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
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”
ACA’s Shared Responsibility Payment Debt Not Entitled to Priority
The shared responsibility payment under the Affordable Care Act is not an “excise tax,” within the meaning of section 507(a)(8) and, therefore, the IRS’s claim for unpaid SRP was not entitled to priority in bankruptcy. IRS v. Huenerberg, No. 18-1617 (E.D. Wisc. Oct. 22, 2020).
When the debtors filed for chapter 13 bankruptcy, the IRS submitted a claim for over $6,000 in unpaid taxes, a portion of which was attributable to the debtors’ failure to pay what they owed under the Affordable Care Act as their shared responsibility payment (SRP). The IRS sought to have the SRP treated as a priority tax debt under section 507(a). The bankruptcy court found that the SRP did not qualify as an “excise tax” under that section and denied the IRS’s motion. The IRS appealed to the district court. [Read more…] about ACA’s Shared Responsibility Payment Debt Not Entitled to Priority
ACA’s Shared Responsibility Payment is Priority Tax Debt
The District Court for the Eastern District of Louisiana determined that the tax assessment for failure to maintain health insurance under the Affordable Care Act is a nondischargeable priority tax debt under section 507(a)(8)(A)(iii), rather than a penalty dischargeable in bankruptcy under section 523(a)(7) and 1328(a). United States v. Chesteen, No. 18-2077 (E.D. La. Feb. 25, 2019).
As the Chapter 13 debtor, John Chesteen pointed out on appeal, the shared responsibility payment at issue is described numerous times in the ACA as a penalty and is collected the same way other tax penalties are collected. The district court noted, however, that statutory descriptions, while informative, are not dispositive of whether a payment is a tax or a penalty. Rather, courts rely on the underlying purpose of the payment. A “tax” is a burden placed on the taxpayer for the financial support of the government, and a “penalty” is a punishment for an unlawful act. [Read more…] about ACA’s Shared Responsibility Payment is Priority Tax Debt
Bankruptcy Court Denies USA’s Blanket Request for Tolling of Deadlines During Lapse of Appropriations
In an unpublished opinion, the Bankruptcy Court for the Northern District of Ohio recently denied a motion from the United States Attorney’s Office “requesting a tolling of all deadlines applicable to the United States, its agencies, or its employees, including, without limitation a tolling of all bar dates for the filing of proofs of claim and request for the payment of administrative expenses with respect to the United States and its agencies from December 22, 2018 through January 28, 2019 (the “Appropriations Lapse”).”
To read more and access the opinion click here.
Court Applies Beard Test to Late-Filed Return
The District Court for the Middle District of Florida declined to follow the First Circuit’s direction on the treatment of tax debts based on late-filed returns and instead applied the pre-BAPCPA Beard test to find that the debtor’s Massachusetts state tax debt was discharged in bankruptcy. Mass. Dept. of Rev. v. Shek, No. 18-341 (M.D. Fla. Nov. 13, 2018). [Read more…] about Court Applies Beard Test to Late-Filed Return
Third Circuit Applies Beard Test to Late-Filed Return Issue
The Third Circuit entered the late-filed tax return fray and applied the Beard test to the question of whether such return, filed post-IRS assessment, is a “return” for dischargeabilty purposes. It found that, at least in this case, it was not. Giacchi v. United States, No. 15-3761 (3rd. Cir. May 5, 2017).
Thomas Giacchi filed his income tax returns after the IRS had performed an independent assessment. The bankruptcy court found that his return was not a “return” within the meaning of section 523(a)(1)(B) and, therefore, the taxes were non-dischargeable. The district court affirmed.
On appeal to the Third Circuit, the court, declining to come down on either side of the “one day late” rule, instead applied the pre-BAPCPA analysis set forth in Beard v. Commissioner of Internal Revenue, 82 T.C. 766, 777 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986). The court specifically addressed the fourth prong of that test which looks to whether the debtor’s return represents an “honest and reasonable attempt to satisfy the requirements of the tax law.”
The court began with the premise that because a tax return is intended to provide information to the tax authority as to the taxpayer’s tax liability, a return filed after the IRS has already conducted its own assessment will rarely be an “honest and reasonable” attempt to comply with tax laws. The court went on to find that this case was no exception to that general rule.
In so holding, the court rejected Mr. Giacchi’s argument, supported by In re Colsen, 446 F.3d 836 (8th Cir. 2006), that the timing of the filing is not a relevant factor in whether the tax return meets the requirements for discharge, but that the court should look merely at the content of the filing to determine whether it is accurate and complete.
Calling it a self-serving attempt to reduce his liability, the court was also unpersuaded by Mr. Giacchi’s argument that because his late-filed return showed a smaller tax liability than that shown by the IRS assessment, his return was of value to the IRS.
Finally, Mr. Giacchi’s “passing” argument that his “emotional state” should excuse his delinquency likewise garnered no relief from the court. Acknowledging that circumstances could demonstrate a good faith attempt to comply with tax law, Mr. Giacchi’s claim did not provide that excuse.
SCOTUS Declines to Decide Late-Filed Tax Return Issue
The Supreme Court denied cert. In the case of Smith v. I.R.S., No. 16-497 (U.S.) dashing hopes of a definitive resolution of the issue of whether a late-filed tax return may constitute a “return” within the meaning of the hanging paragraph to section 523(a) (petition denied, (Feb. 21, 2017)). As NACBA/NCBRC argued in its amicus brief in support of certiorari, the question has deeply divided the courts with the Eighth Circuit relying on the accuracy of the documents purporting to constitute the return and permitting discharge if a bankruptcy petition is filed two years after a late-filed return, Colsen v. the United States (In re Colsen), 446 F.3d 836 (8th Cir. 2006); the Fourth, Sixth, Seventh, Ninth, and Eleventh Circuits, finding that once the IRS has made its assessment of tax liability the late-filed return is not considered a return for purposes of bankruptcy dischargeability, e.g. Smith v. United States (In re Smith), 828 F.3d 1094 (9th Cir. 2016); and the First, Fifth and Tenth Circuits taking the draconian approach epitomized by McCoy v. Mississippi State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), that all taxes described on late-filed returns—even those filed one day late for any reason—are barred from discharge. Unfortunately, given the sharp divide between circuits, treatment of a late-filed return will continue to be based on the luck of the geographical draw.
Smith v. I.R.S., No. 16-497 (USSCt.)
Type: Amicus
Date: November 14, 2016
Description: Late-filed tax return.
Result: Petition denied, February 21, 2017.
Harsh McCoy Rule Rejected in Late Tax Return Cases
The bankruptcy court for the district of New Jersey bucked the current trend, and “agree[d] with those decisions that hold that the timing of the filing is not a factor in determining whether the document meets the definition of a ‘return.’”In re Davis, No. 14-26507 (Bankr. D. N.J. Sept. 29, 2015). See also, In re Maitland, 531 B.R. 516 (Bankr. D. N.J. 2015). [Read more…] about Harsh McCoy Rule Rejected in Late Tax Return Cases