Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: Tax rulings

Taxpayers are denied a discharge of federal taxes in bankruptcy because they failed to timely file Forms 1040; the IRS's assessments are not time-barred after the Tax Court finds mutual mistake and reforms extension agreements to correct a "scrivener's error."

Bankruptcy

Late-Filed Form 1040 Not a Tax Return for Bankruptcy Discharge Exception

The Tenth Circuit, in a case of first impression, held that an untimely Form 1040, U.S. Individual Income Tax Return, filed after the IRS has assessed a taxpayer's tax liability, is not a tax return for purposes of the exception to discharge of a tax debt in bankruptcy.

Bankruptcy

Edson and Liana Mallo, a married couple, did not file timely federal income tax returns for 2000 and 2001. As a result, the IRS issued the Mallos notices of deficiency for those years, which the Mallos did not challenge. The IRS assessed taxes against Mr. Mallo for the 2001 tax year in July 2005 and taxes against Mrs. Mallo for the 2000 tax year in July 2006. The IRS began collection efforts with respect to these deficiencies in 2006.

In 2007, the Mallos filed joint Forms 1040 for the 2000 and 2001 tax years. Based on these forms, the IRS assessed additional joint tax liability against the Mallos for 2000 and partially abated Mr. Mallos 2001 tax liability.

Peter Martin had a similar history for the years 2000 and 2001. Martin did not file timely his returns for those years, and, as a result, the IRS issued statutory notices of deficiency for the years, which Martin did not challenge.

In 2004, the IRS assessed taxes against Martin for 2000 and 2001 and subsequently began collection efforts. In May 2005, Martin filed Forms 1040 for 2000 and 2001. Based on the forms, the IRS partially abated Martin's 2000 and 2001 tax liabilities.

In 2010, the Mallos filed a Chapter 13 bankruptcy petition for adjustment of debts with the U.S. Bankruptcy Court for the District of Colorado; this was converted to a Chapter 7 proceeding in early 2011. After the bankruptcy court issued a general order discharging the Mallos' debts, the Mallos filed an adversary proceeding against the IRS, seeking a determination that their income tax liabilities for 2000 and 2001 had been discharged. In its answer, the IRS denied the debts had been discharged.

The parties filed cross motions for summary judgment on the legal question whether the Mallos' tax debt was excepted from discharge under Section 523(a)(1)(B) of the Bankruptcy Code. Section 523(a)(1)(B) provides that a tax debt is excepted from discharge if a required return or equivalent report or notice reporting the tax is not filed. The bankruptcy court granted the IRS's motion for summary judgment, concluding that the Mallos had not filed a tax return, and, therefore, the Mallos' respective tax debts were not dischargeable.

The legal question was the same in Martin's case, but he obtained a more favorable result. Martin filed a Chapter 7 bankruptcy petition in the same bankruptcy court and received a general discharge order. Like the Mallos, Martin then filed an adversary proceeding against the IRS, seeking a determination that his 2000 and 2001 tax debts had been discharged. The parties filed cross motions for summary judgment, making substantially the same arguments that were made in the Mallos' case. However, the judge in Martin's case determined the late-filed federal tax returns were tax returns for purposes of Section 523(a)(1) (B) and therefore Martin's tax debt was dischargeable.

The Mallos appealed their case, and the IRS appealed Martin's case, to the district court, which consolidated the cases. The district court concluded the post-assessment Forms 1040 were not "returns" for purposes

of Section 523(a)(1)(B) because they served no tax purpose, and affirmed the decision of...