Tenth Circuit, Agreeing with Fifth, Holds that BAPCPA Law Change Means Late Filed Return Liabilities Generally Cannot Be Discharged in Bankruptcy

In the case of Mallo v United States, 114 AFTR 2¶2014-7022, CA10 (cert denied) the appellate court affirm the lower courts’ holding that a liability arising from a late filed income tax return does not qualify for potential discharge in a bankruptcy case.

The issue revolves around language Congress added to Section 523(a) of the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).  That provision, added at the end of Section 523(a) of the Bankruptcy Code, provides:

For purposes of this subsection, the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).

That provision of the Bankruptcy provides for an exclusion from a discharge certain taxes if the requirements of the section are not met.  The key question is whether a late filed return satisfies the requirements of applicable nonbankrupcty law.

The appellate panel determined that, pursuant to IRC §6072(a), a tax return is required to be filed on or before its due date.  A return that is not timely filed fails to meet that mandate and thus, in the view of the panel is not a return that satisfies the requirements of nonbankruptcy law (in this case the IRC).

The panel notes that the other Circuit Court to consider this issue (the Fifth) concluded that a late file state return was not a return that satisfies the requirements of the applicable bankruptcy law (In re McCoy, 666 F.3d 924 (5th Cir.2012)).

However, the taxpayers pointed out that some lower courts have interpreted this rule to not apply to the filing date, but only to other mechanical requirements.  The taxpayers argued that the new law’s language regarding returns filed under §6020(a) where the IRS prepares the return will count as meeting the requirements of the law even if it is prepared late.  As well, the law notes that returns prepared under §6020(b) where the IRS prepares a substitute for return (SFR) and executes it are not qualified, a provision that would not be needed if all late filed returns are not valid since SFRs are only prepared if a timely return is not filed.

As well, the exception found in Bankruptcy Code Section 523(a)(1)(B)(ii) which includes an exclusion for returns filed after they were due and after two years before the date the bankruptcy petition is filed.  The taxpayers argue that the Court’s view would keep any late filed return from being dischargable and render the provision meaningless.

The Court disagrees with this view

But contrary to the Taxpayers' position, our plain language interpretation of "applicable filing requirements" does not render § 523(a)(1)(B)(ii) or the statute's reference to § 6020 superfluous or arbitrary. First, § 523(a)(*) expressly includes as a "return" a form prepared by the Secretary pursuant to § 6020(a). Recall that § 523(a) excepts from discharge tax debts for which a return was not filed, id. § 523(a)(1)(B)(i), or for which a return was filed late, but within two years of the bankruptcy petition, id. § 523(a)(1)(B)(ii). 1324*1324 Returns prepared pursuant to § 6020(a) could be filed late — for the Secretary to prepare such a return, the taxpayer necessarily failed to comply with the requirements of the title — yet still qualify as returns under § 523(a)(*). In that scenario, § 523(a)(1)(B)(i) does not apply, and the related tax debt is dischargeable. But if the return prepared pursuant to § 6020(a) was filed within two years of the date the taxpayer files for bankruptcy, § 523(a)(1)(B)(ii) would bar discharge of the related tax debt. Accordingly, § 523(a)(1)(B)(ii) is not rendered meaningless by a plain language interpretation of "applicable filing requirements" that includes filing deadlines.

Second, § 523 is not ambiguous simply because it provides that tax forms prepared by the Secretary under § 6020(a) are "returns" for the purposes of dischargeability, but that forms prepared under § 6020(b) are not. The reference to both sections simply indicates Congress's efforts to make clear that the "returns" prepared under § 6020(a) constitute a narrow category of otherwise noncompliant tax forms that are expressly dischargeable. See McCoy, 666 F.3d at 931 ("[Section] 523(a)(*) carves out a narrow exception to the definition of `return' for § 6020(a) returns, while explaining that § 6020(b) returns, in contrast, do not qualify as returns for discharge purposes."); Colin N. Gotham & David R. Schapker, A Late-Filed Tax Return Should Still Be Considered A "Return," 32-JUN Am. Bankr.Inst. J. 36, 36 (June 2013) (criticizing the amendment but acknowledging that under the plain language of 523(a)(*), debtors who file late income tax returns are not eligible for discharge of the related tax debt, except in cases where the IRS has exercised its discretion in preparing a § 6020(a) substitute for a return for the taxpayer).

The Court then continues:

In contrast, to read the statute to allow a late-filed tax form to be a return, so long as it complies substantively with the requirements of the Internal Revenue Code, would require us to ignore the plain meaning of the language actually used. If the statutory mandate contained in the Tax Code that a return "shall be filed on or before" a particular date is not an "applicable filing requirement," it is hard to imagine what would be. There is simply no principled way to distinguish between the Tax Code's mandatory provisions relating to tax returns in a way that excludes filing deadlines but includes all other mandatory provisions as "applicable filing requirements." If Congress intended § 523 to define a return through application of the Beard test or some other type of substantial compliance doctrine, rather than by a taxpayer's compliance with the applicable filing requirements contained in the Tax Code, Congress could simply have defined a return as one that "satisfies the requirements of applicable nonbankruptcy law," without qualifying the statement with the phrase "including applicable filing requirements." Alternatively, Congress could have expressly stated a document is a return if it "satisfies the requirements of applicable nonbankruptcy law (including applicable substantive filing requirements)" or "(including applicable filing requirements, except the date the filing is due)." But Congress did not write the statute in any of these ways. It expressly incorporated compliance with applicable filing requirements as part of the definition of a return under the discharge provisions of § 523 of the Bankruptcy Code. We must apply the statute as it is written. Therefore, we reject the Taxpayers' interpretation of "applicable filing requirements" because it conflicts with the plain language of the statute.

As was noted above, the Supreme Court has decided not to hear the taxpayer’s appeal of this decision.  Given there is not yet a split among the Circuits (though lower courts have come to different conclusions) this is not surprising.  However, if another Circuit Court takes the opposite position then it is possible that the Supreme Court would step in to deal with this issue.