Two petitions for certiorari pending before the Supreme Court of the United States ask the Court to resolve the question of whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code (BC). The answer to this question will determine whether a bankrupt taxpayer’s tax debts can be discharged or are permanently barred from discharge. According to these petitions, the courts of appeal are divided as to the answer.
BC § 523(a) generally allows a debtor to discharge unsecured debt, except for, inter alia, tax debts of debtors who: (1) failed to file tax returns; (2) filed fraudulent tax returns; or (3) filed late tax returns, where a bankruptcy petition is filed within two years of the date the late return was filed. See BC § 523(a)(1)(B)(i), (B)(ii), (C).
Before 2005, the BC did not define a “return” for purposes of the non-dischargeability rules, and the Internal Revenue Code (IRC) surprisingly provides no definition. However, in the widely cited Beard v. Commissioner, 82 T.C. 766 (1984), the Tax Court defined a four-part test (the “Beard Test”) for determining whether a document constitutes a “return.” To be a return, a document must: (1) provide sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) be executed by the taxpayer under penalties of perjury. The third prong of the Beard Test has divided courts and given rise to reclassifications of some late-filing taxpayers as non-filing taxpayers, rendering their tax debts non-dischargeable.
In 2005, BC § 523(a) was amended to provide that a “‘[tax] return’ means a return that satisfies the requirements of applicable non-bankruptcy law.” However, as noted above, the IRC provides no definition of “return.” Some courts have since held that this amendment had no effect on the Beard Test, while others have held that the amendment neutralizes it. As a result, there appears to be three distinguishable approaches to determining the dischargeability of a late-filing bankrupt taxpayer’s tax debt. The Eighth Circuit treats post-assessment returns as late returns under the Beard Test, which only postpones dischargeability. The Ninth, Fourth, Seventh, and Eleventh Circuits treat post-assessment returns as non-returns under the Beard Test, rendering the relevant tax debt non-dischargeable. The First, Fifth, and Tenth Circuits treat all late and post-assessment returns as non-returns under amended BC § 523(a), barring dischargeability entirely.
Martin Smith filed a Form 1040 for 2001 in 2009, three years after the IRS had prepared a Substitute for Return (SFR) pursuant to IRC § 6020(b), reporting income and tax liability greater than those in the SFR. In 2011, Smith declared bankruptcy and sought to discharge his 2001 tax debt. The IRS contended that taxes assessed prior to Smith’s 2009 filing for 2001 were non-dischargeable taxes for which no return had been filed. The Ninth Circuit found that Smith’s post-assessment tax return was not an “honest and reasonable attempt” to comply with the tax law, and therefore Smith had not filed a “return” for purposes of the discharge rules.
In a similar case, the IRS solicited tax returns from Christopher Justice for 2001–2006. Justice delivered Forms 1040 for the SFR years of 2000, 2001, 2002 and 2003, as well as for 2004, 2005 and 2006, three non-SFR years, on October 22, 2007. Two years later, the IRS again solicited returns for the SFR years because the returns Justice filed for those years in 2007 had not been processed. Justice resubmitted Forms 1040 for 2000, 2001, 2002 and 2003 on September 1, 2009. On July 22, 2011, Justice filed a Voluntary Petition under BC Chapter 7 and was granted a Discharge of Debtor. Justice sought a determination that the tax liabilities for 2000, 2001, 2002 and 2003 were included in the discharge. The Eleventh Circuit found that Justice had failed to establish that he had made an “honest and reasonable attempt” to comply with the tax law and held that Justice’s tax debt for the SFR years could not be discharged by the bankruptcy.
Both Smith and Justice have filed petitions for certiorari with the Supreme Court (Docket Nos. 16-497 and 16-786, respectively). Both petitions are based on a division among the circuits regarding whether a tax return filed after an IRS assessment is a “return” for purposes of the BC. The petitioners and amici curiae supporting them argue this creates uncertainty and causes dissimilar treatment among bankruptcy filers. The IRS has filed briefs in opposition to certiorari in Smith and Justice, arguing that there is no conflict among the circuits. The IRS asserts that the circuit courts’ differing approaches in interpreting BC § 523(a)(1) does not, in itself, provide a basis for further review, especially where the circuits have come to the same conclusion that post-assessment filings are not “returns” under BC § 523(a)(1).
If the Supreme Court grants certiorari, the circuit split alleged by the petitioners and the amici curiae would be resolved, as well as the uncertainty and potential dissimilar treatment of bankrupt taxpayers that Smith, Justice, and the amici argue exists today.