DISCHARGING income taxes owed to the IRS in bankruptcy requires compliance with certain rules. One rule states that the taxes sought to be discharged is for a return that was filed at least three years before the bankruptcy filing. For instance, you owe $100,000 of income taxes to the IRS for the year 2010. You filed your tax return timely on April 15, 2011. You decide to file for Chapter 7 bankruptcy to discharge the $100,000, and your credit card debts of $60,000. Since it has been more than 3 years from April 15, 2010 to now which is April 23, 2014, you have complied with the 3-year rule to discharge taxes. Assuming you comply with the other rules, then your bankruptcy will discharge the $100,000. But, what happens if you filed your tax return LATE? Let’s say you filed your return on April 24, 2011, will your taxes be discharged? The answer is NO; they will not be discharged because it’s less than 3 years since you filed your tax return for the year 2010.
But if you lived in Massachusetts, there could be a different outcome even if you filed your tax return late. In Re Gonzales, was decided by the 1st Circuit court of appeals last month. On February 28, 2004, debtor filed his state income tax returns for tax years 1999 through 2002. On July 19, 2005, he filed his returns for tax years 2003 and 2004. All were filed LATE, but before any assessment was made by the Commissioner of Revenue. On April 19, 2010, debtor filed for Chapter 7 relief. He listed outstanding state income tax liabilities for 1999 through 2004 of $36,174. On September 23, 2010, the debtor received a discharge. In November 2011, debtor filed an adversary proceeding against the Massachusetts Department of Revenue (MDOR) asserting that his state income tax liabilities had been discharged. The MDOR ASKED FOR SUMMARY JUDGMENT ON THE BASIS THAT THE DEBTOR’S LATE FILED TAX RETURNS DID NOT QUALIFY AS “RETURNS” for purposes of Section 523(a), and that Section 523(a)(1)(B)(i) rendered non-dischargeable tax liabilities for which a return was not filed. The bankruptcy court ruled for the debtor. The 1st Circuit Court of Appeals AFFIRMED. The 1st Circuit found that the new bankruptcy law’s amendment to Section 523(a) provides an unambiguous definition of “return.” Therefore, the court said there was no need to determine whether pre new bankruptcy law rulings defining “return” were still applicable.
“Because Massachusetts law provides a definition of a ‘return’, we limit our examination to whether the debtor’s state tax returns that were filed after the deadline but more than two months prior to his bankruptcy filing, qualify as ‘returns’ within the Bankruptcy Code’s definition of ‘return’ set forth in Section 523…”, the court said. Massachusetts law defines “return’ as a taxpayer’s signed declaration of the tax due, if any, properly completed by the taxpayer or the taxpayer’s representative on a form prescribed by the Commissioner and duly filed with the Commissioner.” The law does not set a deadline for filing returns. Instead, the court said the law is concerned with what the taxpayer filed, not when it was filed. “Nowhere in the Massachusetts regulatory or statutory law, is it specified that a return will be deemed something other than a return in the event of its untimely filing. Thus, we discern no timeliness requirement encompassed in the applicable non-bankruptcy law which governs the specific situation confronting us, namely the case of late-filed-but pre-assessment – state income tax return. We need not delve into questions regarding the consequence of filing either a state or federal income tax return post- assessment, as that issue is not before us. Moreover, the MDOR did not conduct an assessment of the debtor’s tax liabilities prior to the filing of his belated returns.”
Concluding that the debtor’s late filed returns qualified as returns for purposes of determining the discharge of taxes, the court rejected a per se rule that any return that is filed late is not a “return” under Section 523(a).
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
