Putting the Hanging Paragraph Out to Pasture: Reconciling the Mandates of Bankruptcy and Tax Law

Author:Nicholas J. Huffmon
Position:J.D. Candidate, The University of Iowa College of Law, 2018; B.A., The Ohio State University, 2015
Pages:1729-1752
SUMMARY

This Note explores an area of tension between bankruptcy and tax law. The question of when a tax return is dischargeable through bankruptcy is murky and controversial. The current statutory definition of a tax "return" is widely reviled because it is unnecessarily restrictive. This Note proposes redrafting the statutory definition of tax "return" to resolve the issue in a way favorable to debtors.... (see full summary)

 
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1729
Putting the Hanging Paragraph Out to
Pasture: Reconciling the Mandates of
Bankruptcy and Tax Law
Nicholas J. Huffmon
ABSTRACT: This Note explores an area of tension between bankruptcy and
tax law. The question of when a tax return is dischargeable through
bankruptcy is murky and controversial. The current statutory definition of a
tax “return” is widely reviled because it is unnecessarily restrictive. This Note
proposes redrafting the statutory definition of tax “return” to resolve the issue
in a way favorable to debtors. Specifically, this Note proposes allowing a tax
return to be discharged as long as it complies with applicable content
requirements on its face. Unlike the current statutory scheme, this proposal
would not prohibit the discharge of a tax return because it was submitted after
either the passing of a statutory deadline or an independent assessment by a
tax authority. This proposal also aligns with the purpose of the Bankruptcy
Code—to give the honest debtor a fresh start.
I. INTRODUCTION ........................................................................... 1730
II.BACKGROUND ............................................................................. 1733
A.THE DISCHARGABILITY OF TAX DEBT THROUGH
BANKRUPTCY ........................................................................ 1733
B.INITIAL APPLICATION OF THE BEARD TEST ............................ 1734
1.Majority View under the Beard Test: The Fourth,
Sixth, Seventh, and Ninth Circuits............................. 1735
2.Minority View Under the Beard Test: Judge
Easterbrook and the Eighth Circuit ........................... 1737
C.THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER
PROTECTION ACT OF 2005 AND THE INTRODUCTION OF
THE “HANGING PARAGRAPH ................................................ 1738
D.DEFINING “RETURN AFTER BAPCPA .................................... 1739
J.D. Candidate, The University of Iowa College of Law, 2018; B.A., The Ohio Stat e
University, 2015. I wish to thank all the hardworking editors and student writers of Volumes 102
and 103 of the Iowa Law Review—especially Eric M. Hartmann, who piqued my interest in this topic.
1730 IOWA LAW REVIEW [Vol. 103:1729
1.Post-BAPCPA Majority View: The “One-Day-Late”
Rule .............................................................................. 1739
2.Post-BAPCPA Minority View: Lower Courts .............. 1741
III.A CHORUS OF CRITICISM FOR THE ONE-DAY-LATE RULE ........... 1742
A.WHEN “PLAIN MEANING IS NOT PLAIN ................................. 1742
B.PREVIOUSLY PROPOSED LEGISLATIVE SOLUTIONS .................... 1745
IV.A NEW APPROACH TO DEFINING “RETURN”: STATUTORILY
ELIMINATING ALL TIMELINESS REQUIREMENTS .......................... 1747
A.REEXAMINING BEARD V. COMMISSIONER .............................. 1747
B.HOW BEARD SHOULD HAVE BEEN APPLIED IN
POSTASSESSMENT CASES ........................................................ 1749
C.A NEW PROPOSAL TO REDRAFT THE HANGING
PARAGRAPH .......................................................................... 1750
V.CONCLUSION .............................................................................. 1752
I. INTRODUCTION
Federal courts have consistently struggled to resolve a fundamental
conflict at the nexus of our country’s systems of bankruptcy and taxation. The
Bankruptcy Code exists for the economically and socially beneficial purpose
of releasing debtors from otherwise inescapable debt.1 A person trapped in
perpetual insolvency by mounting debt is a burden to society.2 Absolving
debts, while adverse to creditors, is better for society than allowing this cycle
of impoverishment to continue.3 The primary advantage of declaring
1. See Fahey v. Mass. Dep’t of Revenue (In re Fahey), 779 F.3d 1, 11 (1st Cir. 2015)
(Thompson, J., dissenting) (“Our nation’s bankruptcy system was built on the principle that
sometimes, honest people fall on hard times. While the bankruptcy code has naturally gone
through revisions and updates since its inception, that foundational philosophy has always laid at
its root.”).
2. See Sligh v. First Nat’l Bank of Holmes Cty., 704 So. 2d 1020, 1025 (Miss. 1997) (“Our
statutes upon the subject of exemptions indicate a clear public policy that exemption from
personal pauperism is of greater concern than the rights of creditors.” (quotin g Leigh v.
Harrison, 11 So. 604, 606 (Miss. 1892))). The “very purpose” of the Bankruptcy Code “is to
protect debtors from pauperism.” Id. at 1028.
3. See In re Fahey, 779 F.3d at 17 (Thompson, J., dissenting) (“The primary purpose of the
bankruptcy code has always been torelieve the honest debtor from the weight of oppressive
indebtedness, and permit him to start afresh free from the obligations and responsibilities
consequent upon business misfortunes.’ . . . [A] ‘fresh start’ is a ‘fundamental bankruptcy
concept.’” (quoting Schwab v. Reilly, 560 U.S. 770, 791 (2010); Local Loan Co. v. Hunt, 292 U.S.
234, 244 (1934))).

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