Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”

Posted by NCBRC - October 25, 2021

The Ninth Circuit affirmed the opinion of the bankruptcy appellate panel finding that a state-mandated notification to the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Cal. Franchise Tax Bd., No 20-60046 (9th Cir. Oct. 14, 2021) (see discussion of In re Berkovich, 619 B.R. 397 (B.A.P. 9th Cir. 2020) here).

The taxpayer/debtor filed federal and state tax returns for the years 2003, 2004, and 2005. In 2008, the IRS reevaluated the debtor’s tax liability and assessed an additional $145,000 in taxes for those years. The debtor failed to file a report of the change with the California Franchise Tax Board (FTB) as required by California tax code section 18622(a). After learning of the federal tax increase from the IRS, the FTB assessed the debtor additional $45,000 in state taxes for those years.

Cal. Rev. & Tax. Code § 18622(a) provides that when the IRS alters a taxpayer’s federal tax liability that taxpayer must report the change to the FTB. Section 523(a)(1)(B) of the Bankruptcy Code, provides that a tax debt for which the debtor failed to file a “return, or equivalent report or notice,” is excepted from discharge. Taking these provisions together, the court found that the state notification requirement met the definition of “other equivalent report or notice” of section 523(a)(1)(B).

The Ninth Circuit adopted and incorporated the opinion of the BAP (with the exception of footnote 6 relating to a separate case).

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