Eleventh Circuit Creates Split in the Circuits on Issue of Whether a Later Return is a Return for Purposes of the Bankruptcy Code by ROBERT S. HORWITZ
Three types of tax debts are excepted from discharge in bankruptcy:
- First, those entitled to priority under sec. 507(a) of the Bankruptcy Code. 11 U.S.C. Sec. 523(a)(1)(A).
- Second, those with respect to which a return, if required, was not filed or was filed after it was last due and after two years before the date the bankruptcy petition was filed. 11 U.S.C. Sec. 523(a)(1)(B).
- Third, those with respect to which the debtor filed a fraudulent return or attempted to evade or defeat the tax. 11 U.S.C. Sec. 523(a)(1)(C).
Two recent bankruptcy cases discuss whether the debtor’s tax debt was excepted from discharge under the second and third exceptions to discharge. This blog will discuss In re Shek, 947 F.3d 770 (11th Cir. 2020), a recent Eleventh Circuit decision addressing the second exception, and creates a split in the circuits. I will soon post a blog discussing In re Harold, a district court case discussing the attempt to evade or defeat tax provision of the third exception.
First some background. In 2005, Congress added a definition of “return” in a new paragraph at the end of subsection (a) of sec. 523. That paragraph states that “For purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable non bankruptcy law (including applicable filing requirements).” This so-called “hanging paragraph” further provides that “return” includes a return prepared under Internal Revenue Code (IRC) sec. 6020(a) or a written stipulation to a judgment entered by a non-bankruptcy tribunal but does not include a “substitute for return” under IRC sec. 6020(b).
Three circuit courts of appeal have held that the phrase “including applicable filing requirements” included the requirement that a return be filed by a specified date. In re Fahey, 779 F.3d 1 (1st Cir. 2015); In re Mallo, 774 F.3d 1313 (10th Cir. 2014); In re McCoy, 666 F.3rd 925 (5th Cir. 2012). Under these cases, an otherwise dischargeable tax debt was not dischargeable if it was filed even one day late.
The Eleventh Circuit in In re Justice, 817 F.3d 738 (2019) expressly avoided deciding whether the “one-day-late rule” was a correct interpretation of the statute. Which brings us to the In re Shek. Mr. Shek filed his 2008 Massachusetts income tax return in November 2009, seven months late. He owed Massachusetts over $11,000 in tax, which remained unpaid. In 2015 he filed a chapter 7 bankruptcy in Florida and received a discharge. When Massachusetts resumed its efforts to collect the unpaid tax, Shek reopened his bankruptcy case for a determination of whether his 2008 tax debt had been discharged. Both the bankruptcy court and the district court held that the debt was discharged. Rejecting the reasoning of its sister circuits, the Eleventh Circuit affirmed and held that a document that qualifies as a return under non-bankruptcy law remains a return even if filed late.
Massachusetts advanced two arguments why Mr. Shek’s return was not a return for purposes of sec. 523: a) it was not filed when due and thus did not satisfy the “applicable filing requirements” and b) under applicable non-bankruptcy law (i.e., Massachusetts tax law) a return must be timely. Massachusetts’s first argument, that “applicable filing requirements” includes filing deadlines, was an interpretation that was implicitly adopted by the First, Fifth and Tenth Circuits. In rejecting this interpretation, the Eleventh Circuit honed-in on the word “applicable,” which Congress chose to use rather than just “filing requirements” or “all filing requirements.”
The Shek court noted that in interpreting another provision of the Bankruptcy Code, the Supreme Court distinguished “applicable” from “all,” stating that “applicable” requires an analysis of context and normally means “appropriate, relevant, suitable or fit.” Applicable requirements are those having a material bearing on what constitutes a “return” rather than “more tangential considerations” such as whether it was filed on time.
The court looked at the statutory context of the paragraph to determine define “applicable.” When it added the “hanging paragraph,” Congress did not modify the provision that a late-filed return can qualify for discharge if it is filed two years or more before the commencement of the bankruptcy case. Reading the hanging paragraph as proposed by Massachusetts would render the second exception a near nullity, since it would only apply to the relatively rare case of returns prepared under IRC Sec. 6020(a) and those resulting from a stipulated judgment. If accepted, this would mean that a late-filed return almost never qualifies for discharge. Such an interpretation would violate the statutory canon of surplusage, which applies when an interpretation would leave a “clause, sentence, or word … superfluous, void, or insignificant.” The court believed that Congress did not intend to narrow the scope of the second exception to only an insignificant number of cases when it made no change to the sec. 523(a)(1)(B) itself. According to the Court, Congress could have achieved the result advocated by Massachusetts by the more direct method of changing the language of the exception to state that it only applied to returns prepared under IRC sec. 6020(a). The court stated that “It would be a bizarre statute that set forth a broad exclusion for the discharge of tax return debts but limited the application of that exclusion via an opaque and narrow definition of the word ‘return.’” Further, the court noted that its interpretation of the statute harmonized with the principle that “exceptions to discharge should be confined to those plainly expressed.”
The court rejected Massachusetts’ second argument, that Massachusetts tax law defined return with reference to timely filing by noting that the state’s tax code treats late filed returns as “returns.” Thus, under applicable law, Mr. Shek’s late return was a return.
This will not be the last word on what constitutes a return for purposes of bankruptcy discharge. Even if certiorari is not sought, or if sought is denied, this issue will ultimately be headed for the Supreme Court
Contact Robert S. Horwitz at firstname.lastname@example.org or 310.281.3200 Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.