by In In re Mallo, No. 13-98 (Sept. 11, 2013), and In re Martin, No. 12-3380 (Sept. 23, 2013), the District Court in Colorado was faced with determining under what circumstances a late-filed tax return, filed after the IRS had conducted its own assessment, could be deemed a “return” within the meaning of section 523(a)(1)(B)(i). The cases arrived on the desk of District Judge Babcock via different routes. In Mallo, the bankruptcy court found that the debtors’ late-filed return did not constitute an “honest and reasonable” attempt to comply with tax requirements and, therefore, found the tax debt non-dischargeable. Mallo v. Internal Revenue Service (In re Mallo), 2013 WL 49774 (Bankr. D.Colo. Jan. 3, 2013). In Martin, the appeal was brought by the IRS after the bankruptcy court found that the timing of a filing was not a factor in determining whether the filing was an “honest and reasonable” attempt to comply. In re Martin, 482 B.R. 635, 636 (Bankr. D.Colo. 2012).
The facts in both cases were essentially the same. The debtors became delinquent on their taxes and the IRS notified them of the deficiency and then assessed taxes pursuant to its power under section 6020(b) of the Tax Code. After the IRS filed a Notice of Intent to Levy, the debtors filed their 1040 forms and the IRS abated a portion of their taxes based upon those forms. After Debtors obtained a chapter 7 discharge they filed adversary proceedings seeking a finding that their tax liability was discharged.
The district court discussed three approaches to this issue: 1) the McCoy approach which says that a late-filed return can never been deemed a “return” for purposes of dischargeability unless filed by the IRS pursuant to section 6020(a) (IRS assessment performed with participation by tax debtor); 2) the IRS approach which allows for a late-filed return to be deemed a “return” so long as the IRS has not already conducted an assessment under 6020(b) (IRS assessment without assistance from tax debtor); and 3) the pre-BAPCPA Beard test approach which applies a four-part analysis. The court noted that a Bankruptcy Appellate Panel for the Tenth Circuit recently declined to adopt any of these approaches finding, instead, that the facts of the case before it, would fail each of them. Wogoman v. Internal Revenue Service (In re Wogoman), 475 B.R. 239 (B.A.P. 10th Cir. July 3, 2012).
Like both courts below, and at the urging of both the debtors and the IRS, the district court rejected the harsh and inflexible ruling set forth in the fifth circuit case of In re McCoy, 666 F.3d 924, 932 (5th Cir. 2012), cert. denied,133 S.Ct. 192, 184 L.Ed.2d 38 (U.S. Oct. 1, 2012), as being unsupported by statutory text and logic. Neither did the court accept the IRS’s official position. With respect to that approach, the court stated: “Whether a tax debt is or is not dischargeable based on the debtor’s self-assessment of that debt, via the timing of his or her filing before or after assessment, is clearly not contemplated by a plain reading of the statutory language.” After rejecting both per se positions, the court returned to the pre-BAPCPA Beard test and found that it remained the most reasonable approach to the issue.
The four-part Beard test focuses on the nature of the document filed, specifying that, in order for a document to qualify as a return: (1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). See also United States v. Hindenlang, 164 F.3d 1029, 1033 (6th Cir. 1986).
In Wogoman the BAP found that, based on the timing of the late-filed return, it failed the fourth prong of the Beard test. In so holding, the BAP rejected the most debtor-friendly finding of a few courts which have held that the debtor’s motive should never be a factor in answering the question of whether a late return is dischargeable. Those courts endorse a position that the fourth prong of Beard is a purely objective test under which, so long as the return itself complies with filing requirements as to form and documentation, it constitutes a “return.” See In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006). The district court agreed with Wogoman to find that if the fourth prong were interpreted without a subjective component that prong would be rendered irrelevant by the previous three prongs which cover the objective aspects of the filing.
The court concluded that in both Martin and Mallo, the debtors’ unexcused delay in filing their tax returns until after the IRS had assessed tax liability and instituted collection efforts, did not constitute an “honest and reasonable” attempt to comply with IRS requirements. On a positive note, however, the court did not adopt a per se rule that a post-assessment filing would necessarily fail the Beard test. The court allowed that there may be “circumstances beyond the taxpayer’s control that prevented him or her from filing a timely return.” Although the debtors were unsuccessful in both of these appeals, the ultimate rulings which rejected both the untenable decision in McCoy and the unsupported position of the IRS, and instead held to the pre-BAPCPA analysis set forth in Beard, leave the innocent debtor with room to argue extenuating circumstances.