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

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 to ‘relieve 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))).