Tax Liability Nondischargeable Where Returns Filed Post-Assessment

Posted by NCBRC - May 19, 2014

Massachusetts law treats post-assessment, late-filed, tax returns as “abatement applications” and, therefore, any tax liability based on those documents is nondischargeable. Pendergast v. Mass. Dept. of Rev. (In re Pendergast), No. 13-32 and Wood v. Mass. Dept of Rev. (In re Wood), No. 13-058 (B.A.P. 1st Cir. May 2, 2014). Both Pendergast and Wood filed late state tax returns covering tax liability for six tax years. In both cases, the MDOR had already assessed the debtors’ tax liabilities for several of the years covered by the late-filed returns. After receiving their bankruptcy discharges, both Pendergast and Wood, through the same counsel, initiated adversary proceedings against the MDOR seeking findings that their tax liabilities had been discharged.

The Bankruptcy Court adopted the strict rule that late-filed returns cannot be deemed “returns” for purposes of dischargeability and granted summary judgment in favor of the MDOR, first in Pendergast, and then, based on the same reasoning, in Wood. See Pendergast v. Mass. Dep’t of Revenue (In re Pendergast), 494 B.R. 8, 13-15 (Bankr. D. Mass. 2013). Both debtors appealed separately and the Bankruptcy Appellate Panel decided their cases together.

In 2005, Congress added a definition of “return” for purposes of determining whether tax liability may be discharged in bankruptcy. Section 523(a)(*) provides: “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.”

On appeal, the panel noted that this provision replaced the pre-BAPCPA “Beard” test which applied a four-part inquiry including consideration of whether the late-filed return represented an honest and reasonable attempt to satisfy the requirements of the tax law. Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). The panel found that now the proper inquiry is whether state law defines “return” in terms of timeliness of filing.

In an earlier decision by the BAP for the First Circuit, the panel considered the proper treatment of late-filed tax returns post-BAPCPA. In re Gonzalez v. Mass. Dep’t of Revenue (In re Gonzalez), 489 B.R. 1 (Bankr. D. Mass. 2013), aff’d, 506 B.R. 317 (B.A.P. 1st Cir. 2014). There, the panel found that under Massachusetts law there is “no timeliness requirement encompassed in the applicable nonbankruptcy law governing the case of a late-filed – but pre-assessment – income tax return in Massachusetts.” Therefore, late-filed, pre-assessment, returns were deemed “returns” for dischargeability purposes. In that case, however, the panel specifically reserved the question of whether an intervening tax assessment by the taxing authority would change the result. See also Brown v. Mass. Dep’t of Revenue (In re Brown), 489 B.R. 1 (Bankr. D. Mass. 2013), aff’d, No. MW 13-027 (B.A.P. 1st Cir. April 3, 2014).

With respect to post-assessment returns, the panel took the middle road between the draconian finding in McCoy v. Miss. State Tax Comm’n, 666 F.3d 924 (5th Cir. 2012), that a late-filed return can never be a “return” for dischargeability purposes unless filed under section 6020(a), and the view that timeliness is simply not an “applicable filing requirement” determinative of dischargeability. See, e.g., In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006). Rather, as it did in Gonzalez, the panel turned to state law and found that under Massachusetts law once the Department of Revenue assessment has been made, any late-filed return submitted by the taxpayer is deemed an “abatement application” rather than a “return.” The court concluded, therefore, that a “return” filed after the taxing authority has done an independent assessment under state law, does not satisfy the requirements for dischargeability.

This issue has been rattling through the lower courts and is currently on appeal in the First Circuit: See Gonzalez, No. 14-9002 (1st Cir.), Brown, No. 14-9003 (1st Cir.) (untimeliness does not preclude discharge of tax liability); and In re Perkins, No. 14-1350 (1st Cir.), and In re Fahey, No. 14-1328 (1st Cir.) (untimeliness precludes discharge unless “safe harbor” of section 6020(a) applies); and the Ninth Circuit: See In re Smith, Case No. 14-15857 (9th Cir., filed May 1, 2014) (bankruptcy court applied the minority approach to the Beard test and held the debt dischargeable; the district court reversed, applying the majority approach to the Beard test. Neither party advocated McCoy rule).

Pendergast opinion


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