In re Woods

• Decision Date: 30 August 2002
• Docket Number: Bankruptcy No. 01-01694-JKC-7.,Adversary No. 01-212.
• Citation: 285 B.R. 284
• Parties: In re William D. WOODS, Debtor. William D. Woods, Plaintiff, v. Internal Revenue Service and Indiana Department of Revenue, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

285 B.R. 284

In re William D. WOODS, Debtor William D. Woods, Plaintiff, v. Internal Revenue Service and Indiana Department of Revenue, Defendants.

Bankruptcy No. 01-01694-JKC-7.

Adversary No. 01-212.

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

August 30, 2002.

Michael F. Harper, Indianapolis, IN, for debtor.

Amy Davis, Asst. Attorney General, Indianapolis, IN, for creditor.

ORDER DENYING UNITED STATES' MOTION FOR SUMMARY JUDGMENT AND GRANTING PARTIAL SUMMARY JUDGMENT IN FAVOR OF DEBTOR

JAMES K. COACHYS, Bankruptcy Judge.

William D. Woods (the "Debtor") commenced an adversary proceeding pursuant to Section 523 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code"), seeking a determination that certain state and federal income tax liabilities are dischargeable. In response, the United States moved for summary judgment and argued that the subject federal income taxes are excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(B)(i), which prohibits the discharge of taxes for which the debtor did not file a "return." The Debtor then filed a cross-motion for summary judgment, insisting that the Forms 1040 ("1040s") he filed with the Internal Revenue Code ("IRS"), while admittedly filed only after the IRS involuntarily assessed the taxes against him, constitute "returns" for purposes of Code § 523(a)(1)(B). The Court, having considered the parties' arguments, now grants partial summary judgment in favor of the Debtor and against the United States. It appears, however, that the United States is free to argue, if it so chooses, that the subject taxes are nondischarge under § 523(a)(1)(C). As such, the Court will issue an order scheduling this matter for further proceedings.

Facts

The operative facts are not in dispute. On November 14, 1994, the IRS prepared "substitutes for returns" ("SFRs"), for the years 1988 through 1993 pursuant to 26 U.S.C. § 6020(b). Thereafter, the IRS sent notice of the proposed deficiencies ("30-day Letters") to the Debtor, to which he failed to respond. The IRS then sent the Debtor formal notice of deficiency letters, ("90-day letters"). The Debtor did not timely file a petition with the United States Tax Court challenging the deficiencies and, on August 21, 1995, the IRS assessed the tax deficiencies against the Debtor after waiting the statutorily-prescribed period.

Following the involuntary assessments, the Debtor executed a tax collection waiver and entered into an installment agreement with the IRS. Then, by letter dated April 25, 1997, the Debtor offered $8,000 to compromise his tax liabilities, an offer which the IRS rejected. Thereafter, on December 8, 1997, the Debtor filed 1040s for the tax years 1988 through 1993. The purported "returns" contained substantially the same information as the SFRs prepared by the IRS. However, two of the 1040s reported increases in the Debtor's tax liability, while two others reported decreases in the Debtor's liability. There appears to be no dispute that the Debtor signed the 1040s under penalty of perjury.

On February 12, 2001, the Debtor filed a voluntary petition under Chapter 7 of the Code and then commenced this adversary proceeding seeking, in part, a determination that his federal tax liabilities for the years 1988 through 1993 are dischargeable pursuant to Code §§ 523(a)(1)(B) and 727(a). As indicated above, both parties have moved for summary judgment. For the reasons stated below, the Court must conclude that the Debtor's federal tax liabilities are not excepted from dischargeable pursuant to § 523(a)(1)(B).

Discussion and Decision

Summary judgment is appropriate when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A genuine issue of material fact exists when "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). The mere existence of a factual dispute will not bar summary judgment unless "the disputed fact is outcome determinative under governing law." Egger v. Phillips, 710 F.2d 292, 296 (7th Cir.1983), cert. denied, 464 U.S. 918, 104 S.Ct. 284, 78 L.Ed.2d 262 (1983). When a summary judgment motion is made and supported by accompanying affidavits, the party opposing summary judgment may not rely on the mere allegations of his pleadings. Rather, "the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Waldridge v. American Hoechst Corp., 24 F.3d 918, 920 (7th Cir.1994) (quoting Fed.R.Civ.P. 56(e)).

In considering a motion for summary judgment, a court must review the record and draw all reasonable inferences in the light most favorable to the non-moving party. Anderson, 477 U.S. at 255, 106 S.Ct. 2505; Del Raso v. U.S., 244 F.3d 567, 570 (7th Cir.2001). If the party opposing the motion does not present evidence that would permit the finder of fact to find in his favor on a material question, then the court must enter summary judgment against him. Waldridge, 24 F.3d at 920 (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson, 477 U.S. at 249-52, 106 S.Ct. 2505).¹

The party seeking to establish an exception to the discharge of a debt bears the burden of proof. Selfreliance Fed. Credit Union v. Harasymiw (In re Harasymiw), 895 F.2d 1170, 1172 (7th Cir.1990). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). To further the policy of providing a debtor a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of the debtor." Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992) (quoting In re Zarzynski, 771 F.2d 304, 306 (7th Cir.1985)).

Code § 523 enumerates specific exceptions to the dischargeability of debts. As it relates to the present case, § 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 —

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(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, under applicable law or under any extension, 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(a)(1). Under this provision, "tax on or measured by income or gross receipts" for the three years prior to the commencement of a bankruptcy case is not dischargeable. See 11 U.S.C. § 507(a)(8)(A). Furthermore, only taxes for which a "required return" was filed more than two years before the commencement of the bankruptcy case are dischargeable.

There is no question in this case that the tax liabilities in question arose more than three years before the commencement of the case and that the Debtor's 1040s were filed more than two years before the bankruptcy filing.² It would appear, then, that Debtor's federal tax liabilities are not excepted from discharge pursuant to § 523(a)(1)(B). However, the United States maintains that the 1040s filed by the Debtor do not constitute "returns" and that the taxes are therefore excepted from discharge pursuant to § 523(a)(1)(B)(i).

Neither the Bankruptcy Code nor Internal Revenue Code define, "return," and, as a result, a great deal of debate has been generated in the application of § 523(a)(1)(B). Unfortunately, the question raised by the parties' summary judgment motions has not been addressed by the Seventh Circuit, nor resolved by the Supreme Court. In the absence of any binding authority, the Court must choose between two basic lines of reasoning. Compare, e.g., In re Hindenlang, 164 F.3d 1029 (6th Cir.1999), cert. denied, 528 U.S. 810, 120 S.Ct. 41, 145 L.Ed.2d 37 (1999), with In re Nunez, 232 B.R. 778 (9th Cir. BAP 1999).

The United States urges the Court to follow the Sixth Circuit's decision in Hindenlang, 164 F.3d at 1029. As here, the debtors in that case filed Forms 1040 only after the IRS had prepared SFRs and assessed tax deficiencies against them. In determining whether the forms should be treated as "returns," the Sixth Circuit utilized the four-part test articulated in Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984), aff'd, 793 F.2d 139 (6th Cir.1986).³ Under this test, in order for a document to be a return, 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 law.

In applying the fourth prong of the test, the Sixth Circuit stated:

A purported return filed too late to have any effect at all under the Internal Revenue Code cannot constitute "an honest and reasonable attempt to satisfy the requirements of the tax law." Once the government shows that a Form 1040 submitted after an assessment can serve no purpose under the tax law, the government has met its burden [under § 523(a)(1)(B)(i)].

Id. at 1034. The Court further held that the United States was not required to introduce "particularized evidence" showing that a...