Ch. 7 Debtor With Late Filed Form 1040 Can't Discharge Taxes

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By Daniel Gill

July 15 — A debtor couldn't discharge a federal income tax debt in his bankruptcy case because he filed his Form 1040 more than three years after the Internal Revenue service assessed a deficiency against him, the Ninth Circuit ruled ( Smith v. IRS (In re Smith), 2016 BL 224521, 9th Cir., No. 14-15857, 7/13/16 ).

Judge Morgan Christen of the U.S. Court of Appeals for the Ninth Circuit on July 13 concluded that the late-filed Form 1040 was not a “return” for the purposes of considering a Bankruptcy Code section prescribing when tax debts can't be discharged, because the late filing did not represent an “honest and reasonable attempt to satisfy the requirements of tax law.”

The opinion confirmed that prior Ninth Circuit authority ( U.S. v. Hatton (In re Hatton), 220 F.3d 1057 (9th Cir. 2000)) remains good law after the Bankruptcy Code added a definition of “tax return” in 2005.

Martin Smith did not file a tax return for 2001, prompting the IRS to file a Substitution for Return (SFR) on Smith's behalf, the court said. In 2006 the IRS issued a notice of deficiency against Smith, finding him liable for about $70,000.

Three years later, Smith filed his Form 1040, ostensibly to replace the IRS's Substitution for Return, the court said.

In December 2011, Smith filed a Chapter 7 bankruptcy case, hoping to discharge the tax obligation, according to documents he filed in the case. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

The debtor filed suit in bankruptcy court seeking to establish that the 2001 taxes were discharged. Ordinarily, a tax debt for a timely filed return will be discharged, provided that the return was due more than three years before the bankruptcy case is filed.

However, Bankruptcy Code Section 523(a)(1)(B)(1) provides that “any . . . debt for a tax . . . with respect to which a return, or equivalent report or notice, if required . . . was not filed or given” is excepted from the discharge. Accordingly, the court had to decide whether the Form 1040 constituted a “return” filed by the debtor.

The Ninth Circuit said that Hadden remained good law. At least in this case, wherein the debtor did not file a purported return until several years after the IRS had to file its own SFR, the filing did not constitute a “return,” because it failed to meet the fourth prong of the U.S. Tax Court definition which the circuit had adopted: that the filing “must represent an honest and reasonable attempt to satisfy the requirements of the tax law.” The form, filed seven years late and three years after the IRS filed the SFR, was not an “honest and reasonable attempt to comply with the tax code,” the court said.

The court noted that this was not a “close case” and left the door open for the possibility that “any post-assessment filing” might be considered “honest and reasonable” such that it could be deemed a “return,” thereby allowing for the discharge of a tax liability.

Circuit Judges Jerome Farris and Diarmuid F. O'Scannlain joined in the opinion.

Robert L. Goldstein, San Francisco, represented the debtor appellant. The IRS was represented by Julie C Avetta, Department of Justice, Washington.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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