An automatic stay in a Tax Court case triggered by a taxpayer’s filing of a Chapter 11 bankruptcy petition is not terminated by the bankruptcy court’s confirmation of the taxpayer’s bankruptcy plan
Background
The IRS issued married taxpayers Daniel and Kelley Cochran a notice of deficiency for their 2011 tax year in 2016. The Cochrans timely filed a petition with the Tax Court challenging the IRS’s determinations.
In February 2017, the Cochrans filed a Chapter 11 bankruptcy petition. In April 2017, the Cochrans informed the Tax Court that they had filed for bankruptcy, and the proceedings in the Tax Court with respect to their case were subsequently automatically stayed under 11 U.S.C. Section 362(a)(8).
In July 2019, the bankruptcy court confirmed the Cochrans’ Chapter 11 plan, but the Cochrans had not completed all payments pursuant to the plan and their bankruptcy case had not been closed or dismissed. Although the Cochrans’ bankruptcy case was still pending, they filed a motion to lift the stay of proceedings, arguing that the bankruptcy court’s confirmation of their bankruptcy plan terminated the automatic stay.
The Tax Court’s decision
The Tax Court held that the bankruptcy court’s confirmation of the Cochrans’ bankruptcy plan did not terminate the automatic stay in their Tax Court case.
A bankruptcy filing generally triggers an automatic stay of Tax Court proceedings concerning the debtor-taxpayer under 11 U.S.C. Section 362(a)(8). Under 11 U.S.C. Section 362(c)(2), 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. The Cochrans and the IRS agreed that the Cochrans’ bankruptcy case had not been closed or dismissed. Therefore, the question before the court was whether the bankruptcy court’s confirmation of the Cochrans’ Chapter 11 bankruptcy plan acted to grant a discharge, or as a denial of a discharge, to the couple for purposes of terminating the automatic stay in their Tax Court case.
The Cochrans relied primarily on the Tax Court’s decision in Moody, 95 T.C. 655 (1990), to support their position. In Moody, the Tax Court held that a bankruptcy court’s confirmation of the 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), which terminated the automatic stay under 11 U.S.C. Section 362(a). The Tax Court based its holding in Moody on the then-existing version of 11 U.S.C. Section 1141(d) (1), which provided that a bankruptcy court’s confirmation of a Chapter 11 bankruptcy plan generally discharged the debtor from any debt that arose before the confirmation date.
However, as the Tax Court explained, subsequent to Moody, 11 U.S.C. Section 1141(d) was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, P.L. 109-8, and in 2010 as part of the Bankruptcy Technical Corrections Act of 2010, P.L. 111-327. These two laws added 11 U.S.C. Section 1141(d)(5), which provides that, for individual debtors, confirmation of a bankruptcy plan does not discharge any debt provided for in the plan 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.
The Tax Court therefore considered whether the addition of 11 U.S.C. Section 1141(d)(5) constrained its holding in Moody that the confirmation of a Chapter 11 bankruptcy plan terminated an automatic stay in the Tax Court. The court found that the addition of the two requirements in the new subsection did limit the holding because a debt was not discharged unless one of the two requirements was met. In the Cochrans’ case, because they met neither of them, the automatic stay in their Tax Court case remained in place.
The Cochrans also argued that the legislative history showed that the intent of 11 U.S.C. Section 1141(d)(5) was that it would not govern automatic stays in the bankruptcy context. The Tax Court found that looking at the legislative history was unnecessary because the statute was unambiguous on its face, and the court had held in Moody 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.
Finally, the Cochrans also claimed that several cases, including Kovitch, 128 T.C. 108 (2007), stood 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.” The Tax Court distinguished those cases from the Cochrans’ case, finding that in them the taxpayers were challenging the appropriateness of the imposition of the stay, while the Cochrans’ case was focused on whether a properly applied automatic stay had been terminated.
Reflections
While, generally, an automatic stay is 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, there is an exception to this general rule in 11 U.S.C. Section 362(d). That subsection provides that, upon the request of “a party in interest” and after notice and a hearing, a bankruptcy court “shall” grant relief from an automatic stay if certain conditions are present. Under 11 U.S.C. Section 1109(b), a debtor is a party in interest in a Chapter 11 bankruptcy proceeding. However, the Tax Court found no evidence that the Cochrans had made a request for this potential exception with the bankruptcy court.
Cochran, 159 T.C. No. 4 (2022)
Contributor
James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.
