Rhodes v. United States (In re Rhodes)

• Decision Date: 06 May 2013
• Docket Number: Adversary No. 11–4074.,Bankruptcy No. 11–42890–PWB.
• Citation: 498 B.R. 357
• Parties: In the Matter of Edgar Leon RHODES, III, Debtor. Edgar Leon Rhodes, III, Plaintiff v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

498 B.R. 357

In the Matter of Edgar Leon RHODES, III, Debtor.

Edgar Leon Rhodes, III, Plaintiff

v.United States of America, Defendant.

Bankruptcy No. 11–42890–PWB.

Adversary No. 11–4074.

United States Bankruptcy Court,

N.D. Georgia,

Rome Division.

May 6, 2013.

Terry Haygood, Law Offices of Terry Haygood, Rome, GA, for Plaintiff.

Thomas F. Koelbl, U.S. Department of Justice, Washington, DC, for Defendant.

ORDER

PAUL W. BONAPFEL, Bankruptcy Judge.

The Chapter 7 Debtor seeks a determination that his federal income tax liabilities for the years 1999 through 2003 and 2005 are dischargeable. The United States has filed a motion for partial summary judgment that the tax debts for 1999 and 2000 are excepted from discharge under clause (i) of 11 U.S.C. § 523(a)(1)(B), which excepts tax debts for years in which a requiredtax “return” was “not filed or given.”

The Debtor filed tax returns for 1999 and 2000 after they were due and after the Internal Revenue Service (“IRS”) assessed the taxes for those years. The position of the United States is that the late-filed tax returns filed in these circumstances do not qualify as “returns” for purposes of clause (i) of § 523(a)(1)(B). Because no effective returns for the taxes were filed, the United States concludes, clause (i) excepts the taxes from discharge for want of a return.

For the reasons stated below, whether the Debtor filed tax returns that qualify as “returns” for purposes of clause (i) of § 523(a)(1)(B) presents material questions of fact that preclude the grant of summary judgment on this issue in favor of the United States. The Court will, therefore, deny its motion.

I. Introduction and Statement of Issues

Paragraph (1) of § 523(a) of the Bankruptcy Code¹ describes the types of taxes that a Chapter 7 discharge does not discharge in three subparagraphs.

Subparagraph (A) excepts taxes that are entitled to priority under 11 U.S.C. § 507(a)(8).² An income tax is entitled to priority under § 507(a)(8) only if the return for the tax was last due “after three years before” the filing of the bankruptcy petition, if the tax was assessed within 240 days of the filing of the petition, or if the tax was assessable after the filing of the petition. None of these provisions applies to the 1999 and 2000 taxes at issue in the Debtor's bankruptcy case filed in 2011 because the due dates for the returns and the tax assessments occurred more than, respectively, three years and 240 days before the bankruptcy filing.

Subparagraph (C) of § 523(a)(1) excepts a tax “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” The debts for 1999 and 2000 are potentially excepted from discharge under this paragraph, but the United States does not seek summary judgment on this ground.³

The United States grounds its motion on subparagraph (B), which has two clauses. Clause (i) provides that a Chapter 7 discharge does not discharge a debt for a tax if the debtor did not file a tax return at all, if required. 11 U.S.C. § 523(a)(1)(B)(i). If a debtor filed a late tax return, clause (ii) excepts the tax from discharge if the Debtor filed the tax return in the two years preceding the filing of the bankruptcy petition. 11 U.S.C. § 523(a)(1)(B)(ii).

The Debtor did not timely file his federal income tax returns for 1999 and 2000, so the IRS, in accordance with applicable procedures, assessed taxes for those years and filed notices of tax liens. Thereafter, in September 2006, the Debtor filed tax returns for these years, and the IRS adjusted his tax liability in accordance with those returns, increasing the tax for 1999 by $7,325.07 and abating $ 50,769.16 of the tax for 2000.

In its motion for partial summary judgment, the United States asserts that clause (i) of § 523(a)(1)(B) excepts the 1999 and 2000 taxes from discharge because the late-filed, post-assessment returns for these years do not qualify as “returns” within the meaning of § 523(a)(1). The United States appears to advance three arguments in support of this position.

First, the United States asserts that the tax liabilities arose from the tax assessments, not the late returns. Thus, the United States argues that the debts are for taxes for which returns were required and arose at a time when no returns had been filed. As such, the United States concludes, the requirements of clause (i) of § 523(a)(1)(B) are met: (1) a return was required but (2) was not filed at the time the debt arose, i.e., at the time of the assessment.

The second argument is that the tax returns the debtor filed for 1999 and 2000 do not meet the Bankruptcy Code's definition of a “return” for purposes of determining their dischargeability.

The definition of “return,” added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), appears in the Bankruptcy Code as an unnumbered provision following 11 U.S.C. § 523(a)(19). The Court refers to the provision as “§ 523(a)(*).” It states:

For purposes of this subsection [§ 523(a) ], 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 a similar State or local law.

The United States contends that, under this definition in § 523(a)(*), a “return” does not include a federal income tax return that a debtor files after the IRS has prepared a return for the debtor and assessed the tax. If this is so, the taxes are excepted from discharge under clause (i) of § 523(a)(1)(B) because the Debtor did not file a “return.” (Under this interpretation, clause (ii) is inapplicable because it deals only with a “return” that the Debtor filed.) The second issue then, is whether the late-filed, post-assessment returns the Debtor filed qualify as “returns” under the § 523(a)(*) definition of the term.

Finally, the United States contends that the returns do not qualify as a “return” for dischargeability purposes under a four-prong test enunciated in Beard v. Commissioner, 82 T.C. 766,aff'd793 F.2d 139 (6th Cir.1986) (per curiam) (the “Beard test”), that cases such as In re Hindenlang, 164 F.3d 1029 (6th Cir.1999), have adopted for determining whether an untimely return filed after the IRS has prepared a tax return for a debtor and assessed the tax qualifies as a “return” for purposes of clause (i) of § 523(a)(1)(B).

For reasons discussed below, the Court concludes that whether the Debtor filed returns for 1999 and 2000 requires application of Beard's four-prong test and that, therefore, clause (i) of § 523(a)(1)(B) does not except the debtor's liabilities from discharge as a matter of law. Issues of fact remain as to whether the Debtor can satisfy all four prongs of the Beard test. Accordingly, the United States is not entitled to partial summary judgment, and the Court will deny its motion.

II. Statement of Facts

The material facts are not in dispute.

For the tax year ending December 31, 1999, the Debtor timely failed to file a federal tax return. The IRS notified the Debtor that it had commenced deficiency procedures and sent him notice of the actual deficiency it asserted. Thereafter, in December 2002, the IRS assessed $109,587 in taxes, penalties, and interest for 1999.

The Debtor also failed to timely file a federal tax return for 2000. As before, the IRS notified the Debtor that it had commenced deficiency procedures and sent him notice of the actual deficiency. In May 2003, the IRS assessed $175,180 in taxes, penalties, and interest.

In May 2005, the IRS sent notice of the filing of a tax lien for the assessed and unpaid 1999 and 2000 taxes. The Debtor has made some payments on these taxes, but for present purposes the exact amount that the Debtor may have paid is not relevant.

In September 2006, after assessment of the taxes and the filing of tax liens, the Debtor filed tax returns for 1999 and 2000. The Debtor's calculations in his late-filed return for 1999 showed an additional liability of $7,325.07, which the IRS also assessed against the Debtor. The Debtor's late-filed return for 2000 showed a lower tax liability than the IRS had assessed, and the IRS abated $50,769.1 of the tax, penalties, and interest it had assessed. The amounts that the IRS seeks to collect correspond to the tax liabilities that the Debtor reported on his returns.

In sum, the undisputed facts are that, prior to filing bankruptcy: (1) the Debtor failed to file timely returns for 1999 and 2000; (2) the IRS sent notices of deficiencies, assessed taxes for those years, and filed notices of tax liens; and (3) the Debtor filed tax returns for these years after the assessments and filings of the tax liens.

III. Discussion

The United States asserts that clause (i) of 11 U.S.C. § 523(a)(1)(B) excepts the Debtor's tax liabilities for 1999 and 2000 from discharge. The legal issue is whether they are debts for taxes with respect to which a required return was not filed. If so, clause (i) of § 523(a)(1)(B) excepts them from discharge. If not, then § 523(a)(1)(B) does not except the taxes from discharge. Further, because the Debtor filed the returns more than two years before the filing of his bankruptcy petition, and clause (ii) of § 523(a)(1)(B) makes a tax debt nondischargeable when a debtor files a late return only if the filing occurs within the two years preceding the bankruptcy filing, clause (ii) does not except them, either. So if the Debtor filed qualifying returns for the 1999 and 2000 taxes, they are dischargeable unless subparagraph (C) of § 523(a)(1) excepts them, an issue that this Order does not address.

Section 523(a)(1)(B) provides in pertinent...