Couple Can't Discharge Tax Debt in Bankruptcy - Untimely Filings Were Not Returns
(Parker Tax Publishing: October 11, 2013)

Late individual tax returns filed by a debtor couple after the IRS assessed tax liabilities and issued notices of deficiency were not returns within the meaning of Bankruptcy Code Section 523(a), and therefore the couple's tax liabilities were not dischargeable in bankruptcy. In re Mallo, 2013 PTC 278 (D.C. Col. 9/11/13).

Edson and Liana Mallo did not file their Form 1040, Individual Income Tax Return, on time for 2000 and 2001. As a result, in 2006, the IRS made assessments against the couple and issued deficiency notices. After the couple failed to pay the assessed income taxes, the IRS started collection efforts by issuing a Notice of Intent to Levy. In 2007, Edson and Liana jointly filed their 2000 and 2001 Form 1040s. Subsequently, in 2010, the couple filed a Chapter 7 bankruptcy petition and, at the time of filing, owed tax liabilities from 2000 through 2009.

Following the issuance of a bankruptcy discharge order in 2011, Edson and Liana filed an adversary proceeding against the IRS seeking a determination that their income tax debt was discharged by the bankruptcy order. In response, the IRS filed a motion for summary judgment and sought a determination that the couple's income tax liabilities were excepted from discharge because they were debt for which a return was not filed under Bankruptcy Code Section 523.

A debtor who files a bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition, including those debts related to unpaid taxes. Bankruptcy Code Section 523(a) provides exceptions to the general rule of the discharge of unpaid tax debt and precludes the discharge of tax debt under certain circumstances, including if a related return was filed within two years of the bankruptcy petition filing or if a return was not filed. A return is defined as a return that satisfies the filing requirements of the Internal Revenue Code but does not include a return prepared by the IRS under Code Sec. 6020(b).

Edson and Liana argued that their income tax debts for 2000 and 2001 were discharged in bankruptcy by the discharge order. The IRS contended that the exception in Bankruptcy Code Section 523(a) applied because the returns filed by Edson and Liana after they had been contacted by the IRS did not meet the definition of a return. Thus, no return had been filed, and the tax liabilities were not dischargeable.

The bankruptcy court ruled in favor of the IRS. In reaching its decision, the bankruptcy court adopted the analysis of In re Wogoman, 475 B.R. 239 (B.A.P. 10th Cir. 2012), which utilized a four-prong test to determine whether a filing constituted a return for purposes of Bankruptcy Code Section 523(a). The test was whether the filing: (1) purported to be a return; (2) was executed under penalty of perjury; (3) contained sufficient data to allow computation of tax; and (4) represented an honest and reasonable attempt to satisfy the requirements of the tax law. Under this test, the bankruptcy court found that the 2007 returns filed by Edson and Liana did not represent an honest and reasonable attempt to comply with the tax law and were instead a belated attempt to create a record of compliance after the IRS filed substitute returns and issued notices of deficiency. Edson and Liana appealed.

A district court affirmed the bankruptcy court and held that Edson and Liana's filings in 2007 after the IRS assessments did not constitute returns and, as such, their income tax liabilities were excepted from discharge under Bankruptcy Code Section 523(a).

The district court declined to adopt a per se rule that any untimely filed return is not a return for purposes of assessing the dischargeability of the related tax liability in bankruptcy. But the court also rejected Edson and Liana's argument that whether their 2007 filing constituted a return should be determined on the face of the document and not on the timeliness of its filing. The court noted that the prior assessment of the debtors' delinquency was relevant in determining whether the debtors filed a return. The untimely returns filed by the couple negated an honest and reasonable attempt to comply with the tax law under the fourth prong of the Wogoman test, the court said. Because it was undisputed that the couple filed their Form 1040 after the IRS determined their tax liability, issued notices of deficiency and began collection action, the court concluded that the couple's filings did not constitute returns and the subject taxes were excepted from discharge.

For a discussion of the requirements to file a return, see Parker Tax ¶10,100.

Parker Tax Publishing Staff Writers

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