Is an untimely 1040 Form, filed after the Internal Revenue Service has assessed a tax liability, a tax return for the purpose of the exceptions to discharge in § 523(a)(1)(B)(i) of the Bankruptcy Code? This was the question that the Tenth Circuit Court of Appeals recently decided in the case of In Re Mallo, decided on December 29, 2014 (Appeal from the United States District Court for the District of Colorado, (D.C. Nos. 1:13-CV-00098-LTB and 1:12-CV-03380-LTB).
The case was actually a consolidated appeal from two cases, In Re Mallo and In Re Martin. The appeal came out of Colorado. The background to the cases involved situations where bankruptcy debtors had not filed tax returns for certain years. Edson Mallo and Liana Mallo did not file timely federal income tax returns for 2000 and 2001 as required by the Internal Revenue Code. As a result, the IRS issued statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212 and 6213 for those years. The Mallos did not challenge those determinations.
The Internal Revenue Service assessed taxes, including penalties and interest, against the Mallos for various years of delinquencies. The IRS began collection efforts in 2006. In 2007 the Mallos filed additional returns for past due years. The other appellant, Martin, had a similar history of delinquent returns. The IRS tried to make collection efforts against him as well.
The Mallos later filed a Chapter 13 bankruptcy case, which was eventually converted to a Chapter 7 case. They filed an adversary action against the IRS, seeking a determination that the income tax debts had been discharged. The IRS filed a motion for summary judgment in the case, claiming that because the Mallos had not filed a tax return for certain years at issue, the tax debts should not be discharged. The bankruptcy court agreed with the IRS and granted the motion. The Mallos appealed.
Mr. Martin, the other appellant, received a different result. He also filed an adversary action against the IRS seeking a determination that certain income tax debts were discharged. In his case, a bankruptcy court found that his delinquent filed Form 1040 did, in fact, qualify as a tax return. Thus, his tax debts were found to be discharged. The IRS appealed. Both the Martin case and the Mallo case were thus consolidated.
The Court of Appeals thus had to decide what actually constitutes a “tax return” for the purposes of dischargeability under Section 523. The Court found that:
The hanging paragraph [of Section 523] defines “return” as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” Id. § 523(a)(*). It then explains which tax forms prepared under § 6020 of the Bankruptcy Code fall within that definition. Thus, the plain language of the statute requires us to consult nonbankruptcy law, including any applicable filing requirements, in determining whether the tardy tax forms filed by the Mallos and Mr. Martin are returns for purposes of discharge.
The Court reviewed some decisions of other circuits on this issue. What was important to the Court was the idea that filing requirements for tax returns included “deadlines.” And because the applicable filing requirements include filing deadlines, § 523(a)(*) plainly excluded late-filed Form 1040s from the definition of a return. In other words, a delinquent Form 1040 did not constitute a “return” for the purposes of Section 523(a)(*). An untimely filed tax form cannot constitute a “tax return” for the purposes of dischargeability in bankruptcy. Why? Because a due date is an applicable filing requirement. Missing the due date means that a taxpayer has missed a filing requirement. In sum, the Court stated:
Having considered and rejected the arguments advanced by Taxpayers and the Commissioner, we agree with the Fifth Circuit’s decision in McCoy that the plain and unambiguous language of § 523(a) excludes from the definition of “return” all late-filed tax forms, except those prepared with the assistance of the IRS under § 6020(a).
The ruling of the Court makes sense from a policy perspective as well. If taxpayers simply file random forms out of time, without requesting extensions, then a burden would be placed on the IRS with regards to what is or is not a “return.” The lesson here is clear, and has been said before: always file your tax returns in a timely fashion, even if you cannot pay the tax. Unexpected adverse consequences can happen when returns are not filed.
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