of claim, see 11 USC § 502(b)(2).

 

There are no special procedures for asserting/collecting the accrued interest.

 After a bankruptcy case is closed, any nondischargeable liabilities are returned to the regular collection stream.

 

At one seminar I attended, a representative of the IRS said that the Service would probably not file 1305 claims in many cases and just collect the tax, penalty and interest after the case is completed.

 

Since Chapter 13 debtors are required to provide the trustee with a copy of the federal return each year, it behooves debtor’s counsel to inquire whether the tax, if any, has been paid.  There is no deadline for a taxing authority to file a 1305 claim in a Chapter 13 case—which means that it could be filed after the trustee’s Notice of Completion or not at all.  Failure to file a 1305 claim simply means, as the IRS representative stated, that the entire tax liability is non-dischargeable.

 

While we have several cases in which we have received 1305 claims—and even a few cases in which a 1305 claim is filed annually—it is not in the debtor’s best interest to fail to pay the taxes as they come due.   As noted above, the interest on a post-petition tax claim is NOT DISCHARGED even if the post-petition tax is paid through the trustee as a priority claim.

 

When a 1305 claim is filed by the taxing authorities, my office will do a feasibility workup, and if the plan payment needs to increase, we will do a motion to modify.  We will not propose to pay the post-petition interest on that post-petition claim.

 

Debtors’ counsel may file a motion to modify and include the post-petition interest—a suggestion I’ve seen offered in some materials.  There are 2 concerns with that approach.

  1. 11 U.S.C. 1322(b)(10) provides that to pay interest on a non-dischargeable claim all other claims must be paid in full.
  2. Post-petition taxes are not an unanticipated change—even if substantial—so the debtor’s motion to modify to pay the post-petition interest on the post-petition tax may fail on that ground.

 

I should note at this point a 1305 claim on behalf of the taxing authorities may only be filed by the taxing authorities.  So, debtor’s counsel cannot file an amended plan to add the tax itself if the taxing authority has not filed the 1305 claim.