Whenever the Internal Revenue Service is an unsecured creditor, the statute of limitations for a trustee to bring an avoidance action is 10 years, not three to six years as typically provided by state laws, according to Bankruptcy Judge Robert A. Mark of Miami.
To extend the statute of limitations to 10 years, Judge Mark engrafted provisions of the Internal Revenue Code onto Section 544(b), which allows a trustee to avoid a transfer “that is voidable under applicable law by a creditor holding an unsecured claim.”
Judge Mark used IRC Sections 6502(a)(1) and 6901(a)(1)(A). Combined, they allow the IRS to initiate proceedings to recover fraudulent transfers under state law up to 10 years after the assessment of taxes.
In the case before Judge Mark, the IRS assessed about $1 million in taxes against the debtor in 2005. Later that same year, the debtor transferred property, allegedly for inadequate consideration. He filed a chapter 11 petition in 2014 that was converted to chapter 7. The trustee brought suit in bankruptcy court under Florida’s fraudulent transfer laws to recover the transfers in 2005.
The trustee’s suit would have been time barred if the Florida statute of limitations had applied. The debtor stipulated that the IRS, on the bankruptcy filing date, could have brought a timely suit to avoid the 2005 transfers.
In his Aug. 31 opinion, Judge Mark said that lower courts are split on whether a trustee can use an IRS claim to extend the statute of limitations to 10 years. Although five bankruptcy court decisions allow trustees to use the IRC to extend the statute of limitations, a decision by Bankruptcy Judge Robert H. Jacobvitz of Albuquerque came down the other way in 2013.
Judge Jacobvitz saw the IRS’ immunity from state statutes of limitations as a public right not available to a trustee. He did not believe that Congress intended to vest sovereign powers in a trustee.
For Judge Mark, the plain meaning of the statute allows a trustee to step into the shoes of the IRS. He said that policy or congressional intent do not come into play when the language of the statute is “clear.”
Judge Mark did not pretend that his decision would have “limited impact.” He cited Judge Jacobvitz, who said that a 10-year lookback would “eviscerate” current practice.
There have been few cases using the 10-year IRS statute of limitations because trustees “have not generally realized that this longer reach-back is in their arsenal,” Judge Mark said. He conceded that widespread use “would be a major change in existing practice.”
Entailing a pure issue of law, plain meaning and public policy, the case would be an ideal candidate for direct appeal to the Eleventh Circuit.