1. Applicable Law
In the First, Fifth, and Tenth Circuits, the rule is that tax due on a late‑filed return is always nondischargeable, even if the return were filed only one‑day late. McCoy v. Miss. Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012); Mallo v. IRS (In re Mallo), 774 F.3d 1313 (10th Cir. 2014); and Fahey v. Internal Revenue Service, 779 F.3d 1 (1st Cir. 2015). The one‑day-late rule has been discussed extensively in Procedurally Taxing. See K. Fogg, Debtors Still Trying to Fight Against One Day Rule (October 24, 2019), which cites prior discussions. In shortened form, these three circuits reason that the language in 11 U.S.C. §_523(a)(*) requires that, for a document to be considered a valid return, it must satisfy all applicable nonbankruptcy law requirements, including applicable filing requirements and timely filing is an applicable filing requirement. This note focuses on Golden and not the propriety of the one‑day‑late rule.
Outside of those three circuits, to determine whether a document filed late will be considered a valid return, the IRS and the other circuits follow the Beard test, which is a four‑part test. Beard v. Comm’r, 82 T.C. 766, 775‑778 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). The Ninth Circuit uses the Beard test. Smith v. United States Internal Revenue Serv. (In re Smith), 828 F.3d 1094, 1096 (9th Cir. 2016), and United States v. Hatton (In re Hatton), 220 F.3d 1057, 1060-1061 (9th Cir. 2000). As Golden arose within the Ninth Circuit, it will have no impact on those courts bound by the one‑day‑late rule.
Under the four‑part Beard test, for a late‑filed document to be considered a valid return
- there must be sufficient data to calculate the tax liability;
- the document must purport to be a return;
- there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
- the taxpayer must execute the return under penalty of perjury.
The most contentious part of the Beard test is whether the taxpayer made an honest and reasonable attempt to satisfy the requirements of the tax law. That was the key question in Golden.
The Eighth Circuit stands alone in using an objective test to determine whether the taxpayer made an honest and reasonable attempt to satisfy the tax law. Colsen v. United States (In re Colsen), 446 F.3d 836 (8th Cir. 2006). Under the objective test, the inquiry into the validity of the document at issue is limited to the four corners of the document. The IRS accepts that an objective test is used in the Eighth Circuit. IRM 22.214.171.124.1(3) (12-09-2016). The other “non-one-day‑late circuits” use a subjective test, and the Golden court used a subjective test. Golden p.19 (“this court looks to the totality of circumstances”).
2. Factual Background
The tax year at issue in Golden was 2008. The Taxpayers extended the return’s due date to October 15, 2009.
With the onset of the Great Recession in 2008, the Taxpayers experienced financial difficulties, including loss of a rental property through foreclosure. In 2010, Golden took over operation of the jointly owned business from Alter. Golden took an additional, unspecified amount of time to take over the tax responsibilities.
The financial difficulties led to marital difficulties. In February 2010, Golden separated from Alter. At that time, the Taxpayers’ children were aged four and six.
On March 8, 2011, the Taxpayers filed their 2009 tax return. On March 10, 2011, the Taxpayers’ accountant completed the 2008 return and the Taxpayers signed the return. This was approximately 15 months after the extended due date for the 2008 return. Thereafter, the Taxpayers held off filing the 2008 return in hopes of putting together the money to pay off the taxes and to understand the IRS’s position better.
On March 14, 2011, the IRS issued its NOD for 2008. The NOD asserted a deficiency of $276,506. The document signed by the Taxpayers asserted a liability of approximately $23,000. The difference in the two amounts appears to have been primarily expenses incurred in running the Taxpayers’ business that were not accounted for in the NOD.
The Taxpayers did not respond to the NOD, and, on July 28, 2011, the IRS assessed the tax due as reported in the NOD. From issuance of the NOD to assessment, 136 days elapsed. On August 10, 2011, the Taxpayers filed a document that they asserted was their 2008 return. From issuance of the NOD to the filing of the document that purported to be the return, 149 days elapsed. From assessment to filing, 13 days elapsed. From the extended due date to filing, approximately one year and ten months elapsed.
On February 11, 2013, the IRS reduced the assessed tax to the $23,000 number reported as due by the Taxpayers.
On April 30, 2014, the Taxpayers filed for relief under Chapter 13 of the Bankruptcy Code. This was approximately two years and eight months after the Taxpayers filed the document purporting to be their 2008 return. This was approximately four years and six months after the extended due date of the 2008 return.
The Taxpayers successfully completed their Chapter 13 plan. They full paid their secured and priority tax claims of over $58,000 and made a small distribution to their unsecured creditors.
3. Briggs, Sr.
Prior to Golden, the only case known to the author that discharged tax reported on a document filed after the SFR assessment was Briggs, Sr. v. United States (In re Briggs, Sr.), 511 B.R. 707 (Bankr. N.D. Ga. 2014), aff’d, Briggs, Sr. v. United States (In re Briggs, Sr.), N.D. GA. No. 15-2427‑MHC (June 7, 2017) (“District Court Briggs, Sr.). In that case, Mr. Briggs thought his business partner had filed his return. Mr. Briggs had signed the return and sent it back to his business partner, as was his annual custom. The business partner did not file the return, and an IRS SFR designation ensued. The IRS mailed the NOD to the business partner’s address and not Mr. Briggs’s address. Upon learning of the nonfiling and SFR assessment, Mr. Briggs filed a document purporting to be his return, and it was found to be a valid return.
The United States argued in Briggs, Sr. that any document filed after the SFR assessment is per se not a return under §_523(a)(*). Yet, in its appeal brief to the district court, the United States conceded that no appellate court had adopted the per se rule. District Court Briggs, Sr. at p.8. The District Court Briggs, Sr. opinion is now almost five years old. In the ensuing five years, the author is unaware of any appellate court that has adopted the per se rule, i.e., an appellate court outside of the one-day-late circuits and the Eighth Circuit.
4. Facts used by the Court to find for the Taxpayers
At Golden p.20‑21, the Court explained why it thought the Taxpayers had made an honest and reasonable attempt to comply with the tax law.
- The Taxpayers did not “belatedly” accept responsibility for filing a return, and they did not “attempt to present inaccurate or fabricated information.”
- Taxpayers “provided solid and accurate information” to the IRS. Taxpayers used the “assistance of a tax professional” to present accurate information.
- Taxpayers did not try to “walk away” from the debt. They spent five years in “bankruptcy purgatory” in order to obtain a discharge.
- The Taxpayers’ “corrective actions were not merely filing a ‘me too’” 2008 return that “parroted the assessed tax” with a goal of two years later filing for bankruptcy and asserting the tax debt should be discharged.
- The IRS presented “no identifiable bad faith reason for the failure to file” the 2008 return sooner.
- Although “beset” with financial and marital problems, the Taxpayers acted properly to substantially pay their tax obligations.
Without discussion, the Court rejected the per se rule. Golden at p.3 (where the government argument is set forth) and p.19 (where the Court makes clear that the Hatton rule applies; the Court looked at the totality of circumstances to determine whether the Taxpayers acted honestly and reasonably in the filing of their return).
Golden will be a tough case for the IRS to win on appeal. Ninth Circuit case law is clear that a subjective test applies so de novo review is unlikely. The government will need to prove clear error. See District Court, Briggs, Sr. at p.4 (burden is on the government to show that the bankruptcy court’s findings were clearly erroneous). The United States might question, even under a “totality of the circumstances” test, how much weight should be given to actions taken after the document is filed, e.g., completing a Chapter 13 plan. Regardless, sufficient facts exist to support the Court’s holding. For example, the Court found that “the personal and financial maelstrom is the reason for Plaintiff‑Debtor stumbling with respect to the 2008 federal tax return.” Golden at p.21. Kudos to the Taxpayers’ attorney for taking on this battle and winning.
In Golden, the IRS again argued for a per se rule. Even though such a rule would make life easier for the IRS, the IRS should put that argument to bed. It has been singularly unsuccessful. Golden notwithstanding, the IRS still has a de facto per se rule. It is very difficult for a taxpayer to prove that a document filed after the SFR assessment was an honest and reasonable attempt to comply with the tax law.
One other note, if you represent a client with a non‑filed return and a NOD has been issued and the 90‑day period has not run, strongly consider filing a Tax Court petition. Section_523(a)(*) of the Bankruptcy Code provides that a return includes “a written stipulation to a judgment or final order entered by a nonbankruptcy tribunal.” The Tax Court filing and subsequent final order will keep the bankruptcy‑discharge option open, and, perhaps, prevent an expensive discharge litigation.