Discharge of taxes in bankruptcy

Ladies and Gents –

The Fifth Circuit just (1/4/12) issued an opinion that is going to change our world. (Or at least part of it.) In McCoy v. Mississippi State Tax Commission, 2012 WL 19376 (5th Cir. 2012), the court interpreted the hanging paragraph at the end of 523(a) which was added by BAPCPA. That paragraph provides:

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 a similar State or local law. [Emphasis added.]

The Fifth Circuit held that “applicable filing requirements” includes the requirement that a return be timely filed. If a “return” is not timely filed, it does not qualify as a “return” under 523(a). Congress has now defined “return” so that a real, actually filed return is not a “return” if it was filed so much as one day late. (Even if it was actually filed more than two years prior to the bankruptcy filing.) (If congress really wanted to change prior law, shouldn’t they have put the hanging paragraph at the end of 523(a)(1)(B)(ii) [instead of after the other 17 unrelated sub-paragraphs and sub-sub-paragraphs in 523(a)] or wouldn’t they have changed the existing wording of 523(a)(1)(B)(ii)? I am not arguing that the result is incorrect. It appears to be “correct” if you read all of this together. I am simply suggesting that this is one more example of a poorly conceived and/or drafted provision our “friends” in Washington left us with to sort out. Although McCoy involved state income tax returns, there is no basic difference between the Mississippi tax code and the Internal Revenue Code as far as filing requirements. (The Mississippi tax code also requires that returns be filed by April 15th.)

 Literally one week after McCoy,(1/11/12) Judge Lief Clark issued an opinion in Hernandez, v. U.S., Adv. No. 11-5126C (Bankr.W.D.Tex.2012) which made the same analysis with respect to the Internal Revenue Code. He reached the same conclusion Judge King did in McCoy.

To make sure that the client’s tax returns were timely filed, you should probably order a “tax account transcript” for each year in question. (Your client can sign the form so you can order these.)

I am absolutely certain this is not the end of the dispute/discussion over this issue, but advise your clients appropriately. Just my opinion, for what it’s worth.

Michael Baumer

Austin, Texas

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by Michael Baumer