The Eleventh Circuit charted a different course from three other circuits in holding that the debt shown on a late-filed tax return is not dischargeable under Section 523(a)(1)(B)(i) and the so-called hanging paragraph added by Congress along with the 2005 amendments.
Three circuits — the First, Fifth and Tenth — ended up with what’s been called the one-day-late rule: If a return is filed even one day late, the underlying debt can never be discharged, employing a complicated application of case law, several federal statutes and the Bankruptcy Code. It has been said by commentators such as Prof. Ronald J. Mann from Columbia Law School that even the Internal Revenue Service will not support that interpretation.
In a March 30 decision by Circuit Judge R. Lanier Anderson, the Eleventh Circuit held a tax debt nondischargeable using a different theory.
In this case, the debtor did not file tax returns for the years 2000 through 2003. The IRS gave notice of deficiency and assessed taxes in 2006. The taxpayer filed tax returns for those years in 2007, followed by a chapter 7 petition in 2011. The bankruptcy judge held that the tax debt was nondischargeable, and the district court agreed on appeal.
Assuming without deciding that the one-day-late rule is wrong, Judge Anderson used a different approach that still kept the debtor on the hook for the tax debt.
Judge Anderson invoked the four-part test resulting from a 1984 Tax Court decision known as Beard. His opinion focused on the fourth Beard test: Was there an honest and reasonable attempt to satisfy the requirements of tax law?
On that question, there is a split of circuits. The Eleventh Circuit chose to follow the majority, which requires “analysis of the entire time frame relevant to the taxpayer’s actions.” A minority of one, the Eighth Circuit held that “honesty” should be determined exclusively from the face of the tax return. In a dissenting opinion in the Seventh Circuit, Circuit Judge Frank Easterbrook saw the law as the Eighth Circuit did.
In following the majority, Judge Anderson relied on the notion that our tax system depends upon “honest self-reporting.”
Although declining to adopt a per se rule, Judge Anderson held that there is no “honest and reasonable effort” to comply with tax law when the taxpayer files a return “years late, without any justification at all, and only after the IRS has issued notices of deficiency and has assessed his tax liability.”
The opinion does not hint as to whether a tax claim could be discharged if, for instance, the debtor filed a late return before the IRS levied an assessment. In that case, the Eleventh Circuit might have to decide whether three circuits made good or bad law with the one-day-late test.