The Ninth Circuit entered the fray on the question of whether a debtor can discharge a tax debt when the return was filed late. The San Francisco-based court puts itself in the faction where a debtor at least has a glimmer of hope about discharging the debt shown in a late-filed return.
The courts of appeals fall into two camps. The First, Fifth and Tenth Circuits employ 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.
The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits follow the four-part test resulting from a 1984 Tax Court decision known as Beard. Courts invoking the Beard test ordinarily focus on the fourth factor: Was there an honest and reasonable attempt to satisfy the requirements of tax law?
Among those circuits, all but the Eighth analyze all the surrounding facts to decide the “honesty” factor. 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 its decision on July 13, the Ninth Circuit embraced the Beard test while rejecting the Eighth Circuit’s approach of analyzing only the face of the late-filed return. Columbia University Law Professor Ronald J. Mann told ABI in a message that the opinion “is another court of appeals applying a multi-factor test with no obvious relation to the language of the statute.”
The Ninth Circuit’s case involved a man who did not file a 2001 tax return. Using information from third parties, the Internal Revenue Service issued a $70,700 deficiency notice in 2006. Three years later, the taxpayer filed a Form 1041 for 2001 showing a larger tax liability. The IRS added the additional tax to the deficiency.
After he filed bankruptcy, the taxpayer persuaded the bankruptcy court to rule that the taxes were dischargeable. The district court reversed and was upheld in the opinion by Circuit Judge Morgan Christen.
Judge Christen held that the return, filed eight years late and three years after the IRS’s deficiency notice, “was not an honest and reasonable attempt to comply with the tax code.” She added that “many of our sister circuits have held that post-assessment tax filings are not ‘honest and reasonable’ attempts to comply and therefore are not ‘returns’ at all.”
“Because the court views this taxpayer’s behavior as so reprehensible, the decision doesn’t do much to clarify the law about ‘returns,’” Prof. Mann said. “It specifically declines to address the government’s bright-line rule that nothing filed after an assessment can qualify as a ‘return.’” The professor added that “it doesn’t even mention the idea, accepted by some courts, that the reference to ‘filing requirements’ in the definition of ‘return’ means that no late filing can qualify as a return.”
Prof. Mann attempted to take the Tenth Circuit’s one-day-late case to the Supreme Court in 2015. The high court denied certiorari. Prof. Mann said that the circuit court had “ruled against the taxpayer on a ground that the Internal Revenue Service won’t defend.” There is little prospect of Supreme Court review, he said, “until a taxpayer wins one of these cases in the courts of appeals.”
Regardless of the approach a court employs, the issue regarding dischargeability of tax in connection with a late-filed return turns on Section 523(a)(1)(B)(i) and the so-called hanging paragraph added by Congress along with the 2005 amendments.
The Ninth Circuit’s opinion is a vindication for the Ninth Circuit Appellate Panel’s December decision in U.S. v. Martin (In re Martin). There, the B.A.P. rejected the one-day-late rule by holding that the hanging paragraph did not alter 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.
In Martin, the B.A.P. reversed and remanded 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.
To read ABI’s discussion of Martin, click here.
Before the Ninth Circuit’s opinion, the most recent circuit court decision came from the Eleventh Circuit in March in Justice v. U.S. (In re Justice). To read ABI’s discussion of Justice, click here.