9th Circuit BAP Reviews the Late Filed Return and Bankruptcy Issue
Jan. 4, 2016
Keith Fogg, at the terrific tax blog “Procedurally Taxing” has provided a short review of the Martin v. United States Case wherein the 9th Circuit Bankruptcy Panel (BAP) rejects the literal interpretation of Bankruptcy Code Section 523(a)(*). You can read his review here.
If you have tax debt, and have been following the issue of whether it can be discharged in bankruptcy… if the underlying return was filed late, or filed after the IRS files a “substitute return”, this BAP case will be of interest to you.
As you recall, there are three circuit courts, the 1st, 5th and the 10th that have ruled that a return filed even one day late can never meet the requirements of a return filing for bankruptcy discharge purposes. These Courts have primarily based their decisions on the literal reading of the language found in 523 (a)(*).
The 9th Circuit BAP rejects the literal interpretation regarding whether a return is still a return if it is filed late, and does a good job in explaining why courts that have ruled that timeliness is an issue, make little sense.
The 9th circuit hasn't ruled on the issue of tardiness, and in 2015 we were able to help our clients discharge several hundred thousand dollars of tax debt as a result.
Right now in Arizona, a late filed return is still a return for purposes of calculating the discharge dates and a return filed after the IRS has filed a substitute return will still be considered “not-discharged” by the IRS.
I expect a 9th circuit ruling in a case similar to the Martin case, within a few months. That case is called Smith vs. United States. The 9th Circuit may come to some of the same conclusions as the 9th Circuit BAP, potentially setting the issue up for the Supreme Court. Or, it may side with the 1st, 5th, and 10th, and stick it to late-filers.