A creative lawyer from Boston attempted unsuccessfully to evade decisions by the First Circuit and two other courts of appeals holding that debt shown on tax returns filed even one minute late can never be discharged in view of the so-called hanging paragraph resulting from the 2005 BAPCPA amendments that added the provision, typically cited as Section 523(a)(*).
Were his tax returns filed on time, the debtor would have been able to discharge the tax liability because the bankruptcy filing would have been more than two years after the tax returns were filed. Evidently in view of decisions by the First, Fifth and Tenth Circuits, the debtor conceded that his tax liability would not be discharged if his returns were considered “returns.”
He therefore argued that his 1040 forms should be considered “equivalent reports” satisfying Section 523(a)(1)(B), which permits discharge of tax liabilities disclosed in an “equivalent report” filed within two years of bankruptcy.
The debtor was relying on a footnote in the First Circuit’s Fahey decision last year holding that late-filed tax returns can never give rise to dischargeable debt. The footnote said the appeals court did not reject the “possibility” that the Beard test for deciding the dischargeability of tax debts may remain viable with respect to “equivalent reports.” The Beard test, arising from a Tax Court decision predating BAPCPA, sometimes resulted in discharging liability shown in late-filed tax returns.
The debtor lost on summary judgment in bankruptcy court and lost again on appeal before District Judge William G. Young of Boston.
For starters, Judge Young said in his Sept. 6 opinion that the First Circuit had never even adopted the Beard test. He went on to say that no court has ever considered a form 1040 as anything other than a “return.”
Since a return is always a return, Judge Young upheld the bankruptcy court’s conclusion that the tax liability was not discharged.
Although there is no split of circuits, the Ninth Circuit Bankruptcy Appellate Panel held in December that the Beard test should still be applied, despite contrary decisions from the three courts of appeals. The BAP referred to the circuit courts’ “unforgiving view of congressional intent,” because someone who files a late tax return can never discharge the underlying debt.
The Beard test asks whether a document purporting to be a return 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.
Last year, Columbia University Law Professor Ronald J. Mann attempted to take the Tenth Circuit case, In re Mallo, to the Supreme Court. 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.”
To read ABI’s discussion of the BAP opinion, click here.
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). The Ninth Circuit appellate panel opinion is U.S. v. Martin (In re Martin), 14-1180 (B.A.P. 9th Cir. Dec. 17, 2015).