Opinion
No. 93-21401 SR
May 20, 1994
Opinion
Chapter 7 Debtors, Thomas and Patricia McTear, filed the instant adversary proceeding seeking a determination that their 1988 and 1989 income tax liability is dischargeable pursuant to 11 U.S.C. § 523(a)(1)(B)(ii). The parties' Joint Pre-trial Statement indicates that the Internal Revenue Service ("IRS") now agrees that the 1988 tax liability is dischargeable, thus that issue is moot. A hearing was held on May 9, 1994, to consider the dischargeability of the 1989 tax liability.
Background
The McTears filed for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq., on May 4, 1993. The IRS filed proofs of claim for income taxes alleged to be owing for years ending December 31, 1988, and December 31, 1989. The McTears rely on 11 U.S.C. § 523(a)(1)(B)(ii) in attempting to discharge their tax liability.
It is undisputed that the McTears filed their 1988 income tax return late, on or about September 19, 1990. It is likewise undisputed that they filed their 1990 income tax return in a timely manner, i.e., before April 15, 1991. It is also undisputed that the McTears filed their 1989 tax return late; the dispute is whether the McTears filed their 1989 tax return prior to April 15, 1991, as alleged by the McTears, or on approximately November 3, 1992, when the IRS contends it first received the McTears' 1989 tax return. The McTears admit Mrs. McTears mailed a copy of their 1989 return to the IRS in November 1992, but contend that copy of their return was only one of several copies she mailed in response to request of the IRS for their 1989 return.
Mr. and Mrs. McTear each testified that Mr. McTear had delivered their 1989 income tax return in a "large manila envelope" along with their 1990 income tax return to an intake clerk in the IRS office located at 600 Arch Street, Philadelphia, Pennsylvania on approximately April 10, 1991, and absolutely before April 15, 1991. Mr. McTear testified that he was forced to leave the envelope with an intake clerk, even though he asked to deliver the returns directly to a woman, Mrs. Agostino or Angellucci — he was unsure of the exact name, with whom they had been negotiating a settlement of their 1988 tax liability. According to the McTears, it was necessary for them to file their 1989 and 1990 return prior to April 15, 1991, because they had requested a payment agreement from the IRS for their 1988 liability.
Lisa Bernhauser, an IRS supervisor in the IRS special procedures branch, testified for the IRS and admited that the IRS would not have entered into an agreement with the McTears for installment payments unless the McTears had filed their 1989 and 1990 tax returns. The McTears offered a letter from the IRS dated June 18, 1991, sent to "confirm [their] recent agreement to [accept] monthly payments" on the McTears' delinquent tax liability to establish that an agreement had been entered into. Exhibit P-9. Bernhauser explained that the IRS made a mistake and did not discover that the McTears had not filed their 1989 return until four weeks after the agreement to accept monthly payments was entered into.
Mr. and Mrs. McTear each testified that Mrs. McTear had mailed 3 to 5 copies of their 1989 tax return in response to notices from the IRS that it had not received that return. They also testified that she did not mail those copies by certified mail. On cross-examination, Mr. McTear also admitted that he had not received a receipt for the tax return that the allegedly hand delivered.
A dispute also existed as to whether the McTears had been granted an extension until August 15, 1990, to file their 1989 tax return. Bernhauser interpreted the "record of activity" for the McTears' for the years 1988 through 1990, Exhibit D-1, which she testified indicates that the McTears were granted that extension. The McTears offered documentary evidence which established that their application for an extension had been denied, specifically their "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return," which was stamped received by the IRS on May 1, 1990, and an IRS notice, Form 6513, dated 6-7-90, entitled "Extension of Time to File Not Allowed," indicating that the extension was not allowable because the McTears' Application had been filed after their tax return was due. Exhibits P-12 and P-11.
The McTears also offered correspondence from the IRS responding to the McTears' requests for the IRS to locate their 89 return and/or for photocopies of their filed tax returns. Exhibits P-8 and P-9. Exhibit P-8 is a letter from the IRS, dated September 24, 1991, to the McTears in response to the McTears' correspondence, dated August 1, 1991, indicating that "[the IRS] ha[s] made a through search for your 1040 Return for 1989, and cannot find it."
The IRS relied on Bernhauser's analysis of the "record of activity" for the McTears, Exhibit D-1, and Bernhauser's analysis of other data stored in IRS computer systems to establish (1) that the McTears' 1989 tax return was received on or about November 3, 1992, and (2) since the receipt of the 1989 return does not appear elsewhere on this "record of activity" or elsewhere in the IRS system, the 1989 return was not filed on or about April 10, 1991, or at any other time prior to approximately November 3, 1992. The IRS also offered photocopies of two notices, one dated November 25, 1991, and the other dated April 27, 1992, demanding that the McTears file their 1989 tax return. Exhibits D-2 and D-3.
During discovery, the McTears requested (1) copies of their 1988, 1989, and 1990 tax returns and (2) records contained in the "administrative file" maintained by the IRS regarding their tax records. The IRS was unable to locate the 1989 return received by them in November 1992. The IRS was also unable to locate the 1990 return. The IRS was also unable to locate the administrative file.
Discussion
The McTears rely on 11 U.S.C. § 523(a)(1)(B)(ii), which provides, in relevant part:
(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 —
. . .
(ii) was filed after the date on which such return was last due, under applicable law or any extension, and after two years before the date of filing of the petition;
11 U.S.C. § 523(a)(1)(B)(ii) (West 1993).
Pursuant to section 523(a)(1)(B)(ii), a debtor's income tax liability will not be discharged if a late tax return was filed within two years of the bankruptcy petition filing. In other words, a tax debt will be discharged if a late return was filed more than two years before bankruptcy petition filing. Thus, the issue before the court is whether the McTears "filed" their 1989 tax return prior to May 5, 1991, since they filed their bankruptcy petition on May 4, 1993.
As the IRS points out, the term "filed" is not defined in the Bankruptcy Code. The IRS suggests that the Court should utilize Internal Revenue Code's definition of "filing." The IRS further suggests that bankruptcy courts in United States v. D'Avanza, 132 B.R. 462 (M.D.Fla. 1991) and In re Clark, 138 B.R. 579 (Bankr.E.D.Ark. 1991), where debtors sought to discharge their tax liability pursuant to section 523(a)(1)(B)(ii), properly analyzed when a tax return is "filed" for purposes of section 523. Those two decisions are premised upon the courts interpretation of 26 U.S.C. § 7502 , also known as the "mailbox rule." As the term "mailbox rule" implies, D'Avanza and Clark involved disputes over when tax returns alleged to have been submitted by mail were "filed," rather than when a hand delivered tax return is "filed," and accordingly those decisions are clearly inapposite.
The IRS also cites various circuit court opinions construing 26 U.S.C. § 7502, but, as discussed, because those opinions involve the "mailbox rule" in other contexts they are equally inapposite.
Section 26 U.S.C. § 7502 was enacted as a remedial provision to alleviate inequities arising from differences in mail delivery from one part of the country to another. Miller v. United States, 784 F.2d 728, 730 (6th Cir. 1986). The section provides that if any document which must be filed within a prescribed period and which is after that period "delivered by United States Mail" to the office where it is to be filed, the date of the U.S. postmark stamped on the envelope "shall be deemed to be the date of delivery." Id. citing § 7502(a)(1). This "mailbox rule" only applies if the item is actually received. Id.
Based on D'Avanza and Clark, the IRS also argues that where a debtor and the IRS each submit equal evidence as to when a tax return was filed, the IRS wins. That argument is questionable, however, the instant case does not involve a mailed tax return or the presumption created by a postmark under 26 U.S.C. § 7502, and thus, again those cases are inapposite.
In United States v. Lombardo, 241 U.S. 73, 76, 36 S.Ct. 508, 509, 60 L.Ed.2d 897 (1916), the Supreme Court after noting that "filed" had not been defined by Congress, enunciated the "physical delivery rule" which simply provides that filing is complete when a document is delivered and received by the IRS. The "physical delivery rule" is clearly applicable in the instant case, where the debtor has alleged to have filed his tax return by hand delivery. See also, Emmons v. Commissioner of Internal Revenue, 898 F.2d 50, 51 (5th Cir. 1990) (late returns are considered filed as of the date of delivery); Phinney v. Bank of Southwest Nat'l Assoc., 335 F.2d 266, 268 (5th Cir 1964) (filing is not complete until the document is delivered and received).
The Court found Mr. and Mrs. McTear's testimony to be credible. Mr. McTear testified that he was absolutely sure he delivered the 1989 tax return in a large manila envelope with his 1990 tax return to the IRS on approximately April 10, 1991. The IRS does not dispute the timely receipt of the McTears' 1990 return which was due on April 15, 1991. In fact, the IRS' principal exhibit, Exhibit D-1, indicates that a payment and tax return was received by the IRS on April 10, 1991. Mrs. McTear confirmed her husband's testimony that the 1989 return was hand delivered by him on or about April 10, 1991, and absolutely before April 15, 1991.
The McTears testified that because they were negotiating a settlement with the IRS on their delinquent 1988 tax liability in early 1991, it was necessary for them to file their 1989 and 1990 tax returns by April 15, 1991. The McTears also offered documentary evidence that the IRS allowed into a monthly payment agreement with them to pay their delinquent 1988 tax liability. The IRS admits they would not have entered into this monthly payment agreement if the McTears were delinquent in filing their tax returns. In other words, the IRS did not dispute the McTears testimony that before the IRS would agree to a monthly payment agreement the McTears would have been required to file their 1989 and 1990 tax returns.
The IRS provided little reliable evidence to rebut the testimony and other evidence submitted by the McTears. The IRS principally relied on a "record of activity" that indicates that receipt of the McTear's 1989 tax return was posted in December 1992. Bernhauser also testified that the IRS had no other record of the receipt of the 1989 return at an earlier date. Finally, the IRS offered two notices, dated November 25, 1991, and April 27, 1992, demanding that the McTears file the 1989 return.
The Court found the McTears' testimony that they had mailed 3 to 5 returns, but not by registered or certified mail, in response, apparently, to IRS notices to be troubling, since the Court believes the more reasonable course of action would have eventually been to hand deliver a second copy and request a time stamped receipt or mail a copy by certified mail. On this record, however, the Court finds it is conceivable that the IRS either did not receive all of the returns mailed, failed to post them, and/or simply misplaced them. The record shows that the IRS cannot locate either the 1989 tax return or the McTears' 1990 tax return. The IRS was also unable to locate the "administrative file" they had maintained on the McTears. Moreover, the IRS' principal exhibit, D-1, indicates that the McTears' application for an extension to file their 1989 return was granted, and yet the evidence established that this extension was denied. Furthermore, the fact that the IRS entered into the monthly payment agreement suggests the 1989 tax return was filed. Bernhauser's explanation that a mistake occurred is weak when compared with the credible testimony of the McTears. The McTears' testimony is also supported by the IRS response to the McTears' correspondence, dated August 1, 1991, indicating that "[the IRS] ha[s] made a thorough search for your 1040 Return for 1989, and cannot find it." The McTears' correspondence strongly suggests they did file their tax return in April 1991. Asking the IRS to locate a tax return they had in fact not filed involves a degree of disingenuousness and premeditation inconsistent with the Court's impression of the McTears. The cumulative effect of all these facts leads the Court to conclude that Mr. McTear did deliver the 1989 tax return to the IRS office located at 600 Arch Street in Philadelphia on April 10, 1991. Since a tax return is filed upon delivery, and here delivery occurred more than two years before the bankruptcy filing, the McTears' 1989 tax liability is dischargeable pursuant to section 523(a)(1)(B)(ii).
An appropriate order will be entered.