The Ninth Circuit Bankruptcy Appellate Panel is trying to foment a split of circuits so the Supreme Court can decide whether a tax debt can never be discharged if the return is filed even one minute after the deadline.
So far, the Fifth, First and Tenth Circuits have all employed what Bankruptcy Judge Frank L. Kurtz, in his opinion for the Ninth Circuit appellate panel, called a literal construction of the so-called hanging paragraph added by Congress to the end of Section 523(a) in the 2005 BAPCPA amendments. In his Dec. 17 opinion, Judge Kurtz called it the “unforgiving view of congressional intent,” because someone who files a late tax return can never discharge the underlying debt.
Columbia University Law Professor Ronald J. Mann attempted to take the Tenth Circuit case to the Supreme Court in 2015. The high court denied certiorari. Prof. Mann said that the circuit courts “ruled against the taxpayers on a ground that the Internal Revenue Service won’t defend.”
“Every appellate court to consider the question after BAPCPA has adopted the bright-line rule that no late filing ever can be a return,” Prof. Mann told ABI. Judge Kurtz’s opinion, he said, “provides a roadmap for the Ninth Circuit to reject that growing consensus. And that, in turn, would make the likelihood of Supreme Court review almost certain.”
Judge Kurtz’s opinion meticulously picks apart the shortcomings inherent in literal interpretation. He concludes that the hanging paragraph did not alter the two Ninth Circuit cases that adopted a version of the Beard test, which defines the term “return” in the context of determining nondischargeability of tax debts.
The literal approach, he said, would bar a debtor from discharging a tax debt if the return were filed even a minute late, “whereas a debtor taxpayer who never bothers to file his or her own tax return can discharge his or her associated tax debt if the IRS fortuitously prepares a tax return on that person’s behalf.” Judge Kurtz also points out how the IRS itself does not follow the literalist interpretation.
Judge Kurtz reversed and remanded the case for the bankruptcy judge to apply the Ninth Circuit’s modified Beard test, which inquires into whether the document purports to be a return that was signed under penalty of perjury, contained sufficient information to allow calculation of the tax, and was an “honest and reasonable” attempt to satisfy the requirements of tax law.
It is unclear whether Judge Kurtz’s opinion is an appealable final order, because he remanded for the bankruptcy judge to perform more than ministerial functions.
The circuit court cases are Fahey v. Massachusetts Department of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015); In re Mallo, 774 F.3d 1321 (10th Cir. 2014); and McCoy v. Mississippi State Tax Commission (In re McCoy), 666 F.3d 924 (5th Cir. 2012).