by The Eleventh Circuit applied the Beard test to the question of whether and when a late-filed tax return is a “return” for purposes of dischargeability. The court adopted the middle ground finding that timing is relevant to the issue of the debtor’s “honest and reasonable” attempt to comply with tax laws. Justice v. U.S.A., No. 15-10273 (11th Cir. March 30, 2016).
Christopher Michael Justice filed his 2000-2003 tax returns three to six years late, after the IRS had issued notices of deficiency and assessed his taxes using a Substitute for Return form. The IRS abated Mr. Justice’s tax liability based on his filing. After he filed for chapter 7 bankruptcy, the court found the tax debt was not dischargeable. The district court agreed.
Section 523(a)(1)(B)(i), provides that a tax debt is excepted from discharge if there was no return filed by the tax debtor. Section 523(a)(1)(B)(ii) provides that a return filed late and within two years of bankruptcy is also excepted from discharge. It was undisputed that Mr. Justice’s returns, having been filed more than two years before his bankruptcy, did not fall under the latter exception to discharge. In 2005, Congress appended a definition of “return” to section 523(a) as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” This definition has led courts into the now-familiar semantic abyss of having to determine whether a late-filed return is a “return” at all.
On appeal, the Eleventh Circuit applied the pre-BAPCPA Beard test, Beard v. Comm’r of Internal Revenue, 82 T.C. 766, 777 (1984), aff’d sub nom. Beard v. C.I.R., 793 F.2d 139 (6th Cir. 1986), specifically addressing the fourth prong: whether the tax returns filed by Mr. Justice represented an honest and reasonable attempt to comply with tax laws.
The court noted that several circuits have adopted a one-day-late rule under which a return filed even one day late, and not subject to the narrow circumstance of the IRS’s having filed a substitute return with the cooperation of the debtor (as opposed to the circumstance here where the IRS filed a substitute return without the debtor’s input), does not fall within the definition of “return.” The court noted that not even the IRS endorses this draconian rule and suggested, but did not decide, that the rule was incorrect. On the other hand, the fourth, sixth, seventh and ninth districts have adopted the view that a late-filed return may still be dischargeable but that the timing of filing may be considered when faced with the question of the nature of the debtor’s tax compliance. In the most debtor-friendly decision, the eighth circuit has held that so long as the filed documents and forms comply on their face with applicable law, the timing of filing is irrelevant.
Without outright rejecting the one-day-late rule, the appellate court found that Mr. Justice’s tax returns were not dischargeable under the less harsh analysis in which the facts and circumstances of the debtor’s filing are determinative, and it joined the majority in finding that the Beard test was part of the relevant nonbankruptcy law courts must consider. Under that test, timing may be relevant to whether the return constituted an honest and reasonable attempt to comply.
The court addressed the three justifications expressed in In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006), and Judge Easterbrook’s dissent in In re Payne, 431 F.3d 1055 (7th Cir. 2005), for finding that timing is irrelevant to the definition of “return.” The court found the fact that the debtor’s post-IRS assessment filing may still be of value to the IRS improperly shifted the focus away from the debtor’s efforts to comply with the law. It also was unpersuaded by the argument that the benefit of having the person most able to file an accurate return—the debtor—is of independent value even if the IRS has, in the meantime, filed its own without the debtor’s assistance. The importance of saving the IRS the trouble of filing is defeated when the late return follows the IRS’s independent substitute return. Finally, the court rejected the argument that the majority view renders superfluous section 523(a)(1)(C), which prohibits discharge of a tax debt for which the debtor filed a fraudulent return. The court noted overlap but found the category of filings which are not returns under the Beard test is much broader than the cases which could be deemed fraudulent. Perhaps in tacit recognition that section 523(a)(1)(C) would be subsumed in the Beard test, the court found that the restriction against rendering a provision superfluous is not absolute. Because the Beard honest-and-reasonable test and the statute’s fraudulent return test achieve similar goals, the court did not trouble itself with the apparent redundancy.
The court concluded that “[i]n a case such as this one, where a taxpayer files many years late, without any justification at all, and only after the IRS has issued notices of deficiency and has assessed his tax liability, the taxpayer’s behavior does not evince an honest and reasonable effort to satisfy the requirements of the tax law.”