Search Results for: except from discharge late

District Court Reverses Outlying Bankruptcy Court Decision Regarding Discharge of Taxes Following SFR Assessment

The case of IRS, et al v. Starling, No. 7:20-cv-07478 (S.D.N.Y. 2021) reverses the bankruptcy case discussed here.  The bankruptcy court followed the authority created in the 8th Circuit almost two decades ago.  The 8th Circuit’s position is distinctly in the minority regarding how to treat a taxpayer who fails to timely file a return prior to the time the IRS makes a substitute for return assessment (SFR).  By adopting the 8th Circuit’s position regarding late filed returns, the bankruptcy court found that Mr. Starling discharged his taxes and that the IRS violated the discharge injunction by pursuing collection against him after the granting of the discharge.  The decision of the district court realigns the outcome with the majority of courts that have looked at the issue.  A significant split of authority continues to exist crying out for a legislative or judicial resolution.

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Mr. Starling didn’t file his 2002 return.  The IRS followed the substitute for return procedures including a preliminary letter and a notice of deficiency.  He did nothing in response to these letters allowing the IRS to assess the taxes it determined due through the substitute for return procedures.  After the assessment, Mr. Starling submitted a return prepared by him which reflected the same amount of tax as the IRS assessed based on the notice of deficiency.  This fact made his case almost identical to the facts in the Hindenlang case that started this issue almost a quarter century ago. 

Waiting until after the IRS has gone through the notice of deficiency procedure and made the assessment based on a defaulted notice has caused every taxpayer except Mr. Colsen in the 8th Circuit to lose the discharge argument for one reason or another.  The bankruptcy court’s decision surprised me.  The government appealed as I predicted in the prior post.  The outcome here does not surprise me.  Perhaps Mr. Starling will appeal to the 2nd Circuit which does not have circuit decisional law on this issue.  If he does appeal, I expect that he will lose but whether he loses or wins he will create a conflict with one circuit or another.  Perhaps this could be that case that after a quarter of century resolves the issue of when it becomes too late to file a return and still reap the benefit of a discharge.

The district court decision highlights the continued uncertainty which puts the IRS and state taxing authorities in a tough spot.  They must create protocols for discharging taxes.  The IRS has created a protocol that it will not discharge a tax if the taxpayer files the return after the IRS has assessed the liability using the substitute for return procedures (except it cannot safely use that protocol in the 8th Circuit.)  When the bankruptcy court disagreed with the majority of cases reviewing this issue, it then found that the IRS had violated the discharge injunction and imposed sanctions.  The IRS does not want to get sanctioned and it does not want a discharge standard that has too many variables and unknowns.  I am sure it will continue to appeal any adverse decisions similar to Starling.  Its failure to take the Colsen case to the Supreme Court many years ago has proved to have been a mistake.  The IRS believed it could fix the problem created by Colsen with legislation; however, the legislation passed in 2005 has just made the situation more complicated as discussed in the many prior blog posts on this issue.

The additional party in the Starling case was the private debt collection company used by the IRS.  That company essentially violated the discharge injunction as an agent of the IRS.  With the decision that bankruptcy did not discharge this debt, the private debt collection company gets off the hook the same as the IRS.

The district court does a nice job of consolidating the cases decided on this issue and describing the failed legislative fix.  It notes that the bankruptcy court’s decision in Starling goes even further than the 8th Circuit did in Colsen:

But even the Eighth Circuit is unlikely to have regarded Debtor here as having made an honest and reasonable effort. First, there is serious doubt that Colsen‘s reasoning survives the addition of BAPCPA’s hanging paragraph, and at least one bankruptcy court within the Eighth Circuit has instead adopted the one-day-late test. See Kline v. Internal Revenue Serv. (In re Kline), 581 B.R. 597, 604 (Bankr. W.D. Ark. 2018). Second, while Colsen held that “the honesty and genuineness of the filer’s attempt to satisfy the tax laws should be determined from the face of the form itself, not from the filer’s delinquency or the reasons for it,” Colsen, 446 F.3d at 840, the court also noted that the late-filed form in that instance provided the IRS with new information that assisted the agency in determining the taxpayer’s ultimate tax liability, id. at 841. The Eighth Circuit distinguished the facts before it from those in Hindenlang, “where the taxpayer’s forms contained essentially the same information as the substitute forms that the IRS prepared and the calculation of tax did not change substantially.” Id. (citing Hindenlang, 164 F.3d at 1031.) Unlike in Colsen, Starling’s late-filed Form 1040 appears to have simply reiterated the tax assessment the IRS had already performed, and although this effort may have been an “honest” attempt to satisfy his obligations under the tax law, it was hardly “reasonable” to ignore multiple notices and only file years late with the same number the IRS had already come up with on its own. While I do not believe that the Colsen test is the appropriate one to apply here, especially in the wake of BAPCPA, Debtor fails to meet even that most lenient standard for avoiding § 523(a)’s discharge exception.

The statute of limitations on collection has apparently run on Mr. Starling’s debt.  So, the discharge aspect of this case no longer matters to him.  I don’t know if the contempt fees would sufficiently fuel an effort to go to the 2nd Circuit but maybe someone wants another circuit court decision on this issue and another shot at the Supreme Court.  This case breaks no new ground, and puts Colsen back in the 8th Circuit only.  The IRS continues to argue that any document filed after the assessment is automatically not a return.  To date, the IRS has not gotten one court to buy this argument.   In Briggs v. United States (In re Briggs), No. 15-2427-MHC at p.8 (N.D. Ga., June 7, 2017) (government admitted at oral argument that no court of appeals had adopted the per se argument).  The IRS has won every case but one when it argues that the document filed after the SFR assessment was not a return.  So, it has a de facto, if not a de jure, rule.

The facts in Briggs offer a good argument for the non per se rule but the IRS will continue to push for a per se rule because that’s what it needs in order to comfortably administer a provision, the discharge rule, that has significant adverse consequences when the creditor gets it wrong.  Because of their desire for a clear rule, taxing authorities would benefit from a visit to the Supreme Court in order to seek an administrable rule they can follow without fear even if the rule is not as favorable to them as the current situation.  Debtors might prefer the current state of affairs unless they live in the 1st, 5th or 10th Circuits where the current rules create a crushing situation for them.  We’ll see if Starling is the case that brings the issue to a head.

Sixth Circuit Holds that State Court Judge’s Failure To Pay Taxes Was Willful for Purposes of Bankruptcy Discharge Rule

Your bloggers have had lots on their plate this week, so we apologize for the lighter than usual coverage. Luckily, others, like Jack Townsend, who in addition to working with me to cover criminal tax in Saltzman and Book, has his own terrific blog, Federal Tax Crimes. Over there today he discusses United States v Helton, an unpublished Sixth Circuit opinion that addresses the exception for bankruptcy discharge in Bankruptcy Code Section 523(a)(1)(C) for a debt “with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax.”  

The issue in these cases turns on what is needed to prove willfulness. In 2014 guest poster Lavar Taylor discussed the Ninth Circuit’s approach in What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits, Part 1 and Part 2  

Helton involves a Georgia state court judge who prior to his time on the bench ran up some pretty significant income tax debts. At the same time the taxpayer often frequented restaurants, drove a Mercedes, and made sizable charitable contributions. The case turned on whether Helton voluntarily and intentionally violated the duty to pay taxes.  According to the Sixth Circuit (internal cites omitted), “[t]hat element is met when the taxpayer has the financial means to meet his outstanding tax liabilities but makes a conscious decision not to apply those monies toward his tax debt.”

The opinion concluded that Helton’s “discretionary spending—lavish when compared to the pittance he allocated toward his taxes—amply supported the district court’s finding that Helton’s violation of his duty to pay taxes was voluntary and intentional.”

As the Sixth Circuit discusses, the excuse from the taxpayer, that he was busy with work and occasionally depressed, was not enough to escape the finding that he intentionally violated his tax paying duty. It was not necessary for the court to conclude that his lifestyle spending was undertaken specifically to avoid paying taxes.

Stipulations and Res Judicata in Quest for Bankruptcy Discharge

In Minor v. United States, Bankruptcy Case No. 2:13-bk-23787-BR (C.D. Cal. 2021), the district court addressed a debtor’s claim that a stipulation by the IRS barred the collection of taxes for the year covered by the stipulation.  Here, the district court affirmed the dismissal of the adversary proceeding based on the IRS request for a judgment on the pleadings.

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Mr. Minor filed his chapter 7 bankruptcy petition on May 24, 2013.  Already you have a clue that this will not be an ordinary chapter 7 case, since almost eight years have elapsed after the filing of the bankruptcy petition.  He received a discharge on May 18, 2015, almost two years after filing the bankruptcy petition.  On March 9, 2018, the IRS filed an amended proof of claim for $24,857,210.48 for secured liabilities, $997,869.07 for priority liabilities and $61,398.90 as a general unsecured claim.

Mr. Minor also owed taxes to the state of California, which filed its own claim.  The bankruptcy estate did not have sufficient assets to satisfy the state and federal claims for taxes.  The IRS and the state entered into a stipulation splitting the available assets.  With respect to the IRS claim the stipulation provided:

The IRS Claim shall be allowed as a secured claim in the amount of the IRS Sotheby’s Share in the amount of $586,604.12 (the ‘IRS Secured Claim’), a priority claim in the amount of $997,869.07 (the ‘IRS Priority Claim’), a general unsecured claim in the amount of $19,706,386.41, and a subordinated claim for penalties in the amount of $4,625,648.18.

The court approved the stipulation.  Afterward, the IRS notified Mr. Minor that he still owed $462,432 for 2009.  He brought this action arguing that the stipulation together with his discharge prevented that IRS from coming after him at this point to collect the unpaid taxes.

The parties agreed that the taxes for 2009 had priority status since the return was due less than three years prior to the filing of the bankruptcy petition (I assume he filed a request for extension of time to file the 2009 return since the normal due date for 2009 is outside the three year period.)  The parties agreed that priority taxes are excepted from discharge under BC 523(a)(1)(A).

At issue is the impact of the stipulation on the ordinary application of the discharge rules.  The IRS argues that the stipulation did not impact discharge but merely divided the available property in the estate.  Mr. Minor cites bankruptcy cases from other districts arguing that a stipulation can trigger discharge.

The bankruptcy and district courts point out that the stipulation did not discuss discharge and that Mr. Minor was not a party to the stipulation.  Because bankruptcy courts, pursuant to BC 505, can determine the amount of tax, a stipulation of a tax creditor to an amount of tax can serve as a final judgment binding the tax authority to the amount of tax stipulated.  That type of stipulation would address the merits of the liability and not simply split available assets for distribution from the estate.  Mr. Minor’s argument draws from cases involving a contest of the tax liability itself and seeks to import the result of a stipulation in that situation to a division among tax creditors in the same class attempting to divide a limited pot of funds.  The order of the bankruptcy court regarding the stipulation in this case binds the IRS and California with respect to the division of the funds but not with respect to their underlying liabilities.

Mr. Minor was not in privity with the parties entering into the stipulation.  No identity of claims exists in his case that would support a determination that the IRS bound itself to a lower recovery with respect to taxes excepted from discharge simply because it accepted a certain amount of payment from the available funds.  In describing the outcome and the arguments the court observed:

It must be noted that the United States’ main argument in this action seems to be that Minor’s 2009 tax debt is nondischargeable. However, as explained in Breland, 474 B.R. at 770, whether Minor’s 2009 tax debt is nondischargeable under § 523(a)(1)(A) is irrelevant. Whether the Stipulation discusses dischargeability is irrelevant. The only pertinent issue here is whether the IRS is bound, by res judicata, to the amount designated as the IRS Priority Claim in the Stipulation Order.

The court correctly notes that even though the 2009 meets the criteria for an exception to discharge, the possibility still exists that the IRS could have stipulated to a lower amount of debt, which could bind it.  Even though that possibility exists, that’s not what the IRS did here.  The debtor tries to read too much into an agreement between two parties, and the court correctly determines that splitting the available assets does not imply a settlement on the correct amount of the debt or the dischargeability of the debt.

Collection Due Process Request Tolls Statute and Prevents Bankruptcy Discharge

Job Announcement: The Temple University Beasley School of Law was recently notified that it will receive funding from the IRS to open and operate a Low Income Taxpayer Clinic (LITC) on its Main Campus in North Philadelphia which will also serve taxpayers in northeastern Pennsylvania. It is therefore soliciting applications for the position of Visiting Practice Professor of Law and Director of the LITC, which is expected to operate on a part-time basis during 2021. The position will begin on January 15, 2021 or as soon thereafter as practicable, and will run through the end of the calendar year. The Clinic Director will be expected to establish and operate the LITC, including developing a panel of pro bono attorneys and performing community outreach, and to take a leadership role in applying to the IRS for a multi-year grant, which will likely need to be submitted in June, 2021. In addition, the Clinic Director will be expected to develop and teach a course through which students can enroll to participate in the LITC for academic credit in 2021.

It is anticipated that this part-time, visiting position will be enhanced and converted into a clinical faculty position upon receipt of a multi-year grant from the IRS. A national search for an individual to fill the clinical faculty position will be conducted if the multi-year grant is received; the individual selected to fill the part-time visiting position will be eligible for consideration for the clinical faculty position. 

Minimum Qualifications: Candidates must have an excellent academic record and a J.D. degree, as well as experience working in an LITC or equivalent organization, either as a student or practicing lawyer, or other tax practice experience. Candidates must have sufficient tax law expertise to perform and oversee the substantive and procedural aspects of client representation, and be either admitted to practice before the U.S. Tax Court or eligible for such admission.

Temple University values diversity and is committed to equal opportunity for all persons regardless of age, color, disability, ethnicity, marital status, national origin, race, religion, sex, sexual orientation, gender identity, veteran status, or any other status protected by law; it is an equal opportunity/affirmative action employer, and  strongly encourages veterans, women, minorities, individuals with disabilities, LGBTQI individuals, and members of other groups that traditionally have been underrepresented in law teaching to apply.

To Apply: Potential candidates are encouraged to contact the selection committee’s Chair, Professor Alice Abreu, at lawfsc@temple.edu with the following: 1) cover letter and/or statement of interest; 2) resume or CV; 3) the names, affiliations, and contact information for at least three individuals who can serve as professional references; and 4) any other material that demonstrates the candidate’s ability to succeed in the position, such as a publication, brief, or similar document.

Applications should be submitted as soon as possible; interviews, which will be conducted online, could begin as early as January 4, 2021. The position will remain open until filled. Keith.

I have written on more than one occasion about the importance of timing when filing a bankruptcy in order to discharge taxes.  The debtor, or her lawyer, in today’s case, In re Alexander, Dk. No. 19-05033, Adv. Pro No. 19-5033 (D. Conn. 2020) appears to have considered the timing of the filing of the bankruptcy and may have filed bankruptcy primarily for the purpose of discharging the taxes.  Unfortunately for the debtor, a request for a Collection Due Process (CDP) hearing filed before bankruptcy extended the period during which an income tax liability could receive priority status under BC 507(a)(8)(A)(i) and that knocks one of the periods out of alignment with the discharge provisions.  The general rules regarding priority status have a few exceptions designed to protect the IRS and this is one.  Since cases addressing this exception rarely arise, it’s worth a look at how the exception works and why Ms. Alexander continues to owe taxes for 2015.

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Ms. Alexander owed taxes for 2011, 2012, 2013, 2014 and 2015.  She timely filed her returns for these years.  For the last of these years, 2015, she timely filed her return on October 17, 2016 based on an extension and the weekend rule. 

At the time Ms. Alexander filed her bankruptcy petition she was represented; however, her attorney passed away during the adversary proceeding and she did not replace her attorney nor did she really participate after that point.  The bankruptcy petition was filed on October 31, 2019.  Absent the exception for CDP hearings, the timing of the filing of the bankruptcy could not have been more perfect.  It comes slightly more than three years after the due date of the return, as extended, for the most recent tax year.  Under the provisions of BC 507(a)(8)(A) all five of the years at issue would have failed the tests to become priority claims.  Having failed that test and having become general unsecured claims, the taxes for these periods would not fit the discharge exception in BC 523(a)(1) and the IRS would write them off once the bankruptcy court granted the discharge.

One reason I believe that taxes motivated the filing of this bankruptcy provision results from the fact that Ms. Alexander filed an adversary proceeding on December 15, 2019, only six weeks after filing the bankruptcy petition.  I pause here to note that Ms. Alexander’s chapter 7 case was a no asset case which is common.  The IRS and other creditors would have received instructions from the bankruptcy court not to bother submitting a proof of claim because it would have been a waste of time and effort.  She would receive a discharge very quickly and go on her way with many of her debts removed without any payment.

Ms. Alexander did not need to file an adversary proceeding to obtain a declaration regarding the discharge of her taxes.  After the granting of a discharge the IRS abates any taxes discharged by a debtor’s case without the need for the debtor to affirmatively bring such a proceeding.  At that point if the IRS fails to discharge a debt the debtor believes the IRS should have discharged, then the debtor could bring an adversary proceeding seeking a determination regarding the discharge.  Her affirmative effort to do so even before the IRS would make its own determination shows that getting rid of the taxes may have served as a primary motivator for the filing of the bankruptcy case.  In a case such as this the filing of the adversary proceeding may have disadvantaged Ms. Alexander.  If she had waited to see what the IRS did the possibility, arguably remote, exists that the IRS would have written off all of the periods.  By bringing the adversary proceeding she insured that her taxes would be scrutinized by the bankruptcy unit, the IRS attorneys and the Department of Justice attorneys.

Whether the IRS might have mistakenly written off 2015 we will never know.  In response to the adversary proceeding, the IRS filed a motion to dismiss the first four years agreeing that they were dischargeable and removing the need to argue about them in the adversary proceeding.  With respect to 2015, however, the IRS filed a motion for summary judgment setting forth why the taxes for that year achieved priority status and because of that status were excepted from discharge by BC 523(a)(1)(A).  This post will focus on the issues raised in the motion for summary judgment.

As discussed above, she filed her 2015 return on October 17, 2016 and her bankruptcy on October 31, 2019.  Because she timely filed her return and because the bankruptcy filing is more than three years after the due date, under the general rule of 508(a)(8)(A)(i) the tax for 2015 fails the test.  However, the priority rules have exceptions.  One of the exceptions, added in the bankruptcy code changes of 2005 after the adoption of CDP in 1998, suspends or tolls the time period in BC 508(a)(8)(A)(i) for the time during which a CDP case is pending.  The language of the statutory exception appears at the end of the three rules for priority claims set out in 507(a)(8)(A) and provides:

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

The exception exists to give the IRS the full three-year period.  Without this rule a taxpayer could sit in a CDP case for a long time (a real possibility, especially if the taxpayer goes to Tax Court) running out the three-year period while the IRS has no opportunity to engage in enforced collection.  The exception preserves for the IRS the full period of time for a year to receive priority status in bankruptcy, which not only increases its chances of receiving payout in the bankruptcy case but also protects it from discharge under BC 523(a)(1)(A).

Ms. Alexander requested a CDP hearing on February 10, 2017 and remained in CDP status until October 28, 2017.  This period plus the additional 90-day period must be added to the three year period after the due date of filing the return that would normally apply to the determination of priority status in this situation.  When these additional days get added into the picture, the filing of the bankruptcy case occurred too soon to allow the 2015 year to avoid the priority designation.  The bankruptcy court does the math:

At first glance, the Plaintiff’s 2015 tax return date of October 16, 2016 falls outside of the three-year look-back period; given the October 31, 2019 petition date, three years prior would be October 31, 2016. However, the time period the Plaintiff was in Collection Due Process must be extracted from the three years pursuant to section 507(a)(8). The Plaintiff was in Collection Due Process from February 10, 2017 to October 28, 2017. Accordingly, the three-year look-back period did not run consecutively from October 31, 2016 to October 31, 2019, but rather was tolled by the Collection Due Process.

There are 1095 days in the three-year period. The number of days from October 31, 2019 (the petition date) to October 28, 2017 (the end of the Collection Due Process period) is 733 days. 362 days remain of the three-year look-back period (1,095 days minus 733 days equals 362 days). The remaining 362 days, by virtue of the Collection Due Process tolling period, is counted back from February 10, 2017 (the start of the Collection Due Process period), which results in February 14, 2016 as being the end of the three-year look-back period. The Plaintiff’s tax return due date of October 16, 2016, therefore, fell within the three-year look-back period, making her 2015 tax liability a priority claim under section 507(a)(8)(A)(i) that is an exception to discharge under section 523(a)(1)(A).

The case does not break new ground or present an especially difficult legal issue.  It does demonstrate the care that must be taken when choosing the moment for filing bankruptcy if taxes drive that moment.  Here, it appears they did.  So, this is a sad outcome for Ms. Alexander who apparently went into bankruptcy thinking that it would take care of her back taxes.  The good news for her is that bankruptcy did discharge four of the five years for which she owed.

Discharge of Late Filed Return Takes a Turn in Taxpayer’s Favor – Has the Objective Test of Colson Migrated Out of the 8th Circuit?

In the case of In re Starling, 125 AFTR2d 2020-2587 (Bankr. S.D.N.Y 2020) the bankruptcy court holds against the IRS in a case involving the filing of a Form 1040 after an assessment based on a substitute for return.  The case runs contrary to lots of case law but none at the Second Circuit level.  I anticipate the IRS will appeal this aspect of the case and maybe others.  Thanks to Christine Speidel for bringing the case to my attention and Ken Weil for providing me with background research as we discussed the case.  I have posted many times on this issue but not since the beginning of 2020.  Look here for a collection of the posts.

The case also involved a claim for damages under IRC 7433.  The bankruptcy court determined that the debtor could not obtain damages from the IRS because he failed to exhaust administrative remedies; however, it determined that the private debt collector who sent notices to the debtor after a referral of the debt from the IRS did owe damages, since it lacked the immunity available to the IRS on this issue.

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Mr. Starling failed to file his 2002 individual income tax return despite notices from the IRS requesting that he do so.  Eventually, the IRS prepared a substitute for return and made an assessment of tax for 2002 in 2005.  Two years later, the taxpayer filed a Form 1040.  Six years after filing the Form 1040, Mr. Starling filed a chapter 13 bankruptcy petition.  After completion of the plan payments Mr. Starling received a discharge in May 2016.  Although he had paid the priority claim of the IRS through his plan, Mr. Starling found that the IRS did not consider the 2002 year discharged.  In the chapter 13 case the 2002 taxes would have been classified as general unsecured claims because of their age and as general unsecured claims would generally have been eliminated when Mr. Starling received his discharge.  This seems to have been his expectation.

The IRS did not believe the 2002 taxes were discharged because it made its assessment based on an SFR.  I am almost certain that the IRS instructions coded into its computer and given to its bankruptcy employees would treat the 2002 debt in this manner everywhere in the country except in the 8th Circuit.  Because it believed that the 2002 debt survived the bankruptcy discharge and because it remained unpaid, the IRS referred the debt to one of the private debt collectors (PDC) with whom it has a contract, and the PDC sent Mr. Starling letters seeking payment on the outstanding liability.  Sending those types of collection demand letters regarding a discharged debt would violate the discharge injunction in BC 524.

Because Mr. Starling felt that his chapter 13 discharge eliminated the 2002 liability, he brought a contested matter seeking a determination regarding discharge and seeking contempt against the IRS for violating the discharge injunction.  The IRS defended the action arguing that the exception to discharge in BC 523(a)(1)(B)(ii) applied to the 2002 liability because Mr. Starling filed the Form 1040 for 2002 after the IRS had processed a substitute for return and made an assessment based on the substitute.  Since the IRS had already processed a return for Mr. Starling for 2002, it argued that the subsequent submission of the Form 1040 for that year failed the Beard test and, therefore, did not trigger the late filed exception in B.C. 523(a)((1)(B).

The issue here has existed for over 20 years since the 6th Circuit’s decision in the Hindenlang case.  In that case the court decided that the filing of a Form 1040 after the assessment of the liability could serve to trigger a discharge but the late return must have been filed prior to an IRC 6020(b) assessment triggered by the IRS.  Most courts look at the issue agreed with Hindenlang but the 8th Circuit in Colson did not.  The split in authority and the uncertainty resulting from the split caused the IRS to push for and Congress to adopt an amendment to B.C. 523 in 2005 intended to resolve this situation.  Unfortunately, the 2005 amendment did not resolve the uncertainty but injected more uncertainty into the situation.  Instead of two theories regarding what should happen in this situation, the amendment created a third without resolving the original dispute.

The three possible outcomes, in order of likelihood from least likely to most likely, are 1) the debtor’s objective filing of the Form 1040 after the IRS makes the SFR assessment begins the two year period described in B.C. 523(a)(1)(B) allowing debtor to obtain a discharge by waiting two years after filing the delinquent Form 1040 before filing a bankruptcy petition – the Colson view which is the prevailing view in the 8th Circuit; 2) the debtor’s filing a return late, even one day late, prevents the debtor from ever obtaining a discharge for the taxes related to the late return based on an interpretation of the flush language of the 2005 amendment to BC 523(a) in the unnumbered paragraph at the end of that provision – the one day late rule which is the prevailing view in the 1st, 5th and 10th Circuits and most recently repudiated by the 11th Circuit in In re Shek, 937 F.3d 770, 776 (11th Cir. 2020) (providing a definition of applicable to overcome the one day rule).; and 3) the debtor can file a late return and discharge it by waiting two years before filing bankruptcy after the filing of the late return but the late return must be filed prior to an IRC 6020(b) assessment triggered by the IRS – the Hindenlang view.

The bankruptcy court in Starling chooses the path less travelled and essentially follows Colson.  This potentially presents large problems for the IRS if it stands because it requires the IRS to reprogram its computers and issue supplemental instructions to its bankruptcy staff for all bankruptcies in the Southern District of New York.  For that reason and for the reason that the Colson theory has not caught on elsewhere, I expect an appeal to the district court on this issue.  Because the IRS does not agree with the one-day rule, it will appeal arguing that a subjective test should apply and that Mr. Starling knew when he filed the Form 1040 that the IRS had already assessed his taxes for 2002, causing his Form 1040 not to meet the Beard test based on his knowledge of the circumstances. 

So far, there may only be one case applying the subjective test in which a debtor has prevailed on the Beard test that has not been reversed on appeal.  That case is Briggs, Sr. v. United States (In re Briggs, Sr.), 511 B.R. 707 (Bankr. N.D. Ga. 2014).  At trial, the tax was found dischargeable.  The District Court affirmed.  Briggs, Sr. v. United States (In re Briggs, Sr.), N.D. GA. No. 15-2427 (June 7, 2017).  In Briggs, the debtor thought his business partner had filed his return.  Their custom was for the business partner to prepare the return, the debtor to sign it, and the business partner to file it.  The business partner did not file the return.  The IRS’s notice of deficiency was mailed to the business partner’s address and not the debtor’s, so the debtor did not know the return was nonfiled.  As part of a lawsuit, the debtor had done a forensic accounting to determine revenue and expenses.  Upon learning of the nonfiling and SFR assessment, taxpayer filed a return, which was found to be a valid return.

I previously wrote a post on Shek here.  Although Shek is an 11th Circuit case it involves state income taxes owed to Massachusetts.  Massachusetts convinced the 1st Circuit in the Fahey case that the flush language added to the end of BC 523 in 2005 means that a return filed one day late prevents it from ever receiving a discharge.  Shek did not involve an intervening substitute for return but a clean question of the application of the one-day rule.  Thanks to an amicus brief by University of Michigan law professor John Pottow, the 11th Circuit rejected the one day rule argument, finding that the language added in 2005 did not require this result.  

The Massachusetts Department of Revenue wisely, in my opinion, chose not to seek cert from the Supreme Court based on the direct split between the 1st (and 5th and 10th) Circuits and the 11th Circuit.  Because almost all of the Massachusetts Department of Revenue cases exist in the 1st Circuit, it had much to lose by taking the case to the Supreme Court and little to gain.  So, we must wait for another circuit decision before the Supreme Court will have the opportunity to fix the problem.  Of course, Congress could step in and try again to fix the problem without creating a fourth split in possible outcomes.  I know there are some debtor’s attorneys in the 1st Circuit looking for another chance to take on the Fahey decision.  Maybe the 1st Circuit will take another look at this issue and the next split will come there.

In addition to the issue of discharge, the bankruptcy court in Starling also addressed the issue of damages.  Mr. Starling sought damages from the IRS for seeking to collect the tax liability after discharge.  The bankruptcy court found that he could not obtain damages from the IRS, because he did not exhaust administrative remedies by making a request to the IRS before bringing the action.  If he had made a request to the IRS, he likely could have recovered damages, because the IRS would have told him his position on the discharge issues was wrong.

Although the bankruptcy court could not award damages against the IRS because the waiver of sovereign immunity required exhaustion of administrative remedies, it decided that it could award damages against the PDC, which lacked the same sovereign immunity protection cloaking the IRS.  While I am not a fan of PDCs, I expect this aspect of the decision will also be appealed, both because of the argument regarding the applicability of the exception to discharge and the argument of the PDC’s relationship to the IRS and reliance on the IRS.

Affluent Lifestyle plus Ignoring Tax Debts Equals No Discharge

I have discussed the exception to discharge under BC 523(a)(1)(c) previously here, here and here.  These cases usually merit some discussion because they contain the kinds of facts that allow us to get a little riled up and actually root for the IRS.  The case of United States v. Harold, No. 16-05041 (Bankr. E.D. Mich. 2020) proves no exception to the general rule of these types of cases.  The IRS does not pursue this exception to discharge often but when it does the facts usually make for a mildly interesting blog post.

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Dr. Harold, the debtor here, is a medical doctor with an OB/GYN practice.  The court says that she has a successful, busy practice and works long hours.  At issue in this case are unpaid federal tax liabilities for 2004 through 2012 and 2014 which she could discharge in her chapter 7 case unless the exception for attempting to evade payment applied.  The court spends a paragraph talking about her husband, a former CPA who lost his license as a result of a conviction for a false statement on a bank loan application, bank fraud, tax evasion and filing a false return.  These actions took place prior to their marriage in 1993 and he now owns a consulting firm, Fidelity Refund Services.  Dr. Harold did not have experience in financial matters, and her husband handled all of her tax matters.

Their returns were routinely filed on extension or late.  She owed liabilities ranging from $5,000 to $42,000 for the years at issue despite averaging about half a million dollars in gross revenue from her practice during those years.  There appears to be some dispute as to the amount owed but it is at least $250,000.  During the years at issue the IRS sent at least 84 collection notices, very few of which Dr. Harold saw, because she worked long hours and her husband usually picked up the mail and handled the tax matters.  She did, however, know there were outstanding tax liabilities for many years.

The court then described the spending of money during the years at issue.  Spending drives these cases.  Many people owe the IRS but those who have enough money to spend on items that support an affluent lifestyle while not paying the taxes receive the scrutiny of the IRS in discharge cases.  The court first described the purchase of a new home in 2005 along the Detroit River waterfront.  This purchase created financial problems, because they could not sell their prior home and carried two mortgages until finally losing the original home to foreclosure in 2009.  They sent their children to private grade schools and high schools paying a total of $64,247 in tuition for their daughter and $ 89,474 for their son.  Then they sent their children to private colleges paying $118,390 for their daughter to attend Boston University and $53,088 for their son to attend Loyola University.

During these years the family took multiple family vacations to Mexico, Alaska, Puerto Rico, Orlando, Washington, D.C., Paris, Las Vegas, Hawaii, and Dubai in addition to numerous trips to go and visit colleges.  They drove expensive cars: a Jaguar, a Mercury Mountaineer, two Cadillacs, to Lincolns, a Lexus and a Harley Davidson motorcycle.  The debtors also actively sought to place their home beyond the reach of the IRS through a sale and leaseback scheme described by the court.

The court then worked through the existing Sixth Circuit law regarding BC 523(a)(1)(c) and the evidence needed to show an attempt to evade or defeat payment of the tax liability.  The court found that the evidence “overwhelmingly demonstrates that the Debtor engaged in conduct to evade or defeat the payment of her tax liabilities for the years 2004-2012 and 2014.”  The court recounted all of her pre-bankruptcy expenditures but seemed even more convinced by the post-filing efforts to insulate the family home from the federal tax lien.

Her actions convinced the court that she willfully intended not to pay her taxes.  It pointed out that all of her expenditures resulted from “voluntary, conscious and intentional choices.”  It did not matter that she delegated the handling of tax matters to her husband.  She knew his past tax issues and she knew the choices she was making regarding the non-payment of taxes.  The court applied her knowledge and action to the standards established by the Sixth Circuit in the case of Stamper v. United States (In re Gardner), 360 F.3d 551 (6th Cir. 2004).  The Gardner case established the mental state requirement of proof that the debtor had a duty to pay, knew of the duty and voluntarily or intentionally violated the duty. 

Dr. Harold argued that she did not voluntarily or intentionally violate the duty to pay her taxes because she had a strong religious need to send her children to Catholic schools and she relied on her husband to manage the family financial affairs.  The court quickly rejected these arguments.

The use of 523(a)(1)(c) to deny a debtor a discharge for willful non-payment of taxes began in a Sixth Circuit case almost 15 years after the adoption of the “new” bankruptcy code in 1978.  The case of Toti v. United States, 24 F.3d 806 (6th Cir. 1994) was the first circuit level court to approve of the use of the discharge exception in this way.  Since that time courts have struggled at times to decide both the standard for holding the taxpayer liable for the taxes and the amount of lavishness necessary to cause the bankruptcy court to say enough.  Here, the IRS clearly established that Dr. Harold went too far.  The case provides another lesson on the perils of maintaining a high lifestyle while putting off payment of taxes.  I seem to write about it every couple of years simply as a reminder that high personal expenditures while failing to pay taxes serves as a recipe for losing the ability to discharge old taxes in a bankruptcy case.

Is the One Day Late Interpretation of Bankruptcy Code 523 Finally Headed to the Supreme Court?

After the passage of the 2005 amendments to the bankruptcy code an issue developed concerning the discharge of taxes on late filed returns.  The 2005 amendments resulted from the appointment of a commission in 1994 to look into needed changes to the bankruptcy code after almost two decades of experience with the code.  The commission appointed a subcommission to look into the tax issues impacting bankruptcy matters.  The commission and the subcommission did excellent work fairly quickly and turned their recommendations over to Congress.  Congress struggled to come to closure on the recommendations stemming from this effort.  Finally, in 2005, about eight years after the recommendations came forward, Congress passed comprehensive legislation reforming the bankruptcy code.  One of the big issues on the tax piece of the recommendations concerned the need to address the many taxpayers who filed bankruptcy seeking relief but who had neglected to file their tax returns over numerous years.

Congress addressed the delinquent return filing in numerous code sections including a new and unnumbered code section at the end of BC 523(a) concerning the discharge of taxes for non-compliant taxpayers.  For some reason it chose not to put a number or a letter before this paragraph but simply stuck the new paragraph onto the end of 523(a).  Having made life difficult for everyone seeking to cite to the new material, Congress went further by making this unnumbered and unnamed subparagraph difficult to understand.  I have written numerous blog posts on the interpretation of this section including one last October.  For a sampling of the posts, see here, here, here and here.  In some I predicted that this issue would be resolved in the Supreme Court if Congress did not fix the language of the statute.  Since no one expects Congress to fix anything, this means it’s up to the Supreme Court to resolve the language.  In the recent decision of Massachusetts Department of Revenue v. Shek, — F.3d __ ( D.C. Docket Nos. 5:18-cv-00341-JSM; 6:15-bkc-08569-KSJ) (11th Cir. Jan. 23, 2020) a perfect conflict case has arisen.  The opportunity for a Supreme Court resolution seems quite possible though by no means certain.

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The Massachusetts Department of Revenue (MA DOR) is now the litigant in cases before the First and the Eleventh Circuits with the circuits reaching opposite conclusions.  Five years ago, in the case of Fahey v. Massachusetts Department of Revenue, 779 F.3d. 1 (1st Cir. 2015), the First Circuit interpreted the last paragraph of BC 523(a) to mean that if a taxpayer filed a return late, even one day late, the taxpayer could never discharge the tax liability for that year.  In reaching this conclusion the First Circuit joined two other circuits in holding that the plain language of the statute required this result.

Since the Fahey case, other circuits have demurred when given the opportunity to adopt the one-day rule.  No decision has yet reached the Supreme Court.  The Eleventh Circuit’s decision creates a clear conflict.  It not only specifically considers and directly rejects the decisions of three circuit courts but does so with a plaintiff who was also the litigant in the First Circuit’s decision. 

MA DOR filed a claim in the bankruptcy of Mr. Shek for unpaid taxes for a year in which he did not timely file his state tax return.  MA DOR did not receive full payment of its claim in the bankruptcy case and instituted collection action against Mr. Shek after the lifting of the stay and the granting of the discharge.  Mr. Shek opposed the collection action of MA DOR, arguing that the discharge eliminated the liability and that the actions of MA DOR violated the discharge injunction.  MA DOR countered that he filed his tax return late for the period at issue and BC 523(a) excepted this liability from discharge because of the late filed return.  The litigation started in the bankruptcy court and has now moved on to a circuit court decision.

The Eleventh Circuit looked carefully at the language of the paragraph added in 2005 to determine if it could find a meaning different than the meaning of the three circuits and to find a meaning consistent with the language of BC 523(a)(1)(B).  With the help of an amicus brief from University of Michigan law professor John Pottow, the Eleventh Circuit found a way to interpret the new paragraph in a way that did not result any late filing automatically creating an exception from discharge.

The language added in 2005 sought to provide a definition of the term “return” which was not previously defined in the tax code or the bankruptcy code.  The Eleventh Circuit described the new language as follows:

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), which for the first time added a definition of “return” to the Code. The definition states:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or similar State or local law.

11 U.S.C. 523(a)(*).

The Eleventh Circuit described the dispute as follows:

The dispute in this case concerns the first sentence of the hanging paragraph’s definition of “return”, which provides that a “return” for purposes of § 523 means “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” DOR raises two arguments in an attempt to demonstrate that Shek’s putative return, which was filed seven months late, does not qualify as a “return” under § 523(a)(*). First, DOR argues that the return did not satisfy “applicable filing requirements” because it did not comply with Massachusetts’ April 15th tax return deadline. Second, and relatedly, DOR argues that the “applicable nonbankruptcy law” here is Massachusetts law, and that Massachusetts defines a “return” by reference to its timeliness. We address each argument in turn.

In analyzing this argument, the Eleventh Circuit conceded that MA DOR’s argument had some merit:

DOR’s syllogism—a return must comply with “applicable filing requirements,” and a filing deadline is an “applicable filing requirement,” so a return that does not meet its deadline has not complied with “applicable filing requirements”—has some force to it….  We do not, however, agree that the phrase “applicable filing requirements” unambiguously includes filing deadlines….  But it is not obvious that this is the interpretation Congress intended in drafting the hanging paragraph. Notably, this understanding of the word “applicable” would add little to the phrase “applicable filing requirements” that the phrase “filing requirements,” standing alone, would not already encompass. We must strive, if possible, to give meaning to every word of the Code.

The Court then turned to the argument made by Professor Pottow:

He notes that the Supreme Court, in interpreting a different section of the Code, has described “applicable” as meaning something different from “all”; it requires an analysis of context and typically means “appropriate, relevant, suitable or fit.”….  The amicus argues that the “appropriate, relevant, suitable or fit” filing requirements are those concerning what constitutes a return. For example, “applicable” filing requirements could refer to considerations like a return’s form and contents—aspects of the putative return that have a material bearing on whether or not it can reasonably be described as a “return”—but not to more tangential considerations, like whether it was properly stapled in the upper-left corner, or whether it was filed by the required date. This approach makes common sense; in a definition of what constitutes a “return,” it makes sense that the term “applicable” would relate to matters that are relevant to the determination of whether the document at issue can reasonably be deemed a “return.”

The Court describes both the MA DOR and the amicus arguments as plausible interpretations of the language of the statute.  Given that both are plausible, the argument made by the amicus makes the most sense because it provides the most harmony with the other parts of BC 523.  The Court points out that the MA DOR makes BC 523(a)(1)(B)(i) almost a legal nullity and that as a practical matter almost no factual situations exist that prevent this outcome because so few taxpayers agree to the substitute for return by creating a 6020(a) return.  The court had previously analyzed that the only way the MA DOR argument really worked was in situations in which the taxpayer filed a form 6020(a) return.  The court also noted that the IRS did not agree with MA DOR’s interpretation of the statute.  The court concluded:

We think it is deeply implausible that Congress intended § 523(a)(1)(B)(ii) to apply only in such a handful of cases despite no such limitation appearing in that provision itself. It would be a bizarre statute that set forth a broad exclusion for discharge of tax return debts, but limited the application of that exclusion via an opaque and narrow definition of the word “return.” It would be even stranger to enact the broad exclusion in § 523(a)(1)(B)(ii), only to later amend the statute, not by changing the text of § 523(a)(1)(B)(ii) itself, but with a different definitional provision that would cabin § 523(a)(1)(B)(ii) into applying only to the “minute” number of § 6020(a) returns. If Congress had intended this result, it could have achieved it in a much less abstruse manner simply by stating in § 523(a)(1)(B)(ii) itself that that section applied only to § 6020(a) returns.

I agree with the Eleventh’s Circuit’s interpretation of the correct way to read the statute.  After it disposed of the main argument, the Court still had to deal with an argument based on the statutes in Massachusetts.  While acknowledging that this also was a close case, the court rejected the specifics of the Massachusetts statute as a basis for not excepting the liability from discharge.

So, will MA DOR take this case to the Supreme Court and if it will, what will the Supreme Court do?  MA DOR may decide to stick with the bird in the hand.  It has the decision it wants in the First Circuit where the vast majority of persons owing MA DOR reside.  If it files a cert petition, it risks losing the argument and losing a major legal source for keeping open its assessments after a bankruptcy discharge.  Because of this possibility, MA DOR may take a pass on the opportunity to go to the Supreme Court.  The upsides do not outweigh the possible downsides.

On the other hand, many Massachusetts taxpayers live outside of Massachusetts.  Allowing the decision to stand allows these persons to discharge their taxes when persons still living in the state (or at least in the First Circuit) remain liable.  Massachusetts may feel that it is best to have a definitive answer.  If Massachusetts did file a cert petition, it is very possible that the solicitor general would lend a voice to granting cert because of the impact of this issue on the IRS (and potentially other parts of the federal government.)  Those living in circuits in which the issue is already decided will have their own views as well.  People in the Ninth Circuit will not want to roll the dice on the chance that the Supreme Court could reverse their current situation.

Effect of a Revoked Discharge on the Suspension of the Collection Statute of Limitations

On June 22, 2016, I wrote a post about the case of Bush v. United States in which the Tax Division of the Department of Justice argued that B.C. 523(a)(7) did not limit the exception to discharge with respect to the fraud penalty to a fraud penalty arising within three years of the date of the bankruptcy petition. In the Bush case the court ruled against the government and followed the precedent of three circuit court decisions from the early 1990s. After those three decisions the IRS had decided to abandon the argument that B.C. 523(a)(7) limited the exception to discharge to fraud penalty assessments arising within three years of the petition. I speculated in that post that maybe the government had changed its position though it was possible that the case merely reflected the arguments of an Assistant United States Attorney, similar to the situation in a recent post, who made a logical argument unaware of the history of the issue and the position of the government.

In the recently decided case of United States v. Joel No. 3:13-cv-01102 (W.D. Ky. Oct. 18, 2018) the taxpayer made the argument that the government lost in Bush and in the earlier cases. The government goes back to arguing that the circuit court cases were correctly decided, which suggests either that the Bush case was argued by a “rogue” government attorney or that the government has returned to the position it adopted following the three circuit losses in the early 1990s. The court ruled against the taxpayer and spent a little time parsing the confusing language of the statute. The Joel case concerns a post-bankruptcy effort by the IRS to reduce its assessment to judgment and to foreclose its lien on property held by an alleged nominee/alter ego. Most of the opinion focuses on the discharge of the underlying taxes and the effect of the prior bankruptcy case on the statute of limitations on collection.

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Depending on the impact of the prior bankruptcy, the statute could have expired prior to the filing of suit by the government. The court goes through a lengthy analysis in determining that the prior bankruptcy suspended the statute of limitations for a sufficient period of time to make the filing of the suit timely. Anyone interested in the interplay of the filing of a bankruptcy petition on the statute suspension for collection may find the case instructive. What makes this case somewhat unique and causes the taxpayer to argue about the fraud penalty is that the bankruptcy court granted Mr. Joel a discharge in his bankruptcy case and later revoked the discharge when his fraud came to light.

The fraud penalty was a minor point in the case, though because of the dollar amounts at issue the taxpayer may not have thought of it as minor. The tax years at issue are 1991, 1992 and 1993. Mr. Joel filed his first bankruptcy on November 8, 2001. He filed a chapter 7 petition and the court granted a discharge on February 7, 2002. The timing of the discharge reflects a normal time period of about three months for a debtor to obtain a discharge in a chapter 7 case with no objections. At the time of the discharge, the IRS would have written off the fraud penalty assessments as discharged pursuant to B.C. 523(a)(7) and made no further effort to collect those assessments because the discharge injunction of B.C. 524 bars creditors from collection against discharged debts.

After the grant of the discharge, the trustee became aware that Mr. Joel might not be a routine bankruptcy case. On January 29, 2003, the trustee brought an adversary proceeding in Mr. Joel’s bankruptcy case seeking to revoke the discharge because the debtor failed to list assets in the bankruptcy schedules and failed to surrender estate assets to the trustee. Additionally, on January 4, 2005, the IRS indicted Mr. Joel for IRC 7201 evasion of payment of his 1991-1993 taxes. In 2007, Mr. Joel pled guilty to evasion of payment and subsequent to that plea, the bankruptcy court ruled that he committed perjury in the filing of the bankruptcy schedules and revoked his discharge. This is where the position of the parties with respect to the discharge arguments gets somewhat reversed.

The IRS argues that the statute of limitations on collection should be suspended from the time of the bankruptcy filing until the time of the discharge revocation. Prior to the discharge, the IRS was prohibited from collecting the fraud assessment because of the automatic stay of B.C. 362(a). After the discharge, the IRS was prohibited from collecting because B.C. 523(a)(7) caused it to abate the assessment. It wasn’t until after the bankruptcy court revoked the discharge on June 20, 2007, that the IRS could reverse the abatement of any discharged taxes and penalties and begin to try to collect the liabilities again.

The debtor, in a quasi role reversal, argues that the fraud penalties were not discharged because of the language of 523(a)(7). Because the statute did not require the discharge of the taxes, the IRS had the ability to collect the taxes after the initial discharge lifted the automatic stay. So, the statute of limitations suspension lifted at the time of the initial discharge in 2002 and not the revocation in 2007. Because it lifted five years earlier, it had run by the time the IRS brought the suit.

The court looked carefully at the language of 523(a)(7) which provides:

A discharge under 727… of this title does not discharge an individual debtor from any debt-

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty –

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition….

The debtor first argued that (A) and (B) were conjunctive conditions and not disjunctive, such that a penalty must meet both conditions. The fraud penalty cannot meet the first condition because it relates to taxes on which the taxpayer has committed fraud, which are excepted from discharge under B.C. 523(a)(1)(C). It would make logical sense that the fraud penalty should be excepted from discharge. In many instances the IRS does not impose the fraud penalty until long after three years from the due date of the return because the IRS must amass evidence prior to imposing this penalty. The fraud penalty also represents the type of penalty that policy would dictate that the debtor should continue to owe. The legislative history of the statute implies that Congress intended the fraud penalty to continue.

The debtor’s problem here is the same one faced by the government when it litigated the meaning of this provision almost three decades ago. Subsections (A) and (B) are joined by the word “or.” The word “or” places (A) and (B) in a disjunctive and not conjunctive posture. Therefore, if either the condition of (A) or the condition of (B) applies, the provision discharges the fraud penalty. Subsection (B) refers to transactions occurring before three years before the petition date. The fraud penalty relates back to the due date of the return. Those due dates here occurred in the early 1990s, long before the filing of the bankruptcy petition.

Since the condition of (B) is met, the fraud penalty is discharged. The IRS correctly abated the fraud penalty when the bankruptcy court entered the discharge and the IRS receives the benefit of the period between the initial discharge and the revocation in calculating the statute suspension.

While this is not a huge issue, Congress should consider fixing B.C. 523(a)(7) to except from discharge the fraud penalty. Allowing the discharge of this penalty is not good policy. In most instances, I suspect the IRS will struggle to collect the fraud penalty because the individual who committed the fraud will have run through most or all of their assets before the IRS collection personnel arrive on the scene; however, cases exist in which the individual who committed fraud still has assets and the bankruptcy discharge should not protect those assets from collection.