The split widens on the one-day-late rule, where the First, Fifth and Tenth Circuits hold that a tax debt never can be discharged under Section 523(a)(1)(B)(i) if the underlying tax return was filed even one day late.
The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Addressing the question, the Third Circuit joined the majority in a May 5 opinion by adopting the Beard test.
Deepening the controversy over late-filed tax returns, the Third Circuit weighed in on a subordinate split by differing with the Eighth Circuit and considering the timing of the late-filed return as relevant to the question of dischargeability.
The Supreme Court has been ducking the split. Columbia University Law Professor Ronald J. Mann attempted to take a one-day-late case to the Supreme Court in 2015 in In re Mallo. The high court denied certiorari.
In February, the justices denied certiorari in Smith v. IRS, where the petitioner’s counsel raising the same issue was Prof. John A.E. Pottow from the University of Michigan Law School.
The Third Circuit Case
The Third Circuit dealt with a case where the debtor did not file three years’ worth of tax returns until after the Internal Revenue Service made assessments. The bankruptcy court held that the tax debt was not dischargeable and was upheld in district court.
On appeal to the Third Circuit, the debtor argued that his late-filed returns nonetheless qualified as “returns,” making the tax debt dischargeable under Section 523(a)(1)(B)(i). That section excepts a debt from discharge “for a tax . . . with respect to which a return . . . was not filed . . . .”
Added to Section 523(a) along with the amendments in 2005, the so-called hanging paragraph defines “return” to mean “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”
The opinion by Third Circuit Judge Jane R. Roth declined to employ the one-day-late rule followed by three circuits and instead adopted the Beard test used by five others. She tersely alluded to the fact that the IRS does not endorse the one-day-late rule.
Among the four parts to the Beard test, only the fourth element was at issue: whether the debtor’s late-filed return “represent[ed] an honest and reasonable effort to comply with the tax law.”
Citing other circuits, Judge Roth said that a return filed after an IRS assessment will “rarely, if ever, qualify as an honest or reasonable attempt to satisfy the tax law.”
The debtor relied on the Eighth Circuit’s Colsen decision focusing “on the content of the form, not the circumstances of its filing.” Judge Roth declined to follow the sister circuit but instead agreed “with the weight of authority that the timing of the filing of a tax form is relevant” in deciding whether the late-filed return was an “honest and reasonable attempt to comply with tax law.”
Judge Roth therefore ruled that tax debts were not dischargeable under the Beard test because they did not qualify as “returns.”