Late Filed Return Not Equivalent of Tax Return

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By Diane Davis

Dec. 23 — A late filed tax return isn't the equivalent of a tax return under Bankruptcy Code Section 523(a)(1) and, thus, a debtor's income tax liabilities can't be discharged in bankruptcy.

Judge Joan N. Feeney of the U.S. Bankruptcy Court for the District of Massachusetts ruled in favor of the Internal Revenue Service and the Massachusetts Department of Revenue.

Section 523(a)(1) provides three categories of debts for taxes that are excepted from discharge in bankruptcy. Specifically, Section 523(a)(1)(B) excepts from discharge taxes owed with respect to a required “return, equivalent report or notice” which was either not filed or given at all or was filed or given late but within two years prior to the commencement of the bankruptcy case.

Untimely Filed Tax Returns 

Debtor Johan K. Nilsen owed the Massachusetts Department of Revenue and the Internal Revenue Service amounts for unpaid income taxes, penalties, and interest for the years 2000-2005, 2007, 2009, and 2010. For each of the periods at issue, the debtor was required to file tax returns on or before April 15th of the year following each of the years in the periods at issue, or by the deadline pursuant to any allowed extensions.

No extensions of the time to file the returns were applied for or approved. The debtor failed to timely file the tax returns but instead filed on August 23, 2010, a Form 1040, U.S. Individual Income Tax, with the IRS, and a Form 1 with the Massachusetts Department of Revenue for each of the periods at issue, except for the year 2010. For 2010, the debtor filed the same forms with the taxing authorities on or before March 12, 2012.

Debtor Filed for Bankruptcy 

More than two years after these submissions, on March 20, 2015, the debtor filed a Chapter 7 bankruptcy petition and the U.S. trustee appointed a Chapter 7 trustee. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.

On Schedule F, Creditors Holding Unsecured Nonpriority Claims, the debtor listed the IRS as the holder of a claim in the amount of $217,529 for “income taxes 2000-2010,” and the Massachusetts Department of Revenue as the holder of a claim in the amount of $28,434 for income taxes for the same time period.

The Chapter 7 trustee filed a report of no distribution, and, on June 29, 2015, the debtor received a discharge of all dischargeable debts.

The debtor then filed a complaint seeking a determination of the dischargeability of his income tax for the periods at issue.

Tax Forms as ‘Equivalent Reports'?

The debtor didn't argue that the tax forms he submitted to the IRS and the Massachusetts Department of Revenue were “returns” as defined in Section 523(a), but rather that they constituted “equivalent reports” as that term is used in Section 523(a)(1)(B).

He also argued that because the tax forms were filed more than two years prior to the petition date, the amounts owed for the periods at issue aren't excepted from discharge.

In characterizing the tax forms as “equivalent reports” instead of “returns,” the debtor hoped to evade the application of the First Circuit's holding in Fahey v. Massachusetts Dept. of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015), which ruled that a Massachusetts state income tax return filed after the date by which Massachusetts requires such returns to be filed doesn't constitute a “return” under Section 523(a), and therefore, unpaid taxes due pursuant to that return couldn't be discharged.

The IRS and Massachusetts Department of Revenue contended that the distinction between “returns” and “equivalent reports” is immaterial for federal tax obligations. Federal tax law only requires the filing of “returns,” they argued.

The IRS and Massachusetts Department of Revenue also contended that the plain language of Section 523(a)(1)(B) indicates that a late filed Form 1040 isn't an equivalent report or notice.

Excepted From Discharge 

The bankruptcy court determined that the focus of the case was based on Section 523(a)(1)(B). The court found the reasoning of the Massachusetts Department of Revenue and the IRS, as well as the holdings in Fahey, and State of Maryland v. Ciotti (In re Ciotti), 638 F.3d 276 (4th Cir. 2011), compelling.

The debtor filed Form 1040s and Form 1s late and didn't file something akin to or equivalent to those documents, the court said. He filed actual returns, not something different, the court said. According to the court, the debtor is attempting to rename the tax forms as equivalent reports to evade the holding of Fahey.

Even if the court were to consider the debtor's argument that it should apply a four-part test to determine whether his returns constituted “equivalent reports,” the result would be the same, the court said.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/Nilsen_v_Mass_Dept_of_Revenue_In_re_Nilsen_Adv_No_151122_No_15110