by Whether a post-assessment tax return represents an honest and reasonable attempt to comply with tax laws and is a “return” within the meaning of section 523(a)(*), depends on the taxpayer’s subjective intent and the content of the information provided in the late-filed return. Biggers v. I.R.S., No. 15-41 (M.D. Tenn. Sept. 9, 2016).
After Pamela and James Biggers failed to file tax returns for several years, the IRS assessed federal taxes against James. In February, 2007, approximately one year after the IRS performed its final tax assessment, the Biggers filed joint tax returns for the years that had been assessed against James. Their returns showed different tax liability than that which had been determined by the IRS with several years claiming a lower liability and one year claiming higher liability. The Biggers then filed a chapter 7 bankruptcy petition and sought to discharge their tax debts for those years.
Relying on United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029 (6th Cir. 1999), the bankruptcy court found that the Biggers’ tax liability was not dischargeable (with the exception of the overage) because their returns showing reduced liability did not serve any purpose and, therefore, did not constitute “returns” within the meaning of section 523(a)(*). The court granted summary judgment in favor of the IRS. In re Biggers, 528 B.R. 870 (Bankr. M.D. Tenn. 2015).
Section 523(a)(1)(B)(i) excludes from discharge any debt “with respect to which a return, or equivalent report or notice, if required … was not filed or given.” Under the hanging paragraph of section 523(a), added to the Code in the BAPCPA amendments of 2005, a return “must satisfy the requirements of applicable nonbankruptcy law and be filed in accordance with applicable filing requirements.”
On appeal, the district court addressed the split in the circuits as to the effect of the BAPCPA definition of “return” on pre-BAPCPA analysis. The court noted that the First, Fifth and Tenth circuits have adopted the hard line that no late-filed return constitutes a “return,” based on the reasoning set forth in McCoy v. Mississippi State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012). In a departure from its typical stance on this view, the IRS here offered the McCoy rule as an alternative basis for affirming the bankruptcy court judgment. The district court, however, rejected the “draconian” McCoy rule as being contrary to the long-standing bankruptcy principle that exceptions to discharge should be strictly construed in favor of the debtor.
Rather, the district court applied the pre-BAPCPA Beard test under which a “return” must, (1) purport to be a return; (2) be executed under penalty of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax law. Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (6th Cir. 1984). The issue in this case revolved around the fourth element of the Beard test. In applying the Beard test, the Hindenlang court left open the possibility that a late-filed tax return may represent an honest and reasonable attempt to comply with tax law if it serves a purpose.
Because section 523(a)(*) requires reference to applicable non-bankruptcy law, the court looked to how the federal tax court regards late-filed returns, and found that the tax court applies a subjective test taking into consideration the “taxpayer’s action and intent, as well as to the nature of the information provided.”
The court cited with favor, Judge Easterbrook’s dissent in In re Payne, 431 F.3d 1055 (7th Cir. 2005), in which he argued that the Treasury Regulations provide for taxpayers to file tax returns even after the IRS has conducted its own assessment, indicating that the Treasury deems even post-assessment returns to be of value. Moreover, compromise of delinquent tax liability demands that the taxpayer file his own return even after the IRS has conducted its independent assessment.
The court concluded that “the determination of the fourth prong of Beard is a subjective test that allows for circumstances in which there can be an honest and reasonable attempt to comply with the tax law even after assessment by the IRS and even when untimely forms do not report additional tax liability.” The bankruptcy court, therefore, erred by considering only the timing of the Biggers’ returns and whether there was any additional tax liability revealed by them.
Biggers MD Tenn opinion Sept 2016