Opinion
CAUSE NO. 1:02-CV-1742-SEB-VSS, BANKRUPTCY CASE IP01-1694M-JKC-7, ADVERSARY CASE IP01-00212
March 12, 2004
ENTRY ON APPEAL FROM BANKRUPTCY COURT ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
The relevant facts in this litigation are undisputed and the issue before the court is straight forward. William Woods failed to file timely tax returns for the years 1988 through 1993. In November of 1994 the Treasury Department, pursuant to the Internal Revenue Code, prepared substitute returns for those years based upon the information available to it. I.R.C. § 6020(b). In December of 1994 the IRS sent Woods notice of the proposed income tax deficiencies, requesting that he respond within 30 days. Woods did not respond. Formal notice of deficiency letters were then sent to Woods in February 1995, giving him 90 days to respond or file a petition in the United States Tax Court to challenge the deficiencies. Again, Woods did not respond. Consequently, the IRS assessed the tax deficiencies against Voods in August of 1995.
After the tax deficiencies, including penalties and interest, were assessed Woods executed a tax collection waiver and entered into an installment agreement with the IRS. He also made an offer of compromise to the IRS for payment of a reduced amount of taxes owed for the years 1988 through 1995. That offer was rejected by the IRS in April of 1997. Woods was advised by both an IRS agent and his own legal and tax consultants that he should file returns for the years at issue. He did so in December of 1997. The 1040 Forms signed and submitted by Woods for the 1988 through 1993 contained nearly the same information as the substitute returns that had been prepared by the Treasury Department. However, differences in marital status, standard deduction and cost of goods calculations, as submitted by Woods on the 1040 Forms, caused the IRS to make small changes to the ultimate tax assessment for four of the six years. The assessments increased slightly for two years and decreased slightly more for two other years. Woods made payments on the installment contract until he became ill and lost his job.
On February 12, 2001, Woods filed a voluntary petition under Chapter 7 of the Bankruptcy Code. As a debtor, he then filed this adversary proceeding seeking, in part, a determination against the United States that his federal tax liabilities for the years 1988 through 1993 are dischargeable because they are not excepted from discharge by Section 523 of the Bankruptcy Code, 11 U.S.C. § 523.
Section 523 specifically excepts various categories of debts from discharge. As it relates to this case, Section 523 provides as follows:
(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —
(1) for a tax or a customs duty —
(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, if required —
(i) was not filed; or
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.11 U.S.C. § 523(a)(1).
Both woods and the United States moved for summary judgment in the adversary proceeding. woods maintains that the unambiguous language of Section 523 requires a finding that his tax liabilities for 1988 through 1993 do not fall under an exception to discharge. He filed tax returns, albeit late, more than three years prior to his filing a bankruptcy petition. According to woods, without evidence that he committed fraud or otheirwise intended to deceive the Treasury Department with the returns he filed, he is entitled to discharge any tax liability that accrued and for which returns were filed, more than two years prior to the filing of his petition. The United States argues that the filing of a 1040 Form long after the IRS has already crafted a substitute return, issued a proposed deficiency and then assessed the tax liability, should not constitute a "return" as that term is used in 11 U.S.C. § 523(a)(1)(B) (ii). According to the government, what Woods filed had no real legal effect, did not serve the purpose of a self-reported tax filing as envisioned by Congress and created no obligation on the part of the IRS to act in any particular manner.
Neither the Bankruptcy Code nor the Internal Revenue Code defines the term "return". As a result, this issue has been debated without a uniform resolution. The Supreme Court as well as our Seventh Circuit Court of Appeals have yet to weigh in on the issue. Howvever, other circuits, as well as a number of bankruptcy and district courts have faced this issue. The majority have adopted the interpretation encouraged by the government. E.g., In re Moroney, 352 F.3d 902 (4th Cir. 2003); In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999); In re Shrenker, 258 B.R. 82 (Bkrtcy.E.D.N.Y., 2001,). A bold few, including the bankruptcy court in the case at bar, have stuck with what they believe to be the required deference to both a literal interpretation of the statutory language and the concept of strictly interpreting exceptions to discharge so as to allow a debtor the best opportunity to start anew. E.g., In re Savage, 218 B.R. 126 (B.A.P. 10th Cir. 1998); In re Woods, 285 B.R. 284 (Bankr.S.D. Indiana 2002); In re Crawley, 244 B.R. 121 (N.D. Ill. 2000).
Like the majority of courts who have had occasion to visit the issue, this court finds the government's argument the most convincing. The Sixth Circuit provided the benchmark for the majority view in In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999). Finding no direction from the Internal Revenue Code or the Bankruptcy Code, it adopted, as even the courts following the minority view have, a four part test for determining whether a filing with the IRS constitutes a "return". Id. at 1033. Originally devised by the Tax Court in Beard v. Commisioner, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986) through analysis of related Supreme Court cases, the test is as follows:
(1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.In re Hindenlang, 164 F.3d at 1033.
Where the majority and minority analysis split, with regard to post assessment filing of a tax form, is in the application of the fourth element of the Beard test. The Sixth Circuit held as a matter of law that "a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code." Id. at 1034. Such a filing can not constitute the honest and reasonable attempt at satisfying tax law requirements that the fourth element of the Beard test requires. Id. We agree. If the purpose of a tax return is to allow compliance with our system of self reporting and to guide the IRS in its assessment of a taxpayer's liability, see Commissioner v. Lane-Wells Co., 321 U.S. 219, 223 (1944), then the perfunctory filing of a Form 1040 after the tax has been assessed does not meet that purpose and should not be seen as an honest and reasonable attempt to comply with the law.
Accordingly, we find as a matter of law that the 1040 Forms for 1988 through 1993 which William Wood filed in December of 1997, more than two years following assessment of taxes by the IRS for those years, do not constitute "returns" as that term is used in 11 U.S.C. § 523(a)(1)(B). Therefore, Mr. Woods federal tax liabilities, as assessed for those years, are excepted from discharge. The order of the bankruptcy court granting summary judgment to Wood on his adversary proceeding is reversed and the case is remanded to the bankruptcy court for resolution of any remaining issues consistent with this entry.
It is so ORDERED.