<img src="/AM/images/letters/a.gif" align="LEFT" border="0" hspace="5" vspace="5">Although anecdotal, many Department of Justice and Internal Revenue Service attorneys
who practice bankruptcy would most likely state that one of their largest complaints
with the previous version of the Bankruptcy Code was their inability to enforce
tax compliance, most notably in the filing of tax returns. Consumer debtors
had difficulty in producing or paying for the preparation of tax returns, and
corporate debtors avoided tax compliance by not filing business tax returns
or making tax deposits. One of the principal purposes of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (BAPCPA) was to ensure tax compliance.
As an initial matter, BAPCPA amended 28 U.S.C. §960 (an officer's responsibility
to file tax returns under the authority of a U.S. court) to comport with changes
to the Code under BAPCPA by adding subsections (b) and (c) regarding the payment
of taxes. Section 960(a) requires that:
<blockquote>
(a) Any officers and agents conducting any business under authority of a
United States court shall be subject to all federal, state and local taxes
applicable to such business to the same extent as if it were conducted by
an individual or corporation. 
</blockquote>
See also 26 U.S.C. §§6011, 6012.
New Code §1308 provides that on the first setting of the §341 meeting,
the debtor is required to file all pre-petition tax returns that were due within
four years preceding the petition date. The trustee may allow the debtor a reasonable
amount of time to file the delinquent returns up to a period of 120 days that
may be extended if the debtor is able to show by a preponderance of the evidence
that the failure to file the return is attributable to circumstances beyond
the debtor's control.

Further, the trustee may continue the §341 meeting to allow the debtor
time to file the delinquent returns. If the debtor makes the requisite showing,
the court may give the debtor an additional period of time that does not extend
beyond any lawful extension period, and a party in interest or the U.S. Trustee
may dismiss or convert a case for failure to file tax returns. §1307(e).
Under BAPCPA, "return" as defined in this section now includes a tax
return prepared under 26 U.S.C. §6020(a) or (b).
New Code §521(e)(2)(A) also requires an individual chapter 7 or 11 debtor
to provide to a trustee at least seven days before the initial §341 meeting
a copy of the debtor's most recent tax return or a transcript of that return,
and to provide a copy of that return or transcript to any party who makes a
timely request. Failure to do so requires dismissal unless due to factors beyond
the debtor's control.
A taxing authority may also seek dismissal or conversion of a case if an individual
debtor does not file any tax return that becomes due after the petition date
within 90 days of the request, or fails to obtain an extension of the due date.
§521(j). In addition, an individual debtor in a chapter 7, 11 or 13 case
must file a delinquent tax return for any tax year ending within a three-year
period before the petition date when either the court, U.S. Trustee or any party
in interest requests it. In the context of chapter 13 plan confirmations, new
Code §1325 (a)(9) requires the filing of tax returns as prescribed under
§1308 as a condition of confirmation.
Given all the changes made to the Code regarding tax compliance, there is little
doubt that Congress intended that debtors file their tax returns. That said,
there are already some challenges to how a debtor achieves tax compliance. Although
still in its infancy, and with a dearth of published opinions, a couple of developments
have arisen under BAPCPA. Notably, there has been a reluctance among bankruptcy
courts to dismiss chapter 7 cases for failure to provide tax returns seven days
in advance of the §341 meeting. Also, there appears to be a question regarding
what constitutes a tax return "for the most recent tax year ending immediately
before the commencement of a case" under §521(e)(2)(A).
For example, in In re Merrill, 340 B.R. 671, 673 (Bankr. D. N.H. 2006),
the court noted that although the debtor provided the most recent tax return
on the eve of the §341 meeting as opposed to seven days before the §341
meeting as required by §521(e)(2)(A), dismissal was not mandated under
§521(e)(2)(B). The court based its conclusion on the fact that the debtor
did provide the return to counsel more than seven days prior to the §341
meeting, but that it was counsel who forgot to provide the return to the chapter
7 trustee. Id. The court found that the failure to submit the return
to the trustee at least seven days in advance of the §341 meeting constituted
circumstances beyond the debtor's control. Id.
Further, there was a dispute in Merrill as to what the most recent tax
return was. The debtor filed for bankruptcy on Jan. 20, 2006. As such, the debtor
submitted his 2004 individual income tax return to the chapter 7 trustee in
satisfaction of §521(e)(2)(A). The chapter 7 trustee argued that the most
recent tax return would be the 2005 income tax return because it was the 2005
tax year that immediately ended before the debtor filed for bankruptcy. Id.
The court disagreed, noting that under the Internal Revenue Code (§6072(a)),
the debtor did not have a filing obligation for the 2005 income tax return until
April 15, 2006; therefore, the submission of the 2004 income tax return complied
with §521(e)(2)(A). Id.

Similarly, in In re Duffus, 339 B.R. 746 (Bankr. D. Ore. 2006), the
trustee asked for dismissal of the debtors' chapter 7 case because the debtors
failed to provide to the trustee their most recent tax return seven days in
advance of the §341 meeting. The trustee concluded that §521(e) required
dismissal of the debtors' case, even though both parties acknowledged that there
were assets available for distribution to creditors. Id. at 747. The
court found that the chapter 7 trustee had "prosecutorial discretion"
not to file the motion to dismiss. Id. (citations omitted).2
The court stated that the trustee could avoid the implications of §521(e)
by simply not filing the motion to dismiss and that the trustee could base his
decision not to file the motion to dismiss on the fact that there were assets
to distribute to creditors, thereby making the non-filing of the motion in the
best interests of the estate. Id.3
More importantly, the court held that BAPCPA does not require automatic dismissal
of a chapter 7 case for failure to provide tax returns to the trustee seven
days in advance of the §341 meeting, but rather that a chapter 7 case shall
be dismissed for failure to comply with §521(e) upon the filing of a motion
to dismiss and opportunity for notice and a hearing. Id. at 748; see
also In re Ring, 341 B.R. 387 (Bankr. D. Maine 2006) (failure to file returns
under §521(e) (2)(A) does not result in automatic dismissal of debtors'
case absent filing of motion to dismiss).

The few cases that have considered the filing requirements of §521(e)(2)(A)
have appeared to pave a path that suggests dismissal is not automatic under
§521(e) until a party files a motion to dismiss and there is a hearing
and opportunity to be heard. Moreover, initial indications are that courts will
be lenient in allowing chapter 7 debtors to continue in bankruptcy where there
has been compliance under §521(e)(2)(A) by providing tax returns to debtor's
counsel or the trustee if done so before the §341 meeting, even if done
less than seven days prior to confirmation. Finally, it appears that a debtor
can meet its burden of demonstrating "circumstances beyond the debtor's
control" by establishing production of documents prior to the first setting
of the §341 meeting.
<blockquote>
<blockquote> </blockquote>
</blockquote>

<hr>
<h3>Footnotes</h3>
1 The views expressed in this article are Mr. Gargotta's and do not necessarily
reflect the views of the Department of Justice or Internal Revenue Service.

2 A corollary to this discussion is noted in In re Satinoff, 2006 WL
1206492 (Bankr. S.D. Fla. 2006), where the court found merit in the Duffus
court's suggestion that a panel trustee could use his or her discretion in not
filing motions to dismiss under §521(e)(2)(A). Nonetheless, the panel trustee
in that case advised the court that the U.S. Trustee was requiring panel trustees
to file motions under §521(e)(2)(A) in the absence of discretion—a
position the court found untenable.
3 At least one court has found that due to the complex nature of BAPCPA, the
limited number of new cases filed under BAPCPA in its district, and the fact
that at the time of decision BAPCPA was only effective five months, debtor's
counsel's failure to provide the chapter 7 trustee tax returns in advance of
the §341 meeting constituted "circumstances beyond the debtor's control"
and did not require dismissal of debtor's case. In re Grasso,
2006 WL 1390397 (Bankr. D. N.H. 2006).

Journal Authors

Craig A. Gargotta

Journal Date

Friday, September 1, 2006 - 12:00

Bankruptcy Rule

2006

none