The Tenth Circuit, in a case of first impression, held that an untimely Form 1040, U.S. Individual Income Tax Return, filed after the IRS has assessed a taxpayer's tax liability, is not a tax return for purposes of the exception to discharge of a tax debt in bankruptcy.
Edson and Liana Mallo, a married couple, did not file timely federal income tax returns for 2000 and 2001. As a result, the IRS issued the Mallos notices of deficiency for those years, which the Mallos did not challenge. The IRS assessed taxes against Mr. Mallo for the 2001 tax year in July 2005 and taxes against Mrs. Mallo for the 2000 tax year in July 2006. The IRS began collection efforts with respect to these deficiencies in 2006.
In 2007, the Mallos filed joint Forms 1040 for the 2000 and 2001 tax years. Based on these forms, the IRS assessed additional joint tax liability against the Mallos for 2000 and partially abated Mr. Mallo's 2001 tax liability.
Peter Martin had a similar history for the years 2000 and 2001. Martin did not file timely his returns for those years, and, as a result, the IRS issued statutory notices of deficiency for the years, which Martin did not challenge. In 2004, the IRS assessed taxes against Martin for 2000 and 2001 and subsequently began collection efforts. In May 2005, Martin filed Forms 1040 for 2000 and 2001. Based on the forms, the IRS partially abated Martin's 2000 and 2001 tax liabilities.
In 2010, the Mallos filed a Chapter 13 bankruptcy petition for adjustment of debts with the U.S. Bankruptcy Court for the District of Colorado; this was converted to a Chapter 7 proceeding in early 2011. After the bankruptcy court issued a general order discharging the Mallos' debts, the Mallos filed an adversary proceeding against the IRS, seeking a determination that their income tax liabilities for 2000 and 2001 had been discharged. In its answer, the IRS denied the debts had been discharged.
The parties filed cross motions for summary judgment on the legal question whether the Mallos' tax debt was excepted from discharge under Section 523(a)(1)(B) of the Bankruptcy Code. Section 523(a)(1)(B) provides that a tax debt is excepted from discharge if a required return or equivalent report or notice reporting the tax is not filed. The bankruptcy court granted the IRS's motion for summary judgment, concluding that the Mallos had not filed a tax return, and, therefore, the Mallos' respective tax debts were not dischargeable.
The legal question was the same in Martin's case, but he obtained a more favorable result. Martin filed a Chapter 7 bankruptcy petition in the same bankruptcy court and received a general discharge order. Like the Mallos, Martin then filed an adversary proceeding against the IRS, seeking a determination that his 2000 and 2001 tax debts had been discharged. The parties filed cross motions for summary judgment, making substantially the same arguments that were made in the Mallos' case. However, the judge in Martin's case determined the late-filed federal tax returns were tax returns for purposes of Section 523(a)(1)(B) and therefore Martin's tax debt was dischargeable.
The Mallos appealed their case, and the IRS appealed Martin's case, to the district court, which consolidated the cases. The district court concluded the post-assessment Forms 1040 were not "returns" for purposes of Section 523(a)(1)(B) because they served no tax purpose, and affirmed the decision of the bankruptcy court in the Mallos' case and reversed it in Martin's case. The Mallos and Martin (the taxpayers) filed separate appeals, which the Tenth Circuit consolidated.
The Tenth Circuit's Decision
The Tenth Circuit held that the taxpayers' late-filed Forms 1040 were not returns for purposes of Section 523(a), and therefore their tax liabilities were not dischargeable. The court, after analyzing Section 523(a), found that the plain language of the statute dictated this result.
Elements of a return: Looking at the statute (as it had been amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, P.L. 109-8 (BAPCPA)), the court found that it defined "return" as "a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)." Thus, the court concluded that to determine whether the late-filed forms of the taxpayers were returns for the purpose of discharge in bankruptcy, it was required to consult the applicable nonbankruptcy law, including any applicable filing requirements.
"Return" pre-BAPCPA: The court explained that prior to BAPCPA, in the nonbankruptcy context, the standard test used in determining whether a document is a tax return is the four-part test from Beard, 793 F.2d 139 (6th Cir. 1986). To satisfy this test and be a return, the document in question must contain sufficient data to calculate the tax liability; purport to be a return; be an honest and reasonable attempt to satisfy the requirements of the tax law; and be executed by the taxpayer under penalties of perjury. In this case, only the third element was in dispute.
The court noted that the majority of courts addressing whether tax forms filed after the assessment of a taxpayer's liability satisfy the third element of the Beard test have held they do not because the forms have no valid purpose. However, the court further noted that under the minority position, a form filed post-assessment is a return because a taxpayer's provision of accurate information in a post-assessment filing is useful to the IRS and that not treating such a filing as a return inserted a motive requirement into the definition of return that is not found in the statute.
The Tenth Circuit, however, skirted this issue entirely. It found that it was not required to decide whether the third element of the Beard test was satisfied because, under the current version of Section 523(a), after amendment by BAPCPA, in addition to meeting the applicable requirements of nonbankruptcy law to qualify as a return (i.e., satisfying the Beard test), tax forms must meet the applicable filing requirements for the return at issue and, in this case, the taxpayers' tax forms did not meet these requirements.
Applicable Filing Requirements
The court concluded that an applicable filing requirement includes filing a return by the date the form is due. In interpreting the phrase "applicable filing requirement," the Tenth Circuit looked to the dictionary definition of each word in the phrase. The court found that the plain language of the phrase meant "something that must be done with respect to filing a tax return."
The court observed that Sec. 6072(a) provides that "returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year." The court stated:
The phrase "shall be filed on or before" a particular date is a classic example of something that must be done with respect to filing a tax return and[,] therefore, is an "applicable filing requirement."
The court pointed to the case Pace v. DiGuglielmo, 544 U.S. 408 (2005), in support of this proposition. There, the Supreme Court concluded, in the context of a habeas corpus petition that timeliness was a "condition to filing" where the state rule listed as a mandatory condition that the petition "shall" be filed within the time limit. The court also noted that the Tenth Circuit itself had characterized a time limit in another section of the Bankruptcy Code as a filing requirement. Finally, the court listed a number of district courts that had determined that an untimely filed tax form cannot constitute a return for purposes of the discharge of a tax debt because a return's due date is an applicable filing requirement.
The Mallos' argument that their Forms 1040 were legitimate returns is undercut by the fact that, by filing the returns, they actually increased the amount of tax they jointly owed. Thus, it would appear that they filed the returns in anticipation of filing for bankruptcy, which would seemingly make it inappropriate that their tax debts be discharged.
However, in Martin's case, filing the forms lowered his tax liability, making it more plausible that he filed the returns for a reason other than the anticipation of bankruptcy. The Tenth Circuit, however, properly avoided deciding the cases on the equities and held that the law as written did not allow the income tax debts of the taxpayers to be discharged because they had not timely filed their returns.
Mallo, No. 13-1464 (10th Cir. 12/29/14)