Tax Discharge

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NCBRC and NACBA Urge Second Circuit to Preserve Bankruptcy Court Jurisdiction Over Tax Dischargeability

July 31, 2025 — The National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus brief in the Second Circuit in In re Goebel, No. 25-103, in support of a Chapter 7 debtor seeking a determination that over $500,000 in tax debts owed to the Internal Revenue Service (IRS) were discharged in bankruptcy. The amici urge the court to reject the IRS’s efforts to restrict the bankruptcy court’s ability to determine tax dischargeability and to reaffirm the rights of debtors to obtain a timely and final ruling on the scope of their discharge.

[Read more…] about NCBRC and NACBA Urge Second Circuit to Preserve Bankruptcy Court Jurisdiction Over Tax Dischargeability

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Unemployment Overpayment Not a Priority Tax Debt

Kentucky’s Office of Unemployment Insurance’s claim for an overpayment of unemployment compensation benefits was not entitled to priority in the debtor’s chapter 13 case where the nature of the claim was better characterized as a “penalty” than a “tax.” In re Clardy, No. 22-30089 (Bankr. W.D. Ky. Dec. 1, 2022). [Read more…] about Unemployment Overpayment Not a Priority Tax Debt

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First Circuit Dodges Late-Filed Tax Return Issues

Faced with the question of whether the debtor’s tax debt based on a late-filed tax return was excepted from discharge, the circuit declined to reexamine its holding in Fahey where it applied the strict “one day late” rule, found the debtor waived his argument in support of an objective test that does not consider timing of filing, and instead, held the debtor’s late-filed tax return did not meet Beard’s subjective test for a “return.” In re Kriss, 21-1206 (1st Cir. Nov. 22, 2022). [Read more…] about First Circuit Dodges Late-Filed Tax Return Issues

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“Special Charges” Not Included in Priority Tax Debt

The City of Milwaukee failed to present evidence that the “special charges” on the debtor’s delinquent property tax bill were in the nature of property taxes entitled to priority in the debtor’s chapter 13 plan. In re Peete, No. 21-23863 (Bankr. E.D. Wisc. June 30, 2022).

When the debtor filed for bankruptcy, the City of Milwaukee filed a claim for delinquent property taxes of which it claimed $26,754.99 as an unsecured priority debt. Ninety percent of the claim, however, represented special charges consisting of delinquent municipal services, delinquent storm water account, delinquent water account, and “total other special.” Only $903.36 of the claim represented “tax principal.” Additionally, $2,242.87 of the total amount represented interest and penalties.

The debtor objected to the claim’s priority status arguing that the special charges were not property tax debt entitled to priority under section 507(a)(8)(B). He filed a chapter 13 plan consistent with that view, and the City objected to confirmation. [Read more…] about “Special Charges” Not Included in Priority Tax Debt

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Tenancy by Entirety Not Exempt from IRS Debt

The debtor could not exempt property of the estate which he owned as a tenant in the entirety with his non-filing spouse with respect to a debt he owed to the IRS where section 522(b)(3)(B) exempts such property only to the extent it would be exempt under nonbankruptcy law and the Tax Code permits the IRS to collect against the property. Morgan v. Bruton (In re Morgan), No. 21-891 (N.D. N.C. Aug. 12, 2022). [Read more…] about Tenancy by Entirety Not Exempt from IRS Debt

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Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien

Where tax liens are specifically excepted from the debts to which a debtor’s exempt property cannot be liable, the debtors here could not exercise the trustee’s avoidance powers under section 522(h) to avoid their tax debt, nor could they benefit from the trustee’s successful avoidance action. Hutchinson v. IRS, No. 19-60065, amended opinion (9th Cir.  Dec. 23, 2021).

When the debtors filed for chapter 7 bankruptcy, they owed taxes to the IRS. Of that debt, $162,000 represented penalties and was secured by a lien on the debtors’ home. The debtors filed a two-count adversary complaint. In the first count they alleged that because the IRS claim was tax penalty under section 726(a)(4), the lien securing it was avoidable by the trustee under section 724(a). They alleged that because the trustee had not avoided the lien, they could do so themselves under section 522(h), to the extent the lien encumbered their homestead. In the second count they sought to have the avoided lien preserved for their benefit rather than for the benefit of the estate. The trustee responded asserting his right to avoid the lien for the benefit of the estate. The IRS separately moved to dismiss the debtors’ complaint. The bankruptcy court granted the IRS motion to dismiss. Later, the court entered an order avoiding the lien upon motion by the trustee pursuant to section 724(a). The debtors appealed dismissal of their complaint, and the Bankruptcy Appellate Panel for the Ninth Circuit affirmed. [Read more…] about Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien

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

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). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”

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When a Return Is Not a “Return”

A tax return filed four years after it was due and one year after the IRS completed its own independent tax assessment is not dischargeable under section 523(a) because it does not meet the “honest and reasonable” standard set forth in the Beard test for what constitutes a “return.”  IRS v. Starling, Nos. 20-7478, 20-7954 (S.D.N.Y. Sept. 16, 2021).

When the debtor failed to file his 2002 federal tax return, the IRS, in 2005, sent a notification of delinquency informing the debtor that it had performed its own assessment on his behalf and providing instructions for the debtor to file his own return, contest the one completed by the IRS, or take other action. Upon receiving no response from the debtor, the IRS finalized its assessment in 2006. In 2007, the debtor filed a return for the 2002 taxes which mirrored the assessment conducted by the IRS.

The debtor then petitioned for chapter 13 bankruptcy and the IRS filed a claim for the delinquent taxes. Upon completion of his plan and discharge, the debtor had paid off only a portion of the 2002 taxes. The IRS, and its private collection agency, ConServe, continued to dun him for the remaining tax debt until the statute of limitations rendered the debt uncollectible. The debtor then filed a motion in the bankruptcy court seeking sanctions against the IRS and ConServe for violation of the discharge order, asserting that the tax debt had been discharged in his bankruptcy. The bankruptcy court agreed, In re Starling, 617 B.R. 208 (Bankr. S.D.N.Y. 2020), and, after the court denied its motion for reconsideration, the IRS and ConServe appealed to the district court. [Read more…] about When a Return Is Not a “Return”

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Debtor May Avoid County Tax Foreclosure Sale

A county’s tax sale of the debtor’s farm was avoidable as constructively fraudulent under section 548, where the debtor was insolvent at the time of the title transfer and the tax debt was substantially less than the fair market value of the property. DuVall v. County of Ontario, No.19-20179, Adv. Proc. No. 19-2011 (Bankr. W.D. N.Y. Feb. 18, 2021). [Read more…] about Debtor May Avoid County Tax Foreclosure Sale

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

A state-mandated notification with 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. Calif. Franchise Tax Bd., No. 20-1025 (B.A.P. 9th Cir. Oct. 5, 2020). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”