ABI COMMISSION PANEL

2013 SABA/NAAG BANKRUPTCY CONFERENCE

SANTA FE, NEW MEXICO,TAXES

Tuesday, October 8, 2013, 1:30PM – 5:30PM

Allen Rosenberg

Massachusetts Department of Revenue

P.O. Box 9564

Boston MA 02114

(617) 626-3874

E-Mail:

Disclaimer: The opinions set forth herein are those of the author and are not necessarily the official opinions of the Massachusetts Department of Revenue.

LATE FILED RETURN ISSUE

Legislative Background

Unnumbered paragraph added as part of BAPCPA in 2005 after Section 523(a)(19)(iii).

“For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law including applicable filing requirements. Such term includes a return prepared pursuant to Section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.”

Intended Purpose

To define what is and what is not a return for purposes of discharge under Section 523(a).

Specific terms in Statute as the focus of the controversy and related litigation

“applicable nonbankruptcy law” “applicable filing requirements”

Section 523(a)(1)(B)(ii), enacted pre BAPCPA

This section does not discharge the tax shown on a return that is filed or given within 2 years of the petition date, but notwithstanding the current controversy,does otherwise mean that the tax is discharged if the return is filed late and more than 2 years before the petition date.

Specific Controversy and Arguments

The current controversy focuses on whether the terms “applicable nonbankruptcy law” and especially “applicable filing requirements” expressly include the concept of timeliness of the return so that a late filed return may not be a return at all. If so, the question arises as to whether the amendment now renders Section 523(a)(1)(B)(ii) largely meaningless, or in the alternative it clarifies that for a return to trigger Section 523(a)(1)(B)(ii) and start the discharge clock running, it must be filed under the provisions of IRC Section 6020(a), commonly referred to as a “Safe Harbor.” This argument asserts that returns filed even one day late, other than returns filed under the “safe harbor” can never be discharged because the term “applicable filing requirements” typically refers to the standard due date or the extension date of the return.

Proponents of the expansive interpretation of the unnumbered paragraph, cite to the language in Creekmore vs. Internal Revenue Service 401 B.R. 748, 749 (Bankr. N.D. Miss. 2008),and McCoy, vs. the Mississippi State Tax Commission 666 F.3d 924(5th Circuit, 2012).

Proponents of McCoy also cite to Jeffrey Links vs. United States of America, 2009 LEXIS 2921, (Bankr. N. D. Ohio 2009), which states that “the definition of return under Section 523(a) encompasses the filing deadlines for submitting returns contained in the Internal Revenue Code so that a late filed return cannot qualify as a return for purposes of a dischargeability determination,” relying on Creekmore.

Opponents to this position argue that this result is too literal and too extreme and does not work in harmony with Section 523(a)(1)(B)(ii). Opponents also express that such a literal reading of the statute works against the “fresh start” doctrine contained in the Bankruptcy Code. The opponents of this argument cite to the “Beard Test” which historically defined what constituted a return for purposes of determining discharge.

The Beard Test requires that:

  1. The document must purport to be a return.
  2. The document must be executed under the pains and penalties of perjury.
  3. The document must contain specific information for the tax to be calculated.
  4. The document must represent an honest and reasonable attempt to satisfy the requirements of the tax law.

The Beard Test does not refer to timeliness as a standard for definition of “return”.

Opponents also cite to the lack of published legislative history regarding the BAPCPA amendment. However, within other published commentary regarding the late filed return issue, it is stated that purpose of the amendment was likely to nullify the effect of In Re: Elmore, 165 B. R. 35 (Bankr. S.D. Ind. 1994)which held that “returns submitted to Tax Court as evidence were filed for dischargeability purposes”; and In Re: Nunez, 232 B. R. 778 (9th Cir. BAP, 1999)which held that “for dischargeability purposes, a return does not have to have legal significance under nonbankruptcy tax law and for discharge purposes a return must be a return according to the law of the jurisdiction to which the tax is owed.”

Those supporting this narrower view of the amendment argue that its purpose was to codify the result In Re: Hindenlang, 164 F.3d 1029, (6th Cir. 1999), which found that “a return filed too late to have any effect under nonbankruptcy tax law as to an assessment previously made cannot constitutean honest and reasonable attempt to satisfy the requirements of the tax law.”That is, the point of the amendment was to resolve the issue so that the taxing authorities would not have to endlessly argue about whether a return filed years after an assessment still had some useful purpose, even if it were only to the benefit of the debtor, but was not meant to limit the existing scope of Section 523(a)(1)(B)(ii).

The Creekmorecourt held that “a late filed return, unless it was filed pursuant to Section 6020(a) of the Internal Revenue Code can never qualify as a return for dischargeability purposes because it does not comply with the applicable filing requirements set forth in the Internal Revenue Code”. In the Creekmore case, the IRS assessed the tax under Section 6020(b), because it received no information from the debtor. Subsequent to the Section 6020(b) assessment, the debtor submitted returns on form 1040. IRC Section 6072(a) establishes the due date for Income tax returns. A major influence within the Creekmore decision was commentary within In re Payne, 431 F. 3d 1055, 1060 (7th Cir. Ill. 2005). Although Payne was decided under pre BAPCPA law, Judge Esterbrook took the liberty of looking into the future and offered an opinion going forward that post BAPCPA, an untimely return, other than within the safe harbor of IRC, Section 6020(a) could never lead to discharge concluding that timeliness is clearly a part of applicable filing requirements within applicable nonbankruptcy law. However, in another pre-BAPCPA case, Gary Wayne Colsen vs. United States of America, 446 F.3d 836, (8th Cir 2006), the Court ruled that the late returns contained data that allowed the IRS to calculate the tax more accurately and were therefore, an honest attempt to satisfy the requirements of the tax laws. The Colsencourt also applied emphasis to the “fresh start” doctrine.

Since the Creekmore decision, the IRS has taken the position that the literal interpretation espoused in Creekmoreis too extreme. This position is contained in a notice from the Office of the Chief Counsel, dated September 2, 2010. The IRS has also acknowledged that utilization of the IRC Section 6020(a) provision is rare and therefore has settled on an internal policy that a late return filed prior to an assessment made by the IRS can qualify for discharge. Conversely, it takes the position that returns filed late, subsequent to an IRS assessment would not qualify for discharge. In other words, it is taking the position that Hindenlang should be treated as the operative standard. However, if such late return contained items of tax not included within the original assessment, then the additional tax would qualify for discharge as long as the return was filed more than 2 years before the petition as specified in Section 523(a)(1)(B)(ii).

The IRS also adopts a similar test to the so called “Beard Test” for defining returns and adds the requirement of a Social Security Number and the requirement that a Federal Election Campaign contribution election be made on either first page of the return or the page bearing the taxpayers signature, see IRC, Section 6109(a)(1). The IRS advocated for their position in the case of Scott L. Shinn vs. Internal Revenue Service,2012 Bankr. LEXIS 1218, (Bankr. C. D. Ill, 2012). The court noted that while it was in agreement with the IRS position that a Form 1040 filed after the due date could still satisfy the applicable filing requirements as long as it was filed pre-assessment, its job was not to make policy, so it instead ruled in line with the literal reading of the statute, i.e. the Creekmore approach.

In the case of Michael & Holly Wogoman vs. Internal Revenue Service,2012 Bankr. LEXIS 3031, (10th Cir BAP 2012),the IRS assessed the tax, prior to the filing of a tax return. The assessment was not specifically made pursuant to IRC Section 6020(a). The debtors filed their federal tax return after the assessment was made and more than 2 years before thebankruptcy petition was filed.

The Wogomandecision contains a detailed discussion of the facts as they relate to the official IRS position. Of important note are the following assertions:

a)The court did not discredit the “Beard Test” entirely. Instead, it asserted that since the return was filed after an assessment made by the IRS, the return served no real purpose and therefore it did not satisfy the 4th provision of the test, which is an honest and reasonable attempt to satisfy the requirements of the tax law.

b)The court noted that they could not conclude that the unnumbered paragraph created a rule that a late filed return could never lead to discharge unless it fell within the safe harbor.

c)The court noted that the goal of bankruptcy is to give the honest but unfortunate debtor a “fresh start” but the law has always provided that certain debts can never be discharged, citing to Section 523(a)(1)(B)(i) which excepts from discharge any debt for a tax with respect to which a return was not filed and the Section 523(a) unnumbered paragraph which provides that a return must satisfy the requirements of applicable nonbankruptcy law including applicable filing requirements.

The opinions expressed in Wogoman seem to define generally, what should be considered as a return for federal tax purposes based on the official IRS position. A similar analysis to the Wogoman decision is found In re: Smythe vs. United States of America, 2012 Bankr. LEXIS 1057 (W.D.Wash. 2012), where the court noted that the taxing authority’s claim arises when the debt is assessed, either based on returns, or an assessment.

There are a handful of cases that add additional analysis or even express a different result entirely.

In Martin vs. United States of America, 482 B.R. 634 (Bankr. D. Col, 2012)the court rejected the notion that the term “applicable filingrequirements” refers to timeliness. Instead the court noted in its opinion that “this interpretation says too much, essentially rendering Section 523(a)(1)(B)(ii) superfluous.”

However in a subsequent case in the same circuit, In re: Mallo vs. Internal Revenue Service 2013 Bankr. LEXIS 14, (Bankr. D. Col. 2013), the court disagreed with the reasoning in Martin and ruled along the lines of Wogoman.

State Tax Cases

Other than the State of Mississippi, Massachusetts is the only state to litigate the latefiled return issue. The Massachusetts cases provide a true test of the McCoy principals because these cases do not involve situations in which the tax department made assessments prior to the debtor’s late filed returns, posing the same facts as found in McCoy. The court was therefore forced to issue a ruling regarding the plain question of whether a late filed return qualifies as a return under the new statute rather than offering commentary within the boundaries of IRS policy. The Massachusetts cases create a true test regarding the meaning of the terms “applicable nonbankruptcy law”, and “applicable filing requirements.”

The McCoy case may be unique with respect to the definitionof “applicable nonbankruptcylaw” and “applicable filing requirements” as compared to federal statute and other state statutes because the Mississippi Code apparently does not recognize “returns” filed after the due date, see Mississippi Code S. 27-7-53(1) and 27-7-53(2).

Massachusetts currently has 6 cases pending regarding the late filed issue. All of the cases contain similar facts and all were decided upon Motion for Summary Judgment.

In these cases, all on appeal from decisions of different Bankruptcy Judges, two courts haveruled on whether a late filed return can qualify as a return for dischargeability purposes.

In his decisions In re: Brown, vs. Massachusetts Department of RevenueCh. 7 Case No. 08-43819, Adversary No. 11-4150, and In re Gonzalez, vs. Massachusetts Department of Revenue,Ch. 7 Case No. 10-41907, Adversary No. 11-4149, both decided on March 11, 2013,Bankruptcy Judge Hoffman provided an analysis of the Massachusetts Assessment Statute in regard to the question of whether a late filed return served anylegitimate purpose under Massachusetts Law and concluded that the only way a late filed return does not serve as a tax assessment is when the Commissioner of Revenue assesses the tax first, see MGL Ch. 62C, S 26(d). Applying this analysis, the result is similar to the official IRS position and the result in the Wogoman decision. In other words, the operational dividing line is the action taken by the taxing authority, not the lateness per se of the return.

Bankruptcy Judge Hillman has disagreed andhas ruled along the lines of McCoy. He noted that as long as there is one situation where an untimely return is still considered a return, referring to the safe harbor under IRC Section 6020(a), the unnumbered paragraph does not render Section 523(a)(1)(B)(ii) superfluous, seeIn re: Pendergast vs. Massachusetts Department of Revenue, Chapter 7, Case No. 12-14455, Adversary No. 12-1215, also In re: Fahey vs. Massachusetts Department of RevenueChapter 7, Case No. 10-21154, Adversary No. 12-01204, both decided on June 11, 2013.

The Future and summary

Since the IRS has promulgated an official position on the issue, the Service will not bring forth a case regarding discharge unless it has either made an assessment prior to the filing of a return by the debtor, or if the return is beyond the 2 year window provided in Section 523(a)(1)(B)(ii). As a result, case law may be somewhat settled on this issue with regard to Federal Taxes. Many of the cases involving Federal Income Taxes have been decided pursuant to the IRS position with only side bar commentary offered regarding the general question of whether a late return can ever qualify as a return under the new unnumbered paragraph.

However, 48 State Revenue Departments have not yet sought to assert a position similar to McCoy regarding late filed returns. As referenced in many of the Massachusetts cases, analysis of the language of specific filing requirements within each State Statute may be critical in determining whether a late filed return can ever be discharged. The Massachusetts cases like the Mississippi case deal with the general question of whether a late return can ever qualify as a return for purposes of determining discharge.

In 2 states, judges find themselves on the opposite side of the fence regarding the late filed return issue and this is the cause of much confusion and controversy within the Bankruptcy Bar. The construction of the Mississippi Code seems unique and may support the result in the McCoy case.

Further Action

The term “applicable filing requirements” is not defined universally and therefore it is unclear whether or not it must refer to the standard due date of the tax return. It is therefore unclear, if going forward, the courts will still accept the “Beard Test” as a measure to determine the necessary attributes of a “return” and thus “applicable filing requirements.” Absent subsequent legislation, we may be left with an unclear direction regarding this issue and many more years of uncertainty and litigation. A question remains as to whether a subsequent Legislative amendment will provide useful clarification.

BALLOON PAYMENT ISSUE

Issue

There are significant differences in the Bankruptcy Code’s provisions regarding the payment of priority claims in Chapter 11 and other payment provisions found in Chapter 13.

Section 1129(a)(9)(C)

Section 1129(a) in general sets the minimum requirements of the plan in order to be confirmed. Section 1129(a)(9)(C) addresses the requirements for a priority unsecured tax claim, and by incorporation of reference in Section 1129(a)(9)(D) it also sets forth the requirements for a secured claim for a tax that otherwise would meet the prerequisites for priority unsecured status under Section 507(a)(8).

If a plan does not provide for payment in full of the allowed amount of the claim by the effective date of the plan, or if there is not an agreement that provides for an alternative treatment of the claim, then Section 1129(a)(9)(C) requires that the holder of the claim will receive on account of such claim, regular installment payments in cash in the amount of the total value of the claim, as of the effective date of the allowed amount of the claim. This section further requires that the installment payments be made over a period ending not later than 5 years after the date of the order of relief under Section 301, 302 or 303, i.e. generally, the petition date.