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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