by One step forward, two steps back. Two courts out of Massachusetts reached opposite conclusions on the issue of whether a late-filed tax return may be discharged in bankruptcy. Although both courts ostensibly relied on the same Massachusetts tax law, the issue ultimately came down to differing interpretation of language in BAPCPA. In a parenthetical that packs a punch, section 523(a)(*) defines a return as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The question before both courts was whether “applicable filing requirements” refers only to proper forms and documentation, or includes a timeliness factor. The BAP for the First Circuit found the former, Gonzalez v. Mass. Dept. of Rev., No. 13-26 (March 6, 2014), while a Massachusetts District Court found the latter, Perkins v. Mass. Dept. of Rev. (In re Perkins), No. 13-30107, consolidated with, Fahey v. Mass. Dept. of Rev. (In re Fahey), No. 13-11875 (D. Mass. March 7, 2014).
In each case the debtor sought to discharge state tax liabilities for which he had filed late tax returns and no independent assessment had been conducted by the MDOR. The MDOR objected arguing that the late-filed tax returns did not qualify as “returns” for purposes of § 523(a), and that § 523(a)(1)(B)(i) renders nondischargeable tax liabilities for which a return was not filed. The MDOR urged the court to adopt the rule that no late-filed return can be a “return” for dischargeability purposes, unless it is filed under the “safe harbor” provision of IRC section 1060(a), under which the IRS fills out the late return with the debtor’s cooperation. In so arguing, the MDOR relied on federal cases such as Creekmore v. Internal Revenue Serv. (In re Creekmore), 401 B.R. 748 (Bankr. N.D. Miss. 2008), and the state tax case out of the Fifth Circuit, McCoy v. Miss. State Tax Comm’n, 666 F.3d 924 (5th Cir. 2012). The bankruptcy courts found in favor of the debtors in Gonzalez and Perkins, and in favor of the MDOR in Fahey.
On appeal, the BAP in Gonzalez began by noting that section 523(a)(1)(B)(ii) makes specific provision for nondischargeability of tax returns filed both late and within two years of bankruptcy. Therefore, it found that untimeliness of filing alone was not intended to preclude discharge of tax liabilities. The panel turned to whether the debtor had filed a “return” under Massachusetts law. It found the return filed by the debtor qualified as a “return” for dischargeability purposes because state law defines a “return” in terms of proper completion of forms and presentation of documents. 830 Mass. Code Regs. 62C.26.1(2). There is no timeliness requirement in the state definition of a return. “In other words, the determination is controlled by what the debtor filed, and not when.”
The court noted that there is disagreement among the courts as to whether section 523(a)(*) abrogates the pre-BAPCPA, common law test set out in Beard v. Comm’r, 82 T.C. 766, 774-79 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986), for determining whether a late-filed return qualifies as a “return” for purposes of dischargeability. That test applies a four-part analysis under which a late-filed return that represents an “honest and reasonable attempt to satisfy the requirement of the tax law,” would be a “return” for discharge purposes (the other three prongs of the test are typically not dispositive of the issue). The BAP declined to resolve the issue of whether the Beard test is still viable since the debtor’s return met state requirements for a “return.” The court did, however, reject the draconian rule set forth in McCoy stating: “We decline to adopt such a ‘per se’ rule that any late-filed return is not a ‘return’ for the following two reasons: exceptions to discharge must be strictly construed in favor of the debtor; and under the ‘two-year rule,’ it is an undisputed fact that debtors’ late tax returns are eligible for a discharge. 11 U.S.C. § 523(a)(1)(B)(ii).” See also United States of America v. Martin (In re Martin), 428 B.R. 635, 639 (Bankr. D. Colo. 2012) (rejecting McCoy as unsupported by statutory text and logic). In more generally applicable language, the court added that “the definition of ‘return’ in the ‘hanging paragraph,’ § 523(*), appears to be grounded on what is filed rather than when it is filed because it specifically includes a late-filed return under § 6020 of the Internal Revenue Code.”
The court in Perkins and Fahey came to the opposite conclusion with respect to whether timing of filing is an integral part of the definition of “return” under Massachusetts law. The Perkins court, instead of looking to the state law definition, incorporated the separate timing requirement which states that, “[e]xcept as otherwise provided, returns under this section shall be made on or before the fifteenth day of the fourth month following the close of each taxable year.” Thus, the court used the defined term to narrow its definition. The court came down in support of McCoy, specifically rejecting the argument that the McCoy approach renders section 523(a)(1)(B)(ii) superfluous because of the so-called “safe harbor” set out in section 1060(a).
It is notable that even the IRS does not favor the conclusion in McCoy. Instead, the IRS offers the solution—problematic in its own right, but more reasonable overall—of considering late-filed returns to be “returns” so long as they are filed prior to a tax assessment under section 1060(b).