In a case of first impression, the Tenth Circuit Court of Appeals held a tax return that is filed after the April 15 deadline is not a “return” within the meaning of § 523(a)(1)(B) of the Bankruptcy Code; as a consequence, a debtor is not entitled to a discharge of tax liability if the tax return is filed after the deadline.
In Mallo v. United States, ___ F.3d ___, 2014 WL 7360130 (10th Cir. Dec. 29, 2014), the court heard consolidated appeals on the issue of whether the bankruptcy court’s general discharge order discharged certain tax liabilities incurred by debtors who filed tax returns after the IRS assessed tax liabilities against them. Liana and Edson Mallo failed to file federal tax returns for 2000 and 2001. The IRS issued statutory notices of deficiency and, absent any challenge from the Mallos, assessed taxes and penalties in 2002. Five years later, the Mallos filed tax returns for 2000 and 2001, which resulted in the assessment of additional taxes. The Mallos filed their chapter 13 bankruptcy petition in 2010 and the case was later converted to chapter 7. After the Mallos received a general discharge order, they filed an adversary proceeding against the IRS, seeking a declaratory judgment that their income tax liabilities for 2000 and 2001 had been discharged. The IRS answered, arguing that tax returns submitted after the IRS assessed taxes were not returns within the meaning of § 523(a)(1)(B)(i) of the Bankruptcy Code. The bankruptcy court adopted this argument and declared that these tax liabilities were nondischargeable. The Mallos appealed to the district court, who consolidated their appeal with an appeal brought by the IRS in a different case involving Peter Martin. In that case, which had similar facts to the Mallos’ case, the bankruptcy court reached the opposite conclusion and held that the return filed after tax assessment by the IRS was nevertheless a return under § 523(a)(1)(B)(i) and, therefore, the debtor’s tax liability was discharged.
The district court found for the IRS, holding that tax returns filed after the IRS had assessed tax liability were not returns under § 523(a)(1)(B)(i) of the Bankruptcy Code and the tax liability represented by those returns was therefore nondischargeable. In reaching its conclusion, the district court applied the four-part test set forth in Beard v. Commissioner, 793 F.2d 139 (6th Cir. 1986) (per curiam) to determine what qualified as a tax return. Under the Beard test, the district court looked at the following four elements: “[f]irst, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.” The district court, following the holdings of the Fourth, Sixth, Seventh and Ninth Circuits, held that tax forms filed after the IRS assesses liability serve no purpose and therefore cannot satisfy the third element of the Beard test. The Mallos and Martin appealed to the Tenth Circuit.
On appeal, the Mallos and Martin argued that a tax form filed after the IRS assessed liability did serve the purpose of providing accurate information to the IRS, relying on the dissenting opinion of Judge Easterbrook in In re Payne, 431 F.3d 1055 (7th Cir. 2005) and the Eighth Circuit’s decision in In re Colsen, 446 F.3d 836 (8th Cir. 2006). The IRS argued that a tax return serves no purpose after assessment of liability and urged the court to adopt the holdings of the Fourth, Sixth, Seventh and Ninth Circuits.
The Tenth Circuit rejected both arguments, holding that any tax return filed after the deadline is not a return within the meaning of § 523(a)(1)(B)(i) of the Bankruptcy Code. The court focused on the 2005 BAPCPA amendment to the Bankruptcy Code, which added the following hanging paragraph to § 523(a)(1): “For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements . . . .” To determine whether a return satisfied applicable filing requirements, the court looked to the Internal Revenue Code, which said that “[i]n the case of income tax returns, returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year . . . .” 26 U.S.C. § 6072(a). The court concluded that the mandatory language of the IRC statute meant that any return filed after the deadline failed to meet the “applicable filing requirements”; as a consequence, any return filed after the deadline is not a return under the definition set forth in the hanging paragraph, commonly referred to as § 523(a)(*). Because these debtors filed their returns after the deadline, whether the IRS had assessed tax liability was irrelevant; the threshold question is whether the returns were timely filed.
This is the first circuit opinion to interpret the § 523(a)(*) hanging paragraph as applied to federal tax returns. Several lower courts have interpreted the “applicable filing requirements” language to refer not to time but to whether the tax form is a return under the Beard test. See, e.g., In re Pendergast, 510 B.R. 1 (1st Cir. B.A.P. 2014); In re Smith, ___ B.R. ___, 13-CV-871, 2014 WL 1727011 (N.D. Cal. Apr. 29, 2014); In re Briggs, 511 B.R. 707 (Bankr. N.D. Ga. 2014). It will be interesting to follow the evolution of § 523(a)(*) and how other circuits interpret this statute going forward.