The law is clear that bankruptcy will only discharge income tax for which a return, if required, has been filed. However, Congress for many years left it up to the courts to determine exactly what the word “return” means. Courts have varied their definitions of “return”, with some courts using an objective approach and others applying a more subjective definition. The objective approach looks only at the tax return itself; the subjective approach also considers the intent of the taxpayer in determining what sort of document constitutes a return for bankruptcy purposes.
What is a Tax Return?
Requirements set forth in Beard v. Commissioner of Internal Revenue, 82 T.e. 766, 777 (T.e. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986) have generally been accepted as defining the essential elements of a tax return. Under the Beard test, for a document to qualify as a return it must:
(1) contain sufficient data to allow calculation of tax;
(2) purport to be a return;
(3) represent an honest and reasonable attempt to satisfy the requirements of the tax law; and,
(4) be signed under penalty of perjury.
Objective vs. Subjective Determination
The objective approach to defining a “return” is represented by In re Colsen, 446 F. 3d 836 (8th Cir. 2006). If the document looks like a tax return on its face, it passes the Colsen test. When submitted to the IRS it satisfies the filed return requirement. The subjective approach looks to see if the debtor made an “honest and reasonable attempt to satisfy the requirements of the tax law.” The subjective approach is found in US v. Hindenlang, 164 F. 3d 1029 (6th Cir. 1999). In Hindenlang the court determined that a document that otherwise meets the Beard criteria to qualify as a tax return, is not sufficient for bankruptcy dischargeability if filed after tax has been assessed by the IRS.
McCoy and the 2005 Amendments
In 2005, when Congress passed a substantial modification to the Bankruptcy Code, the code section that sets out a list of non-dischargeable debts, 11 U.S.C §523, was amended to include an unnumbered provision, often referred to as the “hanging” paragraph after §523(a)(19), which states in relevant part: ”the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.)” This 2005 change led to McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. Miss. 2012), in which the court decided that the failure to file a tax return in the time required by Mississippi tax law failed to satisfy the “applicable nonbankruptcy law” referred to in the hanging paragraph and tax due was not dischargeable.
A Conflict Between Different Parts of the Law
The McCoy interpretation of this new language creates a conflict. §523(a)(1)(B)(ii) has long prohibited the discharge of income tax due from an untimely tax return submitted within two years of the bankruptcy petition filing. If the court in McCoy is correct, this provision no longer has meaning. According to McCoy, and cases following the same reasoning, if the return is even one day late the tax due will not be discharged. If the tax is already non-dischargeable because the return is tardy, why does the same statute exempt tax from discharge on returns that have been filed for less than two years? This makes no sense. Courts carefully avoid any interpretation that makes statutory language meaningless. Absent legislative guidance the courts will continue to struggle with this problem.