Late-Filed 1040s are Not "Returns" Under Bankruptcy Discharge Exception.

(Parker Tax Publishing January 29, 2015)

In a case of first impression, the Tenth Circuit affirmed a district court ruling that late individual tax returns filed by a debtor couple, after the IRS assessed tax liabilities and issued notices of deficiency, were not returns within the meaning of the Bankruptcy Code. The couple's tax liabilities were thus not dischargeable. Mallo v. U.S., 2014 PTC 606 (10th Cir. 2014).

Background

Edson and Liana Mallo did not file their Form 1040, Individual Income Tax Return, on time for 2000 and 2001. As a result, in 2006, the IRS made assessments against the couple and issued deficiency notices. After the couple failed to pay the assessed income taxes, the IRS started collection efforts by issuing a Notice of Intent to Levy. In 2007, the couple jointly filed their 2000 and 2001 Form 1040s. In 2010, the couple filed a Chapter 13 bankruptcy petition and, at the time of filing, owed tax liabilities from 2000 through 2009.

Following the issuance of a bankruptcy discharge order in 2011, the Mallos filed an adversary proceeding against the IRS in bankruptcy court seeking a determination that their income tax debt was discharged by the bankruptcy order. In response, the IRS filed a motion for summary judgment and sought a determination that the couple's income tax liabilities were excepted from discharge.

The Mallos argued that their income tax debts for 2000 and 2001 were discharged in bankruptcy by the discharge order. The IRS contended that the exception in Bankruptcy Code Section 523(a) applied because the returns filed by Edson and Liana after they had been contacted by the IRS did not meet the definition of a return. Thus, no return had been filed, and the tax liabilities were not dischargeable.

The bankruptcy court ruled in favor of the IRS, finding that the 2007 returns filed by the Mallos did not represent an honest and reasonable attempt to comply with the tax law. The court concluded that the 1040s were instead a belated attempt to create a record of compliance after the IRS filed substitute returns and issued notices of deficiency. The Mallos appealed to the district court of Colorado.

The district court, after considering and rejecting the positions advanced by the Mallos, concluded their postassessment 1040s were not "returns" for purposes of Bankruptcy Code Section 523(a)(1)(B) because they served no tax purpose. As a result, the district court affirmed the decision of the bankruptcy court.

Appeal and Analysis

On appeal before the Tenth Circuit, the Mallos argued that they filed returns within the meaning of Bankruptcy Code Section 523(a), and therefore the exception to discharge did not apply to them, and their debts were dischargeable. They contended that the phrase "applicable filing requirements" under definition of "return" found in statute is ambiguous regarding whether it includes timing for filing, and the statute allows a late-filed tax form to be a return, so long as it complies substantively with the requirements of the Code.

The IRS maintained that the paragraph defining a "return" was irrelevant because, under the IRS view, a debt assessed before the filing of a Form 1040 is a debt for which a return was not filed. The IRS argued that since, in its view, no tax form was filed, the debt could not be discharged in bankruptcy.

A debtor who files a bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition, including those debts related to unpaid taxes. Bankruptcy Code Section 523(a) provides exceptions to the general rule of the discharge of unpaid tax debt and precludes the discharge of tax debt under certain circumstances, including if a related return was filed within two years of the bankruptcy petition filing or if a return was not filed. A return is defined as a return that satisfies the filing requirements of the Internal Revenue Code but does not include a return prepared by the IRS under Code Sec. 6020(b).

The Court rejected the arguments and statutory analysis advanced by both the Mallos and the IRS, concluding the plain and unambiguous language of Bankruptcy Code Section 523(a) excludes from the definition of "return" all late-filed tax forms, except those prepared with the assistance of the IRS under Code Sec. 6020(a). The court disagreed with the taxpayers interpretation of the statute, finding the plain language suggested that "applicable filing requirements" includes the date a tax for is due, thereby excluding a late-filed Form 1040, which otherwise satisfies Code requirements. The court also dismissed the IRS's arguments, finding the IRS's statutory analysis improperly placed emphasis on the timing of the assessment rather than the meaning of "return," under the plain language of the statute, the Form 1040s filed by the Taxpayers were not returns for purposes of the discharge provisions contained in Bankruptcy Code Section 523(a).

The Court noted its conclusion was consistent with that reached by the only other federal circuit to have ruled on a similar issue. In In re McCoy, 666 F.3d 924 (5th Cir. 2012), the Fifth Circuit determined that the "applicable filing requirements" for state tax returns included Mississippi's annual April 15 filing deadline. Because the debtor had filed her tax forms after that deadline, the court concluded she had not filed a "return" as required by the Bankruptcy Code. As a result, the Fifth Circuit held that the debtor's state tax debts were excepted from discharge under Bankruptcy Code Section 523(a)(1)(B)(i).

Ultimately, the Court held the Mallos' late Form 1040s were not returns for purposes of the discharge provisions contained in Bankruptcy Code Section 523(a) and therefore the tax debts reflected in their Form 1040s were not dischargeable in bankruptcy. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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