Some 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.