by The Tenth Circuit has concluded that late-filed tax returns are not “returns” for dischargeability purposes unless filed by the IRS in cooperation with the debtor. Mallo v. IRS (In re Mallo), __ F.3d __, 2014 WL 7360130 (Dec. 29, 2014) (consolidated with In re Martin, 14-1488).
The facts in both Mallo and Martin are 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. The debtors obtained chapter 7 discharges and filed adversary proceedings seeking a finding that their tax liability was discharged. Mallo was denied discharge and Martin was granted discharge by their respective bankruptcy courts.
In a consolidated appeal, the district court applied the pre-BAPCPA, four-part, Beard test which states 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). The district court found that late-filed returns filed after IRS’s independent assessment failed the fourth prong of the Beard test. Though finding against the debtors, the district court left the door open to the possibility that, under appropriate circumstances, a late-filed return that was not filed under section 6020(a) could still qualify as a “return” for dischargeability purposes.
The Tenth Circuit slammed that door.
A “return” is defined in the hanging paragraph to section 523(a) as: “For purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The provision specifies that a return filed by the IRS with the cooperation of the debtor under 26 U.S.C. § 6020(a) is a “return” but a return filed by the IRS without the debtor’s cooperation under section 6020(b) is not.
On appeal, the Tenth Circuit found this language unambiguous despite the differing interpretations among other courts. Representing the two extremes, In re McCoy, 666 F.3d 924 (5th Cir. 2012), held that a filing deadline is an “applicable filing requirement,” and, therefore, a late-filed return can never qualify as a “return” under section 523(a)(*), unless it falls under the 6020(a) exception, while In re Colsen, 446 F.3d 836 (8th Cir. 2006), held that “applicable filing requirements” referred to the form of the return and not the circumstances of its filing.
The Tenth Circuit jettisoned the Beard test, rejected Colsen, and joined forces with McCoy. The court found that the Internal Revenue Code’s timing requirements for filing returns are mandatory, and noted a number of cases, such as Pace v. DiGuglielmo, 544 U.S. 408, 414–15 (2005), in which the timing of a filing has been called “filing requirements.”
[In Pace v. DiGuglielmo, the habeas corpus petitioner argued that the time for filing his petition was tolled while he pursued his state post-conviction remedies even though his state petition was filed late and, the federal tolling statute permitted tolling only for “properly filed” state petitions. The Court found that the late timing of the state court petition was dispositive with respect to tolling the federal petition, in part, because otherwise a petitioner could manipulate the federal limitations period by filing late state court petitions. Unlike the issue of late-filed tax returns, the issue in Pace did not involve the underlying nature of the document filed.
There was a strong dissent in Pace which more closely examined the distinction between filing in accordance with filing preconditions and untimely filing which could preclude judicial determination of the late claim. Justice Stevens, joined by Justices Souter, Ginsburg and Breyer, concluded that the petition was “properly filed” because it was “delivered to, and accepted by, the appropriate court officer for placement into the official record” and complied with the “applicable laws and rules governing filings.”]
In relying on McCoy, the court rejected the arguments put forth by the debtors that: 1) there would be no reason for Congress to have specified that a return filed under 6020(b) is not a “return” for dischargeability purposes if no late-filed return falls under that definition; 2) Congress could not have intended to place complete control in the hands of IRS to determine whether a late-filed return is dischargeable by making its discretionary application of section 6020(a) decisive; 3) the exception to discharge set forth in section 523(a)(1)(B)(ii), which applies to returns that were “filed or given after the date on which such return . . . was last due, . . . and after two years before the date of the filing of the petition,” would be rendered meaningless by a finding that no late-filed return is dischargeable.
The court concluded that Congress intended to make clear that returns filed under 6020(a) are exceptions to nondischargeability and the reference to 6020(b) as not dischargeable is merely offered for illustrative contrast. With respect to section 523(a)(1)(B)(ii), the court found that it was a further restriction upon dischargeability of returns prepared under section 6020(a) rendering those prepared late but within two years of the petition, non-dischargeable.
At base, the court concluded that Congress’s inclusion of the word “filing” in the parenthetical to the hanging paragraph of section 523(a), defeated the debtors’ argument that a “return” should be defined only by the face of the document and not the circumstances of its filing.
The court also rejected the IRS’s middle-ground position that a return filed after the filing deadline but prior to an IRS assessment under 6020(b) could be considered a “return” for dischargeability purposes because the “debt” accrues upon assessment. The court found the relevant issue is when the right to payment arose, not when the amount of the debt was calculated.
Because the Tenth Circuit found “applicable filing requirements” to be unambiguous and inclusive of both the nature of the documents filed and the timing of their filing, it reached the most Draconian of the possible outcomes.