Opinion
CASE NO. 98-13391-BKC-RAM, ADV. NO. 01-1487-BKC-RAM-A
January 13, 2003
James S. Caris, Esq., Hollywood, FL, for Plaintiff.
MEMORANDUM OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT
Plaintiff, Joseph Michael Klein ("Debtor"), filed this adversary proceeding against the Defendant, United States of America ("Government"), seeking a judgment declaring dischargeable his income tax liability for the tax years 1990 and 1991. The issue presented by the pending cross motions for summary judgment is simply stated, but not so simply decided: Did the tax returns filed by the Debtor after he was assessed constitute "returns" under 11 U.S.C. § 523(a)(1)(B), entitling him to discharge these tax liabilities?
Debtor alleges that he is entitled to discharge the taxes in question pursuant to 11 U.S.C. § 523(a)(1)(B)(ii), since he filed tax returns for 1990 and 1991 more than two years prior to filing this Chapter 7 case. The Government disagrees, arguing that the Debtor's untimely filed 1040 Forms do not qualify as "returns" for purposes of § 523(a)(1)(B) because they had no effect on his tax liabilities for those years; the documents simply mirrored the assessments already imposed by the Government which filed substitute returns on the Debtor's behalf. Each party contends that based on the undisputed facts, it is entitled to a judgment in its favor as a matter of law.
Factual and Procedural Background
Debtor did not timely file tax returns for 1990 and 1991. The Government prepared "substitutes for return" for those years, pursuant to 26 U.S.C. § 6020(b)(1) . For both 1990 and 1991, the Government mailed Debtor notices of the proposed tax liabilities (the "30-day letters"). The Debtor did not respond to the 30-day letters and, on October 11, 1993, the Government assessed the Debtor $11,066.00 in tax liability for 1990. On April 25, 1994, the Debtor was assessed $12,749.00 for 1991.
26 U.S.C. § 6020 (b) Execution of return by Secretary —
(1) Authority of Secretary to execute return — If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain though testimony or otherwise.
Debtor did not contact the Government about the tax returns for 1990 and 1991 until 1995. Debtor testified at his deposition that he filed Forms 1040EZ at that time, because the Government initiated a program to encourage non-filers to file their tax returns. Klein Deposition Transcript Page 12 (hereinafter "Depo. Page __"). According to his deposition, he did not previously file returns because of personal problems. Depo. Page 10. In 1995, a Certified Public Accountant prepared Klein's delinquent returns for 1989, 1990, 1991, 1992 and 1993. These returns were filed on March 10, 1995. Starting with the 1994 tax year, Klein has timely filed his returns each year. The 1990 and 1991 returns list taxable amounts that are identical to the amounts previously assessed by the Government.
On April 21, 1998 (the "Petition Date"), more than three years after filing the returns, Debtor filed his Chapter 7 bankruptcy petition. Debtor received his discharge on August 6, 1998. Debtor reopened his bankruptcy specifically to file this adversary proceeding on December 21, 2001 to determine the dischargeability of his outstanding 1990 and 1991 federal income tax obligations. On June 20, 2002, the Government filed the United States' Motion for Summary Judgment. The next day, on June 21, 2002, Debtor filed Plaintiff's Motion for Summary Judgment and Memorandum of Law In Support of Same. The Court conducted a hearing on the cross motions on July 12, 2002.
The Court has considered the record, including the Debtor's deposition and affidavit, the memoranda submitted by the parties and the arguments of counsel presented at the July 12, 2002 hearing. The Court has also carefully reviewed applicable case law. For the reasons that follow, the Court finds that there is no genuine issue of fact and that the Debtor is entitled to judgment as a matter of law declaring his 1990 and 1991 taxes dischargeable.
Discussion
The dispositive issue before this Court is whether the 1040 Forms filed by the Debtor in 1995 for the 1990 and 1991 tax years qualify as "returns" for purposes of § 523(a)(1)(B). if the Debtor's 1995 filings do not constitute returns for purposes of § 523(a)(1)(B), then § 523(a)(1)(B)(i) applies and the taxes are non-dischargeable. If the Debtor's filings do constitute returns for purposes of § 523(a)(1)(B), then § 523(a)(1)(B)(ii) applies and the taxes are dischargeable, since the returns were filed more than two years before the Petition Date.
Section 523(a)(1)(B) provides:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —
(1) for a tax or a customs duty —
. . .
(B) with respect to which a return, if required —
(i) was not filed; or
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.
A. Summary Judgment Standard
Rule 56 of the Federal Rules of Civil Procedure provides that summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Summary judgment should be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Where a movant bears the burden of proof at trial, the movant must show affirmatively the absence of a genuine issue of material fact, showing all essential elements of its case that no reasonable jury could find for the nonmoving party. United States v. Four Parcels, 941 F.2d 1428 (11th Cir. 1991).
B. The Standards for Dischargeability in the Eleventh Circuit
The party seeking to establish an exception to discharge of a debt bears the burden of proof. In re Griffith, 206 F.3d 1389, 1396 (11th Cir. 2000). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 11 S.Ct. 654, 112 L.Ed.2d 755 (1991). Therefore, the Government has the burden to prove that § 523(a)(1)(B), the exception to discharge provision concerning tax liability, applies to the Debtor's delinquent tax return filings. The Government specifically asserts that the Debtor did not file returns within the meaning of § 523(a)(1)(B)(i), and his tax liability is therefore excepted from discharge.
C. The Tax Forms Filed By the Debtor Constitute Returns Under 11 U.S.C. § 523(a)(1)(B)
The Bankruptcy Code does not define a "return" under section 523. Most courts agree that a document must first qualify as a return under federal income tax law in order to qualify as a return for purposes of section 523. See e.g., In re Hatton, 220 F.3d 1057, 1060 (9th Cir. 2000); In re Hindelang, 164 F.3d 1029, 1032-33 (6th Cir. 1999); In re Bergstrom, 949 F.2d 341, 343 (10th Cir. 1991); In re Mathis, 249 B.R. 324, 327 (S.D.Fla. 2000); In re Hetzler, 262 B.R. 47, 51 (Bankr.D.N.J. 2001). Courts commonly look to four factors to determine whether a document filed with the Government qualifies as a "return." The document must: (1) purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law." See, e.g., In re Hatton, 220 F.3d at 1060-61 (citing to Beard v. Commissioner, 82 T.C. 766, 777-78, 1984 WL 15573 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986)); In re Hindenlang, 164 F.3d at In re Pierchoski, 243 B.R. 639, 642 (Bankr.W.D.Pa. 1999); In re Billman, 221 B.R. 281, 282 (Bankr.S.D.Fla. 1998). This test was derived from two Supreme Court cases: Germantown Trust Co. v. Commissioner, 309 U.S. 304, 60 S.Ct. 566, 84 L.Ed. 770 (1940), and Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 55 S.Ct. 127, 79 L.Ed. 264 (1934). TheBeard court combined the principles of the two cases to develop the four-prong test set forth above. The first three parts of the test are not at issue in the case at bar. The dispute is over the application of the fourth factor — did the Form 1040s filed pursuant to a Tax Amnesty Program, represent an honest and reasonable attempt to satisfy the requirements of the tax law?
The Government contends that the Debtor failed to make a bona fide attempt to timely compute his income tax liability for the tax years at issue. It maintains that the Debtor's 1990 and 1991 returns were legal nullities because they merely restated the tax liabilities previously assessed for such years, and had no effect on his tax liabilities. Since the post-assessment 1040s served no tax purpose under the Internal Revenue Code, the Government argues that they should not be treated as returns and therefore, the taxes for those years should be excepted from discharge.
1. Can a Form 1040 Filed After Assessment Ever Constitute a "Return" for Dischargeable Purposes?
The Court must first address a threshold legal issue — Can a form 1040 filed after assessment with the same tax liability assessed by the Government ever constitute a return in determining dischargeability under § 523(a)(1)(B)(ii)? If, as the Government contends, the answer is no, the Government wins since the Debtor's form 1040s were filed after assessment with liability in the same amount as the assessment.
When interpreting a statute, the Court must first look to the statutory language. In re Savage, 218 B.R. 126 (10th Cir. BAP 1998). In § 523(a)(1)(B) (ii), Congress does not distinguish between returns filed pre-assessment and those filed post-assessment. Some courts have found this significant since Congress did utilize "assessment" as a trigger for other time periods in the Bankruptcy Code. See In re Crawley, 244 B.R. 121, 127 (Bankr. N.D.Ill. 2000), referencing § 507(a)(8)(a)(ii) as an example. But, even though Congress did not specify that a Form 1040 had to be filed pre-assessment to qualify as a return under § 523(a)(1)(B)(ii), courts remain split on whether post-assessment filings can constitute "returns." An analysis of the important decisions follows.
The Government relies heavily on In re Hindelang, 164 F.3d 1029 (6th Cir. 1999). In Hindelang, the Chapter 7 debtor sought to discharge his federal income tax liabilities for the tax years 1985 through 1988. Id. Hindelang had not filed tax returns for those years and the Government sent him notices of proposed deficiency. Receiving no response, the Government filed substitute returns followed by formal notice of deficiency letters. The Government then assessed the deficiencies against Hindelang. Two years after the assessment, Hindelang prepared and filed returns for the tax years in question, calculating the taxes to be substantially the same as in the substituted returns. The deficiencies were not paid. More than three years after filing the returns, the Debtor filed for bankruptcy under Chapter 7 and filed an adversary proceeding to determine the dischargeability of his tax liabilities for the 1985 to 1988 tax years. The bankruptcy court entered judgment for the debtor finding the taxes dischargeable under § 523(a)(1)(B)(ii), since returns were filed more than two years prior to the petition. The district court affirmed. On further appeal, the Sixth Circuit focused on "whether Forms 1040 filed after the Government has made an assessment can constitute returns for purposes of § 523(a)(1)(B)." Id. at 1032.
Beginning with the premise that the definition of a return is governed by applicable tax law, the Sixth Circuit applied the four part "Beard" test described above, focusing on the fourth criterion, whether the return represents "an honest and reasonable attempt to satisfy the requirements of the tax law." Id. at 1033. The Sixth Circuit concluded that a Form 1040 submitted after an assessment can serve no tax purpose under the tax law: "[W]hen the debtor has failed to respond to both the thirty-day and the ninety-day deficiency letters sent by the government, and the government has assessed the deficiency, then the Forms 1040 serve no tax purpose." Id. at 1034-35. Based on this conclusion, the Sixth Circuit reversed the district court as a matter of law:
We hold as a matter of law that a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. A purported return filed too late to have any effect at all under the Internal Revenue Code cannot constitute "an honest and reasonable attempt to satisfy the requirements of the tax law." Once the government shows that a Form 1040 submitted after an assessment can serve no purpose under the tax law, the government has met its burden.
Id. at 1034.
Several courts have cited Hindenlang in finding that post-assessment 1040s did not constitute "returns." See e.g. In re Hatton, 220 F.3d at 1061; United States v. Ralph, 266 B.R. 217 (M.D.Fla. 2001); In re Sgarlet, 271 B.R. 688 (Bankr. M.D.Fla. 2001); In re Hetzler, 262 B.R. 47 (Bankr. D.NJ. 2001).
Other courts have rejected Hindelang's bright-line rule finding instead that whether a post-assessment return qualifies as a return must be determined on a case-by-case basis. In re Nunez, 232 B.R. 778 (9th Cir. BAP 1999); In re Hatton, 216 B.R. 278 (9th Cir. BAP 1997) and In re Ralph, 258 B.R. 504 (Bankr. M.D. Fla. 2000) rev'd, United States v. Ralph, 266 B.R. 217 (M.D.Fla. 2001). The Debtor particularly relies on the bankruptcy court decision in Ralph and the BAP decision in Nunez, since in both of these cases, the debtor filed his returns pursuant to the same tax Amnesty Program that induced the Debtor in this case to file returns. The bankruptcy court in Ralph and the BAP in Nunez concluded that the debtor's 1040 Forms constituted tax returns for purposes of section 523, and that the taxes due were dischargeable. Relying in part on the previous Ninth Circuit Bankruptcy Appellate Panel ("BAP") decision in Hatton, the Nunez BAP affirmed the bankruptcy court's decision discharging the taxes, concluding that Congress did not condition the discharge of tax debt on whether a return was filed prior to an assessment. The Court declined to "read into Section 523(a)(1)(B) the requirement that a debtor must have filed a return prior to an assessment by the IRS." Nunez, 232 B.R. at 782.
If Form 1040s filed after assessment are not per se disqualified as "returns," what is the standard for determining whether the post-assessment filing constitutes an "honest and reasonable attempt to comply with the tax law?" The Nunez court described the analysis as a "good faith" inquiry. The court moved away from a "broad, in-depth inquiry into the debtor's compliance with all tax laws" to a requirement that the document "`appear on its face to constitute an honest and genuine endeavor to satisfy the law.'" Id. at 783. The panel explained:
The good faith inquiry under Section 523(a)(1)(B) should focus on the debtor's intent at the time the returns are filed. This keeps the inquiry relevant to Section 523(a)(1)(B). A focus on the delay in filing, or the number of missed years is relevant instead to an inquiry under Section 523(a)(1)(C) [fraudulent return or willful attempt to evade a tax] . . . .Id. In Ralph, Bankruptcy Judge Glenn undertook a comprehensive analysis of the law and agreed with the Nunez court that determining whether the purported tax returns were an honest and reasonable attempt to comply with the tax laws was a good faith inquiry and also agreed that this good faith inquiry should focus on the debtor's intent at the time the returns are filed. In re Ralph, 258 B.R. at 509 (citing In re Nunez, 232 B.R. at 782-83). Judge Glenn found nothing in the Bankruptcy Code requiring a return to be filed prior to assessment to qualify as a return under § 523(a)(1)(B). Judge Glenn agreed with the reasoning in Crawley, discussed earlier, that § 523(a)(1)(B)(i) does not distinguish between returns filed pre-assessment and those filed post-assessment. In re Crawley, 244 B.R. at 127. Thus, after carefully considering the two lines of cases represented by Hindenlang and Nunez, Judge Glenn rejected the Hindenlang per se or absolute rule regarding Form 1040s filed after assessment of a tax by the IRS. In re Ralph, 258 B.R. at 509. Instead, applying the same rationale utilized by the Ninth Circuit BAP in Nunez, Judge Glenn concluded that the Form 1040s filed by the debtor were "returns" for dischargeability purposes. In re Ralph, 258 B.R. at 508. Other courts have also rejected the Hindenlang "per se rule." See e.g. In re Rushing, 273 B.R. 223, 227 (Bankr. D.Ariz. 2001).
Summarizing, the two lines of cases, Hindelang and its progeny present a narrow view looking exclusively at the post-assessment character of the return itself and its effect on the debtor's tax liability. Nunez and its progeny maintain a broader view of compliance, and look to the debtor's intent at the time of filing.
The Eleventh Circuit has not addressed the issue. After consideration of the competing arguments, this Court agrees with Ralph and Nunez, rejecting a bright line rule in favor of a "good faith" inquiry based on the facts of each case. Although Ralph was reversed, this Court agrees with the logic and reasoning of Judge Glenn in the bankruptcy court decision, and disagrees with the district court decision. The short district court decision in United States v. Ralph was too quick to discount Nunez solely because Nunez relied in part on the Hatton BAP decision that was ultimately overturned. However, the Ninth Circuit's decision in Hatton did not explicitly or implicitly overrule Nunez. InHatton, the debtor never filed a return; he merely acquiesced to responsibility of tax liability pursuant to an installment agreement with the Internal Revenue Service. The Ninth Circuit did cite Hindenlang in its Hatton decision, 220 F.3d at 1060-61, but it reversed the BAP based on the debtor's conduct, not because it adopted the Hindenlang per se rule. This Court agrees with the analysis of Hatton discussed inRushing, 273 B.R. at 227.
The Hatton court [Ninth Circuit opinion] rejected the Debtor's contention because the documents were not executed under penalty of perjury and because the debtor's uncooperative behavior post assessment indicated that the submissions were not part of an honest and reasonable attempt to comply with the tax law. Hatton, 220 F.3d at 1061. Had the Hatton court adopted the Hindenlang Rule, it would not have needed to consider whether the Debtor had executed the submissions under penalty of perjury or the Debtor's subjective intent post assessment. The court would simply have determined that the debtor's post assessment submissions, could not as a matter of law, constitute returns under § 523(a)(1)(b).
In addition to being unpersuaded by the district court's opinion inRalph, a careful reading of some of the cases which appear to followHindenlang, reveals that these courts did not rule based on application of a per se rule, but instead looked at the debtor's conduct. For example, in Hetzler, after reviewing the important decisions, Judge Wizmur applied "what appears to be the weight of authority" and found that the IRS met its burden where the 1040s were filed after assessment. 262 B.R. at 53. However, the court left open the possibility that the debtor could still prevail by providing sufficient facts to substantiate an honest and reasonable attempt to comply with the tax laws. 262 B.R. at 54. In looking at the debtor's post assessment conduct, the court found that the debtor cooperated only after the government started collection efforts, and concluded that the filings were not an honest and reasonable attempt to comply with the law.
This Court does not agree that the burden shifts to the debtor once the Government shows that the 1040s were filed post-assessment. However, even if this showing was sufficient to shift the burden to the debtor, the Court finds that this Debtor has satisfied the burden by the facts presented in his uncontroverted deposition testimony and affidavit discussed more fully in the final section of this opinion.
In Sgarlet. Judge Paskay also cited to Hindenlang, but did not adopt a per se rule:
Whether or not this Court accepts the proposition urged by the Government, that a return filed by taxpayer after the Government prepared an SFR and made the deficiency assessment is per se a nullity [the returns filed by this debtor did not] represent an honest and reasonable attempt to satisfy the requirements of the tax law.
In sum, this Court rejects the Hindenlang per se rule and concludes that Form 1040s filed after assessment can still constitute "returns" under § 523(a)(1)(B)(ii). To determine whether the Form 1040s filed by this Debtor qualify as returns, the Court must now determine whether the Debtor acted in good faith focusing on the Debtor's intent at the time he filed the delinquent 1040s in 1995. Ralph, 258 B.R. at 509.
2. The Government Failed to Demonstrate that the Debtor Lacked Good Faith When he Filed the Form 1040s
It is unchallenged that the Debtor filed his Form 1040s in response to the Amnesty Program offered by the Government. "[I]n response to the `amnesty program' being offered by the Internal Revenue Service, I decided it was time to bring all of my past due tax return filing up to date and to `return to the fold' as a responsible citizen and taxpayer." Certification of Joseph Michael Klein, June 21, 2002 (Court Paper #17), Paragraph 6 (hereinafter "Affidavit Paragraph __). IRS Commissioner Shirley D. Peterson, at the time the Amnesty Program was introduced, explained its purpose. "We want to improve tax compliance across the board and the best way to start is to get everyone who is required to file a return to do so." IRS Reaches Out to Bring Nonfilers Back Into the Tax System, IR-News Rel., 1992-94 (Sept. 30, 1992). She further stated, "[t]he IRS will not recommend criminal prosecution of any taxpayer who comes forward, makes a true voluntary disclosure, and files an accurate tax return." Id.
The Debtor testified further about the Amnesty Program. "I was scared that I hadn't filed. I remember when I heard this, I said, great, I can file the returns and get on with my life." Depo. Page 13. As required under the Amnesty Program, Debtor filed accurate tax returns, or forms 1040s. It is uncontroverted that since responding to the Government's Amnesty Program, Debtor has continued to timely file all of his subsequent returns showing good faith and meeting the purpose of the Amnesty Program. "I timely filed my 1994 Federal Income Tax Return in 1995 and have timely filed all of my Federal Income Tax Returns since then utilizing the services of a Certified Public Accountant." Affidavit Paragraph 9.
By compelling Amnesty participants to file Forms 1040s to get the amnesty benefits, the Government implies a tax purpose for these returns. By filing the Forms 1040s in this particular case, this Debtor fulfilled that tax purpose. He brought his filings up to date in March, 1995, in response to the Amnesty Program and has timely filed all of his tax returns since that date. Thus, as the Government intended, he is "back in the fold."
The Court concludes that the undisputed facts presented here demonstrate that the Debtor's returns, even though filed after assessment, constitute an honest and reasonable attempt to satisfy the requirements of the tax law. Moreover, the Court acknowledges the Debtor's attempt and resulting success in making a "fresh start" with his tax return compliance pursuant to the requirements of the Government. "I remember them saying, if you hadn't filed your taxes, come clean, come clean. This is when I started living, [19]95. I cleaned up my life. I got married, I quit all of my bad habits. Filed my tax returns . . . I said, great, I can file the returns and get on with my life." Depo. Pages 12-13. To find that these tax obligations could never be discharged even when there is no evidence to show lack of good faith when he filed his returns, would be contrary to the broad "fresh start" policy that Congress envisioned in the Bankruptcy Code and contrary to the well-accepted rule that exceptions to discharge should be narrowly construed.
Conclusion
The Government has failed to carry its burden to establish, by a preponderance of the evidence, that the exception to discharge found in § 523(a)(1)(B)(i) applies to the Debtor's 1990 and 1991 tax debt. This Court rejects the Government's argument that post assessment Form 1040s cannot constitute "returns." Instead, the Court looks to the debtor's intent at the time of filing. In this case, the Government has failed to present any evidence demonstrating a lack of good faith by the Debtor when he filed his Form 1040s in response to the tax Amnesty Program. Simply stated, it is not the return itself that attempts to comply with tax laws; rather, it is a person who attempts to comply with tax laws. Here, the undisputed facts establish that in filing his 1990 and 1991 Form 1040s, the Debtor made an honest and reasonable attempt to comply with the tax law. As such, these filings constitute returns under § 523(a)(1)(b)(ii) and, since they were filed more than two years prior to the bankruptcy petition, the taxes are dischargeable. Therefore, it is —
ORDERED as follows:
1. The Government's Motion for Summary Judgment is DENIED.
2. The Debtor's Motion for Summary Judgment is GRANTED.
3. The Court will enter a separate judgment declaring that the tax liability owed by the Debtor for 1990 and 1991 are discharged under 11 U.S.C. § 523(a)(1)(B)(ii).
FINAL JUDGMENT
In accordance with this Court's January 13, 2003 Memorandum Opinion and Order on Cross Motions for Summary Judgment, it is —
ORDERED AND ADJUDGED as follows:
1. Final Judgment is entered in favor of the Plaintiff, Joseph Michael Klein, and against the Defendant, United States of America.
2. The Plaintiff's income tax liability for the tax years 1990 and 1991 is discharged.