Late-Filed State Returns Are Not Returns For Purposes of Discharge in Bankruptcy

In re McCoy, No. 11-60146 (5th Cir. 1/4/12): Debtor's late-filed state income tax returns not considered returns for bankruptcy discharge purposes under plain language of statute.

 

Facts: Taxpayer (T) filed for bankruptcy in September 2007. T received a discharge in January 2008, and in December 2008 returned to commence a post-discharge adversary proceeding against a state commission (C). T sought a declaration that the debt to C resulting from pre-petition income tax obligations for 1998 and 1999 had been discharged in bankruptcy.

 

The court stated that the 2005 legislation “added a new hanging paragraph to 11 U.S.C. §523(a) which defined the term ‘return' for discharge purposes.” The court stated that it would adopt the reading of 11 USC §523(a) suggested by the commission and the bankruptcy courts.

 

The court concluded that unless a state income tax return is filed under a safe harbor provision, a state income tax return that is filed late under the applicable non-bankruptcy state law is not a return for bankruptcy purposes under 11 USC §523(a).

Remember In CC-2010-016, the Chief Counsel's Office set forth the IRS litigating position:

a Form 1040 is not disqualified as a “return” under Bankruptcy Code §523(a) solely because it is filed late, but—regardless of whether a Form 1040 filed after assessment is a “return”—the portion of a tax assessed before such a form is filed is nondischargeable under Bankruptcy Code §523(a)(1)(B)(i).

See also SBSE-05-1010-052 (providing guidance on determining dischargeability of Form 1040 tax liability when form is filed later and after assessment of substitute for return under §6020(b) or during assessment of substitute for return) (expiration date 9/29/2010) (available at http://www.irs.gov/pub/foia/ig/sbse/sbse-05-1010-052.pdf).