The following is an excerpt from:

"For Whom the Tax Tolls: Significant Events That Extend IRS Collection Rights"

Published in Tax Practice & Procedure - October/November 2004

By Michael S. Fried and Zachary S. Fried

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1987 to 1996 Tax Liabilities

After concluding that the client's 1997 tax liability is eligible for Chapter 7 or Chapter 13 discharge, while acknowledging the still unsettled law concerning the tolling effect of an offer in compromise, we applied the principles of the Young case and CCA 200404049 to our evaluation of the eligibility of Dr. Delinquent's 1987-1996 tax liabilities for bankruptcy discharge. IRS collection of all the 1987-1996 tax liabilities was stayed during the client's 1994?1997 bankruptcy, and all of these liabilities were included in the 1998 offer in compromise.

Prior to Young, a majority of courts held that a prior bankruptcy tolled the running of the three- ear look-back period during the overlap of the look-back period and the bankruptcy, plus an additional six months thereafter. In Young, the court held that the three-year look-back period of Bankruptcy Code Section 507(a)(8)(A)(i) is a limitations period subject to equitable tolling, and that equitable tolling always applies when the IRS has been prevented by a prior bankruptcy from collecting. Therefore, the Court ruled that the three-year look-back period of Bankruptcy Code Section 507(a)(8)(A)(i) is always tolled during the pendency of a bankruptcy. Applying the rationale of Young, the IRS announced in a chief counsel notice that it would no longer take the position that an additional six months must be added to the tolling period of Bankruptcy Code Section 507(a)(8)(A)(i), stating, ?In light of the rationale of Young, the three-year look back period of B.C. ?507(a)(8)(A)(i) should not be computed by including an additional six months, based on I.R.C. ? 6503(h).? Equitable tolling would be applied only during the bankruptcy and not for any additional time thereafter.

Although Young and the chief counsel notice were limited to the three-year look-back period, it was our conclusion that the rationale contained in Young and the chief counsel notice also applies in the same way to the two-year filing period. Accordingly, we calculated both of these time periods for the 1987-1996 liabilities by tolling them during the taxpayer's bankruptcy but did not add any additional tolling time thereafter. Neither did we add any tolling time to the two-year filing period or the three-year look-back period for the period of the taxpayer's offer in compromise pursuant to CCA 200404049. Based on our analysis, we concluded that all pending 1987-1996 income tax liabilities (other than the trust fund taxes) qualified for discharge under all three timing rules' three-year look-back rule, the two-year filing rule and the 240- day assessment rule.

We advised our client of our opinion and, of course, we added the caveat that the law on the tolling of the three-year look-back and two-year filing periods during an offer in compromise remains unsettled, and that risk remains that the IRS or the courts could reach a different conclusion in the future. If tolling were applied to these time periods during the taxpayer's offer in compromise, in addition to the tolling time for his bankruptcy period, many of the 1987-1996 tax liabilities for 1987-1996 would not qualify under either the three-year look-back rule or the two-year filing rule.

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