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Taxes Discharged When Returns Filed After Assesment
Dear Freedom Researchers,
Below is an RIA article about taxes and bankruptcy which I believe you will find interesting and potentially valuable. What do you think of this and the split between the Circuit Courts? Peymon
Tax debts were discharged in bankruptcy even though returns were filed after IRS assessment. In Re: Colsen, (CA 8, 3/25/2005) 95 AFTR 2d 2005-706 The United States Bankruptcy Appellate Panel for the Eighth Circuit has held that a debtor's Form 1040s filed after IRS had assessed the tax liabilities for the years involved qualified as returns under a Bankruptcy Code provision contained in 11 USC 523(a)(1)(B). As a result, the tax debt relating to these returns was not excepted from discharge under the cited bankruptcy provision. Thus, these taxes qualified to be and were discharged in bankruptcy.
Courts are split on the treatment of returns filed after IRS assesses taxes for purposes of determining the dischargeability of taxes under 11 USC 523(a)(1)(B). The Sixth Circuit, in Hindenlang, William C. in re, (1999, CA6) 83 AFTR 2d 99-509, held that returns filed two years after IRS assessed tax liabilities for the years at issue were not returns for discharge purposes because they served no tax purpose and had no effect under the Internal Revenue Code. Although the Sixth Circuit did not say that returns filed after assessment could not qualify as returns for dischargeability purposes, it did not make clear how returns filed after assessment could qualify. Other courts and the Eighth Circuit panel in the current case have held that a Form 1040 filed after an IRS assessment can qualify as a return under 11 USC 523(a)(1)(B). It appears that the Supreme Court may ultimately have to resolve the issue.
Gary Wayne Colsen failed to timely file income tax returns for years '92 through '96. In Dec. '97, IRS prepared substitutes for returns for those years under Code Sec. 6020(b). Subsequently, IRS issued deficiency notices for these years. Colsen never responded to them or sought review in Tax Court so in Nov. '98 and July '99, IRS assessed taxes, interest, and penalties against him for tax years '92 through '96. In the fall of '99, Colsen prepared and filed Form 1040s for these tax years. IRS examined the returns and authorized partial abatements of the taxes and interest it had previously assessed for those years. On Feb. 10, 2003, Colsen filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. He received a discharge in bankruptcy on May 28,2003. Colsen had initiated an adversary proceeding to determine the dischargeability of his federal income tax liabilities for tax years '92 through '98 (but '97 and '98 were not disputed by the government). Before the bankruptcy court, the government filed a motion for summary judgment seeking a determination that the returns filed by Colsen after IRS had prepared substitutes for returns, issued notices of deficiencies, and assessed the tax liabilities did not qualify as returns under 11 USC 523(a)(1)(B)(i) and that therefore the taxes were excepted from discharge. The bankruptcy court concluded that the Form 1040s were returns for purposes of the cited bankruptcy provision. The government appealed to the Eighth Circuit.
Relevant Bankruptcy Code provisions:
A bankruptcy discharge does not discharge an individual from a debt for a tax with respect to which a return, if required, was not filed. (11 USC 523(a)(1)(B)(i)) This is one of several categories of tax liabilities which are excepted from discharge. Also excepted are tax liabilities arising between the date of an involuntary bankruptcy petition and the entry of an order for relief; taxes entitled to priority under the Bankruptcy Code; taxes for which a required return was filed late and within two years before the bankruptcy petition; and a tax with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat. (11 USC 502(f), 507(a)(2) and (8), and 523(a)(1)) Income taxes which qualify for priority under the Bankruptcy Code and are consequently excepted from discharge include those for which a return was last due within three years before the filing of the bankruptcy petition; those which were assessed within 240 days before the petition date; and certain taxes which were not assessed before the petition date and which are assessable post-petition. (11 USC 507(a)(8))
Colsen's returns were filed late but he waited more than two years after filing them before he petitioned for bankruptcy so he wasn't snared by the rule that excepts from discharge taxes for which a required return was filed late and within two years before the bankruptcy petition.
Dispute in case at hand:
The parties disagreed as to whether Colsen's Form 1040s filed post-assessment qualified as returns under 11 USC 523(a)(1)(B)(i). The Eighth Circuit noted that the word "return" is not defined in the Bankruptcy Code or in the Internal Revenue Code or its regs. It noted, however, that the Tax Court, in Beard, Robert, (1984) 82 TC 766 , affd (1986, CA6) 58 AFTR 2d 86-5290, developed a uniformly accepted definition of a tax return involving a four-prong analysis and concluded that this it is appropriate to apply this analysis in the bankruptcy context.
To qualify as a return under the Beard test:
- the document must contain sufficient data to calculate tax liability;
- the document must purport to be a return;
- there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
- the taxpayer must execute the return under penalty of perjury.
In the current case, the parties' only dispute with respect to the Beard test was whether Colsen's Form 1040s constituted honest and reasonable attempts to satisfy the requirements of the tax law. The government argued that the filing of a Form 1040 after IRS has assessed the tax per se couldn't constitute an honest and reasonable attempt to satisfy the requirements of the tax law. Appellate court rejects per se rule. The Eighth Circuit rejected a per se rule that a return filed post-assessment cannot be an honest and reasonable attempt to satisfy the tax law and therefore cannot be a return under the bankruptcy provision. It then said that a document is an honest and reasonable attempt to satisfy the tax laws if on its face, it constitutes an endeavor to satisfy the law. The Court proceeded to conclude that Colsen's Form 1040s appeared on their faces to be tax returns, noting that IRS even modified his tax liabilities after it received them. The Court said that the documents appeared to IRS to be honest statements of income, deductions, and credits-all information necessary to calculate Colsen's tax liabilities. Accordingly, the Court concluded that Colsen did file tax returns for the years in question and, therefore, the taxes were not excepted from discharge under the 11 USC 523(a)(1)(B)(i).
RIA Research References:
For denial of discharge of taxes in bankruptcy where no return was filed, see FTC 2d/FIN V-7634; United States Tax Reporter 68,734.01; TG 72009. Source: Federal Taxes Weekly Alert, 03/31/2005, Volume 51, No. 13. Research Institute of America