Tax debt not dischargeable after SFRI have written several times about discharging income tax debt in bankruptcy.  Some time ago I wrote a post that dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  At the time, I reported that the question hadn’t been addressed by the Ninth Circuit Court of Appeals.  That statement is no longer correct.

 

Martin Smith v. IRS

 

I watched the oral arguments in Martin Smith v. IRS case that took place on May 12 at 9:00 a.m.

The Court sided with the IRS in this case, and held that Mr. Smith’s tax debt was not dischargeable in his Chapter 7 bankruptcy case.  This case illustrates the old maxim that bad facts make bad law.

The Court summarized Mr. Smith’s history with the IRS:

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties.  In March 2006, the IRS mailed Smith a notice of deficiency.  Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.”

The fact that Mr. Smith filed his return seven years late, and three years after the IRS had filed an SFR clearly bothered the Court.  On that basis the panel held:

Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment.  Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code.

Suppose Mr. Smith had filed his return a month after the IRS filed the SFR.  Would the Court have sided with him?  Probably not because of the locution:  “. . . after the IRS went to the trouble of calculating a deficiency and issuing an assessment.”  In sum, it appears that a return filed after an SFR is not a return for bankruptcy discharge purposes in the Ninth Circuit.

 

Discharging tax debt:  Late filed return, but before the IRS files an SFR

 

What if you file a return late, but before the IRS files an SFR?  Will that return qualify as a return for bankruptcy discharge purposes?  The Court never considered the question.  Therefore, the Fifth Circuit’s draconian holding in In re McCoy, 666 F. 3d 924 (5th Circuit 2012) (a late filed return is not a return for bankruptcy discharge purposes) has not yet polluted Ninth Circuit jurisprudence.  So, at least for now, if you’re in the Ninth Circuit and you filed your return late, but there was no SFR, then if you satisfy the three-year, two-year, 240-day rule, you should be able to discharge the tax debt in bankruptcy.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Based on Flicker Image  (Licensed) by Chris Potter

CourtroomI have written several times about discharging income tax debt in bankruptcy.  My most recent post on this topic dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  I reported that the question hasn’t been addressed by the Ninth Circuit Court of Appeals.  That is about to change.

In a society with a government class and a nongovernment class, the government class will naturally protect itself against the nongovernment class.  I hope the Ninth Circuit will break from that mindset and do the right thing in the Martin Smith v. IRS case.  Oral arguments are scheduled for May 12 at 9:00 a.m., and I intend to watch them at: http://www.ca9.uscourts.gov/media/live_oral_arguments.php.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Image courtesy of Flickr (Licensed) by Karen Neoh

tax return with hundred dollar billsSome time ago I wrote about discharging income taxes in bankruptcy.  I subsequently wrote about discharging income taxes in bankruptcy for a tax year in which the debtor filed a return after the taxing authority ― for simplicity I will generically label the authority as the IRS, though the discussion applies to other taxing authorities ― filed a substitute for return and assessed the tax.

A fellow bankruptcy attorney of the highest caliber, who is also a good friend, read the substitution for return post ― Yippee!  I always love hearing that people are reading the blog ― and drew my attention to a brand new decision of the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) in the appeal of one of the cases I discussed in substitute for return post.  He suggested that I write a follow up post.  Following the rule always to take requests from the audience (please try the veal piccata, and be sure to tip the wait staff), I offer the following update.

To set the stage for this post I will begin with a précis of the aforementioned (does anyone other than an attorney use the word “aforementioned”?) two previous posts.  If you want more detail, read those two posts.

 

I.  The Three-Part Tax Dischargeability Test

 

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

1.  (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,

2.  (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and

3.  (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  It is the afflatus for this post. Continue Reading Discharging Income Taxes In Bankruptcy After A Substitute For Return Is Filed: Part II

IRS From 1040Some time ago I wrote about discharging income taxes in bankruptcy.  I stated that there is a three-part test for determining their dischargeability, and started with the following executive summary:

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

  1. (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,
  2. (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and
  3. (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  Therefore, I suspect that the Supremes will eventually be asked to consider the matter.

My focus today is on what happens if the taxing authority files something called a substitute for return on behalf of the debtor/taxpayer.  For linguistic simplicity, I will refer to the taxing authority as the IRS, though the discussion applies, mutatis mutandis, if the taxing authority is a state taxing authority such as California’s Franchise Tax Board. Continue Reading Discharging Income Taxes In Bankruptcy After A Substitute For Return Is Filed