The Courts, Congress and Tax Debts: An Analysis of the Discharge of Tax Debts Before and After the Enactment of the Bankrupcy Abuse Prevention and Consumer Protection Act of 2005
Fordham Journal of Corporate & Financial Law
Copyright c 2007 by the authors. Fordham Journal of Corporate & Financial Law is produced
by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl
For nearly 100 years, judges and scholars have understood that one
of the most important features of bankruptcy protection is the fresh start
afforded by a discharge pursuant to the Bankruptcy Code.1 Indeed,
bankruptcy laws play a crucial role in our national economy.2 “When
the economic structure of a country embraces risk-taking and
entrepreneurship, the legal system needs to provide a means to address
∗ J.D Candidate, Fordham University School of Law, 2007; B.S., Fordham
University College of Business Administration, 2004. I would like to thank Professor
Elizabeth Maresca, Supervising Attorney of Fordham University School of Law’s Tax
Litigation Clinic, for her insight and advice while researching on behalf of a client the
issue that led to this Note. I would also like to thank the members of the Fordham
Journal of Corporate & Financial Law, and in particular Aymen Aboushi, Notes &
Articles Editor, as well as his outstanding editorial team, for their tireless editing of this
Note until the eve of final exams.
1. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 HARV.
L. REV. 1393, 1394 (1985) (citing Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
Local Loan Co. stated that bankruptcy “gives to the honest but unfortunate debtor who
surrenders for distribution the property which he owns at the time of bankruptcy, a new
opportunity in life and a clear filed for future effort, unhampered by the pressure and
discouragement of preexisting debt.” Id. at 244. See also Jeffrey J. Cymrot, Otherwise
Dischargeable Tax Debt: In re Haas and Judicial Construction of 523(a)(1)(C), 2
DEPAUL BUS. & COMM. L. J. 25, 25 (2003).
2. Robert J. Landry, III & Nancy Hisey Mardis, Comment: Consumer Bankruptcy
Reform: Debtor’s Prison Without Bars or “Just Desserts” for Deadbeats?, 36 GOLDEN
GATE U. L. REV. 91, 93 (2006).
financial failures.”3 The United States’s modern codification of
bankruptcy laws has one basic goal—to promote the role of bankruptcy
law in adding to social stability in our society.4 Two ancillary goals are:
(1) to provide an equitable distribution of assets among creditors, and (2)
to provide debtors a fresh start via discharge of their debts.5 “Both goals
promote stability in dealing with the financial difficulties of people and
businesses,”6 and thus “add stability to financial transactions and
commerce, which in turn provides stability to society as a whole.”7
Not all debtors, however, are able to avail themselves of the fresh
start that bankruptcy law protection provides. Recent developments in
the courts and Congress have resulted in a barrier to the discharge of tax
liabilities. Although all citizens subject to the income tax have to file a
tax return and pay the tax they owe, 8 not all are able to pay that tax.9
The recent developments discussed below have resulted in obstacles that
may prevent those debtors who were unable to pay their tax debts from
getting those debts discharged through bankruptcy. This article will
discuss one specific tax issue—the discharge of tax debts for taxpayers
who file returns after the Internal Revenue Service has already prepared
their own returns and assessed taxes against them.
Part II of this article will describe the goals of bankruptcy
protection, and statutory rules governing the dischargeability of tax
liabilities.10 Part III will describe the Internal Revenue Service’s
authority to prepare returns on behalf of taxpayers and how courts have
treated these returns in deciding the discharge of tax debts.11 Part IV
will describe congressional action and discuss several critiques that were
6. Id. at 93-94.
8. I.R.C. § 6011(a) (2007). Section 6011(a) states:
When required by regulations prescribed by the Secretary any person made liable for
any tax imposed by this title, or with respect to the collection thereof, shall make a
return or statement according to the forms and regulations prescribed by the Secretary.
Every person required to make a return or statement shall include therein the
information required by such forms or regulations.
9. This is given from the fact that tax debts are dischargeable through bankruptcy.
See 11 U.S.C §§ 507, 523 (2007).
10. See Infra Part II.
11. See Infra Part III.
intended to solve a split among the circuit courts on this issue.12 Finally,
Part V will argue how courts should rule on this issue in pre-reform
cases, and will propose that Congress should repeal portions of the
Bankruptcy Act and return deference to the courts while ensuring that
the goals of bankruptcy protection are met.13
II. DISCHARGEABILITY OF TAXES
A. Of “Death and Taxes”14
The Internal Revenue Code15 (the “IRC”) requires all individuals
subject to tax under the Code to file a “return.”16 A return must be filed,
for calendar year taxpayers, on or before the 15th day of April the
following year.17 Unfortunately for both taxpayers and judges the term
“return” is not defined in either the IRC or the Bankruptcy Code.18 The
issue of what constitutes a “return” has been the subject of much
litigation under both the IRC and the Bankruptcy Code.19 This Part will
discuss the statutory requirements governing the dischargeability of tax
debts under the Bankruptcy Code before the passage of the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005.20
B. Tax Debts Meet the Bankruptcy Code
Although everyone has to file a tax return and everyone can apply
for bankruptcy protection if they need it, there are some restrictions on
what tax debts can be discharged. As discussed above, the Bankruptcy
Code allows citizens who have fallen into economic hardship to petition
for a discharge of their debts. Once a debtor has sought bankruptcy
protection and a discharge is granted, the debtor should be freed from all
of their tax debts.21 This, however, is not always the final result. For
instance, a case may be reopened by a creditor whose debts have been
discharged, or by a debtor who feels that a debt should have been
discharged but was not.22 Either party may seek to have a court evaluate
and decide whether or not a certain debt was rightfully discharged.23
The “party seeking to establish an exception to discharge of a debt bears
the burden of proof.”24 As for the burden of proof in such actions, the
Supreme Court has held that a party seeking an exception must prove
that the debt is exempted by a preponderance of the evidence.25
Although this rule is applicable to all types of discharged debts, a
narrower tax-related ruling can provide more relevant guidance. In
cases contesting the dischargeability of tax debts, the 11th Circuit has
held that “the Government has the burden to prove that
Section523(a)(1)(B), the exception to discharge provision concerning
tax liability, applies to the debtor’s delinquent tax return.”26 There are a
number of statutory requirements that must be satisfied in order to have
tax debts discharged through bankruptcy.
To determine whether a tax debt is dischargeable, a debtor must
make sure that his debts pass a number of tests. The first step in
determining the discharge of debts under the Bankruptcy Code presents
itself in Section 727.27 Section 727 provides that the court shall grant
the debtor a discharge unless the debts in question fall under one of the
exceptions found in the Bankruptcy Code.28 Section 523 is one such
exception, and lists certain debts that are excepted from discharge.29
21. 11 U.S.C. § 727 (2007).
22. 11 U.S.C. § 350(b) (2007) (“A case may be reopened in the court in which such
case was closed to administer assets, to accord relief to the debtor, or for other cause.”).
24. Klein v. United States (In re Klein), 2003 Bankr. LEXIS 18, at *6 (Bankr. D.
Fla. 2003) (citing In re Griffin, 206 F.3d 1389, 1396 (11th Cir. 2000)).
27. 11 U.S.C. § 727 (2007).
28. Id. § 727(a).
29. 11 U.S.C. § 523 (2007).
Under Section 523(a)(1), four types of tax debts are not dischargeable
under Section 727.30
First, a tax of the kind, and for the periods, specified in Section
507(a)(8) of the Bankruptcy Code will not be discharged.31 The second
tax debt that will not be discharged arises when a tax return is required
by the IRC but is not filed.32 Third, an exception to discharge is
provided for a tax, with respect to which a return was filed after the due
date, and after two years before the date of the filing of the petition.33
Lastly, tax debts stemming from a fraudulent return, or from which the
debtor willfully attempted in any manner to evade or defeat such a tax, is
The first test to determine whether a tax debt is dischargeable is
found in Section 523(a)(1)(A).35 This section provides that debts listed
under Section 507(a) are not discharged.36 Section 507(a) lists the
priority order of debts and states that the unsecured claims of
governmental units are given eighth priority,37 and are thus not
dischargeable unless certain requirements are met.38 These requirements
are known as the “Three-Year Rule” and “240-Day Test.” Whether a
tax debt is dischargeable under Section 507 depends on when the returns
were filed and when the IRS assessed the taxes.39
The “Three-Year Rule” exempts from discharge any taxes that were
due within the three-year period prior to the date of the filing of the
bankruptcy petition.40 This requirement pertains to when returns are
filed. Next, we come to the “240-Day Test.” The “240-Day Test” states
that if a tax was assessed within 240 days prior to the filing of the
bankruptcy petition, it will be classified as an eighth priority,
nondischargeable, tax debt.41 This is the assessment requirement. The next
exception to discharge states that a tax debt will not be discharged unless
a return has been filed.42
The Bankruptcy Code also provides an exception to discharge for
any tax if an individual did not file his return on time, but instead filed
late, and this late-filing date was after two years prior to the date of the
filing of the bankruptcy petition.43 This requirement seems to be aimed
at debtors who wait until the last minute before filing all outstanding tax
returns.44 If a taxpayer files his tax returns after they are due, and this
filing is within the two years prior to petitioning for bankruptcy, the tax
debts will be excepted from discharge.45
The last test to determine whether a tax debt is dischargeable
concerns the mental state or intent of the debtor. A tax debt will not be
discharged if the debtor “made a fraudulent return or willfully attempted
in any manner to evade or defeat such tax.”46 The importance of this
requirement will be discussed below. Some court decisions holding that
late-filed returns are not “returns” for the purposes of discharge seem to
have written this test out of the section.47 As described in more detail
below, some courts have looked to the debtor’s intent in filing a return
after the IRS has already prepared substitutes and assessed taxes, and
have used this time lapse to prevent the discharge of these debts. There
are a number of reasons why courts have come to this conclusion. The
definition of a return and how courts have treated late returns will be
discussed in more detail below.48
42. 11 U.S.C. § 523(a)(1)(B)(i) (2007).
43. Id. § 523(a)(1)(B)(ii).
44. United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1032 (1999).
The court stated that
[t]his provision appears to serve two purposes. First, the requirement of a two-year
waiting period after filing a late return but before seeking discharge prevents a debtor
who has ignored the filing requirements of the Internal Revenue Code from waiting
until the eve of bankruptcy, filing a delayed but standard tax return form, and seeking
discharge the next day.
45. 11 U.S.C. § 523(a)(1)(B)(ii) (2007).
46. Id. § 523(a)(1)(C).
47. United States v. Payne (In re Payne), 431 F.3d 1055, 1062 (2005) (Easterbrook,
J., dissenting). Judge Easterbrook, in rejecting the majority’s conclusion, stated that
[i]f employment of a document to avoid paying taxes renders that document a
nonreturn, then § 523(a)(1)(C) serves no function, for it supposes that a “return” has been
filed (else § 523(a)(1)(B)(i) would foreclose discharge). If a document designed to
game the system is not a “return” in the first place, then no court would ever get to
See infra Part III.
These requirements must all be met before a tax debt will be
discharged. A plain reading of the statute reveals that the rules appear to
be aimed at preventing abuse of the bankruptcy system. Courts have
also analyzed what Section 523 is meant to address. Courts have noted
that Section 523 seems to serve two purposes.49 The two-year waiting
period after filing but before petitioning for relief will prevent debtors
who have ignored their filing requirements “from waiting until the eve
of bankruptcy, filing a delayed but standard tax return form, and seeking
discharge the next day.”50 This waiting period provides “notice and an
opportunity to act, giving the IRS time to seek payment by levy or court
proceeding.”51 Also, the fact that discharge is denied if a debtor has
filed fraudulent returns, or attempted to evade taxes, “corresponds with
the notion that ‘good faith and candor are necessary requisites to
obtaining a fresh start.’”52
Inescapable is the observation that the term “return” is used quite
frequently in these code sections.53 Even though every individual
subject to the tax code must file a return, the term is not defined. If an
individual files for bankruptcy, what constitutes a “return” can often
play an important role in deciding whether a debt is or is not discharged.
Whether a document constitutes a “return” can make it more difficult to
evaluate whether a taxpayer has met all of the above requirements. The
next part of this Note will discuss how courts have grappled with the
issue of how to define a “return” for the purposes of both the IRC and
the Bankruptcy Code.
III. WHAT CONSTITUTES A RETURN
As stated above,54 the IRC and the Bankruptcy Code do not define
“return;”55 courts, in evaluating whether a document is a return, have
found it “appropriate to look to the IRC to determine the proper
49. Hindenlang, 164 F.3d at 1032.
52. Id. (quoting Industrial Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124,
1129 (6th Cir. 1991) (citation omitted).
53. See 11 U.S.C. §§ 507, 523 (2007).
54. See supra notes 18-19.
55. United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1032-33 (“The
Bankruptcy Code simply adopts the term ‘return’ without defining it further.”).
definition of return.”56
A good starting point comes from Black’s Law Dictionary, which
defines a “tax return” as:
[t]he form on which an individual, corporation, or other entity
reports income, deductions, and exemptions and calculates their tax
liability. A tax return is generally for a one year period, however, in
some cases, the period may be less than a year. A federal tax return
is filed with the Internal Revenue Service, and a state return is filed
with the revenue department of the state.57
Although some courts will mention this definition, most courts then go
on to apply a four-prong test to determine whether a filing with the IRS
constitutes a “return.”58 This test was developed from two Supreme
Court cases, Germantown Trust Co. v. Commissioner,59 and Zellerbach
Paper Co. v. Helvering.60
The Tax Court, in Beard v. Commissioner61 combined the
principles laid out in Germantown and Zellerbach.62 The Beard court
The Supreme Court test to determine whether a document is
sufficient for statute of limitation purposes has several elements:
First, there must be sufficient data to calculate tax liability; second,
the document must purport to be a return; third, there must be an
honest and reasonable attempt to satisfy the requirements of the tax
law; and fourth, the taxpayer must execute the return under penalties
In most cases considering this issue, the first, second, and fourth
prongs are easily disposed of, often by stipulation.64 Whether or not
sufficient data to calculate tax liability has been provided must be
evaluated on a case-by-case basis. The requirement that a document
must purport to be a return deals with the physical form of the document
on which the data is provided.65 This is often satisfied quickly because
most of the cases discussed below will note that the returns are forms
provided by the IRS.66 Next, the document must be signed and executed
under penalty of perjury.67 This will be judged by whether the taxpayer
or debtor has signed the return.68 The most contentious requirement is
that the return must be an honest and reasonable attempt to satisfy the
tax laws.69 This prong is the basis for the split described below.
IV. SUBSTITUTES FOR RETURNS
Although all individuals subject to the income tax must file a
return, not all do so, or do so correctly. If a taxpayer files a valid return
and it is accurate, the amount of tax owed or the amount of a refund due
is assessed. If it is inaccurate, the Commissioner of the Internal
Revenue Service has the authority to adjust the amount owed and notify
the taxpayer.70 If a taxpayer does not file a return, the IRC provides
procedures and authority for the Commissioner to prepare and file a
return on that taxpayer’s behalf.
A. Authority for Filing of Substitute Returns
As described above, all individuals subject to the IRC must file a
return.71 If an individual required to create and file a return does not do
so, the IRC grants authority to the Secretary to prepare returns in their
absence.72 IRC Section 6020 provides two alternative ways in which
this return can be prepared. First, if an individual fails to make a return,
but “shall consent to disclose all information necessary”73 to prepare
one, then “the Secretary shall prepare such return, which, being signed
by such person, may be received by the Secretary as the return of such
Second, if an individual does not file a return or files a fraudulent
return, the Secretary can prepare a return based on information from
other sources.75 If no return is filed, or if a fraudulent return is filed,
“the Secretary shall make such return from his own knowledge and from
such information as he can obtain through testimony or otherwise.”76
This information used to calculate the tax often comes from third
parties.77 The return prepared and executed by the Secretary “shall be
70. I.R.C. § 6212 (a) (2007). Section 6212(a) states that:
If the Secretary determines that there is a deficiency in respect of any tax imposed by
subtitles A or B or chapter 41, 42, 43, or 44 he is authorized to send notice of such
deficiency to the taxpayer by certified mail or registered mail. Such notice shall
include a notice to the taxpayer of the taxpayer’s right to contact a local office of the
taxpayer advocate and the location and phone number of the appropriate office.
prima facie good and sufficient for all legal purpose.”78
If an individual does not file a return and the Secretary prepares one
for him based on outside information, it is known as a substitute for
return (“SFR”).79 These SFRs have been the subject of much litigation,
and courts have ruled on them in a variety of circumstances. In
considering SFRs, courts have stated that “[t]he Internal Revenue
Code’s deficiency procedures ‘do not require the Commissioner to
prepare a return on a taxpayer’s behalf before determining and issuing a
notice of deficiency.’”80 If the IRS does not prepare SFRs under
§ 6020(b) they may still assess taxes and attempt to collect those debts.81
This SFR is a discretionary tool for the IRS. The SFR has different
weight depending on what tax issue has arisen. This determination is
often complicated by taxpayer-prepared tax returns that are filed after
SFRs have been prepared and taxes have been assessed. The discharge
of tax liabilities through bankruptcy protection is one such area.
B. Court Treatment of Substitutes for Returns
An issue arose when judges had to decide whether an SFR, or a
return filed after an SFR has been prepared and executed, constituted a
return for the purpose of dischargeability under the Bankruptcy Code.
Courts have split on the issue. The Fourth,82 Sixth83 and Seventh84
circuits are all in agreement that a Form 1040 filed after the IRS has
made an assessment is not “an honest and reasonable attempt to satisfy
the tax laws.”85 But the Eight Circuit does not agree with this
conclusion, and has stated that “to be a return, a form is required to
‘evince’ an honest and genuine attempt to satisfy the laws.”86 The Ninth
Circuit87 has not ruled on this exact issue, but a case deciding an
ancillary issue will be described below as it will illuminate how this
Circuit has ruled on the question of what constitutes a “return.”
V. COURT TREATMENT OF RETURNS VS. SUBSTITUTES FOR RETURNS
Before analyzing court decisions, an example may help to lay a
helpful foundation from which to proceed. This fact pattern will be akin
to the cases discussed below. Consider this hypothetical taxpayer: he or
she does not file tax returns for 3 years. The IRS becomes aware of this,
it investigates, and then prepares SFRs. Once these substitutes are
prepared, taxes based on those calculations are assessed. Later, the
taxpayer files his returns, albeit a few years late. Three years later, the
taxpayer files for bankruptcy, and asks the court to discharge those tax
debts. The issue here is whether that late-filed return constitutes a return
for the purposes of discharge. As discussed above, courts were split
over how SFRs and late-filed returns were to be treated when evaluating
whether tax debts were discharged through bankruptcy. This part of the
Note will describe the two leading lines of cases concerning this issue.
In United States v. Hindenlang,88 the United States Court of
Appeals for the Sixth Circuit became one of the first appellate courts to
rule on this issue. In Hindenlang, debtor William Hindenlang did not
file tax returns for years 1985 through 1988.89 After sending
Hindenlang notices of proposed deficiencies, the Internal Revenue
Service prepared and sent substitutes for returns for the years at issue.90
Bankr. Court for Middle District of Florida, 2006) (stating that, at the time, “[t]here is a
three to one split amongst the circuit courts of appeal regarding what constitutes an
‘honest and reasonable attempt’”).
86. Colsen v. United States (In re Colsen), 446 F.3d 836, 840 (8th Cir. 2006).
87. United States v. Hatton (In re Hatton) 220 F.3d 1057 (9th Cir. 2000).
88. United States v. Hindenlang (In re Hindenlang), 164 F.3d at 1034 (6th Cir.
89. Id. at 1031.
When Hindenlang did not respond or execute the substitutes, the Internal
Revenue Service sent statutory notices of deficiency.91 Because
Hindenlang did not petition the tax court to challenge the deficiencies,
the Internal Revenue Service was allowed to assess the amounts owed
on his account.92 Two years after this assessment, in 1993, Hindenlang
sent the Internal Revenue Service “what was purported to be individual
income tax returns for the years in question.”93 About four years later,
Hindenlang filed for chapter 7-bankruptcy protection, and instituted an
adversary proceeding to find out whether the tax liabilities at issue were
After noting that there were no factual issues to decide, the court
moved to the legal question of what constitutes a return.95 Pointing out
that there was no statutory definition of return, and laying out the prongs
of the Beard test, the court set out to apply the four prongs to the
specific facts at issue.96 The court quickly dispensed with three of the
four prongs, leaving only “whether Hindenlang’s Forms 1040, filed after
the IRS had made a formal assessment, ‘represent an honest and
reasonable attempt to satisfy the requirements of the tax law.’”97
The Sixth Circuit stated:
We hold as a matter of law that a Form 1040 is not a return if it no
longer serves any tax purpose or has any effect under the Internal
Revenue Code. A purported return filed too late to have any effect at
all under the Internal Revenue Code cannot constitute “an honest and
reasonable attempt to satisfy the requirements of the tax law.”98
The court further concluded that:
91. Id.; see also I.R.C. § 6212(a).
92. 164 F.3d 1029, 1031.
95. Id. (“There are no material disputed fact issues in this case, so we proceed to
the legal issue.”).
97. Id. at 1034. The Court stated:
First, there is no question that the Forms 1040 submitted by Hindenlang purported to
be returns. Hindenlang used the proper form required by the IRS regulations and filed
the completed forms with the IRS. Second, Hindenlang executed these forms under
penalty of perjury. Third, the forms included all the data needed to calculate
Hindenlang’s tax liability. Indeed, as indicated above, the forms were simply mirror
images of the Substitutes for Returns completed by the IRS.
[W]hen the debtor has failed to respond to both the thirty-day and the
ninety-day deficiency letters sent by the IRS, and the government
has assessed the deficiency, then the Forms 1040 serve no tax
purpose, and the government thereby has met its burden of showing
that the debtor’s actions were not an honest and reasonable effort to
satisfy the tax law.99
The narrow result of this case was that the court ruled that
Hindenlang’s tax debts were not discharged.100 In a broader sense, this
case had a much larger impact. The court never had a basis in fact for
why Hindenlang filed late: because the ruling is as a matter of law, a
debtor who, for whatever reason, filed returns after substitutes have been
prepared and taxes assessed can never have those debts discharged.
That the question is decided as a matter of law seems incongruent to the
main goal of bankruptcy: the fresh start. This does not allow for a
caseby-case evaluation of every taxpayer. While this ruling will
undoubtedly prevent some dishonest debtors from abusing the
bankruptcy code, it will also prevent those who do have a legitimate
reason for filing late from ever getting their debts discharged.
Unfortunately for debtors, this case has provided the basis for most of
the other circuit court rulings on this issue.
The Ninth Circuit Court of Appeals considered the dischargeability
of tax debts in In re Hatton.101 While the facts in Hatton are slightly
different from the other cases discussed herein, it is useful to analyze
how the court in that case defined the term “return.”102 The main
question the court faced was “whether the substitute return prepared by
the IRS, the installment agreement signed by Hatton, or a combination
of both, constitute a tax “return” under 11 U.S.C. § 523(a)(1)(B)(i).”103
The court noted the purpose behind Section 523(a)(1): that “‘a debtor
should not be permitted to discharge a tax liability based upon a required
tax return that was never filed.’”104 The court had earlier decided “that
100. Id. at 1035 (“For the reasons stated above, we reverse the judgment of the
101. United States v. Hatton (In re Hatton), 220 F.3d 1057 (2000).
103. Id. at 1059.
104. Id. at 1060 (citing California Franchise Tax Bd. v. Jackson (In re Jackson), 184
the term ‘return’ should be given a strict construction and interpreted in
accordance with its ordinary meaning.”105
After analyzing the definition of “return” under the Beard test,106
the court ruled that the tax liabilities should be excepted from
discharge.107 The court held that the return and installment agreement
did not constitute a return under the four prongs because they were not
signed under penalty of perjury, and did not constitute an honest and
reasonable attempt to satisfy the tax laws.108 The court stated that
because Hatton “made every attempt to avoid paying his taxes until the
IRS left him with no choice,” his “belated acceptance of
responsibility . . . does not constitute an honest and reasonable attempt
to comply with the requirements of the tax law.”109
The Sixth Circuit was not the only court to face this issue, and the
majority of courts that have ruled have adopted a similar position. The
Fourth Circuit Court of Appeals considered this issue in Moroney.110
Debtor Moroney did not submit timely income tax filings for 1990 or
1992.111 As a result of this failure to file, the IRS began to examine
Moroney’s income tax liabilities in 1994, and prepared substitutes.112
On the basis of these substitutes, the IRS assessed taxes in the amounts
of $23,197.00 for 1990 and $45,567.00 for 1992.113 Moroney later filed
tax statements for these two years, but there was a dispute as to when
they were filed.114 One fact important to this case is that because the tax
liabilities on Moroney’s late-filed returns were less than the previous
IRS assessments, the IRS abated the tax due based on these late-filed
Moroney filed for Chapter 7 bankruptcy protection on March 23,
2000.116 After the IRS notified Moroney that, in their view, his tax
debts were not dischargeable, the two parties filed cross-motions for
summary judgment in the bankruptcy court.117 The facts here are similar
to those in Hindenlang, and mirror the hypothetical set out above. The
bankruptcy court ruled,118 and the district court on appeal affirmed,119
that Moroney’s returns did not satisfy the requirement of a return in
Section 523, and were therefore excepted from discharge.120 Appeal
from the district court led to this case.
The question on appeal was “whether delinquent personal income
tax filings, submitted years after [the IRS had] already prepared its own
assessments, constitute[d] ‘returns’ for purposes of the bankruptcy
code.”121 As in many other cases dealing with this question, the court
began with the Beard test, quickly ruled that three of the four prongs
were satisfied, and focused on “whether Moroney’s statements were
honest and reasonable attempts to satisfy the filing requirements
imposed by the bankruptcy and tax laws.”122 The issue was then
narrowed even further: the IRS and Moroney disagreed “about the
relevant time frame in which to assess the honesty and reasonableness of
Moroney’s belated statements.”123 Moroney’s position was that the
relevant time frame was the time at which the returns were filed.124 The
IRS took the opposite position: “The IRS, however, rejoins that most
courts have not ignored a debtor’s delinquency in filing, especially
where the IRS’s interim preparation of a SFR renders the debtor’s filing
unnecessary.”125 The court adopted the IRS position, stating that “to
belatedly accept responsibility for one’s tax liabilities, only when the
IRS has left one with no other choice, is hardly how honest and
reasonable taxpayers attempt to comply with the tax code.”126
Importantly, this decision was based on the effort that the IRS had to
expend in order to calculate his tax liability, and the underpinnings of
the tax system as a whole.127
This ruling did not go as far as the holding in Hindenlang. Instead,
the Moroney court held that “income tax forms unjustifiably filed years
late, where the IRS has already prepared substitute returns and assessed
taxes, do not constitute “returns” for purposes of 11 U.S.C.
§ 523(a)(1)(B)(i).128 Indeed, in an effort to make the outer limits of its
decision clear, the court stated that
the government urges a broader rule than we adopt here, namely that
any post-assessment filing can never qualify as a return for purposes
of Section 523(a)(1)(B)(i). This simply goes too far. Circumstances
not presented in this case might demonstrate that the debtor, despite
his delinquency, had attempted in good faith to comply with the tax
This rejection of the Hindenlang bright-line rule is important,
because it shows judicial recognition of a case-by-case analysis to
ensure that those who are deserving of discharge are granted it, while
those who do not, are not.
As mentioned above, the IRS abated the amount Moroney owed
based on his late-filed returns. This is important because the late-filed
returns clearly served a purpose—the IRS relied on, and believed them
to be accurate. This is in direct contrast to the IRS position that it had
wasted time and effort calculating his tax liabilities. If the test was
whether the IRS had spent time and effort calculating the non-filer’s tax
126. Id. at 906.
127. Id. (“[A]s a result of his failure, the IRS had to assume the onerous task of
estimating Moroney’s taxes without his assistance . . . . The very essence of our system
of taxation lies in the self-reporting and self-assessment of one’s tax liabilities.”).
128. Id. at 907.
liability, then why did the IRS abate the tax owed? This seems to
conflict with the reason why courts side with the IRS.
The court took notice of this argument. “Rather, because his
statements showed lesser liabilities than the IRS had estimated, the IRS
abated portions of its prior assessments. In Moroney’s view, his
statements must be considered honest and reasonable attempts to comply
with the tax laws—after all, the IRS credited them enough to reduce his
assessments.”130 The court rejected this argument, stating that:
The relevant inquiry is whether Moroney made an honest and
reasonable effort to comply with the tax laws, and not whether
Moroney’s eventual effort had some effect on his tax liability.
Under Moroney’s approach, the availability of discharge would turn
on the IRS’s accuracy in assessing taxes, rather than on Moroney’s
sincerity and diligence in complying with the tax code.131
To accept Moroney’s argument would also have another
undesirable effect: the IRS would be discouraged from abating any
debtor’s tax liabilities, because even the smallest adjustment could lead
to the discharge of the entire tax liability.132
The rationale behind the court’s rejection of Hindenlang’s
holding—that, as a matter of law, these returns can never serve a
purpose—is important. The court, although it rejects the discharge
here,133 does recognize that there may be taxpayers who do not file on
time, but are still deserving of discharge.134 In order to ensure that those
deserving of discharge are given it, there must be a case-by-case review
of the reasons for the late-filing. This allows for taxpayers who need
and are deserving of a fresh start to explain themselves. This individual
132. Id. at 907. (“Moroney’s approach would only discourage the IRS from abating
debtor’s tax liabilities—especially when any adjustment, no matter how small, would
lead to a discharge of the entire tax liability, no matter how large.”).
133. Id. The court concluded:
Here we face only a debtor who was apparently too busy, for no less than six years, to
file returns, and whose ultimate filing was merely an attempt to lessen the liability that
he never wanted to assume. Under these circumstances, we cannot hold that Moroney
filed a return in any meaningful sense of that word. We thus affirm the judgment of
the district court.
134. Id. (providing an example of “a post-assessment filing that might actually
increase a taxpayer’s liability”) (emphasis added).
analysis of the case before the court will also allow judges to ferret out
those dishonest debtors who are attempting to abuse the protections
afforded by the bankruptcy code. The Seventh Circuit later adopted this
approach, as will be discussed below.
i. Posner’s Majority Opinion
The United States Court of Appeals for the Seventh Circuit ruled on
this issue in In re John Howard Payne.135 The facts in Payne are similar
to other cases dealing with this issue. Payne did not file tax returns for
1986 to 1992.136 The IRS investigated, and assessed taxes for 1986.137
Payne filed his 1986 return, and a few months later, in 1992, sought a
compromise on the amount owed.138 The IRS rejected a compromise,
and Payne filed for bankruptcy in 1997.139 The bankruptcy court
granted a discharge for this 1986 tax owed, and the IRS argued that this
debt was exempted from discharge.140 After laying out the four prongs
of the Beard test,141 Judge Posner, writing for the majority, stated:
A purported return that does not satisfy all four conditions does not
play the role that a tax return is intended to play in a system, which is
our federal tax system, of self-assessment. So while a “return” that
satisfies the first three conditions comports with the literal meaning
of the word, it does not comport with the functional meaning.142
Although the majority notes that the Hindenlang decision held that
“a return filed after the assessment of tax can never be adjudged an
honest and reasonable endeavor to comply with the tax law,”143 the
court, as those in Hatton and Moroney before it, did not want to extend
the holding to a further extent.144 The majority noted that “[t]here might
as we have said be circumstances beyond a taxpayer’s control that
prevented him from filing a timely return, or even asking for an
extension of the time to file, before the tax was assessed.”145 Because
Payne did not offer a valid excuse for his lateness,146 the court found that
his tax debts should be excepted from discharge.147
Thus, with Payne, another circuit court has expressly reasoned that
there may be instances in which a taxpayer who did not file until after
substitutes had been prepared and taxes assessed should be given the
fresh start afforded by discharge through bankruptcy. This was not,
however, a unanimous decision. Judge Easterbrook filed a dissenting
opinion rejecting this analysis.
ii. Easterbrook’s Dissent in Payne
The decision in Payne was 2-1, with Judge Easterbrook filing a
dissenting opinion.148 His opinion is based on two premises. The first is
that the majority “conflates disclosure with substance.”149 Judge
Easterbrook goes on to state that “[t]he portion of the Internal Revenue
Code that must be satisfied honestly and reasonably, if a document is to
be called a return, is the statute requiring revelation of financial
information, not the statute requiring payment.”150 The second premise
in his dissenting opinion concerns why Payne filed late returns. The
majority stated that Payne’s “purpose in filing the belated return was to
satisfy a condition precedent to obtaining a discharge, rather than to pay
any of the taxes he owed.”151 The dissent’s problem with this is that
“Payne’s purpose is a question of fact, and as far as [the dissent] can see
the United States does not even contend that Payne had such a
purpose.”152 This is indicative of a problem common to cases dealing
with this issue. Many cases are fully stipulated as to the facts, before
146. Id. at 1057. In analyzing whether the “honest and reasonable attempt” prong
was satisfied, Judge Posner stated that “[a]ll but the fourth condition is satisfied by
Payne’s belated return. That condition . . . is not satisfied, and not only or even mainly
because Payne offers no excuse for having failed to file his 1986 return until six years
after it was due.” Id.
147. Id. at 1060 (“The judgment is reversed with directions to deny the discharge.”).
148. Id. (Easterbrook, J., dissenting).
149. Id. at 1061.
152. Id. (emphasis in original).
trial, and there often is no record as to why the returns were filed so
late.153 Most courts resolve this issue on cross-motions for summary
judgment, without a hearing or trial on the reason for the late-filing.
This lack of facts often prevents courts from ruling as to whether a
latefiled return meets the “honest and reasonable attempt to satisfy the tax
The dissent concluded by stating that “[t]he document that Payne
filed is a tax return because it contains all of the required information
and may have helped the agency . . . .”155 Looking to why a person filed
late would make Section 523(a)(1)(C) useless, because if someone were
to use a Form 1040 to evade paying taxes, then under this test it would
not be a return—therefore (a)(1)(c) would not be applicable, because
you need to have a return filed to reach (a)(1)(c). If the reason for why
someone files is relevant in deciding if a document is a return under
§ 523(a)(1)(B)(i), then the intent in § 523(a)(1)(C) becomes irrelevant,
because the government could argue for nondischarge under (B)(i), and
never need to reach (C).
It seems that all four cases follow a similar pattern. One court held
as a matter of law that late-filed returns filed after substitutes had been
prepared and taxes assessed could never be discharged.156 Three other
courts did not go that far, noting that there were some instances in which
the debts should be discharged.157 Though this may be the case, Judge
Easterbrook’s dissenting opinion158 nonetheless had quite an impact.
Indeed, as discussed below, the Ninth Circuit was persuaded by Judge
Easterbrook’s dissent, and followed his reasoning.
Not all courts follow the reasoning in Hindenlang and subsequent
153. See, e.g., United States v. Hindenlang (In re Hindenlang) 164 F.3d 1029, 1032
(1999) (“There are no material disputed fact issues in this case, so we proceed to the
legal issue.”); Moroney v. United States (In re Moroney) 352 F.3d 902, 904 (2003)
(“The IRS and Moroney filed cross-motions for summary judgment before the
bankruptcy court . . . .”); In re Payne, 431 F.3d at 1062 (Easterbrook, J., dissenting)
(“But we can’t do that now, because the bankruptcy judge did not make (and was not
asked to make) a finding on that subject.”).
154. In re Payne, 431 F.3d at 1062 (Easterbrook, J., dissenting).
155. Id. at 1062.
156. See supra notes 89-101, and accompanying text.
157. See supra notes 111-35 and 136-48 and accompanying text.
158. See supra notes 149-54 and accompanying text.
cases holding that late-filed returns after SFRs have been prepared and
taxes have been assessed are not an honest and reasonable attempt to
satisfy the tax laws. The Court of Appeals for the Eighth Circuit
recently rejected the Hindenlang bright-line rule in Colsen v. United
States.159 The facts in Colsen are substantially the same as in
Hindenlang. Debtor Colsen did not file tax returns for 1992-1996.160
The IRS prepared substitutes, and issued statutory notices of
deficiency.161 By the middle of 1999, the IRS had assessed taxes,
interests, and penalties.162 Mr. Colsen filed Forms 1040 for 1992-1998
in late 1999, then waited four years, and filed for Chapter 7 bankruptcy
protection.163 The Eighth Circuit, before applying the Beard test to the
facts at issue, discussed how other circuit courts treated this issue.164
Although the Fourth, Sixth, and Seventh Circuits had all ruled against
late-filed returns qualifying as returns for dischargeability, the court
discussed Judge Easterbrook’s dissent in Payne,165 then stated, “[w]ith
due regard to the opinions of the other circuits, we find Judge
Easterbrook’s arguments persuasive.”166
The Eighth Circuit stated that looking into the reasons why a return
was filed late is not required. An inquiry into the circumstances
surrounding a document’s filing was not required. A tax form, to be
categorized as a “return,” is only “required to ‘evince’ an honest and
genuine attempt to satisfy the laws.”167 This reasoning was based on the
court’s analysis of the Supreme Court ruling in Badaracco168—one of
the cases that led to the formulation of the Beard four-prong test—and
that Court’s analysis of the fourth prong specifically.169 The Eighth
Circuit stated that “[t]he Supreme Court’s objective assessment in
Badaracco is compatible with the requirements of Beard,”170 and that
“the fourth Beard criterion contains no mention of timeliness or the
filer’s intent.”171 Further, the Colsen court stated that it had been
“offered no persuasive reason to create a more subjective definition of
‘return’ that is dependent on the facts and circumstances of a taxpayers
filing.”172 The court declined to do so because “to do so would increase
the difficulty of administration and introduce an inconsistency into the
terminology of the tax laws.”173 The court concluded by holding that
“the honesty and genuineness of the filer’s attempt to satisfy the tax laws
should be determined from the face of the form itself, not from the
filer’s delinquency or the reasons for it . . . [t]he filer’s subjective intent
This holding, that the reason for the late filing is irrelevant, goes
further than all other circuit court rulings on the issue, and is in direct
opposition to the Hindenlang holding. At this point, the courts of
appeals have provided a wide range of rulings on how to treat late-filed
returns when ruling on the dischargeability of tax debts. As discussed
above, the four-prong Beard test was developed by the Tax Court.175
This Tax Court definition provided the basis for what constitutes a
return, and it would be helpful to see how this definition has withstood
the test of time. Before addressing congressional action to solve this
problem, a recent Tax Court ruling will be discussed.
G. Tax Court Decisions
The United States Tax Court was the origin of the four-prong Beard
test.176 Although the Tax Court has not ruled on the exact issue of
whether a return filed after SFRs have been prepared and taxes assessed
can qualify as a “return” for debt discharge, they have continued to use
the four-prong Beard test in other situations. In Swanson v.
Commissioner of Internal Revenue177 the court was asked to rule on
whether or not a taxpayer’s tax liabilities were discharged.178 After first
175. See supra notes 62-69.
177. 121 T.C. 111 (2003).
178. Id. at 122 (“The relevant issue is whether the SFRs prepared by respondent in
this case constitute ‘returns’ within the meaning of 11 U.S.C. sec. 523(a)(1)(B). This is
the first opportunity that this Court has had to consider the issue.”).
considering and then finding that the Tax Court had jurisdiction to rule
on the claim,179 the court was asked to determine whether the taxpayer’s
debts were discharged.180 The Swanson case is somewhat different from
the other cases discussed in this Note because the taxpayer never filed
returns after the Internal Revenue Service had prepared substitutes.181
One interesting line in Swanson concerns the level of effort needed
to prepare an SFR. The court states that “[t]he preparation of an SFR by
the Commissioner is a simple administrative step which allows the
assessment and collection process to begin.”182 This is at odds with how
other courts have characterized the effort required to prepare an SFR.183
Here, the Tax Court concluded by ruling that the debtor’s tax liabilities
were not dischargeable.184
H. The IRS’s Position
The IRS has taken the position that a return filed after SFRs have
been prepared and taxes have been assessed can never serve a purpose.
The IRS has consistently urged the courts in the cases herein to adopt
this position,185 and will likely do so in current and future cases. This
area of law is not clear. There does not appear to be one consistent rule
for courts to apply when confronted with this issue. Congress attempted
to remedy this state of affairs in 2005.
VI. CONGRESSIONAL ACTION
Congress attempted to solve the courts’ disagreements of what
constitutes a return when it enacted the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (the “BAPCPA”).186 The Senate
passed BAPCPA on March 10, 2005 by a vote of 74 to 25.187 On that
same day, President Bush issued a statement “supporting the Senate’s
‘strong bipartisan vote . . . to curb abuses of the bankruptcy system’ and
urging the House ‘to act quickly.’”188 The House passed BAPCPA on
April 14, 2005, by a vote of 302 to 126,189 and it was signed into law on
.190 Most of the changes made to the bankruptcy code,
with some exceptions, became effective on October 17, 2005.191
At the signing, President Bush made a number of statements about
why the BAPCPA was important.192 The President said, “bankruptcy
laws are an important part of the safety net of America . . . they give
those who cannot pay their debts a fresh start,”193 but “[i]n recent years,
too many people have abused the bankruptcy laws.”194 Noting that the
goals of bankruptcy laws are to “give those who cannot pay their debts a
fresh start,”195 the President stated:
America is a nation of personal responsibility where people are
expected to meet their obligations. We’re also a nation of fairness
and compassion where those who need it most are afforded a fresh
start. The act of [C]ongress I sign today will protect those who
legitimately need help, stop those who try to commit fraud, and bring
greater stability and fairness to our financial system.196
Noble goals abound: protect those who need protection, prevent
dishonest debtors from abusing a compassionate system. The BAPCPA
appears to address these goals in a manner that all reasonable minds can
Nevertheless, the BAPCPA has been criticized for a variety of
reasons,197 with some commentators concluding that it will simply not
meet the goals stated above.198 Although President Bush said that the
BAPCPA would “protect those who legitimately need help,”199 some
commentators have noted that “[t]he amendments to the Bankruptcy
Code made by the enactment of BAPCPA in 2005 arguably represent a
shift away from the policy of bankruptcy law favoring debtors.”200 Its
enactment has also affected both lawyers practicing bankruptcy law and
debtors, as “the bankruptcy bar faces greater challenges due to new
responsibilities and sanctions, and debtors face new uncertainties
regarding their ability to find financial solutions under the
creditordriven new law.”201
Because the BAPCPA was passed just a few years ago, there have
not been many cases analyzing its effects. “As with all new statutory
law, the exact meaning and implications of the act will not be known
until courts begin to sort out its myriad provisions via statutory
construction. There are many unsettled areas.”202 The ultimate
judgment of the BAPCPA will take some time to develop. This is not to
say that it has not had an immediate impact.
Although widely criticized,203 the BAPCPA has lowered the
numbers of annual bankruptcy petition filings.204 The Administrative
Office of the U.S. Courts has stated that 1,112,542 bankruptcy cases
were filed in fiscal year 2006, ending September 30, 2006.205 This is a
more than 37 percent drop from the same period in 2005.206 More
specifically, Chapter 7 filings dropped more than 38 percent, from
1,346,201 in 2005 to 833,147 in 2006.207 Although Democrats have
taken back both houses of Congress,208 insiders do not see a reform of
BAPCPA on the horizon.209 Former Bankruptcy Review Commission
Chair Brady Williamson has opined that the reform of BAPCPA will
take place on a longer timeline than the current two-year Congress, and
that “in this longer timeframe more can be done to change the tone of
the public dialogue and thus improve both the consumer and commercial
Court decisions on current and future cases will be important in
seeing what parts of the BAPCPA are helpful to both debtors and
creditors, and what parts do not accomplish the Act’s goals. The
BAPCPA was primarily intended to solve problems experienced by both
creditors and debtors.211 As discussed above, courts were split over the
treatment of substitutes versus late-filed returns in determining the
dischargeability of tax debts.212 Congress and the President attempted to
solve this split when they enacted BAPCPA. To that end, Section 714
of BAPCPA inserted the following paragraph into Section 523:
For the 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 of local law.213
Under the new BAPCPA provisions, a return “filed under [Section]
6020(a) of the Internal Revenue Code are considered properly filed, and
returns filed under [Section] 6020(b) of the IRC are not considered
properly filed.”214 Congress’ goal was to make sure that returns
prepared under Section 6020(a) were considered returns for
dischargeability, but not those prepared under Section 6020(b). This is
in some way related to the idea of a “fresh start.” Taxpayers who make
the effort to get their taxes done pursuant to Section 6020(a) can benefit
from the fresh start; those who do not make an effort, and instead have
returns prepared under Section 6020(b), cannot.
Beginning with the first sentence, if a return for the purposes of this
section must satisfy all non-bankruptcy law, including applicable filing
requirements, then a return that does not satisfy applicable timing
requirements is not a return for the purposes of this section, and any
debts arising from that return are not dischargeable. This seems to
indicate that if a taxpayer files late, even if by a day, they will be
211. See Schlecter, supra note 198, at 788. The author notes that “[a]ccording to
congressional reports on the BAPCPA, its purpose is to ‘improve the bankruptcy system
by deterring abuse, setting enhanced standards for bankruptcy professionals, and
streamlining case administration.’” Id. The deterrence of abuse seems to benefit
creditors, while increasing standards on bankruptcy professionals, and easing case
administration problems, appears to be aimed at debtors.
212. See supra Part V.
213. 109 P.L. 9, 704 (2005).
214. Steven B. Kass, Discharge of Unfiled Taxes under BAPCPA: No More
“Super” Discharge?, 25-5 ABIJ 10 (June 2006).
prevented from seeking the debt’s discharge, regardless of the reason
The first part of the second sentence indicates that debts arising
from returns filed under Section 6020(a), or similar state or local law,
are dischargeable. The returns referenced here are those the taxpayer
signs under penalty of perjury and through which the taxpayer
traditionally provides information to the IRS. The next part of the
second sentence broadens the definition of return to include any written
stipulation to a judgment or any final order entered into by a
nonbankruptcy tribunal. The second part of the second sentence thus seems
to indicate that any debt arising out of an agreement between the IRS
and the taxpayer, or the judgment of a United States District Court215 or
United States Tax Court216 trial would be dischargeable, so long as no
substitutes had been prepared or taxes based on substitutes assessed. So,
for example, if a taxpayer filed an inaccurate return and the IRS sent a
notice of deficiency, and then the debtor and the IRS settled prior to
trial, the resulting tax debt would be dischargeable.
The last part of the second sentence is aimed at solving the split
among the circuits. If a taxpayer does not file, and the IRS invokes
Section 6020(b) to prepare returns and assess taxes, then the tax liability
due is never dischargeable. This rule seems discordant with the stated
goals of the bankruptcy laws. As described above, most cases are solved
on cross motions for summary judgment. This means that there are
often very little facts in dispute, and are based on detailed stipulations.
These detailed stipulations prevent an application of the facts to the
fourth prong of the Beard analysis.
The language of the statute hints at the problem that Congress was
intending to solve with its enactment. Apparently, Congress believed
that Section 6020(a) would catch all taxpayers who are deserve to have
their tax debts discharged in bankruptcy, while Section 6020(b) would
catch all dishonest taxpayers who are not deserving of such protection.
This distinction, however, is not as simple as the statute might otherwise
indicate. For example, as courts have noted there may be times when
taxpayers have legitimate reasons for not filing returns until well after
the IRS has prepared substitutes and assessed taxes. Furthermore, this
new statute may only complicate the issues unnecessarily, as there was
already a statute on the books designed to catch those dishonest people
intent on using the bankruptcy code to discharge fraudulent debts.
Indeed, there is already a solution to Congress’s concerns regarding
fraudulent returns and willful attempts to evade paying fairly-assessed
tax liabilities: Section 523(a)(1)(C)217. A court could have both sides
stipulate to most facts at issue, but have the parties provide evidence as
to why the return was filed so late. If there is a legitimate reason for
filing late and an attempt to comply with the tax laws, the court can
grant a discharge. If these facts are not found in the debtor’s favor, the
court can deny discharge under Section 523(a)(1)(C). To examine a
debtor’s intent when deciding whether a document falls within the
definition of a return removes 523(a)(1)(C) from Section 523. Analyzed
under the four-prong Beard test, a document filed by a taxpayer that is
fraudulent on its face would be found to not constitute an honest and
reasonable attempt, would not fit within the definition of a return, and
would be excepted from discharge under Section 523(a)(1)(b). This
analysis will soon remove any need to look at Subsection (C).
Congress should repeal Section 714 of the BAPCPA. By denying
discharge to tax debts that arise from returns that violate applicable
filing requirements, as well as to tax debts that arise from returns filed
under Section 6020(b), Section 714 clearly conflicts with the primary
goal of bankruptcy—to provide a “fresh start.” To prevent the
fraudulent use of the bankruptcy code by a few, Section 714 punishes
many—even those who may have entirely legitimate reasons for not
filing. By repealing this section and allowing the courts to review the
intent of the debtor on a case-by-case basis, Congress will be better able
to protect those debtors who truly need it, and to prevent abuse of the
bankruptcy system. Indeed, these decisions are native soil for the courts,
and with a developed body of evidence they will make the appropriate
decision as to whether or not a debtor should be granted a discharge for
their tax debts.
By looking at returns on a case-by-case basis, judges will
effectively evaluate whether a return should be exempted from
discharge. Although many facts can be stipulated to for purposes of
judicial economy, parties should produce evidence regarding the reason
for the late filing. Both the Hindenlang and Colsen decisions, as well as
217. 11 U.S.C. § 523(a)(1)(C) (2005).
12. See Infra Part IV.
13. See Infra Part V.
14. Benjamin Franklin is widely quoted as saying “In this world, nothing can be said to be certain, except death and taxes.” See Letter from Benjamin Franklin to Jean Baptiste-Leroy (1789) reprinted in THE WORKS OF BENJAMIN FRANKLIN ( 1817 ).
15. 26 U.S.C. §§ 1 - 9833 ( 2007 ).
16. I.R.C. § 6011 (a) ( 2007 ).
17. I.R.C. § 6072 (a) ( 2007 ).
18. Colsen v. United States (In re Colsen) , 322 B.R. 118 , 122 (B.A.P. 8th Cir . 2005 ).
19. See Beard v . Comm'r , 82 T.C. 766 ( 1984 ) (concerning the definition of a return for purposes of penalties under the Internal Revenue Code); United States v . Nunez (In re Nunez) , 232 B.R. 778 ( B.A.P. 9th Cir. 1999 ) (concerning whether forms filed by taxpayer after Internal Revenue Service had prepared substitutes constitute returns for the purposes of discharge under Bankruptcy Code Section 523); Hindenlang v . United States (In re Hindenlang) , 164 F.3d 1029 ( 6th Cir . 1999 ) (stating that the threshold question is what constitutes a return under Bankruptcy Code Section 523 ).
20. Pub . L. No. 109-8 , 119 Stat . 23 ( 2005 ).
56. Id .
57. BLACK'S LAW DICTIONARY 1020 (6th ed. 1991 ).
58. See Hindenlang, 164 F.3d at 1033 -34 (stating that “[a] number of bankruptcy courts, and others, have since adopted or approved this basic format”). Although Hindenlang was decided in 1999, the four-prong Beard test is still in use. See Colsen v . United States (In re Colsen) , 446 F.3d 836 , 839 ( 2006 ) (quoting Beard v . Comm'r , 82 T.C. 766 , 774 - 79 ( 1984 ), aff'd, 793 F.2d 139 ( 6th Cir . 1986 ) (per curiam)) (“Both parties agree that the appropriate criteria for determining whether a document is a return for present purposes are summarized in Beard v . Commissioner.”) (internal citations omitted).
59. 309 U.S. 304 ( 1940 ).
60. 293 U.S. 172 ( 1934 ).
61. 82 T.C. 766 ( 1984 ).
62. United States v Hindenlang (In re Hindenlang), 164 F.3d 1029 , 1033 ( 1999 ).
63. Beard , 82 T.C. at 777. See also Hindenlang, 164 F. 3d at 1033 (“The Tax Court , in Beard v. Comm'r, combined the principles of Zellerbach and Germantown to
78. I.R.C. § 6020(b)(2) ( 2007 ).
79. Spurlock v. Comm'r , 118 T.C. 155 , 2002 U.S. Tax Ct. LEXIS 9, *2 n.2 (“Respondent states that the term 'substitute for return' is a term used by Respondent for returns or partial returns prepared by Respondent where the taxpayer did not file a return .”).
80. Geiselman v. United States, 961 F.2d 1 , 5 ( 1st Cir . 1992 ) (quoting Roat v . Comm'r, Internal Revenue Serv., 847 F.2d 1379 , 1381 ( 9th Cir . 1988 )).
81. United States v. Bowser 1989 U.S. Dist . LEXIS 10690, *8 (“[A] rule requiring the Commissioner to prepare a return before issuing a deficiency letter would serve no useful purpose because the deficiency letter itself gives notice to the taxpayer of the amount owed .”).
82. Moroney v. United States (In re Moroney) , 352 F.3d 902 , 904 ( 4th Cir . 2003 ).
83. United States v. Hindenlang (In re Hindenlang) , 164 F.3d 1029 , 1034 ( 6th Cir . 1999 ).
84. Payne v. United States (In re Payne) , 431 F.3d 1055 , 1058 ( 7th Cir . 2005 ).
85. Gliem v. United States (In re Gliem) , 2006 Bankr. LEXIS 3147 , at *6- 7 (U.S.
186. 109 P.L. 9 , 119 Stat . 23 ( 2005 ).
187. Susan Jensen , A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM . BANKR. L.J. 485 , 565 ( 2005 ) ; 151 Cong . Rec. S2463 (daily ed. Mar. 10 , 2005 ).
188. Jensen , supra note 188 at 565 ( quoting Press Release, The White House Office of the Press Secretary, Statement by the President, ( Mar. 10 , 2005 ), available at http://www.whitehouse.gov/news/releases/2005/03/20050310- 15 .html).
189. Id . at 566.
190. Press Release, President Signs Bankruptcy Abuse Prevention, Consumer Protection Act, Apr. 20 , 2005 , available at http://www.whitehouse.gov/news/ releases/2005/04/20050420- 5 .html.
191. Landry & Mardis, supra note 2 at 92. For a list of changes that went into effect prior to October 17, 2005 , see Landry & Mardis, supra at 92 n.4.
192. See Jensen, supra note 188 at 566-67.
193. Id . at 566.
194. Id .
195. Id .
196. Id . at 567.
197. See generally Landry and Mardis, supra note 2 ; Daren Schlecter, Note and Comment: Before and After The Bankruptcy Abuse Prevention Consumer Protection Act of 2005 Examined Under Recent Case Law: A Curse in Disguise for Consumers?, 27 WHITTIER L . REV. 787 ( 2006 ) ; Jean Braucher, Symposium: Consumer Bankruptcy and Credit in the Wake of the 2005 Act: The Challenge to the Bench and Bar Presented by the 2005 Bankruptcy Act : Resistance Need Not Be Futile, 2007 U. ILL. L. REV . 93 ( 2007 ); William Houston Brown, Taking Exception to a Debtor's Discharge: The 2005 Bankruptcy Amendments Make It Easier, 79 AM . BANKR. L.J. 419 ( 2005 ). For a thorough description of the legislative history of the BAPCPA, see generally Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM . BANKR. L.J. 485 ( 2005 ). A review of the entire history of the Act is beyond the scope of this Note .
198. See Landry and Mardis, supra note 2 , at 92. (“The substantive revisions to the Code, on the whole, are generally creditor-oriented .”)
199. Press Release, supra note 190.
200. Landry and Mardis, supra note 2 , at 96. The authors state that [f]or eighty years the Bankruptcy Act of 1898, with various amendments, stayed in effect . The Bankruptcy Reform Act of 1978 . . . significantly changed bankruptcy law. Even though the Bankruptcy Code significantly changed substantive bankruptcy, it did not alter the fundamental policy in favor of debtors. In fact, some argue that it enhanced a policy in favor of debtors . Since 1978 , the Bankruptcy Code has been amended numerous times . . . . However, none of these amendments altered the underlying policy of bankruptcy law in favor of debtors. The amendments . . . made by the enactment of BAPCPA in 2005 arguably represent a shift away from the policy of bankruptcy law in favor of debtors.
201. Id . at 119.
202. Id .
203. See supra notes 198-202 and accompanying text.
204. See U.S. Courts , Bankruptcy Filings Decline in FY 2006, available at http://www.uscourts.gov/press_release/bankruptcyfilings120506.html, (last visited Mar . 13 , 2007 ).
205. Id .
206. Id .
207. Id .
208. See Legislative Highlights, Insiders Say Radical Overhaul of BAPCPA Not Likely in Congress Under New Management, 26-1 ABIJ 8 (Feb . 2007 ) (“Despite the Democrat Party takeover of both houses of Congress after the November election, a bipartisan group of Washington insiders sees little chance of major changes to BAPCPA .”).
209. Id .
210. Id .