The I.R.S. can accept an "offer in compromise," an amount to settle a taxpayer's tax liabilities, under certain conditions. In this case, the debtors owed something over $100,000, but before they filed chapter 13 bankruptcy, they settled with the IRS for $4000, which they were going to pay in $1000 payments (pretty good offer in compromise!).

Anyway, before they paid the money in full (they had paid $1000) the debtors filed chapter 13, and proposed in their plan to pay just the remaining amount due on the $4000, about $3000. The I.R.S. said no, our offer in compromise (OIC) form says that if you file bankruptcy, the offer is called off, and you still owe the full amount of the taxes. After the debtors filed an objection to the IRS proof of claim, the bankruptcy judge ruled that what the IRS was trying to do, is unlawful discrimination against people that file bankruptcy under Bankruptcy Code Section 525(a).

Since this is a rather unsettled area of law, I don't know if I would recommend this course of action to a debtor. I would encourage them to pay the full amount of the offer before the bankruptcy filing, if possible. But sometimes people just can't, or perhaps they were faced with some other emergency issue like a foreclosure or repossession.

Anyway, the I.R.S. apparently did not appeal this decision. I reviewed the court's docket since this decision was issued in January 2013, and the parties settled and the amount of the OIC will be accepted by the Internal Revenue Service to be paid through the plan. I doubt that the IRS wants to risk taking it to a higher court, and having a bad precedent against them. But this case is some precedent, and it is a very well-reasoned opinion. In re Mead, Case No. 12-01222-8-JRL (Bankr.E.D.N.C. 2013).

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization