The United States Bankruptcy Appellate Panel (BAP) for the Tenth Circuit has held that a debtor's Form 1040 filed after IRS had assessed the tax liabilities for the year involved did not qualify as a return, as defined by the so-called “hanging paragraph” following 11 USC 523(a)(19). As a result, the tax debt relating to this return was excepted from discharge under 11 USC 523(a)(1)(B)(i). (In re Wogoman, No. CO-11-084 (B.A.P. 10th Cir. 7/3/12)
Debtors Mitchell J. Wogoman and Holly L. Wogoman filed their petition for Chapter 7 bankruptcy relief on Jan. 20, 2011. On Feb, 18, 2011, they initiated an adversary proceeding against IRS to determine the dischargeability of their federal income taxes for tax years '98, 2000, 2001, 2002 and 2003. IRS determined that they owed no taxes for '98 and agreed that their tax debts for 2000, 2002, and 2003 were dischargeable.
The Wogomans did not file a return for 2001 by the regular or extended due date. In October 2003, their tax preparer sent them a letter pointing out they had not filed a 2001 return and needed to take action.
IRS commenced an examination in 2004 to determine the Wogomans' delinquent 2001 tax liability. After establishing a proposed tax liability, IRS issued a statutory notice of deficiency notifying the Wogomans of the deficiency and their right to challenge it in Tax Court, which they did not do.
On Feb. 21, 2005, IRS assessed the deficiency for the 2001 taxes. The Wogomans did not pay the assessed liability, but filed a Form 1040 for tax year 2001 on Aug. 1, 2006. IRS abated part of their 2001 income tax liability and associated penalties on Nov. 13, 2006. On Mar. 23, 2007, they entered into an installment agreement with IRS to pay the remaining 2001 taxes and penalties, and subsequently made approximately 20 payments under the agreement.
Before the bankruptcy court, IRS argued that because no return had been filed at the time it assessed the 2001 taxes, 11 USC 523(a)(1)(B)(i) excepted these taxes from discharge. The Wogomans argued that the express statutory language of the “hanging paragraph” (see below) does not require that a return be filed prior to assessment in order to be effective for dischargeability purposes. The bankruptcy court ruled that the 2001 tax debt was nondischargeable because it came into existence before the filing of the Form 1040 by the Wogomans in 2006. They appealed.
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)) The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added language relevant to this exception in a hanging paragraph. It provides that a return for bankruptcy dischargeability purposes means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). The hanging paragraph further provides that the term “return” includes a return prepared pursuant to Code Sec. 6020(a), but does not include a return made pursuant to Code Sec. 6020(b).
The Tenth Circuit BAP said that the question for it was whether the Wogomans' 2001 tax liability was a tax for which no return was filed within the meaning of 11 USC 523(a)(1)(B)(i)). Because the 2001 Form 1040 filed by the Wogomans in August 2006 was not filed pursuant to Code Sec. 6020(a) or Code Sec. 6020(b), the Court observed that the second sentence of the hanging paragraph was not relevant in this case. However, it said the first sentence of the hanging paragraph was relevant.
On appeal, the Wogomans argued that the express language of 11 USC 523(a)(1)(B)(i) does not distinguish between returns filed pre-assessment and those filed post-assessment, and the Court should not read into it the requirement that a debtor must have filed a return prior to an assessment by IRS in order for taxes to be dischargeable. Instead, they asserted that the bankruptcy court should have employed a four-pronged test formulated by courts pre-BAPCPA.
To qualify as a return under the four-pronged test, known as the Beard test:
(1) the document must purport to be a return;
(2) it must be executed under penalty of perjury;
(3) it must contain sufficient data to calculate tax liability; and
(4) there must be an honest and reasonable attempt to satisfy the requirements of the tax law. (Beard, (1984) 82 TC 766)
The Tenth Circuit BAP concluded that the 2001 taxes could not be discharged under three different alternative approaches to the issue.
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The 2001 taxes could not be discharged under the pre-BAPCPA Beard test because the return filed in 2006 by the Wogomans did not meet the fourth requirement, i.e., it did not represent an honest and reasonable attempt to satisfy the requirements of the tax law.
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While the Tenth Circuit BAP did not conclude as have several bankruptcy courts and the Fifth Circuit in McCoy, Linda Trenett v. Mississippi State Tax Comm, (2012, CA5) 2012 WL 19376, that all late-filed returns are excepted from discharge under the first sentence of the hanging provision, it found in this case that the return was excepted from discharge because applicable requirements were not met. The Tenth Circuit BAP stressed that the debtors in this case, without any reason justifying the delay, did not file their 2001 return until August 2006, after IRS had completed the burdensome process of determining their tax liability, providing the statutory notice of deficiency, assessing the taxes, and attempting collection. Regardless of whether the hanging paragraph creates a much more restrictive rule than the pre-BAPCPA Beardtest, the Tenth Circuit BAP found that the 2001 return filed by the Wogomans post-assessment did not meet applicable filing requirements, and therefore, their 2001 tax liability was excepted from discharge.
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The taxes could not be discharged under the position advanced by IRS that if a return has not been filed prior to assessment, the tax liability cannot be discharged. IRS argued that the Fifth Circuit had gone too far in concluding that every tax for which a return is filed late is nondischargeable. The Tenth Circuit BAP said in this case, whether it adopted the Fifth Circuit's reasoning or IRS's assessment rule, the Wogoman's 2001 tax liability was excepted from discharge.
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