Martin v. United States (In re Martin)

• Citation: 500 B.R. 1
• Decision Date: 23 September 2013
• Docket Number: Civil No. 12–cv–03380–LTB.
• Parties: In re Peter George MARTIN, Debtor. Peter George Martin, Plaintiff–Appellee, v. The United States of America, Defendant–Appellant.
• Court: U.S. District Court — District of Colorado

500 B.R. 1

In re Peter George MARTIN, Debtor.Peter George Martin, Plaintiff–Appellee,

v.The United States of America, Defendant–Appellant.

Civil No. 12–cv–03380–LTB.

United States District Court,

D. Colorado.

Sept. 23, 2013.

Aaron Michael Bailey, Washington, DC, for Appellant.

Charles Stewart Parnell, Parnell & Associates, P.C., Wheat Ridge, CO, for Appellee.

ORDER

LEWIS T. BABCOCK, District Judge.

Appellant, The United States of America, appeals an order of the United States Bankruptcy Court for the District of Colorado dated November 14, 2012, denying its Motion for Summary Judgment and granting the Motion for Summary Judgment filed by the Appellee, Debtor Peter George Martin. [Appellate Record at Doc # 10 pg. 178] Oral argument would not materially assist in the determination of this appeal. After consideration of the record and the parties' briefs, and for the reasons set forth below, I REVERSE the order of the Bankruptcy Court.

I. Facts

The underlying facts in this case are undisputed. As relevant here, Debtor failed to timely file his Form 1040 Federal Income Tax Return for the tax years 2000 and 2001. As a result, the Internal Revenue Service (“IRS”) made assessments for the Debtor's 2000 and 2001 tax years following an examination and the issuance of a Notice of Deficiency. Debtor did not challenge the tax determination set forth in the Notice and, as such, a tax assessment was made for the 2000 and 2001 tax period on November 8, 2004. After Debtor failed to pay his assessed income tax debt, the IRS undertook collection action by issuing a Notice of Intent to Levy regarding Debtor's 2000 and 2001 tax debt on November 29, 2004. Debtor subsequently filed Form 1040s for his 2000 and 2001 federal income tax liability approximately five (5) months later on May 5, 2005. As a result, the IRS partially abated its tax assessment to a total amount equal to the amount reported by Debtor on his 1040s.

Thereafter, on October 28, 2010, Debtor filed a voluntary petition for bankruptcy under Chapter 7, Title 11, of the United States Bankruptcy Code. The Court issued a discharge order on February 18, 2011. [Doc # 10 pg. 14] Following the discharge, Debtor filed an adversary proceeding (AP No. 11–01536) seeking a determination that his income tax debt from 2000 and 2001 was discharged by the discharge order. [Doc # 10 pg. 6] In response, the IRS filed a motion seeking summary judgment and a determination that Debtor's 2000 and 2001 income tax debt was excepted from discharge because it was not a debt for which a return was filed within the meaning of 11 U.S.C. § 523(a)(1)(B)(i). [Doc # 10 pg. 17–74] Debtor, in response, filed a cross-motion seeking summary judgment in his favor and a ruling that his 2000 and 2001 income tax debt was, in fact, discharged. [Doc # 10 pg. 75–102]

On November 14, 2012, the Bankruptcy Court ruled in favor of Debtor by granting his motion for summary judgment, and denying the United State's motion for summary judgment. [Doc # 10 pg. 178] In re Martin, 482 B.R. 635, 636 (Bkrtcy.D.Colo.2012). The United States appealed this decision to the Bankruptcy Appellate Panel. On December 27, 2012, Debtor elected to remove the appeal to the District Court pursuant to 28 U.S.C. § 158(c)(1)(B).

II. Standard of Review

In reviewing a Bankruptcy Court's decision, the district court functions as an appellate court and is authorized to affirm, reverse, modify or remand the Bankruptcy Court's ruling. 28 U.S.C. § 158(a); Fed. R. Bankr.P. 8013. As relevant here, a Bankruptcy Court's legal conclusions—as opposed to its factual findings—are reviewed de novo. In re Warren, 512 F.3d 1241, 1248 (10th Cir.2008); In re D.E. Frey Group, Inc., 2008 WL 630044, *2 (D.Colo.2008).

III. Underlying Law

The legal question at issue is whether the Debtor's tax liability for 2000 and 2001 was discharged in bankruptcy by the order of discharge—as argued by Debtor—or whether the exception found at 11 U.S.C. § 523(a)(1)(B)(i) applies, making the tax debt non-dischargeable—as argued by the United States.

The general rule is that a debtor who files a bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition, including those related to unpaid taxes. 11 U.S.C. § 727(b). The Bankruptcy Code lists several exceptions to the general rule of dischargeability of an unpaid tax debt under 11 U.S.C. § 523(a)(1), which precludes the discharge of a tax debt in several circumstances. For example, a priority tax is not dischargeable pursuant to § 523(a)(1)(A), nor is a debt with respect to a fraudulent return pursuant to § 523(a)(1)(C). The exception to discharge at issue here is § 523(a)(1)(B), which renders a tax debt nondischargeable if a related return was filed within the two years of the filing of the bankruptcy petition or, as relevant here, when a return was not filed. Specifically, that exception provides as follows:

(a) A discharge [in bankruptcy] 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 ...

In October 2005, § 523(a) was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 119 Stat. 23 (April 20, 2005)(the “BAPCPA”), which—as relevant here—added an unnumbered paragraph at the end of the section and provides a definition of a “return” as follows:

For purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or similar State or local law.

This unnumbered section, located at the end of § 523(a), is often referred to as a “hanging paragraph.”

I note that a return under § 6020(a) of the Internal Revenue Code is one prepared by the IRS with the assistance of the taxpayer, as well as signed by the taxpayer—and thus is considered a “return” under § 523(a)(1)(B)(i)—while a § 6020(b) return is prepared and executed by the IRS without assistance or a signature from the taxpayer—and, as such, is not deemed a “return” for the purposes of § 523(a)(1)(B)(i). This case does not involve a tax liability assessed by either § 6020(a) or § 6020(b), but rather assessment via a Notice of Deficiency as provided for in 26 U.S.C. § 6212.

IV. Bankruptcy Court Ruling

The Bankruptcy Court in this matter ruled that Debtor's belated 1040s—filed after IRS assessment—constituted a “return” for purposes of the exception to discharge at § 523(a)(1)(B)(i) and, as such, it concluded that the subject tax debt was dischargeable. In re Martin, supra, 482 B.R. at 641.

In so doing, the Bankruptcy Court first determined that the language “applicable filing requirements”—as set forth in the first sentence of the hanging paragraph of § 523(a)—does not include time requirements or due dates for filing a tax return. Specifically, the Bankruptcy Court ruled that interpreting “applicable filing requirements” to encompass the time for filing a tax return would result in essentially any late-filed return as failing to meet the hanging paragraph definition of a “return” and, in turn, “all taxes relating to late-filed returns [would be] non-dischargeable under § 523(a)(1)(B)(i).” In re Martin, supra, 482 B.R. at 638–39. The Court found such an interpretation untenable in that it would essentially render § 523(a)(1)(B)(ii)—which provides that taxes for which a return was filed “after such return was last due” and less than 2 years prior to the date of bankruptcy are not discharged—superfluous. In re Martin, supra, 482 B.R. at 639. The Court also determined that such an interpretation would defy the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning, because the term “return” in § 523(a)(1)(B)(ii) speaks of “returns” filed “after the date on which such return ... was last due.” Id. As such, the Bankruptcy Court concluded that “ ‘[a]pplicable filing requirements' must refer to considerations other than timeliness, such as the form and contents of a return, the place and manner of filing, and the types of taxpayers that are required to file returns.” In re Martin, supra, 482 B.R. at 639.

As a result of this determination, the Bankruptcy Court then reviewed pre-BAPCPA case law that assessed whether a disputed document sufficiently complied with requirements concerning form, manner, contents, and place of filing, in order to be considered a “return” sufficient to avoid the discharge exception of § 523(a)(1)(B)(i). The Court noted that the most common rubric used to make such a determination is known as the “Beard test,” which indicates that to constitute a “return” a document must: “(1) contain sufficient information to permit a tax to be calculated; (2) purport to be a return; (3) be sworn to as such; and (4) evince an honest and genuine endeavor to satisfy the law.” In re Martin, supra, 482 B.R. at 640 ( citing Beard v. Commissioner, 82 T.C. 766, 774–79, 1984 WL 15573 (1984),aff'd,793 F.2d 139 (6th Cir.1986)).

When looking at the question of whether a filing constitutes a “return” for purposes of § 523(a)(1)(B)(i), the Bankruptcy Court noted that the Circuits have differed in their application of the fourth element of the Beard test when a taxpayer files a 1040 after assessment is made by the IRS. The Sixth, Fourth and Seventh Circuits have found that a 1040 form filed after an assessment “serve no tax purpose” and, thus, the debtor's actions in filing the belated 1040s were not an “honest and reasonable attempt to satisfy the requirements of the tax law.” Thus, these Circuits...