In re Moroney, 02-2417.

Decision Date19 December 2003
Docket NumberNo. 02-2417.,02-2417.
PartiesIn Re: Michael J. MORONEY, Debtor. Michael J. Moroney Plaintiff-Appellant, v. United States of America; Internal Revenue Service, Defendants-Appellees.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Marla Lynn Howell, DECARO & HOWELL, P.C., Upper Marlboro, Maryland, for Appellant.

Kenneth L. Greene, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

ON BRIEF: Thomas M. DeCaro, Jr., DECARO & HOWELL, P.C., Upper Marlboro, Maryland, for Appellant.

Eileen J. O'Connor, Assistant Attorney General, Paul J. McNulty, United States Attorney, Ellen Page DelSole, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

Before WILKINSON and TRAXLER, Circuit Judges, and ROBERT E. PAYNE, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge TRAXLER and Judge PAYNE joined.

OPINION

WILKINSON, Circuit Judge.

The question in this case is whether delinquent personal income tax filings, submitted years after the Internal Revenue Service has already prepared its own assessments, constitute "returns" for purposes of the Bankruptcy Code. A debtor in bankruptcy is permitted to discharge personal income tax liabilities, but only if he has filed a return with the IRS reporting those tax liabilities. In the present case, because the debtor's eventual submissions were neither honest nor reasonable attempts to comply with the tax laws, both the bankruptcy and district courts found that no returns had ever been filed. We affirm that judgment.

I.

The basic facts in this case are not in dispute. Debtor Michael J. Moroney did not submit timely personal income tax filings for either the 1990 or 1992 tax years. Moroney never offered any evidence to the bankruptcy or district courts to explain his late filing. When asked before the district court, Moroney's attorney said that Moroney "just didn't get around to filing his tax returns," because he had been "extremely busy" with his job. Filing tax statements "was just something that got pushed to the back burner."

As a result of Moroney's failure to file, in 1994 the IRS began to examine Moroney's income tax liabilities. The IRS then independently prepared "Substitutes for Returns" ("SFRs") to determine the amounts that Moroney owed for the 1990 and 1992 tax years. On the basis of the SFRs, the IRS assessed taxes against Moroney of $23,197.00 for the 1990 tax year and $45,567.00 for the 1992 tax year.

At some point thereafter, Moroney submitted income tax statements for 1990 and 1992. The IRS contends that Moroney did not file his forms until November 1998. Moroney, however, points to communications between his accountants and the IRS that indicate the forms were filed two years earlier in November 1996. Regardless, Moroney concedes that his forms postdated by at least two years the SFRs prepared by the IRS, and that his forms postdated the original filing deadlines by at least four and six years, respectively. Because Moroney's forms reported tax liabilities that were less than the IRS's assessments, the IRS lowered Moroney's unpaid assessments. Specifically, the IRS abated $8,330 of the 1990 tax year assessment and $14,980 of the 1992 tax year assessment.

On March 23, 2000, Moroney filed a voluntary petition for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. Moroney listed his 1990 and 1992 tax liabilities as nonpriority claims, subject to discharge in a Chapter 7 proceeding. However, the IRS notified Moroney that, given his delinquency in filing for those years, it did not consider his tax liabilities subject to discharge. The IRS and Moroney filed cross-motions for summary judgment before the bankruptcy court, seeking a determination of whether Moroney's tax liabilities were excepted from discharge under Section 523 of the Bankruptcy Code. The bankruptcy court held that Moroney had not filed a "return" within the meaning of Section 523 and therefore that Moroney's tax liabilities were not dischargeable in bankruptcy. On appeal, the United States District Court for the Eastern District of Virginia affirmed the bankruptcy court's grant of summary judgment. Moroney now challenges the decisions of the bankruptcy and district courts.

II.

In general, a debtor filing for relief under Chapter 7 of the Bankruptcy Code is discharged from all pre-petition debt, subject to the exceptions enumerated in Section 523. In relevant part, Section 523 provides:

(a) A discharge under section 727 ... does not discharge an individual debtor from any debt —

(1) for a tax or a customs duty —

* * *

(B) with respect to which a return, if required —

(i) was not filed; or

(ii) was filed after the date on which such return was last due... and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

11 U.S.C. § 523 (2000). The exception at issue here, set forth in Section 523(a)(1)(B)(i), excludes from discharge taxes "with respect to which a return, if required[,]" "was not filed."1 The question is whether Moroney's late-filed forms constitute returns, thus rendering his tax liabilities dischargeable.

A.

Neither the Bankruptcy Code nor the Internal Revenue Code defines the term "return." The Internal Revenue Code generally requires that those owing taxes "make a return or statement" on the necessary forms, without specifying how timely the forms must be in order to qualify as returns. 26 U.S.C. § 6011(a) (2000). However, our sister circuits have uniformly held that in order for a document to be considered a "return," under either the bankruptcy or the tax laws, it must (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 the tax laws. See, e.g., In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir.1999) (citing Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984), aff'd, 793 F.2d 139 (6th Cir.1986)); In re Hatton, 220 F.3d 1057, 1060-61 (9th Cir.2000) (citing Hindenlang and Beard).

Moroney and the IRS agree that Moroney's late-filed statements purported to be returns; that they were executed under penalty of perjury; and that they contained sufficient data to permit calculation of Moroney's taxes, although of course the IRS had already determined Moroney's taxes using SFRs. Moroney and the IRS's disagreement concerns whether Moroney's statements were honest and reasonable attempts to satisfy the filing requirement imposed by the bankruptcy and tax laws.

More fundamentally, they disagree about the relevant time frame in which to assess the honesty and reasonableness of Moroney's belated statements. Moroney contends that his purported returns satisfy the filing requirement, because — at the time they were filed — they were accurate on their face and intended to comply with the tax laws. Moroney notes that some courts in determining good faith have focused on the debtor's intent at the time the returns are filed, rather than on the debtor's intent during the delay prior to filing. See, e.g., In re Nunez, 232 B.R. 778, 783 (B.A.P. 9th Cir.1999);2 In re Crawley, 244 B.R. 121, 128 (Bankr.N.D.Ill.2000).

The IRS, however, rejoins that most courts have not ignored a debtor's delinquency in filing, especially where the IRS's interim preparation of a SFR renders the debtor's filing unnecessary. According to these courts, forms filed after an involuntary assessment do not serve the purposes of the tax system, and thus rarely, if ever, qualify as honest and reasonable attempts to comply with the tax laws. See, e.g., Hindenlang, 164 F.3d at 1034; In re Sgarlat, 271 B.R. 688, 696 (Bankr.M.D.Fla. 2001); In re Hetzler, 262 B.R. 47, 54 (Bankr.D.N.J.2001); In re Walsh, 260 B.R. 142, 151 (Bankr.D.Minn.2001); In re Pierchoski, 243 B.R. 267, 271 (W.D.Pa.1999); In re Prince, 240 B.R. 261, 263-64 (Bankr. N.D.Ohio 1999).

We agree with the weight of authority that a debtor's delinquency is relevant to determining whether the debtor has filed a return. The very essence of our system of taxation lies in the self-reporting and self-assessment of one's tax liabilities. See Commissioner v. Lane-Wells Co., 321 U.S. 219, 223, 64 S.Ct. 511, 88 L.Ed. 684 (1944). Timely filed federal income tax returns are the mainstay of that system. A reporting form filed after the IRS has completed the burdensome process of assessment without any assistance from the taxpayer does not serve the basic purpose of tax returns: to self-report to the IRS sufficient information that the returns may be readily processed and verified. See id.; United States v. Boyle, 469 U.S. 241, 249, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985). Simply put, to belatedly accept responsibility for one's tax liabilities, only when the IRS has left one with no other choice, is hardly how honest and reasonable taxpayers attempt to comply with the tax code. See Hatton, 220 F.3d at 1061.

Here, there is no question that Moroney failed to file timely returns, and that as a result of his failure, the IRS had to assume the onerous task of estimating Moroney's taxes without his assistance. Moroney did not explain to the bankruptcy or district courts why his eventual filings were anything other than self-serving attempts to reduce his tax liabilities. And he never attempted to explain why his statements, which were submitted at least four to six years after the original deadlines, should be considered honest and reasonable attempts at compliance with the tax laws. To consider Moroney's statements "returns" would thus be to render that word a ghost of its true self. In fact, by...

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