9th Circuit BAP Discusses Late-Filed Return Dischargeability

Posted by NCBRC - January 12, 2016

The Bankruptcy Appellate Panel for the Ninth Circuit found that the bankruptcy court erred by failing to follow Ninth Circuit precedent when it held that a late-filed tax return is a “return” for purposes of dischargeability so long as it meets the objective test of proper form and substance. United States v. Martin, No. 14-1180 (B.A.P. 9th Cir. Dec. 17, 2015).

The Martins filed their tax returns after the IRS had conducted its own assessment for the delinquent years. In their bankruptcy, the Martins filed an adversary proceeding to have the tax debts declared dischargeable and the IRS opposed on the basis that, under section 523(a)(1)(B)(i), the debts were for taxes for which no return had been filed and were therefore nondischargeable.

Section 523(a) provides an exception to discharge for a tax debt for which a return was not filed. In BAPCPA, Congress defined “return” for nondischargeability purposes 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 a similar State or local law.”

In finding that the Martins filed a “return” and that their tax debt was therefore dischargeable, the bankruptcy court applied the test set forth in Beard v. Commissioner, 82 T.C. 766, 774–79 (1984), aff’d 793 F.2d 139 (6th Cir. 1986). Under that test, to be a “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.” As is often the case, the decision turned on the fourth factor. The bankruptcy court applied an objective test that examined whether the documents filed by the debtors met the filing requirements on their face without regard to the timing of the filing, and found that the Martins’ tax returns constituted an honest and reasonable attempt to comply with tax laws.

The BAP began its analysis by discussing the more draconian “literal” approach which many courts, notably, McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), have adopted when applying the hanging paragraph. These courts have found that “applicable filing requirements” includes time deadlines and therefore renders all late-filed returns, with the exception of those filed pursuant to section 6020(a), nondischargeable.

The BAP strongly disagreed with these decisions concluding that the literal reading of the statutory language was contradicted by legislative history and other provisions in the Code and was therefore inappropriate. Specific problems the panel found included:

  1. A debtor who files voluntarily but late is treated more harshly than a debtor who never files at all but for whom the IRS “fortuitously” files on his behalf under section 6020(a).
  2. Congress’s inclusion of language in the hanging paragraph specifically excluding returns filed under 6020(b) is rendered superfluous.
  3. Section 523(a)(1)(B)(ii) which predated the hanging paragraph and through which Congress dealt with tax debts associated with late-filed returns is rendered “all but meaningless.”
  4. There is no legislative commentary to support the approach.

Based on these factors, the panel roundly rejected the reasoning in McCoy and its progeny and turned its attention to the action taken by the bankruptcy court. It found that, though the bankruptcy court correctly rejected the McCoy line of reasoning, it failed to apply the Beard test in accordance with Ninth Circuit precedent. “In [the bankruptcy court’s] version, the prong of the test focusing on the honesty and reasonableness of the debtor’s efforts to file the return is narrow in scope and considers only the form and substance of the purported return while ignoring the length of delay, the reason for the delay, and the number of tax years missed.” The panel found that this version of the Beard test was contrary to United States v. Hatton (In re Hatton), 220 F.3d 1057, 1060–61 (9th Cir. 2000) (“Hatton II”), under which the Ninth Circuit gave the  “honest and reasonable” requirement a broad and partially subjective interpretation, including taking into consideration the tax debtor’s delay in filing and the reasons for it. By failing to consider the Martins’ delay and the circumstances surrounding it, the bankruptcy court erred.

The panel went on to discuss the approach endorsed by the IRS that once the IRS has completed a tax assessment under section 6020(b), the tax debtor who then files an independent return can no longer claim to have filed a “return” within the meaning of the hanging paragraph. The panel agreed with the bankruptcy court that the IRS’s position is insupportable because “the tax debt within the meaning of the Bankruptcy Code preexists both the filing of the return and the issuance of the IRS assessment.” “An assessment is merely a method for fixing the amount of that debt and not the source of the debt itself.” The court also rejected the IRS’s contention that once it makes its own assessment anything the debtor files is rendered irrelevant finding that Congress could easily have stated that rule, and noting that if the Ninth Circuit had adopted that position in Hatton, there would have been no reason to apply the Beard test at all.

The court remanded with instructions that the bankruptcy court look to all the relevant facts including “the number of missing returns, the length of the delay, the reasons for the delay, and any other circumstances reasonably pertaining to the honesty and reasonableness of the Martins’ efforts.”

Martin BAP 9th opinion



One Comment

  • NewEnglander
    Posted March 17, 2016 at 4:05 pm | Permalink

    I’m confused.

    The article opens with “The Bankruptcy Appellate Panel for the Ninth Circuit found that the bankruptcy court erred by failing to follow Ninth Circuit precedent when it held that a late-filed tax return IS a “return” for purposes of dischargeability…”

    But then it seems to go on to explain how the BAP disagrees with recent precedent…unless I’ve misread the details.

    In cases where the IRS has NOT yet assessed, but the returns were filed late, do the BAP/BC agree that late-filed tax is still a return for the purpose of discharge?

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