T.C. Memo. 2008-137



                      UNITED STATES TAX COURT



         JOSEPH E. AND CHANTAL M. IMARAH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19737-05L.               Filed May 20, 2008.



     Brian C. Harpst and Joseph E. Mudd, for petitioners.

     Patricia P. Wang, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   Pursuant to section 6330(d),1 petitioners

seek review of respondent’s determination to proceed with the



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, all Rule references are to the Tax
Court Rules of Practice and Procedure, and all references to
sections and chapters of the Bankruptcy Code are to tit. 11 of
the United States Code.
                                   - 2 -

collection of petitioners’ 1995, 1996, 1997, and 1998 Federal

income tax liabilities.       After concessions,2 the issue for

decision is whether petitioners’ income tax liabilities for 1996

and 1998 were discharged in bankruptcy.

                                Background

       The parties submitted this case fully stipulated under Rule

122.       The stipulation of facts is incorporated herein by this

reference.

       Petitioners resided in California when they filed their

petition.

       On November 13, 1996, petitioners filed a petition under

chapter 7 of the Bankruptcy Code (case No. 1).3      On March 10,

1997, the bankruptcy court entered an order of discharge in case

No. 1.       However, case No. 1 remained open until its conversion to

chapter 11, discussed below.

       On April 15, 1997, petitioners filed their joint Federal

income tax return for 1996 reflecting tax due of $55,320.

Petitioners did not submit a payment with their return.

Respondent subsequently assessed petitioners’ 1996 income tax



       2
       Petitioners concede that their 1995 liability was not
discharged. Respondent concedes that petitioners’ income tax
liability for 1997 was discharged by the discharge order entered
on Sept. 2, 2003.
       3
       Petitioners filed all bankruptcy petitions discussed
herein with the U.S. Bankruptcy Court for the Central District of
California.
                                 - 3 -

liability (including applicable interest and penalties) and sent

petitioners a demand for payment of the balance owed.

      On July 13, 1997, petitioners filed a petition under chapter

13 of the Bankruptcy Code (case No. 2).    On September 4, 1997,

the bankruptcy court confirmed petitioners’ plan under chapter

13.

      On April 15, 1999, petitioners filed their joint Federal

income tax return for 1998 reflecting tax due of $89,650.4

Petitioners paid only $15,000 towards their 1998 tax liability

when they filed their return.5    Respondent subsequently assessed

petitioners’ 1998 income tax liability (including applicable

interest and penalties) and sent petitioners a demand for payment

of the balance owed.

      On May 24, 1999, petitioners filed a motion to vacate the

order of discharge entered in case No. 1 and to convert case No.

1 from chapter 7 to chapter 11.    Petitioners argued that because

of a change in their financial circumstances, they believed they

could carry out a plan of reorganization under chapter 11.    On or

around that date, petitioners also moved to dismiss case No. 2.

On July 8, 1999, the bankruptcy court vacated the order of

discharge entered in case No. 1 and converted case No. 1 from


      4
       Petitioners were granted an extension to file their 1998
tax return until Oct. 15, 1999.
      5
       Petitioners also showed a withholding credit of $1,200 on
their 1998 return.
                                - 4 -

chapter 7 to chapter 11.    On the same date, the bankruptcy court

dismissed case No. 2.

     On October 13, 2000, pursuant to a motion by the U.S.

Trustee, the bankruptcy court converted case No. 1 from chapter

11 back to a case under chapter 7.      On January 22, 2002, the

bankruptcy court entered another discharge order in case No. 1.

     On May 21, 2003, petitioners again filed a petition under

chapter 7 of the Bankruptcy Code (case No. 3).      On September 2,

2003, the bankruptcy court entered an order of discharge in case

No. 3.

     On September 29, 2004, respondent advised petitioners that

their unpaid tax liabilities for the years 1996 and 1998 were not

discharged in case No. 3.    On or about October 5, 2004,

respondent filed a notice of Federal tax lien with respect to

petitioners’ 1995 through 1998 unpaid tax liabilities.      On

October 12, 2004, respondent issued to petitioners a Notice of

Federal Tax Lien Filing and Your Right to a Hearing Under IRC

6320.    Petitioners timely submitted a Form 12153, Request for a

Collection Due Process Hearing.

     On August 26, 2005, the Internal Revenue Service (IRS)

Appeals Office conducted petitioners’ section 6320 hearing by

phone.    Petitioners asserted that the tax liabilities at issue

were discharged by the discharge order entered in case No. 3.

The Appeals officer stated that the dischargeability of
                               - 5 -

petitioners’ tax liabilities was not an administrative issue but

a legal dispute that had to be decided by a judge in a court of

law, not by Appeals.6   On September 23, 2005, the Appeals officer

issued to petitioners a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 upholding the

validity of the notice of Federal tax lien.

     On October 21, 2005, petitioners timely filed their petition

in this case challenging respondent’s determination.   Petitioners

argue that the Appeals officer improperly refused to make a

determination regarding the dischargeability of their tax

liabilities.   Petitioners assert that their 1996 and 1998 tax

liabilities were discharged by the discharge order entered in

case No. 3 on September 2, 2003, and therefore respondent’s lien

is improper.

                            Discussion

I.   Section 6320 Hearing

     Section 6321 imposes a lien on all property and property

rights of a taxpayer liable for taxes where a demand for the

payment of the taxes has been made and the taxpayer fails to pay

those taxes.   Section 6320(a) requires the Secretary to send a

written notice to the taxpayer of the filing of a notice of lien



     6
       In a letter dated July 19, 2005, the Appeals officer also
informed petitioners that they were unable to dispute their tax
liabilities because they were given a prior opportunity to
address the dischargeability issue with the bankruptcy court.
                               - 6 -

and of his right to an administrative hearing on the matter.7

Section 6320(b) affords the taxpayer the right to a fair hearing

before an impartial Appeals officer.   Section 6320(c) requires

that the administrative hearing be conducted pursuant to section

6330(c), (d), and (e).   At the hearing, a taxpayer may raise any

relevant issue, including appropriate spousal defenses,

challenges to the appropriateness of the collection action, and

collection alternatives.   Sec. 6330(c)(2)(A).   Taxpayers are

precluded, however, from contesting the existence or amount of

the underlying tax liability unless the taxpayer failed to

receive a notice of deficiency for the tax in question or did not

otherwise have an opportunity to dispute the tax liability.      Sec.

6330(c)(2)(B); see also Sego v. Commissioner, 

, 609

(2000).

     Following a hearing, the Appeals officer is required to

issue a notice of determination regarding the disputed notice of

Federal tax lien.   In making this determination, the Appeals

officer is required to take into consideration:    (1) The



     7
       Sec. 6323(a) requires the Secretary to file notice of a
lien if it is to be valid against any purchaser, holder of a
security interest, mechanic’s lienor, or judgment lien creditor.
Generally, a notice of Federal tax lien is filed with an
appropriate local government entity and gives public notice of
the Federal Government’s lien on the taxpayer’s property. See
Lindsay v. Commissioner, T.C. Memo. 2001-285, affd. 

(9th Cir. 2003). A Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 is then sent to the
taxpayer.

verification presented by the Secretary that the requirements of

applicable law and administrative procedures have been met, (2)

the relevant issues raised by the taxpayer, and (3) whether the

proposed collection action appropriately balances the need for

efficient collection of taxes with a taxpayer’s concerns

regarding the intrusiveness of the proposed collection action.

Sec. 6330(c)(3).   If the taxpayer disagrees with the Appeals

officer’s determination, the taxpayer has the right to seek

judicial review by appealing to this Court.    Sec. 6330(d).    Where

the underlying tax liability is properly at issue, the Court

reviews any determination regarding the underlying tax liability

de novo.   Sego v. Commissioner, supra at 610.    The Court reviews

all other administrative determinations regarding the proposed

collection action for abuse of discretion.

their 1996 and 1998 income tax

liabilities were discharged in bankruptcy raises an issue

relevant to the appropriateness of the collection action, not

petitioners’ underlying tax liability.    See Swanson v.

Commissioner, 

, 118-119 (2003); Washington v.

Commissioner, 

, 120 n.9 (2003); Richardson v.

Commissioner, T.C. Memo. 2003-154.     However, the Appeals officer

did not consider petitioners’ discharge argument during the

section 6320 hearing.   Instead, the Appeals officer stated that

the question of whether petitioners’ tax liabilities were
                               - 8 -

discharged in bankruptcy was a legal dispute to be resolved by a

judge in a court of law rather than by the Appeals Office.    By

electing to defer judgment on whether petitioners’ tax

liabilities were discharged, the Appeals officer failed to take

into consideration a challenge by petitioners to the

appropriateness of the collection action.   Because the Appeals

officer was required to take petitioners’ challenge to the

appropriateness of the collection action into consideration in

making his determination under section 6330(c)(3)(B) and did not,

petitioners did not receive a valid section 6320 hearing.

     Notwithstanding the Appeals officer’s failure to grant

petitioners a valid section 6320 hearing, we do not believe that

it either is necessary or would be productive to remand this case

to respondent's Appeals Office to grant petitioners a proper

section 6320 hearing.   See Lunsford v. Commissioner, 

, 189 (2001); Woods v. Commissioner, T.C. Memo. 2006-38.    As

discussed below, the record demonstrates that petitioners’ 1996

and 1998 tax liabilities were discharged in bankruptcy and that

respondent’s collection action was inappropriate.8




     8
       Respondent does not argue that he has the right to proceed
in rem with respect to the 1986 and 1988 liabilities, see Iannone
v. Commissioner, 

, 292-294 (2004); Woods v.
Commissioner, T.C. Memo. 2006-38, and the stipulated record
contains no evidence to support such an argument.
                               - 9 -

II.   Jurisdiction To Determine Dischargeability

      Before we begin our discussion, we must address whether our

jurisdiction under sections 6320 and 6330(d) includes the ability

to rule on the dischargeability of petitioners’ tax liabilities

or, alternatively, whether the issue is more appropriately left

to the bankruptcy court.   In Washington v. Commissioner, supra at

120-121, in deciding whether we could rule on the

dischargeability of a liability in a lien proceeding brought

under section 6330(d)(1), we stated:

      a lien proceeding commenced in the Court under section
      6330(d)(1) * * * is closely related to and has
      everything to do with collection of a taxpayer’s unpaid
      liability for a taxable year. We must determine in the
      instant lien proceeding whether respondent may proceed
      with the collection action * * *. Whether the * * *
      [bankruptcy court] discharged petitioners from their
      respective unpaid tax liabilities for those years is an
      issue that has a direct bearing on whether respondent
      may proceed with the lien at issue. We hold that in
      the instant lien proceeding commenced under section
      6330(d)(1) the Court has jurisdiction to determine
      whether the * * * [bankruptcy court] discharged
      petitioners from such unpaid liabilities. [Fn. ref.
      omitted.]

Accordingly, we conclude that we have jurisdiction to determine

whether the bankruptcy court discharged petitioners from their

unpaid tax liabilities for 1996 and 1998.

III. Discharge of Taxes in Chapter 7 Bankruptcy

      Entry of a discharge order in a chapter 7 bankruptcy case

generally discharges all debts of an individual debtor that arose
                               - 10 -

before the date of the order for relief.9   11 U.S.C. sec. 727(b)

(2000).   However, under 11 U.S.C. section 523(a)(1)(A), certain

individual debts are excepted from discharge, including any tax

“of the kind and for the periods specified in section * * *

507(a)(8) of this title, whether or not a claim for such tax was

filed or allowed”.   Title 11 U.S.C. section 507(a)(8)(A)(i)

describes unsecured claims of the IRS to the extent such claims

are for “a tax on or measured by income or gross receipts * * *

for a taxable year ending on or before the date of the filing of

the petition for which a return, if required, is last due,

including extensions, after three years before the date of the

filing of the petition”.10   Thus, if the IRS has a claim for

taxes for which a return was due within 3 years before the

bankruptcy petition was filed (the 3-year lookback period), the

claim is not dischargeable in a chapter 7 bankruptcy case under

11 U.S.C. section 523(a)(1)(A).

     The 3-year lookback period of Bankruptcy Code section

507(a)(8)(A)(i), however, is a limitations period subject to

traditional principles of equitable tolling.   In Young v. United


     9
       In a voluntary bankruptcy case, 11 U.S.C. sec. 301
provides that the date of the order for relief is the date that
the bankruptcy petition is filed.
     10
       Tit. 11 U.S.C. sec. 507(a) provides for the priority of
certain claims in the distribution of the debtor’s estate. Tit.
11 U.S.C. sec. 507(a)(8) gives eighth priority to unsecured
claims of the IRS, including claims for the type of tax discussed
above.
                                  - 11 -

States, 

(2002), the Supreme Court held that the 3-

year lookback period is tolled during the pendency of a prior

bankruptcy petition.       In that case the taxpayers initially filed

a bankruptcy petition under chapter 13.

  During the

pendency of their chapter 13 case, the automatic stay of 11

U.S.C. section 362(a)11 prevented the IRS from taking the steps

necessary to collect the taxpayers’ unpaid tax liabilities.

   Subsequently, the taxpayers moved the court to dismiss

their chapter 13 case;12 and 1 day before the bankruptcy court

granted their motion, the taxpayers filed a new petition under

chapter 7.

   Because the taxpayers’ unpaid tax

liabilities did not fall within the 3-year lookback period with

respect to the newly filed chapter 7 petition, the taxpayers

argued that the unpaid taxes were discharged.

disagreed and held that because the IRS was precluded from

protecting its claim during the pendency of the chapter 13 case,

this period of disability tolled the 3-year lookback period when




     11
       The automatic stay of 11 U.S.C. sec. 362(a) generally
prohibits all collection actions against a debtor for any debts
that arose before the commencement of the case; i.e., the filing
of the bankruptcy petition.
     12
       Under 11 U.S.C. sec. 1307(b), the court shall dismiss a
case under ch. 13 at the request of the debtor if the case has
not been converted under 11 U.S.C. sec. 706, 1112, or 1208.
                                - 12 -

the taxpayers filed their chapter 7 petition.

Consequently, the taxpayers’ debts were not discharged.

      Petitioners agree that equitable tolling is applicable in

this case, but they maintain that their 1996 and 1998 tax

liabilities nevertheless fall outside the 3-year lookback period

calculated from May 21, 2003, the date the chapter 7 petition in

case No. 3 was filed.     To assess petitioners’ contention, we must

determine the proper date to which the 3-year lookback period

extends for each contested year.    To calculate the correct date,

we must take into account the periods in which prior bankruptcy

petitions prevented respondent from collecting petitioners’ 1996

and 1998 tax liabilities.13

      Petitioners’ 1996 tax liability arose14 after petitioners

filed their petition in case No. 1 but before they filed their

petition in case No. 2.    The 3-year lookback period is thus


      13
       The bankruptcy court’s decision on July 8, 1999, to
vacate the discharge order in case No. 1 and convert the case
from ch. 7 to ch. 11 does not affect our tolling analysis with
respect to petitioners’ 1996 and 1998 tax liabilities because
both claims arose after petitioners filed their ch. 7 petition in
case No. 1. See infra pp. 17-18.
      14
       Under sec. 6151, a taxpayer is required to pay the tax
owed for a given tax year by the due date of his Federal income
tax return for that year, without regard to extension of time to
file. Petitioners’ 1996 tax liability thus arose on Apr. 15,
1997, the date their 1996 tax return was due. Similarly,
petitioners’ 1998 tax liability arose on Apr. 15, 1999, the date
their 1998 return was due, even though they were granted a 6-
month extension of time to file.
                              - 13 -

tolled by the pendency of case No. 2 because respondent was

prohibited from collecting petitioners’ 1996 tax liability, a

prepetition claim in case No. 2, by virtue of the automatic stay

imposed by Bankruptcy Code section 362(a).    Adding the tolling

period of 1 year, 11 months, and 25 days (July 13, 1997, the date

the petition in case No. 2 was filed, to July 8, 1999, the date

case No. 2 was dismissed) to the 3-year period preceding May 21,

2003 (the date the petition in case No. 3 was filed), we

determine the 3-year look back period extends to May 27, 1998.

Because the due date of petitioners’ 1996 return, April 15, 1997,

falls outside the 3-year lookback period, we conclude that

petitioners’ 1996 tax liability was discharged in case No. 3.

     With regard to petitioners’ 1998 tax liability, we need not

apply the principle of equitable tolling to determine the date to

which the 3-year lookback period extends because petitioners’

1998 tax liability arose after the filing of the petitions in

both case No. 1 and case No. 2.   Respondent thus was at no time

barred by the automatic stay from collecting petitioners’ 1998

tax liability.   Looking back 3 years from the date the petition

in case No. 3 was filed, May 21, 2003, to May 21, 2000, we

determine that the due date of petitioners’ 1998 return, October

15, 1999 (taking into account extensions of time to file), falls

outside the 3-year lookback period.    Accordingly, petitioners’

1998 tax liability was discharged.
                               - 14 -

       Respondent asserts that the calculation of petitioners’ 3-

year lookback period is affected by 11 U.S.C. section 348(d),

which provides:

            (d) A claim against the estate or the debtor that
       arises after the order for relief but before conversion
       in a case that is converted under section 1112, 1208,
       or 1307 of this title * * * shall be treated for all
       purposes as if such claim had arisen immediately before
       the date of the filing of the petition.[15]

Respondent argues that Bankruptcy Code section 348(d) requires

petitioners’ 1996 and 1998 tax liabilities to be treated as

prepetition claims with respect to case No. 1 upon the October

13, 2000, conversion of case No. 1 from chapter 11 to chapter

7.16   According to respondent, petitioners’ 1996 and 1998 tax

liabilities arose after the order for relief in case No. 1,

November 13, 1996 (the date petitioners filed their original

chapter 7 petition), but before case No. 1 was converted from

chapter 11 back to chapter 7 on October 13, 2000.    Thus, even

though the 1996 and 1998 liabilities arose after the filing of

the petition in case No. 1, respondent contends that 11 U.S.C.

section 348(d) mandates that these liabilities be treated as if


       15
       Tit. 11 U.S.C. sec. 348(d) is an exception to the general
rule contained in 11 U.S.C. sec. 348(a), which provides that a
conversion of a case from one chapter to another does not effect
a change in the date of the filing of the petition or the
commencement of the case.
       16
       Respondent points out that 11 U.S.C. sec. 348(d) applies
specifically to conversions made under 11 U.S.C. sec. 1112. Tit.
11 U.S.C. sec. 1112 authorizes the debtor to convert a case in
ch. 11 to another chapter of the Bankruptcy Code.
                               - 15 -

they were incurred before case No. 1 commenced.      Respondent

argues that as a result of the treatment of the 1996 and 1998

liabilities as prepetition claims, the automatic stay operated to

bar respondent from collecting petitioners’ 1996 and 1998 tax

liabilities beginning October 13, 2000, the date case No. 1 was

converted from chapter 11 to chapter 7, until January 22, 2002,

the date the second discharge order in case No. 1 was entered.

Respondent concludes that equitable tolling requires the 3-year

lookback period to be tolled during this additional period,

making petitioners’ 1996 and 1998 tax liabilities

nondischargeable.

     Respondent’s argument is not persuasive.    A similar argument

was rejected by the U.S. Bankruptcy Court for the Western

District of Texas, San Antonio Division, in In re Morris, 155

Bankr. 422 (Bankr. W.D. Tex. 1993).     In that case the debtors

filed a petition for bankruptcy under chapter 7, converted their

case to chapter 11, and then converted their case back to chapter

7.

  The debtors incurred debts after the initial

filing of their chapter 7 petition but before the conversion of

their case to chapter 11.

  The debtors argued that

the incurred debts were dischargeable in their chapter 7 case

because 11 U.S.C. section 348(d) required that the debts be

treated as if they had arisen immediately before the date of the

filing of the original chapter 7 petition.

                                 - 16 -

acknowledged that the plain language of 11 U.S.C. section 348(d)

may have supported this result, the court found that the debtors’

interpretation did not serve the intended purpose of the statute.

    The House and Senate reports accompanying the

enactment of 11 U.S.C. section 348(d) stated that the section was

intended to provide “‘for special treatment of claims that arise

during chapter 11 or 13 cases before the case is converted to a

liquidation case.’”

95-989, at 48 (1978)

and H. Rept. 95-595, at 337 (1977)).      The court also cited

decisions by other bankruptcy courts that found that 11 U.S.C.

section 348(d) was intended “‘to give chapter 11 administrative

claimants priority over unsecured claims when a case is converted

from chapter 11 to chapter 7.’”

Feed &

Seed v. State Natl. Bank (In re Ramaker), 117 Bankr. 959, 963

(Bankr. N.D. Iowa 1990)).     The court concluded that 11 U.S.C.

section 348(d) was inapplicable because the debts arose during

the pendency of the initial chapter 7 case, before conversion to

chapter 11.17

at issue were not incurred


     17
       The court in In re Morris, 155 Bankr. 422 (Bankr. W.D.
Tex. 1993), also quoted 1 Collier Bankruptcy Manual par.
348.03[2] (Lawrence P. King, et al. eds., 3d ed. 1993) in support
of its conclusion:

     “[Section 348(d)] applies only with respect to a claim
     arising in a chapter 11, 12 or 13 case before the case
     is converted into a chapter 7 case. It does not apply
     with respect to claims arising in the context of a
     chapter 7 case which is later converted into a case
                                                   (continued...)
                                - 17 -

in the chapter 11 case, the court determined that treating the

debts as prepetition claims did not serve the purpose for which

11 U.S.C. section 348(d) was enacted.

case the 1996 and 1998 tax liabilities arose

after November 13, 1996, the date the chapter 7 petition in case

No. 1 was filed and before July 8, 1999, the date case No. 1 was

converted to a chapter 11 case.     Under In re 

, and

consistent with the legislative history of 11 U.S.C. section

348(d), the liabilities for 1996 and 1998 cannot be treated as

prepetition claims with respect to case No. 1 because these

liabilities did not arise during the pendency of the chapter 11

case.     Respondent was not barred from collecting petitioners’

1996 and 1998 tax liabilities following the conversion of case

No. 1 back to a chapter 7 case.     Accordingly, we reject

respondent’s argument regarding the application of 11 U.S.C.

section 348(d).

     Because we reject respondent’s argument with respect to the

application of 11 U.S.C. section 348(d), we need not rule on the

issue of whether the bankruptcy court’s decision to vacate the

original order of discharge entered in case No. 1 reinstated the




     17
      (...continued)
     under chapter 11, 12, or 13.”
                               - 18 -

automatic stay with respect to that case.18   Whether or not the

automatic stay in case No. 1 was reinstated is significant only

if petitioners’ 1996 and 1998 tax liabilities are treated as

prepetition claims.   As we discussed above, petitioners’ 1996 and

1998 tax liabilities are postpetition claims with respect to case

No. 1.    Consequently, even if we held that the court’s vacatur of

the order of discharge reinstated the automatic stay in case No.

1, the stay would not prohibit respondent from seeking collection

from petitioners and thus would have no impact on our equitable

tolling analysis.

     We conclude that petitioners’ 1996 and 1998 tax liabilities

fall outside the 3-year lookback period and were discharged by

the discharge order entered in case No. 3.    Consequently, we do

not sustain respondent’s determination to proceed with collection

of petitioners’ 1996 and 1998 tax liabilities.




     18
       Under 11 U.S.C. sec. 362(c)(2), the automatic stay
continues until the earliest of (1) the time the bankruptcy case
is closed, (2) the time the bankruptcy case is dismissed, or (3)
if the case is a case under ch. 7 concerning an individual, the
time a discharge is granted or denied. The automatic stay in
case No. 1 was thus lifted on Mar. 10, 1997, when the bankruptcy
court entered the original order of discharge. Respondent
argues, however, that the bankruptcy court’s subsequent decision
to vacate the original discharge order in case No. 1 reinstated
the automatic stay in that case, which remained in effect upon
the subsequent conversions of case No. 1 to ch. 11 and back to
ch. 7.
                             - 19 -

     We have considered all the other arguments and to the extent

not discussed above, conclude those arguments are irrelevant,

moot, or without merit.

     To reflect the foregoing,


                                        An appropriate decision

                                   will be entered.