Tuesday, November 14, 2017

When is a tax return not a tax return?

Here at Shenwick & Associates, we’re often asked about the dischargeability of tax debts, which we’ve covered on our blog here and mostly recently here.  In brief, it’s a very complex topic that depends on the type of tax, the date of tax and other factors.  But the latest wrinkle in the analysis of tax dischargeability comes in the form of a riddle: when is a tax return not a tax return?

As many of you know, in 2005, Congress enacted the first major reform of bankruptcy law in 27 years, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).  In § 523, which governs exceptions to discharge, the following “hanging paragraph” was added to subsection (a): “[f]or purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  So, the question is, does a late filed tax return count as a tax return for the dischargeablity of a tax debt?

Different courts have come to different conclusions regarding this question.  The first case that held that late filed returns were not returns for the purposes of tax dischargeability was McCoy v. Miss. State Tax Comm’n (In re McCoy), a 2012 case from the Fifth Circuit Court of Appeals.  Other appellate courts, including the Tenth Circuit and the First Circuit issued opinions following McCoy’s reasoning. 

In a recent petition for certiorari to the Supreme Court in Smith v. IRS (In re Smith) (which was denied), the appellant taxpayer explained the deep division of the courts on this issue:

The circuits are actually divided three ways as to whether late-filed returns are “returns” under
§ 523(a)(1)(B). The Eighth Circuit holds that a duly filed return, even if late, is still a “return” and thus permits discharge two years after filing. Other circuits, including the Ninth Circuit below, hold that returns filed after the IRS assesses a tax liability are not “returns” at all, and thus trigger the permanent bar to discharge. Still other circuits have ruled that any belatedness in return filing bars discharge—even if filing occurs before assessment.

Earlier this year, in Giacchi v. U.S. (In re Giacchi), the Third Circuit Court of Appeals held that returns filed after the IRS assesses a tax liability are not “returns” for the purpose of tax dischargeability.  Please note that the Second Circuit Court of Appeals (which includes New York) has not yet ruled on this issue.

For more information about the dischargeability of taxes in bankruptcy, please contact Jim Shenwick.

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