In re Nunez, BAP No. NC-98-1228-MeRyK
| Decision Date | 06 January 1999 |
| Docket Number | Adversary No. 97-5494-JRG,BAP No. NC-98-1228-MeRyK,Bankruptcy No. 97-58034-JRG-7 |
| Parties | In re Richard NUNEZ, Debtor. United States of America, Internal Revenue Service, Appellant, v. Richard Nunez, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Thomas F. Carlucci, Assistant U.S. Attorney, San Francisco, CA, for U.S.A., Internal Revenue Service.
Michael S. Walsh, San Jose, CA, for Richard Nunez.
Before MEYERS, RYAN and KLEIN, Bankruptcy Judges.
The debtor and the United States Internal Revenue Service ("IRS") filed cross-motions for summary judgment regarding the dischargeability of certain tax debt. The issue was whether forms filed by the debtor after the IRS had independently calculated the debtor's tax liability were "returns" for purposes of Bankruptcy Code Section 523(a)(1)(B). The bankruptcy court ruled in favor of the debtor.
We AFFIRM.
The debtor, Richard Nunez ("Debtor"), failed to file federal tax returns for the years 1985-87 and 19891. As a result, the IRS prepared substitute returns based on its determinations of the Debtor's income and deductions. Between November 1990 and April 1993, the IRS assessed the taxes it determined were owed.
In 1994, the Debtor submitted Forms 1040 ("Forms") to the IRS for the subject years. The Forms reflected the same wage income as the substitute returns previously made by the IRS.
The Debtor made an Offer of Compromise but it was rejected on procedural grounds, apparently regarding whether an original or photocopy was supplied to the IRS. A second Offer of Compromise was made. The Debtor asserts the IRS did not respond to that offer.
The Debtor filed for Chapter 7 bankruptcy relief on September 24, 1997. On October 20, 1997, the Debtor filed a complaint to have his tax debt for the years 1984-93 declared dischargeable. The parties then filed cross motions for summary judgment.
The IRS contended that Section 523(a)(1)(B)(i)2 excepted from discharge tax liabilities with respect to which a return was not filed. It argued that the Forms submitted by the Debtor did not constitute tax returns for purposes of that Section, and therefore, that tax debt could not be discharged. It also maintained that the Debtor merely copied the income figures already generated by the IRS, that the Forms served no purpose, and certainly they did not serve the purpose intended by the self-reporting mechanisms of the Internal Revenue Code ("IRC"). The IRS also argued that the returns had to be filed in good faith to be considered a return, citing Germantown Trust Co. v. Comm'r, 309 U.S. 304, 60 S.Ct. 566, 84 L.Ed. 770 (1940).
The Debtor argued that Section 523(a)(1)(B) did not include an exception based on whether a return was filed before or after an assessment by the IRS and did not place a time limit on when the returns are to be filed. The only time limit, he argued, was the two-year waiting period between filing the return and seeking a discharge specifically stated in the statute. The Debtor also contended that the Germantown reasoning was inapplicable because in that case the issue was whether an incorrect form could still satisfy the return requirement.
The Debtor provided a declaration stating that he decided to file returns in response to an amnesty program offered by the IRS and had consulted both an attorney and an accountant to prepare the taxes. Indeed, all of the Forms in question contain a preparer's signature.
The bankruptcy court ruled that the Debtor's Forms were tax returns. It examined the issue of whether the Debtor made an honest and reasonable attempt to satisfy the tax requirements, and concluded that there was no evidence that the Debtor "did something wrong under that prong of the test." The court rejected the argument that the mere passage of time could support a finding of bad faith, stating that Congress could have included such a time limit if it had wanted to.
The Panel reviews the granting of summary judgment de novo. In re Green, 198 B.R. 564, 566 (9th Cir. BAP 1996).
The IRS makes two arguments. The first is that "once the IRS makes an involuntary assessment against a non-filing taxpayer, such as the debtor here, the taxpayer cannot claim that he has filed a return simply by tendering a standard form that reflects the IRS's prior determinations." Basically, it contends that once the IRS has made an assessment on its own and without the assistance of the taxpayer, tax forms such as what the Debtor filed here no longer qualify as returns because they do not serve the purpose for which they were intended, that is, providing the IRS with the information necessary to calculate the tax due. The IRS contends that "a return is not just a piece of paper but is also the provision of information in a manner that implements the self-assessment system."
The second argument is that the Forms were not returns because they did not constitute an honest and reasonable attempt by the Debtor to satisfy the tax laws. Some courts have included this requirement within their definition of a return. The IRS points to the following facts as allegedly supporting a finding of bad faith: the Forms were nine years late; there was a total of nine years of unfiled returns; the Debtor did not attempt to pay any amount of the tax liability; and, according to the IRS, the bankruptcy case was filed solely for the purpose of discharging the tax debt.
We recognize that there is recent authority supporting the IRS's position. See In re Mickens, 215 B.R. 693 (N.Ohio), aff'd 214 B.R. 976 (N.D.Ohio 1997). The district court in Mickens agreed with the IRS that where a document is a legal nullity it cannot satisfy the definition of a return. 214 B.R. at 978. The court stated that the Form 1040 filed by the debtor after the IRS had already prepared a substitute return and assessed the tax liability had no legal effect. Id. The Form 1040 did not allow tax liability to be assessed, it did not affect the amount of the tax liability, it did not trigger the assessment time period under the IRC, or affect the delinquency time period for purposes of calculating civil penalties, and it could not purge the debtor of tax fraud or affect his criminal liability for failure to file a return under IRC 7203. Id. The court also noted that the debtor did not contest the argument that the Forms were a legal nullity and did not suggest any way that the Forms could have any legal effect. Id.
Several courts have rejected this argument on the ground that it requires reading a requirement into the Bankruptcy Code that is not explicitly there. In other words, Section 523(a)(1)(B) does not state that the return must be filed prior to an assessment by the IRS in order to be effective for dischargeability purposes. In re Savage, 218 B.R. 126, 132 (10th Cir. BAP 1998); In re Hindenlang, 205 B.R. 874, 877-78 (S.Ohio), aff'd, 214 B.R. 847 (S.D.Ohio 1997). The Panel in Savage also stated that this reading would lead to an absurd result. 218 B.R. at 132.
The Panel has held that Section 523(a)(1)(B) can be satisfied, even after substitute returns are prepared by the IRS and an assessment is made, if the debtor cooperates with the IRS and takes actions that amount to adopting the substitute returns. In re Hatton, 216 B.R. 278, 282 (9th Cir. BAP 1997). In Hatton, the debtor acknowledged that he owed the taxes and was willing to sign the substitute returns. Eventually he entered into an installment payment agreement. We held that the substitute returns, when taken along with the signed installment agreement, qualified as returns for purposes of Section 523(a)(1)(B). Under Hatton then, the preparation of substitute returns and assessment by the IRS does not act as a complete bar to efforts by the Debtor to file a return. That is, the Debtor can still take actions which will satisfy Section 523(a)(1)(B).
We also agree with the reasoning of the bankruptcy court, and the other courts that have so held, that Congress could have conditioned discharge of tax debt on whether a return was filed prior to an assessment. As correctly noted by the court, Congress used assessment as a trigger for other time periods in the Code, for example, the priority qualifications found in Section 507(a)(8)(A)(ii). When Congress includes particular language in one section of the Code, but omits it in another, it is presumed to have acted intentionally and purposely. BFP v. Resolution Trust Corp., 511 U.S. 531, 537, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). We will not read into Section 523(a)(1)(B) the requirement that a debtor must have filed a return prior to an assessment by the IRS. Accordingly, the IRS's first argument is rejected.
This takes us to the IRS's argument that the Forms should not be considered returns because they did not represent an honest and reasonable attempt by the Debtor to satisfy the tax laws. The bankruptcy court ruled that summary judgment was appropriate because the IRS failed to present any evidence demonstrating that the Forms were filed in bad faith.
The requirement that a debtor must be acting in good faith in filing a document purporting to be a tax return arises from Germantown Trust Co. v. Comm'r, supra.3 In that case, the issue was whether the petitioner, a trust company, had filed the appropriate form. The company filed a fiduciary tax form. The IRS argued that the entity was required to file a corporate return and it prepared substitute corporate returns. The Supreme Court stated that the entity involved was a fiduciary,...
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