A federal appeals court held that bankrupt debtors who filed their income tax return 17 months after their income taxes were assessed were not entitled to have those taxes discharged in the bankruptcy proceeding (In re Wogoman, No. CO-11-084 (B.A.P. 10th Cir. 7/3/12)). In doing so, the court considered what effect a 2005 change to the definition of “return” had on bankruptcy law’s treatment of tax returns, but declined to adopt a bright-line rule.
The debtors filed for chapter 7 bankruptcy relief in January 2011, and the next month they filed a complaint to determine the dischargeability of their federal income taxes for various years. The IRS conceded that their taxes were dischargeable (or that they owed no taxes) for all the years in question, except 2001. The IRS said the debtors had not filed a return for 2001, and therefore their taxes were not dischargeable under Bankruptcy Code Section 523(a)(1)(B)(i), which provides that a debtor is not discharged from any tax debt for which no return was filed.
The IRS had assessed a deficiency against the debtors for their 2001 taxes in February 2005. The debtors did not pay the assessed liability, but they did file a 2001 Form 1040, U.S. Individual Income Tax Return, in August 2006. The IRS then abated part of their tax liability and penalties, and in March 2007 the debtors entered into an installment agreement with the IRS.
The IRS argued that the 2001 tax liability should not be discharged in bankruptcy because, at the time the 2001 taxes were assessed, the debtors had not filed a 2001 return. The debtors argued that the express language of Bankruptcy Code Section 523(a)(1)(B)(i) does not require that the return be filed prior to assessment to be effective for dischargeability purposes.
The lower court held that the tax debt was not dischargeable because “it came into existence prior to the filing of the Form 1040 by the Wogomans in 2006” (In re Wogoman, No. 11-11044 (Bankr. D. Colo. 8/19/11)).
The Tenth Circuit noted that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added new language to Bankruptcy Code Section 523(a)(19) to define “return” to mean “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”
The court also reviewed pre-BAPCPA law, which required that the debtor’s return “must represent an honest and reasonable attempt to satisfy the requirements of the tax law” (In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir. 1999)). The Tenth Circuit held that because the debtors did not file a return until after the IRS commenced an examination, sent them a notice of deficiency, and assessed the taxes, their 2001 return did not represent “an honest and reasonable attempt to satisfy the requirements of the tax law.”
When is a return filed too late?
The court noted that the Fifth Circuit has already interpreted the definition of “return” in Bankruptcy Code Section 523(a)(19) to mean that a late-filed return is not a return for bankruptcy purposes, even if it is filed before the IRS assesses the tax (In re McCoy, 666 F.2d 924 (5th Cir. 2012)). Surprisingly, the IRS argued for a more-lenient standard, and urged the Tenth Circuit to adopt the position that the time of assessment is the proper dividing line for determining that a return is filed too late for purposes of Bankruptcy Code Section 523(a)(19).
The Tenth Circuit was not convinced that the language of Bankruptcy Code Section 523(a)(19) means that no late-filed return can ever qualify a debtor for discharge of tax debts, but it said it did not need to decide that issue in this case. It also declined to adopt the IRS’s proposal that the time of assessment be the dividing line, noting that no court has adopted this position.
Here, the debtors’ return was not merely filed late, but was filed 17 months after the IRS had assessed the taxes, and the debtors provided “no justifiable reason for the delay.” The court held that this situation clearly failed to meet the requirements of Bankruptcy Code Section 523(a)(19), under either interpretation of the section and under the “honest and reasonable attempt” standard. Therefore, the debtors’ 2001 tax liability was not dischargeable.
—Alistair M. Nevius (firstname.lastname@example.org) is the JofA’s editor-in-chief, tax.