ABAIC Pupilage Two Presents:

WHO WANTS TO BE A TAX FREE MILLIONAIRE?

Guest Starring:

Michael R. Harrell

Senior Attorney, Office of Chief Counsel for the Internal Revenue Service

January 7, 2016

Enclosed Written Materials:

(1) Power Point Presentation(2) Department of Treasury, IRS, Notice CC-2010-016(3) Department of Treasury, IRS, Notice CC-2006-0002(4) In re Hatton v. Hatton, 220 F.3d 1057(9thCir.2000)(5) In re Wayne, BAP No. EC-14-1180, Opinion dated Dec. 17,2015(6) IRS Notice Re: Individual Chapter 11 Debtors dated Oct. 2,2006(7) 11 U.S.C. § 507(8) 11 U.S.C. § 523

Michael R. HarrellOffice of Chief Counsel, SBSE

Senior Attorney• Senior attorney practicing in the Phoenix, Arizona field office of

the Office of Chief Counsel, Internal Revenue Service (“IRS”)• Advises IRS regarding collection and bankruptcy matters, as well

as complex federal tax litigation in the United States Tax Court• Provides advice and audit support to the IRS examination

divisions regarding investigation into sophisticated tax shelterarrangements, offshore compliance, Foreign Bank AccountReporting, and many other domestic and international tax issues.

BANKRUPTCY & TAXES1.Priority2.Dischargeability3.Non-Bankruptcy Solutions

RULES• Four Lifelines• Most Correct Answers Wins!

Contestant #1 DannyBoskowitz

• Personal Injury lawyer and part-timestand-up comic from Tucson, Arizona

• Practicing law for 35 years but really funnyafter you’ve had a lot to drink!

• Signed up to be a contestant becausewhat could be better than not paying

taxes?!

Contestant #2 Sir IsaacKnowitalllots

• British Scholar of History, Tax andBankruptcy

• Author of “Dissolution of the Debtor’sJail as a Direct Causal Link to the

Breakdown of Civilized Society” and“Poor, Poor –Good God Ya’ll, What Are

They Good For?”• Working on a new book concerningAmerican taxation and how it can assist

the Crown!

Contestant #3 Max Evader

• Father of twin boys, Brady & Quarles(both a little slow), from Tempe, Arizona

• Philosophy: Lots of neighbors fail to paytaxes or report and pay less than their fair

share so “everyone is doing it”• Hates that a lot of taxes are used for

things he doesn’t support

50:50

A federal tax lien in the amount of $100,000 was recorded on the debtor’scommercial property six months prior to the petition date. An appraisalof the property lists the value as $75,000. When the IRS files its proof of

claim, its claim should be categorized as:

A: General Unsecured

C: Priority

B: Secured

D: A and B

PHONE A FRIEND

CORRECT!

Like other claims that are secured by property of the estate, the claim willbe treated as secured up to the value of the collateral and any remainingamount is reduced to priority or general unsecured status. In the case of

a federal tax lien, the amount of the claim above the value of thecollateral will be treated as a general unsecured claim.

CORRECT ANSWER: D

IRS Proofs of Claim

Filed by IRS Insolvency DepartmentCentralized Insolvency Office (“CIO”) inPhiladelphia, PA.Field Insolvency Office in Phoenix, Arizona.

I.R.M. 5.9.1 through 5.9.21May be amended.May included “estimated” claims for undeterminedtax liabilities.

Division of Labor for IRSBankruptcy WorkIRS Insolvency Department

Makes some routine referrals to AUSA

Office of Chief Counsel, IRSReviews and refers other cases to either AUSA or DOJ Tax

AUSAHandles most “routine” or “bankruptcy-specific” matters

DOJ TaxHandles “non-routine” issues or disputes on the merits ofthe tax liability

IRS Secured Claims• (Generally) Assessed federal tax liabilities for

which a Notice of Federal Tax Lien regarding theliability was properly filed prior to filing ofpetition.

• Bifurcation - The amount of the secured claim islimited to the value of collateral to which itattaches and the remainder is reduced to priorityor general unsecured status

IRS Secured Claims• Exemptions do not reduce IRS secured claim.

• IRS generally calculates its secured claim utilizingthe assets in the schedules and accounting for allsecured claims higher in priority.

50:50

The Debtor was supposed to file his 2014 tax returns in April 2015 butwith all of his other financial problems, he just plain forgot. In June 2015,

the debtor files a chapter 7 bankruptcy. He still has not filed his 2014taxes. His 2014 taxes should be treated as:

A: Fully Secured

C: Priority Unsecured

B: Fully unsecured

D: No claim. The debtornever filed his 2014returns

PUPILAGE ELIMINATES 2WRONG ANSWERS

50:50

The Debtor was supposed to file his 2014 tax returns in April 2015 butwith all of his other financial problems, he just plain forgot. In June 2015,

the debtor files a chapter 7 bankruptcy. He still has not filed his 2014taxes. His 2014 taxes should be treated as:

C: Priority Unsecured

B: Fully unsecured

INCORRECT!

Known as the Three Year Rule, under 507(a)(8)(A)(i) allowed unsecuredclaims of governmental units are eighth in priority if the tax return was

due (including extensions) after three years before the petitiondate. Focus on the date the return was required to be filed, not whether

it was actually filed or the date of filing. Subtract three years from thepetition date -- if the return was required to be filed within those three

years, then it qualifies for priority.

CORRECT ANSWER: C

Priority Income Tax Claims11 U.S.C. § 507(a)(8)

(i) Three year rule – if a return was due within3 years before the bankruptcy petition.

(ii) 240 day rule – if the tax was assessed within240 days before the bankruptcy petition.

(iii) Unassessed but assessable – Proposeddeficiencies

50:50

The Donald owns a highly exclusive piece of real property from which he collectsoutlandish rents. The IRS assesses the income tax shown on his 2014 return onOctober 1, 2015, but The Donald spent too much money on campaigns and can’tafford to pay all of the tax. The Donald makes an offer to compromise the tax debtthat only a moron would refuse. Nonetheless, the IRS does not respond . TheDonald files for bankruptcy on November 9, 2016. The assessed tax is:

A: Priority

C: Fully and especiallydischarged, because asPresident-Elect The Donaldtells the taxing authority:“you’re fired.”

B: Non-Dischargeable

D: Both A & B

CORRECT!

Pursuant to 11 U.S.C. 507(a)(8)(ii)(I), the 240-day rule is tolled while an“offer in compromise” is “pending or in effect.” Here, even though more

than 240 days has passed since the tax was assessed, the time periodwas tolled while the offer was pending. The tax debt is non-

dischargeable under 11 U.S.C. 523(a)(1)(A).

CORRECT ANSWER: D

Priority Income Tax Claims11 U.S.C. § 507(a)(8)(ii)Special Tolling Rules For The 240 DayRule

• Tolled for any time during which an offer incompromise was pending or in effect, plus 30 days;

• Tolled for any time during which a stay of proceedingsagainst collection was in effect in a prior bankruptcyduring the 240 day period, plus 90 days.

Priority Income Tax Claims11 U.S.C. § 507(a)(8) (flushlanguage)• Beware of tolling!

• Prior Bankruptcies;• Offer in Compromise;• CDP Requests from a Notice of Intent

to Levy;• Other situations where IRS prohibited

from collecting.

50:50

In a chapter 7 bankruptcy case, even after you 1) determine that theprevious tax debt is dischargeable, 2) the IRS actually agrees with theanalysis, and 3) your client is current on recent taxes (filings andpayments), what happens if the Debtor does not bother to turnovercopies of the most recent tax returns to the Chapter 7 Trustee:

A: Nothing, the Trusteedoes not care if you turnover records andinformation

C: The case may bedismissed

B: The case willautomatically bedismissed under Section727(a)(4)(D)

D: The discharge will bedelayed by the Clerk’soffice

INCORRECT!

The failure to provide the most recent tax returns will not affect thedischargeability of the prior tax debt, but it could lead to dismissal of the

case under 521(e)(2)(B).

CORRECT ANSWER: C

50:50

Debtor was the owner of a limited liability company in Arizona and had ahundred employees. She withheld taxes from her employees’ paychecks

but spent the money and is now unable to pay the I.R.S. They seemreally upset about it. Can Debtor discharge those taxes in a bankruptcy?

A: Yes, the taxes are owedby the business and not theowner personally

C: No, Debtor cannotdischarge debt owed by hercompany

B: Yes, withholding taxesonly give rise to personalincome tax

D: No, Debtor is liable asthe responsible person forthe business

CORRECT!

Pursuant to 11 U.S.C. § 507(a)(8)(C) and 11 U.S.C § 523(a)(1)(A), a taxrequired to be collected or withheld and for which the debtor is liable “in

whatever capacity” is not discharged regardless of whether or not aclaim for such tax was filed or allowed

CORRECT ANSWER: D

IRS Discharge Procedures• IRS insolvency generally will load

information into the automateddischarge program when dischargeorder received from the bankruptcycourt.

• Discharge entered onto transcript ofaccount.

Tax Issues in Bankruptcy

IRS Transcripts

IRS Discharge ProceduresInternal Revenue Manual -http://www.irs.gov/irm/Bankruptcy I.R.M. 5.9

Closing a Bankruptcy Case. I.R.M.5.9.17Automatic Discharge System. I.R.M.5.9.18

IRS no longer provides “comfort letters.”Instead, check IRS transcripts

IRS Discharge Procedures• To see if liabilities have been

discharged, check IRS transcripts afterthe discharge is entered.

• No need to file an adversary unlessdischargeability is genuinely in dispute.

50:50

Chuck Norris files for bankruptcy on January 7, 2016. Chuck files his 2011return on September 31, 2015 (there is a September 31st because ChuckNorris says so). The IRS does not audit the 2011 return. Under the 240Day Rule, 507(a)(8)(A)(ii), the Norris 2011 taxes are:

A: Not priority because thetax return was not auditedwithin 240 days of thepetition date.C: Chuck Norris files blankreturns with a picture ofhimself crouched in attackposition. He has never hadto pay taxes.

B: Two things are certainin life. The fact that oneday Chuck Norris will killyou and taxes.

D: The taxes are priority.

PHONE A FRIEND

CORRECT!

The taxes are priority. The key date is when the tax was assessed andhere the tax was self-assessed by filing the return within 240 days of the

petition date.

CORRECT ANSWER: D

50:50

What is the name of the tax protest in the United States between 1791-1794 rebelling against the first tax imposed on a domestic product by thenewly-formed federal government?:

A: The Boston Tea Party

C: The Whiskey Rebellion

B: Shay’s Rebellion

D: Fries Rebellion

ASK THE BARTENDER

CORRECT!

The Whiskey Rebellion was the first tax imposed on a domestic productand was put in place by U.S. Secretary Treasury Alexander Hamilton to

pay for the Revolutionary War.

CORRECT ANSWER: C

50:50

Which of the following taxes are dischargeable in an individual chapter 11case filed in 2015:

A: 2010 income taxes relatingto a timely-filed tax return andassessed 1,524 days before thepetition date

C: 2014 income taxes relatingto a timely filed tax return andassessed by the service 225days before the petition date

B: 2010 trust fund taxes forfailure to pay withholdingtaxes owed for the benefitof debtor's employeesD: real property taxes owedto Pima County Treasurer forthe first and second halvesof 2013 and secured by thedebtor's principal residence

INCORRECT!

These taxes are dischargeable under 523(a)(1)(A) because they are notof the kind and for the periods specified in 507(a)(8). That is, these

taxes are: (1) measured by income; (2) for a taxable year ending beforethe petition date; (3) for which a return is last due after three years

before the filing of the petition; and (4) assessed more than 240 daysbefore the filing of the petition.

Answer B is incorrect because trust fund taxes are not dischargeable;Answer C is incorrect because the taxes fail the three year rule and the240 day rule; Answer D is incorrect because real property taxes owed

to Pima County and secured by a lien on the debtor's residence are notdischargeable.

CORRECT ANSWER: A

Non-dischargeable Taxes(Generally) 11 U.S.C. § 523

• Priority taxes under 507(a)(3) and 507(a)(8). § 523(a)(1)(A).

• Taxes with respect to which a required return was filedafter the due date, including extensions, but within 2 yearsof the petition date. § 523(a)(1)(B)(ii).

• Taxes with respect to which the debtor filed a fraudulentreturn, or willfully attempted to evade or defeat the tax. §523(a)(1)(C).

Non-dischargeable Taxes in theDifferent Chapters

• Chapter 7, Hardship Chapter 13, Chapter 11 Individualgenerally apply all of the exceptions to discharge underSection 523.

• Chapter 13 discharge under § 1328(a), at the completion ofChapter 13 plan payments, a debtor is entitled to adischarge of all debts provided for by the plan, includingpriority income taxes (except trust fund taxes) aredischarged if they are provided for in the plan. §1328(a)(2).

50:50

W. Snipes and M. Stewart file bankruptcy petitions on January 7,2016. Snipes filed his 2011 income tax return on January 10, 2013 andStewart failed to file her 2011 return. Under the Three Year Rule,507(a)(8)(A)(i), the Snipes and Stewart 2011 taxes are:

A: Most likely considerablein amount so the IRS willmake sure the rule applies

C: Priority under the rule.

B: Not priority under therule.

D: Snipe’s is priority,Stewart’s is not priority

PHONE A FRIEND

CORRECT!

Neither are priority. The key date is the date the 2011 return wasrequired to be filed – 4/15/2012, which is outside the three year period,

1/7/13 to 1/7/16. It doesn’t matter when the return was filed or if areturn was filed at all.

CORRECT ANSWER: B

50:50

Debtor failed to file tax returns with the I.R.S. for five years and the I.R.S.completed tax returns on her behalf. Debtor didn’t dispute the tax

returns because they actually reflected less income than she made duringthe years. Are any of the taxes assessed dischargeable?

A: Yes, a tax return filed bythe I.R.S. has the sameeffect as a self-filed return

C: Yes, the 3 year/240 dayrule applies

B: No, because the taxreturns filed by the I.R.S.are inaccurate

D: No, a debtor cannotdischarge taxes if a returnwas not filed

PUPILAGE ELIMINATES 2WRONG ANSWERS

50:50

Debtor failed to file tax returns with the I.R.S. for five years and the I.R.S.completed tax returns on her behalf. Debtor didn’t dispute the tax

returns because they actually reflected less income than she made duringthe years. Are any of the taxes assessed dischargeable?

A: Yes, a tax return filed bythe I.R.S. has the sameeffect as a self-filed return

D: No, a debtor cannotdischarge taxes if a returnwas not filed

CORRECT!

Pursuant to 11 U.S.C. § 523(a)(1)(B), a tax is not discharged where the taxreturn was not filed.

CORRECT ANSWER: D

Unfiled Returns § 523(a)(1)(B)(i)

• In most circumstances, the IRS does not treat its“Substitute For Returns” (SFR) as a return under §523(a)(1)(B)(i).

• Definition of return for dischargeability purposes—§523(a), flush language at end of subsection

• The Service’s position: Notice CC-2010-16:• If a tax is assessed (SFR) before return is filed, it is non-

dischargeable. However, if document otherwise meetsthe Beard test, it may qualify as return to extent of anyadditional taxes reported, which could then bedischarged after two years.

• In re Hatton, 220 F.3d 1057 (9th Cir. 2000).

Unfiled Returns § 523(a)(1)(B)(i)

• Stay Tuned!

50:50

Thomas Jefferson filed for Bankruptcy. Within 240 days prior to filing, Mr.Jefferson was assessed tax liability by the IRS. Unfortunately, his case wasdismissed after 20 days for failing to file his schedules. Mr. Jeffersonrefiled for bankruptcy 120 days later. Under 507(a)(8)(A)(ii)(II), Mr.Jefferson’s taxes are:

A: Not priority as tollingdoes not apply to thisBankruptcy Code section.

C: Not Priority, because Mr.Jefferson waited to re-filefor 120 days, therebynegating the effect oftolling.

B: Priority, due to tollingof the prior filing.

D: Priority, because IRSdebt is always a priorityso long as the tax isassessed 240 days priorto the filing of a petition

Your founding father . . . Though born intoa wealthy slave-owning family, Jeffersonhad many financial problems, and filed forbankruptcy several times. He died deeplyin debt and his possessions (including thepersons he held as slaves) were sold off inpublic auctions starting in 1827.

Fun Fact:

CORRECT!

Under Rule 507(a)(8)(ii)(II), the tax liability assessed to Mr.Jefferson would be tolled and receive priority status for the timethat Mr. Jefferson was in the prior bankruptcy (20 days) plus 90days for a total of 110 days. Since Mr. Jefferson waited 120 to re-file he negated the tolling effect of the statute and the priorityeffect of the his tax liability.

CORRECT ANSWER: C

50:50

Clever Debtor just filed his taxes from 2006, 2007, and 2008 in 2015. OnNew Year’s Eve, he pays his tax liability of $25,000.00 from these on hisAmerican Express (Amex). Six months later, he decides to file bankruptcy.The debt to Amex is:

A: Dischargeable becauseCongress hates credit cardcompanies

C: Nondischargeable, unlessClever Debtor brings anadversary against Amex

B: Dischargeable, unlessAmex files a non-dischargeability action

D: Nondischargeable,unless Clever Debtorbrings an adversaryagainst the IRS

CORRECT!

Pursuant to 11 U.S.C. 523(a)(14) debts incurred to pay a tax due to the UnitedStates that is non-dischargeable pursuant to 11 U.S.C. 523(a)(1) remains non-dischargeable. Additionally, pursuant to 11 U.S.C. 523(c)(1) only those debtslisted in 11 U.S.C. 523 incurred pursuant to 11 U.S.C. 523(a)(2),(4), or (6) aredischarged without the Debtor initiating an adversary. Clever Debtor shouldbe prepared to lose his action to discharge the AMEX debt, it might be betterto just hope AMEX doesn’t notice.

CORRECT ANSWER: C

WINNER!!!Contestant #3

Max Evader

How Do I Know My Client’s TaxLiabilities?

• Ask them!• “Trust but verify”• Past Returns• IRS Correspondence• Publicly Recorded Liens• FOIA• United States Tax Court Docket

• Request IRS Transcripts.

Requesting IRS Transcripts

1. In Person: Internal Revenue Office Walk-in Office4041 N Central Ave. STE 112 Phoenix, AZ 850127350 W Camino San Xavier, Glendale AZ 853081818 E. Southern Ave., Mesa, AZ 85204300 W. Congress, Tucson, AZ 85701More available at https://www.irs.gov/uac/Contact-My-Local-Office-in-Arizona

2. Online: https://www.irs.gov/Individuals/Get-TranscriptWill not process online request if the transcripts will be mailed to an addressother than the one the IRS has on file . To send your transcript to a differentaddress, complete and send Form 4506-T (also available online) .3. Call: 1-800-908-9946

Information needed: 1) Full name; 2) Social Security Number (or IRSindividual taxpayer identification number); 3) Date of birth; 4) Street address;and 5) Zip Code.

HELPFUL INFORMATIONSEE ABAIC ONLINE MATERIALS

• IRS Notice RE application of discharge exception under523(a)(1)(B)(i)

• IRS Notice RE the Service’s position in contesting thedischargeability of a tax debt in bankruptcy

• In Re Hatton – 9th Circuit Appeal’s Court Case (220 F.3d 1057)• In Re Martin – 9th Circuit BAP Opinion• IRS Notice RE Chapter 11 debtors and the tax treatment of

post-petition income

Distribute to: X All Personnel

X Electronic Reading Room Filename: CC-2010-016 File copy in: CC:FM:PF

Department of the Treasury

Internal Revenue Service

Office of Chief Counsel N o t i c e

CC-2010-016

September 2, 2010

Subject:

Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities Reported on Late-Filed Returns and Returns Filed After Assessment Cancel Date:

Effective until further notice

Purpose This Notice provides guidance on the application of the discharge exception under section 523(a)(1)(B)(i) of the Bankruptcy Code for a debt with respect to which a return was not filed in cases in which the taxpayer filed a Form 1040 after the due date. Background Pursuant to section 523(a)(1)(B)(i), an individual’s bankruptcy discharge does not discharge a tax debt for which a required return was not filed. The Government successfully argued in a number of circuits that a Form 1040 filed after assessment does not qualify as a return for discharge purposes under section 523(a)(1)(B)(i). For example, In re Hindenlang, 164 F.3d 1029 (6th Cir.), cert. denied, 528 U.S. 810 (1999), the Sixth Circuit held that a document must qualify as a federal tax return under tax law to be a return for bankruptcy purposes. The court applied the test in Beard v. Commissioner, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986), which held that if a document “contains sufficient information to permit a tax to be calculated” and “purports to be a return” and “is sworn to as such, and “evinces an honest and reasonable attempt to satisfy the law,” it is a return. The Hindenlang court concluded that a Form 1040 filed after assessment serves no tax purpose and therefore was not an honest and reasonable attempt to satisfy the tax laws. Other circuits largely followed Hindenlang. See In re Payne, 431 F.3d 1055 (7th Cir. 2005); In re Moroney, 352 F.3d 902 (4th Cir. 2003); In re Hatton, 220 F.3d 1057 (9th Cir. 2000). The Eighth Circuit disagreed in In re Colsen, 446 F.3d 836 (8th Cir. 2006), holding that a document that on its face evinces an honest and reasonable attempt to satisfy the tax laws qualifies as a return, whether or not it was filed after assessment. Section 523(a) was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The following unnumbered paragraph was added to the end of section 523(a), effective for cases filed on or after October 17, 2005:

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For the purpose of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State of local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.

(Emphasis added.) Neither Colsen nor any of the prior decisions of the courts of appeal involved a bankruptcy case filed on or after October 17, 2005. In the dissent in Payne, Judge Easterbrook remarked that, after the 2005 legislation, an untimely return cannot lead to a discharge because of the reference to “applicable filing requirements” in the unnumbered paragraph in section 523(a). 431 F.3d at 1060. In In re Creekmore, 401 B.R. 748, 751 (Bankr. N.D. Miss. 2008), a post-October 17, 2005 case, the bankruptcy court agreed with Judge Easterbrook’s dissent and concluded that any late-filed return can never qualify as a return for dischargeability purposes, unless it was prepared pursuant to I.R.C. § 6020(a). The bankruptcy court in Creekmore acknowledged that its reading of the unnumbered paragraph was harsh, but stated that debtors could avoid the problem by taking advantage of the “safe-harbor” of section 6020(a) by having the Service prepare their returns. Creekmore, 401 B.R. at 752. Discussion 1. For bankruptcy cases filed on or after October 17, 2005, can a tax debt related to a late-filed Form 1040 be discharged?

Yes. Read as a whole, section 523(a) does not provide that every tax for which a return was filed late is nondischargeable. If the parenthetical “(including applicable filing requirements)” in the unnumbered paragraph created the rule that no late-filed return could qualify as a return, the provision in the same paragraph that returns made pursuant to section 6020(b) are not returns for discharge purposes would be entirely superfluous because a section 6020(b) return is always prepared after the due date. It is a cardinal principle of statutory construction that a statute should be construed so that no clause, sentence or word is rendered superfluous. Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (refusing to read one provision of the Bankruptcy Code to render another superfluous). Section 523(a)(1)(B)(ii) provides that an individual’s bankruptcy discharge does not discharge a debt for which a return was filed after the last date, including any extension, the return was due, and after two years before the date of the filing of the petition in bankruptcy. The Creekmore reading would limit the application of section 523(a)(1)(B)(ii) to cases in which the Service prepares a return for the taxpayer’s signature under section 6020(a) of the Internal Revenue Code. By presuming that Congress intended to limit section 523(a)(1)(B)(ii)’s long-standing discharge exception for debts with respect to which a late return was filed more than two years before bankruptcy to the minute number of cases in which the Service prepares a return for the taxpayer’s signature under section 6020(a), the Creekmore reading also contradicts a special rule for interpreting the Bankruptcy Code. As the Supreme Court stated in Dewsnup v. Timm, 502 U.S. 410, 419 (1992), “This Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.” Finally, the supposed “safe harbor” of section 6020(a) is illusory. Taxpayers have no right to demand that the Service prepare a return for them under that provision. We, therefore,

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conclude that section 523(a) in its totality does not create the rule that every late-filed return is not a return for dischargeability purposes. 2. Whether or not a Form 1040 filed after assessment is a return under nonbankruptcy law, is the related tax debt dischargeable? No. A debt for the portion of a tax that was assessed prior to the filing of a Form 1040 is nondischargeable under 523(a)(1)(B)(i). The debt is not dischargeable because a debt assessed prior to the filing of a Form 1040 is a debt for which is return was not “filed” within the meaning of section 523(a)(1)(B)(i).1 For bankruptcy discharge purposes, an income tax for any given year can be partially dischargeable and partially nondischargeable. Section 523(a)(1)(A), together with section 507(a)(8)(A), excepts debts for priority taxes from discharge. Section 507(a)(8)(A) includes three alternative rules that confer priority (and nondischargeability) on income taxes. Two of those rules clearly allow priority to apply to only a portion of the tax for a given year. Section 507(a)(8)(A)(ii) generally confers priority (and nondischargeability) to income taxes that were assessed within 240 days of the bankruptcy petition. If only a portion of a year’s income tax was assessed within the 240-day period, only that portion would be excepted from discharge. Section 507(a)(8)(A)(iii) generally confers priority (and nondischargeability) to income taxes that were unassessed but assessable after the bankruptcy case was filed. If only a portion of the income tax for a given year was unassessed but assessable, only that portion would be excepted from discharge. For discharge purposes, therefore, a given income tax is divided into dischargeable and nondischargeable debts if a criterion for discharge applies only to a portion of the tax. As with section 523(a)(1)(A), a tax liability for any given year can be divided into dischargeable and nondischargeable debts under section 523(a)(1)(B)(i). Section 523(a)(1)(B)(i) excepts from discharge any “debt” for a tax with respect to which a return was not “filed.” For bankruptcy discharge purposes, a debt for an income tax recorded by an assessment should be considered independently of any part of the tax for the same tax year that may be assessed later. If at the time of assessment no return has been filed, then the debt recorded by that assessment is a debt with respect to which a return was not filed and section 523(a)(1)(B)(i) applies to except it from discharge. If the taxpayer later files a Form 1040 that reports an additional amount of tax, only the portion of the tax that was not previously assessed would be a dischargeable debt based upon that subsection. The portion of a tax that was assessed before a Form 1040 was filed would be a debt for which no return was “filed” within the meaning of section 523(a)(1)(B)(i), because at the time of assessment the debtor had not met the filing requirements for that portion of the tax and the assessed portion was not calculated based upon the tax reported on the Form 1040. The assessed portion of the tax was a debt for a tax that was legally enforceable by lien or levy before any return was filed. In the case of a debtor who files a Form 1040 after assessment reporting no more tax than was previously assessed, no portion of the tax would be a dischargeable debt. Conclusion A Form 1040 is not disqualified as a “return” under section 523(a) solely because it was filed late. Regardless of whether a Form 1040 filed after assessment is a “return” for tax purposes, the portion of a tax that was assessed before the Form 1040 was filed is nondischargeable under 1 Accordingly, whether a late-filed Form 1040 is a “return” – the issue addressed in Hindenlang and other cases on section 523(a)(1)(B)(i) – is irrelevant.

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section 523(a)(1)(B)(i). All bankruptcy cases involving application of the discharge exception under section 523(a)(1)(B)(i) to cases involving a Form 1040 filed after assessment should be coordinated with Branch 5, Office of the Associate Chief Counsel (Procedure and Administration). Questions about this Notice should be directed to Branch 5 at (202) 622-3620.

________/s/___________ Deborah A. Butler Associate Chief Counsel (Procedure & Administration)

Instructions: Circulate Distribute X to: All Personnel X Attorneys In:

Other Electronic Filename: CC-2006-002 Original signed copy in: CC:FM:PM

Department of the Treasury

Internal Revenue Service

Office of Chief Counsel N o t i c e

CC-2006-002

November 22, 2005

Subject:

Litigating Position Regarding the Definition of Returns for Bankruptcy Discharge Purposes Cancel Date:

Effective until Further Notice

Purpose This Notice provides guidance regarding the Service’s position in contesting the dischargeability of a tax debt in bankruptcy on the basis that no return was filed when a taxpayer has signed and submitted a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. Background The four part test set forth in Beard v. Commissioner, 82 T.C. 766, 777-78 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986), is the proper test for determining what constitutes a valid return for purposes of the internal revenue laws or regulations. For a document to be considered a valid return, the document must:

(1) purport to be a return; (2) be executed under penalties of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax law.

In Rev. Rul. 74-203, 1974-1 C.B. 330, the Service held that a Form 870 signed by the taxpayers, husband and wife, in response to a proposed substitute for return is a return of the taxpayers for purposes of section 6020(a) of the Internal Revenue Code. Relying upon Rev. Rul. 74-203, some bankruptcy courts have held that execution of a waiver may constitute the filing of a return for purposes of Bankruptcy Code section 523(a)(1)(B) even though the document is not executed under penalties of perjury. See, e.g., In re Carapella, 84 B.R. 779, 782 (Bankr. M.D. Fla. 1988) (Form 870); In re Mathis, 249 B.R. 324, 327 (S.D. Fla. 2000) (Form 4549, Income Tax Examination Changes); In re Lowrie, 162 B.R. 864, 867 (Bankr. D. Nev. 1994) (Form 1902-B, Report of Individual Income Tax Changes). On September 12, 2005, the Service, in Rev. Rul. 2005-59, 2005-37 I.R.B. 505, revoked Rev. Rul. 74-203, and clarified when documents prepared or executed by the Service under section 6020, or waivers on assessment, constitute valid returns. Rev. Rul. 74-203 is inconsistent with Beard and the cases cited therein on what constitutes a return because a Form 870 does not purport to be a

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return and is not executed under penalties of perjury. Position Taxpayers are entitled to rely on Rev. Rul. 74-203 prior to its revocation. The Service will not contest the dischargeability of a tax debt in bankruptcy on the basis that no return was filed if a taxpayer submitted a signed Form 870 before the revocation of Rev. Rul. 74-203 on September 12, 2005. This position applies equally to the Form 1902, Report of Individual Income Tax Audit Changes (obsoleted 1988), and the Form 4549, Income Tax Examination Changes. For bankruptcy cases filed on or after October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amends Bankruptcy Code section 523(a) to provide specifically that a “return” means a return that satisfies the requirements of nonbankruptcy law, including a return prepared under section 6020(a) or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but not a return prepared under section 6020(b). In other words, this provision includes as returns documents meeting the Beard test, Rev. Rul. 2005-59 and signed stipulated decisions entered by nonbankruptcy courts, e.g., the Tax Court. Questions regarding this Notice should be directed to Branch 2 of the Office of Assistant Chief Counsel (Collection, Bankruptcy and Summons), at (202) 622-3620.

_______ _/s/___________ Deborah A. Butler Associate Chief Counsel (Procedure & Administration)

United States Court of Appeals,Ninth Circuit.

In re James H. HATTON Debtor.United States of America, Appellant,

v.James H. Hatton, Appellee.

No. 98-35248.Argued and Submitted Aug. 13, 1999

Filed Aug. 10, 2000

Chapter 7 debtor filed complaint to have his taxliabilities declared dischargeable, and moved forsummary judgment. The United States BankruptcyCourt for the Western District of Washington,Philip H. Brandt, J., granted debtor's motion, andfederal government appealed. The Bankruptcy Ap-pellate Panel, Ryan, J., 216 B.R. 278, affirmed. Onfurther appeal, the Court of Appeals, Brunetti, Cir-cuit Judge, held that neither the substitute returnprepared by the Internal Revenue Service (IRS)without any input or assistance from Chapter 7debtor nor the installment agreement which debtorfinally agreed to sign only after the IRS hadthreatened to levy his wages and to seize his per-sonal property qualified, whether separately or to-gether, as tax “return” filed by debtor, of kindwhich would permit debtor to discharge his corres-ponding tax liability.

Reversed.

West Headnotes

[1] Bankruptcy 51 3782

51 Bankruptcy51XIX Review

51XIX(B) Review of Bankruptcy Court51k3782 k. Conclusions of Law; De Novo

Review. Most Cited CasesWhether substitute return prepared by Internal

Revenue Service (IRS), the installment agreement

signed by debtor, or some combination of the two,qualified as a tax “return” filed by debtor, so as topermit debtor to discharge his corresponding tax li-ability, was question that Court of Appeals was inas good a position to decide as bankruptcy court, sothat Court of Appeals would independently exam-ine bankruptcy court's decision. Bankr.Code, 11U.S.C.A. § 523(a)(1)(B)(i).

[2] Bankruptcy 51 3782

51 Bankruptcy51XIX Review

51XIX(B) Review of Bankruptcy Court51k3782 k. Conclusions of Law; De Novo

Review. Most Cited Cases

Bankruptcy 51 3786

51 Bankruptcy51XIX Review

51XIX(B) Review of Bankruptcy Court51k3785 Findings of Fact

51k3786 k. Clear Error. Most CitedCases

Court of Appeals reviews bankruptcy court'sinterpretation of the Bankruptcy Code de novo andits factual findings for clear error. Fed.RulesBankr.Proc.Rule 8013, 11 U.S.C.A.

[3] Bankruptcy 51 3411

51 Bankruptcy51X Discharge

51X(E) Effect of Discharge51k3411 k. In General. Most Cited Cases

As general rule, debtor who files a Chapter 7petition is discharged of personal liability for alldebts incurred prior to filing of petition, includingthose related to unpaid taxes. Bankr.Code, 11U.S.C.A. § 727(b).

[4] Bankruptcy 51 3343.5

51 Bankruptcy

Page 1220 F.3d 1057, 86 A.F.T.R.2d 2000-5572, 2000-2 USTC P 50,651, 44 Collier Bankr.Cas.2d 970, 36 Bankr.Ct.Dec.148, Bankr. L. Rep. P 78,243, 00 Cal. Daily Op. Serv. 6653, 2000 Daily Journal D.A.R. 8887, 4 Cal. Bankr. Ct.Rep. 78(Cite as: 220 F.3d 1057)

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51X Discharge51X(C) Debts and Liabilities Discharged

51X(C)1 In General51k3343 Particular Debts or Liabilities

51k3343.5 k. Taxes and Assess-ments. Most Cited Cases

(Formerly 51k3352)Term “return,” as used in statutory exception to

discharge for tax debts with respect to which a re-quired “return” is not filed, should be given a strictconstruction and interpreted in accordance with itsordinary meaning. Bankr.Code, 11 U.S.C.A. §523(a)(1)(B)(i).

[5] Bankruptcy 51 3343.5

51 Bankruptcy51X Discharge

51X(C) Debts and Liabilities Discharged51X(C)1 In General

51k3343 Particular Debts or Liabilities51k3343.5 k. Taxes and Assess-

ments. Most Cited Cases(Formerly 51k3352)Term “return,” as used in statutory exception to

discharge for tax debts with respect to which a re-quired “return” is not filed, refers to a formal state-ment on a required legal form showing taxable in-come, allowable deductions and exemptions, and acomputation of the tax due. Bankr.Code, 11U.S.C.A. § 523(a)(1)(B)(i).

[6] Bankruptcy 51 3343.5

51 Bankruptcy51X Discharge

51X(C) Debts and Liabilities Discharged51X(C)1 In General

51k3343 Particular Debts or Liabilities51k3343.5 k. Taxes and Assess-

ments. Most Cited Cases(Formerly 51k3352)In order for document to qualify as a “return,”

within meaning of statutory exception to dischargefor tax debts with respect to which a required“return” is not filed, it must (1) purport to be a re-

turn; (2) be executed under penalty of perjury; (3)contain sufficient data to allow calculation of tax;and (4) represent an honest and reasonable attemptby debtor to satisfy requirements of tax law.Bankr.Code, 11 U.S.C.A. § 523(a)(1)(B)(i).

[7] Bankruptcy 51 3343.5

51 Bankruptcy51X Discharge

51X(C) Debts and Liabilities Discharged51X(C)1 In General

51k3343 Particular Debts or Liabilities51k3343.5 k. Taxes and Assess-

ments. Most Cited Cases(Formerly 51k3352)Neither the substitute return prepared by the In-

ternal Revenue Service (IRS) without any input orassistance from Chapter 7 debtor nor the install-ment agreement which debtor finally agreed to signonly after the IRS had threatened to levy his wagesand to seize his personal property qualified, wheth-er separately or together, as tax “return” filed bydebtor, of kind which would permit debtor to dis-charge his corresponding tax liability, where substi-tute return was never signed by debtor and neitherdocument was executed under penalty of perjury,and neither represented honest attempts by debtorto comply with requirements of tax law.Bankr.Code, 11 U.S.C.A. § 523(a)(1)(B)(i).

*1058 Kenneth L. Greene, AUSA, Washington,D.C., for the appellant.

Christopher E. Allen, Esq., Tacoma, Washington,for the appellee.

Appeal from the United States District Court for theBankruptcy Appellate Panel Ryan, Hagan, and Rus-sell, Judges, Presiding

Before: CANBY, BRUNETTI, andO'SCANNLAIN, Circuit Judges.

BRUNETTI, Circuit Judge:

Page 2220 F.3d 1057, 86 A.F.T.R.2d 2000-5572, 2000-2 USTC P 50,651, 44 Collier Bankr.Cas.2d 970, 36 Bankr.Ct.Dec.148, Bankr. L. Rep. P 78,243, 00 Cal. Daily Op. Serv. 6653, 2000 Daily Journal D.A.R. 8887, 4 Cal. Bankr. Ct.Rep. 78(Cite as: 220 F.3d 1057)

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James Hatton (“Hatton”) failed to file a federalincome tax return in 1983, and the Internal RevenueService (“IRS”) instead prepared a substitute returnon his behalf. Hatton then entered into an install-ment agreement with the IRS, agreeing to tender$200 per month in order to fulfill his outstandingtax liabilities. Before Hatton completed all the pay-ments in the installment agreement, he filed aChapter 7 bankruptcy petition. The IRS filed aproof of claim in order to recover the remaining un-paid sums under the installment agreement. In re-sponse, Hatton filed a motion for an adversary pro-ceeding in order to prove that his tax liabilitiesshould be discharged in bankruptcy. The bank-ruptcy court agreed and granted summary judgmentin favor of Hatton, concluding that Hatton's unpaidtax liabilities were eligible for discharge under sec-tion 727 of the Bankruptcy Code. 11 U.S.C. § 727.The Bankruptcy Appellate Panel (“BAP”) affirmedthe bankruptcy court. We have jurisdiction under28 U.S.C. § 158(d), and we reverse.

I.On July 15, 1994, Hatton filed a Chapter 7

bankruptcy petition. In the debt schedules accompa-nying the petition, Hatton listed his overdue federaltax liabilities for 1983 through 1985 and 1988through 1990. Although Hatton received a dis-charge, the IRS still sought to recover the unpaidtax liabilities for the years listed on Hatton's *1059debt schedules. The IRS ultimately admitted thatthe tax liabilities for all years except 1983 were dis-chargeable. The IRS alleged, however, that the1983 liabilities were not discharged, and that, be-cause its claim for the 1983 tax year was secured, itcould proceed against Hatton's exempt and aban-doned property. Hatton then filed a motion for sum-mary judgment, arguing that his tax liabilities, in-cluding those incurred in 1983, were discharged inbankruptcy. The government opposed Hatton's mo-tion, arguing that Hatton's 1983 tax liabilities werenondischargeable under 11 U.S.C. § 523(a)(1)(B)(i)because Hatton never filed a tax return for the 1983tax year. The relevant facts surrounding the motionare not in dispute.

Hatton failed to file a federal income tax returnfor the 1983 tax year. As a result, the IRS prepareda substitute return on Hatton's behalf pursuant tosection 6020(b) of the Internal Revenue Code(“I.R.C.”). 26 U.S.C. § 6020(b). The IRS completedthe substitute tax return based on information it hadobtained from sources other than Hatton. The IRSdetermined that Hatton had an unpaid tax liabilityof $2,792 and additions to tax totaling $1,043.

Following the completion of the substitute re-turn, the IRS sent Hatton a notice of deficiency, butHatton failed to respond. The IRS then assessed thetax deficiency on January 12, 1987, and sent Hattona notice of assessment and demand for payment.When Hatton failed to pay any of the assessedamounts, the IRS filed a notice of lien against Hat-ton's property.

During the course of the delinquency investiga-tion, the IRS sent Hatton delinquency notices on atleast three occasions, but Hatton failed to respondin any way. In an attempt to recover the unpaidtaxes, the IRS then sent a letter to Hatton proposinga meeting with IRS officials to discuss his tax liab-ilities. The letter informed Hatton that a failure toattend the meeting could result in a levy against hiswages and bank accounts and a seizure of his prop-erty. Consequently, Hatton and his attorneys finallymet with an IRS officer on December 13, 1991.

Although Hatton did not dispute the IRS' com-putation of his 1983 tax liabilities, no agreementwas reached at the initial meeting. After extensivenegotiations between the IRS and Hatton, theparties executed and signed an installment agree-ment. The agreement provided that Hatton wouldpay $200 a month until his tax liabilities were paidin full. Hatton complied with the terms of the in-stallment agreement and continued to make his$200 monthly payments until he filed his Chapter 7bankruptcy petition on July 15, 1994.

After examining the relevant facts, the bank-ruptcy court granted Hatton's motion for summaryjudgment, concluding that Hatton's tax liabilities

Page 3220 F.3d 1057, 86 A.F.T.R.2d 2000-5572, 2000-2 USTC P 50,651, 44 Collier Bankr.Cas.2d 970, 36 Bankr.Ct.Dec.148, Bankr. L. Rep. P 78,243, 00 Cal. Daily Op. Serv. 6653, 2000 Daily Journal D.A.R. 8887, 4 Cal. Bankr. Ct.Rep. 78(Cite as: 220 F.3d 1057)

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were dischargeable under 11 U.S.C. § 727. TheBAP affirmed, reasoning that Hatton had filed a tax“return” as that term is defined under section523(a)(1)(B)(i) because the IRS had prepared a sub-stitute return and Hatton had cooperated with thegovernment in executing the installment agreement.See United States v. Hatton ( In re Hatton), 216B.R. 278, 283 (9th Cir. BAP 1997). The UnitedStates appeals from the BAP's decision.

II.[1][2] The only question on appeal is whether

the substitute return prepared by the IRS, the in-stallment agreement signed by Hatton, or a combin-ation of both, constitute a tax “return” under 11U.S.C. § 523(a)(1)(B)(i). Because we are in as gooda position as the BAP to review bankruptcy courtrulings, we independently examine the bankruptcycourt's decision, reviewing the bankruptcy court'sinterpretation of the Bankruptcy Code de novo andits factual findings for clear error. See Quarre v.Saylor (In re Saylor), 108 F.3d 219, 220 (9thCir.1997).

A.[3][4] The general rule is that a debtor who

files a Chapter 7 bankruptcy petition *1060 is dis-charged from personal liability for all debts in-curred before the filing of the petition, includingthose related to unpaid taxes. See 11 U.S.C. §727(b). The Bankruptcy Code, however, lists sever-al exceptions to the general rule of dischargeability.Section 523(a)(1) of the Bankruptcy Code providessuch an exception, and controls whether unpaidtaxes are dischargeable in bankruptcy. That provi-sion provides:

(a) A discharge under section 727 ... of this titledoes not discharge an individual debtor from anydebt-

(1) for a tax or a customs duty-

(A) of the kind and for the periods specified insection 507(a)(2) or 507(a)(8) of this title,whether or not a claim for such tax was filed or

allowed;

(B) with respect to which a return, if required-

(i) was not filed; or

(ii) was filed after the date on which such re-turn was last due, under applicable law or un-der any extension, and after two years beforethe date of the filing of the petition; or

(C) with respect to which the debtor made afraudulent return or willfully attempted in anymanner to evade or defeat such a tax.

11 U.S.C. § 523(a)(1). Section 523, therefore,“excepts from the Bankruptcy Code's dischargeprovisions a tax liability debt if: (1) the tax underly-ing the tax liability debt required a return; and (2)the debtor failed to file the required return.” Cali-fornia Franchise Tax Bd. v. Jackson (In re Jack-son), 184 F.3d 1046, 1050 (9th Cir.1999). In Jack-son, this Court recognized the purpose behind sec-tion 523(a)(1)-“a debtor should not be permitted todischarge a tax liability based upon a required taxreturn that was never filed.” Id. at 1052 (quoting 3William L. Norton, Jr., Norton Bankruptcy Law andPractice 2d § 47:6, 47-15 (1997)). We also recog-nized in Jackson that the term “return” should begiven a strict construction and interpreted in ac-cordance with its ordinary meaning. See id. at 1051.

[5] The Bankruptcy Code does not define theterm “return.” In differentiating a “return” from areport of reassessment in Jackson, we found it ne-cessary to go no further than Webster's dictionary:“A return is ‘a formal statement on a required legalform showing taxable income, allowable deductionsand exemptions and the computation of the taxdue.’ ” Id. (quoting Webster's Ninth New CollegiateDictionary 1008 (1985)). This definition closelymirrors the accepted meaning of “return” under theI.R.C., and every other Circuit that has consideredthe question has also relied on the I.R.C. to definethe term under section 523(a)(1) of the BankruptcyCode. See United States v. Hindenlang (In re

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Hindenlang), 164 F.3d 1029, 1032 (6th Cir.) (“Wethink it is appropriate to look to the Internal Reven-ue Code to determine the proper definition of re-turn.”), cert. denied, 528 U.S. 810, 120 S.Ct. 41,145 L.Ed.2d 37 (1999); Bergstrom v. United States(In re Bergstrom), 949 F.2d 341, 343 (10thCir.1991) (relying on the definition of “return” un-der the I.R.C. in determining whether a substitutereturn is sufficient to satisfy section 523(a)(1)(B)(i)). Because the Bankruptcy Code uses the term“return” without providing a definition and there isno reason to presume that Congress intended theterm to have a different meaning under the Bank-ruptcy Code than under the I.R.C., we adopt the taxdefinition in determining whether Hatton's tax liab-ilities are dischargeable.

[6] Although the I.R.C. does not provide a stat-utory definition of “return,” the Tax Court de-veloped a widely-accepted interpretation of thatterm in Beard v. Commissioner, 82 T.C. 766, 1984WL 15573 (1984), aff'd, 793 F.2d 139 (6thCir.1986). In order for a document to qualify as areturn: “(1) it must purport to be a return; (2) itmust be executed under penalty of perjury; (3) itmust contain sufficient data to allow calculation oftax; and (4) it must represent an honest and reason-able attempt*1061 to satisfy the requirements of thetax law.” Hindenlang, 164 F.3d at 1033 (citingdefinition of “return” in Beard ); Beard, 82 T.C. at767. The Beard definition was derived from twoSupreme Court cases, Germantown Trust Co. v.Commissioner, 309 U.S. 304, 60 S.Ct. 566, 84L.Ed. 770 (1940) and Zellerbach Paper Co. v.Helvering, 293 U.S. 172, 55 S.Ct. 127, 79 L.Ed.264 (1934), and provides a sound approach underboth the Bankruptcy Code and the I.R.C. Further-more, the Beard definition is consistent with thepurpose of a return, which is not only to get tax in-formation in some form, but “to get it with suchuniformity, completeness, and arrangement that thephysical task of handling and verifying returns maybe readily accomplished.” Commissioner v. Lane-Wells Co., 321 U.S. 219, 223, 64 S.Ct. 511, 88L.Ed. 684 (1944). The underlying question, there-

fore, is whether the installment agreement and thesubstitute return satisfy the Beard factors and thusconstitute the filing of a return under 11 U.S.C. §523(a)(1)(B)(i).

B.[7] The installment agreement and the substi-

tute return fail to qualify as a return under Beard.First, neither document was signed under the pen-alty of perjury. The substitute return was neversigned by Hatton, and although the installmentagreement contains Hatton's signature, his signaturewas not provided under the penalty of perjury. SeeBergstrom, 949 F.2d at 343 (recognizing that under26 U.S.C. § 6020(a), a substitute return must besigned before it can be accepted as the filed returnof a taxpayer). Therefore, under Beard, Hattonfailed to file a tax return.

Second, neither the installment agreement northe substitute return represent an honest and reason-able attempt to satisfy the requirements of the taxlaw. It is undisputed that Hatton failed to file a fed-eral tax return on his own initiative for the 1983 taxyear as required by section 6012 of the I.R.C. See26 U.S.C. § 6012(a)(1)(A). It is also undisputedthat Hatton never attempted to cure this failure untilafter the IRS had assessed his tax deficiency andinitiated a delinquency investigation. It was onlyafter the IRS threatened to levy his wages and bankaccount and seize his personal property that Hattonelected to cooperate with the IRS. Moreover, evenafter Hatton finally responded to the notices sent bythe IRS, it still took months of negotiations beforethe IRS and Hatton could agree on a settlement thatultimately resulted in the installment agreement.

The BAP excused Hatton's failure to file a re-turn because he “cooperated with the IRS, acceptedhis tax assessed liability without objection, signedthe Installment Agreement to pay his tax liability,and performed his obligations under the InstallmentAgreement over a 23-month period.” Hatton, 216B.R. at 283. Hatton's belated acceptance of respons-ibility, however, does not constitute an honest andreasonable attempt to comply with the requirements

Page 5220 F.3d 1057, 86 A.F.T.R.2d 2000-5572, 2000-2 USTC P 50,651, 44 Collier Bankr.Cas.2d 970, 36 Bankr.Ct.Dec.148, Bankr. L. Rep. P 78,243, 00 Cal. Daily Op. Serv. 6653, 2000 Daily Journal D.A.R. 8887, 4 Cal. Bankr. Ct.Rep. 78(Cite as: 220 F.3d 1057)

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of the tax law. Instead, Hatton made every attemptto avoid paying his taxes until the IRS left him withno other choice. Because Hatton never filed a returnand only cooperated with the IRS once collectionbecame inevitable, the bankruptcy court erred inconcluding that section 523 did not except Hatton'stax liability from discharge.

III.Accordingly, because Hatton's tax liability for

the 1983 tax year is a result of his failure to file atax return under section 523(a)(1)(B)(i), Hatton'stax liability is not dischargeable in bankruptcy.

REVERSED.

C.A.9 (Wash.),2000.In re Hatton220 F.3d 1057, 86 A.F.T.R.2d 2000-5572, 2000-2USTC P 50,651, 44 Collier Bankr.Cas.2d 970, 36Bankr.Ct.Dec. 148, Bankr. L. Rep. P 78,243, 00Cal. Daily Op. Serv. 6653, 2000 Daily JournalD.A.R. 8887, 4 Cal. Bankr. Ct. Rep. 78

END OF DOCUMENT

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FILEDDEC 17 2015

SUSAN M. SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT

ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. EC-14-1180-KuKiTa)

KEVIN WAYNE MARTIN and SUSAN ) Bk. No. 11-62436MARTIN, )

) Adv. No. 12-01131Debtors. )

______________________________))

UNITED STATES, ))

Appellant, ))

v. ) OPINION)

KEVIN WAYNE MARTIN; SUSAN )MARTIN, )

)Appellees. )

______________________________)

Argued and Submitted on November 19, 2015at Pasadena, California

Filed – December 17, 2015

Appeal from the United States Bankruptcy Courtfor the Eastern District of California

Honorable W. Richard Lee, Bankruptcy Judge, Presiding

Appearances: Boris Kukso argued for appellant United States;Appellees Kevin Wayne Martin and Susan Martinargued pro se.

Before: KURTZ, KIRSCHER and TAYLOR, Bankruptcy Judges.

KURTZ, Bankruptcy Judge:

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INTRODUCTION

When is a tax return not a tax return? According to an

increasing number of courts, including some courts of appeal, the

answer is: when the tax return, otherwise wholly compliant with

applicable tax laws, is filed a second (or more) late. According

to these courts, by way of the 2005 Bankruptcy Code amendments,

Congress intended to make a substantial and exceptionally harsh

change to nondischargeability law by adding a hanging paragraph

at the end of 11 U.S.C. § 523(a)1 defining the term “return” to

exclude any taxpayer filing that does not wholly and strictly

comply with all applicable return filing requirements, even if

the taxing authority itself could and would forgive that

noncompliance. Indeed, the United States rejects this statutory

interpretation in this appeal.

The courts adopting a literal construction of the “return”

definition more or less admit that their unforgiving view of

congressional intent cannot be squared within the context of

§ 523(a), or even within the narrower context of the hanging

paragraph itself, without running into some significant

conundrums. The second sentence of the hanging paragraph

expressly includes within the definition of “return” some types

of returns that the taxing authority prepares on behalf of the

taxpayer, when the taxpayer never gets around to it. Why

Congress would want to treat a taxpayer who files a tax return a

1Unless specified otherwise, all chapter and sectionreferences are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, andall "Rule" references are to the Federal Rules of BankruptcyProcedure, Rules 1001-9037. All “Civil Rule” references are tothe Federal Rules of Civil Procedure.

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month or a week or even a day late – possibly for reasons beyond

his or her control – so much more harshly than a taxpayer who

never files a tax return on his or her own behalf is a mystery

that literal construction adherents never adequately explain.

Nor have they adequately explained why, later on in the second

sentence of the hanging paragraph, Congress felt a need to

explicitly exclude from the “return” definition another type of

return filed by taxing authorities on behalf of taxpayers when

that exclusion is superfluous if one accepts a literal

construction of the first sentence of the hanging paragraph.

When one looks beyond the hanging paragraph, at the context

of the nondischargeability statute as a whole and Congress’

scheme for nondischargeable debts, one encounters additional,

even-more-serious problems with the literal construction of the

“return” definition. Section 523(a)(1)(B)(ii), which pre-existed

the 2005 amendments, already contains a specific and carefully-

balanced treatment of tax debts associated with untimely-filed

tax returns. Literal construction of the “return” definition

renders § 523(a)(1)(B)(ii) all but meaningless - reducing the

potential application of that provision to a minuscule scope.

And, according to the literal construction adherents, Congress

intended the “return” definition to accomplish this dramatic re-

balancing of the dischargeability of tax debt without a single

legislative comment to that effect.

In light of these concerns arising from a contextual reading

of the hanging paragraph, we reject the literal construction of

the “return” definition. We further conclude that there is

binding Ninth Circuit authority predating the 2005 amendments

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instructing us how to determine when a taxpayer filing should be

treated as a return for nondischargeability purposes and that

authority was not abrogated by the 2005 amendments.

The bankruptcy court erred because it declined to apply the

existing Ninth Circuit test as to what constitutes a “return,” so

we VACATE the bankruptcy court’s ruling declaring the Martins’

tax debt dischargeable, and we REMAND so that the bankruptcy

court can apply the Ninth Circuit test.

FACTS

The facts are undisputed. The Martins did not file their

tax returns for 2004, 2005 and 2006 at the time they were due.

Consequently, the Internal Revenue Service (“IRS”) conducted an

audit examination beginning in June 2008 to fix the amount of the

Martins’ tax liability for those three years. Without the

benefit of the Martins’ self-reported income tax data in the form

of tax returns, the IRS duly followed the deficiency and

assessment procedures set forth in the Internal Revenue Code.

See 26, U.S.C. § 6201, et seq. In August 2008, following the

completion of the audit examination, the IRS issued a notice of

deficiency for each of the three tax years.

The Martins did not respond to the notices of deficiency,

but the notices did spur the Martins to hire a new accountant to

prepare the missing tax returns. In December 2008, the

accountant signed and completed the Martins’ tax returns for

2004, 2005 and 2006, but the Martins did not get around to

signing and filing the tax returns until six months later in June

2009. There is no evidence explaining the reason for the

Martins’ several-year delay in preparing their 2004, 2005 and

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2006 tax returns, nor is there any evidence explaining the

Martins’ delay in signing and filing the completed returns.2

2While it does not constitute evidence in the strict sense,at the summary judgment oral argument, the Martins attempted toexplain the delays. With respect to their initial failure totimely prepare their 2004, 2005 and 2006 tax returns, Ms. Martinstated:

[W]e had problems with our previous accountant. Herhusband died and she had to let us go and -- and so she-- basically we were trying to -- she had her assistanttry to finish us up. And she got sick and held on toour taxes for over a year. And we repeatedly tried to get them back from her, and she kept saying she wasgoing to finish them.

And then by the time we realized -- finally we demanded them back, and we had to find a new accountantwho had to start fresh. And that was Andrea, andthat's when she started reassessing and doing all ourtaxes to help get us caught up.

Hr’g Tr. (Aug. 29, 2013) at 6:4-15. With respect to the six-month delay in signing and filing the completed returns, thebankruptcy court and Ms. Martin engaged in the followingcolloquy:

THE COURT: Why didn't the tax returns get filed [six]months earlier, when the accountant signed them?

SUSAN MARTIN: Because she actually finished them on12-18-08. And I believe we were waiting for two otheryears that were behind, '07 and '08, to be completedbefore we put them all in together.

THE COURT: Why? Why. Why didn't -- why didn't --

SUSAN MARTIN: I don't know. I -- I just feel like wewere trying to get it all in at once. I -- I guessthat's why we waited. I was wondering the same thing,why we didn't get them in right away. But we had somany back taxes that we were just trying to get themall done. And that's why they sat for a little while.

(continued...)

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Meanwhile, having not heard from the Martins, the IRS made

assessments against the Martins for the 2004, 2005 and 2006 tax

years in March 2009. Thereafter, the IRS twice sent the Martins

notices of the unpaid taxes and demands for payment – once in

March 2009 and another time in April 2009. The IRS then gave the

Martins notice of its intent to collect the assessed taxes by

levy.

Only after the IRS threatened to collect the unpaid taxes

did the Martins finally file their 2004, 2005 and 2006 tax

returns. The IRS accepted the untimely returns and adjusted the

Martins’ tax liability based on the information set forth in the

returns. The IRS adjusted their 2004 tax liability downward by

roughly $1,000 (from $18,432 to $17,358), their 2005 tax

liability upward by roughly $5,000 (from $9,928 to $14,852), and

their 2006 tax liability downward by roughly $5,000 (from $32,133

to $27,010).

The Martins commenced their chapter 7 bankruptcy case in

November 2011 and commenced pro se the adversary proceeding from

which this appeal arises in July 2012. By way of their

complaint, they sought a determination that their 2004, 2005 and

2006 tax debt was dischargeable. The IRS responded to the

complaint by alleging that the subject tax debt was

nondischargeable pursuant to § 523(a)(1)(B)(i), as a tax debt for

which a tax return was required but never filed.3

2(...continued)Hr’g Tr. (Aug. 29, 2013) at 5:7-19.

3Ultimately, the IRS conceded the dischargeability of the(continued...)

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The IRS filed a summary judgment motion based on the

undisputed facts. The bankruptcy court denied the IRS’s summary

judgment motion and instead, on the undisputed facts, granted

judgment in favor of the Martins. In a thoughtful, thorough and

detailed memorandum of decision, the bankruptcy court rejected

the IRS’s legal theories attempting to explain why a tax return

filed post-assessment is the functional equivalent of no tax

return at all for both tax purposes and nondischargeability

purposes.

The bankruptcy court also grappled with the meaning of the

word “return” for purposes of the nondischargeability statute,

both before and after the 2005 Bankruptcy Code amendments.

Ultimately, the bankruptcy court held that the correct standard

for determining whether a taxpayer filing qualified as a return

for purposes of the nondischargeability statute had not changed

as a result of the 2005 amendments. According to the bankruptcy

court, the test established in the tax court decision of Beard v.

Commissioner, 82 T.C. 766, 774–79 (1984), aff'd 793 F.2d 139 (6th

Cir. 1986), should be used to determine whether the debtor

taxpayer had filed a return. The Beard test as articulated in

Ninth Circuit authority requires courts to consider the following

factors:

(1) it must purport to be a return; (2) it must beexecuted under penalty of perjury; (3) it must containsufficient data to allow calculation of tax; and (4) itmust represent an honest and reasonable attempt to

3(...continued)additional amount assessed for 2005 based on the Martins’ 2005tax return. Nor did it contest the dischargeability of thepenalties it assessed and the interest accrued on the penalties.

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satisfy the requirements of the tax law.

United States v. Hatton (In re Hatton), 220 F.3d 1057, 1060–61

(9th Cir. 2000) (“Hatton II”) (citing United States v. Hindenlang

(In re Hindenlang), 164 F.3d 1029, 1033 (6th Cir. 1999)).

Instead of utilizing the version of the Beard test as

applied in Hatton II and In re Hindenlang, the bankruptcy court

utilized a slightly different version of the Beard test. Whereas

the honest-and reasonable inquiry in the Hatton/Hindenlang

version is broad in scope and at least partially subjective in

focus, the honest-and-reasonable inquiry in the version of the

Beard test utilized by the bankruptcy court was narrow in scope

and exclusively objective in focus. The bankruptcy court only

considered the face of the Martins’ tax filings and looked at the

form and content of those filings in order to determine, from an

objective standpoint, that the Martins’ filings for the 2004,

2005 and 2006 tax years constituted “an honest and reasonable

attempt to satisfy the requirements of the tax law.”

The bankruptcy court concluded that the Martins’ 2004, 2005

and 2006 tax filings qualified as returns for nondischargeability

purposes and granted judgment in their favor on that basis. The

IRS timely filed its notice of appeal on April 14, 2014.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(I), and we have jurisdiction under

28 U.S.C. § 158.

ISSUE

Did the bankruptcy court apply the correct legal standard

for determining whether the Martins’ tax filings qualified as tax

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returns for purposes of the nondischargeability statute?

STANDARD OF REVIEW

This appeal presents a question of statutory construction,

which is a question of law we review de novo. Samson v. W.

Capital Partners, LLC (In re Blixseth), 684 F.3d 865, 869 (9th

Cir. 2012) (per curiam).

DISCUSSION

A. The Parties’ Positions

In this appeal, the IRS has advocated two distinct

positions: an official, preferred position and an unofficial,

fall-back position. Officially, the IRS contends that the

dischargeability of income tax debt associated with a late-filed

tax return should hinge on whether the taxpayer filed the return

before or after the IRS made any assessment. This position is

not new for the IRS. See, e.g., Mallo v. I.R.S. (In re Mallo),

774 F.3d 1313, 1325-27 (10th Cir. 2014); Wogoman v. I.R.S.

(In re Wogoman), 475 B.R. 239, 250 (10th Cir. BAP 2012); see also

IRS Chief Counsel Notice CC–2010–016, available at 2010 WL

3617597.

Alternately and unofficially, the IRS contends that the

Ninth Circuit’s version of the Beard test is sufficient to

accomplish its litigation goal in this appeal. According to the

IRS, if the bankruptcy court here had applied the Ninth Circuit

version of the Beard test, it should have and would have

concluded that the Martins’ 2004, 2005 and 2006 tax returns do

not qualify as returns for nondischargeability purposes.

The Martins similarly contend that the Beard test applies,

but they insist that the bankruptcy court correctly determined

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under the Beard test that their 2004, 2005 and 2006 tax returns

qualify as returns for nondischargeability purposes.

Notably, neither side here advocates in favor of the literal

construction of the “return” definition that Congress added to

the nondischargeability statute as part of the 2005 Bankruptcy

Code amendments. Indeed, in this case and in other cases, the

IRS expressly has rejected the literal construction and has

stated that the literal construction leads to “overly harsh”

results. In re Wogoman, 475 B.R. at 250. Instead, the IRS has

advocated for its less draconian approach focusing on whether the

taxpayer filing occurred before or after an IRS tax assessment.

Id.

Even though neither side here supports the literal

construction of the “return” definition, in light of the

increasing number of courts that have adopted that construction,

our analysis necessarily focuses on that approach first. Before

undertaking that analysis, however, we first describe the legal

state of affairs in the Ninth Circuit before Congress added the

“return” definition to the nondischargeability statute.

B. The Ninth Circuit Legal Landscape Before BAPCPA4

Section 523(a)(1)(B)(i) excepts from discharge tax debt when

the debtor taxpayer was required to file a tax return but did not

do so. Cal. Franchise Tax Bd. v. Jackson (In re Jackson),

184 F.3d 1046, 1050 (9th Cir. 1999). “The policy behind this

subsection is that a debtor should not be permitted to discharge

4The Bankruptcy Abuse Prevention and Consumer ProtectionAct, Pub.L. No. 109–8, 119 Stat. 23 (2005) (“BAPCPA”).

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a tax liability based upon a required tax return that was never

filed.” Id. at 1052 (citing 3 NORTON BANKRUPTCY LAW AND PRACTICE 2d

§ 47:6, 47–15 (1997)). Meanwhile, § 523(a)(1)(B)(ii) excepts

from discharge tax debt associated with untimely filed tax

returns filed within two years of the debtor’s bankruptcy filing,

and § 523(a)(1)(C) excepts from discharge tax debt associated

with tax returns that are fraudulent or evasive. See

In re Hindenlang, 164 F.3d at 1032; see also 4 COLLIER ON BANKRUPTCY

¶ 523.07[3],[4] (Alan N. Resnick & Henry J. Sommer, eds., 16th

ed. rev. 2015).

In United States v. Hatton (In re Hatton) (“Hatton I”),

216 B.R. 278, 282 (9th Cir. BAP 1997), this Panel adopted for

purposes of § 523(a)(1)(B)(i) the meaning of “return” set forth

in Beard. Beard held that a document qualifies as a return if:

(1) it must purport to be a return; (2) it must beexecuted under penalty of perjury; (3) it must containsufficient data to allow calculation of tax; and (4) itmust represent an honest and reasonable attempt tosatisfy the requirements of the tax law.

In re Hindenlang, 164 F.3d at 1033. Hatton I applied the Beard

test in upholding the bankruptcy court’s finding that the debtor

had filed a return within the meaning of § 523(a)(1)(B)(i).

Hatton I reasoned that the debtor taxpayer came close enough to

filing a return by meeting with the IRS, by acquiescing to the

substitute return the IRS filed on the debtor taxpayer’s behalf,

by acknowledging his liability for 1983 taxes in the amount set

forth in the substitute return, and by entering into an

installment payment agreement, pursuant to which debtor agreed to

pay his delinquent taxes at a rate of $200 per month.

The Ninth Circuit Court of Appeals reversed. Hatton II,

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220 F.3d at 1060–61. Hatton II rejected Hatton I’s attempted

expansion of the Beard test to include a debtor taxpayer who had

not signed any document under penalty of perjury and who “made

every attempt to avoid paying his taxes” until the IRS sent the

debtor taxpayer a letter threatening to levy on his wages and

bank accounts and to seize his property. Id. at 1061. But

Hatton II did not throw out the baby with the bath water. For

purposes of § 523(a)(1)(B)(i), Hatton II explicitly adopted

Beard’s definition of return, as articulated in

In re Hindenlang.5

By adopting In re Hindenlang’s version of the Beard test,

Hatton II sub silentio overruled, at least in part, another Panel

decision – United States v. Nunez (In re Nunez), 232 B.R. 778,

783 (9th Cir. BAP 1999). In re Nunez adopted a slightly

5There is nothing in Hatton II suggesting that it adoptedother aspects of In re Hindenlang, particularlyIn re Hindenlang’s holding that post-assessment tax returns filedby the taxpayer never qualify as returns for purposes of§ 523(a)(1)(B). To the contrary, Hatton II’s analysis –especially its reliance on the Beard test to determine whetherthe taxpayer filed a return – is inconsistent withIn re Hindenlang’s pre- or post-assessment test. As stated inone persuasive bankruptcy court decision:

Had the Hatton court adopted the Hindenlang [pre- orpost-assessment] Rule, it would not have needed toconsider whether the Debtor had executed thesubmissions under penalty of perjury or the Debtor'ssubjective intent post assessment. The court wouldhave simply determined that the debtor's postassessment submissions, could not as a matter of law,constitute returns under § 523(a)(1)(B).

Rushing v. United States (In re Rushing), 273 B.R. 223, 227(Bankr. D. Ariz. 2001).

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different version of the Beard test. Following Savage v. I.R.S.

(In re Savage), 218 B.R. 126, 132 (10th Cir. BAP 1998),

In re Nunez narrowed the honesty-and-reasonableness prong of the

Beard test to examine only what appeared on the face of the

taxpayer’s filing in order to ascertain whether that filing

constituted “an honest and genuine endeavor to satisfy the law.”

In re Nunez, 232 B.R. at 783 (quoting In re Savage, 218 B.R. at

132). In re Nunez, therefore, excluded from its honesty-and-

reasonableness analysis the length of the delay in the taxpayer’s

filing, the reason for the delay and the number of tax years for

which timely filings were missed. Id. It is impossible to

reconcile this aspect of In re Nunez with Hatton II’s honesty-

and-reasonableness analysis, which largely hinged on the delay in

taxpayer compliance. See Hatton II, 220 F.3d at 1061.

In short, in the Ninth Circuit, the Hatton II/

In re Hindenlang version of the Beard test indisputably governed

the definition of the term “return” for purposes of determining

the nondischargeability of tax debts, at least until the

enactment of BAPCPA. In the next section, we attempt to discern

how (if at all) BAPCPA changed the legal landscape.

C. The Impact of BAPCPA on the Nondischargeability of Tax Debts

Recall that, when Congress first enacted the Bankruptcy

Code in 1978, it specifically noted that § 523(a)(1)(B)

represented a careful balancing of the competing interests of the

debtor, the taxing authority, and the debtor’s other creditors.

See Maryland v. Ciotti (In re Ciotti), 638 F.3d 276, 279 (4th

Cir. 2011) (citing S.Rep. No. 95–989, at 14 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5800)). Congress further stated that

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§ 523(a)(1)(B) reflected its intent that “tax claims which are

nondischargeable, despite a lack of priority, are those to whose

staleness the debtor contributed by some wrong-doing or serious

fault.” S.Rep. No. 95–989, at 14 (1978), reprinted in 1978

U.S.C.C.A.N. 5787, 5800 (emphasis added).

In contrast, when Congress enacted BAPCPA, it did not offer

any similarly specific statement of its legislative rationale for

adding a definition of “return” into the Code’s

nondischargeability statute. In re Mallo, 774 F.3d at 1327.6

But BAPCPA was accompanied by a general statement of legislative

intent indicating that the 2005 amendments as a whole were

motivated by four general factors:

the “recent escalation of consumer bankruptcy filings,”the “significant losses . . . associated withbankruptcy filings,” the fact that the “bankruptcysystem has loopholes and incentives that allow

6Congress did explain the second sentence of the hangingparagraph, as follows:

Income Tax Returns Prepared by Tax Authorities. Section 714 of the Act amends section 523(a) of theBankruptcy Code to provide that a return preparedpursuant to section 6020(a) of the Internal RevenueCode, or similar State or local law, constitutes filinga return (and the debt can be discharged), but that areturn filed on behalf of a taxpayer pursuant tosection 6020(b) of the Internal Revenue Code, orsimilar State or local law, does not constitute filinga return (and the debt cannot be discharged).

H.R. REP. 109-31(I), at 103 (2005), reprinted in 2005U.S.C.C.A.N. 88, 167. It seems odd that Congress would bother toexplain the relatively minuscule effect of the second sentence ofthe hanging paragraph but not offer any legislative comment onthe first sentence, which literal construction adherents claimdramatically altered the nondischargeability of tax debtassociated with untimely filed tax returns.

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and—sometimes—even encourage opportunistic personalfilings and abuse,” and “the fact that some bankruptcydebtors are able to repay a significant portion oftheir debts.”

In re Ciotti, 638 F.3d at 279 (citing H.R.Rep. No. 109–31, at 3-5

(2005), reprinted in 2005 U.S.C.C.A.N. 88, at 90–92).

In any event, BAPCPA added the “return” definition into the

nondischargeability statute in a hanging paragraph tacked onto

the end of § 523(a) and often cited as § 523(a)(*). The hanging

paragraph consists of two sentences, the first of which defines

the term “return” and the second of which further refines that

definition by explicitly including a certain type of return

prepared by the taxing authority on behalf of the taxpayer and by

expressly excluding another. The full text of the hanging

paragraph provides as follows:

For purposes of this subsection, the term “return”means a return that satisfies the requirements ofapplicable nonbankruptcy law (including applicablefiling requirements). Such term includes a returnprepared pursuant to section 6020(a) of the InternalRevenue Code of 1986, or similar State or local law, ora written stipulation to a judgment or a final orderentered by a nonbankruptcy tribunal, but does notinclude a return made pursuant to section 6020(b) ofthe Internal Revenue Code of 1986, or a similar Stateor local law.

11 U.S.C. § 523(a)(*).

A number of courts, including several Courts of Appeal, have

addressed the issue of what the “return” definition means, and

many of them have held that the term “applicable filing

requirements” is unambiguous and that the plain and ordinary

meaning of the term necessarily includes time deadlines for

filing returns as stated in the Internal Revenue Code, 26 U.S.C.

§ 6072(a), and/or in equivalent state statutes. Therefore, these

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literal construction courts have concluded that untimely returns

are not returns at all for purposes of the nondischargeability

statute. See, e.g., Fahey v. Massachusetts Dep’t of Revenue

(In re Fahey), 779 F.3d 1, 4-5 (1st Cir. 2015); In re Mallo,

774 F.3d at 1321; McCoy v. Miss. State Tax Comm'n (In re McCoy),

666 F.3d 924, 928, 932 (5th Cir. 2012).

The literal construction adherents have not been deterred by

the perceived harshness resulting from their reading of the

statute. They rely heavily (if not exclusively) on the plain

language of the phrase “applicable filing requirements” to

conclude that Congress intended by way of the “return” definition

in the hanging paragraph to except from discharge the tax debts

of all taxpayers whose tax returns do not strictly comply with

all filing requirements – including time deadlines. See, e.g.,

In re Fahey, 779 F.3d at 4-5; In re Mallo, 774 F.3d at 1321;

In re McCoy, 666 F.3d at 932. In doing so, they gloss over one

of the most important rules of plain meaning statutory

construction: that the meaning of a statutory term only is

considered plain and unambiguous if the term is clearly

understood in the context of the words surrounding it and in the

context of the larger statutory scheme.

The Supreme court reiterated the vital importance of

contextual reading in Yates v. United States, 135 S. Ct. 1074,

1081-82 (2015). Yates emphasized that the clarity of statutory

language only can be measured in “the specific context in which

that language is used, and the broader context of the statute as

a whole.” Id. at 1081 (quoting Robinson v. Shell Oil Co.,

519 U.S. 337, 341 (1997)). While the Court’s ruling in Yates was

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a plurality decision, there was no controversy amongst the

Justices about the critical importance of contextual reading. In

fact, the Yates dissent, in which four Justices joined, was even

more compelling on this point:

I agree with the plurality (really, who does not?) thatcontext matters in interpreting statutes. We do not“construe the meaning of statutory terms in a vacuum.”Rather, we interpret particular words “in their contextand with a view to their place in the overall statutoryscheme.” And sometimes that means, as the pluralitysays, that the dictionary definition of a disputed termcannot control.

Id. at 1092 (Justice Kagan dissenting) (citations omitted).

The more one considers the phrase “applicable filing

requirements” in context, the more doubtful the literal

construction becomes. First, within the hanging paragraph

itself, the second sentence does not square with the so-called

ordinary meaning of the term “applicable filing requirements”

found in the first sentence. The literal construction of

“applicable filing requirements” effectively excepts from

discharge all taxes associated with untimely-filed returns, but

the second sentence adds right back into the definition returns

prepared by taxing authorities under 26 U.S.C. § 6020(a) or under

equivalent state statutes. That subsection provides:

(a) Preparation of return by Secretary.--If any personshall fail to make a return required by this title orby regulations prescribed thereunder, but shall consentto disclose all information necessary for thepreparation thereof, then, and in that case, theSecretary may prepare such return, which, being signedby such person, may be received by the Secretary as thereturn of such person.

26 U.S.C. § 6020(a). Thus, under the literal construction of the

hanging paragraph, a debtor taxpayer who is one month or one day

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or even one hour late in filing his or her return will have his

associated tax debt excepted from discharge, whereas a debtor

taxpayer who never bothers to file his or her own return can

discharge his or her associated tax debt if the IRS fortuitously

prepares a return on that person’s behalf.

Why would Congress want to treat debtor taxpayers who do

nothing on their own to comply with their return filing

obligations so much better than debtor taxpayers who – perhaps

for reasons beyond their control – miss the filing deadline by as

little as a day but then conscientiously complete and file their

return? The literal construction adherents have an answer to

this question, but that answer is hardly persuasive. The literal

construction adherents speculate that Congress wanted to make

available to the taxing authorities a “carrot” they could offer

to formerly uncooperative taxpayers to encourage their

cooperation going forward. In re Fahey, 779 F.3d at 7;

In re Mallo, 774 F.3d at 1324; In re McCoy, 666 F.3d at 931.

This makes no sense. The literal construction adherents

admit (at least some of them do) that it is extremely rare for

taxing authorities to engage in the expensive and time-consuming

process of preparing tax returns on behalf of taxpayers. See,

e.g., In re Fahey, 779 F.3d at 6-7. More importantly, the

literal construction of the “return” definition in reality

creates an incentive for impoverished taxpayers who already are

late in filing one or more tax returns to further delay, with the

hope that they would be some of the lucky few for whom the taxing

authorities decide to prepare returns on the taxpayers’ behalf

(which then would enable them under the literal construction to

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obtain a discharge of an otherwise nondischargeable tax debt).

When read with a literal construction, the disconnect

between the first and second sentences of the hanging paragraph

does not end there. In the last part of the second sentence, the

hanging paragraph excludes from the definition of “return”

returns prepared by taxing authorities under 26 U.S.C. § 6020(b)

or under equivalent state statutes. That subsection provides in

relevant part:

(b) Execution of return by Secretary.--

(1) Authority of Secretary to execute return.--Ifany person fails to make any return required byany internal revenue law or regulation madethereunder at the time prescribed therefor, ormakes, willfully or otherwise, a false orfraudulent return, the Secretary shall make suchreturn from his own knowledge and from suchinformation as he can obtain through testimony orotherwise.

26 U.S.C. § 6020(b). Thus, according to the literal construction

adherents, even though the first sentence of the hanging

paragraph already excludes all late-filed returns from the

definition of “return,” Congress felt it necessary (supposedly

for the sake of clarity) to repeat one tiny aspect of this

exclusion one sentence later – the exclusion with respect to §

6020(b) returns, which by definition are untimely. See, e.g., In

re Fahey, 779 F.3d at 7; In re Mallo, 774 F.3d at 1324. Many

literal construction adherents acknowledge that a statute should,

if possible, be construed in a manner that avoids rendering any

part of it redundant. See, e.g., In re Fahey, 779 F.3d at 6;

In re Mallo, 774 F.3d at 1317. Indeed, In re Fahey cites to

TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001), which stated: “[i]t

is a cardinal principle of statutory construction that a statute

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ought, upon the whole, to be so construed that, if it can be

prevented, no clause, sentence, or word shall be superfluous,

void, or insignificant.” Id. (citations and internal quotation

marks omitted and emphasis added).

The literal construction adherents offer little to explain

their acceptance of the redundancy created by their

interpretation of the hanging paragraph. According to them,

Congress likely was redundant for the sake of clarity. But this

explanation is wholly at odds with the cardinal principle of

statutory construction referenced immediately above.

Alternately, the literal construction adherents dismiss the

redundancy as insignificant, especially in light of the plain

meaning of the term “applicable filing requirements.” See, e.g.,

In re Fahey, 779 F.3d at 7. This reasoning not only is circular

but also undermines a contextual reading of the statute.

Assuming the literal construction of the term “applicable

filing requirements” already has not collapsed under the weight

of the contextual difficulties found within the hanging paragraph

itself, another more-extreme level of difficulties awaits within

§ 523(a)(1)(B)(ii). In that subparagraph, as originally enacted

in 1978, Congress clearly excepted from discharge any and all tax

debts associated with untimely filed returns that were filed

within two years of the debtor’s bankruptcy petition filing.

In re Ciotti, 638 F.3d at 279. Before BAPCPA, there was no

genuine dispute regarding the broad coverage of this

subparagraph. See id. After BAPCPA, at least under the literal

construction, the once-expansive coverage of this subparagraph

has been dramatically reduced to an infinitesimal scope – a scope

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bordering on and approaching zero. As the literal construction

adherents would have it, this subparagraph post-BAPCPA only would

apply to § 6020(a) returns, since § 6020(a) returns are the only

type of untimely returns that fall within the definition of

“return” under the literal construction. See, e.g., In re Fahey,

779 F.3d at 6; In re Mallo, 774 F.3d at 1323-24.

Structurally, interpreting the definitional hanging

paragraph in a way that dramatically alters the coverage of

§ 523(a)(1)(B)(ii) is an excellent example of “the tail wagging

the dog.” This structural concern is the least of our concerns.

The literal construction also renders § 523(a)(1)(B)(ii) all but

meaningless. The literal construction adherents explain away

this concern by suggesting that, while “meaningless” is not okay

under the cardinal rule disfavoring interpretations that render

part of a statute superfluous, “all but meaningless” is fine.

See, e.g., In re Fahey, 779 F.3d at 6; In re Mallo, 774 F.3d at

1323-24.

And yet we have an even more significant concern. The

Supreme Court disfavors interpretations of ambiguous Bankruptcy

Code provisions (and amendments) that impose major changes in

pre-existing practice in the absence of at least some discussion

in the legislative history. See Dewsnup v. Timm, 502 U.S. 410,

419 (1992). The literal construction adherents reason that this

concern is unjustified because the “return” definition is

unambiguous. But our contextual reading of the statutory text

convinces us otherwise.

At the outermost circle of contextual reading, we must

consider how the literal construction of the term “applicable

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filing requirements” fits within Congress’ statutory scheme for

excepting debts from discharge. Recall that Congress’ original

Bankruptcy Code enactment of § 523(a)(1)(B) embodied a careful

balancing of the competing interests of the debtor, taxing

authorities and the debtor’s other creditors. See In re Ciotti,

638 F.3d at 279 (citing S.Rep. No. 95–989, at 14 (1978),

reprinted in 1978 U.S.C.C.A.N. 5787, 5800)). Nothing in the term

“applicable filing requirements” or in the four general factors

that served as the impetus for BAPCPA manifests an intent to

effect a sea-change in how Congress chose to balance the

dischargeability of tax debts associated with untimely filed

returns.

The Supreme Court before BAPCPA recognized that “exceptions

to discharge should be confined to those plainly expressed,”

Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (quoting Gleason v.

Thaw, 236 U.S. 558, 562 (1915)), and the Supreme Court after

BAPCPA continues to adhere to this same principle. Bullock v.

BankChampaign, N.A., 133 S. Ct. 1754, 1760 (2013). Here, in

light of our contextual reading of the term “applicable filing

requirements,” we are not persuaded that the statutory text, as

amended by BAPCPA, manifests a plainly expressed intent to re-

balance the nondischargeability of tax debts associated with

untimely filed tax returns.

D. Application of the Correct Definition of “Return” to thisAppeal

Our rejection of the literal construction of the “return”

definition leaves us with the task of articulating what the

definition of “return” in the hanging paragraph is supposed to

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mean. The generic terms “applicable bankruptcy law” and

“applicable filing requirements” necessarily reflect that the

answer will depend on which nonbankruptcy laws are applicable

(federal or state or local) and what the applicable filing

requirements say. “[N]early all courts” pre-BAPCPA utilized some

version of the Beard test. In re Mallo, 774 F.3d at 1318. In

other words, for purposes of determining the dischargeability of

federal income tax debt, the “return” definition added by

Congress in 2005 effectively codified the Beard test, except that

Congress in the second sentence of the hanging paragraph carved

out some specific rules for tax returns prepared by taxing

authorities.7

In this appeal, in the context of late-filed federal income

tax returns prepared and filed by the taxpayers, there is no

convincing or persuasive indication that BAPCPA or the hanging

paragraph abrogated Hatton II’s holding that we should use

In re Hindenlang’s version of the Beard test – a test derived

from nonbankruptcy law – to determine whether the Martins’

untimely tax returns qualify as tax returns for

nondischargeability purposes. That version of the Beard test

provides:

(1) it must purport to be a return; (2) it must beexecuted under penalty of perjury; (3) it must containsufficient data to allow calculation of tax; and (4) itmust represent an honest and reasonable attempt tosatisfy the requirements of the tax law.

7We express no opinion on what “return” means underapplicable nonbankruptcy law when state tax returns are in play,as that issue is not properly before us.

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In re Hindenlang, 164 F.3d at 1033.8

Similar to what this Panel held in In re Nunez, the

bankruptcy court here concluded that it should utilize a

different version of the Beard test. In this alternate version,

the prong of the test focusing on the honesty and reasonableness

of the debtor’s efforts to file the return is narrow in scope and

considers only the form and substance of the purported return

while ignoring the length of delay, the reason for the delay, and

the number of tax years missed. As we stated at the outset of

this discussion, this alternate version of the Beard test is

inconsistent with the holding and reasoning set forth in

Hatton II, so we cannot uphold the bankruptcy court’s usage of

this alternate test.

Hatton II offered two distinct reasons why the taxpayer

there did not satisfy the Beard test. Hatton II, 220 F.3d at

1061. First, Hatton II explained the the taxpayer had not signed

any document under penalty of perjury, so the second Beard test

factor was not met. Id. In addition, Hatton II explained that

8The IRS follows the Beard test in defining the term“return” under many circumstances. As the bankruptcy court notedin its Memorandum Decision:

The IRS has referenced the Beard Test in its revenuerulings and other materials. See Rev. Rul. 2005-59,2005-2 C.B. 505 (2005) (clarifying when documentsconstitute valid returns under Beard Test in context ofjoint filers); I.R.S. Chief Couns. Notice CC-2004-032,2004 WL 3210764 (Sept. 9, 2004) ("The four part testset forth in [Beard] is widely accepted as the analysisfor determining what constitutes a return for purposesof the Internal Revenue Code.").

Mem. Dec. (March 31, 2014) at 20:23-26.

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the taxpayer indisputably took no steps to cure his delinquency

in filing his 1983 federal income tax return, and did not begin

to cooperate with the IRS’s efforts, until the IRS threatened to

levy on his wages and his bank account. Id. According to

Hatton II, these undisputed facts established that the taxpayer

had not engaged in “an honest and reasonable attempt to comply

with the requirements of the tax law” as required by the fourth

Beard test factor. Id. The bankruptcy court posited that,

because Hatton II offered two separate and independent reasons

why the Beard test was not met, the second reason given –

regarding the honesty and reasonableness of the taxpayer’s

efforts – perhaps was non-binding dicta. We disagree. When

alternate grounds are given for a holding, neither ground

constitutes non-binding dicta. Exp. Grp. v. Reef Indus., Inc.,

54 F.3d 1466, 1471 (9th Cir. 1995).

The bankruptcy court attempted to offer some other reasons

why it might not be bound by Hatton II, but none of these other

reasons, even if valid, justify a departure from Hatton II’s

version of the Beard test, which included a broader honesty-and-

reasonableness prong than the bankruptcy court utilized. Because

the bankruptcy court did not apply the correct legal standard for

assessing the honesty and reasonableness of the Martins’ efforts

to comply with applicable tax laws, we must VACATE AND REMAND so

that the bankruptcy court can apply the proper legal standard to

the relevant facts of this case, which are not limited to the

form and content of the Martins’ filings, but also include the

number of missing returns, the length of the delay, the reasons

for the delay, and any other circumstances reasonably pertaining

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to the honesty and reasonableness of the Martins’ efforts.

In sum, we need to ensure that the bankruptcy court views

all of the relevant facts through the lens of the appropriate

legal standard set forth in Hatton II, and we furthermore believe

that the determination of whether all of the relevant facts and

circumstances constitute an honest and reasonable effort to

comply with the applicable tax laws is best made, in the first

instance, by the bankruptcy court.

E. IRS Argument That Tax Debts Associated With Post-AssessmentTax Returns Are Always Nondischargeable

There is only one other issue that we need to address. We

must address the IRS’s argument that a tax debt associated with

an IRS tax assessment made without the benefit of a taxpayer-

prepared tax return always should be treated as nondischargeable.

The IRS’s argument is twofold. First, the IRS contends

that, when as here the taxpayer does not file his or her tax

return until after the IRS has assessed taxes pursuant to

Internal Revenue Code deficiency procedures, the debt arising

from the assessment is (and always will be) a debt for which no

return has been filed, thereby bringing the debt within the scope

of § 523(a)(1)(B)(i) – a tax debt for which a tax return was

required but never filed. According to the IRS, it makes no

difference whether the taxpayer, after assessment, belatedly

files his or her tax return because the nature of the debt (as a

debt arising from the assessment rather than the return) cannot

and does not change under applicable tax law even when a return

is later filed. Aplt. Opn. Br. at pp. 7-15.

Our initial reaction to this argument is that it tends to

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prove too much. If we were to accept the IRS’s interpretation of

the nature of an assessment-based tax debt, it proves not only

that the tax liability arose without a tax return, but also that

a tax return was neither necessary nor “required” to impose the

assessment-based tax debt. In any event, even if the belated tax

return associated with an assessment-based tax debt was still

required in some sense, we agree with the reason offered by the

bankruptcy court for rejecting this argument. As the bankruptcy

court explained, the tax debt within the meaning of the

Bankruptcy Code preexists both the filing of the return and the

issuance of the IRS assessment. Mem. Dec. (March 31, 2014) at

p. 12 (citing Rhodes v. United States (In re Rhodes), 498 B.R.

357, 362 (Bankr. N.D. Ga. 2013); see also In re Mallo, 774 F.3d

at 1326 (following In re Rhodes). Under the Internal Revenue

Code, the tax debt – or right to payment – arises at the end of

each tax year and not later on. In re Rhodes, 498 B.R. at 362.

An assessment is merely a method for fixing the amount of that

debt and not the source of the debt itself. Id.

Second, the IRS argues that a post-assessment tax return is

the functional equivalent of no tax return at all. As the IRS

puts it, once it is forced to assess taxes without the benefit of

a taxpayer-prepared return, a later-filed tax return fails to

serve its primary function as a vehicle for self-reporting tax

liability. We already rejected this identical argument in

In re Nunez, 232 B.R. 778, 781-82 (9th Cir. BAP 1999). While

some parts of In re Nunez were sub-silentio overruled by

Hatton II, Hatton II did not overrule this part of In re Nunez.

Nor did Hatton II overrule the following reasoning from

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In re Nunez supporting its rejection of the IRS’s post-assessment

tax return argument:

Congress could have conditioned discharge of tax debton whether a return was filed prior to an assessment.As correctly noted by the [bankruptcy] court, Congressused assessment as a trigger for other time periods inthe Code, for example, the priority qualificationsfound in Section 507(a)(8)(A)(ii). When Congressincludes particular language in one section of theCode, but omits it in another, it is presumed to haveacted intentionally and purposely. We will not readinto Section 523(a)(1)(B) the requirement that a debtormust have filed a return prior to an assessment by theIRS.

In re Nunez, 232 B.R. at 782 (internal citation omitted).

Indeed, Hatton II is consistent with Nunez’s rejection of

the IRS’s post-assessment tax return argument in the following

sense: if Hatton II had agreed with the IRS that a post-

assessment tax return is no tax return at all, Hatton II would

not have had any need to apply the Beard test (as it did) to

resolve the question of whether the debtor there had filed a

return within the meaning the nondischargeability statute.

Simply put, Hatton II’s holding and reasoning cannot be

reconciled with the IRS’s post-assessment tax return argument.

Accordingly, we reject both aspects of the IRS’s post-

assessment tax return argument.

CONCLUSION

For the reasons set forth above, we VACATE the bankruptcy

court’s judgment holding that the Martins’ tax debt was

dischargeable, and we REMAND for further proceedings consistent

with this decision.

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Notice 2006-83, 2006-40 I.R.B. 596, 2006-2 C.B. 596, 2006 WL 2663467 (IRS NOT)

Internal Revenue Service (I.R.S.)IRS NOT

Notice

INDIVIDUAL CHAPTER 11 DEBTORS

Released: September 18, 2006Published: October 2, 2006

This notice provides guidance to individual chapter 11 debtors and their bankruptcy estates regarding the tax treatment ofpost-petition income as the result of the enactment of section 1115 of the Bankruptcy Code by the Bankruptcy AbusePrevention and Consumer Protection Act of 2005. The notice also alerts information return preparers regarding their re-porting re-sponsibilities.

This notice provides guidance for individuals who file bankruptcy cases under Chapter 11 of the Bankruptcy Code (11U.S.C. § 1101 et seq.) on or after October 17, 2005. This notice also provides guidance for (1) employers of these indi-viduals, (2) persons filing Forms W-2, 1099-INT, 1099-DIV, 1099-MISC, and other information returns (includingSchedule K-1) that report payments to these individuals, and (3) Chapter 11 trustees in bankruptcy cases filed by theseindividuals. Upon consideration of the comments received concerning this notice, as requested in section 7, additionalguidance may be published.

Section 1. PURPOSEThe bankruptcy estate of a Chapter 11 debtor who is an individual is a separate taxable entity under section 1398 of theInternal Revenue Code. The estate, rather than the debtor, must include in its gross income all of the debtor's income towhich the estate is entitled under the Bankruptcy Code, except for amounts received or accrued by the debtor before thecommencement of the case. Section 1115 of the Bankruptcy Code was enacted by section 321(a)(1) of the BankruptcyAbuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23 (2005) and is ef-fective for cases filed on or after October 17, 2005. As a result of the enactment of section 1115, the bankruptcy estate,rather than the debtor, must include in its gross income both (1) the debtor's gross earnings from his or her performanceof services after the commencement of the case (“post-petition services”) and (2) the gross income from property ac-quired by the debtor after the commencement of the case (“post-petition property”).I.R.C. § 1398(e)(1). The gross earn-ings from post-petition services include wages and other compensation earned by a debtor who is an employee and self-employment income earned by a debtor who is a self-employed individual.

Section 2. BACKGROUND AND GENERAL LEGAL PRINCIPLES.01 The commencement of a bankruptcy case creates an estate, which generally includes all legal or equitable interests ofthe debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). Specific exclusions apply, however.See11 U.S.C. § 541(b) (excluded property).See also11 U.S.C. § 522 (exempt property); 11 U.S.C. § 554 (abandonedproperty). Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently re-moved from the estate. By contrast, property excluded from the estate is never included in the estate.

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.02 Confirmation of a Chapter 11 plan of reorganization generally vests all the property of the estate in the debtor, exceptas otherwise provided in the plan or in the court order confirming the plan. 11 U.S.C. § 1141(b). If no plan is confirmedand a bankruptcy case is dismissed, the property of the estate generally revests in the debtor, unless the court orders oth-erwise. 11 U.S.C. § 349(b)(3).

.03 When a trustee is appointed pursuant to section 1104 of the Bankruptcy Code, the debtor generally must turn over tothe trustee control over the assets of the bankruptcy estate. In most Chapter 11 cases, a trustee is not appointed and thedebtor (referred to as the debtor in possession) remains in control of the property of the bankruptcy estate. Under section1107(a) of the Bankruptcy Code, the debtor in possession must perform all the functions and duties of a trustee, exceptfor the duties specified in Bankruptcy Code section 1106(a)(2), (3) and (4).

.04 Because the bankruptcy estate is a separate taxable entity, the trustee or debtor in possession must obtain an employeridentification number (EIN) for the estate. I.R.C. § 6109. The trustee or debtor in possession uses the EIN on any tax re-turns filed for the estate.

.05 Section 1398(e)(1) of the Code provides that the gross income of the estate includes the gross income of the debtor towhich the estate is entitled under the Bankruptcy Code. Section 1398(e)(2) provides that the gross income of the debtordoes not include any item to the extent the item is included in the gross income of the bankruptcy estate.

.06 In general, the determination of whether or not any amount paid or incurred by the estate is allowable as a deductionor credit to the estate shall be made as if the amount were paid or incurred by the debtor and as if the debtor were still en-gaged in the trades and businesses, and in the activities, the debtor was engaged in before the commencement of the case.I.R.C. § 1398(e)(3)(A). The estate is, however, specifically allowed a deduction for administrative expenses allowed un-der section 503 of the Bankruptcy Code and for any fee or charge assessed against the estate under chapter 123 of title 28of the United States Code. I.R.C. § 1398(h)(1).

.07 The individual debtor must continue to file his or her own individual tax returns during the bankruptcy proceedings.I.R.C. § 6012(a)(1).

.08 For bankruptcy cases filed before October 17, 2005, the property of the estate does not generally include any post-petition property acquired by an individual Chapter 11 debtor. Nor in those cases does the property of the estate includethe individual Chapter 11 debtor's earnings from post-petition services, because section 541(a)(6) of the BankruptcyCode specifically excluded those earnings from the estate. See, e.g., In re Fitzsimmons, 725 F.2d 1208 (9th Cir. 1984); Inre Larson, 147 B.R. 39 (Bankr. D.N.D. 1992). Therefore, in these cases income from post-petition property and earningsfrom post-petition services are not generally includible in the estate's gross income. Instead, such income and earningsare generally includible in the debtor's gross income.

.09 Section 321 of BAPCPA made several changes to Chapter 11, effective for bankruptcy cases filed by individuals onor after October 17, 2005.Although many of the provisions that apply to individual Chapter 11 cases now operate in amanner similar to the provisions that apply in Chapter 13 cases, section 1398 of the Internal Revenue Code has not beenamended and continues to apply to individual Chapter 11 cases, but not to Chapter 13 cases. Based on section 1115 of theBankruptcy Code, read in conjunction with section 1398(e)(1) of the Internal Revenue Code, the debtor's gross earningsfrom post-petition services and gross income from post-petition property are, in general, includible in the bankruptcy es-tate's gross income, rather than in the debtor's gross income. This rule is subject to the exceptions noted below in sections2.10, 2.11, 2.12, and 2.13.

.10 If a chapter 11 case is converted to a Chapter 13 case, the Chapter 13 estate is not a separate taxable entity and earn-

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ings from post-conversion services and income from property of the estate realized after the conversion to Chapter 13 aretaxed to the debtor. I.R.C. § 1399.

.11 If the Chapter 11 case is converted to a Chapter 7 case, section 1115 will not apply after conversion and earningsfrom post-conversion services will be taxed to the debtor, rather than the estate. 11 U.S.C. § 541(a)(6). In such a case, theproperty of the Chapter 11 estate will become property of the Chapter 7 estate. Any income on this property will be taxedto the estate even if the income is realized after the conversion to Chapter 7.

.12 If a Chapter 11 case is dismissed, the debtor is treated as if the bankruptcy case had never been filed and as if nobankruptcy estate had been created. I.R.C. § 1398(b)(1).

.13 For Chapter 11 cases filed by individuals on or after October 17, 2005, the estate's gross income includes gross in-come from property held by the debtor when the case commenced (“pre-petition property”), as was the case under pre-BAPCPA law. There are certain exceptions to this general rule, however. The gross income on pre-petition property isincluded in the gross income of the debtor, rather than the estate, if the pre-petition property is excluded from the estateand the gross income is subject to taxation. Also, the gross income on pre-petition property is included in the gross in-come of the debtor, rather than the estate, after the pre-petition property is removed from the estate by exemption orabandonment.

Section 3. FILING INCOME TAX RETURNS OF THE DEBTOR AND THE ESTATE; NOTIFICATION TO PER-SONS FILING INFORMATION RETURNS (OTHER THAN FORM W-2) OF THE STATUS OF THE CHAPTER 11BANKRUPTCY CASE.01 The debtor in possession or trustee, if one is appointed, must prepare and file the income tax returns of the bank-ruptcy estate if required under section 6012(a)(9).I.R.C. § 6012(b)(4). In preparing the income tax returns of the debtorand the bankruptcy estate, the debtor in possession (or the trustee) must follow the rules stated in sections 2.09, 2.10,2.11, 2.12, and 2.13 of this notice, and must attach to the returns the statement discussed in section 6.

.02 A debtor in possession may be compensated by the estate to manage or operate a trade or business that the debtorconducted before the commencement of the bankruptcy case. Such payments should be reportable by the debtor as mis-cellaneous income on his or her individual income tax return. I.R.C. § 61(a). Amounts paid by the estate to the debtor inpossession for managing or operating the trade or business may qualify as administrative expenses of the estate. An ad-ministrative expense allowed by the bankruptcy court under section 503 of the Bankruptcy Code will generally be de-ductible by the estate as an administrative expense when it is paid or incurred. I.R.C. § 1398(h)(1).

.03 Within a reasonable time after the commencement of a Chapter 11 bankruptcy case, the trustee (if one is appointed)or the debtor in possession should provide notification of the bankruptcy estate's EIN to persons that are required to fileinformation returns with respect to the bankruptcy estate's gross income, gross proceeds, or other types of reportable pay-ments. I.R.C. § 6109(a)(2). Since these payments are property of the estate under section 1115, such persons should re-port the gross income, gross proceeds, or other reportable payment on an appropriate information return using the estate'sname and EIN in the time and manner required under the Internal Revenue Code and regulations (see, e.g.,sections 6041through 6049). The trustee or debtor in possession should not, however, provide the EIN to the debtor's employer or oth-er person filing Form W-2 with respect to the debtor's wages or other compensation, since section 1115 does not affectthe determination of what constitutes wages for purposes of Federal income tax withholding or the Federal InsuranceContributions Act. I.R.C. §§ 3121(a) and 3401(a). As provided in section 5, an employer should continue to report allwage income and accompanying tax withholdings, whether pre-petition or post-petition, on a Form W-2 issued to thedebtor under the debtor's social security number. See sections 6721 through 6724 for applicable penalties for failure to

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comply with information reporting requirements, including providing taxpayer identification numbers, and provisions forpenalty waivers for reasonable cause.

.04 When a Chapter 11 bankruptcy case is closed, dismissed, or converted to a case under Chapter 12 or 13 of the Bank-ruptcy Code, the bankruptcy estate ends as a separate taxable entity. The debtor should, within a reasonable time, providenotification of the closing, dismissal, or conversion to the persons that were previously notified of the bankruptcy caseunder section 3.03 to the extent notification is necessary to ensure that gross income, gross proceeds, and other types ofreportable payments realized after the closing, dismissal, or conversion are reported to the proper person and with thecorrect taxpayer identification number. Gross income, gross proceeds, and other reportable payments realized after theclosing, dismissal, or conversion to Chapter 12 or 13 should, in general, be reported to the debtor, rather than the estate.

.05 If the Chapter 11 case is converted to a Chapter 7 case, the bankruptcy estate will continue to exist as a separate tax-able entity and gross income (other than post-conversion income from the debtor's services), gross proceeds, or other re-portable payments should continue to be reported to the estate if the gross income, gross proceeds, or other reportablepayment represents property of the Chapter 7 estate. As section 2.11 notes, income from services performed by the debt-or after conversion to Chapter 7 is not property of the Chapter 7 bankruptcy estate. Therefore, within a reasonable timeafter the conversion to Chapter 7, the debtor should notify payors required to report the debtor's nonemployee compensa-tion on Form 1099-MISC that such compensation earned after the conversion to Chapter 7 should be reported using thedebtor's name and taxpayer identification number, rather than the estate's name and TIN.

.06 The debtor is not required to file a new Form W-4 with an employer adjusting the debtor's withholding allowancessolely because the debtor has filed a Chapter 11 case and his or her post-petition wages are includible in the gross incomeof the estate. This is true even though the estate may be taxed at a higher tax rate than the debtor and is entitled to onlyone personal exemption. A new Form W-4 may be necessary, however, under the applicable regulations when, for in-stance, the debtor employee is no longer entitled to claim the same number of allowances claimed on the Form W-4 pre-viously provided to the employer, such as for certain deductions or credits that now belong to the estate. See §31.3402(f)(2)-1 of the Employment Tax Regulations. Furthermore, even where not required, in some circumstances itmay be prudent for the debtor to file a new Form W-4 to increase the amount of income tax withheld from the debtor'spost-petition wages that will be allocated to the estate in accordance with section 6. Otherwise, estimated tax paymentson behalf of the estate may be required in order to avoid a penalty for underpayment of estimated tax. See section6654(a).

Section 4. APPLICATION OF THE SELF-EMPLOYMENT TAX.01 Section 1401 of the Internal Revenue Code imposes a tax upon the self-employment income of every individual. Theterm “self-employment income” means the net earnings from self-employment derived by an individual. I.R.C. § 1402(b). The term “net earnings from self-employment” means, in relevant part, the gross income derived by an individual fromany trade or business carried on by such individual less deductions allowed attributable to such trade or business. I.R.C. §1402(a).

.02 Under section 1115 of the Bankruptcy Code, the earnings from a Chapter 11 debtor's post-petition services, includingthe debtor's self-employment income, constitute property of the estate under section 1115. As property of the estate, theincome from post-petition services is includible in the income of the bankruptcy estate, rather than the income of thedebtor. I.R.C. § 1398(e)(1). However, neither section 1115 of the Bankruptcy Code nor section 1398 of the Internal Rev-enue Code addresses the application of the self-employment tax to the earnings from the individual debtor's continuingservices. Because the debtor continues to derive gross income from the performance of services as a self-employed indi-vidual after the commencement of the bankruptcy case, the debtor must continue to report on Schedule SE of the debtor's

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individual income tax return the self-employment income earned post-petition, which includes the attributable deduc-tions, and must pay the resulting self-employment tax imposed by section 1401.

Section 5. APPLICATION OF EMPLOYMENT TAXES AND OBLIGATION TO FILE FORM W-2.01 As a result of the enactment of section 1115, post-petition wages earned by a debtor are generally treated for incometax purposes as gross income of the estate, rather than the debtor. The reporting and withholding obligations of a debtor'semployer, however, have not changed as a result of the enactment of section 1115. Section 1115 has no effect on the de-termination of wages under the Federal Insurance Contributions Act (FICA), including application of the contributionand benefit base (as determined under section 230 of the Social Security Act).I.R.C. § 3121(a). Similarly, the enactmentof section 1115 has no effect on the determination of wages for Federal Unemployment Tax Act (FUTA) tax or FederalIncome Tax Withholding purposes. See I.R.C. §§ 3306(b) and 3401(a).

.02 Since section 1115 does not affect the application of FICA tax, FUTA tax, or Federal Income Tax Withholding, withrespect to the wages of a Chapter 11 debtor in a case commenced on or after October 17, 2005, an employer should con-tinue to reflect such wages and accompanying tax withholdings on a Form W-2 issued to the debtor under the debtor'sname and social security number.

Section 6. ALLOCATION OF INCOME AND CREDITS ON INFORMATION RETURNS AND REQUIRED STATE-MENT FOR RETURNS.01 When an employer issues a Form W-2 to a Chapter 11 debtor reporting all of the debtor's wages, salary, or othercompensation to the debtor for a calendar year, and a portion of the wages, salary, or other compensation represents earn-ings from post-petition services includible in the estate's gross income under section 1398(e)(1), an allocation of theamounts reported on the Form W-2 must be made. The debtor in possession, or the trustee, if one is appointed, must al-locate in a reasonable manner wages, salary, or other compensation reported in box 1 and the withheld income tax repor-ted in box 2 of Form W-2 between the debtor and the estate. The allocations must be in accordance with all the rulesstated in sections 2.09, 2.10, 2.11, 2.12, and 2.13 of this notice. If reasonable, the debtor and trustee may use a simplepercentage method for allocating income and withheld income tax between the debtor and the estate. The same methodused to allocate income must be used to allocate withheld income tax. For example, if one-sixth of the wages reported onForm W-2 for the calendar year ending December 31, 2005, was earned after the commencement of the case and musttherefore be included in the estate's gross income, one-sixth of the withheld income tax reported on Form W-2 must beclaimed as a credit on the estate's income tax return and five-sixths of the withheld income tax must be claimed as a cred-it on the debtor's income tax return. SeeI.R.C. § 31(a).

.02 In some cases, persons filing information returns may report to the debtor gross income, gross proceeds, or other re-portable payments that should have been reported to the bankruptcy estate using Forms 1099-INT, 1099-DIV,1099-MISC, Schedule K-1 or other information returns. This may occur, for instance, if the debtor in possession fails tonotify the payor of the bankruptcy in accordance with section 3.03. In these cases, the debtor in possession, or the trustee,must allocate the improperly reported income in a reasonable manner between the debtor and the estate. In general, theallocation must ensure that any income (and any income tax withheld) attributable to the post-petition period is reportedon the estate's return, and any income (and income tax withheld) attributable to the pre-petition period is reported on thedebtor's return. The allocations, however, must be in accordance with all the rules stated in sections 2.09, 2.10, 2.11,2.12, and 2.13 of this notice.

.03 The debtor must attach a statement to his or her income tax return stating that he or she filed a Chapter 11 bankruptcycase. The statement must reflect the foregoing allocations of income and withheld income tax and must describe themethod used to allocate income and withheld tax between the debtor and the estate. The statement should list the filing

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date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, andthe bankruptcy estate's EIN. The debtor in possession or trustee must attach a similar statement to the income tax returnof the estate.

.04 The following model statement may be used by debtors, debtors in possession and trustees in complying with the re-quirements of section 6 of this notice:

Notice 2006-83 Statement

Pending Bankruptcy Case

The taxpayer, __________________, filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on__________________ in the Bankruptcy Court for the __________________ District of __________________. Thebankruptcy court case number is __________________. Gross income, and withheld federal income tax, reported onForm W-2, Forms 1099, K-1, Schedule K-1, and other information returns received under the taxpayer's name and socialsecurity number (or other taxpayer identification number) are allocated between the taxpayer and the bankruptcy estate(EIN___-_____) as follows, using [describe allocation method]:

Year Taxpayer Estate

1. Form W-2 from ______ Co. $______ $____________________

Withheld income tax shownon Form W-2

$______ $____________________

2. Form 1099-INT from ______Bank

$______ $____________________

Withheld income tax (if any)shown on Form 1099-INT

$______ $____________________

3. Form 1099-DIV from______ Co.

$______ $____________________

Withheld income tax (if any)shown on Form 1099-DIV

$______ $____________________

4. Form 1099-MISC from______ Co.

$______ $____________________

Withheld income tax (if any)shown on Form 1099-MISC

$______ $____________________

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Section 7. REQUEST FOR COMMENTS.01 The IRS and the Treasury Department are aware that further guidance may be needed as a consequence of the enact-ment of section 1115 and request comments from the public.

.02 In particular, section 1115 does not address whether, or to what extent, the income earned by the debtor from servicesperformed after confirmation of the Chapter 11 plan is property of the estate or property of the debtor. Nor does section1115 address whether, or to what extent, property of the estate retains its character as such after it vests in the debtorupon plan confirmation under section 1141(b) of the Bankruptcy Code. Courts have addressed the effects of plan con-firmation on the scope and extent of the Chapter 13 estate under the analogous provisions of that Chapter, but the courtshave reached varying and conflicting results. See, for example, Telfair v. First Union Mortgage Corp., 216 F.3d 1333,1340 (11th Cir. 2000) (describing the estate termination approach, the preservation approach, and the transformation ap-proach) and Barbosa v. Soloman, 235 F.3d 31, 36, 37 (1st Cir. 2000) (describing a fourth, hybrid, approach). Commentsare requested as to the proper treatment of post-confirmation income, given the conflicting holdings under analogous pro-visions of Chapter 13. Comments are also requested as to whether the terms of the Chapter 11 plan and the order con-firming the plan may affect the taxation of post-confirmation earnings of the debtor and post-confirmation income onproperty of the estate.

.03 Section 3.02 of this notice addresses the tax consequences of compensation that a debtor in possession receives fromthe estate for managing or operating a trade or business carried on by the debtor before the commencement of the bank-ruptcy case. In some cases, however, the estate might not conduct a trade or business because the debtor was the employ-ee of a third party before the commencement of the case and continues as an employee post-petition. Comments are re-quested on the tax treatment to the estate and the debtor of the portion of the post-petition compensation from a thirdparty employer that the bankruptcy court allows the debtor to retain to pay for the debtor's personal or living expenses. Inparticular, comments are requested regarding whether such post-petition compensation is subject to double taxation asgross income to the debtor under section 61 and earnings under section 1115(a)(2) of the Bankruptcy Code includible inthe estate's gross income under section 1398(e)(1), without a corresponding deduction for the estate.

.04 Comments should be submitted on these and other relevant issues in writing on or before December 1, 2006, to theInternal Revenue Service, P.O. Box 7604, Washington, D.C. 20044, Attn: CC:PA:CBS (Notice 2006-83). Submissionsmay also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier's Desk atRoom 105, First Floor, Internal Revenue Service, 1901 S. Bell Street, Jeff Davis Highway, Arlington, Va., Attn:CC:PA:CBS (Notice 2006-83). Submissions may also be sent electronically via the internet to the following email ad-dress: Notice.comments @irscounsel.treas.gov.Include the notice number (Notice 2006-83) in the subject line. All com-ments will be available for public inspection and copying.

Section 8. PAPERWORK REDUCTION ACT.01 The collection of information in the notice has been reviewed and approved by the Office of Management and Budget(OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-2033.

.02 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unlessthe collection of information displays a valid OMB control number.

.03 The collection of information in the notice is in section 6 of this notice entitled “Allocation of Income and Credits onInformation Returns and Required Statement for Returns.”The collection of information is required for compliance withI.R.C. § 1398. The collection of information is required to comply with the Internal Revenue Code. The likely respond-ents are individuals and their chapter 11 bankruptcy estates.

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.04 The estimated total annual reporting burden is 1,500 hours. The estimated annual burden per respondent is 1/2 hour.The estimated number of respondents is 3,000. The estimated frequency of responses is annually.

.05 Books or records relating to a collection of information must be retained as long as their contents may become mater-ial to the administration of the internal revenue law. Generally, tax returns and tax return information are confidential, asrequired by 26 U.S.C. 6103.

Section 9. DRAFTING INFORMATION

The principal author of this notice is William F. Conroy of the Office of Associate Chief Counsel (Procedure & Adminis-tration). For further information regarding this notice, contact William F. Conroy at (202) 622-3620 (not a toll-free call).

Notice 2006-83, 2006-40 I.R.B. 596, 2006-2 C.B. 596, 2006 WL 2663467 (IRS NOT)

END OF DOCUMENT

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§ 507. Priorities, 11 USCA § 507

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

Proposed Legislation

United States Code AnnotatedTitle 11. Bankruptcy (Refs & Annos)

Chapter 5. Creditors, the Debtor, and the Estate (Refs & Annos)Subchapter I. Creditors and Claims

11 U.S.C.A. § 507

§ 507. Priorities

Effective: December 22, 2010Currentness

(a) The following expenses and claims have priority in the following order:

(1) First:

(A) Allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a caseunder this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child's parent, legalguardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmentalunit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under thistitle after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcylaw.

(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic support obligations that, as of thedate of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child's parent, legalguardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntarily by the spouse,former spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt) orare owed directly to or recoverable by a governmental unit under applicable nonbankruptcy law, on the condition thatfunds received under this paragraph by a governmental unit under this title after the date of the filing of the petition beapplied and distributed in accordance with applicable nonbankruptcy law.

(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expenses ofthe trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paid before payment of claims undersubparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the paymentof such claims.

(2) Second, administrative expenses allowed under section 503(b) of this title, unsecured claims of any Federal reserve bankrelated to loans made through programs or facilities authorized under section 13(3) of the Federal Reserve Act (12 U.S.C.343), and any fees and charges assessed against the estate under chapter 123 of title 28.

(3) Third, unsecured claims allowed under section 502(f) of this title.

§ 507. Priorities, 11 USCA § 507

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(4) Fourth, allowed unsecured claims, but only to the extent of $12,475 1 for each individual or corporation, as the case maybe, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor's business,whichever occurs first, for--

(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or

(B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independentcontractor in the sale of goods or services for the debtor in the ordinary course of the debtor's business if, and only if,during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned byacting as an independent contractor in the sale of goods or services was earned from the debtor.

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan--

(A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessationof the debtor's business, whichever occurs first; but only

(B) for each such plan, to the extent of--

(i) the number of employees covered by each such plan multiplied by $12,475 1 ; less

(ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the aggregate amount paidby the estate on behalf of such employees to any other employee benefit plan.

(6) Sixth, allowed unsecured claims of persons--

(A) engaged in the production or raising of grain, as defined in section 557(b) of this title, against a debtor who owns oroperates a grain storage facility, as defined in section 557(b) of this title, for grain or the proceeds of grain, or

(B) engaged as a United States fisherman against a debtor who has acquired fish or fish produce from a fisherman througha sale or conversion, and who is engaged in operating a fish produce storage or processing facility--

but only to the extent of $6,150 1 for each such individual.

(7) Seventh, allowed unsecured claims of individuals, to the extent of $2,775 1 for each such individual, arising from thedeposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or thepurchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.

(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for--

§ 507. Priorities, 11 USCA § 507

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(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of thepetition--

(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of thepetition;

(ii) assessed within 240 days before the date of the filing of the petition, exclusive of--

(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and

(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title duringthat 240-day period, plus 90 days; or

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, butassessable, under applicable law or by agreement, after, the commencement of the case;

(B) a property tax incurred before the commencement of the case and last payable without penalty after one year beforethe date of the filing of the petition;

(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;

(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earnedfrom the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a returnis last due, under applicable law or under any extension, after three years before the date of the filing of the petition;

(E) an excise tax on--

(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, underapplicable law or under any extension, after three years before the date of the filing of the petition; or

(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filingof the petition;

(F) a customs duty arising out of the importation of merchandise--

(i) entered for consumption within one year before the date of the filing of the petition;

§ 507. Priorities, 11 USCA § 507

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(ii) covered by an entry liquidated or reliquidated within one year before the date of the filing of the petition; or

(iii) entered for consumption within four years before the date of the filing of the petition but unliquidated on such date, ifthe Secretary of the Treasury certifies that failure to liquidate such entry was due to an investigation pending on such dateinto assessment of antidumping or countervailing duties or fraud, or if information needed for the proper appraisementor classification of such merchandise was not available to the appropriate customs officer before such date; or

(G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which agovernmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by thedebtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any timeduring which the stay of proceedings was in effect in a prior case under this title or during which collection was precludedby the existence of 1 or more confirmed plans under this title, plus 90 days.

(9) Ninth, allowed unsecured claims based upon any commitment by the debtor to a Federal depository institutions regulatoryagency (or predecessor to such agency) to maintain the capital of an insured depository institution.

(10) Tenth, allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if suchoperation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

(b) If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claimsecured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable undersubsection (a)(2) of this section arising from the stay of action against such property under section 362 of this title, from theuse, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title,then such creditor's claim under such subsection shall have priority over every other claim allowable under such subsection.

(c) For the purpose of subsection (a) of this section, a claim of a governmental unit arising from an erroneous refund or creditof a tax has the same priority as a claim for the tax to which such refund or credit relates.

(d) An entity that is subrogated to the rights of a holder of a claim of a kind specified in subsection (a)(1), (a)(4), (a)(5), (a)(6),(a)(7), (a)(8), or (a)(9) of this section is not subrogated to the right of the holder of such claim to priority under such subsection.

CREDIT(S)(Pub.L. 95-598, Nov. 6, 1978, 92 Stat. 2583; Pub.L. 98-353, Title III, §§ 350, 449, July 10, 1984, 98 Stat. 358, 374; Pub.L.

101-647, Title XXV, § 2522(d), Nov. 29, 1990, 104 Stat. 4867; Pub.L. 103-394, Title I, § 108(c), Title II, § 207, Title III, §304(c), Title V, § 501(b)(3), (d)(11), Oct. 22, 1994, 108 Stat. 4112, 4123, 4132, 4142, 4145; Pub.L. 109-8, Title II, §§ 212,223, Title VII, §§ 705, 706, Title XIV, § 1401, Title XV, § 1502(a)(1), Apr. 20, 2005, 119 Stat. 51, 62, 126, 214, 216; Pub.L.111-203, Title XI, § 1101(b), July 21, 2010, 124 Stat. 2115; Pub.L. 111-327, § 2(a)(15), Dec. 22, 2010, 124 Stat. 3559.)

Notes of Decisions (1119)

§ 507. Priorities, 11 USCA § 507

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Footnotes1 Dollar amount as adjusted by the Judicial Conference of the United States. See Adjustment of Dollar Amounts notes set out under

this section and 11 U.S.C.A. § 104.

11 U.S.C.A. § 507, 11 USCA § 507Current through P.L. 114-93 (excluding P.L. 114-74 and 114-92) approved 11-25-2015.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

§ 523. Exceptions to discharge, 11 USCA § 523

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

Proposed Legislation

United States Code AnnotatedTitle 11. Bankruptcy (Refs & Annos)

Chapter 5. Creditors, the Debtor, and the Estate (Refs & Annos)Subchapter II. Debtor's Duties and Benefits

11 U.S.C.A. § 523

§ 523. Exceptions to discharge

Effective: December 22, 2010Currentness

<Notes of Decisions for 11 USCA § 523 are displayed in multiple documents.>

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtorfrom any debt--

(1) for a tax or a customs duty--

(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for suchtax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required--

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or underany extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeatsuch tax;

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider'sfinancial condition;

(B) use of a statement in writing--

§ 523. Exceptions to discharge, 11 USCA § 523

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(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; or

(C)(i) for purposes of subparagraph (A)--

(I) consumer debts owed to a single creditor and aggregating more than $650 1 for luxury goods or services incurred byan individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable;and

(II) cash advances aggregating more than $925 1 that are extensions of consumer credit under an open end credit planobtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to benondischargeable; and

(ii) for purposes of this subparagraph--

(I) the terms “consumer”, “credit”, and “open end credit plan” have the same meanings as in section 103 of the Truthin Lending Act; and

(II) the term “luxury goods or services” does not include goods or services reasonably necessary for the support ormaintenance of the debtor or a dependent of the debtor;

(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditorto whom such debt is owed, in time to permit--

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim,unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim andtimely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor hadnotice or actual knowledge of the case in time for such timely filing and request;

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

§ 523. Exceptions to discharge, 11 USCA § 523

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(5) for a domestic support obligation;

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is notcompensation for actual pecuniary loss, other than a tax penalty--

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and thedebtor's dependents, for--

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made underany program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal RevenueCode of 1986, incurred by a debtor who is an individual;

(9) for death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation wasunlawful because the debtor was intoxicated from using alcohol, a drug, or another substance;

(10) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title orunder the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727(a)(2), (3), (4),(5), (6), or (7) of this title, or under section 14c(1), (2), (3), (4), (6), or (7) of such Act;

(11) provided in any final judgment, unreviewable order, or consent order or decree entered in any court of the United Statesor of any State, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreemententered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed withrespect to any depository institution or insured credit union;

(12) for malicious or reckless failure to fulfill any commitment by the debtor to a Federal depository institutions regulatoryagency to maintain the capital of an insured depository institution, except that this paragraph shall not extend any suchcommitment which would otherwise be terminated due to any act of such agency;

(13) for any payment of an order of restitution issued under title 18, United States Code;

§ 523. Exceptions to discharge, 11 USCA § 523

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(14) incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1);

(14A) incurred to pay a tax to a governmental unit, other than the United States, that would be nondischargeable underparagraph (1);

(14B) incurred to pay fines or penalties imposed under Federal election law;

(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by thedebtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order ofa court of record, or a determination made in accordance with State or territorial law by a governmental unit;

(16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respectto the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in ahomeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest insuch unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for amembership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequentbankruptcy case;

(17) for a fee imposed on a prisoner by any court for the filing of a case, motion, complaint, or appeal, or for other costsand expenses assessed with respect to such filing, regardless of an assertion of poverty by the debtor under subsection (b)or (f)(2) of section 1915 of title 28 (or a similar non-Federal law), or the debtor's status as a prisoner, as defined in section1915(h) of title 28 (or a similar non-Federal law);

(18) owed to a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457,or 501(c) of the Internal Revenue Code of 1986, under--

(A) a loan permitted under section 408(b)(1) of the Employee Retirement Income Security Act of 1974, or subject tosection 72(p) of the Internal Revenue Code of 1986; or

(B) a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that satisfies the requirementsof section 8433(g) of such title;

but nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section414(d), or a contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim or a debtunder this title; or

(19) that--

(A) is for--

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(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities ExchangeAct of 1934), any of the State securities laws, or any regulation or order issued under such Federal or State securitieslaws; or

(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

(B) results, before, on, or after the date on which the petition was filed, from--

(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;

(ii) any settlement agreement entered into by the debtor; or

(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgementpayment, attorney fee, cost, or other payment owed by the debtor.

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcylaw (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the InternalRevenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by anonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986,or a similar State or local law.

(b) Notwithstanding subsection (a) of this section, a debt that was excepted from discharge under subsection (a)(1), (a)(3), or (a)(8) of this section, under section 17a(1), 17a(3), or 17a(5) of the Bankruptcy Act, under section 439A of the Higher EducationAct of 1965, or under section 733(g) of the Public Health Service Act in a prior case concerning the debtor under this title, orunder the Bankruptcy Act, is dischargeable in a case under this title unless, by the terms of subsection (a) of this section, suchdebt is not dischargeable in the case under this title.

(c)(1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specifiedin paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, andafter notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), asthe case may be, of subsection (a) of this section.

(2) Paragraph (1) shall not apply in the case of a Federal depository institutions regulatory agency seeking, in its capacityas conservator, receiver, or liquidating agent for an insured depository institution, to recover a debt described in subsection(a)(2), (a)(4), (a)(6), or (a)(11) owed to such institution by an institution-affiliated party unless the receiver, conservator, orliquidating agent was appointed in time to reasonably comply, or for a Federal depository institutions regulatory agency actingin its corporate capacity as a successor to such receiver, conservator, or liquidating agent to reasonably comply, with subsection(a)(3)(B) as a creditor of such institution-affiliated party with respect to such debt.

(d) If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, andsuch debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee

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for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shallnot award such costs and fees if special circumstances would make the award unjust.

(e) Any institution-affiliated party of an insured depository institution shall be considered to be acting in a fiduciary capacitywith respect to the purposes of subsection (a)(4) or (11).

CREDIT(S)(Pub.L. 95-598, Nov. 6, 1978, 92 Stat. 2590; Pub.L. 96-56, § 3, Aug. 14, 1979, 93 Stat. 387; Pub.L. 97-35, Title XXIII, §

2334(b), Aug. 13, 1981, 95 Stat. 863; Pub.L. 98-353, Title III, §§ 307, 371, 454, July 10, 1984, 98 Stat. 353, 364, 375; Pub.L.99-554, Title II, §§ 257(n), 281, 283(j), Oct. 27, 1986, 100 Stat. 3115 to 3117; Pub.L. 101-581, § 2(a), Nov. 15, 1990, 104 Stat.2865; Pub.L. 101-647, Title XXV, § 2522(a), Title XXXI, § 3102(a), Title XXXVI, § 3621, Nov. 29, 1990, 104 Stat. 4865,4916, 4964; Pub.L. 103-322, Title XXXII, § 320934, Sept. 13, 1994, 108 Stat. 2135; Pub.L. 103-394, Title II, § 221, Title III,§§ 304(e), (h)(3), 306, 309, Title V, § 501(d)(13), Oct. 22, 1994, 108 Stat. 4129, 4133 to 4135, 4137, 4145; Pub.L. 104-134,Title I, § 101[(a)] [Title VIII, § 804(b)], Apr. 26, 1996, 110 Stat. 1321, 1321-74; renumbered Title I Pub.L. 104-140, § 1(a),May 2, 1996, 110 Stat. 1327; amended Pub.L. 104-193, Title III, § 374(a), Aug. 22, 1996, 110 Stat. 2255; Pub.L. 105-244,Title IX, § 971(a), Oct. 7, 1998, 112 Stat. 1837; Pub.L. 107-204, Title VIII, § 803, July 30, 2002, 116 Stat. 801; Pub.L. 109-8,Title II, §§ 215, 220, 224(c), Title III, §§ 301, 310, 314(a), Title IV, § 412, Title VII, § 714, Title XII, §§ 1209, 1235, TitleXIV, § 1404(a), Title XV, § 1502(a)(2), Apr. 20, 2005, 119 Stat. 54, 59, 64, 75, 84, 88, 107, 128, 194, 204, 215, 216; Pub.L.111-327, § 2(a)(18), Dec. 22, 2010, 124 Stat. 3559.)

Notes of Decisions (941)

Footnotes1 Dollar amount as adjusted by the Judicial Conference of the United States. See Adjustment of Dollar Amounts notes set out under

this section and 11 U.S.C.A. § 104.

11 U.S.C.A. § 523, 11 USCA § 523Current through P.L. 114-93 (excluding P.L. 114-74 and 114-92) approved 11-25-2015.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.