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Tax Debts Were Not Dischargeable in Bankruptcy; Late Returns Were Not Returns for Bankruptcy Purposes

(Parker Tax Publishing May 2017)

In a case of first impression, the Third Circuit held that an individual's late Form 1040s, filed after the IRS assessed deficiencies, were not an honest and reasonable effort to comply with the tax law and therefore did not constitute returns. The tax debts were for tax liabilities for which no return was filed, so they were not dischargeable in bankruptcy. Giacchi v. IRS, 2017 PTC 215 (3d Cir. 2017).

Thomas Giacchi failed to timely file his Forms 1040 for 2000 through 2002. The IRS assessed a liability against Giacchi in 2004 for his 2000 and 2001 taxes. About a month after the assessment, Giacchi filed Forms 1040 for 2000 and 2001. In 2005, the IRS assessed his 2002 liability. Giacchi filed a Form 1040 for 2002 in 2006. The IRS partially reduced its assessments based on Giacchi's late returns.

Giacchi filed a Chapter 7 bankruptcy petition in 2010. In 2012, Giacchi sued for a judgment that his assessed tax liabilities for 2000 through 2002 had been discharged in the bankruptcy. The bankruptcy court concluded that Giacchi's debt to the IRS was nondischargeable under 11 U.S.C. Sec. 523(a)(1)(B) because Giacchi had failed to file returns for those years. It found that his late filings were not returns for bankruptcy purposes. A district court affirmed the bankruptcy court's decision and Giacchi appealed to the Third Circuit.

In general, a debtor who files a Chapter 7 bankruptcy petition is discharged from liability for all debts incurred before the petition was filed. An exception applies under 11 U.S.C. Sec. 523(a)(1)(B) to debts for taxes if no return was filed. If Giacchi's late Forms 1040 were not returns, then the exception applied and his tax debts were not dischargeable in bankruptcy. Under 11 U.S.C. Sec. 727(b), a return is defined for bankruptcy purposes as a return that satisfies the requirements of the applicable nonbankruptcy law, including any filing requirements.

The issue before the Third Circuit was whether belatedly filed forms constitute "returns." If they do, Giacchi's tax debts are not subject to 11 U.S.C. Sec. 523(a)(1)(B)(i)'s exception from discharge; if the forms do not, Giacchi's tax debts are excepted from discharge.

Giacchi made two arguments for why his late filings should be treated as returns. First, he said that the fact that they were late did not make them any less of an honest and reasonable attempt to comply. For this proposition, he cited the Eighth Circuit's decision in In re Colsen, 446 F.3d 836 (8th Cir. 2006), in which the court held that the "honest and reasonable attempt" inquiry focuses on the content of the return, not the circumstances of its filing. Second, Giacchi asserted that because his late filings showed less tax liability, and the IRS reduced its assessment based on those filings, the late filings served a tax purpose and thus were returns.

Noting that this was an issue of first impression in its court, the Third Circuit held that Giacchi's belatedly filed forms did not constitute "returns" and thus, his tax debts were not dischargeable in bankruptcy. The court noted that several other circuits have interpreted "applicable filing requirements" to include filing deadlines. In those jurisdictions, late filings therefore cannot be returns. The court also considered the decision in Beard v. Comm'r, 82 T.C. 766 (1984), which held that a document must meet four requirements to be a tax return: (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. The Third Circuit determined that the issue was whether Giacchi's late Forms 1040 were an honest and reasonable effort to comply with the tax law.

Giacchi's late returns were not, in the court's view, an honest and reasonable attempt to comply with the law. The court reasoned that the purpose of a tax return is to provide information to the government regarding the amount of tax due. When a taxpayer fails to file a return, the IRS must independently determine the tax liability; a return filed after the IRS has done so, the court said, can no longer serve the purpose of a tax return and thus cannot be an honest and reasonable attempt to comply with the tax law.

The court declined to adopt the Eight Circuit's approach in In re Colsen. It said the weight of authority supported the view that the timing of a filing is relevant to determining whether it is an honest and reasonable attempt to comply with the law. With respect to Giacchi's second argument that his taxes went down after filing the late Form 1040s, the court said that because the IRS had to determine Giacchi's tax liability without his assistance when he failed to file his returns, he could not now try to benefit from the IRS's imprecise estimate. In the court's view, Giacchi's late filings were merely self-serving bids to reduce his tax liabilities rather than attempts to comply with the requirements and objectives of prompt self-reporting and self-assessment.

For a discussion on the discharge of tax liabilities in a bankruptcy proceeding, see Parker Tax ¶16,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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