In re Hetzler, Bankruptcy No. 99-20523/JHW. Adversary No. 00-1018.
| Decision Date | 12 March 2001 |
| Docket Number | Bankruptcy No. 99-20523/JHW. Adversary No. 00-1018. |
| Parties | In the Matter of Philip T. HETZLER, Debtor, Philip T. Hetzler, Plaintiff, v. United States of America, Internal Revenue Service, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Charles T. Eckel, Egg Harbor Township, NJ, for Debtor.
Richard G. Jacobus, U.S. Department of Justice, Washington, DC, for Internal Revenue Service.
We have before the court for resolution competing motions for summary judgment on the question of the dischargeability of certain delinquent federal income taxes owed by the debtor. The debtor seeks to discharge the taxes in question pursuant to 11 U.S.C. § 523(a)(1)(B), contending that the taxes relate to tax returns that he filed over two years prior to his bankruptcy filing. The IRS disagrees, and maintains that the debtor's untimely filed 1040 Forms do not qualify as "returns" for purposes of § 523(a)(1)(B) because they had no effect on his tax liabilities for those years; the documents simply mirrored the assessments already prepared by the IRS. We resolve this matter below.
On December 2, 1999, Philip T. Hetzler filed a petition for relief under Chapter 7 of the Bankruptcy Code. The debtor scheduled as his only debt, $162,871.00 in unsecured priority taxes owed to the IRS for the tax years 1988 through 1992 and 1996.1 The debtor's case was classified as a no-asset Chapter 7 case, and he received his discharge on May 1, 2000. In the interim, on January 18, 2000, the debtor filed this adversary complaint challenging the nondischargeability of the federal income taxes he scheduled as due to the IRS for the 1988 through 1992 and the 1996 tax years. The parties have agreed that the 1992 taxes due are dischargeable, and that the 1996 taxes and interest due are not dischargeable. The parties have also agreed that pre-petition civil penalties imposed by the IRS with respect to the debtor's tax obligations for 1988 through 1992 are dischargeable. Remaining to be resolved is the dischargeability of debtor's tax obligations for 1988, 1989, 1990 and 1991.2
The debtor submits that prior to the 1988 tax year, he had been working on a salary and commission basis under which his employer withheld federal income taxes. For the tax years of 1988 through 1991, he was employed on a straight commission basis, and his employer did not withhold any taxes. The debtor claims that this led to confusion and difficulty on his part in meeting his tax obligations, and as a result, he failed to timely file his federal income tax returns. The debtor explains that he was not familiar with the requirements of filing estimated tax returns and by the time he realized what was happening, he owed such a substantial amount of taxes that he did not have the ability to make payment.
The IRS sent written inquiries to the debtor in June and July of 1993, but did not receive a response.3 The IRS then prepared substituted tax returns ("SFRs") for the 1988 through 1991 tax years, in April and May of 1994, pursuant to 26 U.S.C. § 6020(b).4 The debtor did not participate in this process and did not sign the substituted returns. Based on the SFRs and an examination report prepared by the tax auditor assigned to the debtor's case, the IRS imposed income tax assessments for each of the years that returns were not filed.
Approximately three years later, in April and May 1997, the debtor filed 1040 Forms purporting to be his delinquent federal income tax returns. The 1989, 1990 and 1991 returns were filed on April 25, 1997, and the 1988 return was filed on May 2, 1997. Following is a chart comparing the IRS assessment and tax calculations, and the debtor's self-assessment and tax calculations.
Tax Year Taxable Income Assessment
IRS Debtor's IRS Debtor's Self-
Assessment 1040 Calculation Assessment
(1994) (1997) (1994) (1997)
1988 $52,296 $52,296 $18,639 $19,038
1989 $59,656 $59,656 $21,280 $21,280
1990 $26,623 $26,624 $ 9,780 $ 9,781
1991 $17,479 $18,532 $ 2,438 $ 2,675
The chart reflects that the debtor's taxable income in each of the tax years except 1991 is identical in both the IRS assessment and the debtor's 1040 Form, with minor variation in the calculation of tax liability based on the taxable income. No additional assessment was imposed by the IRS for 1988, because the IRS contends that the debtor miscalculated the tax liability on his taxable income for that year.
On April 15, 1997, the debtor timely filed his federal income tax return for the 1996 tax year, showing an income tax liability of $1,877, which remains unpaid. In June 1997, Hetzler entered into an Installment Agreement with the IRS, and made regular payments under the agreement of $140 per month for approximately 28 months. In May 1999, the IRS abated $458 of the debtor's 1988 taxes, apparently based on an overpayment of 1998 taxes. In late 1997, the debtor was assessed an additional tax of $237 based on his late filed 1991 tax return. In 1998, the debtor attempted unsuccessfully to submit an offer in compromise to the IRS.
On these competing motions for summary judgment, the precise question before the court is whether the 1040 Forms filed by the debtor in April and May of 1997 for the 1988 through 1991 tax years qualify as "returns" for purposes of 11 U.S.C. § 523(a)(1)(B).5 If we conclude that the debtor's 1997 filings do not constitute returns for purposes of § 523(a)(1)(B), then the debtor's tax liabilities for the 1988 through 1991 tax years would be nondischargeable under § 523(a)(1)(B)(i). If the debtor's filings do constitute returns for purposes of § 523(a)(1)(B), the debtor's tax liabilities for the 1988 through 1991 tax years would be dischargeable under § 523(a)(1)(B)(ii).
The Code does not define a "return" under section 523. Most courts agree that a document must first qualify as a return under federal income tax law in order to qualify as a return for purposes of section 523. See, e.g., In re Hatton, 220 F.3d 1057, 1060 (9th Cir.2000); In re Hindenlang, 164 F.3d 1029, 1032-33 (6th Cir. 1999); In re Bergstrom, 949 F.2d 341, 343 (10th Cir.1991); In re Mathis, 249 B.R. 324 (S.D.Fla.2000). Courts commonly look to four factors in determining whether a document filed with the IRS qualifies as a "return". The document must: (1) purport to be a return; (2) be executed by the debtor under penalty of perjury; (3) contain sufficient data to allow the calculation of the tax liability, and (4) represent an honest and reasonable attempt on the part of the taxpayer to satisfy the requirements of the tax law. See, e.g., In re Hatton, 220 F.3d at 1060-61 (); In re Hindenlang, 164 F.3d at 1033 (same); In re Pierchoski, 243 B.R. 639, 642 (Bankr.W.D.Pa.1999); In re Billman, 221 B.R. 281, 282 (Bankr.S.D.Fla. 1998). The parties agree that the first three factors are satisfied by the debtor's filing of his 1040 Forms for the tax years 1988 through 1991. The dispute is over the application of the fourth factor.
The IRS contends that the debtor has failed to make a bona fide attempt to timely self assess his income tax liability for the tax years at issue. The IRS maintains that the debtor's 1988 through 1990 returns were legal nullities because they merely restated the tax liabilities previously assessed for such years, and "had zero effect upon his tax liabilities for such years." Because the debtor's "belated, post-assessment attempt to file what purported to be his 1988, 1989 and 1990 tax returns . . . served no tax purpose under the Internal Revenue Code," his taxes for those years cannot be rendered dischargeable. The IRS contends that the same argument holds true for the 1991 tax year, except to the extent of the additional tax of $237.00. In support of its position the IRS directs our attention to In re Hindenlang, 164 F.3d 1029 (6th Cir.1999).
In Hindenlang, the Chapter 7 debtor sought to discharge certain federal tax liabilities for which he had filed late tax returns. In re Hindenlang, 164 F.3d 1029 (6th Cir.), cert. denied, 528 U.S. 810, 120 S.Ct. 41, 145 L.Ed.2d 37 (1999). Hindenlang had failed to file his federal tax returns for the tax years 1985 through 1988. The IRS sent Hindenlang notices of proposed deficiency for those tax years, with no response, followed by substituted returns and then formal notice of deficiency letters. The IRS then assessed the deficiencies against Hindenlang. Two years after the assessment, Hindenlang prepared and sent to the IRS 1040 Forms for the tax years in question, calculating the taxes to be substantially the same as in the substituted returns. The deficiencies were not paid. Three years later, the debtor filed for bankruptcy under Chapter 7 and sought to discharge his tax liabilities for the 1985 to 1988 tax years. The bankruptcy court granted the debtor's motion. The district court affirmed. The Sixth Circuit focused on the question of "whether Forms 1040 filed after the IRS has made an assessment can constitute returns for purposes of § 523(a)(1)(B)." Id. at 1032.
Beginning with the premise that the definition of a return is governed by applicable tax law, the Sixth Circuit applied the four part "Beard" test described above, focusing on the fourth criterion, whether the return represents "an honest and reasonable attempt to satisfy the requirements of the tax law." Id. at 1033.
Reversing the district court, the Sixth Circuit held as a matter of law: that a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. A purported return filed too late to have any effect...
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