Although a taxpayer failed to produce a copy or exact details of a delinquent return she said she filed, the IRS did not disprove her assertion that she filed it, a bankruptcy court held, and the court discharged the related tax debt.
Facts: Michelle McGrew failed to timely file income tax returns for most of the 2000s. The IRS prepared substitutes for returns for 2000, 2001, and 2004 through 2008, assessing a total of more than $78,000 in taxes, interest, and penalties. In October 2010, after the IRS began garnishing her wages, McGrew sent the IRS returns for what she said were each of the years covered by the substitutes for returns. She entered an installment agreement to pay the tax debts but later defaulted and, in February 2013, filed a Chapter 7 petition in the Bankruptcy Court for the Northern District of Iowa. In May 2013, the court granted a discharge of her tax debt, but the IRS continued its collection activity.
In June 2015, McGrew filed an adversary proceeding in the bankruptcy court, seeking a determination that all the tax debts were discharged. The IRS admitted that her tax debts were dischargeable except for those relating to tax year 2006, for which it said she did not file a return.
Issue: The parties agreed that if McGrew had filed a valid 2006 return as and when she claimed, the tax debt would be dischargeable. Thus, the only issue was whether the IRS could prove by a preponderance of the evidence that McGrew did not file the return.
McGrew's IRS transcript for 2006 showed only the substitute for return, while the other years showed both a substitute for return and one that McGrew filed. McGrew testified that she mailed the 2006 return with those for 2000, 2001, 2005, and 2007 to an address in California and returns for 2004 and 2008, plus her currently due return for 2009 to another address. She did not submit a copy of the 2006 return in a hearing before the bankruptcy court, nor did she identify amounts of income it reported, other than to testify that the total was less than the nearly $95,000 shown on the substitute for return.
In support of her argument that the IRS lost her 2006 return, McGrew noted that the IRS had initially claimed that her 2007 return also was unfiled but later agreed that it had been received. Also, she said, the IRS's letter of November 2011 said she could not enter into a new installment agreement because she had not filed her 2009 return, but without mentioning a missing 2006 return. In addition, the IRS stopped garnishing her wages and entered into the first installment agreement after she had filed the returns, which suggested that the Service then regarded her filing duties as fulfilled, she argued.
In an adversary proceeding under Section 523 of the Bankruptcy Code, a creditor bears the burden to prove by a preponderance of the evidence that a debt is nondischargeable, the court noted, citing cases including Grogan v. Garner, 498 U.S. 279 (1991). Bankruptcy Code Section 523 also specifies that a substitute for return prepared under IRC Sec. 6020(b), as in this case, does not qualify as a return for dischargeability purposes.
Holding: The court found credible McGrew's testimony regarding preparing and mailing her returns. The return's absence from the IRS transcript was not dispositive, the court held. It noted that the transcript indicated McGrew's 2007 return was entered into the system eight months after those for the other years the IRS acknowledged receiving—a lapse that remained unexplained. "Thus, for eight months, the IRS had Debtor's 2007 return, but either temporarily misplaced it or forgot to record it," the court stated.
Consequently, the court held that McGrew's tax debt for 2006 was discharged.
- McGrew, No. 15-09024 (Bankr. N.D. Iowa 10/13/16)
—By Paul Bonner, a JofA senior editor.