COURTS, CONGRESS AND TAX DEBTS: AN ANALYSIS OF THE DISCHARGE OF TAX DEBTS BEFORE AND AFTER THE ENACTMENT OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, THE

Fordham Journal of Corporate & Financial Law, 2007 by Power, Brian

After noting that there were no factual issues to decide, the court moved to the legal question of what constitutes a return.95 Pointing out that there was no statutory definition of return, and laying out the prongs of the Beard test, the court set out to apply the four prongs to the specific facts at issue.96 The court quickly dispensed with three of the four prongs, leaving only "whether Hindenlang' s Forms 1040, filed after the 1RS had made a formal assessment, 'represent an honest and reasonable attempt to satisfy the requirements of the tax law.'"97

The Sixth Circuit stated:

We hold as a matter of law that a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. A purported return filed too late to have any effect at all under the Internal Revenue Code cannot constitute "an honest and reasonable attempt to satisfy the requirements of the tax law."

The court further concluded that:

[W]hen the debtor has failed to respond to both the thirty-day and the ninety-day deficiency letters sent by the 1RS, and the government has assessed the deficiency, then the Forms 1040 serve no tax purpose, and the government thereby has met its burden of showing that the debtor's actions were not an honest and reasonable effort to satisfy the tax law.99

The narrow result of this case was that the court ruled that Hindenlang's tax debts were not discharged.100 In a broader sense, this case had a much larger impact. The court never had a basis in fact for why Hindenlang filed late: because the ruling is as a matter of law, a debtor who, for whatever reason, filed returns after substitutes have been prepared and taxes assessed can never have those debts discharged. That the question is decided as a matter of law seems incongruent to the main goal of bankruptcy: the fresh start. This does not allow for a caseby-case evaluation of every taxpayer. While this ruling will undoubtedly prevent some dishonest debtors from abusing the bankruptcy code, it will also prevent those who do have a legitimate reason for filing late from ever getting their debts discharged. Unfortunately for debtors, this case has provided the basis for most of the other circuit court rulings on this issue.

C. Hatten

The Ninth Circuit Court of Appeals considered the dischargeability of tax debts in In re Hatton. m While the facts in Hatton are slightly different from the other cases discussed herein, it is useful to analyze how the court in that case defined the term "return."102 The main question the court faced was "whether the substitute return prepared by the 1RS, the installment agreement signed by Hatton, or a combination of both, constitute a tax "return" under 11 U.S.C. § 523(a)(l)(B)(i)."103 The court noted the purpose behind Section 523(a)(1): that '"a debtor should not be permitted to discharge a tax liability based upon a required tax return that was never filed.'"104 The court had earlier decided "that the term 'return' should be given a strict construction and interpreted in accordance with its ordinary meaning."105