tax_returnThe question of what constitutes a tax “return” for purposes of 11 U.S.C. §523(a)(1) has been the subject of conflicting Circuit Court cases the last several years.   The Eleventh Circuit Court of Appeals addressed the issue in In re Justice, No. 15-10273, 2016 WL 1237766 (11th Cir. March 30, 2016) (click for .pdf of opinion).  The Debtor sought to discharge taxes for tax years 2000-2003, but had filed the returns for those years several years late and only after the IRS had issued notices of deficiency and assessments.  The Bankruptcy Court held that the taxes were non-dischargeable and the District Court affirmed.

Section 523(a)(1) excepts from discharge any debt:

(1) for a tax or a customs duty – (B) with respect to which a return, or equivalent report or notice, if required— (i) was not filed or given; or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition….

The question that has led to conflicting Circuit opinions is the definition of “return.”

The criteria for a document to qualify as a tax return are set out in the Beard test articulated by the United States Tax Court in 1984. Beard v. Comm’r of Internal Revenue, 82 T.C. 766, 777, 1984 WL 15573 (1984), aff’d sub nom. Beard v. C.I.R., 793 F.2d 139 (6th Cir.1986). The Beard test was derived from the Supreme Court opinions in Zellerbach Paper Company v. Helvering, 293 U.S. 172, 180, 55 S.Ct. 127, 79 L.Ed. 264 (1934) and Germantown Trust Co. v. Commissioner of Internal Revenue, 309 U.S. 304, 306–09, 60 S.Ct. 566, 567–69, 84 L.Ed. 770 (1940). It establishes four requirements for a document to serve as a tax return: (1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. See In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir.1999). Only the fourth prong of the Beard test is at issue in this case: whether Justice’s Forms 1040 represented an honest and reasonable effort to comply with the tax law.

Justice at *1.  The 2005 amendments to the Bankruptcy Code (“BAPCPA”) included, for the first time, a definition:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.

See the “Hanging Paragraph” after §523(a)(19).  The question is whether this definition includes a strict filing deadline, such that the filing of a return even one day late leads to the conclusion that the tax debt would not be discharged.  Three Circuit Courts – the First, Fifth and Tenth – follow the “one day late” rule and prohibit the discharge of tax debts when the return was filed even one day late.  “See In re Fahey, 779 F.3d 1, 4 (1st Cir.2015) (‘So the question is whether timely filing is a ‘filing requirement’ … The answer is plainly yes.’); In re Mallo, 774 F.3d 1313 (10th Cir.2014), cert. denied sub nom. Mallo v. I.R.S., ––– U.S. ––––, 135 S.Ct. 2889, 192 L.Ed.2d 924 (2015); In re McCoy, 666 F.3d 924, 932 (5th Cir.2012) (‘Unless it is filed under a ‘safe harbor’ provision similar to § 6020(a), a state income tax return that is filed late under the applicable nonbankruptcy state law is not a ‘return’ for bankruptcy discharge purposes under § 523(a).’).”Justice at *3.

Both Debtor, and the IRS argued that the one-day late rule was incorrect because §523(a)(1)(B)(ii) would exclude “the unusual situation in which the IRS prepares a return with the taxpayers’ cooperation under §6020(a) [of the IRC].”  Justice at *3.  The Eleventh Circuit held that the one-day late rule was ….. actually…. they punted and did not actually rule on the issue.

However, we hold that, even under Justice’s preferred interpretation of § 523(*), his tax debts are non-dischargeable. We can assume arguendo, although we expressly do not decide, 6 that the one-day late rule is incorrect. We can do this because, even under this assumption, Justice’s tax debts are nevertheless nondischargeable for the following reasons… Thus, we assume arguendo that the applicable filing requirements Congress envisioned in the hanging paragraph do not include filing deadlines. Even if late-filed tax documents can sometimes qualify as returns, the BAPCPA definition also demands that a return satisfy “the requirements of applicable nonbankruptcy law.”

Justice at *3.  The Court instead decided the case based on the fourth factor of the Beard test: whether or not the Debtor’s late returns represented “an honest and reasonable attempt to satisfy the requirements of the tax law.”

The IRS argues, consistent with the holdings of the Fourth, Sixth, Seventh, and Ninth Circuits, that delinquency in filing a tax return is relevant to determining whether the taxpayer made an honest and reasonable effort to comply with the law. Justice urges the contrary approach adopted by the Eighth Circuit, which holds “that the honesty and genuineness of the filer’s attempt to satisfy the tax laws should be determined from the face of the form itself, not from the filer’s delinquency or the reasons for it. The filer’s subjective intent is irrelevant.” In re Colsen, 446 F.3d 836, 840 (8th Cir.2006).

We join the majority of federal appeals courts in holding that the fourth Beard factor requires analysis of the entire time frame relevant to the taxpayer’s actions. Failure to file a timely return, at least without a legitimate excuse or explanation, evinces the lack of a reasonable effort to comply with the law. This interpretation comports with the common-sense meaning of “honest and reasonable.” It is also consistent with the purpose of bankruptcy generally: to provide a “fresh start” to the “honest but unfortunate debtor.”

Justice at *4.  The Court emphasized the relevant time frame of the returns as important in determining the “honest and reasonableness” of the taxpayers’ efforts to comply with tax laws, which the Court found was a “common sense” inquiry for the Beard test.  A return that is filed only after the IRS issues a notice of deficiency is evidence of a lack of effort to comply with the self-reporting requirements of the tax system.  This interpretation does not render  §523(a)(1)(C) superfluous, even if that subsection also includes late filed or fraudulent returns.

First, although there is overlap, the category of filings which are not honest and reasonable is much broader than the category of fraudulent returns. Congress had ample reason to deny dischargeability in cases where it would be difficult for the Government to prove fraud. And indeed, although a taxpayer’s actions might not rise to the level of fraud, Congress understandably intended to deny dischargeability to a taxpayer who did not make an honest and reasonable effort to comply with the tax laws… In fact, both sections have the same goal; Congress has provided that non-dischargeability should result both from fraudulent returns and also from returns with respect to which the taxpayer has not made honest and reasonable efforts to comply with the law. We must give effect to both provisions. Thus we have no qualms in adopting this interpretation of “honest and reasonable…”

Applying this standard to this case, the Court found that the Debtor’s filing of returns several years late, with no justification, and only after the IRS issued notices of deficiency and assessments, did not satisfy the Beard test.  Thus, the tax debts were non-dischargeable.  The Court left open the question of whether a “one day late” return was, in fact a “return” for purposes of dischargeability, but it appears that any taxpayer who filed late returns would have to have some reasonable justification for filing late and would have to file within a “reasonable time” after the original deadline.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here