The Oklahoma Bar Journal December 2023

Bankruptcy Court for the Northern District of Oklahoma held that a filing extension rendered a debtor’s income tax liability nondischarge able when it may have otherwise been dischargeable due to the three-year limitations period pro vided in §523(a)(8)(A)(i). FAILURE TO FILE A RETURN IN ACCORDANCE WITH NONBANKRUPTCY LAW As referenced above, taxes owed for which a return (or equivalent report or notice) is required and remains unfiled or not given or was filed or given late and within two years before the bankruptcy filing are nondischargeable. 11 While the word “return” may seem straightforward, it is important to understand what is – and what is not – considered a “return” for bankruptcy purposes. According to another “hanging” paragraph in §523(a), which immediately follows §523(a)(20) of the Bankruptcy Code (sometimes cited as §523(a)(*)), “‘return’ means a return that satis fies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” 12 13 In Mallo , the 10th Circuit held that “the plain and unambigu ous language of §523(a) excludes from the definition of ‘return’ all late-filed tax forms, except those prepared with the assis tance of the IRS under [26 U.S.C.] §6020(a).” 14 Additionally, under §6020(a), a return must be signed by the taxpayer to be accepted as a filed return. While in some cases, the IRS will file a return on behalf of a taxpayer, the 10th Circuit has also previously held that a return filed by the IRS but not signed by the taxpayer does not qualify as a filed return under §523(a)(1)(B). 15 Notably, the issue

of when a late-filed return quali fies as a “return” for purposes of dischargeability is one on which courts disagree. 16 FRAUD AND WILLFUL TAX EVASION Pursuant to Bankruptcy Code §523(a)(1)(C), taxes “with respect to which the debtor made a fraudu lent return or willfully attempted in any manner to evade or defeat such tax” are nondischargeable. Unsurprisingly, there is no time limit associated with this provi sion. Note that nonpayment alone will not result in a finding that the debt is nondischargeable; however, “nonpayment is relevant evidence which a court should consider in the totality of conduct to deter mine whether or not the debtor willfully attempted to evade or defeat taxes.” 17 A debtor’s ability to pay is also relevant. “A debtor’s actions are willful under § 523(a) (1)(C) if they are done voluntarily, consciously or knowingly, and intentionally.” 18

TAX PENALTIES Finally, under §523(a)(7) of the Bankruptcy Code, certain tax pen alties are nondischargeable: (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 not compensation 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 [ i.e. , a tax that is dischargeable]; or (B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.

The 10th Circuit has held that §523(a)(7)(B) “creates an arbitrary cutoff of three years, after which all uncollected tax penalties may be discharged in bankruptcy.” 19

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.

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THE OKLAHOMA BAR JOURNAL