Confirmation of Bankruptcy Plan Doesn't Lift Automatic Stay of Tax Court Proceedings

(Parker Tax Publishing November 2022)

The Tax Court denied a taxpayers' motion to lift an automatic stay of its Tax Court case under 11 U.S.C. 362(a)(8) which was triggered by the taxpayers' filing of a chapter 11 bankruptcy petition. The court concluded that the confirmation of the taxpayers' chapter 11 plan did not terminate the automatic stay in the Tax Court and the taxpayers could not rely on the court's earlier decision in Moody v. Comm'r, 95 T.C. 655 (1990) because the subsequent enactment of 11 U.S.C. Section 1141(d)(5) created a limitation on the court's holding in Moody. Cochran v. Comm'r, 159 T.C. No. 4 (2022).

Background

In July 2016, the IRS issued a notice of deficiency to Daniel and Kelley Cochran, a married couple, for tax year 2011. Shortly thereafter, the Cochrans filed a petition with the Tax Court challenging the IRS's deficiency determinations in the notice.

In February 2017, the Cochrans filed a chapter 11 bankruptcy petition with a bankruptcy court. In April 2017, the Cochrans filed a Notice of Proceeding in Bankruptcy in the Tax Court. The proceedings in the Tax Court were subsequently automatically stayed under 11 U.S.C. Section 362(a)(8). In July 2019, the bankruptcy court issued an order confirming the Cochrans' chapter 11 plan. As of October 12, 2022, the Cochrans had not completed all payments pursuant to that plan, and their bankruptcy case had not been closed or dismissed. With their bankruptcy case still pending, the Cochrans filed a Motion to Lift the Stay of Proceedings in the Tax Court, in which they argued that the bankruptcy court's confirmation of their chapter 11 plan acted to terminate the automatic stay.

Under 11 U.S.C. Section 362(a)(8), a bankruptcy filing triggers an automatic stay of Tax Court proceedings concerning the debtor-taxpayer. 11 U.S.C. Section 362(c)(2) provides that this automatic stay is generally lifted at the earliest of the closing of the bankruptcy case, the dismissal of the bankruptcy case, or the granting or denial of a discharge to the debtor. In Moody v. Comm'r, 95 T.C. 655 (1990), the Tax Court held that a bankruptcy court's confirmation of a taxpayer's chapter 11 bankruptcy plan served to effectively discharge or deny discharge to the taxpayer-debtor for purposes of 11 U.S.C. Section 362(c)(2)(C), thereby terminating the automatic Tax Court stay that was in place under 11 U.S.C. Section 362(a). In reaching this holding, the court relied on 11 U.S.C. Section 1141(d)(1), which provides that, except as otherwise provided in that subsection, a bankruptcy court order confirming a debtor's chapter 11 bankruptcy plan acts to discharge the debtor from any debt that arose before the date of the confirmation.

The version of 11 U.S.C. Section 1141(d) applied in Moody was subsequently amended in 2005 and in 2010 to add 11 U.S.C. Section 1141(d)(5). That paragraph states that, unless the bankruptcy court orders otherwise, confirmation of an individual debtor's plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan.

Thus, the question for the Tax Court was whether 11 U.S.C. Section 1141(d)(5) placed a constraint on its prior holding in Moody with respect to the termination of an automatic stay following confirmation of a chapter 11 bankruptcy plan. Despite the clear text of the statute, the Cochrans asked the Tax Court to question the intent of this provision by looking to its legislative history and find that it does not govern automatic stays in the bankruptcy context. The Cochrans also broadly cited Kovitch v. Comm'r, 128 T.C. 108 (2007), People Place Auto Hand Carwash, LLC v. Comm'r, 126 T.C. 359 (2006), and 1983 Western Reserve Oil & Gas Co. v. Comm'r, 95 T.C. 51 (1990), aff'd 995 F.2d 235 (9th Cir. 1993), for the proposition that an automatic stay under 11 U.S.C. Section 362(a)(8) "should not apply unless the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy."

Analysis

The Tax Court held that the enactment of 11 U.S.C. Section 1141(d)(5) created a limitation to the court's holding in Moody with respect to the effect under 11 U.S.C. Section 362(c) of a confirmation of a debtor's chapter 11 bankruptcy plan. Therefore, the court held that the automatic stay on the Cochrans' Tax Court proceeding continued pending satisfaction of 11 U.S.C. Section 362, including through 11 U.S.C. Section 1141(d)(5).

In the view of the Tax Court, 11 U.S.C. Section 1141(d)(5) clearly provides in relevant part that any debt provided for in the plan is not discharged until (1) the bankruptcy court grants a discharge on completion of all payments under the plan, or (2) a bankruptcy court grants a discharge before that time after notice and a hearing. Because neither of these events had occurred in this case, the court concluded that the automatic stay remained in place. The court rejected the Cochrans' invitation to review the legislative history of 11 U.S.C. Section 1141(d)(5), finding such an exercise unnecessary in an instance like this where the statute was unambiguous on its face. The court also noted that in Moody it concluded that 11 U.S.C. Section 1141(d) can control the termination of an automatic stay in the context of 11 U.S.C. Section 362.

The decisions cited by the Cochrans were, in the court's view, distinguishable on the basis that they were concerned with ascertaining which entities related to a debtor should fall within the scope of 11 U.S.C. Section 362(a). The court observed that this was not the question before it. Unlike the taxpayers in those cases, the court explained, the Cochrans were not challenging the appropriateness of the imposition of an automatic stay; rather, the focus was on determining whether an automatic stay that was properly applied had been terminated. According to the court, 11 U.S.C. Sections 362(c) and 1141(d) squarely supplied the conditions that had to be met for such a termination and those conditions had not been met in this case.

For a discussion of the automatic stay provided in 11 U.S.C. Section 362(a), see Parker Tax ¶16,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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