A Chapter 13 debtor could discharge the tax debt by paying the tax liability through the repayment plan. However, most people are interested in the dischargeability of the tax debt in a Chapter 7 bankruptcy case without any payment to the IRS.
In In re Mallo, 774 F.3d 1313 (10th Cir. 2014), the taxpayers filed a Chapter 7 bankruptcy case to discharge tax debt relating to an IRS assessment made prior to the taxpayers filing the bankruptcy petition. The taxpayers failed to file the returns for 2000 and 2001. The IRS issued statutory notices of deficiencies pursuant to 26 U.S.C. §§ 6212 and 6213 for those years. The IRS began collection efforts in 2006. In response, the taxpayers filed joint Form 1040s for the missing years in 2007.
The Mallo court defined the issue as follows: whether an untimely 1040 Form, filed after the IRS has assessed the tax liability, is a tax return for purposes of the exceptions to discharge in 11 U.S.C. §523(a)(1)(B)(i) of the US Bankruptcy Code. The Court began its analysis by examining the Bankruptcy Code’s definition of “return,” which states a return “means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” Id at 1318.
Second, the Mallo court noted that prior to the BAPCPA amendments of 2005 most courts determined whether a document qualified as a tax return by following the four-pronged test approved in Beard v. Commissioner, 793 F.2d 139 96th Cir. 1986). This Beard test consisted of: (1) there must be sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury. The majority of courts have held that tax forms filed after the IRS assesses the taxpayer’s liability have no valid purpose and therefore cannot satisfy the 3rd prong of the Beard test— there being no honest and reasonable attempt to satisfy the requirements of the tax law. See In re Payne, 431 F.3d 1055 (7th Cir. 2005).
The Mallo court side-stepped the Beard test and held that 11 U.S.C. §523(a)(*) of the US Bankruptcy Code excludes late-filed Form 1040s from the definition of “return” because the “applicable filing requirement” includes filing deadlines—and late-filed returns do not satisfy applicable filing deadlines. The court rejected the taxpayers’ argument that the “applicable filing requirements” refer not to the filing time, but to whether a tax form qualifies as a return upon form and content per the Beard test. Apparently, the Mallo court would hold that no late-filed tax returns would ever be deemed a “return” for bankruptcy purposes.
Consequently, the Mallo court held that the taxpayer’s liability was excepted from the general Chapter 7 discharge order after finding the taxpayers’ Form 1040s were not “returns” for bankruptcy purposes of 11 U.S.C. §523(a)(1)(B)(i).
Practice Pointer: File all tax returns and perform all other filing obligations on a timely basis. There appears to be a growing trend to side-step the Beard test and find that late-filed tax returns can never be deemed a “return” and therefore can never be discharged in a Chapter 7 bankruptcy case. The US Court of Appeals for the Seventh Circuit has not ruled on this issue directly. But read In re Payne, 431 F.3d 1055 (7th Cir. 2005). The 7th Circuit covers all of Illinois, Indiana, and Wisconsin.
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