“Equivalent Report” Workaround Fails in First Circuit

Posted by NCBRC - September 22, 2016

A late-filed tax return is not an “equivalent report” for purposes of dischargeability. Nilsen v. Mass. Dept. of Rev., No. 16-10148 (D. Mass. Sept. 6, 2016). Johan Nilsen filed several of his state and federal tax returns one to five years late. Neither the IRS nor the state department of revenue had conducted their own assessment of Mr. Nilsen’s taxes prior to his filing. After some of his debts were discharged in chapter 7 bankruptcy, Mr. Nilsen filed an adversary complaint seeking to discharge his tax debts. The bankruptcy court granted the tax authorities’ motion for summary judgment finding that the tax debts were nondischargeable under section 523(a)(1)(B). In re Nilsen, 542 B.R. 640 (Bankr. D. Mass. 2015).

Section 523(a)(1)(B)(i) provides that a tax debt for which no “return, or equivalent report or notice,” was filed is not subject to discharge. In the 2005 BAPCPA amendments, Congress “defined” a “return” in the hanging paragraph to section 523(a) as: “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The First Circuit has adopted the hard-line McCoy rule that a late-filed return is not a “return” within that definition. Perkins v. Massachusetts Dep’t of Revenue, 507 B.R. 45 (D. Mass. 2014), aff’d sub nom. In re Fahey, 779 F.3d 1 (1st Cir. 2015).

Mr. Nilsen argued that his filings were not “returns” but were “equivalent reports” under the hanging paragraph and that the court should apply the pre-BAPCPA Beard test to his filings to determine whether his tax debts qualify for discharge. The court noted that the first prong of the Beard test is that the filing “purport to be a return” and therefore that test would not apply to an “equivalent report.” In any case, the court found that Mr. Nilsen’s filings clearly purported to be returns as he filed the state and federal tax return forms. Thus, his effort to work around the decision in Fahey was unavailing. He filed returns. The returns were late. Therefore, under First Circuit precedent, the tax debts were not dischargeable. In sum, the court rejected Mr. Nilsen’s argument that his filings were “equivalent reports” because they were clearly returns. Because of that finding, Mr. Nilsen was not entitled to discharge of those tax debts because he failed to file “returns.”

Nilsen D Mass opinion Sept 2016


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