Widening an existing split of circuits, the Eleventh Circuit rejected the one-day-late rule adopted by three circuits and held that a tax debt can be discharged even if the return was filed late.

The Atlanta-based circuit aligned itself with the Third, Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, which employ the four-part Beard test, named for a 1984 Tax Court decision. Beard v. Commissioner of IRS, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). Following Beard, it’s possible — but not automatic — to discharge the debt on a late-filed tax return.

The First, Fifth and Tenth Circuits hold that a tax debt never can be discharged as a consequence of the hanging paragraph in Section 523(a) if the underlying tax return was filed even one day late.

The Supreme Court has been ducking the split. Columbia University Law Professor Ronald J. Mann attempted to take a one-day-late case to the Supreme Court in 2015. The high court denied certiorari. Mallo v. IRS, 135 S. Ct. 2889, 192 L. Ed. 2d 924 (2015). In February 2017, the justices denied certiorari in Smith v. IRS, where the petitioner’s counsel raising the same issue was Prof. John A.E. Pottow from the University of Michigan Law School. Smith v. IRS, 137 S. Ct. 1066, 197 L. Ed. 2d 176 (2017).

Participating in oral argument in the Eleventh Circuit on behalf of the debtor, Prof. Pottow resurrected the argument and won this time around. If the Massachusetts taxing authority files a petition for certiorari, it will be difficult for the Supreme Court to dodge the question once again.

The January 23 opinion for the Eleventh Circuit by Circuit Judge R. Lanier Anderson, III picks apart the logic employed by the three circuits that refuse to discharge tax debts under all circumstances if the return was even a day late. The statutory analysis employed by Judge Anderson and advocated by Prof. Pottow raises questions of statutory interpretation that are the Supreme Court’s bread and butter.

In a footnote, Judge Anderson said that Prof. Pottow’s “briefing and oral argument were very helpful in untangling this corner of bankruptcy law.”

Simple Facts

The case is a good vehicle for Supreme Court review because it entails none of the difficult issues that sometimes arise under the Beard test. Indeed, the state taxing authority stipulated that the debtor satisfied all four parts of the Beard test. Instead, the state argued that the debt was nondischargeable because the debtor was late in filing his return.

The debtor had filed his 2008 state tax return in late 2009, seven months late. He filed a chapter 7 petition six years later and received a general discharge in January 2016. Then, the state resumed collection activities.

The debtor reopened his bankruptcy case, and the parties filed cross motions for summary judgment on the dischargeability of the tax debt. Bankruptcy Judge Karen S. Jennemann of Orlando, Fla., ruled in favor of the debtor, discharging the debt. She was upheld in district court, prompting the taxing authority to appeal a second time.

The Confusing Statute

Two provisions of the Bankruptcy Code come into play. Section 523(a)(1) bars discharge if no “return” was filed or if the return was filed less than two years before bankruptcy.

Until Congress added the so-called hanging paragraph in Section 523(a) in 2005, the Bankruptcy Code had not defined “return.” Added in 2005, the unnumbered subsection in Section 523(a) defines a “return” as a “return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The term includes “a return prepared pursuant to Section 6020(a)” of the IRS Code but excludes “a return made pursuant to Section 6020(b)” of the IRS Code.

Section 6020(a) governs “substitutes for returns,” where the IRS drafts a return with the taxpayer’s cooperation. Significantly, Judge Anderson quoted the IRS in another case as having said that Section 6020(a) is “almost never used.”

Section 6020(b) allows the IRS to file a return without the taxpayer’s cooperation. In other words, the hanging paragraph bars discharge if the taxing authority has filed a return without the debtor’s cooperation, but permits discharge if the IRS files a return with the debtor’s cooperation.

In substance, the question for Judge Anderson was this: Did the debtor satisfy “the applicable filing requirements”?

Judge Anderson’s Statutory Analysis

The First, Fifth and Tenth Circuits believe that the plain language of the hanging paragraph means that a late tax return does not qualify for discharge. Judge Anderson conceded that the argument “has some force to it.” However, he did not agree that “the phrase ‘applicable filing requirements’ unambiguously includes filing deadlines.” [Emphasis in original.]

To the contrary, he said the “best reading” of “applicable filing requirements” must include the statutory context. He said the court must also devise an interpretation that gives meaning to every word in the statute.

Judge Anderson distinguished between “applicable filing requirements” and “other” filing requirements. He decided that “applicable” means “something different from ‘all.’”

Examining the “statutory context,” Judge Anderson concluded that “applicable” relates to “whether the document at issue can reasonably be deemed a ‘return.’”

Significantly, Judge Anderson noted that Section 523(a)(1) predated the adoption of the hanging paragraph and was not altered by Congress in 2005. “By negative implication,” he said, a tax debt can be discharged if the return was filed more than two years before bankruptcy.

The one-day-late approach, Judge Anderson said, “would render Section 523(a)(1)(B)(ii) a near nullity.” That section “explicitly permits the discharge of at least some late-filed returns,” he said.

Judge Anderson rejected the taxing authority’s approach to statutory interpretation because it “would render the dischargeability limitation in Section 523(a)(1)(B)(ii) insignificant” and would apply only to a “subset of already ‘minute’ set of tax returns.” [Emphasis in original.]

Adopting the analysis of the three circuits, Judge Anderson said, “would run counter” to the Supreme Court’s refusal to construe statutes in a manner that would make them “‘entirely superfluous in all but the most unusual circumstances,’” quoting Roberts v. Sea-Land Services Inc., 566 U.S. 93 (2012).

Judge Anderson said it was “deeply implausible” that Congress intended for “Section 523(a)(1)(B)(ii) to apply only in such a handful of cases despite no such limitation appearing in that provision itself.” He did not believe that Congress would curtail dischargeability “so starkly without a clearer indication that it was indeed intending to do so.”

Judge Anderson explained in detail why he was not persuaded by the opinions from the First, Fifth and Tenth Circuits. He upheld the discharge of the debtor’s tax liability because he determined that the late return satisfied the requirements for a “return” under both the Beard test and Massachusetts tax law.

Will Massachusetts File ‘Cert’?

Massachusetts won in the First Circuit on exactly the same question. Since most Massachusetts residents will file bankruptcy in the First Circuit, the state may see no reason for filing a petition for certiorari from its loss in the Eleventh Circuit.

However, a debtor in the First Circuit in the future could raise the issue expecting to lose but intending to file a petition for certiorari based on the circuit split. One way or another, the issue should eventually bubble to the surface in the Supreme Court.