The 11th Circuit Bypasses the Chance to Rule of the Late Return Issue

0 Flares 0 Flares ×

In Justice v. United States, the 11th Circuit had the chance to become the fourth Circuit Court to rule on the impact of the unnumbered paragraph, aka (*) paragraph, at the end of B.C. 523(a).  It passed on the opportunity and went back to the roots of this issue before siding with the majority of Circuit Courts that addressed this issue based on the pre-2005 law.  Mr. Justice loses because the majority of Circuit Courts deciding the issue prior to 2005 held that debtors filing a Form 1040 in circumstances similar to his were not filing a tax return under the Beard test.  I think everyone loses because the opinion just defers to another day the resolution of the (*) paragraph problem.  I have written about this issue on numerous occasions and the last post has links to the earlier ones.


The Justice case provides a nice review of the law as it existed when Congress tried to fix the problem in 2005. Because the Court essentially ignores, or leaves for another day, the 2005 legislation, those following this issue simply have another opinion that follows the way the case law was developing prior to the legislative change. By deciding the case based on pre-2005 law, the 11th Circuit did a disservice to those concerned about this issue including debtors and the various taxing authorities trying to decide how to deal with this discharge provision. Both sides need a speedy resolution to a problem that has persisted for 18 years since the Sixth Circuit decided Hindenlang.

Resolution of the issue is important for debtors because so many individuals fail to timely file their returns. These individuals need to know if their failure to timely file the return means that they are forever barred from using bankruptcy to discharge the taxes or have some hope for relief that seems to exist in B.C. 523(a)(1)(B)(ii). The taxing authorities need to know because every day they must make a decision on whether to discharge a debtor in these circumstances. The longer the uncertainty lingers, the more debtors that have what may ultimately turn out to be a wrongful discharge determination and the more trouble the taxing authorities will have unwinding the situation. The IRS continues to resist applying the harsh discharge rule as interpreted by three Circuit Courts but it has no obligation to continue to do so in the face of continuing uncertainty and given the certainty that the harsh rule provides.

The problem with the pre-2005 state of the law and the problem that the Justice opinion prolongs is the difficulty of administering a law concerning discharge based on a case by case factual determination of whether the late for 1040 represents a meaningful attempt to file a return under the Beard test, there by resulting in a discharge, or does not represent a good faith attempt to file, thereby resulting in an exception to discharge. The IRS has offered a post-2005 alternative which provides certainty, viz., if the debtor does not file the return until after the IRS makes an assessment based on an SFR then the debt is always excepted from discharge because it is not a return and if the debtor files the late return before an assessment based on an SFR then the two year rule applies. The IRS offered up this outcome to the 11th Circuit but it was not buying what the IRS was selling. So, it sticks the parties with the factual determination test.

To its credit the 11th Circuit seems to choose the “best” of the factual determination cases – Moroney out of the 4th Circuit but Moroney is still a factual determination case at its heart although one in which the debtor will almost always lose making it easy for the IRS to administer and for debtors to predict the outcome. The application of the Moroney rules will almost always create the same result the IRS seeks in its post-2005 argument for a legal test but it does not quite get all the way to the legal test.

Last week I was working on a case in the clinic that demonstrates the problems with the application of the harsh (*) rule and cries out for a simple solution. The individual owes for three years and has a total liability over $60,000. For each of the three years he was running a small business and requested an extension of time to file his return. He clearly filed two of the three returns on time but he may have filed the third year late by a week or two. The year is old and I am trying to get a definitive answer on when the return was filed because it is so critical. The individual has a very low income now but has recently married someone with a good income. Because of her income, I do not think he can obtain an offer in compromise without a very high payment. He is someone who has always filed. With the possible exception of the one year where I am trying to find out if the return was timely filed or filed shortly after the extended due date, he has always filed timely. The IRS did not impose a late filing penalty on him and would have abated the penalty based on its first time abate rules if it had imposed the late filing penalty. Yet, if it turns out he did not timely file, he cannot discharge this debt in bankruptcy because he lives in the First Circuit. Because he got married to someone with a good and stable income, he also cannot obtain an offer unless his new spouse is willing to pay off his long outstanding and substantial tax debt. Understandably, she is not excited about paying off his old tax debts and the situation is putting a strain on their relationship. So, he may end up waiting out the statute of limitations on collection and putting pressure on his marriage.

This is a wasteful policy dilemma. Section 523(a)(1)(B)(ii) set up a system to allow late filers to still obtain a discharge if they waited extra time. In the case of my client, who, if he filed late, did so immediately after the due date, would not even have to wait extra time because of the timing of his filing. Yet, he appears to be prevented from obtaining a discharge for this year. By demurring on the correct interpretation of (*) the 11th Circuit sentences those seeking to know the answer to a longer wait. No matter which way it ruled, having the opinion of the 11th Circuit on (*) would have helped to move the issue to resolution faster.

Les’ post discussing how  filing within 10 days of an e-file rejection will still result in a timely return.  This work around will not present itself often but is worth remembering for those situation where your client has tried and failed to timely file their return electronically.


  1. Regarding the OIC, if the BK doesn’t work out, you may still want to consider the OIC. We just had an OIC go through where taxpayer owed TFRP for a defunct business. Spouse was non-liable. The OIC examiner didn’t consider her income (or her share of the expenses) in determining the taxpayer’s reasonable collection potential. The OIC is being recommended for acceptance to be reviewed by counsel and the manager. We are optimistic it will go through. Just a thought.

  2. Jason T. says

    So much for Mrs. Client’s vow about taking her husband “for richer, or for poorer.”

    What, if anything, happened with Mr. Client’s CDP hearing(s)? If the IRS has yet to offer one, then why bother with it, a bankruptcy, or an offer-in-compromise? If Mr. Client’s debt is “long outstanding,” then his waiting out the collection statute of limitations seems a good strategy.

    As for that strategy “putting pressure on his marriage,” I would tell Mrs. Client that good things come to she who waits. For good measure, I would advise Mr. Client to dump his wife for her despicable attitude. In the long run, a subpar wife with a good income will be worth far less than a good wife with a subpar income.

  3. Bob Kamman says

    Villanova is about to win the NCAA Men’s Basketball Championship, and you’re worried about some unnumbered paragraph?

  4. Norman Diamond says

    So if a taxpayer files a late return containing the same information that was in a section 6020(b) return isn’t a return under the Beard test? The Beard test has four conditions that have to be met, right? One of those conditions is that the taxpayer has to sign the preprinted jurat and the guy did it, right? What about the other three conditions, what was the defect in the information that the IRS and the taxpayer agreed on?

  5. Norman Diamond says

    ‘So much for Mrs. Client’s vow about taking her husband “for richer, or for poorer.” […] For good measure, I would advise Mr. Client to dump his wife for her despicable attitude.’

    So much for Mr. Client’s vow about taking his wife “for better, or for worse.”

    (Yeah I know, since a court can contradict itself within a single ruling, so can a lawyer. But I couldn’t help noticing.)

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind