by The District Court for the Middle District of Florida declined to follow the First Circuit’s direction on 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).
The debtor, John Shek, filed his Massachusetts state tax return seven months late. Almost six years later, he filed for chapter 7 bankruptcy in Florida and obtained a discharge. He later reopened his bankruptcy seeking a ruling that his state tax debt had been discharged along with his other debts. The bankruptcy court found that it was. In re Shek, 578 B.R. 918 (Bankr. M.D. Fla., Dec. 21, 2017).
On appeal, the MDOR stipulated that Mr. Shek satisfied all four prongs of the Beard test for determining whether a late-filed tax return meets the definition of “return” for purposes of dischargeability under section 523(a)(1). It argued, however, that the test was inapplicable in light of Congress’s definition of “return” in the 2005 amendment to the Code.
Section 523(a)(1) excepts from discharge tax debts for which a return was not filed. Prior to 2005, courts faced with the question of whether the debtor had filed a return generally applied the four-part test set forth in Beard v. Comm’r of Internal Revenue, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). With the 2005 BAPCPA amendments, however, Congress defined “return” in a hanging paragraph to section 523(a)(1), as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”
From that definition, a body of law arose under which some courts deemed any filing that did not comply with the taxing authority’s temporal filing requirements would not be deemed a “return” for dischargeability purposes. One such court was the First Circuit in In re Fahey, 779 F.3d 1 (1st Cir. 2015). Other courts have continued to apply Beard to late-filed returns, finding that “applicable filing requirements” applies to the form of the documents filed rather than the temporal filing requirements. The Eleventh Circuit assumed, arguendo, application of the Beard test in In re Justice, 817 F.3d 738 (11th Cir. 2016).
The court here found that while it was not bound by Justice, it agreed with the reasoning in that case and disagreed with the conclusion and reasoning in Fahey.
In Fahey, the court applied a literal reading of the phrase “applicable filing requirements” to include timing requirements. The Fahey court would allow late-filed returns to be discharged only when they complied with Internal Revenue Code section 6020(a), which provides that a taxpayer who has not filed a return may cooperate with the IRS to file the return late. Section 6020(b), in contrast, permits the IRS to file a late return for a taxpayer who has not cooperated. Returns filed under section 6020(b) are specifically excluded from discharge under section 523(a)(1)’s hanging paragraph while those filed under 6020(a) are not.
The court here found that under the reasoning in Fahey, Congress’s reference to section 6020(b) in the hanging paragraph would be rendered superfluous. Moreover, language in section 523(a)(1)(B)(ii) suggests that a return filed after its due date may still be treated as a “return.” The court agreed with the dissent in Fahey which pointed out the absurd result that a taxpayer who does nothing until the IRS takes action to seek cooperation from him may obtain a discharge, while a taxpayer who files one day late, for any reason, will not be entitled to discharge.
The district court found that the bankruptcy court correctly found Mr. Shek’s tax debt to have been discharged.
The MDOR has appealed to the Eleventh Circuit, Case No. 18-14922.