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Extension of 2009 Return Precludes 2009 Taxes from Being Dischargeable in Bankruptcy. (Parker Tax Publishing June 18, 2014)

Because a debtor filed for an extension of his 2009 tax return, his 2009 tax liability fell outside the three year rule, and was not dischargeable in bankruptcy. In re Leslie, 2014 PTC 247 (D.C. Iowa 5/21/14).

Craig Leslie fell on hard times due to his former wife's serious illness. Additionally, medical problems make it hard for him to find a job. Craig lives off social security of $1,087 per month and sporadic help from friends and family who sometimes deposit small amounts into his bank account. For his 2009 tax return, Craig obtained an extension from the IRS. The IRS extended his due date to October 15, 2010, and Craig filed his 2009 tax return on October 13, 2010.

On February 15, 2013, Craig filed for Chapter 7 bankruptcy. He listed the IRS as a creditor in his bankruptcy petition based on outstanding amounts due from his 2007 and 2009 federal income taxes. He sought to have his 2007 and 2009 tax liabilities discharged. The IRS did not dispute that Craig's 2007 taxes were dischargeable. However, Craig and the IRS disagreed that his 2009 tax liability was dischargeable.

Section 507(a)(8)(A)(i) of the Bankruptcy Code grants priority status to a tax on or measured by income or gross receipts for a tax year ending on or before the date of the filing of a bankruptcy, where the tax liability was due within three years from the filing of the petition. The IRS argued that because of the extension, Craig's 2009 tax liability was due within three years of the filing of the bankruptcy petition and therefore it was a priority claim under 11 U.S.C. Section 507(a)(8)(A)(i). According to the IRS, that made the 2009 taxes nondischargeable under 11 U.S.C. Section 523(a)(1)(A).

Craig argued that his 2009 tax liability would have been dischargeable if he had not obtained the extension to file his 2009 tax return. According to Craig, his 2009 tax liability should be discharged on hardship and equitable grounds. He argued that he was an honest, but unfortunate debtor, who has simply fallen on hard times and has no ability to pay the IRS.

A district court held that Craig's 2007 tax liability was dischargeable but his 2009 tax liability was not. In order to have the 2009 tax claim fall outside the three year rule, and be dischargeable, Craig needed to file for bankruptcy after October 15, 2013. Instead, the court noted, he filed for bankruptcy on February 15, 2013 eight months too early. The court also noted that there is no exception in the chapter 7 context for hardship or any other equitable grounds. The three-year nondischargeability rule is mandatory. (Staff Editor Parker Tax Publishing)

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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