Opinion ID: 163637
Heading Depth: 2
Heading Rank: 1

Heading: The Bankruptcy Regulation

Text: 26 As mentioned above, the Commissioner argues that the Bankruptcy Regulation converts Taxpayer's share of 1990 partnership losses into nonpartnership items. The regulation states: 27 Bankruptcy. The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy. 28 Treas. Reg. § 301.6231(c)-7T(a). 29 Under this regulation, items that would otherwise be partnership items are converted to nonpartnership items because the taxable year in which they arose is too intertwined with the bankruptcy proceeding. The taxable years so designated are those ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding. Id. It is not surprising that an argument could emerge regarding the meaning of such intricate language. 30 There is no question that the disputed items arose during the partnership year ending on December 31, 1990. What the parties do not agree upon is what was the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding. If the last day of that taxable year was on or after December 31, 1990, then the regulation provides that the disputed items are to be treated as nonpartnership items. 31 The problem for the Commissioner is that 1989 (which, of course, ended on December 31, 1989 — well before December 31, 1990) is the latest taxable year of Taxpayer for which the United States could file a claim in the bankruptcy proceeding. Because Taxpayer elected not to bifurcate his 1990 tax year into a pre-petition partial year and a post-petition partial year, his 1990 taxes were treated as a post-petition debt — a personal obligation not encompassed by the bankruptcy. See In re Johnson, 190 B.R. 724, 726 (Bankr.D.Mass. 1995); In re Mirman, 98 B.R. 742, 745 (Bankr.E.D.Va.1989). The United States thus could not file a claim ... in the bankruptcy proceeding for Taxpayer's taxes for 1990 and thereafter. 32 The Commissioner concedes that the latest year for which the United States could file a claim for [Taxpayer's] liability is 1989. Aple. Br. at 27. He contends, however, that for purposes of the Bankruptcy Regulation, the bankruptcy estate must be identified with the partner who declared bankruptcy. The bankruptcy estate can continue to incur tax liability for the duration of the bankruptcy proceedings. Therefore, as the Commissioner points out, the IRS could file a claim in the bankruptcy proceedings for income tax liabilities incurred by the bankruptcy estate during the tax year 1990 (and thereafter, as long as the bankruptcy continued). Because that tax year ended on or after December 31, 1990, he concludes that the disputed partnership items converted into nonpartnership items under the regulation. 33 In support of his interpretation of the Bankruptcy Regulation, the Commissioner emphasizes a policy justification. He contends that severing a bankrupt partner from partnership-level proceedings promotes the efficient resolution of disputes between the IRS and the other partners. The filing of a bankruptcy petition effects a stay on the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor. 11 U.S.C. § 362(a)(8). According to the Commissioner, [i]f the tax liability of the debtor or the bankruptcy estate were still affected by a partnership proceeding, the stay imposed by the bankruptcy petition would halt the commencement or continuation of the partnership proceeding, and would prevent the IRS and the remaining partners from litigating whether any adjustments were appropriate to the partnership return. Aple. Br. at 26. Moreover, he argues, even if the bankruptcy court lifted the stay, ongoing tax court proceedings might delay and complicate resolution of the bankruptcy proceeding. 34 The Commissioner may be right that public policy favors his reading of the Bankruptcy Regulation. Our task, however, is to interpret the regulation's language, not to decide public policy. And we are unable to read the words of the regulation as the Commissioner proposes. 35 In our view, it would require a gross distortion of the regulation's language to read the word partner to include the bankruptcy estate. That word appears four times in the regulation: 36 The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy. 37 Treas. Reg. § 301.6231(c)-7T(a) (emphasis added). The first and fourth times that the word partner is used, the regulation expressly refers to the partner's status as a debtor. This is significant because, as Taxpayer emphasizes, the debtor and the bankruptcy estate are distinct entities in an individual's bankruptcy proceeding. See, e.g., In re Smith, 235 F.3d 472, 477-78 (9th Cir.2000) (The Bankruptcy Code distinguishes between property of the estate in bankruptcy and property of the debtor. The commencement of a case under the Bankruptcy Code creates an estate and though the estate may acquire property after the commencement of the case, estate property remains distinct from the debtor's property.) (internal citations omitted); Martin v. United States, 159 F.3d 932, 934 (5th Cir.1998) (IRC § 1398 treats the bankruptcy estate as a separate entity [from the debtors] for tax purposes....). The first and fourth references to a partner thus cannot be construed as referring to the bankruptcy estate. Given that the second use of the word partner refers back to the preceding use (partnership items of such a partner), the second use also cannot be read to include the bankruptcy estate. 38 The remaining use of the word partner is the operative one for our purposes. The defining date for determining whether an item should be treated as a nonpartnership item is based on the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding. Here, too, the partner must be the debtor in bankruptcy. A commonsense rule of statutory construction states that identical words used in different parts of the same act are intended to have the same meaning. Comm'r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159, 113 S.Ct. 2006, 124 L.Ed.2d 71 (1993) (internal quotation marks omitted). We think it is not asking too much of the drafters of our nation's laws to say that if they use a term three times in the same sentence, they should be sure that they intend to give it the same meaning each time. Accordingly, we agree with Taxpayer that the word partner does not encompass the bankruptcy estate and therefore the Bankruptcy Regulation does not convert his 1990 partnership losses into nonpartnership items.