Pursuant to Section 523(a)(1)(B)(i) and (ii) of the Bankruptcy Code:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this [the Bankruptcy Code] does not discharge an individual debtor from any debt – (1) for a tax or custom duty –
* * * *
(B) with respect to which a return, if required – (i) was not filed; or (ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition
In 2005, as part of BAPCPA, Congress added a “hanging paragraph” to Section 523(a), commonly cited to as §523(*), which following subsection (19) defines the “return” as follows:
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 similar State or local law
A dispute exists among the courts as to whether a debtor has filed a “tax return,” in compliance with applicable nonbankruptcy law, if the return was filed after the Internal Revenue Service (“IRS”) made an assessment of the tax owed. To understand this issue, one must understand the procedures followed by the IRS when a taxpayer fails to file a return. If an individual fails to file a tax return, the IRS commences a Taxpayer Delinquency Inquiry and the IRS Automated Substitute for Return program generates the first of several notices to the taxpayer. If the taxpayer does not provide tax information in response to the notices, the IRS calculates the taxpayer’s income tax for the relevant period from third party information, including Forms 1099 or W–2. After the IRS has calculated the taxpayer’s obligations, including penalties and interest, the IRS sends the taxpayer a notice of proposed assessment and asks the taxpayer to respond within 30 days.
On the date the notice of proposed assessment is sent to the taxpayer, an Internal Revenue Code §6020(B) Automated Substitute for Return Certification (“Certification”) is created and attached to the taxpayer’s electronic file. This Certification, which contains the electronic signature of an employee of the IRS, is associated with the notice of proposed assessment and the computation of the taxpayer’s income tax completed by the IRS. The Certification, with additional documents, constitutes a return prepared by the Commissioner of Internal Revenue pursuant to 26 U.S.C. §6020(b).
On or about the day the notice of proposed assessment is sent to the taxpayer, a dummy return is posted to the taxpayer’s account, but the form does not contain a computation of the taxpayer’s tax liability or any information from which to compute the taxpayer’s tax liability. If the taxpayer fails to respond to the notice of proposed assessment, the IRS will automatically issue a statutory notice of deficiency to the taxpayer. The notice of deficiency is sent via certified mail to the taxpayer’s last known address and advises the taxpayer that unless he or she challenges the amount of the proposed assessment by filing a petition with the U.S. Tax Court within 90 days of the date the letter was mailed, the tax obligation calculated by the IRS, will be assessed against the taxpayer. If the taxpayer fails to file a petition with the Tax Court within the 90 day period, the IRS automatically posts the assessment that was proposed in the notice of deficiency.
In re McGrath, 217 B.R. 389 (Bankr. N.D.N.Y. 1997), stands for the proposition that a Chapter 7 debtor/tax payer who mailed his Form 1040 tax returns to the IRS, filed a tax return within the meaning §523(a)(1)(B)(i), even though the return was sent after the IRS prepared the debtor’s Substitute Tax Return and made its assessment. The court ruled that submission of the Form 1040, although late and after the assessment, was not considered to a nullity.
In In re Colsen, 446 F.3d 836 (8th Cir. 2006), the United States filed a motion for summary judgment seeking a determination that the 1040 Forms filed by the debtor after IRS had prepared substitutes for returns, issued notices of deficiency, and assessed the tax liabilities did not qualify as returns under §523(a)(1)(B)(i). The Circuit Court disagreed with this conclusion. Colsen started by adopting a definition of “return” it believed was universally accepted in the tax arena. The court did not apply the BAPCPA definition of “return” because the debtor’s bankruptcy petition was filed before the BAPCPA’s effective date. Id. at 839. Instead, the court used the following 3-prong test: (1) the document contains sufficient data to calculate tax liability; (2) the document purports to be a return; and (3) the debtor executed the return under penalty of perjury.
The parties apparently disagreed as to whether the debtor’s 1040 Forms constituted honest and reasonable attempts to satisfy the requirements in the tax laws. The court, however, found a subjective attempt was not relevant in determining whether a document was an “honest and reasonable attempt to satisfy the law.” Id. at 840. Instead, objective intent as apparent on the face of the document was sufficient to satisfy the final prong of the test establishing what was a “return.” Further, under the facts of this case, the court noted that it had “no evidence to suggest that the forms appeared obviously inaccurate or fabricated[.]” Indeed, the court noted that the forms contained data that allowed the IRS to calculate his tax obligation more accurately. Therefore, the filing of the forms served an important purpose under the tax laws for this debtor.
In In re Brown, 489 B.R. 1 (Bankr. D.Mass. 2013), the court noted that interpreting the definitional paragraph of Section 523(a) to mean that all late-filed tax returns are not returns rendered virtually meaningless Section 523(a)(1)(B)(ii). Further, such an interpretation would render superfluous the reference at the end of the definitional paragraph itself to late-filed returns under Section 6020(b) of the Internal Revenue Code. “If all late-filed returns except §6020(a) returns are not returns there is no need to state that §6020(b) returns are not returns.” Id. at 5. Rather, the court stated that:
A far more sensible reading of the definitional paragraph added * * * by BAPCPA is that the phrase “the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)” refers to a return that qualifies as a return under applicable nonbankruptcy law including the filing requirements of such law. This essentially was the approach taken pre-BAPCPA by the courts adopting the Beard test when determining whether a return was a return under federal law and it seems quite logical to read the BAPCPA addition of the definitional paragraph as extending that analytical approach with respect to all tax returns, federal, state or local.
Id. at 5-6. Applying this approach to the facts of the case, the court inquired whether the late filed returns served any tax purpose under Massachusetts law? It noted that a late-filed return serves as the formal assessment of the tax in the amount set forth therein. Mass.Gen.Laws ch. 62C, §26(a). The only way a late-filed return does not serve as the tax assessment under Massachusetts law is when the commissioner of revenue had assessed the tax first. Id. at 6. In this case, there was no assessment by the commissioner prior to the debtors filing their returns. Therefore, their late-filed returns were “returns” under applicable Massachusetts law and there was no basis in Section 523(a) for excepting from discharge the taxes assessed by such returns. Id.
An opposite conclusion was reached In re Hindenlang, 164 F.3d 1029 (6th Cir.1999). In Hindenlang, the debtor did not file federal income tax returns for years 1985 through 1988. The IRS served the debtor with 30-day notices of deficiency for years 1985 through 1987 in April of 1990. When the debtor did not consent to the proposed liability, the IRS prepared substitute returns for the relevant years and sent them to the debtor pursuant to 26 U.S.C. §6020(b). Again, the debtor neither responded nor executed the substitute for returns, leading the IRS to send out 90-day deficiency notices. The debtor did not file a petition in the tax Court challenging any of these deficiency notices. Therefore, in 1991, after waiting the statutorily prescribed 90 days, the IRS assessed the deficiencies against the debtor. In 1993, two years after the assessments, the debtor sent the IRS what was purported to be individual income tax returns for the years in question. The debtor used the proper forms 1040 and calculated the tax in substantially the same manner as in the Substitutes For Returns previously prepared by the IRS.
The threshold issue on appeal was whether the Forms 1040 the debtor had filed with the IRS qualified as “returns” for purposes of Section 523(a)(1)(B)(i). More precisely, the Sixth Circuit sought to answer the question as to when a purported return is filed too late to qualify as a bona fide return. The court started its analysis by applying a four-part test that helps define a “return.” The test provides that for a document to qualify as a return, it must: (1) purport to be a bona fide tax return; (2) be executed under penalty of perjury; (3) contain sufficient information to enable calculation of the amount of tax owed; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax laws. Id. at 1033-34.
The court held that the late 1040 forms in Hindenlang were not “returns” because they failed to satisfy the fourth element of the above test. The court interpreted Section 523(a)(1)(B)(i) as serving two purposes. First, the requirement of a two-year waiting period after filing a late return but before seeking discharge prevents a debtor who has ignored the filing requirements of Internal Revenue Code from waiting until the eve of Bankruptcy, filing the delayed tax return, and seeking discharge the next day. “It is, in a sense, provision affording notice and an opportunity to act, giving the IRS time to seek payment by levy or court proceeding”. Id. at 1032. Second, Section 523 forbids discharge when the debtor has acted fraudulently or in a manner calculated to evade or defeat a tax.
The debtor filed his Forms 1040 for the years in question after the IRS already made independent assessments of his tax liability. He then waited to requisite two years required by Section 523 before filing for bankruptcy. The issue was whether the debtor’s Form 1040 tax returns, filed after the IRS made a formal assessment, “represent[ed] an honest and reasonable attempt to satisfy the requirements of the tax law”. The court held that:
a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. A purported return filed found too late to have any effect at all under the Internal Revenue Code cannot constitute “an honest and reasonable attempt to satisfy the requirements of the tax law.” Once the government shows that a Form 1040 has been submitted after an assessment can serve no purpose under the tax law, the government has met its burden.
Id. at 1034.
The Hindenlang ruling was followed in In re Pierchoski, 243 B.R. 267 (W.D.Pa.1999), wherein the debtor failed to file tax returns for calendar years 1983 through 1989. In March of 1992, the IRS sent Pierchoski a Notice of Deficiency. The notice advised Pierchoski that he could “contest this deficiency in court” by filing a petition with the United States Tax Court for a redetermination of the deficiency. Pierchoski pursued the relief available from the Tax Court. During the course of that litigation, the parties agreed to the deficiencies. In September of 1993, the IRS assessed tax liabilities for the tax years in question in the amounts set forth in the stipulation reached by the parties. The following month the debtor filed individual income tax returns on IRS’s Form 1040 for the years in question.
Following Hindenlang, the court found that the returns filed were not valid returns because after the IRS issued its assessment they were “not an honest and reasonable effort to satisfy the tax law.” Id. at 271. The debtor was required to show that the returns served some “tax purpose.” “Here, it appears that the 1040’s filed by Pierchoski neither served as a means for self-assessment nor as a trigger for the three-year statute of limitations in which an assessment may be entered.” Id. However, the court remanded the case so that Pierchoski could “attempt to demonstrate that the 1040’s he filed on October 14, 1993 serve some ‘tax purpose’ under the Internal Revenue Code.” Id.
In In re Hetzler, 262 B.R. 47 (Bankr.D.N.J.2001), the debtor filed his forms 1040 three years after the government filed its SFR’s. Each return revealed taxable income identical to that reflected on the SFR’s. The debtor thereafter entered into an Installment Agreement with the IRS, and made regular payments for approximately 28 months. In attempting to decide whether the debtor’s post-assessment 1040’s were “returns” within the meaning of Section 523(a)(1)(B), the court focused on the question of whether the 1040’s represented an honest and reasonable attempt on the part of the taxpayer to satisfy the requirements of the tax law.” The court concluded that they did not, noting that (1) the forms were filed three years after the IRS issued assessments for the years in question, and (2) the forms substantially mirrored the information in the assessments. Id. at 53. The court concluded:
Our system of self-assessment requires prompt reporting from tax payers without the government’s prior determination of tax liability. Where such self-assessment has not occurred, and the government is required to make its own assessment, the subsequent duplication of the government’s assessment by the taxpayer may be considered a nullity.
Id. at 54.
In In re Washburn, 290 B.R. 162 (Bankr.M.D.Fla.2002), the court held that the late 1040 filed by the debtor would not be considered a “return” because the actual return was filed by the debtor not only after the IRS filed an SFR, but after the IRS already served a Notice of Levy on the debtor’s employer. The court further found as relevant the fact that the debtor was well aware of her obligations to file the return, having earned substantial taxable income in the years in question. Id. at 167; see also In re Prince, 240 B.R. 261 (Bankr. N.D.Ohio 1999).
The Seventh Circuit came to the same conclusion in In re Payne, 431 F.3d 1055 (7th Cir.2005). The court started its analysis by noting that neither the Bankruptcy Code, nor the Internal Revenue Code defined “return.” The court then adopted a four-part test, noting that to be a return, the document must (1) purport to be a “return,” (2) be signed under penalty of perjury, (3) contain enough information to enable the taxpayer’s tax liability to be calculated, and (4) “evince an honest and genuine endeavor to satisfy the law.” With respect to returns filed after an IRS assessment, the court noted that all but the fourth condition are satisfied. “That condition – that the purported return evidence an ‘honest and reasonable’ endeavor to comply with the law – is not satisfied, and not only or even mainly because Payne offers no excuse for having failed to file his 1986 return until six years after it was due.”
The court noted that when Payne filed, the IRS had already calculated the tax due from him, which means that he had succeeded in defeating the main purpose of the requirement that taxpayers file income tax returns: to spare the tax authorities the burden of trying to reconstruct a taxpayer’s income and income tax liability without any help from him. “A return filed after the authorities have borne the burden does not serve the purpose of the filing requirement.” The court concluded:
The influential Hindenlang decision . . . states that a return filed after the assessment of tax can never be adjudged an honest and reasonable endeavor to comply with the tax law. We need not go that far in this case. There might as we have said be circumstances beyond a taxpayer’s control that prevented him from filing a timely return, or even from asking for an extension of the time to file, before the tax was assessed. Payne, however, offered no excuse . . . for his six-year delay in filing; and the assessment was hardly precipitate.
In In re Mallo, 774 F.3d 1313 (10th Cir. 2014), the debtors failed to file timely federal income tax returns for 2000 and 2001. As a result, the IRS issued statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212 and 6213 for those years. The Mallos did not challenge those determinations. The IRS assessed $34,464 in taxes, including penalties and interest, against Mr. Mallo for the 2001 tax year on July 11, 2005, and $19,022 in taxes against Mrs. Mallo for the 2000 tax year on July 10, 2006. The IRS began collection efforts in 2006. In 2007, the Mallos filed a joint Form 1040 for tax year 2000 and another joint Form 1040 for tax year 2001. Based on this information, the IRS assessed additional joint tax liability against the Mallos in the amount of $4,576 for 2000 and partially abated Mr. Mallo’s 2001 tax liability by $3,330.
The court noted that prior to the BAPCPA amendments in 2005, the Bankruptcy Code, the IRC, and the regulations promulgated under those statutes did not define “return.” This changed with BAPCPA, and the hanging paragraph. Due to this new definition, even if the court were to adopt the Beard test, it would not answer the question whether post-assessment tax forms are returns under §523(a)(*). See, Beard v. Comm’r of Internal Revenue, 82 T.C. 766 (1984). This is because the hanging paragraph provides that in addition to meeting the requirements of applicable nonbankruptcy law, to qualify as returns under Section 523(a), tax forms must comply with applicable filing requirements.
The court attempted to interpret the plain meaning of the phrase “applicable filing requirements.” “Applicable” means “[c]apable of being applied; relevant or appropriate,” American Heritage Dictionary of the English Language 86 (5th ed.2011); “filing” means “[t]o enter (a legal document) as an official record,” Id. at 657; and “requirement” is commonly defined as “[s]omething obligatory; a prerequisite,” Id. at 1492. Thus, the plain language of the phrase means something that must be done with respect to filing a tax return. Further, Chapter 61 of the IRC provides:
In the case of [income tax] returns, returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15th day of the fourth month following the close of the fiscal year….
See, 26 U.S.C. §6072(a). The court stated that the phrase “shall be filed on or before” a particular date is a classic example of something that must be done with respect to filing a tax return and, therefore, an “applicable filing requirement.” Indeed, it noted that in a different context, the Supreme Court has characterized the date a document “shall be filed” as a “filing requirement.” The court stated that because the applicable filing requirements include filing deadlines, §523(a)(*) plainly excludes late-filed Form 1040s from the definition of a return. The court then noted that this interpretation did not make §523(a)(1)(B)(ii) superfluous:
[Section] 523(a)(*) expressly includes as a “return” a form prepared by the Secretary pursuant to §6020(a). Recall that §523(a) excepts from discharge tax debts for which a return was not filed, §523(a)(1)(B)(i), or for which a return was filed late, but within two years of the bankruptcy petition,§523(a)(1)(B)(ii). Returns prepared pursuant to §6020(a) could be filed late – for the Secretary to prepare such a return, the taxpayer necessarily failed to comply with the requirements of the title – yet still qualify as returns under §523(a)(*). In that scenario, §523(a)(1)(B)(i) does not apply, and the related tax debt is dischargeable. But if the return prepared pursuant to §6020(a) was filed within two years of the date the taxpayer files for bankruptcy, §523(a)(1)(B)(ii) would bar discharge of the related tax debt. Accordingly, §523(a)(1)(B)(ii) is not rendered meaningless by a plain language interpretation of “applicable filing requirements” that includes filing deadlines.
Id. at 1323-24.
The court stated that if the statutory mandate contained in the Tax Code that a return “shall be filed on or before” a particular date is not an “applicable filing requirement,” it is hard to imagine what would be. “If Congress intended §523 to define a return through application of the Beard test or some other type of substantial compliance doctrine, rather than by a taxpayer’s compliance with the applicable filing requirements contained in the Tax Code, Congress could simply have defined a return as one that ‘satisfies the requirements of applicable nonbankruptcy law,’ without qualifying the statement with the phrase ‘including applicable filing requirements.’” Id. at 1325.
In In re Selbst, 2016 WL 199076 (Bankr.E.D.N.Y.), the debtor claimed that he was unable to file his tax returns because of the effects of a “serious addiction to heroin and cocaine.” Nonetheless, the court held that the returns filed by the debtor were not “tax returns.” The court noted that the third prong of the Beard Test asks whether the filer made an honest and reasonable attempt to comply with the tax law. While an objective review of the Form 1040 is necessary to determine whether the debtor made such an attempt, the circumstances surrounding the debtor’s filing would also be relevant. Filing a tax form following an IRS assessment of the debt defeats the purpose of preparing a return. As the facts in Selbst demonstrated, the IRS does not post its assessments quickly, or without first communicating that it will do so to the filer. The court noted that the IRS first sends deficiency notices, warnings, and posts dummy tax returns. A filer who fails to heed these warnings and waits for the IRS to post its assessment before filing their return cannot be said to have made an honest and reasonable attempt to comply with the tax law. Id. at *5.
The court noted that like the taxpayers in Hindenlang and Payne, the debtor here did not file his tax return until after the IRS had performed its assessment. While the debtor argued that he never received the deficiency notices mailed to him by the IRS because he moved to a new address, he did not claim that he notified the IRS of his change of address. The debtor’s failure to inform the IRS that he moved and subsequent failure to comply with any of the deficiency notices, and his failure to file until after the IRS performed an assessment, demonstrated that the debtor did not make an honest and reasonable attempt to comply with the tax law. The court concluded:
The Debtor claimed that he failed to file tax returns for the 2006 and 2007 tax years because of a drug addiction during that period. The IRS will not penalize a taxpayer for failure to file tax returns if the taxpayer can show “reasonable cause.” 26 U.S.C. §6651(a)(1). “A taxpayer may have reasonable cause for failure to timely file a return where the taxpayer experiences an illness or incapacity that prevents the taxpayer from filing the return.” Hazel v. C.I.R., 95 T.C.M. (CCH) 1528 at 3 (T.C.2008). “[A] taxpayer’s illness or incapacity generally does not prevent the taxpayer from filing returns where the taxpayer is able to continue his business affairs despite the illness or incapacity.” Id. The Debtor does not allege that his drug use created an incapacity that prevented him from continuing his business affairs; he acknowledges that he was employed by SJI Associates as a freelance graphic designer from 2004 to 2013. The Debtor further testified at his deposition that he continued to work when his addiction caused his mental state to suffer. On this record, the Debtor has failed to demonstrate reasonable cause for his failure to file a timely tax return under §6651(a)(1).
In In re Boudreau, 562 B.R. 853 (Bankr. D.R.I. 2017), the debtor filed his state tax return for the 2010 tax year in 2012, which was late because the return was due on April 15, 2011. The court ruled that the tax debt was nondischargeable, and in doing so, found the decision of Fahey v. Mass. Dep’t of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015) dispositive. The First Circuit ruled that a Massachusetts state income tax return filed late under applicable Massachusetts tax laws, does not qualify as a “return” under §523(a)(*) because a “straightforward reading of Massachusetts law” commands “that returns ‘shall’ be made [on or before the fifteenth day of the fourth month following the close of the tax year] certainly seems like a ‘filing requirement.’ ” Fahey, 779 F.3d at 4–5 “[A] return filed after the due date is a return not filed as required, i.e., a return that does not satisfy ‘applicable filing requirements.’ ” Id. at 5. Boudreau noted that this statutory interpretation has been coined the ‘one-day late rule’ because it prohibits discharge of a tax debt with respect to which a return was filed even one day late.
Boudreau noted that like its Massachusetts counterpart, Rhode Island General Law §44–30–51(a) provides, “On or before the fifteenth day of the fourth month following the close of a taxable year, a Rhode Island personal income tax return shall be made and filed ….” Because the Fahey court found persuasive the use of the mandate “shall” in the similar Massachusetts statutory filing deadlines in concluding that such filing deadlines constitute “applicable filing requirements” that must be strictly adhered to for a tax return to qualify as a “return” for purposes of Section 523(a)(1)(B), so would the Boudreau court in interpreting Rhode Island law.
In In re Petersen, 2017 WL 4803893 (Bankr. E.D.Cal.), the debtor filed late returns for 1999 through 2002 more than two years before filing his bankruptcy case. The court held that the plaintiff’s late-filed returns were not returns for purposes of Section 523(a)(1) due to the effect of Section 523(a)(*), which is a judicially crafted definition of what a “return” is. Under it, a filing qualifies as a return if it provides “sufficient data to calculate tax liability”; it “purport[s] to be a return”; the taxpayer has made “an honest and reasonable attempt to satisfy the requirements of the tax law”; and the taxpayer has “execute[d] the return under penalties of perjury.” Therefore, in order to qualify as returns, the plaintiff’s filings had to be an honest and reasonable attempt to comply with the requirement that timely returns be filed. They were not.
The plaintiff’s filings for 1999 through 2002 were made between 11 and 8 years after they were due, and more than 5 years after the Internal Revenue Service assessed the plaintiff’s income tax liabilities without the benefit of his returns. The plaintiff received communications from the Internal Revenue Service in 2005, 2006 and 2007 about his unfiled returns but he chose to ignore them.
Id. at *3. The court noted that In the IRS’s view, a late-filed return may be a return for purposes of §523(a)(1) provided it is filed before a debtor’s taxes are assessed without the benefit of a return. Such a late return fulfills its essential purpose—self-reporting and assessment of income tax. See also, In re Nedelka, 595 B.R. 449 (Bankr.D.Del.2018), which stated that a late filed return does not represent “an honest and reasonable attempt to satisfy the requirements of the tax law” if it is filed after an IRS assessment.
Matthew T. Gensburg