Faxed Copies of IRS Tax Adjustments Not a “Return” for Discharge Purposes

Posted by NCBRC - January 4, 2022

The debtor’s faxed copies of the IRS adjustment to his federal taxes did not constitute a “return” within the meaning of section 523(a)’s hanging paragraph because the California law process with which his faxes complied was not “similar” to 26 U.S.C. § 6020(a), which authorizes the IRS to prepare a tax return when a taxpayer fails to do so. Sienega v. Calif. Franchise Tax Bd., No. 20-60047 (9th Cir. Dec. 6, 2021).

The debtor failed to file state tax returns with the California Franchise Tax Board (FTB) for four years. When the federal IRS made adjustments to the debtor’s federal taxes for those years, the debtor’s counsel notified the FTB of the changes by faxing a copy of the IRS form showing the changes and a cover sheet stating in part: “Pursuant to California State law, Mr. and Mrs. Sienega hereby notify the Franchise Tax Board that the Internal Revenue Service has made recent adjustments to their [year] federal tax return, which they concede.” This filing was in satisfaction of California tax law, Cal. Rev. & Tax. Code §18622(a), requiring state taxpayers to notify the FTB of any adjustments made by the IRS to the taxpayer’s federal taxes within six months of the adjustment.

Mr. Sienega filed for chapter 13 bankruptcy which he later converted to chapter 7. In the meantime, the FTB assessed state taxes against Mr. Sienega for the four years he had failed to file returns. Mr. Sienega did not dispute the tax debt and the FTB filed a claim in the debtor’s bankruptcy case in the amount of taxes owing. The FTB later filed an adversary complaint seeking a finding that the taxes were nondischargeable under section 523(a)(1)(B). The bankruptcy court found in favor of the FTB and the bankruptcy appellate panel affirmed. The debtor appealed to the Ninth Circuit.

Section 523(a)(1)(B) makes tax debts nondischargeable where the debtor failed to file a tax return for those tax years. In this case, the debtor argued that the faxes notifying the FTB of the adjustments made by the IRS constituted a “return” for those same years. The debtor pointed to the hanging paragraph to section 523(a) which provides in part:

“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, . .”

The debtor argued that the form filed pursuant to Cal. Rev. & Tax. Code, section 18622 was sufficiently similar to an IRS return prepared under section 6020(a) that it met the “return” requirement as defined in the hanging paragraph of section 523(a).

The Ninth Circuit applies the Beard test to the question of whether a particular filing constitutes a “return” for purposes of tax debt discharge. Under that test a filing is a “return” if it “(1) purport[s] to be a return; (2) is executed under penalty of perjury; (3) contains enough data to allow computation of the tax; and (4) represents an ‘honest and reasonable attempt to satisfy the requirements of the tax law.’” Beard v. Commissioner, 82 T.C. 766 (T.C. 1984).

The court found the faxes showing the IRS adjustment did not satisfy any component of the Beard test. They did not purport to be returns, the debtor did not sign them under penalty of perjury, and they did not contain the information necessary to allow the FTB to calculate the debtor’s taxes. The court concluded that the faxed documents were not an “honest and reasonable attempt to satisfy the requirements of the tax law.”

The court noted that the case of In re Berkovich, 15 F.4th 997, 998 (9th Cir. 2021) found that a form filed under Cal. Rev. & Tax. Code § 18622(a), was an “equivalent report” under section 523(a)(1)(B), but cautioned that Berkovich “expressly rejected the argument that a ‘report’ must meet the definition of a ‘return.’”

Though the issue was whether the faxes constituted a “return,” the court found that “the BAP correctly concluded that sending faxes was not the equivalent of paying taxes.”

Sienega 9th Cir Dec 2021



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