In re Wright

• Decision Date: 04 January 2000
• Docket Number: Bankruptcy No. 91-43546 TS. Adversary No. 98-4735 AT.
• Citation: 244 BR 451
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re Paul C. WRIGHT, Debtor. Paul C. Wright, Plaintiff. v. United States of America, Treasury Department, Internal Revenue Service Division, Defendant.

244 B.R. 451 (2000)

In re Paul C. WRIGHT, Debtor Paul C. Wright, Plaintiff. v. United States of America, Treasury Department, Internal Revenue Service Division, Defendant.

Bankruptcy No. 91-43546 TS. Adversary No. 98-4735 AT.

United States Bankruptcy Court, N.D. California, Oakland Division.

January 4, 2000.

Morgan D. King, Law Offices of Morgan D. King, Dublin, CA, for Plaintiff.

Thomas R. Mackinson, Special Assistant United States Attorney, San Francisco, CA, for I.R.S.

MEMORANDUM OF DECISION

LESLIE TCHAIKOVSKY, Bankruptcy Judge.

Plaintiff Paul C. Wright (the "Debtor") seeks a determination that his tax obligations to the defendant Internal Revenue Service (the "IRS") for 1978 through 1982 were discharged by his 1991 chapter 7 bankruptcy case. For the reasons stated below, the Court concludes that his tax penalties were discharged but that the principal and interest portions of his tax obligations were not. Judgment will be entered in favor of the IRS in accordance with this decision.

SUMMARY OF FACTS

The Debtor is a physician. During 1978 through 1982, and for some time thereafter, the Debtor was having both marital and business problems. As a result, although the Debtor had an accountant prepare joint federal tax returns for him and his wife for 1978 through 1982, neither he nor his wife signed the returns, and the returns were never filed with the IRS.

In 1984, the IRS conducted a criminal investigation with regard to the Debtor's failure to file tax returns for 1978 through 1982. In January 1984, special agents from the IRS criminal division visited the offices of the Debtor's accountant and obtained copies of the Debtor's and his wife's unsigned, unfiled returns (the "Prototype Returns"). In May 1984, the special agents deposed the Debtor under oath concerning his failure to file tax returns. They asked him questions about the sources of the figures set forth on the Prototype Returns. They also asked him why he had not signed and filed the returns on a timely basis. The special agents did not ask the Debtor to sign the Prototype Returns or advise the Debtor to file tax returns for the years in question.¹

In June 1985, the Debtor was charged with four counts of willful failure to file tax returns: for 1978 through 1981. In September 1985, the Debtor pled guilty to two of the four counts, for 1980 and 1981; the remaining two counts were dismissed. The Debtor was sentenced to five years of probation which he served.

At trial in this adversary proceeding, the Debtor testified that his probation officer asked for copies of the Prototype Returns and that he provided copies to her. He testified that it was his recollection that his probation officer told him that she would file the Prototype Returns for him. She did not ask him to sign the Prototype Returns.

After the criminal case was concluded, the special agents' files were turned over to the IRS civil division for a civil closing. In November 1986, the case was assigned to Valerie Fintel ("Fintel"), a revenue agent. Fintel was given copies of all the documents obtained and notes prepared by the special agents from the criminal division. Included among these documents were copies of the Prototype Returns.

Beginning in December 1986, Fintel attempted to contact the Debtor to see if he had any additional information to provide concerning his tax liabilities for 1978 through 1982. In these letters, Fintel did not ask the Debtor to sign and file the Prototype Returns. The Debtor did not respond to Fintel's first two letters. As a consequence, Fintel prepared an examination report, setting forth her calculation of the Debtor's taxes for 1978 through 1982. Her figures mirrored in large part (although not entirely) the figures contained in the Prototype Returns.

In February 1987, Fintel was contacted by James Barbic ("Barbic"), a tax representative acting on the Debtor's behalf. Barbic challenged Fintel's calculation of the Debtor's tax liability on various grounds. After several phone calls, Fintel concluded that she would be unable to close the case on an agreed basis. Consequently, in June 1987, she prepared Substitute Tax Returns (the "Substitute Returns") for 1978 through 1982 and sent them to her Group Manager for review and filing.

The Substitute Returns were filed on April 11, 1988. As is customary with Substitute Returns, the Substitute Returns indicated a zero tax liability. Thereafter, on September 26, 1988, the IRS issued notices of tax deficiencies for 1978 through 1982 (the "Tax Deficiency Notices"). The Tax Deficiency Notices set forth the actual amounts of the Debtor's tax liabilities for 1978 through 1982 as calculated by Fintel.

On January 3, 1989, the Debtor filed two petitions in United States Tax Court (the "Tax Court Petitions") challenging the IRS's calculation of the tax deficiencies.² Stipulated judgments were entered in Tax Court with respect to both petitions on March 14, 1990 (the "Stipulated Judgments"). The Debtor filed a chapter 7 bankruptcy petition on June 4, 1991. Shortly thereafter, he received a discharge.

DISCUSSION

Three issues are presented by this adversary proceeding: (1) whether the Debtor's tax liabilities for 1978 through 1982 are excepted from the discharge in his 1991 bankruptcy case pursuant to 11 U.S.C. § 523(a)(1)(B); (2) whether the IRS is equitably estopped from contending that the Debtor did not file tax returns more than two years before filing his bankruptcy petition; and (3) whether the penalties assessed with respect to the Debtor's 1978 through 1982 federal tax obligations were discharged in his 1991 chapter 7 bankruptcy case. Each of these issues is addressed below.

A. ARE THE DEBTOR'S TAX LIABILITIES FOR 1978 THROUGH 1982 EXCEPTED FROM THE DISCHARGE IN HIS 1991 BANKRUPTCY CASE PURSUANT TO 11 U.S.C. § 523(a)(1)(B)?

The principal issue presented by this adversary proceeding is whether the principal and interest portions of the Debtor's tax liabilities for 1978 through 1982 are excepted from the discharge in his 1991 chapter 7 bankruptcy case pursuant to 11 U.S.C. § 523(a)(1)(B). Section 523(a)(1)(B) provides as follows:

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

(1) for a tax . . . —

. . .

(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. . . .

11 U.S.C. § 523(a)(1)(B). The Debtor does not contend that he filed tax returns for 1978 through 1982 in a conventional sense: i.e., by filing Form 1040s signed under penalty of perjury for the years in question. Rather, he contends that the IRS's possession of the Prototype Returns, containing substantially accurate information concerning his tax liabilities, coupled with his conduct in connection with the criminal prosecution, should be deemed to constitute the filing of tax returns for 1978 through 1982.

This argument must fail. The Prototype Returns do not qualify as tax returns. As set forth in Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984), there are normally four requirements that a document must satisfy in order to constitute a valid tax return: (1) the document must contain sufficient data to permit the tax liability to be calculated; (2) it must purport to be a return; (3) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) it must be executed by the taxpayer under penalty of perjury.

Based on the evidence presented, the Court finds that the Debtor did not file tax returns that satisfied these four requirements during the criminal case. The Prototype Returns contained sufficient data to permit the tax liability to be calculated. They purported to be returns. They represented an honest and reasonable attempt to satisfy the requirements of the tax law. However, they were not signed by the Debtor, let alone signed under penalty of perjury. The only document signed by the Debtor was the plea admitting guilt for willful failure to file tax returns for 1980 and 1981. Additionally, the Prototype Returns were not filed by the Debtor. The fact that the IRS obtained possession of copies of the Prototype Returns as a result of its criminal investigation did not constitute their being filed with the IRS.³

Under certain circumstances, the IRS has recognized documents other than a Form 1040 as a valid tax return. In Revenue Ruling 74-203, 1974 WL 34901, the IRS stated that Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, Form 1902E, Report of Individual Income Tax Audit Changes, and Form 4549, Income Tax Audit Changes, if signed by a debtor, all qualify as tax returns within the meaning of 26 U.S.C. § 6020(a). The ruling states that: "Even though a document is not in the form prescribed for use as the appropriate return, it may constitute a return if it discloses the data from which the tax can be computed, is executed by the taxpayer, and is lodged with the Internal Revenue Service." See In re Berard, 181 B.R. 653 (Bankr.M.D.Fla.1995) (Form 4549 qualified as tax return); In re Carapella, 84 B.R. 779 (Bankr.M.D.Fla.1988) (Form 870 qualified as tax return).

Although none of the forms specified in the Revenue Ruling require the taxpayer to sign under penalty of perjury, they are all executed under circumstances where the IRS has computed the taxpayer's tax liability. By signing the form, the taxpayer consents to the amounts so computed and permits the taxes to be immediately assessed without requiring the IRS to follow the notice of deficiency process. In this important respect, the effect of the taxpayer's signing these forms is the same as the effect of the debtor's filing a tax return.

Courts have also found that, by signing documents other than the forms...