Kentucky’s Office of Unemployment Insurance’s claim for an overpayment of unemployment compensation benefits was not entitled to priority in the debtor’s chapter 13 case where the nature of the claim was better characterized as a “penalty” than a “tax.” In re Clardy, No. 22-30089 (Bankr. W.D. Ky. Dec. 1, 2022). [Read more…] about Unemployment Overpayment Not a Priority Tax Debt
First Circuit Dodges Late-Filed Tax Return Issues
Faced with the question of whether the debtor’s tax debt based on a late-filed tax return was excepted from discharge, the circuit declined to reexamine its holding in Fahey where it applied the strict “one day late” rule, found the debtor waived his argument in support of an objective test that does not consider timing of filing, and instead, held the debtor’s late-filed tax return did not meet Beard’s subjective test for a “return.” In re Kriss, 21-1206 (1st Cir. Nov. 22, 2022). [Read more…] about First Circuit Dodges Late-Filed Tax Return Issues
Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien
Where tax liens are specifically excepted from the debts to which a debtor’s exempt property cannot be liable, the debtors here could not exercise the trustee’s avoidance powers under section 522(h) to avoid their tax debt, nor could they benefit from the trustee’s successful avoidance action. Hutchinson v. IRS, No. 19-60065, amended opinion (9th Cir. Dec. 23, 2021).
When the debtors filed for chapter 7 bankruptcy, they owed taxes to the IRS. Of that debt, $162,000 represented penalties and was secured by a lien on the debtors’ home. The debtors filed a two-count adversary complaint. In the first count they alleged that because the IRS claim was tax penalty under section 726(a)(4), the lien securing it was avoidable by the trustee under section 724(a). They alleged that because the trustee had not avoided the lien, they could do so themselves under section 522(h), to the extent the lien encumbered their homestead. In the second count they sought to have the avoided lien preserved for their benefit rather than for the benefit of the estate. The trustee responded asserting his right to avoid the lien for the benefit of the estate. The IRS separately moved to dismiss the debtors’ complaint. The bankruptcy court granted the IRS motion to dismiss. Later, the court entered an order avoiding the lien upon motion by the trustee pursuant to section 724(a). The debtors appealed dismissal of their complaint, and the Bankruptcy Appellate Panel for the Ninth Circuit affirmed. [Read more…] about Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien
Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
The Ninth Circuit affirmed the opinion of the bankruptcy appellate panel finding that a state-mandated notification to the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Cal. Franchise Tax Bd., No 20-60046 (9th Cir. Oct. 14, 2021) (see discussion of In re Berkovich, 619 B.R. 397 (B.A.P. 9th Cir. 2020) here). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
When a Return Is Not a “Return”
A tax return filed four years after it was due and one year after the IRS completed its own independent tax assessment is not dischargeable under section 523(a) because it does not meet the “honest and reasonable” standard set forth in the Beard test for what constitutes a “return.” IRS v. Starling, Nos. 20-7478, 20-7954 (S.D.N.Y. Sept. 16, 2021).
When the debtor failed to file his 2002 federal tax return, the IRS, in 2005, sent a notification of delinquency informing the debtor that it had performed its own assessment on his behalf and providing instructions for the debtor to file his own return, contest the one completed by the IRS, or take other action. Upon receiving no response from the debtor, the IRS finalized its assessment in 2006. In 2007, the debtor filed a return for the 2002 taxes which mirrored the assessment conducted by the IRS.
The debtor then petitioned for chapter 13 bankruptcy and the IRS filed a claim for the delinquent taxes. Upon completion of his plan and discharge, the debtor had paid off only a portion of the 2002 taxes. The IRS, and its private collection agency, ConServe, continued to dun him for the remaining tax debt until the statute of limitations rendered the debt uncollectible. The debtor then filed a motion in the bankruptcy court seeking sanctions against the IRS and ConServe for violation of the discharge order, asserting that the tax debt had been discharged in his bankruptcy. The bankruptcy court agreed, In re Starling, 617 B.R. 208 (Bankr. S.D.N.Y. 2020), and, after the court denied its motion for reconsideration, the IRS and ConServe appealed to the district court. [Read more…] about When a Return Is Not a “Return”
Debtor May Avoid County Tax Foreclosure Sale
A county’s tax sale of the debtor’s farm was avoidable as constructively fraudulent under section 548, where the debtor was insolvent at the time of the title transfer and the tax debt was substantially less than the fair market value of the property. DuVall v. County of Ontario, No.19-20179, Adv. Proc. No. 19-2011 (Bankr. W.D. N.Y. Feb. 18, 2021). [Read more…] about Debtor May Avoid County Tax Foreclosure Sale
Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
A state-mandated notification with the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Calif. Franchise Tax Bd., No. 20-1025 (B.A.P. 9th Cir. Oct. 5, 2020). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
ACA’s Shared Responsibility Payment is Priority Tax Debt
The District Court for the Eastern District of Louisiana determined that the tax assessment for failure to maintain health insurance under the Affordable Care Act is a nondischargeable priority tax debt under section 507(a)(8)(A)(iii), rather than a penalty dischargeable in bankruptcy under section 523(a)(7) and 1328(a). United States v. Chesteen, No. 18-2077 (E.D. La. Feb. 25, 2019).
As the Chapter 13 debtor, John Chesteen pointed out on appeal, the shared responsibility payment at issue is described numerous times in the ACA as a penalty and is collected the same way other tax penalties are collected. The district court noted, however, that statutory descriptions, while informative, are not dispositive of whether a payment is a tax or a penalty. Rather, courts rely on the underlying purpose of the payment. A “tax” is a burden placed on the taxpayer for the financial support of the government, and a “penalty” is a punishment for an unlawful act. [Read more…] about ACA’s Shared Responsibility Payment is Priority Tax Debt
Bankruptcy Court Denies USA’s Blanket Request for Tolling of Deadlines During Lapse of Appropriations
In an unpublished opinion, the Bankruptcy Court for the Northern District of Ohio recently denied a motion from the United States Attorney’s Office “requesting a tolling of all deadlines applicable to the United States, its agencies, or its employees, including, without limitation a tolling of all bar dates for the filing of proofs of claim and request for the payment of administrative expenses with respect to the United States and its agencies from December 22, 2018 through January 28, 2019 (the “Appropriations Lapse”).”
To read more and access the opinion click here.
Court Applies Beard Test to Late-Filed Return
The District Court for the Middle District of Florida declined to follow the First Circuit’s direction on the treatment of tax debts based on late-filed returns and instead applied the pre-BAPCPA Beard test to find that the debtor’s Massachusetts state tax debt was discharged in bankruptcy. Mass. Dept. of Rev. v. Shek, No. 18-341 (M.D. Fla. Nov. 13, 2018). [Read more…] about Court Applies Beard Test to Late-Filed Return