A bankruptcy court held that a couple's tax return filing allowed a related tax debt to be discharged in bankruptcy, despite the return's having been filed over a year and a half late, after the IRS had prepared a substitute for return and issued a notice of deficiency.
Facts: Nicole Golden and her husband, Stephen Alter, timely filed an extension until Oct. 15, 2009, for their 2008 tax return but did not file the return by the extended date. They experienced financial and marital difficulties and separated in 2010, after also experiencing problems in their sole-proprietorship real estate rental business that included foreclosure on the rental property.
In March 2011, Golden had a paid preparer complete the couple's 2008 and 2009 returns. A few days later, the IRS sent Golden a notice of deficiency of $276,506, which with penalties and interest eventually grew to approximately $417,000. Golden filed the 2009 return but not the 2008 return because, she testified, she was unable to pay the taxes and was attempting to understand the reason for the deficiency's amount. Her prepared 2008 return showed a balance due of $23,040. In August 2011, Golden did file the 2008 return.
In April 2014, Golden and Alter filed a Chapter 13 bankruptcy petition. The IRS filed a claim for $88,516, of which nearly $8,000 was identified as secured, nearly $50,000 as priority, and the balance of more than $30,000 shown as a general unsecured claim. The couple obtained a general discharge in February 2020 after paying more than $51,000 to the IRS. In June 2020, the IRS issued the taxpayers a notice of lien for the remaining taxes owed.
In February 2021, Golden and Alter filed an adversary proceeding in bankruptcy court against the IRS, contending that the tax debt had been discharged. The IRS contended that the tax debt was nondischargeable. Both sides moved for summary judgment.
Issues: The Bankruptcy Code provides that a discharge does not include an individual's tax debt with respect to which a required return or its equivalent was not filed, or that the debtor filed after its due date, including extensions, and within less than two years before filing the bankruptcy petition (11 U.S.C. §523(a)(1)(B)). Among a number of other things, the IRS claimed the taxpayers' 2011 filing did not qualify as a return under the tests of Beard, 82 T.C. 766 (1984); specifically, it did not represent an honest and reasonable attempt to satisfy the requirements of the tax law.
The IRS argued that Golden and Alter's return was not an honest and reasonable attempt to satisfy the requirements of the tax law because their conduct with respect to the return was like that of taxpayers in two Ninth Circuit cases in which that court held their tax debts were nondischargeable due to a "belated acceptance of responsibility" demonstrating a lack of an honest and reasonable attempt to meet tax requirements under the Beard test. In one, Hatton II, 220 F.3d 1057 (9th Cir. 2000), the taxpayer failed to file a federal tax return on his own initiative and attempted to do so only after the IRS threatened a levy and seizure of his property, followed by months of negotiations on an installment agreement. In the other, Smith, 828 F.3d 1094 (9th Cir. 2016), the taxpayer failed to file a return until seven years after it was due, three years after the IRS had determined a deficiency and issued an assessment.
Holding: The bankruptcy court held that Golden and Alter's tax debt could be discharged in bankruptcy, despite the late filing of their return. The court concluded that their conduct was not analogous to that of the taxpayers in the Ninth Circuit cases.
Looking at the couple's intent when they filed the 2008 return, as required by 11 U.S.C. Section 523(a)(1)(B), the court determined they had made an honest and reasonable attempt to satisfy the requirements of the tax law.
Among facts and circumstances the court pointed to as evidence of this were that:
- The IRS received the return about 150 days after it had mailed the notice of deficiency;
- The taxpayers experienced financial and marital difficulties;
- The reason for their delay was Golden's attempt to determine how to pay the balance owed;
- On the basis of the late return, the IRS reduced the outstanding tax obligation;
- The taxpayers paid in full all priority and secured tax claims in bankruptcy totaling $58,060 and paid a dividend of $1,222 on the remaining $30,665 general unsecured claim.
The taxpayers' disruptive financial and personal events were not excuses but did explain their lapses toward their tax obligation, which they did not seek to avoid and hide from but took steps to correct, the court said. Although they filed late, they "did not act with a belated acceptance of responsibility or in an attempt to present inaccurate or fabricated information" to the IRS, the court stated. Accordingly, the evidence was considered to show a reasonable effort to comply with the law, and the court granted the taxpayers' motion for discharge.
- In re Golden, No. 14-24616-E-13 (Bankr. E.D. Cal. 4/27/22)
— Paul Bonner is a JofA senior news writer.