Bankruptcy law provides that judicial or administrative proceedings by creditors are automatically halted when a bankruptcy petition is filed with respect to the debtor. The automatic stay applies to proceedings in Tax Court, but not necessarily to appeals from a Tax Court decision. On March 28th, the Tenth Circuit issued its decision in Schoppe v. Commissioner, allowing the appeal of a Tax Court case to go forward. The Tenth Circuit became the sixth Circuit to rule on the issue.
There are two automatic stay provisions at issue in tax litigation when the taxpayer files for bankruptcy. The first provision applies specifically to “a proceeding before the United States Tax Court concerning a tax liability of a debtor.” In 1991, the Ninth Circuit ruled in Cheng v. Commissioner that this provision does not apply to appeals, when the taxpayer files for bankruptcy after the Tax Court decision. Thus, the Ninth Circuit allowed the appeal and did not stay it. Since then, parties arguing for the stay of an appeal of a Tax Court decision have relied on a different provision of the Bankruptcy Code. That provision imposes an automatic stay of actions only “against the debtor,” not by the debtor.
Technically, a Tax Court case is initiated by the taxpayer – the taxpayer files a petition with the Tax Court. However, the Ninth Circuit concluded in Delpit v. Commissioner that the proceeding was really a continuation of the administrative proceeding that the IRS began against the taxpayer. Therefore, even though the taxpayer files the petition, the appellate case must be halted once a bankruptcy petition is filed. But the First, Third, Fifth, and Eleventh Circuits have reached the opposite conclusion: the litigation was an independent action initiated by the taxpayer, not a continuation of the audit. Therefore an appeal of the Tax Court case is not of an action “against the debtor” and is not subject to the automatic stay provision. In Schoppe, the Tenth Circuit agreed that the appeal of a Tax Court decision could proceed even after the taxpayer filed for bankruptcy.
If you would like to know more about this issue, please contact the undersigned or any of the other tax attorneys at Thompson & Knight.