A Cogent Look at the “What is a Return?” Question

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In Briggs v. United States, 511 B.R. 707 (Bankr. N.D. Ga. 2014), Bankruptcy Judge Wendy Hagenau carefully examined the facts of the case and the applicable law in concluding that a Form 1040 filed after the IRS assessed taxes based on a substitute for return procedures met the requirements for filing a return. I previously blogged about the mess created by the litigation and legislation in this area. Judge Hagenau worked her way through existing precedent and arrived at a conclusion that offers hope to many taxpayers who fail to timely file their return and later seek relief through bankruptcy. 


The Briggs case presents a classic set of facts. The taxpayer did not file his 2002 return by the due date as extended. Eventually, the IRS calculated his liability using IRC 6020(b) procedures and sent him a statutory notice of deficiency. He did not petition the Tax Court within 90 days. The IRS assessed the tax (over $200,000) and began collection. He eventually filed a Form 1040 showing that his correct tax liability was $149,870 rather than the $226, 536 assessed. The IRS accepted the Form 1040 as a claim for abatement and abated his tax to the lower amount. The IRS partially collected the lower liability through levy and offset but he still owed a substantial liability for 2002 when he filed bankruptcy on March 23, 2013. 

The IRS made two arguments in support of its position that BC 523(a)(1)(B)(i) excepts the 2002 taxes from discharge. First, it argued that the tax “debt” arose from the IRS assessment and not from the late filed Form 1040, making the debt one from which the debtor had an unfiled return at the time it arose. This argument represents later thinking by the Government than its original position on this issue and seeks to create a bright line test not available through the Beard test. Second it made its original argument slightly modified by the passage of BC 523(a)(*), that an untimely return filed after assessment does not qualify as a “return” under applicable non-bankruptcy law. 

The Court first addressed the “debt” argument and used bankruptcy definitions to reject it. My guess is that the IRS will appeal the case because it has had several successful outcomes with this argument and it represents a clear path to victory. Judge Hagenau, citing Rhodes v. United States (In re Rhodes), 498 B.R. 357 (Bankr. N.D. Ga. 2013), rejected this argument because the term “debt” in bankruptcy focuses “on the nature and source of debt . . . not on the mechanism to determine debt.” Under bankruptcy law the debt to the IRS arises at the end of the tax period and not when assessment occurs. The assessment or non-assessment of a tax does not “change the fact that the right to payment existed.” So, Judge Hagenau placed no importance on the assessment as creating the debt before the later filed return since the debt for bankruptcy purposes arose long before either of these events. Her interpretation makes the most sense given the bankruptcy definition of debt. The IRS will continue making this argument because of its ability to create a clear statement regarding discharge. 

The Court next addressed whether the late-filed Form 1040 qualifies as a return. This is the original issue on which the IRS won in In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999), although now with the overlay of BC 523(a)(*) adopted in 2005. Remembering the peculiar facts of Hindenlang provides important background information. Like Briggs, Mr. Hindenlang did not timely file his return and the IRS made an assessment after using the substitute for return procedures and issuing a notice of deficiency from which he did not petition the Tax Court. Mr. Hindenlang’s subsequent Form 1040, however, merely mirrored the substitute for return prepared by the IRS. He did not report any more tax or, like Mr. Briggs, any less tax than the IRS determined from its examination. That unusual fact pattern must have influenced the 6th Circuit as it reviewed the Hindenlang case. 

The late filed Form 1040 submitted by Mr. Briggs reported a tax liability over $75,000 less than the amount assessed by the IRS using the substitute for return procedures. The IRS accepted his Form 1040 and abated the liability down to the amount shown on the form. Mr. Briggs’ form had meaning while Mr. Hindenlang’s form really added nothing to the situation. A Form 1040, such as the one Mr. Hindenlang filed, really does not seem like an honest attempt to file a return under the circumstances; however, a return like the one Mr. Briggs filed had meaning and the IRS abated his liability based on that meaning. Judge Hagenau drew from that fact. Before simply applying the facts in the Briggs case to the Beard test she analyzed BC 523(a)(*) to determine what new requirements the 2005 changes imposed, if any, since the Hindenlang decision started the inquiry regarding late filed returns. 

Judge Hagenau’s analysis of the requirements led to a discussion of the cases decided after 2005. A line of cases, led by McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), interprets the 2005 amendment to encompass a timeliness element that makes any untimely filed Form 1040, even if only one day late, something other than a return for purposes of the discharge provisions. The IRS does not agree with this interpretation but the Court here looked at this line of cases before concluding – correctly in my opinion – that the term applicable non-bankruptcy law in BC 523(a)(*) “does not incorporate the timeliness requirements of the tax code.” Judge Hagenau explained that the interpretation in McCoy and its progeny does violence to the overall workings of the bankruptcy code. 

Judge Hagenau then turned at last to the Beard test, which requires that a document must meet four tests to be a return: (1) purport to be a return, (2) be executed under penalty of perjury, (3) contain sufficient data to allow calculation of tax, and (4) represent an honest and reasonable attempt to satisfy the requirements of tax law. In these cases the focus is almost always on the fourth test. Remember that Hindenlang’s Form 1040 really served no purpose except to seek to start the two year period for discharge. Here, the Court agreed with the minority view of cases lead by In re Colson that a return such as the one Mr. Brigg’s filed does meet the Beard test. Therefore, the Court determined that the remaining 2002 taxes were discharged. 

This issue bears careful watching. The IRS chose not to file a petition for cert when it lost Colson in 2006. If its new argument that the debt arose before the late filed return fails and it does not adopt the McCoy argument, it is left with the fact specific Beard argument. Without a bright line legal argument the IRS takes on a lot of administrative risks with this issue because it is not discharging taxes in these situations. It leaves these liabilities on its books and restarts collection action after bankruptcy. If it ultimately must concede this issue, fifteen years or more of post-discharge taxes will exist on its books that it must address. Similar to the situation that now exists in the post-Rand concession, the IRS will need to clean up its assessment records and with the discharge injunction hanging over its head the burden will clearly be on the IRS and cannot be pushed off to the taxpayer. The path it has taken on post-Hindenlang is a risky path and one that is difficult to administer. It tried to fix the problem in 2005 but got language that has proven inadequate. Keep an eye on this issue if you have clients with late filed returns who may need bankruptcy as a refuge. 



  1. Lavar Taylor says

    Quoting from the opinion in Briggs:

    ” The IRS’s first argument is that the debt
    in question “arose and became enforceable by virtue of the assessment” of the tax liability, not the Debtor’s late-filed return. [Doc. No. 10 at 5].”

    That argument by IRS is completely at odds with well-established case law in which the IRS has (successfully) argued a contrary position. In these other cases, the IRS has argued that the liability arises immediately at the close of the tax year, before the return is due, before the tax is assessed, etc.

    Consider the following quote from In re Reed, 2013-2 U.S.T.C. ¶50,580, (Bankr. W.D. Wis. 2013) , in which the Court held that the IRS was entitled to relief from the automatic stay to offset a Chapter 13 debtor couple’s pre-petition tax liability with their post-petition tax refund:

    “A number of courts, including this one, have held that “a tax refund for purposes of §553 arises at the end of the taxable year to which it relates, and not when that right of refund is claimed by the taxpayer/debtor.” Rozel Indus., Inc. v. Internal Revenue Serv. (In re Rozel Indus. Inc.), 120 B.R. 944, 950-51 (Bankr. N.D. Ill. 1990) (“The date on which the return is filed is not relevant in determining when the debt arose.”). These cases involved Chapter 7 and 11 petitioners who filed for bankruptcy after the end of the tax year and were owed a tax refund. In this case, the debtors filed for bankruptcy before the tax year had concluded.

    The reasoning of this line of cases appears rooted in the “all events” test 1 which is “a fundamental principle in tax accounting” for the determination of when an expense is to be regarded as incurred. United States v. Hughes Properties, Inc., 476 U.S. 593, 600 (1986). The elements of that test are: (1) all the events that establish the fact of the liability must have occurred; and (2) the amount of the liability must be capable of being determined with reasonable accuracy. Id. “Thus, to satisfy the all-events test, a liability must be ‘final and definite in amount,’ must be ‘fixed and absolute,’ and must be ‘unconditional.’” Id.

    Under this rationale, a tax liability is incurred at the end of the tax year when all events necessary to determine that liability have occurred. At this point both the government’s liability for tax refunds and the taxpayers’ tax liability becomes “final and definite in amount,” “fixed and absolute,” and “unconditional.” This is true because the IRS can determine its own liability for overpayments only after all events necessary for taxpayers’ liability have taken place. For example, if a taxpayer marries or has a child on December 31, the tax liability of that individual, if any, would depend on the events of the last day of the tax year.” [end quote]

    There are other cases in which IRS successfully set aside fraudulent conveyances which reach an identical conclusion: the tax debt, for purposes of determining whether a fraudulent conveyance occurred, arose at the close of the tax year, not later, when the return was filed or the tax was assessed.

    I hope that the IRS and DOJ decide to stop making this argument, because making this argument does not reflect well on them. If they won’t stop, everyone out there should be bringing to the attention of the courts the fact that, in other contexts, the IRS has repeatedly and successfully taken a position that is contrary to this argument.

  2. I’m confused about why this issue is more than “much ado about nothing.”

    First, to address Lavar Taylor’s concern, how is it even relevant on what date the debt arose and when the return was filed relative to that date? The Briggs return for 2002 met the two and three year pre-petition requirements. The IRS’s argument is either frivolous or I’m missing something.

    Second, Briggs filed a bona fide tax return. The IRS treated the return as such when it conformed its assessment to it. A Beard inquiry was therefore unnecessary. And I’ve always thought of Hindenlang as a disaster.

    Third, the Briggs court got it right. I would have, however, gone further in the statutory analysis.

    A “return” is one that “satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The key word in this statutory language is “applicable.” The first “applicable” narrows the “nonbankruptcy law” to only the law that applies to the debtor and his debt, e.g. income tax, employment tax, customs duty. It follows, then, that the second “applicable” narrows the “filing requirements” to only those requirements that apply to the debtor and his debt. But a timeliness requirement applies generally to all filers, not only to the debtor and his debt. That contrary reading therefore renders the term “applicable” superfluous.

    • Lavar Taylor says


      The point of my comment above is that the government should not be out there talking out of both sides of its mouth. Government litigators should be above that. I was not directly addressing the question of whether the government’s argument that “the debt arose and became enforceable when the liability was assessed” is relevant to the resolution of the legal issue.

      I agree with you that the government’s argument on that point is the equivalent of arguing that “the debtor’s son was born more than two years before the bankruptcy was filed and therefore the tax debt should be discharged,” i.e., their argument is nonsensical. The point of my post, however, was to focus on how the government is talking out of both sides of its mouth in making this argument.

      The fact is that judges often pay more attention to what the government has to say just because the government is saying it. Note how the Supremes treat the Solicitor General’s Office and often ask that the SG’s Office provide its views. Judges paying more attention to what the government is saying because it is the government saying it happens in lower courts as well.

      That does not mean the government attorney is going to prevail by standing up and saying “I”m from the government, I never lie and I’m always right.” (to paraphrase the Firesign Theater, if you are old enough to remember them) Judges rule against the government with a fair amount of frequency.

      But in my view it does mean that government litigators have a duty to cut square corners. Their role is not just to win. Their role is to win in a way that treats the people whom they govern fairly. A consistent failure by the government to litigate in a manner that cuts square corners undermines the government’s legitimacy and, in the tax area, undermines the voluntary compliance system. So when I see the government talking out of both sides of its mouth in litigation, I’m not a happy camper and tend to do something about it.

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