In a recent decision, the Third Circuit Court of Appeals determined whether Internal Revenue Service Forms 1040, filed after the IRS has made an assessment of the taxpayer’s liability, constitute “returns” for purposes of determining the dischargeability in bankruptcy of tax debts under 11 U.S.C. § 523(a)(1)(B). In plain language, the question before the Court in Giacchi v. Internal Revenue Service, decided on May 5, 2017, was whether tax debts can be discharged in bankruptcy where the return is filed late.
Currently, the First, Fourth and Tenth Circuits hold that a tax debt can never be discharged if the underlying tax return is filed even one day late. The Fourth, Sixth, Seventh and Eighth Circuits employ a four-part test articulated in a Tax Court decision known as Beard v. Comm’r, 82 T.C. 766, 777 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986)(“Beard”). In reviewing the two lines of authority, the Appeals Court noted that, in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted and added a definition of “return” to the Bankruptcy Code. The definition reads, in pertinent part, “[f]or purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The Court concluded that the requirements of applicable nonbankruptcy law are set forth in the Beard case, and thus determined to follow Beard, joining those Circuits following its four pronged analysis.
In order to meet the four-part test to qualify as a “return” a tax filing must satisfy the following criteria: (1) it must purport to be a return, (2) it must be executed under penalty of perjury, (3) it must contain sufficient data to allow calculation of tax, and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. In Giacchi, only the fourth factor was in question.
Because the “returns” in question had been filed late and only after the IRS had assessed the tax liability, the Court held that they “could not be an honest and reasonable attempt to comply with the tax law,” and thus did not meet the definition of “returns.” As such, the tax debts were determined not to be dischargeable.
The Court’s decision in Giacchi widened the existing split among the Circuits with regard to the dischargeability of tax debts where the returns are not timely filed. The existing division between the “one-day-late” Courts and the Beard Courts was heightened because the Third Circuit rejected the Eighth Circuit’s analysis that “honest and reasonable attempt” inquiry focuses on the content of the form, not the circumstances of its filing. Instead, the Court concluded that it is the timing of the filing that is relevant in considering whether the form evinces an honest and reasonable attempt to comply with tax law.
While the Third Circuit did not adopt the bright line test followed in the “one-day-late” jurisdictions, it nevertheless established a difficult hurdle for delinquent filers to overcome. While some late-filed tax debts may be subject to discharge, debtors will have to establish each of the four factors set forth in Beard. Returns filed after an assessment has been made are not likely to be regarded as an honest and reasonable attempt to comply with the tax laws, and thus the tax debts will not be dischargeable in bankruptcy. As with most splits among the Circuits, the division may need legislative action or a ruling from the Supreme Court in order to be resolved. In any event, the timely filing of tax returns remains the safest means to preserve the option to discharge the debts in a subsequent bankruptcy case.
The attorneys at Fitzpatrick Lentz & Bubba have extensive experience representing businesses on a variety of matters relating to bankruptcy and creditor’s rights. For more information, please contact Douglas J. Smillie, or any other attorney in our Litigation & Trial Practice.